<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 20, 1996
REGISTRATION NO. 333-3648
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
AFFYMETRIX, INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
CALIFORNIA 8731 77-0319159
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
Incorporation or Organization) Number)
</TABLE>
3380 CENTRAL EXPRESSWAY, SANTA CLARA, CALIFORNIA 95051; (408) 522-6000
(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant's Principal Executive Offices)
KENNETH J. NUSSBACHER, EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
3380 CENTRAL EXPRESSWAY, SANTA CLARA, CALIFORNIA 95051; (408) 522-6000
(Name, Address Including Zip Code, and Telephone Number, Including
Area Code, of Agent For Service)
------------------------
COPIES TO:
<TABLE>
<S> <C>
Julian N. Stern Alan K. Austin
August J. Moretti Elizabeth R. Flint
Stephen C. Ferruolo Elizabeth M. Kurr
Heller Ehrman White & McAuliffe Wilson, Sonsini, Goodrich & Rosati
525 University Avenue 650 Page Mill Road
Palo Alto, California 94301 Palo Alto, California 94304
(415) 324-7000 (415) 493-9300
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE FOLLOWING THE EFFECTIVENESS OF THIS REGISTRATION
STATEMENT.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
AFFYMETRIX, INC.
CROSS-REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM AND HEADING
FOR S-1 REGISTRATION STATEMENT PROSPECTUS LOCATION IN PROSPECTUS
---------------------------------------------------------------- -----------------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus...................... Outside Front Cover Page; Additional Information
2. Inside Front and Outside Back Cover Pages of
Prospectus.......................................... Inside Front Cover Page
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges........................... Summary; Risk Factors
4. Use of Proceeds...................................... Summary; Use of Proceeds
5. Determination of Offering Price...................... Outside Front Cover Page; Underwriting
6. Dilution............................................. Dilution
7. Selling Security Holders............................. Not Applicable
8. Plan of Distribution................................. Outside and Inside Front Cover Pages; Underwriting
9. Description of Securities to be Registered........... Summary; Capitalization; Description of Capital Stock
10. Interests of Named Experts and Counsel............... Legal Matters; Experts
11. Information with Respect to the Registrant........... Outside and Inside Front Cover Pages; Summary; Risk
Factors; Use of Proceeds; Dividend Policy;
Capitalization; Dilution; Selected Financial Data;
Management's Discussion and Analysis of Financial
Condition and Results of Operations; Business;
Management; Certain Transactions; Principal
Shareholders; Description of Capital Stock; Shares
Eligible for Future Sale; Financial Statements
12. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities...................... Not Applicable
</TABLE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED MAY 20, 1996
LOGO
5,000,000 SHARES
COMMON STOCK
All of the 5,000,000 shares of Common Stock offered hereby are being sold by
Affymetrix, Inc. ("Affymetrix" or the "Company"). Prior to this offering, there
has been no public market for the Common Stock of the Company. It is currently
estimated that the initial public offering price will be between $11.00 and
$13.00 per share. See "Underwriting" for information relating to the method of
determining the initial public offering price.
------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS COMPANY (1)
---------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share..................... $ $ $
---------------------------------------------------------------------------------
Total (2)..................... $ $ $
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
</TABLE>
(1) Before deducting expenses payable by the Company estimated at $800,000.
(2) The Company has granted the Underwriters a 30-day option to purchase up to
an additional shares of Common Stock solely to cover over-allotments,
if any. See "Underwriting." If such option is exercised in full, the total
Price to Public, Underwriting Discounts and Commissions, and Proceeds to
Company will be $ , $ , and $ , respectively.
------------------
The Common Stock is offered by the Underwriters as stated herein, subject to
receipt and acceptance by them and subject to their right to reject any order in
whole or in part. It is expected that delivery of such shares will be made
through the offices of Robertson, Stephens & Company LLC ("Robertson, Stephens &
Company"), San Francisco, California, on or about , 1996.
ROBERTSON, STEPHENS & COMPANY
CS FIRST BOSTON
MONTGOMERY SECURITIES
The date of this Prospectus is , 1996
<PAGE>
Affymetrix GeneChip-TM- Technology Opportunities
--------------------------------------------
All genomics programs are expected to be research collaborations.
All diagnostic product opportunities are in research and development
with the indicated collaborators, except for HIV, which Affymetrix
introduced as a "Research Use Only" product in April 1996.
Diagnostic use of the Company's products would be subject to FDA and
other applicable regulatory approvals, which have not been applied
for or received, and which may not be obtained for several years, if
at all.
--------------------------------------------------------------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
DURING THIS OFFERING, CERTAIN PERSONS AFFILIATED WITH PERSONS PARTICIPATING IN
THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR THEIR OWN ACCOUNTS OR FOR THE
ACCOUNTS OF OTHERS IN THE COMMON STOCK PURSUANT TO EXEMPTIONS FROM RULES 10B-6,
10B-7, AND 10B-8 UNDER THE SECURITIES EXCHANGE ACT OF 1934.
<PAGE>
Affymetrix GeneChip Technology
-----------------------------------------
[Depictions of genes,
double helix and
probe array in cartridge]
Affymetrix GeneChip probe arrays provide the capacity to acquire, analyze, and
manage complex genetic information.
Integrated GeneChip System
<TABLE>
<S> <C> <C>
[PICTURE] [PICTURE] [PICTURE]
GeneChip Fluidics Station GeneChip Scanner GeneChip Software
Controls hybridization of the Quantitatively detects Analyzes and manages genetic
test sample to the probe hybridization of test sample information from the scanner.
array. to the probe array.
</TABLE>
<PAGE>
GeneChip Probe Array
A GeneChip probe array currently contains
from 16,000 to more than 100,000 different
DNA probes. Each probe array is packaged
in a catridge.
Probe Array Image
A GeneChip scanner image of an
HIV probe array for sequencing the
reverse transcriplase and protease
genes. Each small square represents
the quantitative hybridization
intensity of a labeled test sample to
a specific DNA probe.
[PICTURE]
[PICTURE]
GeneChip Software
GeneChip software translates the quantitative hybridization
intensities into sequence information which can also be used for
gene expression analysis and genetic mapping. The red "a" in the
Sequences window indicates a mutation in HIV causing resistance to
a class of HIV protease inhibitor drugs.
<PAGE>
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THE PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER
TO, OR SOLICITATION OF, ANY PERSON IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary................................................................... 4
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 18
Dividend Policy........................................................... 18
Capitalization............................................................ 19
Dilution.................................................................. 20
Selected Financial Data................................................... 21
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 22
Business.................................................................. 26
Management................................................................ 48
Certain Transactions...................................................... 54
Principal Shareholders.................................................... 56
Description of Capital Stock.............................................. 58
Shares Eligible for Future Sale........................................... 60
Underwriting.............................................................. 62
Legal Matters............................................................. 63
Experts................................................................... 63
Additional Information.................................................... 63
Glossary.................................................................. 64
Index to Financial Statements............................................. F-1
</TABLE>
------------------
The Company's executive offices are located at 3380 Central Expressway,
Santa Clara, California 95051. The Company's telephone number is (408) 522-6000.
GeneChip-TM- and Affymetrix-TM- are trademarks of the Company. Tradenames
and trademarks of other companies appearing in this Prospectus are the property
of their respective holders.
3
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING "RISK FACTORS", AND THE FINANCIAL STATEMENTS AND NOTES
THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. THIS PROSPECTUS CONTAINS
FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET
FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS. A GLOSSARY OF
TECHNICAL TERMS USED IN THIS PROSPECTUS APPEARS AT PAGE 64 OF THIS PROSPECTUS.
THE COMPANY
Affymetrix has developed and intends to establish its GeneChip system as the
platform of choice for acquiring, analyzing and managing complex genetic
information in order to improve the diagnosis, monitoring and treatment of
disease. The Company's system consists of disposable DNA probe arrays containing
gene sequences on a chip, instruments to process the probe arrays, and software
to analyze and manage genetic information. The Company commenced commercial
sales of the GeneChip system and an HIV probe array for research use in April
1996.
The Company manufactures its DNA probe arrays using an innovative and
proprietary process that combines photolithographic fabrication techniques from
the semicondutor industry with solid phase DNA synthesis to assemble large
amounts of genetic information on a small glass chip called a probe array. The
Company can manufacture a number of identical DNA probe arrays on a glass wafer,
which is then diced into individual probe arrays. Currently, each probe array
manufactured by the Company contains from 16,000 to more than 100,000 different
DNA probes.
Genes provide the fundamental basis for understanding human health and
disease. Increased knowledge of how genes encode the functions of living
organisms has generated a worldwide effort to identify and sequence genes of
many organisms, including the estimated 100,000 genes within the human genome.
This effort is being led by the Human Genome Project and related academic,
government and industry research projects. Once the genes and their sequences
are identified, it is anticipated that many years of additional research will be
required to understand the specific function of each gene and its role in
disease. Affymetrix believes that the GeneChip system can play an important role
in this research and its application in drug discovery and the development of
new diagnostic products. The Company intends to commercialize the GeneChip
system in two principal areas: genomics, or the study of genes and their
function, and diagnostics.
In genomics, Affymetrix intends to sell custom DNA probe arrays to
pharmaceutical and biotechnology companies through collaborative agreements. The
Company would receive revenues in the form of probe array design and development
fees, and subsequently through the sale of DNA probe arrays and instruments. In
addition, the Company may receive milestone payments and royalties from
discoveries made through the use of the DNA probe arrays. Affymetrix also
intends to use the GeneChip technology to help create and commercialize
databases containing information on the function of genes and their role in
disease. There can be no assurance that the Company will be successful in
marketing its GeneChip system for these genomics applications.
In diagnostics, Affymetrix intends to develop DNA probe arrays to analyze
genetic information from patient samples to improve the accuracy and speed of
diagnosis. The Company is pursuing diagnostic products and research applications
in infectious diseases, cancer and other areas, such as monitoring drug
metabolism. The Company intends to market its diagnostic GeneChip products
directly and through collaborative partnerships. Affymetrix believes its
GeneChip technology can also be used as a discovery tool for new diagnostic
markers to be used in conventional immunoassays. There can be no assurance that
the Company will be successful in marketing its GeneChip system for these
diagnostic applications.
The Company's first application for the GeneChip system is to help
researchers identify mutations in HIV that cause resistance to antiviral drugs,
such as AZT. The Company believes that monitoring such mutations may become an
important aspect of managing patients with AIDS. As of March 31, 1996,
Affymetrix had placed five prototype GeneChip systems for the HIV application in
academic research centers and pharmaceutical companies for research use.
An important part of the Company's strategy is to work with collaborative
partners to expand the applications of the Company's technology and to acquire
access to complementary technologies and resources such as manufacturing and
marketing. Affymetrix has two agreements with Genetics Institute, Inc. ("GI") to
apply the Company's technology to understand the function of human genes. The
Company will design, manufacture and supply custom probe arrays for use in GI's
drug discovery programs. Affymetrix also has a collaborative agreement with
Hewlett-Packard Company ("HP"), whereby HP will develop advanced instruments to
read the GeneChip probe arrays. In addition, in collaboration with HP, the
Company will develop and manufacture certain probe arrays to be marketed by HP.
Affymetrix began operations in 1991 as a division of Affymax N.V.
("Affymax"), was incorporated in California in March 1992 and began operating
independently as a wholly-owned subsidiary of Affymax in March 1993. In March
1995, Glaxo plc, now Glaxo Wellcome plc ("Glaxo"), purchased Affymax. Prior to
this offering, Glaxo indirectly owns approximately 46% of the Common Stock of
Affymetrix.
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. The Company's GeneChip system and other potential products will
require significant additional development and investment. While the Company's
initial product sales for research use have not required regulatory approval,
the Company expects that such approval will be required for diagnostic
applications in the future. There can be no assurance that the Company will
obtain any required regulatory approval for the GeneChip system or that the
GeneChip system will be successfully commercialized or obtain market acceptance.
Other risk factors include the Company's early stage of development,
uncertainties relating to technological approaches, history of losses and
expectation of future losses, intense competition, rapid technological change,
limited manufacturing capability and sales and marketing experience and the
Company's dependence on proprietary technology. See "Risk Factors."
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company........... 5,000,000 shares
Common Stock Outstanding after the Offering... 21,239,231 shares (1)
Use of Proceeds............................... For research and development (including product
development and core research), capital expenditures
(manufacturing scale-up, facilities and laboratory
equipment), expansion of sales and marketing, working
capital and other general corporate purposes. See "Use
of Proceeds."
Proposed Nasdaq National Market Symbol........ AFFX
</TABLE>
SUMMARY FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Contract and grant revenue........................ $ -- $ 43 $ 1,413 $ 1,574 $ 4,625 $ 854 $ 1,416
Operating expenses:
Research and development...................... 1,576 4,106 6,566 9,483 12,420 2,274 4,177
General and administrative.................... 261 582 577 2,303 3,833 777 1,649
------- ------- ------- ------- -------- --------- ---------
Total operating expenses.................... 1,837 4,688 7,143 11,786 16,253 3,051 5,826
------- ------- ------- ------- -------- --------- ---------
Loss from operations.............................. (1,837) (4,645) (5,730) (10,212) (11,628) (2,197) (4,410)
Interest income (expense), net.................... -- (15) 138 532 881 23 489
------- ------- ------- ------- -------- --------- ---------
Net loss.......................................... $(1,837) $(4,660) $(5,592) $(9,680) $(10,747) $ (2,174) $ (3,921)
------- ------- ------- ------- -------- --------- ---------
------- ------- ------- ------- -------- --------- ---------
Pro forma net loss per share...................... $ (0.52) $ (0.55) $ (0.61) $ (0.12) $ (0.22)
------- ------- -------- --------- ---------
------- ------- -------- --------- ---------
Pro forma weighted average shares outstanding..... 10,715 17,653 17,664 17,663 17,664
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
------------------------
AS
ACTUAL ADJUSTED (2)
-------- -----------
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents, and short-term investments............... $ 34,837 $ 89,837
Total assets..................................................... 41,185 96,185
Long-term obligation............................................. 898 898
Deficit accumulated during development stage..................... (36,437) (36,437)
Total shareholders' equity....................................... 34,652 89,652
</TABLE>
-------------
(1) Excludes 2,191,518 shares of Common Stock issuable upon exercise of
outstanding options under the Company's 1993 Stock Plan. Also excludes
203,881 shares issuable upon the exercise of warrants outstanding as of
March 31, 1996. See "Management -- Stock Plans" and Note 6 of Notes to
Financial Statements.
(2) As adjusted to reflect the sale of the 5,000,000 shares of Common Stock
offered by the Company hereby at an assumed initial public offering price of
$12.00 per share and the receipt of the estimated net proceeds therefrom.
See "Use of Proceeds."
UNLESS OTHERWISE INDICATED, ALL INFORMATION CONTAINED IN THIS PROSPECTUS (I)
ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION; (II) REFLECTS A
2-FOR-3 REVERSE STOCK SPLIT PRIOR TO THE EFFECTIVENESS OF THIS REGISTRATION
STATEMENT; AND (III) GIVES EFFECT TO THE CONVERSION OF ALL OUTSTANDING SHARES OF
PREFERRED STOCK INTO COMMON STOCK UPON THE CLOSING OF THIS OFFERING.
5
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business before purchasing shares of the Common Stock offered hereby. This
Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth in the following risk factors and elsewhere in this
Prospectus.
EARLY STAGE OF DEVELOPMENT
The Company is at an early stage of development. The Company has not
commercialized significant quantities of products based on its technologies. As
of March 31, 1996, the Company had placed only nine GeneChip systems, all of
which have been solely for research use and only five of which have been
purchased by customers. Substantially all of the Company's revenues have been
derived from payments from collaborative research and development agreements and
government research grants.
The Company's GeneChip system and other potential products will require
significant additional development and investment, including testing to further
validate performance and demonstrate cost effectiveness. While the Company's
initial product sales for research use have not required regulatory approval,
the Company expects that such approval will be required in the future. The
Company may need to undertake costly and time-consuming efforts to obtain this
approval. There can be no assurance that any products will be successfully
developed, be proven to be accurate and efficacious in any markets, meet
applicable regulatory standards in a timely manner or at all, be protected from
competition by others, avoid infringing the proprietary rights of others, be
manufactured in sufficient quantities or at reasonable costs, or be marketed
successfully.
The Company has experienced significant operating losses since inception and
expects these losses to continue for at least the next several years. Whether
the Company can successfully manage the transition to a commercial-scale
enterprise will depend upon a number of factors including establishing its
commercial manufacturing capability, developing its marketing capabilities,
establishing a direct sales force and entering into collaborative arrangements
to market its products. Failure to make such a transition successfully would
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
UNCERTAINTIES RELATING TO TECHNOLOGICAL APPROACHES; NEED FOR ADDITIONAL RESEARCH
AND DEVELOPMENT
The Company intends to develop its GeneChip system for genomics and
diagnostics applications. The GeneChip system involves several new technologies,
including a complex chemical synthesis process necessary to create DNA probe
arrays. In addition, technicians using the GeneChip system require new technical
skills and training. There can be no assurance that technicians will not
experience difficulties with the system that would prevent or limit its use. The
instrumentation and software that comprise the GeneChip system are new and have
not been previously used in commercial applications. As the system is used, it
is possible that previously unrecognized defects will emerge. In addition, DNA
probe arrays are tested only on a random sample basis, and quality problems
could develop with the untested arrays. Further, in order for the Company to
address new applications for the GeneChip system, the Company may be required to
reduce the size of its probe arrays, increase the number of features on these
arrays, develop instruments capable of processing the information from such
probe arrays, and design software capable of managing such information. There
can be no assurance that the Company will be capable of validating or achieving
the improvements in the components of the GeneChip system necessary for its
successful commercialization. The Company's GeneChip technology will also need
to compete against well-established techniques and enhancements to such
techniques for analyzing genes and for diagnostics. There can be no assurance
that the GeneChip system will replace or compete successfully against existing
techniques and instruments. Furthermore, there can be no assurance that the
Company's GeneChip technology will be useful in providing information on the
function of genes or for the analysis of larger sequences of genes.
The development of diagnostic and therapeutic products based on the
Company's technologies will be subject to the risks of failure inherent in the
development of products based on new technologies. These risks include
possibilities that any products based on these technologies will be found to be
ineffective, unreliable or
6
<PAGE>
unsafe, or otherwise fail to receive necessary regulatory clearances; that
products will be difficult to manufacture on a large scale or will be
uneconomical to market; that proprietary rights of third parties will preclude
the Company or its collaborative partners from marketing products; or that third
parties will market superior or equivalent products. Furthermore, there can be
no assurance that the Company's research and development activities will result
in any commercially viable products. See "Business -- Technology."
UNCERTAINTY OF MARKET ACCEPTANCE
The commercial success of the Company's GeneChip system will depend upon
market acceptance by academic research centers, pharmaceutical and biotechnology
companies and reference laboratories. Market acceptance will depend on many
factors, including convincing researchers that the GeneChip system is an
attractive alternative to current technologies for the acquisition, analysis and
management of genetic information; the receipt of regulatory clearances in the
United States, Europe, Japan and elsewhere; the need for laboratories to license
other technologies, such as amplification technologies that may be required to
use the GeneChip system for certain applications; and the availability of new
proprietary markers that may be important to the diagnosis, monitoring and
treatment of disease for incorporation on the Company's probe arrays. Market
acceptance may be adversely affected by ethical concerns that may limit the use
of the GeneChip system for certain diagnostic applications or the analysis of
genetic information. In addition, potential customers will need skilled
laboratory technicians to operate the GeneChip system. Market acceptance of the
GeneChip system could also be adversely affected by limited funding available
for academic research centers and other research organizations that are the
potential customers for the GeneChip system.
Potential customers of the GeneChip system will need to acquire the
Company's fluidics station and probe array scanner in order to utilize the DNA
probe arrays. The cost of this instrumentation may deter certain potential
customers from purchasing probe arrays. The Company may be required to discount
the price of its GeneChip system in order to place the system with customers.
The failure of the Company to place sufficient quantities of the instruments for
the GeneChip system would have a material adverse effect on its ability to sell
the disposable probe arrays. There can be no assurance that academic research
centers, pharmaceutical or biotechnology companies or reference laboratories
will replace existing instrumentation and techniques with the GeneChip system.
Because of these and other factors, there can be no assurance that the Company's
products will gain market acceptance.
The Company expects that its customers will be concentrated in a small
number of academic research centers, pharmaceutical and biotechnology companies
and reference laboratories. As a result, the Company's financial performance may
depend on large orders from a limited number of customers. There are only three
major reference laboratories in the United States, two of which are associated
with large pharmaceutical companies. There can be no assurance that the Company
will be able to successfully market the GeneChip system to reference
laboratories or that the affiliation of these laboratories with pharmaceutical
companies will not adversely affect their decision to purchase GeneChip systems.
The Company's dependence on sales to a few large reference laboratories may also
strengthen the purchasing leverage of these potential customers, which could
reduce the sales price of the GeneChip system. Also, the Company believes that
the sales cycle for the GeneChip system will be lengthy due to the need to
educate potential customers about its characteristics. The failure of the
Company to gain additional customers, the loss of any customer or a significant
reduction in the level of sales to any customer would have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business -- Business Strategy" and "-- Sales and Marketing."
UNCERTAINTIES RELATED TO THE HIV PROBE ARRAY
The first commercial application of the Company's GeneChip system is an HIV
probe array designed to detect mutations in HIV, the virus that causes AIDS. The
HIV probe array provides sequence information from the reverse transcriptase and
protease genes of HIV and the system includes a fluidics station, a scanner and
related software. In April 1996, the Company introduced the HIV probe array for
research purposes only. The Company has placed only five HIV probe arrays at
customer sites to date, all in the United States. These systems have been in
operation for only a limited period of time, and their accuracy and efficacy
have not been fully demonstrated. There are other uncertainties relating to the
system, including that the Company has no prior experience in introducing a
commercial product, that technicians may encounter difficulties with the system
that would prevent
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or limit its use, and that the Company will rely on third parties to manufacture
and service its instruments. Furthermore, there can be no assurance that the
accuracy of the HIV probe array in providing sequence information from HIV will
be better than current technologies, such as gel-based sequencing techniques.
As new therapies and combinations of therapies for treating HIV are
employed, new mutations in the HIV genome may be discovered that would require
the Company to redesign its current probe array or develop new probe arrays.
Advanced therapies could be discovered that target other components of the virus
or which do not generate drug resistance. In addition, cost containment
pressures for treating HIV patients may limit the price the Company may be able
to charge potential customers for its HIV probe array. There can be no assurance
that the HIV probe array will provide useful diagnostic and monitoring
information, that it will operate without difficulties, that technicians will
have adequate training to use the system, or that the Company will not
experience manufacturing or marketing difficulties selling the HIV probe array
to academic research centers, pharmaceutical and biotechnology companies and
reference laboratories. Furthermore, there can be no assurance that the HIV
probe array will gain regulatory approval for clinical use. The Company's
product revenues in the near term are dependent upon the commercialization of
the HIV probe array. There can be no assurance that these revenues will be
realized in the near term, or at all. Failure of the Company to successfully
commercialize the HIV probe array could have a material adverse effect on the
Company's business, financial condition and results of operations, and may
adversely affect the Company's ability to commercialize any future products it
may develop. See "Business -- Business Strategy" and "-- Sales and Marketing."
HISTORY OF LOSSES AND EXPECTATION OF FUTURE LOSSES
The Company has incurred operating losses in each year since its inception,
including net losses of approximately $10.7 million during the year ended
December 31, 1995, and, at March 31, 1996, the Company had an accumulated
deficit of approximately $36.4 million. The Company's losses have resulted
principally from costs incurred in research and development and from general and
administrative costs associated with the Company's operations. These costs have
exceeded the Company's interest income and revenues which, to date, have been
generated principally from collaborative research and development agreements and
government research grants. The Company expects to incur substantial additional
operating losses over the next several years as a result of increases in its
expenses for research and product development, manufacturing scale-up, expanding
sales and marketing and capital expenditures. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
PROFITABILITY UNCERTAIN
The Company has experienced substantial operating losses and has never been
profitable. The Company expects that it may have to discount the price of the
GeneChip system to gain market acceptance, which could adversely affect gross
margins. The Company's future gross margins, if any, will be dependent on, among
other factors, the Company's ability to cost-effectively manufacture the
GeneChip system, product mix and the degree of price discounts required to
market its products to academic research centers, pharmaceutical and
biotechnology companies and reference laboratories. The amount of future
operating losses and time required by the Company to reach profitability, if
ever, are highly uncertain. The Company's ability to generate significant
revenues and become profitable is dependent in large part on the ability of the
Company to enter into additional collaborative arrangements and on the ability
of the Company and its collaborative partners to successfully commercialize
products developed under the collaborations. In addition, delays in receipt of
any necessary regulatory approvals by the Company or its collaborators, or
receipt of approvals by competitors, could adversely affect the successful
commercialization of the Company's technologies. There can be no assurance that
the Company will successfully commercialize any product or that the Company will
achieve product revenues or profitability. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
FLUCTUATIONS IN OPERATING RESULTS
The Company's quarterly operating results will depend upon the volume and
timing of orders for GeneChip systems and probe arrays received and delivered
during the quarter, variations in payments under collaborative agreements,
including milestones, royalties, license fees, and other contract revenues, and
the timing of new product introductions by the Company. The Company's quarterly
operating results may also fluctuate significantly depending on other factors,
including the introduction of new products by the Company's
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competitors; regulatory actions; market acceptance of the GeneChip system and
other potential products; adoption of new technologies; manufacturing
capabilities; variations in gross margins of the Company's products;
competition; the cost, quality and availability of reagents and components; the
mix of products sold; changes in government funding; and third-party
reimbursement policies. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
INTENSE COMPETITION; RAPID TECHNOLOGICAL CHANGE
Competition in genomics and diagnostics is intense and expected to increase.
Further, the technologies for discovering genes associated with significant
diseases and approaches for commercializing those discoveries are new and
rapidly evolving.
Currently, the Company's principal competition comes from existing
technologies that are used to perform many of the same functions for which the
Company plans to market its GeneChip systems. In the diagnostic field, these
technologies are provided by established diagnostic companies, such as Abbott
Laboratories, Boehringer Mannheim GmbH, Hoffmann-LaRoche, Inc. ("Roche"),
Johnson & Johnson and SmithKline Beecham plc. These technologies include a
variety of established assays, such as immunoassays, histochemistry, flow
cytometry and culture, and newer DNA probe diagnostics to analyze certain
amounts of genetic information. In the genomics field, competitive technologies
include gel-based sequencing using instruments provided by companies such as the
Applied Biosystems division of Perkin Elmer and Pharmacia Biotech AB. In order
to compete against existing technologies, the Company will need to demonstrate
to potential customers that the GeneChip system provides improved performance
and capabilities.
The market for diagnostic products derived from gene discovery is currently
limited and will be highly competitive. Many companies are developing and
marketing DNA probe tests for genetic and other diseases. Other companies are
conducting research on new technologies for diagnostic tests based on advances
in genetic information. Established diagnostic companies could provide
significant competition to Affymetrix through the development of new products.
These companies have the strategic commitment to diagnostics, the financial and
other resources to invest in new technologies, substantial intellectual property
portfolios, substantial experience in new product development, regulatory
expertise, manufacturing capabilities and the distribution channels to deliver
products to customers. These companies also have an installed base of
instruments in several markets, including clinical and reference laboratories,
which are not compatible with the GeneChip system. In addition, these companies
have formed alliances with genomics companies which provide them access to
genetic information that may be incorporated into their diagnostic tests.
In the genomics field, future competition will likely come from existing
competitors as well as other companies seeking to develop new technologies for
sequencing and analyzing genetic information. In addition, pharmaceutical and
biotechnology companies, such as Genome Therapeutics Corporation, Human Genome
Sciences, Inc., Incyte Pharmaceuticals, Inc. ("Incyte"), Millennium
Pharmaceuticals, Inc., Myriad Genetics, Inc. and Sequana Therapeutics, Inc. have
significant needs for genomic information and may choose to develop or acquire
competing technologies to meet these needs.
Genomics and diagnostic technologies have undergone and are expected to
continue to undergo rapid and significant change. The Company's future success
will depend in large part on its ability to maintain a competitive position with
respect to these technologies. Rapid technological development by the Company or
others may result in products or technologies becoming obsolete. In addition,
products offered by the Company would be made obsolete by less expensive or more
effective tests based on other technologies or by new therapeutic or
prophylactic agents that obviate the need for diagnostic and monitoring
information. There is no assurance that the Company will be able to make the
enhancements to its technology necessary to compete successfully with newly
emerging technologies. See "Business -- Research and Development" and "--
Competition."
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DEPENDENCE UPON COLLABORATIVE PARTNERS
An important element of the Company's business strategy involves
collaborations with pharmaceutical, diagnostic and biotechnology companies that
have discovered genes and may seek to use the Company's technologies to discover
genetic mutations or develop diagnostic and therapeutic products. The Company
has significant collaborations with HP and GI.
In November 1994, the Company entered into a collaborative agreement with HP
to develop an advanced scanner for use with the GeneChip probe arrays. The HP
scanner is currently under development and, in 1997 the Company expects that HP
will be the sole source of its scanners. Accordingly, if the HP scanner does not
become available on a timely basis or fails to meet its performance and cost
specifications, it would have a material adverse effect on the Company's
business.
The Company has two agreements with GI, dated November 1994 and December
1995, relating to use of GeneChip technology to measure gene expression in order
for GI to develop new therapeutic proteins. If GI is not successful in using the
GeneChip technology or if the Company fails to maintain a satisfactory
relationship with GI, the Company could lose significant revenues and its
ability to obtain additional collaborations with other companies would be
impaired.
The Company has received a substantial portion of its revenues since
inception from its collaborative partners and intends to enter into
collaborative arrangements with other companies to apply its technology, fund
development, commercialize potential future products, and assist in obtaining
regulatory approval. There can be no assurance that any of the Company's present
or future collaborative partners will perform their obligations as expected or
will devote sufficient resources to the development, clinical testing or
marketing of the Company's potential products developed under the
collaborations. Any parallel development by a partner of alternative
technologies or components of the GeneChip system, preclusion of the Company
from entering into competitive arrangements, failure to obtain timely regulatory
approvals, premature termination of an agreement, or failure by a partner to
devote sufficient resources to the development and commercialization of the
Company's products could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company's agreements with consultants and collaborators are complex.
There may be provisions within such agreements which give rise to disputes
regarding the rights and obligations of the parties. These and other possible
disagreements could lead to delays in collaborative research, development or
commercialization of certain products, or could require or result in litigation
or arbitration, which would be time-consuming and expensive, and could have a
material adverse effect on the Company's business, financial condition and
results of operations.
There can be no assurance that the Company will be able to negotiate future
collaborative arrangements on acceptable terms, if at all, or that such
collaborations will be successful. See "Business -- Collaborative Agreements and
Grants."
NEED FOR ADDITIONAL FUNDING; UNCERTAINTY OF ACCESS TO CAPITAL
The Company anticipates that its existing capital resources, together with
the net proceeds of this offering and interest earned thereon, will enable it to
maintain currently planned operations through at least 1998. However, this
expectation is based on the Company's current operating plan, which could change
as a result of many factors, and the Company could require additional funding
sooner than anticipated. In addition, the Company may choose to raise additional
capital due to market conditions or strategic considerations even if it has
sufficient funds for its operating plan. The Company's requirements for
additional capital will be substantial and will depend on many factors,
including payments received under existing and possible future collaborative
agreements; the availability of government research grant payments; the progress
of the Company's collaborative and independent research and development
projects; the costs of preclinical and clinical trials for the Company's
products; the prosecution, defense and enforcement of patent claims and other
intellectual property rights; and development of manufacturing, marketing and
sales capabilities. The Company has no credit facility or other committed
sources of capital. To the extent capital resources are insufficient to meet
future capital requirements, the Company will have to raise additional funds to
continue the development of its technologies. There can be no assurance that
such funds will be available on favorable terms, or at all. To the extent that
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additional capital is raised through the sale of equity or convertible debt
securities, the issuance of such securities could result in dilution to the
Company's shareholders. If adequate funds are not available, the Company may be
required to curtail operations significantly or to obtain funds through entering
into collaboration agreements on unattractive terms. The Company's inability to
raise capital would have a material effect on the Company's business, financial
condition and results of operations. See "Use of Proceeds."
ETHICAL, LEGAL AND SOCIAL IMPLICATIONS OF GENETIC PREDISPOSITION TESTING
The Company's success will depend in part upon the Company's ability to
develop genetic tests for genes discovered by the Company and others. Genetic
tests, such as certain of the Company's GeneChip tests, may be difficult to
perform and interpret and may lead to misinformation or misdiagnosis. Further,
even when a genetic test identifies the existence of a mutation in an
individual, the interpretation of the result is often limited to the
identification of a statistical probability that the tested individual will
develop the disease or condition for which the test is performed. In addition,
once available, such tests may be subject to ethical concerns or reluctance to
administer or pay for tests for conditions that are not treatable. Further, it
is possible that gene-based diagnostic tests marketed by other companies could
encounter specific difficulties, resulting in societal and governmental concerns
regarding genetic testing.
The prospect of broadly available genetic predisposition testing has raised
issues regarding the appropriate utilization and the confidentiality of
information provided by such testing. It is possible that discrimination by
insurance companies could occur through the raising of premiums by insurers to
prohibitive levels, outright cancellation of insurance or unwillingness to
provide coverage to patients shown to have a genetic predisposition to a
particular disease. In addition, employers could discriminate against employees
with a positive genetic predisposition due to the increased risk for disease
resulting in possible cost increases for health insurance and the potential for
lost employment time. Finally, governmental authorities could, for social or
other purposes, limit the use of genetic testing or prohibit testing for genetic
predisposition to certain conditions which could adversely affect the use of the
Company's products. There can be no assurance that ethical concerns about
genetic testing will not materially adversely affect market acceptance of the
Company's GeneChip system. See "Business -- Government Regulation."
LIMITED MANUFACTURING CAPABILITY; SOLE SOURCE SUPPLIERS
The Company has limited experience manufacturing products for commercial
purposes. To date, the Company has a small scale facility providing limited
quantities of probe arrays for internal and collaborative purposes and initial
sales of the GeneChip system to the research market. To achieve the production
levels of probe arrays necessary for successful commercialization of its
products, the Company will need to scale-up its manufacturing facilities and
establish automated manufacturing capabilities. The Company may also need to
comply with the current good manufacturing practices ("GMP") prescribed by the
United States Food and Drug Administration ("FDA") for sale of products in the
United States, ISO standards for sale of products in Europe, as well as other
standards prescribed by various federal, state and local regulatory agencies in
the United States and other countries. Although the Company does not currently
need to comply with GMP to manufacture probe arrays and related instrumentation
for sale for research purposes, it may need to be GMP compliant to sell these
products to clinical reference laboratories, and it will need to be compliant to
sell these products for clinical use. There can be no assurance that
manufacturing and quality control problems will not arise as the Company
attempts to scale-up its manufacturing facilities or that such scale-up can be
achieved in a timely manner or at commercially reasonable costs.
The Company's probe array manufacturing process is complex and involves a
number of technologies that have never before been combined in the manufacture
of a single product. The Company tests only selected probe arrays from each
wafer and only selected probes on each probe array. It is therefore possible
that defective probe arrays might not be identified before they are shipped. The
Company therefore relies on quality control procedures, including controls on
the manufacturing process and sample testing, to verify the correct completion
of the manufacturing process. In addition, there may be certain aspects of the
Company's manufacturing that are not fully understood and cannot be readily
replicated for commercial use. If the Company is unable to manufacture probe
arrays on a timely basis because of these or other factors, its business,
financial condition and results of operations could be adversely affected.
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As the Company's technologies evolve, new manufacturing techniques and
systems will be required. For example, it is anticipated that batch processing
systems will be needed to meet the Company's future probe array manufacturing
needs. Further, as products requiring increased density are developed,
miniaturization of the features on the arrays will be necessary, requiring new
or modified manufacturing equipment and processes. Further, the Company's
manufacturing equipment requires significant capital investment. The Company
will rely on a single manufacturing facility for its probe arrays for the
foreseeable future. This manufacturing facility is subject to natural disasters
such as earthquakes and floods. The former are of particular significance since
the manufacturing facility is located in an earthquake prone area. In the event
that its manufacturing facility were to be affected by accidental or natural
disasters, the Company would be unable to manufacture products for sale until
the facility was replaced or restored to operation.
Certain key parts of the GeneChip system, such as the probe array scanner,
the fluidics station, and certain reagents, are currently available only from a
single source or a few sources. The Company currently obtains the scanner for
its GeneChip probe arrays from Molecular Dynamics, Inc. ("Molecular Dynamics").
The Company is dependent on Molecular Dynamics for quality testing and service
of this instrument. The Company has entered into an agreement with HP to supply
a new scanner for the GeneChip system, which the Company expects to be available
for commercialization in 1997. The Company's ability to commercialize a probe
array with more features is dependent upon successful development of the HP
scanner. The Company has contracted with RELA, Inc. ("RELA"), a private company,
to supply the fluidics station that is part of the GeneChip system. The fluidics
stations of the nine GeneChip systems placed to date are prototypes manufactured
by the Company and not supplied by RELA. No assurance can be given that probe
array scanners, fluidics stations or reagents will be available in commercial
quantities at acceptable costs. If the Company is required to seek alternative
sources of supply, it could be time consuming and expensive. In addition, the
Company is dependent on its vendors to provide components of appropriate quality
and reliability and to meet applicable regulatory requirements. Consequently, in
the event that supplies from these suppliers were delayed or interrupted for any
reason, the Company's ability to develop and supply its products could be
impaired, which could have a material adverse effect on the Company's business,
financial condition and results of operations.
The GeneChip system is a complex set of instruments and includes DNA probe
arrays, which are produced in an innovative and complicated manufacturing
process. During the beta testing phase of the GeneChip system's development, the
Company and its vendors have encountered and addressed a number of technical
problems, including software failures, improper alignment of probe array wafers,
valve and tube failures in the fluidics station, sensor wiring issues and
scanner control problems. Due to the complexity and lack of operating history of
these products, the Company anticipates that additional technical problems may
occur or be discovered as more systems are placed into operation. If these
problems cannot be readily addressed, they could cause delays in shipments,
warranty expenses and damages to customer relationships, which would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Manufacturing."
LIMITED SALES AND MARKETING EXPERIENCE
The Company does not have a direct sales force and has only limited
experience in sales and marketing. As of March 31, 1996, the Company had placed
nine GeneChip systems, of which only five had been sold. The Company has not
placed any of its GeneChip systems outside the United States. The Company
intends to market its products to academic research centers, pharmaceutical and
biotechnology companies and reference laboratories. The Company intends to
market diagnostic tests through a direct sales force to its potential customers
for research use only. The Company intends to market the GeneChip system for
genomic applications through collaborations with pharmaceutical and
biotechnology companies. The Company anticipates a long sales cycle to market
the GeneChip system to its potential customers. The Company will be required to
enter into collaboration or distribution arrangements to commercialize its
products outside the United States. There can be no assurance that the Company
will be able to establish a direct sales force or to establish collaborative or
distribution arrangements to market its products. Failure to do so would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Sales and Marketing."
UNCERTAINTIES RELATED TO GOVERNMENT FUNDING
A significant portion of the Company's products for research use are likely
to be sold to universities, government research laboratories, private
foundations and other institutions where funding is dependent upon
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grants from government agencies such as the National Institutes of Health
("NIH"). Research funding by the government, however, may be significantly
reduced under several budget proposals being discussed by the United States
Congress. Any such reduction may materially affect the ability of the Company's
prospective research customers to purchase the Company's products for research
use.
The Company has received and expects to continue to receive significant
funds under various United States Government research and technology programs.
While the programs are generally multi-year awards, they are subject to a yearly
appropriations process in the United States Congress. Proposed legislation being
debated in the United States Congress would eliminate or reduce the program
under which the Company's Advanced Technology Program ("ATP") grant is funded by
the Department of Commerce. There can be no assurance that the Company will
receive the entire $20.8 million of funding designated for it under the ATP
grant, and termination of the ATP grant could have a material adverse effect on
the Company's business, financial condition and results of operations.
The Company's grants from the Departments of Commerce and Energy and the NIH
give the government certain rights to license for its own use inventions
resulting from funded work. There can be no assurance that the Company's
proprietary position will not be adversely affected should the government
exercise these rights. See "Business -- Collaborative Agreements and Grants."
UNCERTAINTIES RELATED TO THIRD-PARTY REIMBURSEMENT
The Company's ability to successfully commercialize its products may depend
on the Company's ability to obtain adequate levels of third-party reimbursement
for use of certain diagnostic tests in the United States, Europe and other
countries. Currently, availability of third-party reimbursement is limited and
uncertain for genetic tests.
In the United States, the cost of medical care is funded, in substantial
part, by government insurance programs, such as Medicare and Medicaid, and
private and corporate health insurance plans. Third-party payors may deny
reimbursement if they determine that a prescribed device or diagnostic test has
not received appropriate FDA or other governmental regulatory clearances, is not
used in accordance with cost-effective treatment methods as determined by the
payor, or is experimental, unnecessary or inappropriate. The Company's ability
to commercialize certain of its products successfully may depend on the extent
to which appropriate reimbursement levels for the costs of such products and
related treatment are obtained from government authorities, private health
insurers and other organizations, such as health maintenance organizations
("HMOs"). Third-party payors are increasingly challenging the prices charged for
medical products and services. The trend towards managed health care in the
United States and the concurrent growth of organizations such as HMOs, which
could control or significantly influence the purchase of health care services
and products, as well as legislative proposals to reform health care or reduce
government insurance programs, may all result in lower prices for certain of the
Company's products. The cost containment measures that health care providers are
instituting and the results of any health care reform could have an adverse
effect on the Company's ability to sell certain of its products and may have a
material adverse effect on the Company's business, financial condition and
results of operations.
GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY APPROVAL
The Company anticipates the manufacturing, labeling, distribution and
marketing of some or all of the Company's diagnostic products will be subject to
regulation in the United States and in certain other countries.
In the United States, the FDA regulates, as medical devices, most diagnostic
tests and IN VITRO reagents that are marketed as finished test kits or
equipment. Some clinical laboratories, however, purchase individual reagents
intended for specific analytes, and develop and prepare their own finished
diagnostic tests. Although the FDA has not generally exercised regulatory
authority over these individual reagents or the finished tests prepared from
them by the clinical laboratories. The FDA has recently proposed a rule that, if
adopted, would regulate the reagents sold to clinical laboratories as medical
devices. The proposed rule would also restrict sales of these reagents to
clinical laboratories certified under Clinical Laboratory Improvement Amendments
of 1988 ("CLIA") as high complexity testing laboratories. The Company intends to
market some diagnostic products as finished test kits or equipment and others as
individual reagents; consequently, some or all of these products will be
regulated as medical devices.
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Medical devices generally require FDA approval or clearance prior to
marketing in the United States. The process of obtaining FDA clearances or
approvals necessary to market medical devices can be time-consuming, expensive
and uncertain, and there can be no assurance that any clearance or approval
sought by the Company will be granted or that FDA review will not involve
delays, adversely affecting the marketing and sale of the Company's products.
Further, clearance or approval may place substantial restrictions on the
indications for which the product may be marketed or to whom it may be marketed.
Additionally, there can be no assurance that FDA will not request additional
data or request that the Company conduct further clinical studies.
If approval or clearance is obtained, the Company will be subject to
continuing FDA obligations. When manufacturing medical devices, the Company will
be required to adhere to regulations setting forth current GMP, which require
that the Company manufacture its products and maintain its records in a
prescribed manner with respect to manufacturing, testing and quality control
activities. In addition, among other requirements, the Company will be required
to comply with FDA requirements for labeling and promotion of its medical
devices. Further, if the Company wanted to make changes on a product after FDA
clearance or approval, including changes in indications or intended use or other
significant modifications to labeling, manufacturing or product design,
additional clearances or approvals would be required from the FDA.
Failure to obtain required regulatory approval or clearance or failure to
obtain timely approval or clearance, or the imposition of stringent labeling or
sales restrictions on the Company's products, could have a material adverse
effect on the Company. In addition, failure to comply with applicable regulatory
requirements could subject the Company to enforcement action, including product
seizures, recalls, withdrawal of clearances or approvals, restrictions on or
injunctions against marketing the Company's products, and civil and criminal
penalties, any one or more of which could have a material adverse effect on the
Company.
Medical device laws and regulations are also in effect in many countries
outside the United States. These range from comprehensive device approval
requirements for some or all of the Company's medical device products to
requests for product data or certifications. The number and scope of these
requirements are increasing. Failure to comply with applicable state and foreign
medical device laws and regulations may have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company is also subject to numerous environmental and safety laws and
regulations, including those governing the use and disposal of hazardous
materials. Any violation of, and the cost of compliance with, these regulations
could adversely affect the Company's operations. See "Business -- Government
Regulation."
DEPENDENCE ON PROPRIETARY TECHNOLOGY AND UNPREDICTABILITY OF PATENT PROTECTION
As of April 15, 1996, Affymetrix had exclusive licenses from Affymax for
over 20 patents and patent applications in the United States related to its
business in the fields of clinical diagnostics and research supply. In addition,
Affymetrix is the assignee of 52 United States patent applications and one
issued patent in the United States. Many of these patents and applications have
been filed and/or issued in one or more foreign countries. Affymetrix also
relies upon those patents, copyright protection, trade secrets, know-how,
continuing technological innovation and licensing opportunities to develop and
maintain its competitive position. The Company's success will depend in part on
its ability to obtain patent protection for its products and processes, to
preserve its copyright and trade secrets and to operate without infringing the
proprietary rights of third parties.
The Company is party to various license option agreements (including
agreements with Affymax, Stanford University and the University of California)
which give it rights to use certain technologies. Failure of the Company to
maintain rights to such technology could have a material adverse effect on the
Company's business, financial condition and results of operations. For example,
inability of the Company to exercise the option for the Stanford technology
under commercially reasonable terms could have an adverse effect on the ability
of the Company to sell certain of its products.
The patent positions of pharmaceutical, biopharmaceutical and biotechnology
companies, including the Company, are generally uncertain and involve complex
legal and factual questions. There can be no assurance that any of the Company's
pending patent applications will result in issued patents, that the Company will
develop additional proprietary technologies that are patentable, that any
patents issued to the Company or its strategic partners will provide a basis for
commercially viable products or will provide the Company with any competitive
advantages or will not be challenged by third parties, or that the patents of
others will not have an
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adverse effect on the ability of the Company to do business. In addition, patent
law relating to the scope of claims in the technology fields in which the
Company operates is still evolving. The degree of future protection for the
Company's proprietary rights, therefore, is uncertain. Furthermore, there can be
no assurance that others will not independently develop similar or alternative
technologies, duplicate any of the Company's technologies, or, if patents are
issued to the Company, design around the patented technologies developed by the
Company. In addition, the Company could incur substantial costs in litigation if
it is required to defend itself in patent suits brought by third parties or if
it initiates such suits.
Others may have filed and in the future are likely to file patent
applications that are similar or identical to those of the Company. To determine
the priority of inventions, the Company may have to participate in interference
proceedings declared by the United States Patent and Trademark Office that could
result in substantial cost to the Company. No assurance can be given that any
such patent application will not have priority over patent applications filed by
the Company.
The commercial success of the Company also depends in part on the Company
neither infringing patents or proprietary rights of third parties nor breaching
any licenses that may relate to the Company's technologies and products. For
example, the Company, its collaborators and customers may need to acquire a
license for an amplification technology to use the GeneChip system, and there is
no assurance such a license will be available on commercially reasonable terms.
The Company is aware of third-party patents that may relate to the Company's
technology, including reagents used in probe array synthesis and in probe array
assays, probe array scanners, synthesis techniques, oligonucleotide
amplification techniques, assays, and probe arrays. There can be no assurance
that the Company will not infringe these patents, other patents or proprietary
rights of third parties. In addition, the Company has received and may in the
future receive notices claiming infringement from third parties as well as
invitations to take licenses under third party patents. Any legal action against
the Company or its collaborative partners claiming damages and seeking to enjoin
commercial activities relating to the affected products and processes could, in
addition to subjecting the Company to potential liability for damages, require
the Company or its collaborative partner to obtain a license in order to
continue to manufacture or market the affected products and processes. There can
be no assurance that the Company or its collaborative partners would prevail in
any such action or that any license (including licenses proposed by third
parties) required under any such patent would be made available on commercially
acceptable terms, if at all. There are a significant number of United States and
foreign patents and patent applications in the Company's areas of interest, and
the Company believes that there may be significant litigation in the industry
regarding patent and other intellectual property rights. If the Company becomes
involved in such litigation, it could consume a substantial portion of the
Company's managerial and financial resources, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The enactment of legislation implementing the General Agreement on Trade and
Tariffs has resulted in certain changes in United States patent laws that became
effective on June 8, 1995. Most notably, the term of patent protection for
patent applications filed on or after June 8, 1995 is no longer a period of
seventeen years from the date of grant. The new term of United States patents
will commence on the date of issuance and terminate twenty years after the
earliest effective filing date of the application. Because the time from filing
to issuance of biotechnology patent applications in the Company's area of
interest is often more than three years, a twenty-year term after the effective
date of filing may result in a substantially shortened term of the Company's
patent protection which may adversely affect the Company's patent position.
The Company also relies upon copyright and trade secret protection for its
confidential and proprietary information. There can be no assurance, however,
that such measures will provide adequate protection for the Company's trade
secrets or other proprietary information. In addition, there can be no assurance
that proprietary information will not be disclosed, that others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to the Company's copyrights and trade
secrets or disclose such technology, or that the Company can meaningfully
protect its trade secrets.
The Company's academic collaborators have certain rights to publish data and
information in which the Company has rights. There is considerable pressure on
academic institutions to publish discoveries in the
15
<PAGE>
genetics and genomics fields. There can be no assurance that such publication
would not adversely affect the Company's ability to obtain patent protection for
some genes in which it may have a commercial interest. See "Business --
Intellectual Property."
ATTRACTION AND RETENTION OF KEY EMPLOYEES AND CONSULTANTS
The Company is highly dependent on the principal members of its management
and scientific staff. The loss of services of any of these persons could have a
material adverse effect on the Company's product development and
commercialization objectives. In addition, recruiting and retaining qualified
scientific personnel to perform future research and development work will be
critical to the Company's success. There can be no assurance that the Company
will be able to attract and retain such personnel.
Product development and commercialization will require additional personnel
in areas such as diagnostic testing, regulatory affairs, manufacturing and
marketing. The inability to acquire such services or to develop such expertise
could have a material adverse effect on the Company's business, financial
condition and results of operations.
In addition, the Company relies on its scientific advisors to assist the
Company in formulating its research and development strategy. All of the
scientific advisors are employed by employers other than the Company and have
commitments to other entities that may limit their availability to the Company.
Some of the Company's scientific advisors also consult for companies that may be
competitors of the Company. See "Business -- Scientific Advisory Board."
EXPOSURE TO PRODUCT LIABILITY CLAIMS
The Company's business exposes it to potential product liability claims that
are inherent in the testing, manufacturing, marketing and sale of human
diagnostic and therapeutic products. The Company intends to acquire clinical
liability insurance. There can be no assurance that it will be able to obtain
such insurance or general product liability insurance on acceptable terms or at
reasonable costs or that such insurance will be in sufficient amounts to provide
the Company with adequate coverage against potential liabilities. A product
liability claim or recall could have a material adverse effect on the Company's
business, financial condition and results of operations.
BROAD DISCRETION IN ALLOCATION AND USE OF PROCEEDS
Although the Company expects to use approximately $46,000,000 of the net
proceeds of this offering for research and development, including product
development and core research, manufacturing scale-up, and to expand sales and
marketing capabilities, the Company has not yet identified the specific amounts
and uses of approximately $9,000,000 (approximately 16%) of the net proceeds.
The Company's Board of Directors and management will retain broad discretion as
to the allocation of the net proceeds of the offering. See "Use of Proceeds."
CONTROL BY GLAXO, MANAGEMENT AND RELATED PERSONS
Upon completion of this offering, Glaxo will indirectly beneficially own
35.9% of the Company's outstanding Common Stock and executive officers,
directors and principal shareholders (other than Glaxo) will indirectly
beneficially own 15.0% of the Company's outstanding Common Stock. Accordingly,
Glaxo and these shareholders may be able to influence the outcome of shareholder
votes, including votes concerning the election of directors, adoption of
amendments to the Company's Articles of Incorporation and Bylaws and approval of
mergers and other significant corporate transactions. Glaxo and the Company have
executed a governance agreement that confers rights on Glaxo in certain
circumstances. See "Principal Shareholders" and "Certain Transactions."
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS
Certain provisions of the Company's Articles of Incorporation and Bylaws and
certain other contractual provisions could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
attempting to acquire, or control the Company. Such provisions could limit the
price that certain investors might be willing to pay in the future for shares of
the Company's Common Stock. Certain of these provisions allow the Company to
issue Preferred Stock with rights senior to those of the Common Stock without
any further vote or action by the shareholders, eliminate the right of
shareholders to act by written consent which could make it more difficult
16
<PAGE>
for shareholders to affect certain corporate actions. These provisions could
also have the effect of delaying or preventing a change in control of the
Company. The issuance of Preferred Stock could decrease the amount of earnings
and assets available for distribution to the holders of Common Stock or could
adversely affect the rights and powers, including voting rights, of the holders
of the Common Stock. In certain circumstances, such issuance could have the
effect of decreasing the market price of the Common Stock.
NO PRIOR TRADING MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE;
DILUTION
Prior to this offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active public market will
develop or be sustained after this offering. The initial public offering price
will be determined by negotiations among the Company and the Representatives of
the Underwriters and may not be indicative of future market prices. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price. The trading price of the Company's Common
Stock could be subject to significant fluctuations in response to announcements
of results of research activities, collaborative agreements, technological
innovations, or new commercial products by the Company, collaborative partners
or competitors, changes in government regulations, regulatory actions, changes
in patent laws, developments concerning proprietary rights, quarterly variations
in operating results, litigation and other events. The stock market has from
time to time experienced significant price and volume fluctuations which have
particularly affected the market prices of the stocks of technology companies,
and which may be unrelated to the operating performance of particular companies.
Further, there has been particular volatility in the market prices of securities
of biotechnology and other life sciences companies.
Purchasers of the Common Stock will incur an immediate and substantial
dilution in the net tangible book value of the Common Stock from the initial
public offering price. Additional dilution is likely to occur upon exercise of
options granted by the Company. See "Dilution."
SHARES ELIGIBLE FOR FUTURE SALE; POSSIBLE ADVERSE EFFECT ON FUTURE MARKET PRICE
Future sales of substantial amounts of the Company's Common Stock in the
public market after this offering could adversely affect the market price of the
Common Stock. Of the 21,239,231 shares to be outstanding after the offering, the
5,000,000 shares of Common Stock offered hereby (plus any shares issued upon
exercise of the Underwriters' over-allotment option) will be freely tradeable
without restriction. Beginning 90 days after the Effective Date, approximately
50,100 additional shares will be eligible for sale in the public market subject
to compliance with Rule 701. In addition, beginning 90 days after the Effective
Date approximately 186,140 shares subject to vested options will be available
for sale subject to compliance with Rule 701. Certain shareholders of the
Company, including the officers, directors, employees and the affiliates of the
Company are subject to contractual "lock-up" agreements generally providing that
they will not offer, sell, contract to sell or grant any option to purchase or
otherwise dispose of the shares of Common Stock of the Company or any securities
exercisable for or convertible into the Company's Common Stock owned by them for
a period of 180 days after the effective date of the offering (the "Effective
Date") without the prior written consent of Robertson Stephens & Company. As a
result of these contractual restrictions, notwithstanding possible earlier
eligibility for sale under the provisions of Rules 144, 144(k) and 701 under the
Securities Act of 1933, as amended (the "Securities Act"), shares subject to
lock-up agreements will not be saleable until such agreements expire or are
waived by Robertson Stephens & Company. Beginning 180 days after the Effective
Date, approximately 10,411,408 additional shares will become eligible for sale
subject to the provisions of Rule 144 or Rule 701 upon the expiration of the
lock-up agreements not to sell such shares. Beginning 180 days after the
Effective Date, approximately 183,366 additional shares subject to vested
options will be available for sale subject to compliance with Rule 701 upon the
expiration of lock-up agreements not to sell such shares. Robertson, Stephens &
Company may, in its sole discretion and at any time without notice, release all
or any portion of the securities subject to lock-up agreements. In addition, the
Company intends to register on Form S-8 under the Securities Act within 180 days
after the Effective Date shares of Common Stock issued or reserved for issuance
under the Company's 1993 Stock Plan (the "Stock Plan"), and the 1996 Nonemployee
Directors Stock Option Plan (the "Directors Plan") and such registrations will
be effective on filing. As of March 31, 1996, there were outstanding options for
the purchase of 2,191,518 shares under the Stock Plan, of which options for
158,490 shares were exercisable. No shares have been issued to date under the
Directors Plan. As of April 30, 1996, the holders of approximately 15,834,537
shares are entitled to certain registration rights with respect to such shares.
If a large
17
<PAGE>
number of such shares were registered and sold in the public market, such sales
could have an adverse effect on the market price for the Company's Common Stock.
If the Company were required to include in a Company-initiated registration the
shares held by such holders pursuant to the exercise of their registration
rights, such sales may have an adverse effect on the Company's ability to raise
needed capital. See "Management -- Stock Plans," "Description of Capital Stock
-- Registration Rights of Certain Shareholders," "Shares Eligible for Future
Sale," and "Underwriting."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 5,000,000 shares of
Common Stock offered by the Company hereby at an assumed initial public offering
price of $12.00 per share are estimated to be approximately $55,000,000
($63,370,000 assuming the Underwriters' over-allotment option is exercised in
full), after deducting the underwriting discounts and commissions and estimated
offering expenses payable by the Company.
The Company intends to use the net proceeds from this offering to develop
new products and applications for the GeneChip system. Such products may be
developed by the Company internally or through collaborative arrangements using
the Company's existing technology and products or complementary products or
technologies acquired from third parties. While such collaborations and
acquisitions may represent a significant use of the proceeds of the offering, no
significant acquisitions are currently planned. The Company expects to use
approximately $25 million for research and development, including product
development and core research; approximately $15 million for capital
expenditures, including scale-up of manufacturing, facilities and laboratory
equipment; and approximately $6 million for expansion of sales and marketing.
The Company will use the $9 million balance (approximately 16%) of the net
proceeds for working capital and other general corporate purposes. The Company's
Board of Directors and management will retain broad discretion as to the
allocation of the net proceeds of the offering.
The amounts actually expended for each purpose and the timing of such
expenditures will depend upon numerous factors, including payments received
under existing and possible future collaborative agreements; the availability of
government research grant payments; the progress of the Company's collaborative
and independent research and development projects; the costs of preclinical and
clinical trials for the Company's products; the prosecution, defense and
enforcement of patent claims and other intellectual property rights; and
development of manufacturing, marketing and sales capabilities. Pending such
uses, the Company intends to invest the net proceeds of this offering in
short-term, investment-grade, interest-bearing securities.
DIVIDEND POLICY
The Company has never paid dividends since its inception and does not intend
to pay any dividends in the foreseeable future. The Company currently intends to
retain any future earnings to fund the development of its business.
18
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1996, (i) on a pro forma basis to give effect to the automatic conversion of
all outstanding shares of the Company's Preferred Stock into Common Stock upon
the closing of this offering and (ii) as adjusted to reflect the receipt of the
estimated net proceeds from the sale of the 5,000,000 shares of Common Stock
offered hereby, at an assumed initial public offering price of $12.00 per share,
after deducting the underwriting discounts and commissions and estimated
offering expenses payable by the Company. This table should be read in
conjunction with the financial statements of the Company and the notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1996
------------------------
PRO FORMA AS ADJUSTED
----------- -----------
(in thousands)
<S> <C> <C>
Noncurrent portion of capital lease obligation (1)....................................... $ 898 $ 898
Shareholders' equity:
Preferred stock; no par value, 27,500,000 shares authorized; pro forma and as adjusted,
no shares issued and outstanding...................................................... -- --
Common stock; no par value, 50,000,000 shares authorized;
pro forma 16,239,231 issued and outstanding; as adjusted,
21,239,231 issued and outstanding (2)................................................. 73,528 128,528
Notes receivable from officers......................................................... (41) (41)
Unrealized gain on available-for-sale securities....................................... 1 1
Deferred compensation.................................................................. (2,399) (2,399)
Deficit accumulated during the development stage....................................... (36,437) (36,437)
----------- -----------
Total shareholders' equity........................................................... 34,652 89,652
----------- -----------
Total capitalization............................................................... $ 35,550 $ 90,550
----------- -----------
----------- -----------
</TABLE>
------------
(1) See Note 5 of Notes to Financial Statements for a description of the
Company's obligation under capital lease.
(2) Excludes (i) 203,881 shares of Common Stock issuable upon exercise of
outstanding warrants at an exercise price of $8.25 per share, (ii) 2,191,518
shares issuable upon exercise of outstanding options at March 31, 1996, at a
weighted average price of $0.65 per share and (iii) 965,228 shares of Common
Stock reserved for future issuance under the Stock Plan. Also excludes
300,000 shares reserved for issuance under the Directors Plan, which was
adopted in April 1996. See "Management -- Stock Plans" and Note 6 of Notes
to Financial Statements.
19
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of March 31, 1996
was $34,652,000 or
approximately $2.13 per share. Pro forma net tangible book value per share
represents the amount of the Company's total tangible assets less total
liabilities, divided by the number of shares of Common Stock outstanding at
March 31, 1996. Pro forma net tangible book value dilution per share represents
the difference between the amount per share paid by purchasers of shares of
Common Stock in the offering made hereby and the pro forma net tangible book
value per share immediately after completion of this offering. After giving
effect to the estimated net proceeds from the sale of the 5,000,000 shares of
Common Stock offered hereby at an assumed initial public offering price of
$12.00 per share, after deducting the underwriting discounts and commissions and
estimated offering expenses payable by the Company, the pro forma net tangible
book value of the Company as of March 31, 1996 would have been $89,652,000 or
approximately $4.22 per share of Common Stock. This represents an immediate
increase in net tangible book value of $2.09 per share to existing shareholders
and an immediate dilution in pro forma net tangible book value of $7.78 per
share to purchasers of Common Stock in this offering. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price........................................ $ 12.00
Pro forma net tangible book value as of March 31, 1996............. $ 2.13
Increase attributable to new investors............................. 2.09
---------
Pro forma net tangible book value after the offering................. 4.22
---------
Dilution to new investors............................................ $ 7.78
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1996,
the number of shares of Common Stock purchased from the Company, the total cash
consideration paid and the average price per share paid by the existing
shareholders and by new investors before deducting the underwriting discounts
and commissions and estimated offering expenses payable by the Company at the
assumed initial public offering price of $12.00 per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------------- ------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ --------- -------------- --------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders................. 16,239,231 76.5% $ 70,860,000 54.1% $ 4.36
New investors......................... 5,000,000 23.5 60,000,000 45.9 12.00
------------ --------- -------------- ---------
Total............................... 21,239,231 100.0% $ 130,860,000 100.0%
------------ --------- -------------- ---------
------------ --------- -------------- ---------
</TABLE>
The foregoing table assumes no exercise of outstanding stock options or
warrants. As of March 31, 1996, there were outstanding warrants to purchase
203,881 shares of Common Stock at an exercise price of $8.25 per share and
outstanding options to purchase an aggregate of 2,191,518 shares of Common Stock
at a weighted average exercise price of $0.65 per share. To the extent that any
of these options or warrants or additional options or warrants are exercised,
there will be further dilution to new investors. See "Management -- Stock Plans"
and Note 6 of Notes to Financial Statements.
20
<PAGE>
SELECTED FINANCIAL DATA
The statement of operations data set forth below for the years ended
December 31, 1993, 1994 and 1995 and the balance sheet data as of December 31,
1994 and 1995 are derived from financial statements of the Company audited by
Ernst & Young LLP, independent auditors, which are included elsewhere in this
Prospectus. The statement of operations data for the years ended December 31,
1991 and 1992 and the balance sheet data as of December 31, 1991, 1992, and 1993
are derived from financial statements audited by Ernst & Young LLP, which are
not included in this Prospectus. The balance sheet data at March 31, 1996 and
the statement of operations data for the three months ended March 31, 1995 and
1996 and for the period from inception (January 1, 1991) to March 31, 1996 are
derived from unaudited financial statements included elsewhere in this
prospectus. The unaudited financial statements include all adjustments,
consisting only of normal recurring adjustments, that the Company considers
necessary for a fair presentation of the financial position and results of
operations for these periods. Operating results for the three months ended March
31, 1996 are not necessarily indicative of the results that may be expected for
the entire year ending December 31, 1996. The Company has never declared or paid
any cash dividends on shares of its capital stock. The data set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Financial Statements,
related Notes thereto, and other financial information included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
THREE MONTHS ENDED (JANUARY 1,
1991) THROUGH
YEAR ENDED DECEMBER 31, MARCH 31, MARCH 31,
----------------------------------------------------- -------------------- ---------------
1991 1992 1993 1994 1995 1995 1996 1996
--------- --------- --------- --------- --------- --------- --------- ---------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Contract and grant revenue..... $ -- $ 43 $ 1,413 $ 1,574 $ 4,625 $ 854 $ 1,416 $ 9,071
Operating expenses:
Research and development..... 1,576 4,106 6,566 9,483 12,420 2,274 4,177 38,328
General and administrative... 261 582 577 2,303 3,833 777 1,649 9,205
--------- --------- --------- --------- --------- --------- --------- -------
Total operating expenses... 1,837 4,688 7,143 11,786 16,253 3,051 5,826 47,533
--------- --------- --------- --------- --------- --------- --------- -------
Loss from operations........... (1,837) (4,645) (5,730) (10,212) (11,628) (2,197) (4,410) (38,462)
Interest income.............. -- 3 211 575 1,301 183 517 2,607
Interest expense............. -- (18) (73) (43) (420) (160) (28) (582)
--------- --------- --------- --------- --------- --------- --------- -------
Net loss....................... $ (1,837) $ (4,660) $ (5,592) $ (9,680) $ (10,747) $ (2,174) $ (3,921) $ (36,437)
--------- --------- --------- --------- --------- --------- --------- -------
--------- --------- --------- --------- --------- --------- --------- -------
Pro forma net loss per share
(1)........................... $ (0.52) $ (0.55) $ (0.61) $ (0.12) $ (0.22)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Pro forma weighted average
shares outstanding (1)........ 10,715 17,653 17,664 17,663 17,664
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
----------------------------------------------------- -----------
1991 1992 1993 1994 1995 1996
--------- --------- --------- --------- --------- -----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments.................................. $ -- $ 94 $ 20,392 $ 17,805 $ 38,883 $ 34,837
Working capital............................... 1 (320) 17,452 15,677 36,070 31,729
Total assets.................................. 1 813 22,817 19,861 44,552 41,185
Long-term obligations......................... -- 564 -- 7,135 948 898
Deficit accumulated during development
stage........................................ (1,837) (6,497) (12,089) (21,769) (32,516) (36,437)
Total shareholders' equity (net capital
deficiency).................................. 1 (181) 19,214 9,170 38,519 34,652
</TABLE>
---------------
(1) See Note 1 of Notes to Financial Statements for an explanation of the
determination of the number of shares used in computing pro forma net loss
per share.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements which involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those set forth under "Risk Factors" and elsewhere in
this Prospectus.
OVERVIEW
Affymetrix is a development stage company which is developing GeneChip
systems and related applications and technologies for the acquisition, analysis
and management of complex genetic information. The business and operations of
Affymetrix were commenced in 1991 by Affymax and were initially conducted within
Affymax. In March 1992, Affymetrix was incorporated as a California corporation
and became a wholly-owned subsidiary of Affymax. In September 1993, Affymetrix
issued equity securities through a private financing of approximately $21
million that reduced Affymax' ownership to approximately 65%. In March 1995,
Glaxo acquired Affymax, including its then majority ownership interest in
Affymetrix. In August 1995, Affymetrix issued equity securities through a second
private financing of approximately $39 million, further reducing Affymax'
percentage ownership. Glaxo currently indirectly owns approximately 46% of
Affymetrix.
The Company has a limited operating history that, to date, has focused
primarily on the development of its technology. Based on its GeneChip technology
platform, Affymetrix is developing a portfolio of products for academic research
centers, pharmaceutical and biotechnology companies and reference laboratories.
As of March 31, 1996, the Company had placed nine of its GeneChip systems with
customers for validation, initial testing and certain research applications.
Only five of the systems have been purchased by customers, three of which were
for the HIV application. The payments received from the sale of these systems
were recorded as contract revenues pursuant to development agreements. The
Company commercially introduced its first product, the GeneChip system and the
HIV probe array for research use only, in April 1996. Failure of the Company to
successfully develop, manufacture and market additional products over the next
several years or to realize product revenues would have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company has incurred operating losses in each year since its inception,
including net losses of approximately $10.7 million during the year ended
December 31, 1995, and at March 31, 1996, the Company had an accumulated deficit
of approximately $36.4 million. The Company's losses have resulted principally
from costs incurred in research and development and from general and
administrative costs associated with the Company's operations. These costs have
exceeded the Company's interest income and revenues which to date have been
generated principally from collaborative research and development agreements and
government research grants. The Company expects to incur substantial additional
operating losses over the next several years as a result of increases in its
expenses for research and product development, manufacturing and marketing
capabilities.
The Company's quarterly operating results will depend upon the volume and
timing of orders for GeneChip systems and probe arrays received and delivered
during the quarter, variations in payments under collaborative agreements,
including milestones, royalties, license fees, and other contract revenues, and
the timing of new product introductions by the Company. The Company's quarterly
operating results may also fluctuate significantly depending on other factors,
including the introduction of new products by the Company's competitors;
regulatory actions; market acceptance of the GeneChip system and other potential
products; adoption of new technologies; manufacturing capabilities; variations
in gross margins of the Company's products; competition; the cost, quality and
availability of reagents and components; the mix of products sold; changes in
government funding; and third-party reimbursement policies.
The Company expects that it may have to discount the price of the GeneChip
system to gain market acceptance, which could adversely affect gross margins.
The Company's future gross margins, if any, will be dependent on, among other
factors, the Company's ability to cost-effectively manufacture the GeneChip
system, product mix and the degree of price discounts required to market its
products to academic research centers,
22
<PAGE>
pharmaceutical companies and reference laboratories. The amount of future
operating losses and time required by the Company to reach profitability, if
ever, are highly uncertain. The Company's ability to generate significant
revenues and become profitable is dependent in large part on the ability of the
Company to enter into additional collaborative arrangements and on the ability
of the Company and its collaborative partners to successfully commercialize
products incorporating the Company's technologies. In addition, delays in
receipt of any necessary regulatory approvals by the Company or its
collaborators, or receipt of approvals by competitors, could adversely affect
the successful commercialization of the Company's technologies.
From inception through March 31, 1996, the Company has generated $11.7
million from government grants, collaborative agreements and interest income.
The Company has significant collaborative relationships with GI and HP and a
significant grant from the National Institute of Standards and Technology's
Advanced Technology Program. The Company began its collaboration with GI in
November 1994 to develop applications of the GeneChip system to the
identification of new genes and new uses of genes using expression monitoring.
Under this agreement, GI funded the Company's research to determine the
feasibility of this application of GeneChip technology and agreed to make
milestone and royalty payments. In December 1995, GI and the Company signed a
second agreement for the supply of custom probe arrays to GI in return for
up-front fees, milestone payments and royalties for products developed from use
of the probe arrays. As of March 31, 1996, the Company recognized contract
revenues totaling $1.3 million from GI. As a result of entering into an
agreement with Incyte in April 1996, Affymetrix is required to refund 30% of the
development funding received from GI and future funding from GI will be
proportionally reduced. The Company recorded an accrued liability for this
refund and believes that the reduction of future funding from GI will not have a
material effect on its operations. See "Business -- Collaborative Agreements and
Grants."
The Company entered into a collaboration with HP in November 1994 to
develop, manufacture and supply a more advanced scanner for use with the
Company's GeneChip probe arrays and for the Company, in collaboration with HP,
to develop, manufacture and supply certain probe arrays to HP for sale in
certain markets. As of March 31, 1996, the Company recognized contract revenues
totaling $1.5 million from HP.
In October 1994, the Company and Molecular Dynamics received a five-year
grant from the National Institute of Standards and Technology's Advanced
Technology Program in the amount of $31.5 million to develop a miniaturized DNA
diagnostic system based on the Company's technology. Pursuant to the grant,
$20.8 million is designated for the Company and its subcontractors and $10.7
million is designated for Molecular Dynamics and its subcontractors, subject to
the requirements of each company to match such funding. As of March 31, 1996,
the Company's revenues from this grant totaled $1.6 million.
Collaborations will continue to be an important element of the Company's
business strategy. There can be no assurance that the Company will be able to
maintain existing collaborations, enter into future collaborations to develop
applications of its GeneChip system or that any such collaborative arrangements
will be successful.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 31, 1995
Contract and grant revenue increased by 66% for the three months ended March
31, 1996 to $1.4 million from $854,000 for the three months ended March 31,
1995. The increase was principally due to the sale of one GeneChip system
pursuant to a development agreement in the first quarter of 1996, as compared to
none in the first quarter of 1995, and an increase in ATP grant revenue.
Research and development expenses increased to $4.2 million for the first
quarter of 1996 compared to $2.3 million for the same period of 1995. The
increase was attributable primarily to the hiring of additional research and
development personnel, costs incurred to further product development in
anticipation of Affymetrix' initial product launch, and purchase of research
supplies. Affymetrix anticipates that research and development expenses will
continue to increase in future periods.
General and administrative expenses increased to $1.6 million for the three
months ended March 31, 1996 compared to $777,000 for the comparable period in
1995. The increase in general and administrative expenses was attributable
primarily to the hiring of additional management personnel and the incurring of
legal and other
23
<PAGE>
professional fees in connection with the overall scale-up of operations and
business development efforts. General and administrative expenses are expected
to increase significantly in future periods to support Affymetrix operations and
business development efforts.
Interest income was $517,000 for the three months ended March 31, 1996
compared to $183,000 for the comparable period in 1995. The increase was
primarily attributable to the investment of the net proceeds from the private
placement of Series B Senior Convertible Preferred Stock in August 1995 and
higher interest rates. Interest expense in 1996 decreased by $132,000 as
compared to 1995, primarily due to the conversion of a $6.0 million subordinated
convertible promissory note held by Affymax in August 1995.
YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1994
Contract and grant revenue increased to $4.6 million for 1995 from $1.6
million for 1994 as a result primarily of its ATP grant and revenue earned from
collaborative agreements with GI and HP.
Research and development expenses increased to $12.4 million for 1995
compared to $9.5 million for 1994. The increase in research and development
expenses was attributable primarily to the hiring of additional research and
development personnel, costs incurred to establish a pilot manufacturing
facility, and increased purchases of research supplies.
General and administrative expenses increased to $3.8 million for 1995
compared to $2.3 million for 1994. The increase in general and administrative
expenses was attributable primarily to the hiring of additional management
personnel and the incurring of legal and other professional fees in connection
with the overall scale-up of operations and business development efforts.
Interest income was $1.3 million for 1995 compared to $575,000 for 1994. The
increase resulted from the investment of net proceeds from Affymetrix' private
placement of Series B Senior Convertible Preferred Stock in August 1995.
Interest expense resulted from lease financing for manufacturing equipment and
facilities.
YEARS ENDED DECEMBER 31, 1994 AND DECEMBER 31, 1993
Contract and grant revenue increased to $1.6 million for 1994 from $1.4
million for 1993 as a result of additional funding from government grants.
Research and development expenses increased to $9.5 million for 1994
compared to $6.6 million for 1993. The increase in research and development
expenses was attributable primarily to the hiring of additional research and
development personnel and increased purchases of research supplies.
General and administrative expenses increased to $2.3 million for 1994
compared to $577,000 for 1993. The increase in general and administrative
expenses was attributable primarily to the hiring of additional administrative
personnel and the incurring of legal and other professional fees in connection
with the expansion of Affymetrix' operations.
Interest income was $575,000 for 1994 compared to $211,000 for 1993. The
increase resulted from the investment of net proceeds from the private placement
of Series A Senior Convertible Preferred Stock in September 1993.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, Affymetrix has financed its operations primarily through
private placements of equity securities, contributions from Affymax, government
grants, collaborative agreements, issuances of convertible debt, equipment lease
financings and interest income. Through March 31, 1996, Affymetrix has received
net cash of $71.4 million from financing activities, consisting principally of
approximately $53.6 million from issuances of common and preferred stock, $10.6
million from contribution by Affymax, $7.1 million from issuances of notes
payable, and $1.3 million in lease financing. As of March 31, 1996, $1.1 million
of notes have been repaid, $6.0 million of convertible notes held by Affymax
have been converted into shares of Series B Senior Convertible Preferred Stock,
and $10.6 million of contributions from Affymax have been converted to shares of
Series 1 Subordinated Convertible Preferred Stock.
Affymetrix' net cash used in operating activities was $3.1 million for the
three months ended March 31, 1996, $10.2 million for 1995, $7.4 million for 1994
and $3.2 million for 1993. The cash used for operations was
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primarily to fund research and development expenses and manufacturing start-up
costs related to the introduction and support of Affymetrix' products.
Affymetrix has also received collaborative research and government grant funding
totaling $11.0 million, of which $9.1 million has been recognized as contract
and grant revenue.
The cash used by the Company in investing activities since its inception
through March 31, 1996 totaled $41.0 million. Capital expenditures totaled
$701,000 for the three months ended March 31, 1996. Capital expenditures totaled
$2.3 million in 1995, $1.2 million in 1994 and $1.5 million in 1993. Purchases
of available-for-sale securities were $2.0 million for the three months ended
March 31, 1996 and $38.4 million, $3.0 million, and $14.0 million for 1995,
1994, and 1993, respectively. Proceeds from sales and maturities of
available-for-sale-securities were $3.6 million for the three months ended March
31, 1996 and $14.0 million and $5.3 million for 1995 and 1994, respectively.
There were no sales or maturities in 1993.
As of March 31, 1996, Affymetrix had cash, cash equivalents, and short-term
investments of $34.8 million. The Company anticipates that these existing
capital resources, together with the net proceeds of this offering and interest
earned thereon, will enable it to maintain currently planned operations through
at least 1998. However, this expectation is based on the Company's current
operating plan, which could change and the Company could require additional
funding sooner than anticipated. In addition, the Company may choose to raise
additional capital due to market conditions or strategic considerations even if
it continues to have sufficient funds for its operating plan. The Company's
requirements for additional capital will be substantial and will depend on many
factors, including payments received under existing and possible collaborative
agreements; the availability of government research grant payments; the progress
of the Company's collaborative and independent research and development
projects; the costs of preclinical and clinical trials for the Company's
products; the prosecution, defense and enforcement of patent claims and other
intellectual property rights; and the development of manufacturing, sales and
marketing capabilities. The Company has no credit facility or other committed
sources of capital. To the extent capital resources, including payments from
existing and possible future collaborative agreements and grants, together with
the net proceeds of the offering are insufficient to meet future capital
requirements, the Company will have to raise additional funds to continue the
development of its technologies. There can be no assurance that such funds will
be available on favorable terms, or at all. To the extent that additional
capital is raised through the sale of equity or convertible debt securities, the
issuance of such securities could result in dilution to the Company's
shareholders. If adequate funds are not available, the Company may be required
to curtail operations significantly or to obtain funds through entering into
collaborative agreements on unattractive terms. The Company's inability to raise
capital would have a material adverse effect on the Company's business,
financial condition and results of operations.
Affymetrix expects its capital requirements to increase over the next
several years as it expands its facilities and acquires scientific equipment to
support manufacturing and research and development efforts. The Company's
expenditure requirements will depend on numerous factors, including the progress
of its research and development programs; the development of commercial scale
manufacturing capabilities; its ability to maintain existing collaborative
arrangements and establish and maintain new collaborative arrangements; the
costs involved in preparing, filing, prosecuting, defending and enforcing
intellectual property rights; the effectiveness of product commercialization
activities and arrangements and other factors.
At December 31, 1995, Affymetrix' net operating loss carryforwards and
research tax credit carryforwards for income tax purposes were approximately
$22.0 million and $1.2 million, respectively. Because Affymetrix has experienced
ownership changes, future utilization of these carryforwards may be subject to
certain limitations as defined by Internal Revenue Code and similar state
regulations. If not utilized,the carryforwards expire at various dates beginning
in 2008 through 2010. As a result of the annual limitation, a portion of these
carryforwards may expire before ultimately becoming available to reduce income
tax liabilities.
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BUSINESS
The following Business section contains forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Risk Factors" and
elsewhere in this Prospectus.
OVERVIEW
Affymetrix has developed and intends to establish its GeneChip system as the
platform of choice for acquiring, analyzing and managing complex genetic
information in order to improve the diagnosis, monitoring and treatment of
disease. The Company's system consists of disposable DNA probe arrays containing
gene sequences on a chip, instruments to process the probe arrays, and software
to analyze and manage genetic information. The Company commenced commercial
sales of the GeneChip system and a HIV probe array for research use in April
1996.
BACKGROUND
GENES AND DISEASE
Genes provide the fundamental basis for understanding human health and
disease. Genomics, the study of genes and their functions, will lead to new
approaches to diagnose, monitor and treat disease.
The entire genetic content of an organism is known as its genome. DNA is the
molecule that makes up genes and encodes the genetic instructions. These
instructions are embodied in the sequence of the four nucleotide bases (A, C, G
and T) that are the chemical building blocks of DNA. The DNA molecule is a
combination of two strands held together by chemical bonds between nucleotide
bases on one strand and the other strand. Only certain pairs of nucleotide bases
can form these bonds: A always pairs with T, and C always pairs with G. Such
paired DNA strands are said to be complementary. When two DNA strands are
complementary, they bind together to form a double helix in a process called
hybridization. In humans, the DNA molecule contains 3 billion nucleotide pairs
organized into 46 chromosomes. The human genome is believed to contain over
100,000 genes.
Cells carry out their normal biological functions through the genetic
instructions encoded in their DNA. This process, known as gene expression,
involves several steps. In the first step, nucleotides in a gene are copied into
a related nucleic acid molecule called messenger RNA. Messenger RNA instructs
the cell to produce proteins. Proteins are molecules that regulate or perform
most of the physiological functions of the body. Because the order of
nucleotides in each gene is different, each gene directs the production of a
different protein. Each organism's characteristics are thus ultimately
determined by proteins encoded in its DNA. This process is illustrated below.
[DIAGRAM]
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The diversity of living organisms results from variability in their genomes.
Variability stems from differences in the sequences of genes and from
differences in gene expression. Changes in the sequences of normal genes may be
introduced by environmental or other factors, such as errors in replication of
genes. These changes are known as polymorphisms, and the affected genes can be
passed from generation to generation. In some cases, polymorphisms have no
effect on the organism. However, in other cases, polymorphisms can result in
altered function of the protein encoded by the gene. Such polymorphisms are
called mutations. Mutations in single genes have been associated with diseases
such as cystic fibrosis, and mutations in multiple genes have been associated
with diseases such as cancer and cardiovascular disease. Similarly, it has
recently been discovered that polymorphisms in the genome of HIV, the virus that
causes AIDS, enable that virus to develop resistance to antiviral drugs,
resulting in disease progression and ultimately death. In order to understand
how mutations in particular genes cause disease, scientists must compare genes
from healthy and diseased people. These efforts are laborious and time
consuming, requiring the repeated sequencing of genes from a large number of
people.
The genes expressed, as well as the order and level of their expression,
determine differences among cell types in an organism. Although most cells
contain an organism's full set of genes, only a small fraction of this set is
expressed in each cell. The expression of the wrong or defective genes, or the
expression of too much or too little of genes normally expressed, causes
disease. Such abnormalities in gene expression have been associated with human
diseases, including many types of cancer. The role of gene expression in disease
requires an understanding of how genes interact to cause disease and how
external stimuli, such as drugs, cause variations in gene expression.
THE ROLE OF GENOMICS IN UNDERSTANDING DISEASE
Increased knowledge of how DNA molecules encode the functions of living
organisms has generated a worldwide effort to identify and sequence genes of
many organisms, including the estimated 100,000 genes within the human genome.
This effort is being led by the Human Genome Project and related academic,
government and industry research projects. Once the genes and their nucleotide
sequences are identified, it is anticipated that many years of additional
research will be required to understand the specific function of each gene and
its role in disease. This research, commonly referred to as genomics, may lead
to new opportunities in drug discovery and diagnostics.
The general processes by which researchers are attempting to discover genes
fall into two principal categories: genetic mapping and high-throughput
sequencing. Once a gene has been identified, either through mapping or
high-throughput sequencing, researchers must understand the function of the gene
and how variability in the gene leads to disease. Many diseases are caused by
either changes in the sequence of the gene or by changes in the expression of
the gene. Understanding the role of a gene in disease requires either
quantitative gene expression monitoring or large scale polymorphism screening.
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[CHART]
THE CHART ABOVE ILLUSTRATES TECHNIQUES USED TO
IDENTIFY GENES AND UNDERSTAND THEIR FUNCTIONS, WHICH
CAN LEAD TO THE DEVELOPMENT OF NEW DIAGNOSTIC AND
THERAPEUTIC OPPORTUNITIES.
GENETIC MAPPING. Researchers use genetic mapping to identify the gene or
genes causing an observable and well-characterized disease or genetic disorder.
The gene mapping process is extensive and typically begins by assembling tissue
samples and histories from families where the disease of interest is prevalent.
Researchers then attempt to locate the position of the gene responsible for the
disease using a technique called linkage analysis. This technique relies on the
identification of genes using DNA sequences called markers, whose specific
locations are known among the three billion base pairs of the human genome. By
comparing the patterns of markers in generations of healthy and diseased people,
researchers can link genes to markers and thereby determine that a particular
marker is located near the gene responsible for the disease. By using more
markers, genes can be more precisely mapped. Since many major diseases, such as
diabetes and atherosclerosis, are believed to be caused by the interplay of
numerous genes, it is often necessary to try to map several genes
simultaneously. This mapping process requires extensive efforts and significant
computational capabilities. It is expected that increasing the speed and
accuracy of genetic mapping and improving the ability to analyze information
from thousands of different markers may accelerate the identification of disease
genes.
HIGH-THROUGHPUT SEQUENCING. High-throughput sequencing involves first
identifying genes and subsequently determining their function and possible role
in disease. When a gene is expressed in a particular cell, its DNA is copied
into messenger RNA. In this process, sequences that do not code for an expressed
gene are removed. Thus, messenger RNA contains only expressed gene sequences.
Using high-throughput sequencing methods, DNA copies of the messenger RNA can be
sequenced and thereby reveal the sequence of a gene. Corporate, academic and
government efforts have been successful in identifying a substantial number of
the 100,000 genes in the human genome using such techniques.
GENE EXPRESSION MONITORING. By monitoring the expression of a large number
of genes, researchers seek to correlate changes in expression patterns with a
particular disease. The effectiveness of monitoring gene
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expression is a function of the number of genes that can be monitored
simultaneously, the sensitivity (ability to measure low levels of gene
expression) and the ability of the method used to provide qualitative
information. Relative levels of gene expression are currently monitored
primarily through an intensive process of sequencing many copies of genes.
Scientists believe that the development of technologies that can quantitatively
monitor thousands of genes simultaneously will increase the effectiveness of
gene expression monitoring as a tool for understanding the roles of genes in
disease.
POLYMORPHISM SCREENING. Using polymorphism screening, researchers seek to
correlate variability in the sequence of genes with a specific disease. By
sequencing a gene of interest from a large number of healthy and diseased
persons, researchers are able to statistically correlate specific gene mutations
with the disease. Currently, the polymorphism screening process is done using
gel-based sequencing. A typical polymorphism screening project might require
sequencing 10 genes of 5,000 nucleotide bases each in up to 1,000 patients, or a
total of 50 million bases, to understand the role of these 10 genes in one
disease. Using high-throughput sequencing techniques, even at a cost of cents
per base, such projects are expensive and time consuming. It is expected that
new technologies will be needed to effectively screen the more than 100,000
human genes for polymorphisms that correlate with many known diseases.
OPPORTUNITIES IN DIAGNOSTICS AND THERAPEUTICS
Current diagnostic tests can monitor the physiological effects of disease,
detect infectious organisms by growing them in culture, or use specific markers,
such as proteins, known to be associated with disease. Diagnostic tests rely on
a patient sample of tissue, blood, or urine, and detect the physiological
effect, the infectious organism or the marker, in the sample. For example,
immunoassays detect and measure specific proteins already known to be associated
with a disease using antibodies generated against those proteins. However,
protein markers are not available or are not useful for diagnosing many
diseases. Diagnostic tests that monitor physiological effects are also limited
because different diseases can cause the same effect. For example, an elevated
white blood cell count can be caused by appendicitis, an acute infection or
leukemia.
Most infectious diseases are viral, bacterial or fungal. Diagnosis of
bacterial and fungal infections is generally achieved by growing a culture,
which may take several days. Even after the infectious organism is identified,
further analysis may be required to determine which antibiotics, if any, may be
effective in treating the disease. In the case of many viruses, diagnosis
depends on immunoassay tests that detect antibodies to the virus. However, these
tests provide no information as to whether the virus is resistant to drug
therapy or if the infection is active or latent.
Recent advances in gene-based diagnostic tests using DNA probes, DNA
amplification techniques and sequencing technologies have begun to address these
shortcomings by directly examining the genes associated with a given disease
rather than relying on physiological parameters or antibodies. For example,
amplification of specific genes from an infectious organism eliminates the need
to grow that organism in culture.
However, current techniques for gathering genetic information for diagnosis
and monitoring of disease have limitations. For example, gel-based sequencing
techniques used in some approaches are time-consuming, require skilled
operators, and can analyze only limited lengths of contiguous DNA sequences in a
given run. Gene-based diagnosis often requires rapid turnaround and examination
of noncontiguous DNA sequences. As a result, new techniques and tools are being
developed to improve the diagnosis, monitoring and treatment of disease.
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Using genetic mapping and high-throughput sequencing, scientists have been
successful in discovering many genes. Technological improvements that increase
the speed and decrease the cost of gene expression monitoring and polymorphism
screening will improve the ability of researchers to understand the function of
these genes and their role in disease. Such knowledge may assist in the
development of therapeutics with greater efficacy and fewer side effects, as
well as diagnostic products with greater sensitivity and accuracy.
BUSINESS STRATEGY
Affymetrix' objective is to establish the GeneChip system as the platform of
choice for acquiring, analyzing and managing complex genetic information in
order to improve the diagnosis, monitoring and treatment of disease. The
Company's GeneChip system consists of disposable DNA probe arrays containing
gene sequences on a chip, instruments to process the probe arrays, and software
to analyze and manage genetic information from the probe arrays. The Company
intends to commercialize the GeneChip system in two principal areas: genomics
and diagnostics.
GENOMICS
- ESTABLISH GENECHIP TECHNOLOGY AS A PLATFORM FOR GENOMICS RESEARCH. The
Company intends to develop the GeneChip system for use in several
applications where Affymetrix believes it has substantial advantages over
conventional tools used for DNA sequence analysis in the identification of
genes and their role in disease. Initially, four such applications have
been identified: gene discovery, gene mapping, gene expression monitoring
and polymorphism screening, all of which require analyzing and processing
large amounts of genetic information.
- COMMERCIALIZE CUSTOM PROBE ARRAYS THROUGH CORPORATE PARTNERSHIPS. The
Company intends to sell custom probe arrays to pharmaceutical and
biotechnology companies through collaborative agreements. The Company will
seek to receive revenues through design and development fees, milestone
payments and sales of DNA probe arrays and instruments to the
collaborative partner. If the collaborative partner is successful in
discovering products through the use of the GeneChip technology, the
Company would also seek to receive royalties from the sale of such
products.
- PARTICIPATE IN THE COLLECTION AND APPLICATION OF GENETIC INFORMATION.
Affymetrix intends to use the DNA sequence analysis capabilities of the
GeneChip technology to measure gene expression in order to create
databases containing information on the function of genes and their role
in disease. Affymetrix anticipates that such databases will be developed
and commercialized through partnerships with pharmaceutical and
biotechnology companies.
DIAGNOSTICS
- IMPROVE ACCURACY AND SPEED OF DIAGNOSIS. Affymetrix intends to develop DNA
probe arrays to obtain genetic information from patient samples so that
specific diseases can be rapidly diagnosed. Furthermore, such probe arrays
will be designed to simultaneously collect additional relevant
information, including drug resistance data.
- ESTABLISH DIRECT SALES EFFORTS AND PARTNERSHIPS. Affymetrix intends to
initially market its GeneChip products, for research use only, directly to
academic research centers and reference laboratories that conduct the
majority of gene-based diagnostic tests. In addition, the Company will
seek to partner with, or license technology to, established diagnostic
companies which could develop, seek regulatory approval, and commercialize
probe arrays for broader clinical use.
- DISCOVER NOVEL DIAGNOSTIC MARKERS. The Company intends to use information
from the Human Genome Project and related efforts to identify genes
associated with particular diseases and use the proteins encoded by these
genes in new diagnostic tests. The Company will seek to partner with
established diagnostic companies by providing these novel protein markers
for development and commercialization as conventional immunoassays.
There can be no assurance that the Company will be successful in
implementing its strategy or marketing its GeneChip system for these genomics
and diagnostic applications. The Company's GeneChip system and
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other potential products will require significant additional development and
investment, including testing to further validate performance and demonstrate
cost effectiveness. While the Company's initial product sales for research use
have not required regulatory approval, the Company expects that such approval
will be required for diagnostic applications in the future. The Company may need
to undertake costly and time-consuming efforts to obtain this approval. There
can be no assurance that any products will be successfully developed, be proven
to be accurate and efficacious in any markets, meet applicable regulatory
standards in a timely manner or at all, be protected from competition by others,
avoid infringing the proprietary rights of others, be manufactured in sufficient
quantities or at reasonable costs, or be marketed successfully.
TECHNOLOGY
Affymetrix' probe array technology and systems integrate semiconductor
fabrication techniques, molecular biology, solid phase chemistry, software and
robotics. The Company's GeneChip system consists of four integrated parts:
disposable DNA probe arrays containing genetic information on a chip housed in a
cartridge, a fluidics station for introducing the test sample to the probe
arrays, a scanner to read the data from the probe arrays, and software to
control the instruments, analyze and manage the genetic information. The
GeneChip system is designed for use by pharmaceutical and biotechnology
companies, academic research centers and reference laboratories. The price of
the Company's GeneChip system, excluding probe arrays, is approximately
$120,000. The HIV probe array, currently being sold commercially for research
use, is priced at $45 per array.
DNA PROBE ARRAYS. The Company produces its DNA probe arrays using a process
based on semiconductor photolithographic fabrication techniques, which enables
it to assemble vast amounts of genetic information on a small glass chip called
a probe array. The genetic information is contained in sequences of DNA probes
that are built on the probe array. This process uses technology initially
developed at Affymax and exclusively licensed to the Company for selected
applications. The Company believes that this technology enables the efficient
use of a large number of DNA probes to analyze DNA or RNA sequences in a test
sample.
ILLUSTRATION OF THE LIGHT DIRECTED PROBE ARRAY SYNTHESIS PROCESS
[DIAGRAM]
The Company uses photolithography to synthesize large numbers of DNA
sequences simultaneously in specific locations on a glass chip. Photolithography
is a technique which uses light to induce chemical reactions that create
exposure patterns on the glass chip. The process begins by coating the chip with
light-sensitive chemical compounds (defined as "protecting" groups) that prevent
chemical coupling. Lithographic masks, which consist of predetermined patterns
that either block or transmit light, are used to selectively illuminate the
glass surface of the chip. Only those areas exposed to light are deprotected and
thus activated for chemical coupling through removal of the light-sensitive
protecting groups. The entire surface is then flooded with a
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solution containing the first in a series of DNA building blocks (A, C, G or T).
Coupling only occurs in those regions which have been deprotected through
illumination. The new DNA building block also bears a light-sensitive protecting
group so that the cycle can be repeated. This process of exposure to light and
subsequent chemical coupling can be repeated on the same chip in order to
generate an array of DNA sequences. The intricate illumination patterns allow
the Company to build arrays of many diverse DNA sequences in a small area. The
Company can manufacture a large number of identical DNA probe arrays on a large
glass wafer, which is then diced into single probe arrays.
Each probe array contains thousands of "features." Each feature contains
millions of copies of the same single-stranded DNA sequence, or probe. The
patterns of photolithographic masks and the order of DNA building blocks used in
the synthesis process dictate the sequence of the probes in each feature on the
chip surface. The number of synthesis cycles determines the length of the DNA
probes in each feature.
[DIAGRAM]
The Company's GeneChip technology enables it to effectively synthesize a
large number of DNA sequences, which would not be possible with existing
technologies. Unlike conventional synthesis, which generally uses a linear
process to create compounds, the Company's synthesis technology is
combinatorial, in that the number of compounds synthesized grows exponentially
with the number of cycles in the synthesis. For example, in a 40 cycle process,
Affymetrix has produced a probe array with over one million features, each
containing a unique DNA sequence. This process would take over ten million
cycles using standard DNA synthesis techniques.
The function of each single-stranded probe on the GeneChip probe array is to
bind to its complementary single strand of DNA or RNA from the patient sample.
Each feature on the GeneChip probe array contains identical copies of a single
strand of DNA. The nucleic acid to be tested is isolated from a sample, such as
blood or biopsy tissue, and fluorescently labeled by one of several standard
biochemical methods. The test sample is then washed over the probe array surface
and the labeled test sample binds, or hybridizes, to the complementary probes if
they are present in the probe array. When scanned by the laser in the GeneChip
scanner, the hybridized test sample generates a fluorescent signal. The presence
and sequence of the nucleic acid sample can be determined by detecting these
signals since the sequence and position of each complementary DNA probe on the
probe array are known. The Company's currently manufactured probe arrays contain
from 16,000 to more than 100,000 features.
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INSTRUMENTATION. The fluidics station controls the introduction of the test
sample to the probe array and the hybridization process. A technician places the
test sample in a small container in the fluidics station, which introduces the
test sample into the cartridge containing the DNA probe array. The technician
uses a computer to control the delivery of reagents and the timing and
temperature required for hybridization of the test sample to the probe array.
The process concludes with a reagent wash that leaves only the hybridized test
sample bound to the probe array. The fluidics station can process four probe
arrays simultaneously, typically taking less than one hour to process these
arrays.
After completion of hybridization on the fluidics station, the technician
places the cartridge in the scanner which reads the probe array. The GeneChip
scanner consists of a laser, high resolution optics, robotics to position and
scan the cartridge, a fluorescence detector and an interface to a personal
computer. The label on the test sample emits fluorescent signals when excited by
the light from the laser. The intensity of the fluorescent signal is recorded by
the scanner and stored in the computer. The current scanner can read 1.28X1.28
centimeter probe arrays with up to 64,000 features. An advanced scanner is being
developed to read 1.28X1.28 centimeter probe arrays with up to 400,000 features.
However, there can be no assurance that this scanner will be successfully
developed or commercialized.
SOFTWARE. The GeneChip product software is supplied as part of the
integrated system and runs on a Windows platform. The fluorescence intensity
data captured from the scanner are used in conjunction with computer files
containing the sequence and location of all the probes on the probe array to
determine the nucleotide sequence of the test sample. For the HIV GeneChip
product, the analysis takes less than 90 seconds for one probe array and the
resulting sequence is displayed on the computer. Customized software enables the
technician to rapidly identify polymorphisms in the test sample and to compare
genetic sequences across test samples.
GENOMICS APPLICATION AREAS
Affymetrix is applying the GeneChip technology to create a platform for
genomics and pharmaceutical research. Genomics applications include gene
discovery, genetic mapping, expression monitoring and polymorphism screening.
GENE DISCOVERY. The discovery of genes may be an important means to
understand disease and to design new therapies. A large number of the genes
identified to date have been classified into families based on common sequences
within these genes. One approach to gene discovery uses these common sequences
to search for and identify previously unknown members of these gene families. To
facilitate this approach, the Company designs DNA probe arrays containing a
large number of probes for both common and variable regions of known genes.
Using this technology, samples containing DNA are screened against the probe
arrays, and, for genes that are already known, both the variable and common
regions are detected from the sample. For previously unknown genes, only the
common regions are detected, thus identifying a new gene.
The Company believes that this approach to gene discovery may accelerate the
rate of new gene identification. In November 1994, Affymetrix established a
collaboration with GI to apply the GeneChip technology to the discovery of new
genes and uses of genes in selected gene areas. As part of this collaboration,
GI and the Company have undertaken a three-year research project whereby GI
provides research funding. In addition, Affymetrix supplies custom probe arrays
to GI for specified fees and may receive milestone payments and royalties.
GENETIC MAPPING. Genetic mapping is an important method for linking
diseases to particular genes. Over the last five years, over 60 genes have been
linked to known diseases by this method. However, the current technologies for
mapping genes are slow and labor intensive. This problem is exacerbated when
looking at complex diseases such as diabetes, asthma, and cardiovascular disease
which are believed to be associated with multiple genes. Using genetic mapping,
researchers attempt to find disease genes by using markers. The correlation
between markers in diseased and healthy people enables researchers to link such
genes to a particular disease state. Research to identify markers is currently
being conducted by various academic and scientific groups to improve genetic
mapping techniques. The Company has established a collaboration with the
Whitehead Institute for Biomedical Research at the Massachusetts Institute of
Technology ("MIT") to design probe arrays with new markers identified by
Whitehead scientists. The Company intends to develop mapping
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probe arrays based upon publicly available markers as well as custom probe
arrays based upon proprietary markers. The Company intends to market these
arrays to pharmaceutical and biotechnology companies for conducting genetic
mapping. There can be no assurance that these arrays will be successfully
developed or marketed to these or other customers.
EXPRESSION MONITORING. Currently, large amounts of genetic sequence
information are being generated, through the Human Genome Project and related
efforts, yet relatively little is understood about the function of most genes.
Affymetrix believes that monitoring gene expression is fundamental for
understanding the function of genes and their role in disease. To facilitate the
monitoring of gene expression, the Company designs probe arrays with DNA probes
that are complementary to a sequence within a gene of interest. By providing
sequence information, these probe arrays may enable researchers to identify the
particular gene and quantitatively measure its level of expression compared to
other genes of interest in the test sample. By synthesizing specific probes for
multiple genes on a single probe array, the Company also enables researchers to
quickly, quantitatively and simultaneously monitor the expression of a large
number of genes of interest. By monitoring the expression of such genes at
different times, researchers can use the probe arrays to understand gene
expression and how it is related to disease progression. The Company believes
that such information will be an important tool in the development of new
therapeutics.
Under its collaboration with GI established in November 1994, the Company is
receiving research funding to develop probe arrays for gene expression
monitoring. The Company will also design, manufacture, and supply custom probe
arrays for GI pursuant to a second agreement executed in December 1995. Multiple
custom DNA probe arrays will be designed by the Company to monitor the
expression patterns of approximately 15,000 genes to be specified by GI. GI
retains all rights to discovered genes and their uses. Affymetrix will supply
custom probe arrays for specified fees and may receive milestone payments and
royalties on certain therapeutic products based on the discovered genes. In
April 1996, the Company also entered into an agreement with Incyte to explore
the potential use of DNA probe arrays in the area of gene expression.
POLYMORPHISM SCREENING. As the identity of genes in the human genome is
determined, the need to understand the significance of the variability of
nucleotide sequences in these genes increases. Researchers must determine the
normal sequence of the gene, which mutations exist and how these mutations
correlate with a disease. This requires the sequencing of samples from a large
number of affected and unaffected individuals. Using sequencing strategies
developed for the HIV probe array, Affymetrix believes that GeneChip probe
arrays could significantly reduce the cost and time of polymorphism screening,
which is currently done through more labor intensive gel-based sequencing
techniques. In May 1996, the Company entered into an agreement with Glaxo to
design, test and supply probe arrays to demonstrate use of the arrays in
detecting polymorphisms in specific genes. Glaxo and Affymetrix will design and
test a probe array containing several genes specified by Glaxo. If successfully
developed, Affymetrix will supply Glaxo's requirements of such probe arrays for
research purposes.
There can be no assurance that the Company's collaborative partners will
perform their obligations as expected or will devote sufficient resources to the
development, testing or marketing of the Company's potential products developed
under the collaborations. Further, there can be no assurance that any products
for genomics applications will be successfully developed, be proven to be
accurate and efficacious in any markets, be protected from competition by
others, avoid infringing the proprietary rights of others, be manufactured in
sufficient quantities or at reasonable costs, or be marketed successfully.
DIAGNOSTIC PRODUCTS AND RESEARCH APPLICATIONS
Affymetrix intends to use the GeneChip platform in conjunction with public
and private gene databases to discover and develop diagnostic products. The
Company is pursuing diagnostic products and research applications in infectious
diseases, cancer and other areas, including drug metabolism.
INFECTIOUS DISEASES. The Company believes its GeneChip technology may
enable it to develop tests which, by sequencing large amounts of genetic
information and quantitatively measuring levels of gene expression, can provide
information that could improve treatments for many infectious diseases.
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Industry sources estimate that in North America and Europe approximately 1.5
million persons are infected with HIV and that approximately 100,000 persons are
diagnosed with AIDS annually. Many HIV symptomatic patients receive antiviral
treatment with reverse transcriptase inhibitors, such as AZT, or protease
inhibitors, both of which block proteins required for the virus to replicate.
The HIV genome encodes the reverse transcriptase and protease gene proteins
within approximately 1,400 bases (or approximately 15%) of the viral genome.
Mutations in the viral genome result from errors in replication. Some of these
mutations confer resistance to the antiviral drugs being administered to the
patient. It is believed that the identity of nucleotides in the reverse
transcriptase and protease genes will be essential in order to monitor a
patient's drug resistance profile.
Affymetrix has developed the GeneChip system with an HIV probe array as its
first product for commercialization. The Company believes this GeneChip system
will enable researchers to identify the mutations associated with drug
resistance in HIV infected patients and allow researchers to identify new
mutations. The HIV probe array contains DNA probes in approximately 20,000
features that represent sequences of the reverse transcriptase and protease
genes of the virus. These features can identify mutations at any of the sites in
the genes that have been associated with drug resistance. The Company expects to
initially market the HIV product for research use in identifying the correlation
between mutations in the virus and drug resistance. The Company believes that
monitoring drug resistance related mutations during therapy may become a
valuable aspect of patient management. Affymetrix has placed five GeneChip
systems for the HIV application in academic research and pharmaceutical
companies for evaluation and validation. The Company commenced commercial sales
of the GeneChip system and HIV probe array for research use only in April 1996.
The Company will rely on third parties to manufacture and service its
instruments. The Company has no prior experience in introducing a commercial
product. There can be no assurance that technicians will not experience
difficulties with the system that would prevent or limit its use. In addition,
there can be no assurance that the efficiency and accuracy of the HIV probe
array in providing sequence information from HIV will be better than current
technologies, such as gel-based sequencing.
The Company intends to develop additional diagnostic products in the
infectious disease area that could determine complex drug resistance and gene
identification information. The Company is evaluating the development of
additional GeneChip probe tests for bacterial, viral and fungal infections, such
as tuberculosis and cytomegalovirus (CMV). The Company intends to seek
collaborators to participate in the funding, development and marketing of these
tests.
CANCER. In the United States, approximately 1.1 million new cases of cancer
are diagnosed annually and the incidence of cancer deaths is approximately
520,000 individuals each year. Colorectal, breast, prostate and lung cancer
account for approximately half of all diagnoses.
The p53 gene encodes a protein whose normal function is to control cell
replication. However, mutations in the p53 gene can result in the loss of this
function and are known to contribute to the aggressive growth of some types of
cancer, including colorectal, breast and bladder cancers. Mutations have been
observed to date at more than 400 distinct sites in the p53 gene sequence.
Currently available diagnostic tests include IN VITRO assays that use antibodies
to detect the accumulation of p53 molecules in cells but cannot directly detect
mutations in the p53 gene. Gel-based sequencing methods are impractical because
mutations can occur over a large area of the genome, requiring many gels to be
processed to sequence the entire gene. As a result, these methods are unable to
predict the rate of cancer progression. Understanding the rate of progression is
often necessary to determine whether to treat the cancer with chemotherapy,
radiation or surgery.
The Company is currently developing a GeneChip p53 probe array that contains
DNA probes to detect known mutation sites, as well as to sequence areas of the
p53 gene where other mutations may occur but have currently not been identified.
Initially, the Company intends to market these p53 probe arrays to academic
research centers and reference laboratories to study the p53 gene. The Company
also intends to seek regulatory approval to use the p53 probe array for clinical
use to assist in monitoring cancer progression and improving patient therapy.
The Company is currently evaluating other genes associated with cancer for
potential product development. There can be no assurance that the p53 probe
array or other cancer products will be developed, receive regulatory approvals
or be successfully commercialized.
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OTHER APPLICATIONS. The Company is developing its GeneChip technology to
address other applications in pharmaceutical research, such as monitoring drug
metabolism.
Monitoring drug metabolism is an essential component in drug development.
Drug metabolism determines how quickly or slowly a drug is eliminated or
rendered inactive and whether any of the drug is processed into a toxic
compound. Genetic differences among patients are an important factor in drug
metabolism. Variations in drug metabolism are important to the development of
new drugs because these variations determine how patients will react to drugs
and which drugs will have relatively uniform effects across a broad population.
Certain of the genes coding for metabolic enzymes have been identified and
sequenced by researchers. Patients who have mutations in these genes are poor
metabolizers of drugs and may suffer from excessive drug accumulation and severe
toxicity from standard drug doses.
Affymetrix is collaborating with HP to develop a GeneChip probe array with
probes containing the gene sequence of mutations in two genes coding for
metabolic enzymes. Mutations in these two genes have been associated with
patients who are poor metabolizers of numerous drugs. HP will have worldwide
marketing rights for the probe arrays in the nonclinical market, which are to be
manufactured and supplied by the Company. The Company is entitled to royalties
and revenues, if any, from the supply of these probe arrays to HP. There can be
no assurance that these DNA probe arrays will be developed or commercialized or
will result in revenues to the Company.
NEW DIAGNOSTIC MARKERS. As genes are discovered through the Human Genome
Project and related efforts, the Company believes that additional correlations
will be found between genes and disease. Affymetrix believes that by using probe
arrays to monitor the levels of expression of many genes in parallel, it will be
able to identify proteins encoded by these genes that can serve as new markers
for conventional immunoassays. The Company intends to collaborate with
diagnostic companies to incorporate such protein markers into established
immunoassay formats. There can be no assurance that the Company will be able to
identify any new markers, negotiate such collaborative agreements on acceptable
terms, if at all, or that such collaborations will be successful.
There can be no assurance that any products for diagnostic applications will
be successfully developed, be proven to be accurate and efficacious in any
markets, meet applicable regulatory standards in a timely manner or at all, be
protected from competition by others, avoid infringing the proprietary rights of
others, be manufactured in sufficient quantities or at reasonable costs, or be
marketed successfully.
MANUFACTURING
The Company's strategy is to manufacture its disposable DNA probe arrays
in-house and contract with third-party suppliers to manufacture the fluidics
station and scanner for its GeneChip system.
The Company is currently manufacturing limited quantities of probe arrays
for internal and collaborative purposes and for initial product sales for
research use. The Company's probe array manufacturing process involves wafer
preparation, probe synthesis, dicing of synthesized wafers into chips, assembly
of chips into cartridges, and quality control. Glass wafers are prepared for
synthesis through the application of chemical coatings. DNA probes are
synthesized on the wafers using the Company's proprietary photolithographic
process. The completed wafers are then diced to yield individual probe arrays,
which are assembled into disposable cartridges and packaged for shipment. The
Company's probe array synthesis, dicing and assembly processes currently use
robotics and the Company's manufacturing process is partially automated. The
Company intends to further automate the manufacturing process. There can be no
assurance that manufacturing and quality control problems will not arise as the
Company attempts to scale-up its manufacturing facilities or that such scale-up
can be acheived in a timely manner or at commercially reasonable costs.
Affymetrix has developed software programs that automatically design
photolithographic masks used in probe array manufacturing and control the probe
array manufacturing lines.
The Company relies on outside vendors to manufacture its fluidics stations
and scanners. The Company has a supply agreement with Molecular Dynamics for its
current scanner, which can read up to 64,000 features per
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1.28X1.28 centimeter probe array. The Company's HIV probe array currently has
20,000 features on a 1.28X1.28 centimeter probe array and may be used with the
Molecular Dynamics scanner. The Company expects to purchase scanners from
Molecular Dynamics through the end of 1996.
As part of the Company's collaboration with HP, HP is developing a higher
resolution scanner. The HP scanner is designed to read probe arrays with up to
400,000 features per 1.28X1.28 centimeter probe array. The Company expects that
the HP scanner will be commercially available for use with the Company's probe
arrays in 1997.
The fluidics stations currently in the field are prototype versions that
were manufactured by the Company. The Company has entered into an agreement with
RELA, a private company, for the supply of fluidics stations. Pursuant to the
Company's supply agreement with RELA, the Company must provide a six-month
rolling forecast of its purchase requirements for fluidics stations and is
obligated to make certain minimum purchases, at prices that vary depending on
the volume ordered.
There can be no assurance that the HP scanner will be developed
successfully. Further, no assurance can be given that probe array scanners,
fluidics stations or reagents will be available in commercial quantities at
acceptable costs. If the Company is required to seek alternative sources of
supply, it could be time consuming and expensive. In addition, the Company is
dependent on its vendors to provide components of appropriate quality and
reliability and to meet applicable regulatory requirements. Consequently, in the
event that supplies from these suppliers were delayed or interrupted for any
reason, the Company's ability to develop and supply its products could be
impaired, which could have a material adverse effect on the Company's business,
financial condition and results of operations.
The GeneChip system is a complex set of instruments and includes DNA probe
arrays, which are produced in an innovative and complicated manufacturing
process. During the beta testing phase of the GeneChip system's development, the
Company and its vendors have encountered and satisfactorily addressed a number
of technical problems, including software failures, improper alignment of probe
array wafers, valve and tube failures in the fluidics station, sensor wiring
issues and scanner control problems. Due to the complexity and lack of operating
history of these products, the Company anticipates that additional technical
problems may occur or be discovered as more systems are placed into operation.
If these problems cannot be readily addressed, they could cause delays in
shipments, warranty expenses and damages to customer relationships, which would
have a material adverse effect on the Company's business, financial condition
and results of operations.
Although the Company does not currently need to comply with GMP to
manufacture probe arrays and related instrumentation for sale for research
purposes, it may need to be GMP compliant to sell these products to clinical
reference laboratories and it will need to be compliant to sell these products
for clinical use. There can be no assurance that manufacturing and quality
control problems will not arise as the Company attempts to scale-up its
manufacturing facilities or that such scale-up can be achieved in a timely
manner or at a commercially reasonable cost.
SALES AND MARKETING
The Company intends to market the GeneChip system for diagnostic
applications through direct sales efforts and collaborative arrangements with
corporate partners and distributors. The Company intends to market the GeneChip
system for genomics applications through collaborations with corporate partners.
The Company's near term strategy is to commercialize the GeneChip system for
research use only. The Company's longer term strategy is to seek regulatory
approval for and to commercialize GeneChip systems as diagnostic tests for
clinical use. To date, the Company has placed nine systems for research use in
the United States. Five of these systems are for HIV applications.
The Company believes that the primary market for diagnostic applications in
the United States will be academic research centers, pharmaceutical and
biotechnology companies and reference laboratories. The Company intends to
establish a direct sales force to market to these potential customers for
research use. The Company believes that academic research centers could use the
GeneChip system in their disease related research. Affymetrix believes
pharmaceutical companies could use the GeneChip system to study genetic
variations in patients participating in clinical trials of new drugs. Currently,
there are three major reference laboratory companies in the United States, two
of which are associated with large pharmaceutical companies.
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These reference laboratories are specialized laboratories at multiple locations
that conduct complex testing for the diagnosis and monitoring of disease and
clinical trials and testing for pharmaceutical and biotechnology companies. The
Company believes that each of these reference laboratories could be a customer
for the GeneChip system and may require multiple systems at each location
depending on the volume and complexity of the tests.
The Company believes that the primary international customers for diagnostic
applications of its GeneChip system will be academic research centers,
pharmaceutical and biotechnology companies, and independent testing
laboratories. The Company initially intends to market to these customers through
collaborative partners. To date, the Company has not placed any of its GeneChip
systems outside the United States.
Affymetrix believes that the primary customers for genomics applications of
its GeneChip system will be pharmaceutical and biotechnology companies that
would use the GeneChip system in the discovery of new therapeutics. Affymetrix
intends to market to these customers directly and to form non-exclusive
contracts for the design, manufacture and supply of custom GeneChip probe
arrays. Affymetrix currently has a small internal technical support group to
service its GeneChip system, which the Company intends to expand as necessary.
The Company believes that it will need to develop a larger technical support
infrastructure to service these collaborations.
Under the Company's collaboration with HP, HP has worldwide rights to market
GeneChip systems in specified nonclinical markets. Affymetrix has the right to
market the system in the clinical diagnostic market, subject to HP's option to
certain rights in selected clinical markets.
Market acceptance will depend on many factors, including convincing
researchers the GeneChip system is an attractive alternative to current
technologies for the acquisition, analysis and management of genetic
information; the receipt of regulatory clearances in the United States, Europe,
Japan and elsewhere; the need for laboratories to license other technologies,
such as amplification technologies that may be required to use the GeneChip
system for certain applications; and the availability of new proprietary markers
that may be important to the diagnosis, monitoring and treatment of disease for
incorporation on the Company's probe arrays. Market acceptance may be adversely
affected by ethical concerns that may limit the use of the GeneChip system for
certain diagnostic applications or the analysis of genetic information. In
addition, potential customers will need skilled laboratory technicians to
operate the GeneChip system. Market acceptance of the GeneChip system could also
be adversely affected by limited funding available for academic research centers
and other research centers that are the potential customers for the GeneChip
system. The Company anticipates a long sales cycle to market the GeneChip system
to its potential customers. There can be no assurance that the Company will be
able to establish a direct sales force or to establish collaborative or
distribution arrangements to market its products. Failure to do so would have a
material adverse effect on the Company's business, financial condition and
results of operations.
RESEARCH AND DEVELOPMENT
The Company believes that substantial investment in research and development
is essential to obtaining a competitive position in the genetic information and
diagnostics markets. Affymetrix focuses on three types of research and
development: applied research, including diagnostic product research and
discovery; core technology development, including manufacturing process
refinement, new instrumentation design, and novel chemical synthesis; and basic
research to explore and expand the potential uses of DNA probe arrays and to
discover new technologies.
APPLIED RESEARCH. Affymetrix has several diagnostic research projects in
three major diagnostic fields: infectious disease, cancer and other diseases. In
the infectious disease area, the Company is evaluating probe array applications
for several infectious organisms, such as tuberculosis and CMV. The Company's
research in cancer is focused on monitoring mutations associated with cancer
progression and the discovery of diagnostic markers for cancers such as breast
and colorectal cancers. The Company has a collaboration with Dr. Francis Collins
at the NIH for the development of probe arrays directed to the detection of
certain mutations believed to be associated with the development of breast
cancer.
Other research efforts at Affymetrix are currently focused on developing
probe arrays for the diagnosis of genetic diseases and certain other disorders.
Affymetrix has conducted a feasibility study funded by Roche to
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develop a probe array to detect mutations causing cystic fibrosis. Affymetrix
also intends to initiate research programs based on known markers, such as HLA,
for determining compatibility for tissue transplants. The Company intends to
initiate research programs to discover novel markers for prevalent chronic human
diseases, such as cardiovascular disease, osteoporosis and arthritis.
CORE TECHNOLOGY DEVELOPMENT. The Company conducts research in several
areas, including novel and improved synthesis chemistries, manufacturing
processes, new manufacturing instrumentation, and enhancements in the design of
fluidics stations and scanners. A significant research effort is dedicated to
designing data analysis software to extract information from DNA probe arrays.
BASIC RESEARCH. Affymetrix' basic research efforts are focused on expanding
the applications of the GeneChip system and discovering related new
technologies. These efforts are focused on improving sensitivity, increasing
capacity and conducting more complex assays.
The Company's research and development expenses for the years ended December
31, 1995, 1994 and 1993, were $12.4 million, $9.5 million and $6.6 million
respectively. Research and development expenses for the three-month period ended
March 31, 1996 and 1995 were $4.2 million and $2.3 million, respectively.
Genomics and diagnostic technologies have undergone and are expected to
continue to undergo rapid and significant change. Rapid technological
development by the Company or others may result in products or technologies
becoming obsolete. In addition, any products offered by the Company would be
made obsolete by less expensive or more effective tests based on other
technologies or by new therapeutic or prophylactic agents that obviate the need
for diagnostic and monitoring information. There is no assurance that the
Company will be able to make the enhancements to its technology necessary to
compete successfully with newly emerging technologies.
COLLABORATIVE AGREEMENTS AND GRANTS
The Company's strategy regarding collaborative agreements is to expand the
applications of the Company's technology and to acquire access to complementary
technologies and resources, such as manufacturing and marketing, from its
collaborative partners. Accordingly, the Company's agreements emphasize
preserving the Company's rights to technological improvements and future
business opportunities rather than large up-front fees or sizeable commitments
of research funding from its partners.
GENETICS INSTITUTE, INC.
In November 1994, the Company entered into a collaboration with GI to
develop and apply new technologies for understanding the functions of human
genes. Under the agreement, GI provides research funding to the Company for the
development of DNA probe arrays used in DNA sequence analysis to enable GI to
discover new genes and uses for genes and to rapidly screen for the expression
of specified genes in both normal and diseased tissues.
The initial term of the research collaboration with GI is three years. In
the event that the specified technical milestones are achieved prior to such
time, GI and the Company may either conclude the collaboration or agree to
continue the collaboration with additional milestones for the remainder of the
three years. The agreement provides that if the Company enters into similar
agreements for gene expression with other third parties, it may be required to
refund a portion of the development funding received from GI and future funding
may be proportionately reduced. As a result of the agreement entered into with
Incyte in April 1996, the Company expects to refund a portion of such funding to
GI in 1996. In addition, either party has the right to terminate the
collaboration for lack of feasibility or if the parties cannot reach agreement
on certain matters, in which event the Company could be obligated to refund up
to 50% of the funding paid by GI.
Until five years from the end of the research collaboration, Affymetrix has
agreed to supply custom probe arrays to GI for gene discovery and gene
expression research in certain designated fields in return for specified
payments. In addition, upon the achievement of technical milestones, GI pays
Affymetrix milestone payments. Until November 1999, the Company cannot develop
probe arrays duplicating specific characteristics of those developed for GI.
Thereafter, the Company can sell such probe arrays, provided that they do not
contain proprietary sequences or other confidential information belonging to GI.
GI will have all rights to therapeutic
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compounds discovered through the use of DNA probes provided by the Company, and
the Company will receive royalties on certain such therapeutic compounds. The
Company retains all rights to enhancements to the GeneChip system technology
developed in the collaboration.
In December 1995, the Company and GI expanded their relationship by entering
into a supply agreement in the field of genomics under which the Company will
manufacture and supply additional custom probe arrays based on specific genes
identified and selected by GI. Unlike the 1994 agreement with GI, this agreement
does not provide research funding to the Company. Pursuant to the agreement, GI
is obligated to purchase and the Company is obligated to supply certain minimum
quantities of the custom probe arrays developed for GI until the later of 2001
or four years after development of specified probe arrays. The Company will
receive fees for the design and delivery of the custom probe arrays, as well as
certain milestone payments and royalties on most therapeutic compounds if
developed by GI using these probe arrays. GI has exclusive rights to specific
probe arrays supplied by the Company.
As of March 31, 1996, the Company had received a total of $1.8 million from
GI, a portion of which is subject to refund.
HEWLETT-PACKARD COMPANY
In November 1994, the Company entered into a collaborative agreement with HP
to combine the Company's GeneChip technology and HP's measurement and instrument
capabilities to develop and manufacture a more advanced scanner for use with
GeneChip probe arrays.
Pursuant to the agreement, the Company will develop and manufacture probe
arrays and HP will develop and manufacture instruments to read the arrays. Each
of the parties is obligated to supply the components of the system developed by
it to the other party. Under certain circumstances, if either party ceases to
supply its component, the other party could obtain the manufacturing rights to
such component.
The agreement also specifies marketing rights outside of the clinical market
in certain non-clinical fields. HP has primary rights to market the GeneChip
system to the bioanalytical market, and the Company has primary rights to market
the GeneChip system in the biomedical research market. The Company has rights to
market the system for clinical use, subject to HP's option to certain rights in
selected clinical markets. The Company also has reserved rights to supply custom
probe arrays for collaborations in the genomics field.
As of March 31, 1996, the Company had received a total of $3.0 million from
HP under this collaboration, consisting of research funding, license fees and
option payments. The Company is also entitled to receive certain milestone
payments and royalties on HP's sales of the GeneChip system and HP is entitled
to receive royalties on any systems sold by the Company. The collaboration is
for a five-year term and is renewable for consecutive three-year terms
thereafter, subject to either party's right to terminate on six months notice.
Pursuant to the agreement, the Company, in collaboration with HP, will
manufacture and supply a limited number of custom probe array designs for HP in
the nonclinical field. HP also has a one-year option, to sponsor the development
of custom probe arrays in certain specified fields and to obtain exclusive
rights to such probe arrays. In the event that HP exercises such option, the
Company will be required to develop the probe arrays on a timely basis. If the
Company fails to provide the requested probe arrays, it will be required to
grant HP rights to develop and manufacture such probe arrays, subject to the
payment of established royalty rates to the Company.
ADVANCED TECHNOLOGY PROGRAM (UNITED STATES DEPARTMENT OF COMMERCE)
In October 1994, the Company and Molecular Dynamics were awarded a $31.5
million five-year grant to develop novel point-of-care diagnostic systems under
the National Institute of Standards and Technology's Advanced Technology
Program. Pursuant to the grant, $20.8 million is designated for the Company and
its subcontractors and $10.7 million for Molecular Dynamics and its
subcontractors subject to the requirement of each company to match such funding.
The grant specifies the development of an advanced miniaturized nucleic acid
diagnostic device intended to reduce the costs and increase the speed and
reliability of DNA diagnostic tests. The device would be used in point-of-care
settings, such as hospitals, clinics and doctors' offices. The research
agreements between the Company and its subcontractors under the ATP grant (the
University of
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California, Stanford University and the University of Washington) require that
the universities assign the rights to any project inventions made by them to the
Company subject to specified royalty payments. The ATP agreement provides that
the Company and Molecular Dynamics retain rights in their respective fields to
intellectual property developed as part of the project.
The ATP grant is administered by the United States Department of Commerce.
As of March 31, 1996, the Company had received $1.4 million under the ATP grant.
The grant is subject to yearly appropriations by the United States Congress for
the ATP program, and legislation has been introduced to eliminate the program.
There can be no assurance that funding for the ATP program will not be reduced
or eliminated at any time. The reduction or elimination of the ATP grant could
have a material adverse effect on the Company's business, financial condition
and results of operations.
NATIONAL INSTITUTES OF HEALTH
In August 1995, the Company received a three-year grant for approximately
$6.0 million from the NIH National Center for Human Genome Research, for a
project entitled "Sequencing and Mapping with DNA Probe Arrays." Under the
project, the Company is developing applications of DNA probe arrays for larger
scale gene sequencing and creating a laboratory at the Company for use by
outside researchers. The grant also includes a subcontract with Stanford
University to continue research and development of the DNA probe array
technology. The Company has been awarded approximately $2.0 million for the
first year of the grant, and the remaining amounts are subject to yearly
appropriations by the NIH. There can be no assurance that the NIH will obtain
the necessary funding from the United States Congress to continue to fund this
grant.
OTHER AGREEMENTS
The Company has agreements with several entities to develop and test probe
arrays for the detection of certain gene sequences, mutations or organisms.
These include a one-year feasibility agreement with Roche Molecular Systems,
Inc., entered into in November 1995, for detection of certain mutations
associated with the cystic fibrosis transmembrane regulator (CFTR) gene, a
six-month feasibility agreement with Incyte, entered into in April 1996 to
evaluate the use of DNA probe arrays to generate gene expression data, and a
development and supply agreement entered into in May 1996 with Glaxo for
detection of polymorphisms in specific genes, which has a term of up to three
years. Under such agreements, the Company is typically paid a development fee
and may receive milestone payments upon achievement of certain technical goals.
The Company also has research agreements with several universities and research
organizations. For example, the Company has an agreement with Dr. Francis
Collins at the NIH for the development of probe arrays to detect certain
mutations believed to be associated with the development of breast cancer, and
an agreement with Dr. Eric Lander at the Whitehead Institute for Biomedical
Research at MIT to collaborate in the investigation of single nucleotide
polymorphism markers using DNA probe arrays.
The Company generally obtains rights to intellectual property arising from
these agreements. If a project is successful, the Company and the third-party
collaborator would negotiate the right to commercialize products resulting from
such project. The Company has received a substantial portion of its revenues
since inception from its collaborative partners and intends to enter into
collaborative arrangements with other companies to apply its technology, fund
development, commercialize potential future products, and assist in obtaining
regulatory approval. There can be no assurance that any of the Company's present
or future collaborative partners will perform their obligations as expected or
will devote sufficient resources to the development, clinical testing or
marketing of the Company's potential products developed under the
collaborations. There can be no assurance that the Company will be able to
maintain its current collaborations, negotiate collaborative arrangements on
acceptable terms, if at all, or that any collaborations will be successful.
INTELLECTUAL PROPERTY
As of April 15, 1996, Affymetrix had exclusive licenses from Affymax for
over 20 patents and patent applications in the United States related to its
business in the fields of clinical diagnostics and research supply. In addition,
Affymetrix is the assignee of 52 United States patent applications and one
issued patent in the United States. Many of these patents and applications have
been filed and/or issued in one or more foreign countries. Affymetrix also
relies upon copyright protection, trade secrets, know-how, continuing
technological
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innovation and licensing opportunities to develop and maintain its competitive
position. The Company's success will depend in part on its ability to obtain
patent protection for its products and processes, to preserve its copyright and
trade secrets and to operate without infringing the proprietary rights of third
parties.
In 1993 Affymetrix and Affymax entered into a technology license agreement
(the "Technology License Agreement") pursuant to which Affymax granted to
Affymetrix an exclusive, worldwide, royalty-free license with right to
sublicense, among other things, certain patents and patent applications (and any
foreign counterparts) to develop, make, use and sell certain products for the
clinical diagnostic and research supply markets, including rights to sell DNA
probe arrays. The patents licensed to Affymetrix include those for the
light-directed synthesis technology and for several other technologies.
Affymetrix has the exclusive right to sell DNA probe array technology for DNA
sequencing and sequence analysis. The Company's rights to the other technologies
are for the fields of diagnostics and analytical and bioanalytical tests, and do
not include other fields such as drug discovery. In addition, Affymax granted to
Affymetrix an exclusive license to certain trademarks, including "Affymetrix."
Pursuant to the Technology License Agreement, Affymax also granted to
Affymetrix certain rights to future inventions made by, or on behalf of, Affymax
to use such inventions for the development and commercialization of, among other
things, certain products in the clinical diagnostics and research supply
markets, including rights to sell DNA probe arrays. These rights consist of
either an exclusive, worldwide royalty-free license with right to sublicense or
a right of first negotiation covering such inventions made during the period
until July 2000. In turn, Affymetrix granted to Affymax certain parallel rights
to future inventions made by, or on behalf of, Affymetrix during the same period
for the development and commercialization of products in drug discovery and
related fields, not including those related to DNA sequence analysis. The rights
granted to Affymax consist of an exclusive, worldwide royalty-free license with
right to sublicense, to develop and commercialize any new Affymetrix technology
that is dominated by one or more patents licensed to Affymetrix in drug
discovery and related fields, and the right of first negotiation with respect to
other Affymetrix inventions in these fields, not including those related to DNA
sequence analysis. In addition, Affymetrix agreed to notify Affymax in advance
of its intention to sell certain products in the research supply market to
ensure that such products cannot be used for drug discovery, as reagents for IN
VIVO imaging or certain other related purposes.
The Company is party to various license option agreements with third parties
(including Stanford University and the University of California) which give it
rights to use certain technologies. Failure of the Company to maintain rights to
such technology could have a material adverse effect on the Company's business,
financial condition and results of operations. For example, inability of the
Company to exercise the option for the Stanford technology under commercially
reasonable terms could have an adverse effect on the ability of the Company to
sell certain of its products.
The patent positions of pharmaceutical, biopharmaceutical and biotechnology
companies, including the Company, are generally uncertain and involve complex
legal and factual questions. There can be no assurance that any of the Company's
pending patent applications will result in issued patents, that the Company will
develop additional proprietary technologies that are patentable, that any
patents issued to the Company or its strategic partners will provide a basis for
commercially viable products or will provide the Company with any competitive
advantages or will not be challenged by third parties, or that the patents of
others will not have an adverse effect on the ability of the Company to do
business. In addition, patent law relating to the scope of claims in the
technology fields in which the Company operates is still evolving. The degree of
future protection for the Company's proprietary rights, therefore, is uncertain.
Furthermore, there can be no assurance that others will not independently
develop similar or alternative technologies, duplicate any of the Company's
technologies, or, if patents are issued to the Company, design around the
patented technologies developed by the Company. In addition, the Company could
incur substantial costs in litigation if it is required to defend itself in
patent suits brought by third parties or if it initiates such suits.
The commercial success of the Company also depends in part on the Company
neither infringing patents or proprietary rights of third parties nor breaching
any licenses that may relate to the Company's technologies and products. For
example, the Company, its collaborators and customers may need to acquire a
license for an amplification technology to use the GeneChip system, and there is
no assurance such a license will be available on commercially reasonable terms.
The Company is aware of third-party patents that may relate to the Company's
technology, including reagents used in probe array synthesis and in probe array
assays, probe array
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scanners, synthesis techniques, oligonucleotide amplification techniques,
assays, and probe arrays. There can be no assurance that the Company will not
infringe on these patents, other patents or proprietary rights of third parties.
In addition, the Company has received and may in the future receive a notice
claiming infringement from third parties as well as invitations to take licenses
under third party patents. Any legal action against the Company or its
collaborative partners claiming damages and seeking to enjoin commercial
activities relating to the affected products and processes could, in addition to
subjecting the Company to potential liability for damages, require the Company
or its collaborative partner to obtain a license in order to continue to
manufacture or market the affected products and processes. There can be no
assurance that the Company or its collaborative partners would prevail in any
such action or that any license (including licenses proposed by third parties)
required under any such patent would be made available on commercially
acceptable terms, if at all. There are a significant number of United States and
foreign patents and patent applications in the Company's areas of interest, and
the Company believes that there may be significant litigation in the industry
regarding patent and other intellectual property rights. If the Company becomes
involved in such litigation, it could consume a substantial portion of the
Company's managerial and financial resources, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Others may have filed and in the future are likely to file patent
applications that are similar or identical to those of the Company. To determine
the priority of inventions, the Company may have to participate in interference
proceedings declared by the United States Patent and Trademark Office that could
result in substantial cost to the Company. No assurance can be given that any
such patent application will not have priority over patent applications filed by
the Company.
The enactment of legislation implementing the General Agreement on Trade and
Tariffs has resulted in certain changes in United States patent laws that became
effective on June 8, 1995. Most notably, the term of patent protection for
patent applications filed on or after June 8, 1995 is no longer a period of
seventeen years from the date of grant. The new term of United States patents
will commence on the date of issuance and terminate twenty years after the
earliest effective filing date of the application. Because the time from filing
to issuance of biotechnology patent applications in the Company's area of
interest is often more than three years, a twenty-year term after the effective
date of filing may result in a substantially shortened term of the Company's
patent protection which may adversely affect the Company's patent position.
The Company also relies upon copyright and trade secret protection for its
confidential and proprietary information. There can be no assurance, however,
that such measures will provide adequate protection for the Company's trade
secrets or other proprietary information. In addition, there can be no assurance
that proprietary information will not be disclosed, that others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to the Company's copyrights and trade
secrets or disclose such technology, or that the Company can meaningly protect
its trade secrets.
The Company's academic collaborators have certain rights to publish data and
information in which the Company has rights. There is considerable pressure on
academic institutions to publish discoveries in the genetics and genomics
fields. There can be no assurance that such publication would not adversely
affect the Company's ability to obtain patent protection for some genes in which
it may have a commercial interest.
COMPETITION
Competition in genomics and diagnostics is intense and expected to increase.
Further, the technologies for discovering genes associated with significant
diseases and approaches for commercializing those discoveries are new and
rapidly evolving.
Currently, the Company's principal competition comes from existing
technologies that are used to perform many of the same functions for which the
Company plans to market its GeneChip systems. In the diagnostic field, these
technologies are provided by established diagnostic companies such as Abbott
Laboratories, Boehringer Mannheim GmbH, Roche, Johnson & Johnson, and SmithKline
Beecham plc. These technologies include a variety of established assays, such as
immunoassays, histochemistry, flow cytometry and culture, and newer DNA probe
diagnostics to analyze certain limited amounts of genetic information. In the
genomics field, competitive technologies include gel-based sequencing using
instruments provided by companies such as the
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Applied Biosystems division of Perkin Elmer and Pharmacia Biotech AB. In order
to compete against existing technologies, the Company will need to demonstrate
to potential customers that the GeneChip system provides improved performance
and capabilities.
The market for diagnostic products derived from gene discovery is currently
limited and will be highly competitive. Many companies are developing and
marketing DNA probe tests for genetic and other diseases. Other companies are
conducting research on new technologies for diagnostic tests based on advances
in genetic information. Established diagnostic companies could provide
significant competition to Affymetrix through the development of new products.
These companies have the strategic commitment to diagnostics, the financial and
other resources to invest in new technologies, substantial intellectual property
portfolios, substantial experience in new product development regulatory
expertise, manufacturing capabilities and the distribution channels to deliver
products to customers. These companies also have an installed base of
instruments in several markets, including clinical and reference laboratories,
which are not compatible with the GeneChip system. In addition, these companies
have formed alliances with genomics companies which provide them access to
genetic information that may be incorporated into their diagnostic tests.
In the genomics field, future competition will likely come from existing
competitors as well as other companies seeking to develop new technologies for
sequencing and analyzing genetic information. In addition, pharmaceutical and
biotechnology companies, such as Genome Therapeutics Corporation, Human Genome
Sciences, Inc., Incyte, Millenium Pharmaceuticals, Inc., Myriad Genetics, Inc.
and Sequana Therapeutics, Inc. have significant needs for genomic information
and may choose to develop or acquire competing technologies to meet these needs.
GOVERNMENT REGULATION
The Company anticipates that the manufacturing, labeling, distribution and
marketing of some or all of the Company's diagnostic products will be subject to
government regulation in the United States and in certain other countries.
In the United States, the FDA regulates, as medical devices, most diagnostic
tests and IN VITRO reagents that are marketed as finished test kits or
equipment. Some clinical laboratories, however, purchase individual reagents
intended for specific analytes, and, using those reagents, to develop and
prepare their own finished diagnostic tests. Although the FDA has not generally
exercised regulatory authority over these individual reagents or the finished
tests prepared from them by the clinical laboratories. The FDA has recently
proposed a rule that, if adopted, would regulate reagents sold to clinical
laboratories as medical devices. The proposed rule would also restrict sales of
these reagents to clinical laboratories certified under CLIA as high complexity
laboratories. The Company intends to market some diagnostic products as finished
test kits or equipment and others as individual reagents; consequently, some or
all of these products will be regulated as medical devices.
The Food, Drug, and Cosmetic Act requires that medical devices introduced to
the United States market, unless exempted by regulation, be the subject of
either a premarket notification clearance (known as a "510(k)") or an approved
premarket approval ("PMA"). Some of the Company's products may require a PMA and
others may require a 510(k). With respect to devices reviewed through the 510(k)
process, a Company may not market a device until an order is issued by the FDA
finding the product to be substantially equivalent to a legally marketed device
known as a "predicate device." A 510(k) submission may involve the presentation
of a substantial volume of data, including clinical data, and may require a
substantial review. The FDA may agree that the product is substantially
equivalent to a predicate device and allow the product to be marketed in the
United States. The FDA, however, may (i) determine that the device is not
substantially equivalent and require a PMA, or (ii) require further information,
such as additional test data, including data from clinical studies, before it is
able to make a determination regarding substantial equivalence. By requesting
additional information, the FDA can further delay market introduction of a
company's products. If the FDA indicates that a PMA is required for any of the
Company's products, the application will require extensive clinical studies,
manufacturing information and likely review by a panel of experts outside the
FDA. Clinical studies to support either a 510(k) submission or a PMA application
would need to be conducted in accordance with FDA requirements. Failure to
comply with FDA requirements could result in the FDA's refusal to accept the
data or the imposition of regulatory sanctions. FDA review of a PMA application
could take significantly longer than that for a 510(k).
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There can be no assurance that the Company will be able to meet the FDA's
requirements or that any necessary approval will be received. Once granted, a
510(k) clearance or PMA approval may place substantial restrictions on how the
device is marketed or to whom it may be sold. Even where a device is exempted
from 510(k) clearance or PMA approval, the FDA may impose restrictions on its
marketing. In addition to requiring clearance or approval for new products, the
FDA may require clearance or approval prior to marketing products that are
modifications of existing products. There can be no assurance that any necessary
510(k) clearance or PMA approval will be granted on a timely basis or at all.
FDA imposed restrictions could limit the number of customers to whom particular
products could be marketed or what may be communicated about particular
products. Delays in receipt of or failure to receive any necessary 510(k)
clearance or PMA, or the imposition of stringent restrictions on the Company's
labeling and sales of its products could have a material adverse effect on the
Company.
As a medical device manufacturer, the Company would also be required to
register and list its products with the FDA. In addition, the Company would be
required to comply with the FDA's GMP regulations, which require that medical
devices be manufactured and records be maintained in a prescribed manner with
respect to manufacturing, testing and control activities. Further, the Company
would be required to comply with FDA requirements for labeling and promotion of
its medical devices. For example, the FDA prohibits cleared or approved devices
from being marketed for uncleared or unapproved uses. In addition, the medical
device reporting regulation would require that the Company provide information
to the FDA whenever there is evidence to reasonably suggest that one of its
devices may have caused or contributed to a death or serious injury, or that
there has occurred a malfunction that would be likely to cause or contribute to
a death or serious injury if the malfunction were to recur.
Medical device manufacturers are subject to periodic inspections by the FDA
and state agencies. Additionally, FDA will conduct a preapproval inspection for
all PMA devices and in some cases for 510(k) devices as well. If the FDA
believes that a company is not in compliance with applicable laws or
regulations, it can institute proceedings to issue a warning letter apprising of
violative conduct, detain or seize products, issue a recall, enjoin future
violations and assess civil and criminal penalties against the company, its
officers or its employees. In addition, clearances or approvals could be
withdrawn in appropriate circumstances. Failure to comply with regulatory
requirements or any adverse regulatory action could have a material adverse
effect on the Company.
Medical device laws and regulations are also in effect in many of the
countries in which the Company may do business outside the United States. These
range from comprehensive device approval requirements for some or all of the
Company's medical device products to requests for product data or
certifications. The number and scope of these requirements are increasing.
Medical device laws and regulations are also in effect in some states in which
the Company does business. There can be no assurance that the Company will
obtain regulatory approvals in such countries or that it will not be required to
incur significant costs in obtaining or maintaining its foreign regulatory
approvals. In addition, the export by the Company of certain of its products
which have not yet been cleared for domestic commercial distribution may be
subject to FDA export restrictions. The failure to obtain product approvals in a
timely fashion or to comply with state or foreign medical device laws and
regulations may have a material adverse impact on the Company.
In addition, federal, state and foreign laws and regulations regarding the
manufacture and sale of medical devices are subject to future changes. For
example, the FDA is currently considering significant changes to its GMP and to
other regulations. The Company cannot predict what impact, if any, such changes
might have on its business; however, such changes could have a material impact
on the Company.
Any of the Company's customers using its diagnostic devices for clinical use
in the United States may be regulated under the CLIA. CLIA is intended to ensure
the quality and reliability of clinical laboratories in the United States by
mandating specific standards in the areas of personnel qualifications,
administration, participation in proficiency testing, patient test management,
quality control, quality assurance and inspections. The regulations promulgated
under CLIA establish three levels of diagnostic tests ("waived," "moderately
complex" and "highly complex") and the standards applicable to a clinical
laboratory depend on the level of the tests it performs. CLIA requirements may
prevent some clinical laboratories from using certain of the Company's
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diagnostic products. Therefore, there can be no assurance that the CLIA
regulations and future administrative interpretations of CLIA will not have a
material adverse impact on the Company by limiting the potential market for the
Company's products.
The Company is also subject to numerous environmental and safety laws and
regulations, including those governing the use and disposal of hazardous
materials. Any violation of, and the cost of compliance with, these regulations
could have a material adverse effect on the Company's business, financial
condition and results of operations.
REIMBURSEMENT
The Company's ability to successfully commercialize its products may depend
on the Company's ability to obtain adequate levels of third-party reimbursement
for use of certain diagnostic tests, in the United States, European and other
countries. Currently, the availability of third-party reimbursement is limited
and uncertain for genetic tests.
In the United States, the cost of medical care is funded, in substantial
part, by government insurance programs, such as Medicare and Medicaid, and
private and corporate health insurance plans. Third-party payors may deny
reimbursement if they determine that a prescribed device or diagnostic test has
not received appropriate FDA or other governmental regulatory clearances, is not
used in accordance with cost-effective treatment methods as determined by the
payor, or is experimental, unnecessary or inappropriate. The Company's ability
to commercialize certain of its products successfully may depend on the extent
to which appropriate reimbursement levels for the costs of such products and
related treatment are obtained from government authorities, private health
insurers and other organizations, such as HMOs. Third-party payors are
increasingly challenging the prices charged for medical products and services.
The trend towards managed health care in the United States and the concurrent
growth of organizations such as HMOs, which could control or significantly
influence the purchase of health care services and products, as well as
legislative proposals to reform health care or reduce government insurance
programs, may all result in lower prices for certain of the Company's products.
The cost containment measures that health care providers are instituting and the
impact of any health care reform could have an adverse effect on the Company's
ability to sell certain of its products and may have a material adverse effect
on the Company's business, financial condition and results of operations.
EMPLOYEES
As of March 31, 1996, Affymetrix had 117 full-time employees, 29 of whom
hold Ph.D. degrees. The employee group includes chemists, engineers, computer
scientists, mathematicians and molecular biologists with experience in the
diagnostic products, medical products, semiconductor, computer software or
electronics industries. None of the Company's employees is represented by a
collective bargaining agreement, nor has the Company experienced work stoppages.
The Company believes that its relations with its employees are good.
FACILITIES
Affymetrix subleases 47,000 square feet in Santa Clara, California from
Affymax for research laboratories and administrative offices under a lease
expiring in 1996. The Company has an option to renew the lease on this facility
for an additional seven years. The Company leases 20,000 square feet of space
for manufacturing operations in Sunnyvale, California under a lease that expires
in 2000. The Company has options to renew this lease for two successive
three-year terms. The Company also leases 31,000 square feet of research and
development space in Sunnyvale, California under a lease that expires in 1999.
The Company expects to add to its existing facilities over the next few years.
See "Certain Transactions."
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
SCIENTIFIC ADVISORY BOARD
The Company's scientific advisors have made significant contributions to the
development of Affymetrix technologies. Each scientific advisor spends between
one day per week and one day per quarter working on Company projects. Scientific
advisors are compensated on a retainer or per diem basis and have options to
acquire Common Stock of the Company subject to vesting during continued service.
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PAUL BERG, PH.D., is Cahill Professor in Cancer Research, Professor of
Biochemistry and Director of the Beckman Center for Molecular and Genetic
Medicine at Stanford University School of Medicine. He received the Nobel Prize
in Chemistry in 1980, the National Medal of Science in 1983 and is a member of
the National Academy of Sciences, the Royal Society, London, and the French
Academy of Sciences. Dr. Berg also serves as a member of the Company's Board of
Directors.
RONALD W. DAVIS, PH.D., is Professor of Biochemistry and Genetics at
Stanford University Medical School. He was elected to the National Academy of
Sciences in 1983 and has received numerous awards for his contributions to the
field of genetics. He has published more than 155 papers. Dr. Davis' research
focuses on developing new technologies and instrumentation to study genomic
organization and whole genome analysis, including whole genome DNA sequencing,
gene expression, gene deletion, functional analysis, protein interaction, and
point mutational analysis.
ERIC LANDER, D. PHIL., is a director of Whitehead Institute/MIT Center for
Genome Research and Professor of Biology at the Massachusetts Institute of
Technology. Dr. Lander was a MacArthur Prize Fellow from 1987 to 1992 and serves
as Chair of the Genome Research Review Committee of the National Center for
Human Genome Research. Dr. Lander's research focuses on genetic mapping and
genome structure in the mouse and human, genetic analysis of polygenic traits
and population genetics of human diseases.
JOSHUA LEDERBERG, PH.D., is Sackler Foundation Scholar and Research
Geneticist at Rockefeller University, where he was President from 1978 to 1990.
Dr. Lederberg received the Nobel Prize in Medicine in 1958 for his research in
the genetic structure and function of microorganisms and in 1989 was awarded the
National Medal of Science. Dr. Lederberg has been involved in artificial
intelligence programs and has served on the Advisory Health Research Council of
the World Health Organization for many years.
RICHARD A. MATHIES, PH.D., is Professor of Chemistry at the University of
California, Berkeley. Dr. Mathies is an expert on the development of new methods
for the detection and analysis of biomolecules, such as capillary array
electrophoresis and photolithographic chemical analysis systems. Dr. Mathies is
assisting Affymetrix with high sensitivity fluorescence detection methodologies,
photophysics and the development of microchemical nucleic acid preparation and
analysis systems. Dr. Mathies received an NIH Merit Award in 1991 and the
American Society for Photobiology Research Award in 1989. He has received
fellowships from the Helen Hay Whitney and Alfred P. Sloan Foundations.
R. FABIAN PEASE, PH.D., is Professor of Electrical Engineering at Stanford
University. Dr. Pease's current research focuses on micro- and nano-lithography,
novel ultra-small electron devices, and advanced packaging concepts. From 1971
to 1978, he was supervisor of the electron beam exposure group at Bell
Laboratories, where he and his colleagues developed the electron beam
mask-making process that was the semiconductor industry standard for over a
decade. Dr. Pease is assisting Affymetrix with the application of very large
scale integrated circuit technology to the development of the Company's
light-directed synthesis technology.
CALVIN F. QUATE, PH.D., is Professor of Applied Physics and Electrical
Engineering at Stanford University. Dr. Quate served as senior Research Fellow
of the Xerox Palo Alto Research Center from 1984 to 1994. He is a director of
Tencor Instruments and Park Scientific Instruments. Dr. Quate's awards include
the IEEE Morris N. Liebmann Award (1981), Rank Prize for Opto-Electronics
(1982), IEEE Achievement Award, Ultraoxics, Ferroelectrics and Frequency Control
Society (1986), IEEE Medal of Honor (1988), President's National Medal of
Science (1992) and Foreign Member Royal Society (1995).
LUBERT STRYER, M.D., Chairman of the Scientific Advisory Board, is Winzer
Professor in the School of Medicine and Professor of Neurobiology at Stanford
University. He served as President and Scientific Director of Affymax Research
Institute and Managing Director of Affymax in 1989 and 1990. He is a co-inventor
of the Company's light-directed synthesis technology. Dr. Stryer has pioneered
the development of novel fluorescence detection techniques and holds ten patents
involving fluorescence and light-activated chemical synthesis. Dr. Stryer is the
author of BIOCHEMISTRY, a major text used widely in colleges and universities
around the world. Dr. Stryer received the American Chemical Society Award in
Biological Chemistry (the Eli Lilly Award) and is a member of the National
Academy of Sciences and received an honorary Doctor of Science from the
University of Chicago.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company, and their ages as of
March 31, 1996, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
------------------------------------------ --- ---------------------------------------------------------------
<S> <C> <C>
John D. Diekman........................... 53 Chairman and Chief Executive Officer
Stephen P.A. Fodor........................ 42 President, Chief Operating Officer and Director
Paul M. Kaplan............................ 50 Vice President of Product Development
Vernon A. Norviel......................... 37 Vice President and General Counsel
Kenneth J. Nussbacher..................... 43 Executive Vice President and Chief Financial Officer
Richard P. Rava........................... 38 Vice President of Research and Engineering
Paul Berg (1)............................. 69 Director
Douglas M. Hurt (2)....................... 39 Director
Vernon R. Loucks, Jr...................... 61 Director
Barry C. Ross............................. 47 Director
David B. Singer (2)....................... 33 Director
John A. Young (1)(2)...................... 64 Director
Alejandro C. Zaffaroni (1)................ 73 Director
</TABLE>
------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
JOHN D. DIEKMAN, PH.D., has served as a Director of the Company and Chairman
since the Company's inception and was appointed Chief Executive Officer in July
1995. Dr. Diekman served as President and Chief Operating Officer of Affymax
from July 1991 to March 1995 and as Chairman of the Affymax Board of Directors
from July 1994 to July 1995. Prior to 1991, Dr. Diekman served as President of
Monoclonal Antibodies Inc. (now Quidel Corp.), a diagnostic products company;
Salutar, Inc., an IN VITRO diagnostic company; and Zoecon Corporation, an
agrochemical company. Dr. Diekman also currently serves as a director of Quidel
Corp.
STEPHEN P.A. FODOR, PH.D., is the President and Chief Operating Officer of
the Company and has been a Director of the Company since February 1993. From
September 1994 to July 1995, he served as President and Chief Technical Officer
and, from February 1993 until September 1994, as Chief Technical Officer of the
Company. Dr. Fodor previously was Vice President and Director of Physical
Sciences at the Affymax Research Institute. For the invention of the
photolithographic synthesis technology used by the Company to manufacture its
probe arrays, Dr. Fodor and his colleagues were awarded the 1992 AAAS
Newcomb-Cleveland Prize for the best research article published in SCIENCE and
the 1993 "Distinguished Inventor Award" from the Intellectual Property Owners'
Association.
PAUL M. KAPLAN, PH.D., has been Vice President of Product Development since
joining the Company in April 1994. From 1988 to 1994, Dr. Kaplan served as Vice
President, Research and Development of the Diagnostic Division at Centocor,
Inc., where he was responsible for the identification, development and
commercialization of a variety of proprietary immunoassay products.
VERNON A. NORVIEL, J.D., was appointed Vice President and General Counsel of
the Company in February 1996. From 1989 to 1996, as a partner with Townsend and
Townsend and Crew LLP ("Townsend"), Mr. Norviel led the intellectual property
and patent prosecution efforts of the Company. Mr. Norviel continues as a
partner with Townsend on a part time basis.
KENNETH J. NUSSBACHER, J.D., joined the Company in September 1995 as
Executive Vice President and Chief Financial Officer. From 1989 to 1995, Mr.
Nussbacher held various management positions at Affymax, most
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recently as Executive Vice President for Business and Legal Affairs and Managing
Director of Affymax Technologies N.V. Prior to 1989, Mr. Nussbacher practiced
intellectual property law in the high technology field as General Counsel of
Daisy Systems, as Vice President, Intellectual Property for Atari, Inc., and
with Kirkland & Ellis, in Chicago.
RICHARD P. RAVA, PH.D., has served as Vice President of Research and
Engineering since September 1994. Dr. Rava joined the Company in February 1993
as Director of Biomedical Engineering. From 1992 to 1993, Dr. Rava was a Senior
Scientist at Affymax Research Institute. From 1990 to 1992, he was a Principal
Research Scientist in the George R. Harrison Spectroscopy Laboratory at MIT and
the research coordinator for the NIH Laser Biomedical Research Center at MIT.
PAUL BERG, PH.D., has been a Director of the Company since August 1993. Dr.
Berg is Cahill Professor in Cancer Research, Professor of Biochemistry and
Director of the Beckman Center for Molecular and Genetic Medicine at Stanford
University School of Medicine. He received the Nobel Prize in Chemistry in 1980,
the National Medal of Science in 1983 and is a member of the National Academy of
Sciences, the Royal Society, London, and the French Academy of Sciences. Dr.
Berg also serves as a member of the Company's Scientific Advisory Board.
DOUGLAS M. HURT, a Director of the Company since June 1995, is Senior Vice
President and Chief Financial Officer of Glaxo. Mr. Hurt has held various
financial management positions at Glaxo since 1983 and was designated by Glaxo
to serve on the Board of Directors.
VERNON R. LOUCKS, JR., has been a Director of the Company since August 1993.
Mr. Loucks has served as Chief Executive Officer of Baxter International Inc.
("Baxter") since 1980 and Chairman of Baxter since 1987. Mr. Loucks also serves
as a director of The Dun and Bradstreet Corp., Emerson Electric Co., Quaker Oats
Co. and Anheuser-Busch Companies, Inc.
BARRY C. ROSS, PH.D., a Director of the Company since March 1995, has served
as Director of Group Research Strategy and Alliances at Glaxo Wellcome Research
and Development Ltd. since 1995. Dr. Ross joined Glaxo in 1984 and served as
Director, Medicinal Chemistry from 1989-93 and was designated by Glaxo to serve
on the Board of Directors.
DAVID B. SINGER, a Director of the Company since February 1993, served as
Vice Chairman from July 1995 to April 1996. From February 1993 to June 1995, Mr.
Singer was President and Chief Executive Officer of the Company. He served as
Vice President of Finance and Treasurer of Affymax from 1991 to 1993 and as
Director of Corporate Development at Affymax from 1990 to 1991.
JOHN A. YOUNG, a Director of the Company since August 1993, is the retired
President and Chief Executive Officer of Hewlett-Packard Co. Mr. Young also
serves as a director of Wells Fargo & Company, Chevron Corp., SmithKline Beecham
Corp., Novell, Inc., Ciphergen Bio Systems, Inc., General Magic, Inc., Shaman
Pharmaceuticals, Inc. and is a member of the Business Council.
ALEJANDRO C. ZAFFARONI, PH.D., a founder of the Company, has served as a
Director since February 1993. Dr. Zaffaroni is also the founder of Affymax, ALZA
Corporation ("ALZA"), DNAX Research Institute of Molecular & Cellular Biology,
Inc. and a co-founder of Syntex. Dr. Zaffaroni served as Chairman of Affymax
from its inception to July 1994 and as Chief Executive Officer and Managing
Director of Affymax from its inception until its acquisition by Glaxo Wellcome
in March 1995. He served as Chairman and Chief Executive Officer of ALZA from
1968 to 1987 and has been Co-Chairman of ALZA since 1987.
BOARD OF DIRECTORS COMMITTEES AND OTHER INFORMATION
All directors are elected at the annual meeting of shareholders and hold
office until the election and qualification of their successors at the next
annual meeting of shareholders. Officers of the Company serve at the discretion
of the Board of Directors. There are no family relationships among the Company's
directors and executive officers.
The Board of Directors currently has an Audit Committee and a Compensation
Committee. The Audit Committee oversees the actions taken by the Company's
independent auditors and reviews the Company's
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internal financial and accounting controls and policies. The Compensation
Committee is responsible for determining salaries, incentives and other forms of
compensation for officers and other employees of the Company and administers
various incentive compensation and benefit plans.
DIRECTOR COMPENSATION
During the fiscal year ending December 31, 1995, John D. Diekman, Stephen
P.A. Fodor and David B. Singer received the cash compensation described under
"Management -- Executive Compensation." During the same fiscal year each of the
remaining directors received a cash payment of $2,500 for each meeting attended
plus reasonable expenses. In December 1995, each nonemployee director received
an option to purchase 33,333 shares of Common Stock at $0.675 per share under
the Company's Stock Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is responsible for determining salaries,
incentives and other forms of compensation for officers and other employees of
the Company and administers various incentive compensation and benefit plans.
The Compensation Committee consists of Paul Berg, John A. Young and Alejandro C.
Zaffaroni. Stephen P.A. Fodor, President and Chief Operating Officer of the
Company, participates in all discussions and decisions regarding salaries and
incentive compensation for all employees and consultants of the Company, except
that Dr. Fodor is excluded from discussions regarding his own salary and
incentive compensation.
EXECUTIVE COMPENSATION
The following table sets forth certain compensation paid by the Company in
the year ended December 31, 1995 to the Company's Chief Executive Officer,
former Chief Executive Officer, and to the Company's other executive officers
who earned in excess of $100,000 (collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
-------------
ANNUAL COMPENSATION SECURITIES
----------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS COMPENSATION
----------------------------------------------------------- ------------ --------- ------------- -------------
<S> <C> <C> <C> <C>
John D. Diekman
Chief Executive Officer and Chairman...................... $ 97,304(1) $ -- 166,666 $ --
David B. Singer
Former President and Chief Executive Officer.............. 183,010 -- 33,333 6,189
Stephen P.A. Fodor
President and Chief Operating Officer..................... 188,819 -- 166,666 --
Paul M. Kaplan
Vice President of Product Development..................... 146,218 -- 26,666 33,638(2)
Richard P. Rava
Vice President of Research and Engineering................ 136,962 -- 60,000 --
</TABLE>
------------
(1) Represents Dr. Diekman's compensation commencing July 1, 1995, when he
joined the Company. Prior to March 1996 when he became a full-time employee,
Dr. Diekman devoted 80% of his time to the Company and 20% to Affymax.
(2) Includes reimbursement for certain relocation expenses of $21,556 and
housing allowances of $12,082.
50
<PAGE>
STOCK OPTION GRANTS
The following table contains information concerning the stock option grants
made to each of the Named Executive Officers for the year ended December 31,
1995:
OPTION GRANTS IN YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------- POTENTIAL REALIZABLE VALUE
NUMBER OF AT ASSUMED ANNUAL RATES OF
SECURITIES % OF TOTAL STOCK PRICE APPRECIATION
UNDERLYING OPTIONS GRANTED EXERCISE FOR OPTION TERMS (1)
OPTIONS TO EMPLOYEES IN PRICE PER EXPIRATION --------------------------
NAME GRANTED (2) FISCAL YEAR SHARE DATE 5% 10%
---------------------------- ------------- --------------- ------------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
John D. Diekman............. 100,000 9.7% $ 0.675 07/01/05 $ 1,887,300 $ 3,045,300
66,666 6.5 0.675 12/20/05 1,258,200 2,030,200
David B. Singer............. 33,333 3.2 0.675 12/20/05 629,100 1,015,100
Stephen P.A. Fodor.......... 166,666 16.2 0.675 12/20/05 3,145,500 5,075,500
Paul M. Kaplan.............. 26,666 2.6 0.675 12/20/05 503,300 812,100
Richard P. Rava............. 60,000 5.8 0.675 12/20/05 1,132,400 1,827,200
</TABLE>
------------
(1) Assumes a value of $12.00 for each share of Common Stock (the initial public
offering price for this offering) on the date of grant. Potential gains are
net of the exercise price but before taxes associated with the exercise. The
5% and 10% assumed annual rates of compounded stock appreciation are
mandated by the rules of the Securities and Exchange Commission and do not
represent the Company's estimate or projection of the future Common Stock
price. Actual gains, if any, on stock option exercises are dependent on the
future financial performance of the Company, overall market conditions and
the option holders' continued employment through the vesting period.
(2) Grants generally vest at a rate of 20% each year following the date of
grant, as long as the optionee remains an employee with, consultant to, or
director of, the Company. The maximum term of each option granted is ten
years from the date of grant. The exercise price is equal to the fair market
value of the stock on the grant date as determined by the Board of
Directors.
The following table sets forth for each of the Named Executive Officers
certain information with respect to the exercise of options to purchase Common
Stock during the year ended December 31, 1995 and the number of shares subject
to both exercisable and unexercisable stock options as of December 31, 1995.
AGGREGATE OPTION EXERCISES IN FISCAL YEAR-END AND FISCAL YEAR-END VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-
OPTIONS AT THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 1995 DECEMBER 31, 1995 (1)
ACQUIRED ON VALUE -------------------------- --------------------------
NAME EXERCISE REALIZED (2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------------------- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John D. Diekman.......... -- -- -- 166,666 -- $ 1,887,500
David B. Singer.......... -- -- 50,000 33,333 $ 566,200 377,500
Stephen P.A. Fodor....... -- -- 20,000 246,666 226,500 2,793,500
Paul M. Kaplan........... -- -- 8,000 58,666 92,600 672,000
Richard P. Rava.......... 10,000 $ 3,750 1,333 88,666 15,000 1,013,000
</TABLE>
------------
(1) Based on an assumed initial offering price of $12.00 per share minus the
exercise price.
(2) Based on the fair market value at the date of exercise, as determined by the
Board of Directors, minus the exercise price.
51
<PAGE>
STOCK PLANS
1993 STOCK PLAN
The Company's Stock Plan was adopted by the Board of Directors in February
1993, approved by the shareholders in July 1993 and has been subsequently
amended. As of March 31, 1996, a total of 3,700,000 shares of Common Stock have
been reserved for issuance under the Stock Plan. As of March 31, 1996, options
to purchase a total of 543,254 shares of Common Stock had been exercised (of
which 148,889 are subject to repurchase by the Company), options to purchase a
total of 2,191,518 shares at a weighted average exercise price of $0.65 per
share were outstanding, and 965,228 shares remain available for future option or
purchase rights grants.
The purpose of the Stock Plan is to attract, retain and motivate officers,
key employees, consultants and directors of the Company by giving them the
opportunity to acquire Stock ownership in the Company. The Stock Plan provides
for the granting to employees of the Company (including officers and employee
directors) of "incentive stock options" within the meaning of Section 422 of the
Code, for the grant of nonstatutory stock options to employees and consultants
of the Company, and for the grant of purchase rights providing for the direct
sale of stock to eligible participants, subject to the Company's repurchase
rights. To the extent an optionee would have the right in any calendar year to
exercise for the first time incentive stock options for shares having an
aggregate fair market value (under all plans of the Company and determined for
each share as of the grant date) in excess of $100,000, any such excess options
shall be automatically converted to a nonstatutory stock option.
The Stock Plan is administered by the Board of Directors or a committee of
the Board of Directors (the "Administrator"). The Administrator determines the
type and terms of options and purchase rights granted under the Stock Plan,
including the number of shares covered, exercise or purchase price, term and
condition for exercise of the option or purchase right. The exercise price of
all stock options granted under the Stock Plan must be at least 100% (85% for
purchase rights) of the fair market value of the Common Stock of the Company on
the grant date. The term of an incentive stock option may not exceed ten years
from the date of grant. With respect to any participant who owns stock
possessing more than 10% of the voting power of all classes of stock of the
Company, the exercise price of any stock option granted shall be at least 110%
(100% for purchase rights) of the fair market value of the Common Stock on the
grant date and the term of such option may not exceed five years. Payment of the
exercise price may be in cash, check, or, at the discretion of the
administrator, by promissory notes or shares of stock held by the optionee or
purchaser, or a combination thereof.
No option may be transferred by the optionee other than by will or the laws
of descent and distribution or pursuant to a qualified domestic relations order
("QDRO"). During the lifetime of an optionee, only the optionee (or the
optionee's spouse pursuant to a QDRO) may exercise an option. An option shall be
exercisable on or after each vesting date in accordance with the terms set forth
in the option agreement; provided, however, that the right to exercise an option
must vest at the rate of at least 20% per year over five years from the grant
date.
In the event of certain changes in control of the Company or a sale of
substantially all its assets, the Administrator may cancel each outstanding
option upon payment in cash to the optionee of the amount by which any cash and
any other property which the optionee would have received for the shares of
stock covered by the vested portion of the option exceeds the exercise price of
the option. The Board may amend, suspend or terminate the Stock Plan as long as
such action does not adversely affect any outstanding option or purchase right
and provided that shareholder approval shall be required for any amendment to
(i) increase the number of shares subject to the Stock Plan, (ii) materially
change eligibility for the grant of options or purchase rights, or (iii)
materially increase the benefits accruing to participants. If not terminated
earlier, the Stock Plan will terminate in 2003.
1996 NONEMPLOYEE DIRECTORS STOCK OPTION PLAN
The Company's Directors Plan was adopted by the Board of Directors in March
1996 and approved by the shareholders in April 1996. There are 300,000 shares of
Common Stock reserved for issuance under the Directors Plan. Only nonemployee
directors of the Company are eligible to participate in the Directors Plan and
52
<PAGE>
only nonstatutory stock options can be granted. The Directors Plan provides that
option grants to nonemployee directors of the Company are made on a mandatory
basis and not on a discretionary basis. The Directors Plan may be administered
by the Board of Directors or the Board may delegate its authority to a committee
composed of not less than two outside directors (the "Administrator") and may
delegate routine matters to management.
If a person who is neither an officer nor an employee of the Company and who
has not previously been a member of the Board is elected or appointed director,
the Company is required to grant that person an initial 10-year option to
purchase 33,333 shares of the Company's Common Stock at an exercise price equal
to the fair market value of Common Stock on the date of grant. Each such option
will become exercisable at the rate of one-fifth of the number of shares covered
by the option on each anniversary of the grant date so long as the director is
serving on the Board with full vesting over five years.
In addition, on the date of each annual meeting of the shareholders of the
Company held after January 1, 2001 for existing nonemployee directors who
continue on the Board and after 54 months after the initial option grant to new
nonemployee directors who continue on the Board, the Company will grant to each
nonemployee director a ten-year option to purchase 6,667 shares of the Company's
Common Stock, at an exercise price equal to the fair market value of Common
Stock on the date of grant. These options will vest one year after grant.
The consideration payable in connection with any option (including any
related taxes) may be paid in cash, by promissory note of the nonemployee
director or by delivery of shares of Common Stock of the Company. Options
generally terminate three months after a nonemployee director ceases to be, for
any reason, a director of the Company, with the following exceptions: if a
nonemployee director ceases to be a director due to death, disability or
retirement, the option may be exercised for 18 months after the termination.
The Board may amend, alter, or discontinue the Directors Plan or any option
at any time, except that the consent of a participant is required if the
participant's existing rights under an outstanding option would be impaired. In
addition, to the extent required under applicable tax and securities laws and
regulations, the shareholders of the Company must approve any amendment,
alteration, or discontinuance of the Directors Plan that would increase the
total number of shares reserved under the Directors Plan and in certain other
circumstances as the Board may deem advisable to comply with such laws and
regulations. In addition, the provisions of the plan governing who is granted
options, the number of shares covered by each option, the exercise price, and
the period of exercisability and the timing of option grants may not be amended
more than once every six months, other than for changes to comply with the
Internal Revenue Code of 1986 or the Employee Retirement Income Security Act of
1974.
In the event of a merger, consolidation, sale of all or substantially all of
the Company's assets, or any like occurrence, the options will vest at twice the
rates set forth above.
LIMITATION OF DIRECTORS' LIABILITY AND INDEMNIFICATION
The Company's Articles of Incorporation limit the liability of directors for
monetary damages to the maximum extent permitted by California law. Such
limitation of liability has no effect on the availability of equitable remedies,
such as injunctive relief or rescission. The Company is also empowered under its
Articles of Incorporation to enter into indemnification agreements with its
directors and officers and to purchase insurance on behalf of any person whom it
is required to indemnify. The Company's Bylaws provide that the Company will
indemnify its directors and officers as a contractural obligation and may
indemnify its employees and agents against certain liabilities to the fullest
extent permitted by California law. The Company has entered into indemnification
agreements with each of its current directors and officers or persons
controlling the Company pursuant to the foregoing provisions.
53
<PAGE>
CERTAIN TRANSACTIONS
In September 1993, the Company sold an aggregate of 6,000,000 shares of
Series A Preferred Stock (the "Series A") at $3.50 per share in a private
placement transaction. In August 1995, in another private placement transaction,
the Company sold an aggregate of 8,666,666 shares of Series B Preferred Stock
(the "Series B") at $4.50 per share.
The purchasers of the Series A and Series B (collectively, the "Preferred
Stock") included, among others, the following executive officers and directors
of the Company and investors known to own beneficially more than 5% of the
Company's outstanding Common Stock (assuming conversion of all outstanding
shares of Preferred Stock into Common Stock) (see "Principal Shareholders"):
<TABLE>
<CAPTION>
NUMBER OF SHARES
----------------------
DIRECTORS AND EXECUTIVE OFFICERS SERIES A SERIES B
------------------------------------------------------------------------------- ---------- ----------
<S> <C> <C>
John D. Diekman................................................................ 20,000 40,000
Paul A. Berg................................................................... 10,000 15,000
John A. Young.................................................................. 20,000 40,000
Vernon R. Loucks, Jr........................................................... -- 40,000
Alejandro C. Zaffaroni......................................................... -- 450,000
<CAPTION>
5% SHAREHOLDERS
-------------------------------------------------------------------------------
<S> <C> <C>
Glaxo Wellcome plc (indirectly through Affymax N.V.)........................... 1,250,000 1,333,333
College Retirement Equities Fund............................................... 1,428,570 800,000
R.A. Investment Group.......................................................... 570,000 856,000
</TABLE>
In July 1995, the Company and Glaxo entered into an agreement (the
"Governance Agreement") pursuant to which Glaxo has the right to designate a
number of directors based on the percentage of voting stock then held directly
or indirectly by Glaxo and is obligated to vote its shares for the slate of
directors recommended to the shareholders. Glaxo currently has the right to
designate four of the nine directors of the Company. See "Management --
Executive Officers and Directors." Pursuant to the Governance Agreement, Glaxo
also agreed that any merger, consolidation or business combination whereby the
Company would become a direct or indirect wholly-owned subsidiary of Glaxo and
any material transaction between the Company and Glaxo must be approved by a
majority of the independent directors of the Company. In addition, pursuant to
the Governance Agreement, the Company granted Glaxo certain registration rights
with respect to its shares. See "Description of Stock -- Registration Rights of
Certain Shareholders."
In December 1994, Affymax provided a bridge loan to the Company in the
principal amount of $6.0 million. The loan was evidenced by a subordinated
convertible promissory note, the terms of which were amended by the Governance
Agreement (the "Convertible Note") and was converted into 1,333,333 shares of
Series B Senior Convertible Preferred Stock in August 1995. Interest on the
Convertible Note through the date of conversion, amounting to $319,856, was
satisfied by the Company issuing Affymax three five-year warrants to purchase an
aggregate of 202,441 shares of Series 2 Subordinated Convertible Preferred Stock
at $5.50 per share.
In connection with the lease agreement between the Company and a third
party, in December 1994, Affymax agreed to relieve the Company of certain
financial covenants and to guarantee its obligation to the third party in
exchange for warrants to purchase Series 2 Subordinated Convertible Preferred
Stock. In December 1994, Affymax received a five-year warrant to purchase
103,382 shares of Series 2 Subordinated Convertible Preferred Stock at $5.50 per
share pursuant to this agreement.
Effective January 1, 1993, the Company entered into the Technology License
Agreement with Affymax whereby the Company was granted an exclusive worldwide
royalty free license from Affymax, with the right to sublicense, to certain
technology and to certain future inventions to be used in the development,
production and sale of products and services in the clinical diagnostic and
research supply markets. See "Intellectual Property." In August 1993, the
Company agreed to issue Affymax 8,500,000 shares of Series 1 Subordinated
Convertible Preferred Stock as consideration for the Technology License
Agreement and funding the Company's operations through September 1993.
54
<PAGE>
The Company and Affymax Research Institute, a subsidiary of Affymax ("ARI"),
entered into a Services Agreement dated October 1, 1993, pursuant to which ARI
agreed to perform certain administrative and management services for the
Company. For the fiscal year ended December 31, 1995, the Company made payments
to ARI in the aggregate amount of $834,000. John D. Diekman is a director of
ARI.
In February 1994, the Company entered into a sublease with Affymax providing
for the Company to sublease facilities in Santa Clara from Affymax until October
1, 1995. The sublease provides for its term to be extended until August 31, 2003
in the event that, at the Company's request, Affymax exercises its option to
extend the underlying lease until that date. In April 1995, the option was
exercised to extend the lease to October 1, 1996.
The Company believes that the agreements with Affymax are on terms no less
favorable to the Company than would be obtained from unaffiliated third parties.
In May 1996, the Company entered into an agreement with Glaxo to develop and
supply probe arrays to detect polymorphisms in specific genes. See "Business --
Genomics Application Areas" and "-- Collaborative Agreements and Grants."
In December 1993, in connection with grants to each of Stephen P.A. Fodor
and David B. Singer of rights to purchase 133,333 shares of Common Stock at
$0.30 per share, subject to repurchase at the Company's option, the Company
entered into Loan and Pledge Agreements with each of Dr. Fodor and Mr. Singer.
Pursuant to those agreements, the Company lent Dr. Fodor and Mr. Singer each
$40,000, which loans are evidenced by secured promissory notes due in July 1998
or when their employment is terminated. These notes bear interest at the rate of
5.07% per annum. Interest payments on the notes are due and payable each year
until the loan is repaid.
In November 1994, the Company agreed to guarantee a loan in the amount of
$117,000 of Stephen P. A. Fodor.
In June 1995, the Company entered into an agreement with David B. Singer in
connection with his assumption of the position of Vice Chairman of the Board.
Pursuant to Mr. Singer's transition from President, Chief Executive Officer and
Chief Financial Officer to Vice Chairman, Mr. Singer continues to be paid
$14,583 per month and may receive health care coverage until December 15, 1996.
In addition, pursuant to the agreement, the Company relinquished its right to
repurchase any of the 133,333 shares of Common Stock acquired by Mr. Singer in
December 1993, amended the option to purchase 100,000 shares granted to Mr.
Singer in December 1994 to fully vest 50,000 shares as of September 1995, and
waived its right to demand repayment of Mr. Singer's $40,000 promissory note
until July 1998. Pursuant to the agreement, Mr. Singer agreed to continue to
serve as a Director of the Company if nominated and elected by the shareholders,
to serve as Vice Chairman of the Board, and to provide consulting services to
the Company relating to the financing of the Company, grants and government
relations.
The Company and Symyx, Inc. ("Symyx") have entered into a sublease agreement
for a portion of the property leased to the Company in Sunnyvale at market
rates. Kenneth J. Nussbacher is a director, and Alejandro C. Zaffaroni is a
director and greater than 10% stockholder, of Symyx.
The Company has entered into indemnification agreements with each of its
directors and executive officers. Such agreements require the Company to
indemnify such persons to the fullest extent permitted by California law. See
"Management -- Limitation of Liability and Indemnification Matters."
55
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock as of April 30, 1996, and as adjusted
to reflect the sale of the shares of Common Stock offered hereby by (i) each
person who is known by the Company to be the beneficial owner of more than 5% of
the Common Stock, (ii) each of the Company's directors, (iii) each of the Named
Executive Officers and (iv) all current directors and executive officers as a
group.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY
OWNED (1)(2)
SHARES ---------------------
BENEFICIALLY PRIOR TO AFTER
BENEFICIAL OWNER OWNED (1) OFFERING OFFERING
-------------------------------------------------------------------------------- ----------- ---------- ---------
<S> <C> <C> <C>
Glaxo Wellcome plc (3).......................................................... 7,705,067 46.8% 35.9%
Greenford Road
Greenford, Middlesex, UBG OHE, UK
College Retirement Equities Fund................................................ 1,507,991 9.3% 7.1%
730 Third Avenue
New York, NY 10017
R.A. Investment Group........................................................... 959,554 5.9% 4.5%
200 West Madison, Suite 3800
Chicago, IL 60606
Paul A. Berg, Ph.D (4).......................................................... 38,488 * *
John D. Diekman, Ph.D (5)....................................................... 76,177 * *
Stephen P.A. Fodor, Ph.D (6).................................................... 153,333 * *
Douglas M. Hurt (7)............................................................. 7,705,067 46.8 % 35.9%
Paul M. Kaplan (8).............................................................. 13,334 * *
Vernon R. Loucks, Jr............................................................ 59,999 * *
Richard P. Rava, Ph.D (9)....................................................... 11,333 * *
Barry C. Ross, Ph.D (7)......................................................... 7,705,067 46.8 % 35.9%
David B. Singer................................................................. 160,666 * *
John A. Young................................................................... 41,643 * *
Alejandro C. Zaffaroni, Ph.D (10)............................................... 140,000 * *
All directors and executive officers as a group (13 persons) (11)............... 8,426,706 50.9 % 39.1%
</TABLE>
------------
* Represents beneficial ownership of less than one percent of the Common Stock.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of Shares
beneficially owned by a person and the percentage of ownership of that
person, shares of Common Stock subject to options held by that person that
are currently exercisable or exercisable within 60 days of April 30, 1996
are deemed outstanding. Such shares, however, are not deemed outstanding for
the purpose of computing the percentage ownership of each other person. The
persons named in this table have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them,
subject to community property laws where applicable and except as indicated
in the other footnotes to this table.
(2) Percentage of beneficial ownership is based on 16,248,148 shares of Common
Stock outstanding as of April 30, 1996 and 21,248,148 shares of Common Stock
outstanding after completion of this offering.
(3) Held through its subsidiary, Affymax N.V. Includes 203,881 shares issuable
upon exercise of outstanding warrants at $8.25 per share.
56
<PAGE>
(4) Includes 3,333 shares issuable upon exercise of options exercisable within
60 days of April 30, 1996.
(5) Includes 40,000 shares issuable upon exercise of options within 60 days of
April 30, 1996.
(6) Includes 20,000 shares issuable upon exercise of options within 60 days of
April 30, 1996.
(7) Represents 7,705,067 shares beneficially owned by Glaxo, of which Mr. Hurt
and Dr. Ross disclaim beneficial ownership.
(8) Represents 13,334 shares issuable upon exercise of options exercisable
within 60 days of April 30, 1996.
(9) Includes 1,333 shares issuable upon exercise of options within 60 days of
April 30, 1996.
(10) Includes 6,667 shares issuable upon exercise of options within 60 days of
April 30, 1996 and excludes any shares Dr. Zaffaroni may purchase in the
offering. See "Underwriting."
(11) Includes 98,000 shares issuable upon exercise of options within 60 days of
April 30, 1996. Also includes 7,705,067 shares owned by Glaxo, of which Mr.
Hurt and Dr. Ross disclaim beneficial ownership. Excludes any shares Dr.
Zaffaroni may purchase in the offering. See "Underwriting."
57
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, the authorized capital stock of the
Company will consist of 50,000,000 shares of Common Stock, no par value, and
27,500,000 shares of Preferred Stock, no par value (the "Undesignated Preferred
Stock").
COMMON STOCK
At March 31, 1996, assuming the conversion of all outstanding Preferred
Stock and the issuance of 203,881 shares of Common Stock pursuant to the
exercise or conversion of outstanding warrants, 16,443,112 shares of Common
Stock were outstanding and held of record by shareholders. Options to purchase
an aggregate of 2,191,518 shares of Common Stock were also outstanding. See
"Management -- Stock Plans."
The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the shareholders. Subject to preferences that may be
applicable to any outstanding Preferred Stock, the holders of Common Stock are
entitled to receive ratably such dividends, if any, as may be declared from time
to time by the Board of Directors out of funds legally available therefor. See
"Dividend Policy." In the event of a liquidation, dissolution or winding up of
the Company, the holders of Common Stock are entitled to share ratably in all
assets remaining after payment of liabilities, subject to prior rights of
Preferred Stock, if any, then outstanding. The Common Stock has no preemptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions available to the Common Stock. All outstanding shares of
Common Stock are fully paid and non-assessable.
PREFERRED STOCK
Effective upon the closing of this offering, the Company will be authorized
to issue 27,500,000 shares of Undesignated Preferred Stock. The Board of
Directors will have the authority to issue the Undesignated Preferred Stock in
one or more series and to determine the powers, preferences and rights and the
qualifications, limitation or restrictions granted to or imposed upon any wholly
unissued shares of Undesignated Preferred Stock and fix the number of shares
constituting any series and the designation of such series, without any further
vote or action by the shareholders. The issuance of Undesignated Preferred Stock
may have the effect of delaying, deferring or preventing a change in control of
the Company without further action by the shareholders and may adversely affect
the voting and other rights of the holders of Common Stock. At present, the
Company has no plans to issue any shares of Undesignated Preferred Stock.
REGISTRATION RIGHTS OF CERTAIN SHAREHOLDERS
Certain holders of Common Stock or their transferees are entitled to certain
rights with respect to the registration of such shares under the Securities Act.
Registration rights are held with respect to 9,871,185 shares of Common Stock
issuable upon the conversion of Preferred Stock under the terms of agreements
between the Company and the holders of Series A and B Senior Preferred Stock
(collectively the "Registrable Securities"). Subject to certain limitations in
the agreements, the holders of Registrable Securities have "piggyback" rights to
request that their shares be registered for public resale with respect to up to
four registrations of the Company's securities. However, if such piggyback
rights are exercised in connection with an underwritten offering of the
Company's Common Stock, the underwriter of such offering has the right to reduce
to 20% of the total the number of such shares to be included in such public
offering or, in the case of the initial public offering, to exclude such shares
entirely. In addition, at a time when the Company is eligible to register
securities on Form S-3, holders of Registrable Securities not already registered
may demand that the Company file a Form S-3, provided that the aggregate
offering price of the Registrable Securities would be at least $2,000,000. The
Company will pay certain expenses in connection with the exercise of the
foregoing rights. These registration rights expire five years after an initial
public offering of the Company's securities.
Pursuant to the Governance Agreement, the Company also has granted to Glaxo,
as long as Glaxo and its subsidiaries hold more than 10% of the outstanding
Common Stock of the Company, the right to demand, at any time after six months
following the Company's initial public offering, that the Company file an
underwritten registration statement covering the registration of at least 40% of
the Common Stock held by Glaxo and its subsidiaries. Glaxo's registration rights
cover 7,705,067 shares of Common Stock issuable on conversion of Preferred Stock
(including Series 1 Subordinated Convertible Preferred and Series 2 Subordinated
Convertible
58
<PAGE>
Preferred Stock, issuable upon exercise of warrants). If such demand is made
after the time the Company is, or normally would have been, eligible to register
securities on Form S-3, the Company will pay certain expenses incurred by Glaxo
in exercising these demand rights. Glaxo has this demand right with respect to
up to four registrations of the Company's securities on Form S-1 and an
unlimited number of registrations on Form S-3. In addition, pursuant to the
Governance Agreement, Glaxo has piggyback rights similar to those held by
holders of the Registrable Securities.
WARRANTS
Pursuant to the terms of an agreement between Affymetrix and Affymax dated
December 29, 1994, whereby Affymax agreed to guarantee Affymetrix' lease
obligations to a third party, Affymetrix has issued to Affymax a warrant to
purchase 103,382 shares of Series 2 Subordinated Convertible Preferred Stock.
The warrants have an exercise price of $5.50 and expire in December 1999.
Pursuant to the terms of a note agreement, Affymetrix has issued to Affymax
warrants to purchase 202,441 shares of Series 2 Subordinated Convertible
Preferred Stock for certain interest payments otherwise due on the note through
August 1995, at which time the note was converted into Preferred Stock. These
warrants have an exercise price of $5.50 and expire from March to July 2000.
After the offering, as a result of automatic conversion of the Preferred Stock
upon the closing of this offering and the 2-for-3 reverse stock split, these
warrants will be exercisable for a total of 203,881 shares of Common Stock at an
exercise price of $8.25 per share. See "Certain Transactions."
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company's Common Stock is American
Stock Transfer & Trust Company.
59
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding
21,239,231 shares of Common Stock. Of these shares, the 5,000,000 shares sold in
this offering (plus any shares issued upon exercise of the Underwriters'
over-allotment option) will be freely tradeable without restriction under the
Securities Act, unless purchased or held by "affiliates" of the Company as that
term is defined in Rule 144 under the Securities Act and the regulations
promulgated thereunder.
The remaining 16,239,231 shares of Common Stock outstanding (or any
securities exercisable for or convertible into the Company's Common Stock) held
by officers, directors, employees, consultants and certain shareholders, are
"restricted securities" within the meaning of Rule 144 under the Securities Act
("Restricted Shares"). Restricted Shares may be sold in the public market only
if registered or if they qualify for an exemption from registration under Rules
144, 144(k) or 701 promulgated under the Securities Act, which are summarized
below. Sales of the Restricted Shares in the public market, or the availability
of such shares for sale, could adversely affect the market price of the Common
Stock. None of the Restricted Shares will be available for sale upon the
Effective Date. Approximately 50,100 of these shares of Common Stock will be
eligible for sale in the public market 90 days after the Effective Date subject
to the provisions of Rule 701. In addition, an additional 186,140 shares subject
to vested options will be available for sale 90 days after the Effective Date
subject to compliance with Rule 701.
The officers, directors, certain employees and shareholders of the Company
have entered into contractual "lock-up" agreements generally providing that they
will not offer, sell, contract to sell or grant any option to purchase or
otherwise dispose of the shares of Common Stock of the Company or any securities
exercisable for or convertible into the Company's Common Stock owned by them for
a period of 180 days after the Effective Date without the prior written consent
of Robertson, Stephens & Company. Pursuant to the Stock Plan, all shares of
Common Stock issued upon exercise of options are also subject to a lock-up
arrangement for a period of 180 days after the date of this prospectus.
Robertson, Stephens & Company may, in its sole discretion and at any time
without notice, release all or any portion of the securities subject to lock-up
agreements.
As a result of these contractual restrictions, notwithstanding possible
earlier eligibility for sale under the provisions of Rules 144, 144(k) and 701,
shares subject to lock-up agreements will not be saleable until such agreements
expire or are waived by Robertson, Stephens & Company. Beginning 180 days after
the Effective Date, approximately 10,411,408 additional Restricted Shares will
become eligible for sale subject to the provisions of Rule 144 or Rule 701 upon
the expiration of the lock-up agreements not to sell such shares. In addition,
beginning 180 days after the Effective Date, an additional 183,366 shares
subject to vested options will be available for sale subject to compliance with
Rule 701 upon the expiration of lock-up agreements not to sell such shares.
Robertson, Stephens & Company may, in its sole discretion and at any time
without notice, release all or any portion of the securities subject to lock-up
agreements.
In general, under Rule 144, as currently in effect, beginning 90 days after
the Effective Date, a person (or persons whose shares are aggregated) who has
beneficially owned Restricted Shares for at least two years would be entitled to
sell within any three-month period a number of shares that does not exceed the
greater of: (i) one percent of the number of shares of Common Stock then
outstanding (which will equal approximately 212,392 shares immediately after
this offering); or (ii) the average weekly trading volume of the Common Stock
during the four calendar weeks preceding the filing of a Form 144 with respect
to such sale. Sales under Rule 144 are also subject to certain manner of sale
provisions and notice requirements and to the availability of current public
information about the Company. Under Rule 144(k), a person who is not deemed to
have been an affiliate of the Company at any time during the 90 days preceding a
sale, and who has beneficially owned the shares proposed to be sold for at least
three years, is entitled to sell such shares without complying with the manner
of sale, public information, volume limitation or notice provisions of Rule 144.
Beginning 90 days after the Effective Date, certain shares issued upon
exercise of options granted by the Company prior to the date of this Prospectus
will also be available for sale in the public market pursuant to Rule 701 under
the Securities Act. Any employee, officer or director of or consultant to the
Company who purchased his or her shares pursuant to a written compensatory plan
or contract may be entitled to rely on the resale provisions of Rule 701. Rule
701 permits affiliates to sell their Rule 701 shares under Rule 144 without
60
<PAGE>
complying with the holding period requirements of Rule 144. Rule 701 further
provides that non-affiliates may sell such shares in reliance on Rule 144
without having to comply with the public information, volume limitation or
notice provisions of Rule 144. In both cases, a holder of Rule 701 shares is
required to wait until 90 days after the date of this Prospectus before selling
such shares.
The Company intends to file registration statements under the Securities Act
180 days after the Effective Date to register shares of Common Stock reserved
for issuance under the Stock Plan and the Directors Plan, thus permitting the
resale of such shares by non-affiliates in the public market without restriction
under the Securities Act. Such registration statements will become immediately
upon filing.
As of April 30, 1996, the holders of approximately 15,834,537 shares are
entitled to certain registration rights with respect to such shares. If a large
number of such shares were registered and sold in the public market, such sales
could have an adverse effect on the market price for the Company's Common Stock.
If the Company were required to include in a Company-initiated registration the
shares held by such holders pursuant to the exercise of their registration
rights, such sales may have an adverse effect on the Company's ability to raise
needed capital. See "Description of Capital Stock -- Registration Rights of
Certain Shareholders."
Prior to this offering, there has been no public market for the Common Stock
of the Company and no predictions can be made as to the effect, if any, that
market sales of shares of Common Stock prevailing from time to time may have on
the market price of the Common Stock. Nevertheless, sales of significant numbers
of shares of the Common Stock in the public market may adversely affect the
market price of the Common Stock offered hereby and could impair the Company's
future ability to raise capital through an offering of its equity securities.
61
<PAGE>
UNDERWRITING
The Underwriters named below acting through their representatives,
Robertson, Stephens & Company LLC, CS First Boston Corporation and Montgomery
Securities (the "Representatives"), have severally agreed, subject to the terms
and conditions of the Underwriting Agreement to purchase from the Company the
number of shares of Common Stock set forth opposite their respective names
below. The Underwriters are committed to purchase and pay for all of such shares
if any are purchased:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
-------------------------------------------------------------------------------------------- ----------
<S> <C>
Robertson, Stephens & Company LLC...........................................................
CS First Boston Corporation.................................................................
Montgomery Securities.......................................................................
----------
Total................................................................................... 5,000,000
----------
----------
</TABLE>
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public at the initial public
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price, less a concession of not more than $ per share, of which
$ may be reallowed to other dealers. After the initial public offering, the
public offering price, concession and reallowances to dealers may be reduced by
the Representatives.
The Underwriters may offer up to $3 million worth of the Common Stock to
Alejandro C. Zaffaroni, a founder and director of the Company, at the initial
public offering price set forth on the cover page of this Prospectus. The
Underwriters would not receive an underwriting discount or commission on the
sale of any of these shares of Common Stock to Dr. Zaffaroni.
The Company has granted to the Underwriters an option, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to an
additional 750,000 shares of Common Stock at the same price per share as the
Company receives for the 5,000,000 shares that the Underwriters have agreed to
purchase. To the extent that the Underwriters exercise such option, each of the
Underwriters will have a firm commitment to purchase approximately the same
percentage of such additional shares that the number of shares of Common Stock
to be purchased by it shown in the above table represents as a percentage of the
5,000,000 shares offered hereby. If purchased, such additional shares will be
sold by the Underwriters on the same terms as those on which the 5,000,000
shares are being sold. The Company will be obligated, pursuant to the option, to
sell shares to the Underwriters to the extent the option is exercised. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of shares of Common Stock offered hereby.
The Underwriting Agreement contains covenants of indemnity between the
Underwriters and the Company against certain civil liabilities, including
liabilities under the Securities Act of 1933, as amended, and liability arising
from breaches of representations and warranties contained in the Underwriting
Agreement.
Each officer, director and certain shareholders together holding
approximately 12,643,742 shares of Common Stock have agreed with the
Representatives that, until 180 days from the Effective Date, subject to certain
limited exceptions, they will not, directly or indirectly, sell, offer contract
to sell, pledge, grant any option to purchase or otherwise dispose of any shares
of Common Stock or any securities convertible into, or exchangeable for, or any
rights to purchase or acquire, shares of Common Stock, owned directly by such
holders or with respect to which they have the power of disposition, without the
prior written consent of Robertson, Stephens & Company LLC. Approximately
10,411,408 of such shares will be eligible for immediate public sale following
expiration of the lock-up period pursuant to Rule 144. Robertson, Stephens &
Company LLC may, in its sole discretion and at any time without notice, release
all or any portion of the securities subject to lock-up agreements. In addition,
the Company has agreed that, until 180 days from the Effective Date, the Company
will not, without the prior written consent of Robertson, Stephens & Company
LLC, subject to certain limited exceptions, sell or otherwise dispose of, any
shares of Common Stock, any options or warrants to purchase any
62
<PAGE>
shares of Common Stock or any securities convertible into, exercisable for or
exchangeable for shares of Common Stock other than the Company's sale of shares
in this offering, the issuance of Common Stock upon the exercise of the
outstanding warrants or options, or the Company's grant of options and issuance
of stock under existing employee stock option or stock purchase plans. See
"Shares Eligible for Future Sale."
The Underwriters do not intend to confirm sales to accounts over which they
exercise discretionary authority.
Prior to this offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock was determined through negotiations between the Company and the
Representatives. The material factors considered in such negotiations were
prevailing market conditions, certain financial information of the Company in
recent periods, market valuations of other companies that the Company and the
Representatives believed to be comparable to the Company, estimates of the
business potential of the Company, the present state of the Company's
development and the Company's management.
A managing director of CS First Boston Corporation, one of the
Representatives, is the beneficial owner of 7,407 shares of Common Stock.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Heller Ehrman White & McAuliffe, Palo Alto, California. Julian N.
Stern, the beneficial owner of 26,980 shares of Common Stock, is the sole
shareholder and employee of a professional corporation that is a partner of
Heller Ehrman White & McAuliffe. Certain legal matters relating to the offering
will be passed upon for the Underwriters by Wilson, Sonsini, Goodrich & Rosati,
Palo Alto, California.
EXPERTS
The financial statements of Affymetrix at December 31, 1994 and 1995, and
for the years ended December 31, 1993, 1994 and 1995, appearing in this
Prospectus and Registration Statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein, and are included in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing.
The statements in this Prospectus as set forth under the captions "Risk
Factors -- Dependence on Proprietary Technology and Unpredictability of Patent
Protection" and "Business -- Intellectual Property" have been passed upon by
Townsend and Townsend and Crew LLP, Palo Alto, California, patent counsel to the
Company, as experts on such matters, and are included herein in reliance upon
that review and approval.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement, of which this Prospectus constitutes a
part, under the Securities Act with respect to the shares of Common Stock
offered hereby. This Prospectus omits certain information contained in the
Registration Statement, and reference is made to the Registration Statement and
the exhibits and schedules thereto for further information with respect to the
Company and the Common Stock offered hereby. Statements contained in this
Prospectus as to the provisions of any referenced contracts or other documents
summarize the material elements of such contracts or documents. Such statements,
however, are not necessarily complete, and in each instance reference is made to
the copy of such document filed as an exhibit to the Registration Statement.
Each such statement is qualified in its entirety by such reference. The
Registration Statement, including exhibits and schedules filed therewith, may be
inspected without charge at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the regional offices of the Commission located at 7 World
Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials
may be obtained from the Public Reference Section of the Commission, Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and its public
reference facilities in New York, New York and Chicago, Illinois, at prescribed
rates.
63
<PAGE>
GLOSSARY
<TABLE>
<S> <C>
Amplification..................... An increase in the number of copies of specific DNA or
RNA fragments.
Base.............................. The nucleotides that comprise DNA.
Chromosomes....................... The self-replicating genetic structures in cells
containing the cellular DNA that bears in its nucleotide
sequence the linear array of genes.
Complementary sequence............ Nucleic acid base sequences that can form a
double-stranded structure by matching base pairs; the
complementary sequence to GTAC is CATG.
DNA (deoxyribonucleic acid)....... The molecule that encodes genetic information. DNA is a
double-stranded molecule held together by weak bonds
between base pairs. The four nucleotides in DNA contain
the bases adenine (A), guanine (G), cytosine (C) and
thymine (T). In nature, base pairs form only between A
and T and between G and C; thus, the base sequence of
each single strand can be deduced from that of its
complementary sequence.
DNA sequence...................... The relative order of base pairs, whether in a fragment
of DNA, a gene, a chromosome, or an entire genome.
DNA synthesis..................... The process of building strands of nucleotide bases
through controlled chemical reactions.
Feature........................... A discrete section of a probe array containing millions
of copies of the same DNA probe. Each probe array
contains from 16,000 to more than 100,000 individual
features.
Fluorescent label................. A compound that may be attached to another molecule and
that is capable of emitting light. The emitted light may
be detected to determine the presence or location of
the molecule.
Gel-based sequencing.............. Determination of the order of nucleotides (base
sequences) in a DNA molecule using a matrix of a
polymeric molecule to form a gel, which separates
pieces of DNA in an electric field based upon their
sizes.
Gene.............................. The fundamental physical and functional unit of
heredity. A gene is an ordered sequence of nucleotides
located in a particular position on a particular
chromosome that encodes a specific functional product.
Gene expression................... The process by which a gene's coded information creates
the structures present and operating in the cell.
Expressed genes include those that are transcribed into
mRNA and then translated into protein and those that
are transcribed into RNA but not translated into
protein.
Gene expression monitoring........ The process of correlating the level and timing of gene
expression with abnormal cellular behavior and disease.
Genetic code...................... The sequence of nucleotides, coded in triplets along the
mRNA, that determines the sequence of amino acids in
protein synthesis. The DNA sequence of a gene can be
used to predict the mRNA sequence, and the genetic code
can in turn be used to predict the amino acid sequence.
</TABLE>
64
<PAGE>
<TABLE>
<S> <C>
Genetic mapping................... Determining the relative positions of genes on a DNA
molecule and the distance between them.
Genetic marker.................... An identifiable physical location on a chromosome, whose
inheritance can be monitored.
Genome............................ All the genetic material in the chromosomes of a
particular organism. Genome size is generally given as
its total number of base pairs.
Genomics.......................... The study of genes and their function.
High-throughput sequencing........ The process of identifying and sequencing small
stretches of genes expressed in a certain cell type
using gel-based sequencing techniques.
HIV............................... Human Immunodeficiency Virus, the virus responsible for
HIV disease and its end-stage, AIDS (Acquired
Immunodeficiency Syndrome).
Human Genome Project.............. Collective name for several projects begun in 1986 by
United States Department of Energy to map and sequence
the human genome and develop new techniques and
instruments for detecting and analyzing DNA.
Hybridization..................... The process of joining two complementary strands of DNA
or one each of DNA and RNA to form a double-stranded
molecule.
Immunoassay....................... A diagnostic test that uses a protein produced by the
immune system, called an antibody, to detect specific
proteins that may be used to aid in the identification
or treatment of disease.
In vitro.......................... Studies or phenomena that take place outside the body
(for instance, in test tubes).
Linkage analysis.................. Locating of genes on chromosomes by determining the
inheritance patterns of genetic markers that are close
to one another.
mRNA (messenger RNA).............. RNA that serves as a template for protein synthesis. See
"Genetic code."
Mutation.......................... A transmissible change in the genetic material of an
organism, usually in a single gene.
Nucleic acid...................... A large molecule composed of nucleotide subunits.
Nucleotide........................ A subunit of DNA or RNA consisting of a nitrogenous base
(adenine, guanine, thymine, or cytosine in DNA;
adenine, guanine, uracil, or cytosine in RNA), a
phosphate molecule and a sugar molecule (deoxyribose in
DNA, ribose in RNA). Thousands of nucleotides are
linked to form a DNA or RNA molecule.
Nucleotide pair................... Two nitrogenous bases (adenine and thymine or guanine
and cytosine) held together by weak bonds. Two strands
of DNA are held together in the shape of a double helix
by the bonds between base pairs.
Polymorphism...................... Difference in DNA sequence among individuals.
Polymorphism Screening............ The process of correlating genetic variations with
disease or traits.
Photolithography.................. A technique that uses light to induce chemical reactions
that create exposure patterns on a surface.
</TABLE>
65
<PAGE>
<TABLE>
<S> <C>
Probe............................. Short sequence of DNA used to identify longer stretches
of complementary DNA or RNA sequence.
Probe array....................... Small, disposable chip consisting of densely packed DNA
sequences (probes), where the identity and position of
each probe is known on the chip surface.
Protein........................... A large molecule composed of one or more chains of amino
acids in a specific order; the order is determined by
the base sequence of nucleotides in the gene or genes
coding for the protein. Proteins are required for the
structure, function and regulation of the body's cells,
tissues, and organs, and each protein has unique
functions. Examples of proteins are hormones, enzymes,
and antibodies.
RNA (Ribonucleic acid)............ A chemical found in the nucleus and cytoplasm of cells;
it plays an important role in protein synthesis and
other chemical activities of the cell. The structure of
RNA is similar to that of DNA. There are several
classes of RNA molecules, including messenger RNA,
transfer RNA, ribosomal RNA, and other small RNAs, each
serving a different purpose.
Solid-phase DNA synthesis......... DNA synthesis in which the chains of bases are anchored
to a solid substrate, such as glass, as opposed to being
synthesized in solution.
Virus............................. A noncellular biological entity that can reproduce only
within a host cell. Viruses consist of nucleic acid
covered by protein. Some animal viruses are also
surrounded by membrane. Once inside the infected cell,
the virus uses the synthetic capability of the host to
produce progeny virus.
Wafer............................. Pieces of glass on which multiple probe arrays are
simultaneously manufactured. The wafers are subsequently
diced to yield individual probe arrays.
</TABLE>
66
<PAGE>
AFFYMETRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.......................................................... F-2
Financial Statements:
Balance Sheets........................................................................................... F-3
Statements of Operations................................................................................. F-4
Statement of Shareholders' Equity........................................................................ F-5
Statements of Cash Flows................................................................................. F-7
Notes to Financial Statements............................................................................ F-8
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Affymetrix, Inc.
We have audited the accompanying balance sheets of Affymetrix, Inc. (a
development stage company) at December 31, 1994 and 1995, and the related
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1995 and for the period from
inception (January 1, 1991) to December 31, 1995. 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, the financial statements referred to above present fairly,
in all material respects, the financial position of Affymetrix, Inc. (a
development stage company) at December 31, 1994 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995 and for the period from inception (January 1, 1991) to
December 31, 1995, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Palo Alto, California
February 9, 1996,
except for the first paragraph of Note 9 as to which the date is
, 1996
--------------------------------------------------------------------------------
The foregoing report is in the form that will be signed upon the completion of
the reverse stock split described in Note 9 of the financial statements.
/s/ ERNST & YOUNG LLP
Palo Alto, California
May 20, 1996
F-2
<PAGE>
AFFYMETRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- --------- MARCH 31, PRO FORMA
----------- SHAREHOLDERS'
1996 EQUITY AT
----------- MARCH 31,
-------------
(UNAUDITED) 1996
-------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.................................... $ 6,659 $ 2,481 $ 308
Short-term investments....................................... 11,146 36,402 34,529
Contract and grant receivables............................... 90 1,342 636
Inventories.................................................. -- 670 1,469
Other current assets......................................... 88 260 422
--------- --------- -----------
Total current assets....................................... 17,983 41,155 37,364
Property and equipment, at cost:
Equipment and furniture...................................... 2,554 4,254 4,955
Leasehold improvements....................................... 356 586 587
--------- --------- -----------
2,910 4,840 5,542
Less accumulated depreciation and amortization............... (1,047) (1,583) (1,863)
--------- --------- -----------
Net property and equipment................................. 1,863 3,257 3,679
Other assets................................................... 15 140 142
--------- --------- -----------
$ 19,861 $ 44,552 $ 41,185
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued liabilities............... $ 1,046 $ 2,469 $ 3,278
Payable to Affymax........................................... 254 89 12
Deferred revenue............................................. 837 2,340 2,153
Current portion of capital lease obligation.................. 169 187 192
--------- --------- -----------
Total current liabilities.................................. 2,306 5,085 5,635
Convertible note payable to Affymax............................ 6,000 -- --
Noncurrent portion of capital lease obligation................. 1,135 948 898
Advance from collaborative partner............................. 1,250 -- --
Commitments.................................................... --
Shareholders' equity:
Convertible preferred stock, no par value; 27,500,000 shares
authorized; 14,500,000 issued and outstanding at December
31, 1994, 23,166,666 at December 31, 1995 and March 31, 1996
(none pro forma); aggregate liquidation preference of
$70,625 at December 31, 1995 and March 31, 1996............. 31,283 70,439 70,439 $ --
Common stock, no par value; 50,000,000 shares authorized;
408,198 shares issued and outstanding at December 31, 1994,
536,267 at December 31, 1995 and 609,240 at March 31, 1996
(16,239,231 pro forma)...................................... 122 2,717 3,089 73,528
Notes receivable from officers............................... (84) (42) (41) (41)
Unrealized gain(loss) on available-for-sale securities....... (382) 281 1 1
Deferred compensation........................................ -- (2,360) (2,399) (2,399)
Deficit accumulated during development stage................. (21,769) (32,516) (36,437) (36,437)
--------- --------- ----------- -------------
Total shareholders' equity................................. 9,170 38,519 34,652 $ 34,652
--------- --------- ----------- -------------
-------------
$ 19,861 $ 44,552 $ 41,185
--------- --------- -----------
--------- --------- -----------
</TABLE>
See accompanying notes.
F-3
<PAGE>
AFFYMETRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- --------- THREE MONTHS PERIOD FROM
ENDED MARCH 31, INCEPTION
------------------------ (JANUARY 1,
1995 1996 1991)
----------- ----------- THROUGH
MARCH 31, 1996
(UNAUDITED) (UNAUDITED) ---------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Contract and grant revenue.......... $ 1,413 $ 1,574 $ 4,625 $ 854 $ 1,416 $ 9,071
Operating expenses:
Research and development.......... 6,566 9,483 12,420 2,274 4,177 38,328
General and administrative........ 577 2,303 3,833 777 1,649 9,205
--------- --------- --------- ----------- ----------- -------
Total operating expenses
(includes related-party expense
of $1,147, $1,647, $1,432,
$428, $364 and $4,590,
respectively).................. 7,143 11,786 16,253 3,051 5,826 47,533
--------- --------- --------- ----------- ----------- -------
Loss from operations................ (5,730) (10,212) (11,628) (2,197) (4,410) (38,462)
Interest income................... 211 575 1,301 183 517 2,607
Interest expense (includes
related-party expense of $320 in
1995 and $128 in the three months
ended March 31, 1995)............ (73) (43) (420) (160) (28) (582)
--------- --------- --------- ----------- ----------- -------
Net loss............................ $ (5,592) $ (9,680) $ (10,747) $ (2,174) $ (3,921) $ (36,437)
--------- --------- --------- ----------- ----------- -------
--------- --------- --------- ----------- ----------- -------
Pro forma net loss per share........ $ (0.61) $ (0.12) $ (0.22)
--------- ----------- -----------
--------- ----------- -----------
Shares used in computing pro forma
net loss per share................. 17,664 17,663 17,664
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
See accompanying notes.
F-4
<PAGE>
AFFYMETRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (JANUARY 1, 1991) TO MARCH 31, 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CONTRI-
CONVERTIBLE NOTES BUTIONS
PREFERRED COMMON RECEIVABLE FROM UNREALIZED DEFERRED
STOCK STOCK FROM OFFICERS AFFYMAX GAIN (LOSS) COMPENSATION
----------- ----------- ------------- --------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of 666 shares of common stock
for cash in March 1992 at $0.15 per
share................................ $ -- $ -- $ -- $ -- $ -- $ --
Contributions from Affymax (1991 and
1992)................................ -- -- -- 6,316 -- --
Net loss (1991 and 1992).............. -- -- -- -- -- --
----------- ----------- --- --------- ----- ------
Balance at December 31, 1992.......... -- -- -- 6,316 -- --
Contributions from Affymax through
September 1993....................... -- -- -- 4,309 -- --
Issuance of 6,000,000 shares of Series
A Senior convertible preferred stock
for cash in September 1993, at $3.50
per share, net of issuance costs of
$342................................. 20,658 -- -- -- -- --
Conversion of all contributions from
Affymax into 8,500,000 shares of
Series 1 Subordinated convertible
preferred stock in September 1993 at
$1.25 per share...................... 10,625 -- -- (10,625) -- --
Issuance of 66,666 shares of common
stock for cash upon exercise of stock
options in December 1993 at $0.30 per
share................................ -- 20 -- -- -- --
Issuance of 266,666 shares of common
stock for notes receivable upon
exercise of options in December 1993
at $0.30 per share................... -- 80 (80) -- -- --
Net loss.............................. -- -- -- -- -- --
----------- ----------- --- --------- ----- ------
Balance at December 31, 1993.......... 31,283 100 (80) -- -- --
Issuance of 74,200 shares of common
stock for cash upon exercise of stock
options at $0.30 per share........... -- 22 -- -- -- --
Interest accrued on notes receivable
from officers........................ -- -- (4) -- -- --
Unrealized loss on available-for-sale
securities........................... -- -- -- -- (382) --
Net loss.............................. -- -- -- -- -- --
----------- ----------- --- --------- ----- ------
Balance at December 31, 1994.......... 31,283 122 (84) -- (382) --
Issuance of 7,333,333 shares of Series
B Senior convertible preferred stock
for cash in August 1995, at $4.50 per
share, net of issuance costs of
$164................................. 32,836 -- -- -- -- --
Conversion of $6,000 note payable into
1,333,333 shares of Series B Senior
convertible preferred stock in August
1995, at $4.50 per share............. 6,000 -- -- -- -- --
Issuance of 62,749 shares of common
stock for cash upon exercise of stock
options at $0.30 to $0.675 per
share................................ -- 23 -- -- -- --
Issuance of 65,320 shares of common
stock for financing commissions in
August 1995 at $0.675 per share...... -- 44 -- -- -- --
<CAPTION>
DEFICIT TOTAL
ACCUMULATED SHAREHOLDERS'
DURING EQUITY (NET
DEVELOPMENT CAPITAL
STAGE DEFICIENCY)
------------- -------------
<S> <C> <C>
Issuance of 666 shares of common stock
for cash in March 1992 at $0.15 per
share................................ $ -- $ --
Contributions from Affymax (1991 and
1992)................................ -- 6,316
Net loss (1991 and 1992).............. (6,497) (6,497)
------------- -------------
Balance at December 31, 1992.......... (6,497) (181)
Contributions from Affymax through
September 1993....................... -- 4,309
Issuance of 6,000,000 shares of Series
A Senior convertible preferred stock
for cash in September 1993, at $3.50
per share, net of issuance costs of
$342................................. -- 20,658
Conversion of all contributions from
Affymax into 8,500,000 shares of
Series 1 Subordinated convertible
preferred stock in September 1993 at
$1.25 per share...................... -- --
Issuance of 66,666 shares of common
stock for cash upon exercise of stock
options in December 1993 at $0.30 per
share................................ -- 20
Issuance of 266,666 shares of common
stock for notes receivable upon
exercise of options in December 1993
at $0.30 per share................... -- --
Net loss.............................. (5,592) (5,592)
------------- -------------
Balance at December 31, 1993.......... (12,089) 19,214
Issuance of 74,200 shares of common
stock for cash upon exercise of stock
options at $0.30 per share........... -- 22
Interest accrued on notes receivable
from officers........................ -- (4)
Unrealized loss on available-for-sale
securities........................... -- (382)
Net loss.............................. (9,680) (9,680)
------------- -------------
Balance at December 31, 1994.......... (21,769) 9,170
Issuance of 7,333,333 shares of Series
B Senior convertible preferred stock
for cash in August 1995, at $4.50 per
share, net of issuance costs of
$164................................. -- 32,836
Conversion of $6,000 note payable into
1,333,333 shares of Series B Senior
convertible preferred stock in August
1995, at $4.50 per share............. -- 6,000
Issuance of 62,749 shares of common
stock for cash upon exercise of stock
options at $0.30 to $0.675 per
share................................ -- 23
Issuance of 65,320 shares of common
stock for financing commissions in
August 1995 at $0.675 per share...... -- 44
</TABLE>
F-5
<PAGE>
AFFYMETRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF SHAREHOLDERS' EQUITY (CONTINUED)
FOR THE PERIOD FROM INCEPTION (JANUARY 1, 1991) TO MARCH 31, 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CONTRI-
CONVERTIBLE NOTES BUTIONS
PREFERRED COMMON RECEIVABLE FROM UNREALIZED DEFERRED
STOCK STOCK FROM OFFICERS AFFYMAX GAIN (LOSS) COMPENSATION
----------- ----------- ------------- --------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of warrants in June, July,
and October 1995 for 202,441 of
Series 2 Subordinated convertible
preferred stock at $1.58 per share in
exchange for interest................ 320 -- -- -- -- --
Interest received on notes receivable
from officers........................ -- -- 2 -- -- --
Reclassification of notes receivable
from officers to other assets........ -- -- 40 -- -- --
Compensation from accelerated
options.............................. -- 40 -- -- -- --
Deferred compensation related to grant
of stock options..................... -- 2,488 -- -- -- (2,488)
Amortization of deferred
compensation......................... -- -- -- -- -- 128
Unrealized gain on available-for-sale
securities........................... -- -- -- -- 663 --
Net loss.............................. -- -- -- -- -- --
----------- ----------- --- --------- ----- ------
Balance at December 31, 1995.......... 70,439 2,717 (42) -- 281 (2,360)
Issuance of 72,973 shares of common
stock for cash upon exercise of stock
options at $0.30 to $0.675 per share
(Unaudited).......................... -- 46 -- -- -- --
Interest received on notes receivable
from officers (Unaudited)............ -- -- 1 -- -- --
Deferred compensation related to grant
of stock options (Unaudited)......... -- 326 -- -- -- (326)
Amortization of deferred compensation
(Unaudited).......................... -- -- -- -- -- 287
Unrealized loss on available-for-sale
securities (Unaudited)............... -- -- -- -- (280) --
Net loss (Unaudited).................. -- -- -- -- -- --
----------- ----------- --- --------- ----- ------
Balance at March 31, 1996
(Unaudited).......................... $ 70,439 $ 3,089 $ (41) $ -- $ 1 $ (2,399)
----------- ----------- --- --------- ----- ------
----------- ----------- --- --------- ----- ------
<CAPTION>
DEFICIT TOTAL
ACCUMULATED SHAREHOLDERS'
DURING EQUITY (NET
DEVELOPMENT CAPITAL
STAGE DEFICIENCY)
------------- -------------
<S> <C> <C>
Issuance of warrants in June, July,
and October 1995 for 202,441 of
Series 2 Subordinated convertible
preferred stock at $1.58 per share in
exchange for interest................ -- 320
Interest received on notes receivable
from officers........................ -- 2
Reclassification of notes receivable
from officers to other assets........ -- 40
Compensation from accelerated
options.............................. -- 40
Deferred compensation related to grant
of stock options..................... -- --
Amortization of deferred
compensation......................... -- 128
Unrealized gain on available-for-sale
securities........................... -- 663
Net loss.............................. (10,747) (10,747)
------------- -------------
Balance at December 31, 1995.......... (32,516) 38,519
Issuance of 72,973 shares of common
stock for cash upon exercise of stock
options at $0.30 to $0.675 per share
(Unaudited).......................... -- 46
Interest received on notes receivable
from officers (Unaudited)............ -- 1
Deferred compensation related to grant
of stock options (Unaudited)......... -- --
Amortization of deferred compensation
(Unaudited).......................... -- 287
Unrealized loss on available-for-sale
securities (Unaudited)............... -- (280)
Net loss (Unaudited).................. (3,921) (3,921)
------------- -------------
Balance at March 31, 1996
(Unaudited).......................... $ (36,437) $ 34,652
------------- -------------
------------- -------------
</TABLE>
See accompanyng notes.
F-6
<PAGE>
AFFYMETRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH
------------------------------- 31,
1993 1994 1995 ------------------------
--------- --------- --------- 1995 1996
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss..................................................... $ (5,592) $ (9,680) $ (10,747) $ (2,174) $ (3,921)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization.............................. 465 689 701 150 279
Amortization of investment premiums and discounts, net..... -- 148 (191) 165 (24)
Loss on disposal of equipment.............................. -- 417 188 -- --
Compensation due to accelerated vesting.................... -- -- 40 -- --
Amortization of deferred compensation...................... -- -- 128 -- 287
Interest payable exchanged for warrants.................... -- -- 320 -- --
Changes in operating assets and liabilities:
Contract and grant receivables........................... -- (90) (1,252) (675) 706
Inventories.............................................. -- -- (670) -- (799)
Other current assets..................................... (649) 575 (172) (19) (162)
Other assets............................................. 14 (15) (80) -- (2)
Accounts payable and other accrued liabilities........... 570 295 1,423 (196) 809
Payable to Affymax....................................... 1,574 (1,320) (165) (1) (77)
Deferred revenue......................................... 460 377 253 (150) (187)
Advance from collaborative partner....................... -- 1,250 -- -- --
--------- --------- --------- ----------- -----------
Net cash used in operating activities.................. (3,158) (7,354) (10,224) (2,900) (3,091)
--------- --------- --------- ----------- -----------
Cash flows from investing activities:
Capital expenditures....................................... (1,537) (1,207) (2,283) (580) (701)
Proceeds from the sale of available-for-sale securities.... -- 5,308 8,538 -- 1,466
Proceeds from maturities of available-for-sale
securities................................................ -- -- 5,485 -- 2,156
Purchases of available-for-sale securities................. (13,997) (2,990) (38,428) (2,007) (2,004)
--------- --------- --------- ----------- -----------
Net cash provided by/(used in) investing activities.... (15,534) 1,111 (26,688) (2,587) 917
--------- --------- --------- ----------- -----------
Cash flows from financing activities:
Contributions from Affymax................................... 4,309 -- -- -- --
Issuances of common stock.................................... 20 22 23 -- 46
Issuances of preferred stock, net............................ 20,658 -- 32,880 -- --
Proceeds from capital lease obligation....................... -- 1,307 -- -- --
Principal payments on capital lease obligation............... -- (3) (169) (41) (45)
Issuance of convertible note payable to Affymax.............. -- 6,000 -- -- --
Issuance of notes payable.................................... 333 -- -- -- --
Principal payments on notes payable.......................... (327) (819) -- -- --
--------- --------- --------- ----------- -----------
Net cash provided by (used in) financing activities.... 24,993 6,507 32,734 (41) 1
--------- --------- --------- ----------- -----------
Net increase (decrease) in cash and cash equivalents........... 6,301 264 (4,178) (5,528) (2,173)
Cash and cash equivalents at beginning of period............... 94 6,395 6,659 6,659 2,481
--------- --------- --------- ----------- -----------
Cash and cash equivalents at end of period..................... $ 6,395 $ 6,659 $ 2,481 $ 1,131 $ 308
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Supplemental disclosure of noncash financing activities:
Issuance of common stock for note receivable from officers... $ 80 $ -- $ -- $ -- $ --
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Conversion of note payable and contributions from
Affymax to preferred stock.................................. $ 10,625 $ -- $ 6,000 $ -- $ --
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Assets under capital lease obligation........................ -- $ 1,297 $ -- $ -- $ --
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Issuance of common stock for financing commissions........... $ -- $ -- $ 44 $ -- $ --
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Issuance of warrants in exchange for interest payable........ $ -- $ -- $ 320 $ -- $ --
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Supplemental disclosure of cash flow information:
Interest paid................................................ $ 73 $ 20 $ 122 $ 32 $ 28
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
<CAPTION>
PERIOD FROM
(JANUARY 1,
1991)
THROUGH MARCH
31, 1996
<S> <C>
Cash flows from operating activities:
Net loss..................................................... $ (36,437)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization.............................. 2,210
Amortization of investment premiums and discounts, net..... (67)
Loss on disposal of equipment.............................. 605
Compensation due to accelerated vesting.................... 40
Amortization of deferred compensation...................... 415
Interest payable exchanged for warrants.................... 320
Changes in operating assets and liabilities:
Contract and grant receivables........................... (636)
Inventories.............................................. (1,469)
Other current assets..................................... (422)
Other assets............................................. (98)
Accounts payable and other accrued liabilities........... 3,278
Payable to Affymax....................................... 12
Deferred revenue......................................... 903
Advance from collaborative partner....................... 1,250
--------------
Net cash used in operating activities.................. (30,096)
--------------
Cash flows from investing activities:
Capital expenditures....................................... (6,494)
Proceeds from the sale of available-for-sale securities.... 15,312
Proceeds from maturities of available-for-sale
securities................................................ 7,641
Purchases of available-for-sale securities................. (57,419)
--------------
Net cash provided by/(used in) investing activities.... (40,960)
--------------
Cash flows from financing activities:
Contributions from Affymax................................... 10,625
Issuances of common stock.................................... 111
Issuances of preferred stock, net............................ 53,538
Proceeds from capital lease obligation....................... 1,307
Principal payments on capital lease obligation............... (217)
Issuance of convertible note payable to Affymax.............. 6,000
Issuance of notes payable.................................... 1,146
Principal payments on notes payable.......................... (1,146)
--------------
Net cash provided by (used in) financing activities.... 71,364
--------------
Net increase (decrease) in cash and cash equivalents........... 308
Cash and cash equivalents at beginning of period............... --
--------------
Cash and cash equivalents at end of period..................... $ 308
--------------
--------------
Supplemental disclosure of noncash financing activities:
Issuance of common stock for note receivable from officers... $ 80
--------------
--------------
Conversion of note payable and contributions from
Affymax to preferred stock.................................. $ 16,625
--------------
--------------
Assets under capital lease obligation........................ $ 1,297
--------------
--------------
Issuance of common stock for financing commissions........... $ 44
--------------
--------------
Issuance of warrants in exchange for interest payable........ $ 320
--------------
--------------
Supplemental disclosure of cash flow information:
Interest paid................................................ $ 262
--------------
--------------
</TABLE>
See accompanying notes.
F-7
<PAGE>
AFFYMETRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 AND FOR THE PERIOD
FROM INCEPTION TO MARCH 31, 1996 IS UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION, OWNERSHIP, AND BUSINESS
Affymetrix, Inc. ("Affymetrix") is a development stage company focused on
developing GeneChip-TM- based products and related technology for the
acquisition, analysis, and management of complex genetic data. The business and
operations of Affymetrix commenced in 1991 by Affymax N.V. and subsidiaries
("Affymax") and were initially conducted within Affymax. In March 1992,
Affymetrix was incorporated as a California corporation and became a wholly
owned subsidiary of Affymax. Beginning in September 1993, Affymetrix issued
equity securities which diluted Affymax' shareholding in Affymetrix. Affymax
owns approximately 46% of Affymetrix at December 31, 1995. In March 1995, Glaxo
plc, now Glaxo Wellcome plc ("Glaxo"), purchased Affymax, including its then 65%
interest in Affymetrix. The accompanying financial statements include the
operations of Affymetrix from inception (January 1, 1991). The advances from
Affymax through September 1993 were recorded as capital contributions and
converted to convertible preferred shares in September 1993. Since September
1993, the financial statements reflect the operations of Affymetrix on a
stand-alone basis.
Affymetrix' success will depend in part on its ability to obtain and
maintain patent protection in the United States and other countries for its
technologies and products. The commercial success of Affymetrix also depends in
part on neither infringing patents or proprietary rights of third parties nor
breaching any licenses that may relate to Affymetrix' technologies and products.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
INTERIM FINANCIAL INFORMATION
The financial information at March 31, 1996 and for the three-month periods
ended March 31, 1995 and 1996 is unaudited but includes all adjustments
(consisting only of normal recurring adjustments) which Affymetrix considers
necessary for a fair presentation of the financial position at such date and the
operating results and cash flows for those periods. Results for the March 31,
1996 period are not necessarily indicative of the results for the entire year.
REVENUE RECOGNITION
Contract and grant revenue is recorded as earned as defined within the
specific agreements. Payments received in advance under these arrangements are
recorded as deferred revenue until earned. Direct costs associated with these
contracts and grants are reported as research and development expense. Revenue
for the beta shipments are recorded as contract revenue pursuant to the
development agreements.
Revenue from customers representing 10% or more of total contract and grant
revenue during fiscal 1993, 1994, and 1995 is as follows:
<TABLE>
<CAPTION>
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Customer:
A -- -- 25%
B -- -- 23%
C -- -- 22%
D 49% 54% 17%
E 38% 29% --
</TABLE>
F-8
<PAGE>
AFFYMETRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 AND FOR THE PERIOD
FROM INCEPTION TO MARCH 31, 1996 IS UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT
Research and development expenses consist of costs incurred for internal,
contract and grant-sponsored research and development. These costs include
direct and research-related overhead expenses.
NET LOSS PER SHARE
Except as noted below, historical net loss per share is computed using the
weighted average number of common shares outstanding. Common equivalent shares
are excluded from the computation as their effect is antidilutive, except that,
pursuant to the Securities and Exchange Commission ("SEC") Staff Accounting
Bulletins, common and common equivalent shares (stock options, convertible notes
payable, convertible preferred stock, and warrants) issued during the 12 months
prior to the initial filing of the proposed offering at prices below the assumed
public offering price have been included in the calculation as if they were
outstanding for all periods presented (using the treasury stock method for stock
options and warrants and the if-converted method for convertible preferred
stock).
Historical net loss per share information is as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------- --------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net loss per share...... $ (0.75) $ (1.24) $ (1.38) $ (0.28) $ (0.50)
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Shares used in computing
net loss per share..... 7,422,000 7,801,000 7,812,000 7,811,000 7,812,000
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
Pro forma net loss per share has been computed as described above and also
gives effect to the conversion of convertible preferred shares not included
above that will automatically convert upon completion of Affymetrix' initial
public offering (using the if-converted method) from the original date of
issuance.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Effective January 1, 1994, Affymetrix adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." The effect of adopting Statement 115 at January 1, 1994 was
immaterial.
Cash equivalents and short-term investments consist of debt securities.
Management determines the appropriate classification of debt securities at the
time of purchase. As of December 31, 1995, Affymetrix' debt securities are
classified as available-for-sale and are carried at fair value with unrealized
gains and losses reported in shareholders' equity. Affymetrix reports all liquid
securities with maturities at date of purchase of three months or less that are
readily convertible into cash and have insignificant interest rate risk as cash
equivalents. All other available-for-sale securities are recorded as short-term
investments. The cost of debt securities is adjusted for amortization of
premiums and discounts to maturity. This amortization is included in interest
income. Realized gains and losses on available-for-sale securities are included
in interest income. The cost of securities sold is based on the specific
identification method. Interest and dividends on securities classified as
available-for-sale are included in interest income. The fair values of
securities are based on quoted market prices.
F-9
<PAGE>
AFFYMETRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 AND FOR THE PERIOD
FROM INCEPTION TO MARCH 31, 1996 IS UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost, as determined by the first-in,
first-out method, or market and consist entirely of finished goods at December
31, 1995, and $256,000 of raw material and $1,213,000 of finished goods at March
31, 1996.
DEPRECIATION AND AMORTIZATION
The costs of property and equipment are depreciated for financial reporting
purposes using the straight-line method over the estimated useful lives of the
assets ranging from two to five years. Leasehold improvements are amortized over
the useful lives of the assets or the lease-term, whichever is shorter.
Expenditures for maintenance and repairs are expensed as incurred.
ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES
Accounts payable and other accrued liabilities include the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
-------------------- -----------
1994 1995 1996
--------- --------- -----------
<S> <C> <C> <C>
Accounts payable......................................... $ 587 $ 1,088 $ 963
Accrued compensation..................................... 262 576 617
Collaborative research refund............................ -- 360 448
Accrued research......................................... 132 115 533
Legal.................................................... -- 222 351
Other.................................................... 65 108 366
--------- --------- -----------
$ 1,046 $ 2,469 $ 3,278
--------- --------- -----------
--------- --------- -----------
</TABLE>
STOCK BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued "Accounting
for Stock-Based Compensation" ("Statement No. 123") which is effective for
fiscal 1996. Under Statement No. 123, stock-based compensation expense is
measured using either the intrinsic-value method as prescribed in APB Opinion
No. 25 or the fair value method described in Statement No. 123. Affymetrix
intends to adopt the disclosure only alternative under Statement No. 123 and,
accordingly, Affymetrix will be required to disclose the pro forma net income or
loss and per share amounts in the notes to the financial statements using the
fair value based method. Affymetrix has not yet determined the impact of these
pro forma adjustments.
CONCENTRATIONS OF CREDIT RISK
Cash equivalents and investments are financial instruments which potentially
subject Affymetrix to concentrations of risk. Corporate policy restricts the
amount of credit exposure to any one issuer and to any one type of investment,
other than securities issued by the United States Government.
NOTE 2. COLLABORATIVE AGREEMENTS AND GRANTS
Affymetrix expects to collaborate with various partners to successfully
commercialize its technology. Total costs incurred under contract and grant
arrangements are approximately $1,412,000 in 1993, $1,499,000 in 1994,
$5,237,000 in 1995, $602,000 for the three months ended March 31, 1995,
$1,759,000 for the three months ended March 31, 1996 and $9,952,000 for the
period from inception through March 31, 1996.
F-10
<PAGE>
AFFYMETRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 AND FOR THE PERIOD
FROM INCEPTION TO MARCH 31, 1996 IS UNAUDITED)
NOTE 2. COLLABORATIVE AGREEMENTS AND GRANTS (CONTINUED)
Affymetrix began its collaboration with Genetics Institute ("GI") in
November 1994 to develop applications of the GeneChip system to the
identification of new genes and new uses of genes using expression monitoring.
Under this agreement, GI funded Affymetrix' research to determine the
feasibility of this application of GeneChip technology and agreed to make
milestone and royalty payments. Under certain circumstances, Affymetrix may pay
royalty payments to GI. If Affymetrix enters into similar agreements for gene
expression with third parties, Affymetrix may be required to refund a portion of
the development funding received from GI and future funding may be
proportionately reduced (see Note 9).
In December 1995, Affymetrix and GI expanded their relationship by entering
into a supply agreement in the field of genomics under which Affymetrix will
manufacture and supply additional custom probe arrays based on specific genes
identified and selected by GI. Unlike the 1994 agreement with GI, this agreement
does not provide research funding to Affymetrix. Pursuant to the agreement, GI
is obligated to purchase and Affymetrix is obligated to supply certain minimum
quantities of custom probe arrays developed for GI until the later of 2001 or
four years after development of specified probe arrays. Affymetrix will receive
fees for the design and delivery of the custom probe arrays, and may receive
milestone payments and royalties on therapeutic compounds if developed by GI
using these probe arrays. GI has exclusive rights to specific probe arrays
supplied by Affymetrix.
In October 1995, Affymetrix entered into a collaborative research and
development agreement with Roche Molecular Systems, Inc. ("Roche"). Under this
agreement, Roche agreed to fund certain research efforts for approximately one
year aimed at developing GeneChip based products designed to detect certain
genetic mutations. Roche is required to make additional payments if certain
milestones are reached. Under certain circumstances, Affymetrix may pay
royalties to Roche.
In August 1995, Affymetrix received a three-year grant from the National
Institutes of Health ("NIH") National Center for Human Genome Research for
approximately $6,000,000. Affymetrix has been awarded approximately $2,000,000
for the first year of the grant, and the remaining amounts are subject to yearly
appropriations by the NIH.
Affymetrix entered into a collaboration with Hewlett-Packard Company ("HP")
in November 1994 for HP to manufacture and supply a more advanced scanner for
the use with Affymetrix' GeneChip probe arrays and for Affymetrix to develop,
manufacture and supply certain probe arrays to HP for sale in certain markets.
In exchange for certain rights, Affymetrix received and will receive certain
payments, including milestones, as defined research and development objectives
are achieved. In addition, HP will fund certain research work at Affymetrix. The
collaborative agreement is for an initial five-year term and shall be extended
thereafter for consecutive three-year terms, unless either party terminates the
agreement upon six months notice. In November 1994, Affymetrix received a
license payment from HP that is classified as deferred revenue and as an advance
from collaborative partner in 1995 and 1994, respectively. The agreement
contains terms, expiring in November 1996, that allow the payment to be applied
towards the purchase of an equity position in Affymetrix upon agreement of both
parties. Affymetrix is required to pay royalties to HP on HP and Company
sponsored probe arrays sold by the Company pursuant to the agreement.
In October 1994, Affymetrix and Molecular Dynamics, Inc. were awarded a
five-year matching grant for a total of $31,500,000 under the Advanced
Technology Program within the National Institute of Standards and Technology to
develop a miniaturized DNA diagnostic device, of which approximately $10,700,000
will be available to Molecular Dynamics. The contract provides that Affymetrix
will receive funding for approximately
F-11
<PAGE>
AFFYMETRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 AND FOR THE PERIOD
FROM INCEPTION TO MARCH 31, 1996 IS UNAUDITED)
NOTE 2. COLLABORATIVE AGREEMENTS AND GRANTS (CONTINUED)
50% of its costs up to $20,800,000, some of which will be used to fund
activities at collaborating academic institutions. The award is subject to
yearly congressional authorization, which is uncertain. Affymetrix expects to
receive payments monthly based on costs incurred.
Affymetrix recognized revenues of approximately $1,412,000 in 1993,
$1,499,000 in 1994, $1,034,000 in 1995, and $212,000 and $51,000 for the three
months ended March 31, 1995 and 1996, respectively, pursuant to other contracts
and grants.
NOTE 3. AVAILABLE-FOR-SALE SECURITIES
The following is a summary of available-for-sale securities as of December
31, 1994 (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
U.S. Government obligations.................... $ 16,503 $ -- $ 382 $ 16,121
--------- --- --- -----------
--------- --- --- -----------
Amounts included in:
cash equivalents........................... $ 4,975 $ -- $ -- $ 4,975
short-term investments..................... 11,528 -- 382 11,146
--------- --- --- -----------
Total securities........................... $ 16,503 $ -- $ 382 $ 16,121
--------- --- --- -----------
--------- --- --- -----------
</TABLE>
The following is a summary of available-for-sale securities as of December
31, 1995 (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
U.S. Government obligations.................... $ 38,115 $ 309 $ 27 $ 38,397
--------- --- --- -----------
--------- --- --- -----------
Amounts included in:
cash equivalents........................... $ 1,995 $ -- $ -- $ 1,995
short-term investments..................... 36,120 309 27 36,402
--------- --- --- -----------
Total securities........................... $ 38,115 $ 309 $ 27 $ 38,397
--------- --- --- -----------
--------- --- --- -----------
</TABLE>
The gross realized gains and gross realized losses on sales of
available-for-sale securities were immaterial for the years ended December 31,
1994 and 1995.
The following is a summary of the amortized cost and estimated fair value of
available-for-sale securities at December 31, 1995, by contractual maturity (in
thousands):
<TABLE>
<CAPTION>
ESTIMATED FAIR
AMORTIZED COST VALUE
-------------- ------------------
<S> <C> <C>
Mature in one year or less................................ $ 14,184 $ 14,184
Mature after one year through three years................. 23,931 24,213
------- -------
Total................................................... $ 38,115 $ 38,397
------- -------
------- -------
</TABLE>
NOTE 4. RELATED PARTY TRANSACTIONS
In December 1994, Affymetrix issued a $6,000,000 subordinated convertible
promissory note to Affymax. In August of 1995, the note was converted into
1,333,333 shares of Series B Senior convertible preferred stock
F-12
<PAGE>
AFFYMETRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 AND FOR THE PERIOD
FROM INCEPTION TO MARCH 31, 1996 IS UNAUDITED)
NOTE 4. RELATED PARTY TRANSACTIONS (CONTINUED)
issued at $4.50 per share. Affymetrix also exercised an option to satisfy
interest due on the note through July 1995, amounting to $319,856, by issuing
Affymax five-year warrants to purchase 202,441 shares of Series 2 Subordinated
convertible preferred stock at $5.50 per share.
In December 1994, in connection with a lease agreement between Affymetrix
and a third party, Affymax, with approval of the third party lessor, agreed to
release Affymetrix of certain financial covenants to the third party. In
exchange for this release, Affymetrix issued a five-year warrant to Affymax to
purchase 103,382 shares of Series 2 Subordinated convertible preferred stock at
$5.50 per share.
Effective January 1, 1993, Affymetrix entered into a Technology License
Agreement with Affymax whereby Affymetrix was granted an exclusive worldwide
royalty-free license from Affymax, with the right to sublicense, to certain
technology and to certain future inventions for use in the diagnostic and
research supply markets including uses of DNA probe arrays. In exchange for the
Technology License Agreement and prior Affymax contributions, Affymetrix issued
Affymax 8,500,000 shares of Series 1 Subordinated convertible preferred stock
using a share price of $1.25, and agreed to share certain costs of developing
certain technology.
Two directors of Affymetrix are employees of a subsidiary of Glaxo.
Pursuant to a service agreement, Affymax provided certain general
administrative and legal services to Affymetrix from October 1, 1993 until
December 31, 1994. As of January 1, 1995, the agreement was amended to limit
those services. Amounts expensed by Affymetrix under this agreement are
approximately $787,000 in 1993, $806,000 in 1994, $291,000 in 1995, $150,000 for
the three months ended March 31, 1995, $37,000 for the three months ended March
31, 1996 and $1,921,000 for the period from inception through March 31, 1996.
General administrative and legal services were allocated to Affymetrix based on
time spent by Affymax employees exclusively on Affymetrix activities, at a rate
based on the salaries of the employees involved plus an overhead rate. Such
allocation was reasonable in the opinion of Affymetrix management.
Since January 1, 1993, Affymetrix has been occupying a research facility in
Santa Clara, California subleased from Affymax (See Note 7). Amounts expensed
under this agreement are approximately $275,000 in 1993, $472,000 in 1994,
$529,000 in 1995, $134,000 for the three months ended March 31, 1995, $134,000
for the three months ended March 31, 1996 and $1,410,000 for the period from
inception through March 31, 1996.
Affymetrix received legal services from Townsend and Townsend and Crew LLP
("Townsend") related to the intellectual property rights of Affymetrix. A
partner of Townsend was also an employee on a part time basis of Affymetrix.
Legal expenses related to services performed by Townsend are approximately
$85,000 in 1993, $369,000 in 1994, $612,000 in 1995, $144,000 for the three
months ended March 31, 1995, $193,000 for the three months ended March 31, 1996
and $1,259,000 for the period from inception through March 31, 1996.
In June 1993, the Board approved the issuance of secured loans to certain
officers for a total of $80,000 at an interest rate of 5.07% per year and
payable in full at the earlier of July 1, 1998 or upon termination of
employment. The loans were originally recorded as "notes receivable from
officers" in shareholders' equity. In June 1995, one loan for $40,000 was
reclassified to "other assets". In November 1994, the Board agreed to authorize
$115,000 as collateral to a bank for an officer's loan. In August 1995, the
Board approved the issuance of a five-year secured loan to an employee for a
total of $50,000 at an interest rate of 8% per year and payable in full at the
earlier of October 2, 2000 or upon termination of employment.
F-13
<PAGE>
AFFYMETRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 AND FOR THE PERIOD
FROM INCEPTION TO MARCH 31, 1996 IS UNAUDITED)
NOTE 5. NOTES PAYABLE AND CREDIT ARRANGEMENTS
NOTES PAYABLE
In December 1994, Affymetrix issued a $6,000,000 subordinated convertible
promissory note to Affymax maturing on December 1, 1997, which was subsequently
converted into 1,333,333 shares of Series B Senior convertible preferred stock
in August 1995 at a conversion rate of $4.50 per share (See Note 4).
CREDIT ARRANGEMENTS
In December 1994, Affymetrix entered into a financing arrangement with a
leasing company for existing equipment. Under the terms of the lease, Affymetrix
received a single minimum aggregate lease payment of $1,307,000 at the inception
of the lease. The leaseback contract includes a five-year term expiring January
2, 2000, with an option to purchase the equipment at the greater of the residual
value or fair market value. Under certain provisions, the lease may be extended
for an additional year. The amount included in property and equipment related to
the lease is $1,761,000 with accumulated depreciation of $464,000 and $818,000
at December 31, 1994 and December 31, 1995, respectively. Amortization of this
property and equipment is included in depreciation expense. Future minimum lease
payments under the capital lease obligation at December 31, 1995 are as follows
(in thousands):
<TABLE>
<S> <C>
1996........................................................ $ 292
1997........................................................ 292
1998........................................................ 292
1999........................................................ 291
2000........................................................ 280
---------
Total minimum lease payments................................ 1,447
Less amount representing interest........................... (312)
---------
Present value of minimum lease payments..................... 1,135
Less current portion........................................ (187)
---------
Noncurrent obligation under capital lease................... $ 948
---------
---------
</TABLE>
NOTE 6. SHAREHOLDERS' EQUITY
PREFERRED SHARES
Affymetrix is authorized to issue 27,500,000 shares of preferred stock,
designated as follows: 6,000,000 for Series A Senior convertible preferred
stock; 8,666,666 for Series B Senior convertible preferred stock; 8,500,000 for
Series 1 Subordinated convertible preferred stock; 1,000,000 for Series 2
Subordinated preferred stock and 3,333,334 shares undesignated.
The following table describes information with respect to the various series
of convertible preferred stock outstanding as of December 31, 1994:
<TABLE>
<CAPTION>
TOTAL
SHARES ISSUED ISSUANCE PRICE LIQUIDATION
AND OUTSTANDING PER SHARE PREFERENCE
--------------- --------------- -------------
<S> <C> <C> <C>
Series A...................................... 6,000,000 $ 3.50 $ 21,000,000
Series 1...................................... 8,500,000 1.25 10,625,000
--------------- -------------
14,500,000 $ 31,625,000
--------------- -------------
--------------- -------------
</TABLE>
F-14
<PAGE>
AFFYMETRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 AND FOR THE PERIOD
FROM INCEPTION TO MARCH 31, 1996 IS UNAUDITED)
NOTE 6. SHAREHOLDERS' EQUITY (CONTINUED)
The following table describes information with respect to the various series
of convertible preferred stock outstanding as of December 31, 1995 and March 31,
1996:
<TABLE>
<CAPTION>
TOTAL
SHARES ISSUED ISSUANCE PRICE LIQUIDATION
AND OUTSTANDING PER SHARE PREFERENCE
--------------- --------------- -------------
<S> <C> <C> <C>
Series A...................................... 6,000,000 $ 3.50 $ 21,000,000
Series B...................................... 8,666,666 4.50 39,000,000
Series 1...................................... 8,500,000 1.25 10,625,000
--------------- -------------
23,166,666 $ 70,625,000
--------------- -------------
--------------- -------------
</TABLE>
The Series A and Series B Senior and Series 1 and Series 2 Subordinated
convertible shares represent convertible noncumulative preferred shares.
Dividends for Series A and B are payable at $.28 and $.36 per share,
respectively, in preference to payment of any dividends on the Series 1
Subordinated preferred shares, Series 2 Subordinated preferred shares and common
stock, when and if declared by the Board. Dividends for Series 1 and 2 are
payable at $.10 and $.44 per share, respectively. In the event of liquidation,
dissolution, or winding up of Affymetrix, the Series A and Series B Senior
preferred shares will have a liquidation preference over the Series 1
Subordinated preferred shares, Series 2 Subordinated preferred shares and common
stock. Each share of preferred stock is entitled to the number of votes equal to
the number of shares of common stock into which such share of preferred stock
could be converted. Each share of preferred stock is convertible, at the
holder's option, into 0.6667 share of common stock subject to anti-dilution
adjustment upon the issuance of additional shares of common stock as defined in
Affymetrix' Articles of Incorporation (See Note 9).
The Series A Senior preferred shares, Series B Senior preferred shares,
Series 1 Subordinated preferred shares and Series 2 Subordinated preferred
shares will be automatically converted (i) upon the closing of a firm commitment
underwritten public offering pursuant to an effective registration statement
under the Securities Act of 1933, as amended, covering the offer and sale of
common stock to the public at an aggregate offering price of at least
$7,500,000; (ii) immediately upon receipt by Affymetrix of a written request for
conversion of at least 60% of the then outstanding shares of that series; or
(iii) upon the conversion of at least 60% of the shares of that series ever
outstanding.
STOCK WARRANTS
At December 31, 1995, the following warrants to purchase Affymetrix'
preferred stock were outstanding:
<TABLE>
<CAPTION>
EXERCISE NUMBER OF EXPIRATION
PRICE SHARES ISSUE DATE DATE
----------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Series 2 Subordinated convertible preferred.............. $ 5.50 103,382 1994 1999
Series 2 Subordinated convertible preferred.............. $ 5.50 202,441 1995 2000
</TABLE>
STOCK OPTION AND BENEFIT PLANS
In 1993, the Board adopted the Affymetrix 1993 Stock Plan (the "Stock Plan")
under which incentive stock options, nonqualified stock options and purchase
rights may be granted to employees and outside consultants.
Options granted under the Stock Plan expire no later than ten years from the
date of grant. The option price shall be at least 100% of the fair value on the
date of grant (110% in certain circumstances), as determined by the Board of
Directors. Options may be granted with different vesting terms from time to time
but not to exceed five years from the date of grant.
F-15
<PAGE>
AFFYMETRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 AND FOR THE PERIOD
FROM INCEPTION TO MARCH 31, 1996 IS UNAUDITED)
NOTE 6. SHAREHOLDERS' EQUITY (CONTINUED)
Activity under the Stock Plan through March 31, 1996 is as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
--------------------------------------
NUMBER OF PRICE PER AGGREGATE
SHARES SHARE PRICE
---------- ------------ ------------
<S> <C> <C> <C>
Options granted............................................... 714,081 $ 0.30 $ 214,224
Options exercised............................................. (333,332) 0.30 (100,000)
---------- ------------ ------------
Balance at December 31, 1993................................ 380,749 0.30 114,224
Options granted............................................... 634,238 0.30-0.675 331,547
Options exercised............................................. (74,200) 0.30 (22,260)
Options canceled.............................................. (38,799) 0.30 (11,640)
---------- ------------ ------------
Balance at December 31, 1994................................ 901,988 0.30-0.675 411,871
Options granted............................................... 1,423,917 0.675 961,144
Options exercised............................................. (62,749) 0.30-0.675 (22,524)
Options canceled.............................................. (104,032) 0.30-0.675 (56,597)
---------- ------------ ------------
Balance at December 31, 1995................................ 2,159,124 0.30-0.675 1,293,894
Options granted............................................... 107,500 0.675-4.80 173,281
Options exercised............................................. (72,973) 0.30-0.675 (45,627)
Options cancelled............................................. (2,133) 0.30-0.675 (690)
---------- ------------ ------------
Balance at March 31, 1996................................... 2,191,518 $ 0.30-4.80 $ 1,420,858
---------- ------------ ------------
---------- ------------ ------------
</TABLE>
At December 31, 1995 and March 31, 1996, options for the purchase of 219,446
and 158,490 shares were exercisable, respectively, and 148,889 shares were
subject to repurchase.
For options granted through December 31, 1995, Affymetrix recognized an
aggregate of $2,488,000 as deferred compensation for the excess of the deemed
fair value for financial statement presentation purposes of the common stock
issuable on exercise of such options over the exercise price. Deferred
compensation related to options granted during the three months ended March 31,
1996 was $326,000. The deferred compensation expense is being recognized over
the vesting period of the options.
Affymetrix employees have participated in the Affymax stock option and
benefit plan. The Affymax stock option plan, employees stock purchase plan, and
investment savings plan have had no impact on the financial statements of
Affymetrix.
NOTE 7. OPERATING LEASE COMMITMENTS
Since January 1, 1993, Affymetrix has been occupying a research facility in
Santa Clara, California leased by Affymax. In February 1994, Affymetrix entered
into a noncancelable operating sublease agreement with Affymax for a 21 month
period. Affymetrix obtained an extension through October 1996. The underlying
lease contains an option to renew the lease for an additional term of 82 months.
In December 1994, Affymetrix entered into a noncancelable five-year lease
for the rental of a manufacturing facility in Sunnyvale, California. Affymetrix
has options to renew the lease for two additional three-year terms.
F-16
<PAGE>
AFFYMETRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 AND FOR THE PERIOD
FROM INCEPTION TO MARCH 31, 1996 IS UNAUDITED)
NOTE 7. OPERATING LEASE COMMITMENTS (CONTINUED)
In October 1995, Affymetrix entered into a four-year lease, and a
noncancelable 17 month sublease, for the rental of a research and development
facility in Sunnyvale, California.
Future minimum rental payments under noncancelable operating leases at
December 31, 1995 are as follows (in thousands):
<TABLE>
<S> <C>
1996........................................................ $ 1,102
1997........................................................ 1,042
1998........................................................ 1,039
1999........................................................ 1,099
2000........................................................ 688
Thereafter.................................................. 1,664
---------
Total minimum rental payments............................... $ 6,634
---------
---------
</TABLE>
Rent expense related to operating leases was approximately $275,000 in 1993,
$472,000 in 1994, $664,000 in 1995 and $2,005,000 for the period from inception
through December 31, 1995.
Affymetrix entered into certain noncancelable obligations for the purchase
of GeneChip equipment and supplies. The maximum commitment under the contracts
at December 31, 1995 is $1,735,000, which will be paid as units are received in
1996.
NOTE 8. INCOME TAXES
As of December 31, 1995, Affymetrix has net operating loss carryforwards of
approximately $22,000,000, which will expire at various dates beginning on 2008
through 2010, if not utilized.
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code of 1986. The annual limitation may result in the
expiration of net operating losses and credits before utilization.
Significant components of Affymetrix deferred tax assets as of December 31
are as follows (in thousands):
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Net operating loss carryforwards.............................. $ 1,733 $ 4,284 $ 8,063
Research credits.............................................. 346 708 1,167
Deferred revenue.............................................. 156 710 1,041
Other-net..................................................... 7 209 532
--------- --------- ---------
Total deferred tax assets..................................... 2,242 5,911 10,803
Valuation allowance for deferred tax assets................... (2,242) (5,911) (10,803)
--------- --------- ---------
Net deferred tax assets....................................... $ -- $ -- $ --
--------- --------- ---------
--------- --------- ---------
</TABLE>
The valuation allowance increased by $2,163,000, $3,669,000, and $4,892,000
during 1993, 1994, and 1995, respectively.
NOTE 9. OTHER EVENTS SUBSEQUENT TO DECEMBER 31, 1995
On March 7, 1996, the Board of Directors approved a two-for-three reverse
stock split of its common stock through an amendment to its Articles of
Incorporation. All common share and per share amounts have been
F-17
<PAGE>
AFFYMETRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 AND FOR THE PERIOD
FROM INCEPTION TO MARCH 31, 1996 IS UNAUDITED)
NOTE 9. OTHER EVENTS SUBSEQUENT TO DECEMBER 31, 1995 (CONTINUED)
retroactively adjusted to reflect this event. The conversion rates for the
various issues of preferred stock have also been retroactively adjusted to
reflect the reverse stock split as well as the anti-dilution adjustment. As of
the effective date of the offering it is estimated that each share of Series A,
Series B and Series 1 preferred stock will convert into approximately 0.6823,
0.6667, and 0.6775 shares of common stock, respectively.
In addition, on March 7, 1996, the Board authorized the filing of a
registration statement with the Securities and Exchange Commission permitting
Affymetix to sell shares of its common stock to the public. If the offering is
consummated under the terms presently anticipated, all of the currently
outstanding preferred stock will automatically convert into 15,629,991 shares of
common stock and the warrants will be exercisable for 203,881 shares of common
stock at $8.25 per share. Unaudited pro forma shareholders' equity, as adjusted
for the conversion of the preferred stock, is set forth in the accompanying
balance sheets.
In April 1996, Affymetrix entered into an agreement with Incyte
Pharmaceuticals, Inc. to explore potential uses of DNA probe arrays in the area
of gene expression. As a result of this agreement, Affymetrix is required to
refund 30% of the development funding received from GI, and future funding from
GI will be proportionally reduced. The Company has recorded an accrued liability
for this refund. (See Note 2).
In May 1996, Affymetrix entered into an agreement with Glaxo to design, test
and supply probe arrays to demonstrate use of the arrays in detecting
polymorphisms in specific genes. Glaxo and Affymetrix will design and test a
probe array containing genes specified by Glaxo. If successfully developed,
Affymetrix will supply Glaxo's requirements of such probe arrays for research
purposes.
F-18
<PAGE>
Affymetrix GeneChip Probe Array Manufacturing
-----------------------------------
<TABLE>
<S> <C>
Combinationatorial [PICTURE]
Synthesis
Affymetrix is able to
synthesize tens of
thousands of different
DNA probes in parallel. A
robotic arm is shown
transporting a wafer on a
synthesizer.
[PICTURE] Photolithography
Affymetrix manufactures wafers of
GeneChip probe arrays using a high
resolution photolithographic
fabrication process adapted from the
semiconductor industry. A wafer is
shown being exposed to ultraviolet
light through a lithographic mask.
Wafer-Scale Production [PICTURE]
Affymetrix achieves manufacturing
efficiencies by simultaneously
synthesizing many probe arrays on a
single wafer. A wafer, diced into
individual probe arrays, is shown being
packaged into cartridges.
</TABLE>
<PAGE>
[LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the registrant in connection
with the sale of the Common Stock being registered. All amounts are estimated
except the SEC Registration Fee, the NASD Filing Fee and the Nasdaq National
Market Application Fee.
<TABLE>
<S> <C>
SEC Registration Fee.............................................. $ 25,776
NASD Filing Fee................................................... 7,975
Nasdaq National Market Application Fee............................ 1,000
Blue Sky Qualification Fees and Expenses.......................... 10,000
Accounting Fees and Expenses...................................... 150,000
Legal Fees and Expenses (including Blue Sky)...................... 300,000
Transfer Agent and Registrar Fees................................. 5,000
Printing and Engraving............................................ 150,000
Miscellaneous..................................................... 150,249
---------
Total......................................................... $ 800,000
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Pursuant to Section 204(a) and 317 of the California Corporations Code, as
amended, the registrant has included in its articles of incorporation and
by-laws provisions regarding the indemnification of officers and directors of
the registrant. Article Four of registrant's Restated Articles of Incorporation,
as amended, provides as follows:
"The liability of the directors of this corporation for monetary damages
shall be eliminated to the fullest extent permissible under California law. This
corporation is also authorized, to the fullest extent permissible under
California law, to indemnify its agents (as defined in Section 317 of the
California Corporations Code), whether by by-law, agreement or otherwise, in
excess of the indemnification expressly permitted by Section 317 and to advance
defense expenses to its agents in connection with such matters as they are
incurred, subject to the limits on such excess indemnification set forth in
Section 204 of the California Corporations Code. If, after the effective date of
this Article, California law is amended in a manner which permits a corporation
to limit the monetary or other liability of its directors or to authorize
indemnification of, or advancement of such defense expense to, its directors or
other persons, in any such case to a greater extent than is permitted on such
effective date, the references in this Article to "California law" shall to that
extent be deemed to refer to California law as so amended."
Section 29 of the registrant's By-Laws, as amended, provides as follows:
"29. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
(A) INDEMNIFICATION. To the fullest extent permissible under California
law, the corporation shall indemnify its directors and officers against all
expenses, judgment, fines settlement and other amounts actually and reasonably
incurred by them in connection with any proceeding, including an action by or in
the right of the corporation, by reason of the fact that such person is or was a
director or officer of the corporation, or is or was serving at the request of
the corporation as a director, officer, trustee, employee or agent of another
corporation, or of a partnership, joint venture, trust or other enterprise
(including service with respect to employee benefit plans). To the fullest
extent permissible under California law, expenses incurred by a director or
officer seeking indemnification under this By-law in defending any proceeding
shall be advanced by the corporation as they are incurred upon receipt by the
corporation of an undertaking by or on behalf of the director or officer to
repay such amount if it shall ultimately be determined that the director or
officer is not entitled to be indemnified by the corporation for those expenses.
If, after the effective date of this By-law, California law is amended in a
manner which permits the corporation to authorize indemnification of or
advancement of expenses to its
II-1
<PAGE>
directors or officers, in any such case to a greater extent than is permitted on
such effective date, the references in this By-law to "California law" shall to
that extent be deemed to refer to California law as so amended. The rights
granted by this By-law are contractual in nature and, as such, may not be
altered with respect to any present or former director or officer without the
written consent of that person.
(b) PROCEDURE. Upon written request to the Board of Directors by a person
seeking indemnification under this By-law, the Board shall promptly determine in
accordance with Section 317(e) of the California Corporations Code whether the
applicable standard of conduct has been met and, if so, the Board shall
authorize indemnification. If the Board cannot authorize indemnification because
the number of directors who are parties to the proceeding with respect to which
indemnification is sought prevents the formation of a quorum of directors who
are not parties to the proceeding, then, upon written request by the person
seeking indemnification, independent legal counsel (by means of a written
opinion obtained at the corporation's expense) or the corporation's shareholders
shall determine whether the applicable standard of conduct has been met and, if
so, shall authorize indemnification.
(c) DEFINITIONS. The term "proceeding" means any threatened, pending or
completed action or proceeding, whether civil, criminal, administrative or
investigative. The term "expenses" includes, without limitation, attorney's fees
and any expenses of establishing a right to indemnification."
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, the registrant has issued the securities set
forth below which were not registered under the Securities Act of 1933, as
amended (the "Act"). The share amounts (and purchase and option exercise prices)
set forth below have been adjusted to give effect to the two-for-three reverse
stock split of the Common Stock effected in May 1996 but do not give effect to
the conversion of Preferred Stock into Common Stock upon the closing of this
offering.
(1) COMMON STOCK. In August 1993, the registrant issued to Affymax N.V.
("Affymax"), an accredited investor, 667 shares of Common Stock at $0.15 per
share. The issuance was a private placement without general advertising or
solicitation to an "accredited investor" within the meaning of Rule 501(a) under
the Act and was exempt from registration under Section 4(2) of the Act. From
December 1993 to April 30, 1996, the registrant issued 552,169 shares of Common
Stock at prices ranging between $0.30 per share and $0.675 per share to
directors, employees and consultants in connection with the exercise by such
directors, employees and consultants of stock options held by them. All
issuances made pursuant to the exercise of options were made under the
registrant's 1993 Stock Plan, as amended. In August 1995, the registrant issued
65,320 shares of Common Stock for financing commissions. All of the foregoing
issuances and exercises of options were exempt from registration pursuant to
Section 3(b) of the Act and Rule 701 promulgated thereunder.
(2) SERIES A SENIOR CONVERTIBLE PREFERRED STOCK. In September 1993, the
registrant sold an aggregate of 6,000,000 shares of Series A Convertible Senior
Preferred Stock for $3.50 per share to approximately 48 accredited investors.
The sales were private placements without general advertising or solicitation to
"accredited investors" within the meaning of Rule 501(a) under the Act and were
exempt from registration under Section 4(2) of the Act.
(3) SERIES B SENIOR CONVERTIBLE PREFERRED STOCK. In August 1995, the
registrant sold 8,666,666 shares of Series B Senior Convertible Preferred Stock
at a price of $4.50 per share to approximately 100 accredited investors. The
sales were private placements without general advertising or solicitation to
"accredited investors" within the meaning of Rule 501(a) under the Act and were
exempt from registration under Section 4(2) of the Act.
(4) SERIES 1 SUBORDINATED CONVERTIBLE PREFERRED STOCK. In September 1993
the registrant issued to Affymax 8,500,000 shares of Series 1 Subordinated
Preferred Stock at a price of $1.25 per share. The sale was a private placement
without general advertising or solicitation to an "accredited investor" within
the meaning of Rule 501(a) under the Act and was exempt from registration under
Section 4(2) of the Act.
(5) WARRANTS TO PURCHASE SERIES 2 SUBORDINATED CONVERTIBLE PREFERRED
STOCK. In December 1994, the registrant issued a five-year warrant to purchase
an aggregate of 103,382 shares of Series 2 Subordinated
II-2
<PAGE>
Convertible Preferred Stock exercisable at $5.50 per share to Affymax in
consideration for relieving the Company of certain financial covenants and to
guarantee its obligation to a third party. In 1995, the registrant issued
five-year warrants to purchase an aggregate of 202,441 shares of Series 2
Subordinated Convertible Preferred Stock exercisable at $5.50 per share to
Affymax in consideration for certain interest payments otherwise due on a note
agreement. Affymax is an "accredited investor" within the meaning of Rule 501(a)
under the Act. The sales were private placements without general advertising or
solicitation and was exempt from registration under Section 4(2) of the Act.
(6) OPTION ISSUANCES TO DIRECTORS, OFFICERS, EMPLOYEES AND
CONSULTANTS. From July 1993 to April 30, 1996, the registrant has issued
options to purchase a total of 2,885,400 shares of Common Stock at an exercise
price ranging between $0.30 and $4.80 per share to directors, officers,
employees and consultants. As of the date of this registration statement,
552,169 options have been exercised. All of such issuances were made under the
registrant's 1993 Stock Plan, as amended. No consideration was paid to the
registrant by any recipient of any of the foregoing options for the grant of any
such options. All of the foregoing issuances and exercises were exempt from
registration pursuant to Section 3(b) of the Act and Rule 701 promulgated
thereunder.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement
**3.1 Amended and Restated Articles of Incorporation
**3.2 Form of Amended and Restated Articles, to be effective upon closing
**3.3 Bylaws
**3.4 Form of Certificate of Amendment of Amended and Restated Articles of
Incorporation
**4.1 Specimen Common Stock Certificate
**5.1 Opinion of Heller Ehrman White & McAuliffe
**10.1 1993 Stock Plan, as amended
**10.2 1996 Nonemployee Directors Stock Option Plan
**+10.3 Collaboration Agreement by and between Hewlett-Packard Company and Affymetrix,
Inc. dated November 11, 1994
**+10.4 Development and Supply Agreement between Affymetrix, Inc. and Genetics
Institute, Inc. dated November 15, 1994
**+10.5 Supply Agreement with Genetics Institute, Inc. dated December 8, 1995
**+10.6 Technology License Agreement among Affymax N.V., Affymax Technologies, N.V.,
the Affymax Research Institute, and Affymetrix, Inc. dated January 1, 1993
**10.7 Severance Agreement and Release between Affymetrix, Inc. and David B. Singer
dated June 15, 1995
**10.8 Loan and Pledge Agreement between David B. Singer and Affymetrix, Inc.
effective December 7, 1993.
**+10.9 ATP Participation Agreement between Affymetrix, Inc. and Molecular Dynamics,
Inc. dated January 12, 1995 pursuant to the National Institute of Standards
and Technology's Advanced Technology Program.
**10.10 Amendment 1 to the ATP Participation Agreement between Affymetrix, Inc. and
Molecular Dynamics, Inc. effective January 13, 1996.
**+10.11 Governance Agreement between Affymetrix, Inc. and Glaxo Wellcome plc dated
July 6, 1995.
**10.12 Services Agreement between Affymax Research Institute and Affymetrix, Inc.
effective October 1, 1993.
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
**10.13 Loan Agreement between Affymax Technologies N.V. and Affymetrix, Inc. dated
December 1, 1994.
**10.14 Lease between Solar Oakmead Joint Venture and Affymetrix, Inc. dated October
20, 1995.
**10.15 Sublease between Salutar, Inc. and Affymetrix, Inc. dated October 20, 1995.
**10.16 Sublease between Affymax Research Institute and Affymetrix, Inc. dated
February 1, 1994.
**+10.17 Manufacturing and Supply Agreement between Affymetrix, Inc. and RELA, Inc.
dated November 27, 1995.
**10.18 Loan and Pledge Agreement between Stephen P.A. Fodor and Affymetrix, Inc.
effective December 7, 1993.
**10.19 Agreement between Stephen P.A. Fodor and Affymetrix, Inc. dated November 1,
1994.
**10.20 Form of Director and Officer Indemnification Agreement
**+10.21 Demonstration Agreement between Affymetrix, Inc. and Glaxo Wellcome, Inc.
dated May 1, 1996
10.22 Lease between Harry Locklin and Affymetrix, Inc. dated December 5, 1994.
11.1 Statement of computation of net loss per share
23.1 Consent of Ernst & Young LLP, independent auditors
**23.2 Consent of Heller Ehrman White & McAuliffe
23.3 Consent of Townsend and Townsend and Crew LLP
**24.1 Power of Attorney (included on page II-5)
**24.2 Power of Attorney of Alejandro C. Zaffaroni
24.3 Power of Attorney of Barry C. Ross
</TABLE>
------------
** Previously filed.
+ Confidential treatment requested.
ITEM 17. UNDERTAKINGS
A. The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements,
certificates in such denominations and registered in such names as required by
the underwriter to permit prompt delivery to each purchaser.
B. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers, and controlling persons of
the registrant pursuant to the provisions described in Item 14 above, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
C. The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act of 1933 shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial BONA FIDE offering thereof.
II-4
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Act of 1933, Affymetrix, Inc.
has duly caused this Amendment No. 2 to Registration Statement on Form S-1 to be
signed on its behalf by the undersigned, thereunto duly authorized, in Santa
Clara, California on May 20, 1996.
AFFYMETRIX, INC.
By *
------------------------------------
JOHN D. DIEKMAN, Ph.D.
CHIEF EXECUTIVE OFFICER AND CHAIRMAN
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form S-1 has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
----------------------------------------------------- ------------------------------------------ ---------------
<C> <S> <C>
* Director, and Chief Executive
------------------------------------------ Officer (Principal Executive Officer) May 20, 1996
John D. Diekman, Ph.D.
*
------------------------------------------ Director and President May 20, 1996
Stephen P.A. Fodor, Ph.D.
*
------------------------------------------ Director May 20, 1996
Paul Berg, Ph.D.
*
------------------------------------------ Director May 20, 1996
Douglas M. Hurt
*
------------------------------------------ Director May 20, 1996
Vernon R. Loucks, Jr.
*
------------------------------------------ Director May 20, 1996
Barry C. Ross, Ph.D.
*
------------------------------------------ Director May 20, 1996
David B. Singer
*
------------------------------------------ Director May 20, 1996
John A. Young
*
------------------------------------------ Director May 20, 1996
Alejandro C. Zaffaroni Ph.D.
/S/ KENNETH J. NUSSBACHER Chief Financial Officer
------------------------------------------ (Principal Financial and May 20, 1996
Kenneth J. Nussbacher Accounting Officer)
*By: /S/ KENNETH J. NUSSBACHER
------------------------------------- May 20, 1996
Kenneth J. Nussbacher
(ATTORNEY-IN-FACT)
</TABLE>
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT PAGE
---------- ---------
<C> <S> <C>
1.1 Form of Underwriting Agreement........................................................
**3.1 Amended and Restated Articles of Incorporation........................................
**3.2 Amended and Restated Articles, to be effective upon closing...........................
**3.3 Bylaws................................................................................
**3.4 Form of Certificate of Amendment of Amended and Restated Articles of Incorporation....
**4.1 Specimen Common Stock Certificate.....................................................
**5.1 Opinion of Heller Ehrman White & McAuliffe............................................
**10.1 1993 Stock Plan, as amended...........................................................
**10.2 1996 Nonemployee Directors Stock Option Plan..........................................
**+10.3 Collaboration Agreement by and between Hewlett-Packard Company and Affymetrix, Inc.
dated November 11, 1994...............................................................
**+10.4 Development and Supply Agreement between Affymetrix, Inc. and Genetics Institute, Inc.
dated November 15, 1994...............................................................
**+10.5 Supply Agreement with Genetics Institute, Inc. dated December 8, 1995.................
**+10.6 Technology License Agreement among Affymax N.V., Affymax Technologies, N.V., the
Affymax Research Institute, and Affymetrix, Inc. dated January 1, 1993................
**10.7 Severance Agreement and Release between Affymetrix, Inc. and David B. Singer dated
June 15, 1995.........................................................................
**10.8 Loan and Pledge Agreement between David B. Singer and Affymetrix, Inc. effective
December 7, 1993......................................................................
**+10.9 ATP Participation Agreement between Affymetrix, Inc. and Molecular Dynamics, Inc.
dated January 12, 1995 pursuant to the National Institute of Standards and
Technology's Advanced Technology Program..............................................
**10.10 Amendment 1 to the ATP Participation Agreement between Affymetrix, Inc. and Molecular
Dynamics, Inc. effective January 13, 1996.............................................
**+10.11 Governance Agreement between Affymetrix, Inc. and Glaxo Wellcome plc dated July 6,
1995..................................................................................
**10.12 Services Agreement between Affymax Research Institute and Affymetrix, Inc. effective
October 1, 1993.......................................................................
**10.13 Loan Agreement between Affymax Technologies N.V. and Affymetrix, Inc. dated December
1, 1994...............................................................................
**10.14 Lease between Solar Oakmead Joint Venture and Affymetrix, Inc. dated October 20,
1995..................................................................................
**10.15 Sublease between Salutar, Inc. and Affymetrix, Inc. dated October 20, 1995............
**10.16 Sublease between Affymax Research Institute and Affymetrix, Inc. dated February 1,
1994..................................................................................
**+10.17 Manufacturing and Supply Agreement between Affymetrix, Inc. and RELA, Inc. dated
November 27, 1995.....................................................................
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C>
**10.18 Loan and Pledge Agreement between Stephen P.A. Fodor and Affymetrix, Inc. effective
December 7, 1993......................................................................
**10.19 Agreement between Stephen P.A. Fodor and Affymetrix, Inc. dated November 1, 1994......
**10.20 Form of Director and Officer Indemnification Agreement................................
**+10.21 Demonstration Agreement between Affymetrix, Inc. and Glaxo Wellcome, Inc. dated May 1,
1996..................................................................................
10.22 Lease between Harry Locklin and Affymetrix, Inc. dated December 5, 1994...............
11.1 Statement of computation of loss per share............................................
23.1 Consent of Ernst & Young LLP, independent auditors....................................
**23.2 Consent of Heller Ehrman White & McAuliffe............................................
23.3 Consent of Townsend and Townsend and Crew LLP.........................................
**24.1 Power of Attorney (included on page II-5).............................................
**24.2 Power of Attorney of Alejandro C. Zaffaroni...........................................
24.3 Power of Attorney of Barry C. Ross....................................................
</TABLE>
------------
** Previously filed.
+ Confidential treatment requested.
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
EXHIBITS
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
AFFYMETRIX, INC.
VOLUME I
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
---------------------------------------------------------
---------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
EXHIBITS
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
AFFYMETRIX, INC.
VOLUME II
---------------------------------------------------------
---------------------------------------------------------
<PAGE>
5,000,000 SHARES(1)
AFFYMETRIX, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
____________, 1996
ROBERTSON, STEPHENS & COMPANY LLC
CS FIRST BOSTON CORPORATION
MONTGOMERY SECURITIES
As Representatives of the several Underwriters
c/o Robertson, Stephens & Company LLC
555 California Street
Suite 2600
San Francisco, California 94104
Ladies/Gentlemen:
Affymetrix, Inc., a California corporation (the "Company"), addresses you
as the Representatives of each of the persons, firms and corporations listed in
Schedule A hereto (herein collectively called the "Underwriters") and hereby
confirms its agreement with the several Underwriters as follows:
1. DESCRIPTION OF SHARES. The Company proposes to issue and sell
5,000,000 shares of its authorized and unissued Common Stock, no par value, (the
"Firm Shares") to the several Underwriters. The Company also proposes to grant
to the Underwriters an option to purchase up to 750,000 additional shares of the
Company's Common Stock, no par value, (the "Option Shares"), as provided in
Section 7 hereof. As used in this Agreement, the term "Shares" shall include
the Firm Shares and the Option Shares. All shares of Common Stock, no par value
of the Company to be outstanding after giving effect to the sales contemplated
hereby, including the Shares, are hereinafter referred to as "Common Stock."
2. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE COMPANY. The
Company represents and warrants to and agrees with each Underwriter that:
(a) A registration statement on Form S-1 (File No. 333-3648) with
respect to the Shares, including a prospectus subject to completion, has been
prepared by the Company in conformity with the requirements of the Securities
Act of 1933, as amended (the "Act"), and the applicable rules and regulations
(the "Rules and Regulations") of the Securities and Exchange Commission (the
"Commission") under the Act and has been filed with the Commission; such
amendments to such registration statement, such amended prospectuses subject to
completion and such abbreviated registration statements pursuant to Rule 462(b)
of the Rules and Regulations as may have been required prior to the date hereof
have been similarly prepared and filed with the Commission; and the Company
------------------------
(1) Plus an option to purchase up to 750,000 additional shares from the Company
to cover over-allotments.
<PAGE>
will file such additional amendments to such registration statement, such
amended prospectuses subject to completion and such abbreviated registration
statements as may hereafter be required. Copies of such registration statement
and amendments, of each related prospectus subject to completion (the
"Preliminary Prospectuses") and of any abbreviated registration statement
pursuant to Rule 462(b) of the Rules and Regulations have been delivered to you.
If the registration statement relating to the Shares has been declared
effective under the Act by the Commission, the Company will prepare and promptly
file with the Commission the information omitted from the registration statement
pursuant to Rule 430A(a) or, if Robertson, Stephens & Company LLC, on behalf of
the several Underwriters, shall agree to the utilization of Rule 434 of the
Rules and Regulations, the information required to be included in any term sheet
filed pursuant to Rule 434(b) or (c), as applicable, of the Rules and
Regulations pursuant to subparagraph (1), (4) or (7) of Rule 424(b) of the Rules
and Regulations or as part of a post-effective amendment to the registration
statement (including a final form of prospectus). If the registration statement
relating to the Shares has not been declared effective under the Act by the
Commission, the Company will prepare and promptly file an amendment to the
registration statement, including a final form of prospectus, or, if Robertson,
Stephens & Company LLC, on behalf of the several Underwriters, shall agree to
the utilization of Rule 434 of the Rules and Regulations, the information
required to be included in any term sheet filed pursuant to Rule 434(b) or (c),
as applicable, of the Rules and Regulations. The term "Registration Statement"
as used in this Agreement shall mean such registration statement, including
financial statements, schedules and exhibits, in the form in which it became or
becomes, as the case may be, effective (including, if the Company omitted
information from the registration statement pursuant to Rule 430A(a) or files a
term sheet pursuant to Rule 434 of the Rules and Regulations, the information
deemed to be a part of the registration statement at the time it became
effective pursuant to Rule 430A(b) or Rule 434(d) of the Rules and Regulations)
and, in the event of any amendment thereto or the filing of any abbreviated
registration statement pursuant to Rule 462(b) of the Rules and Regulations
relating thereto after the effective date of such registration statement, shall
also mean (from and after the effectiveness of such amendment or the filing of
such abbreviated registration statement) such registration statement as so
amended, together with any such abbreviated registration statement. The term
"Prospectus" as used in this Agreement shall mean the prospectus relating to the
Shares as included in such Registration Statement at the time it becomes
effective (including, if the Company omitted information from the Registration
Statement pursuant to Rule 430A(a) of the Rules and Regulations, the information
deemed to be a part of the Registration Statement at the time it became
effective pursuant to Rule 430A(b) of the Rules and Regulations); PROVIDED,
HOWEVER, that if in reliance on Rule 434 of the Rules and Regulations and
with the consent of Robertson, Stephens & Company LLC, on behalf of the
several Underwriters, the Company shall have provided to the Underwriters a
term sheet pursuant to Rule 434(b) or (c), as applicable, prior to the time
that a confirmation is sent or given for purposes of Section 2(10)(a) of the
Act, the term "Prospectus" shall mean the "prospectus subject to completion"
(as defined in Rule 434(g) of the Rules and Regulations) last provided to the
Underwriters by the Company and circulated by the Underwriters to all
prospective purchasers of the Shares (including the information deemed to be
a part of the Registration Statement at the time it became effective pursuant
to Rule 434(d) of the Rules and Regulations). Notwithstanding the foregoing,
if any revised prospectus shall be provided to the Underwriters by the
Company for use in connection with the offering of the Shares that differs
from the prospectus referred to in the immediately preceding sentence
(whether or not such revised prospectus is required to be filed with the
Commission pursuant to Rule 424(b) of the Rules and Regulations), the term
"Prospectus" shall refer to such revised prospectus from and after the time
it is first provided to the Underwriters for such use. If in reliance on
Rule 434 of the Rules and Regulations and with the consent of Robertson,
Stephens & Company LLC, on behalf of the several Underwriters, the Company
shall have
-2-
<PAGE>
provided to the Underwriters a term sheet pursuant to Rule 434(b) or (c), as
applicable, prior to the time that a confirmation is sent or given for purposes
of Section 2(10)(a) of the Act, the Prospectus and the term sheet, together,
will not be materially different from the prospectus in the Registration
Statement.
(b) The Commission has not issued any order preventing or suspending
the use of any Preliminary Prospectus or instituted proceedings for that
purpose, and each such Preliminary Prospectus has conformed in all material
respects to the requirements of the Act and the Rules and Regulations and, as of
its date, has not included any untrue statement of a material fact or omitted to
state a material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading; and at the time
the Registration Statement became or becomes, as the case may be, effective and
at all times subsequent thereto up to and on the Closing Date (hereinafter
defined) and on any later date on which Option Shares are to be purchased,
(i) the Registration Statement and the Prospectus, and any amendments or
supplements thereto, contained and will contain all material information
required to be included therein by the Act and the Rules and Regulations and
will in all material respects conform to the requirements of the Act and the
Rules and Regulations, (ii) the Registration Statement, and any amendments or
supplements thereto, did not and will not include any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, and (iii) the
Prospectus, and any amendments or supplements thereto, did not and will not
include any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; PROVIDED, HOWEVER, that none of the
representations and warranties contained in this subparagraph (b) shall apply to
information contained in or omitted from the Registration Statement or
Prospectus, or any amendment or supplement thereto, in reliance upon, and in
conformity with, written information relating to any Underwriter furnished to
the Company by such Underwriter specifically for use in the preparation thereof
which is specified in the last paragraph of Section 3 hereof.
(c) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the jurisdiction of its
incorporation with full power and authority (corporate and other) to own, lease
and operate its properties and conduct its business as described in the
Prospectus; the Company is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction in which the ownership
or leasing of its properties or the conduct of its business requires such
qualification, except where the failure to be so qualified or be in good
standing would not have a material adverse effect on the condition (financial or
otherwise), earnings, operations or business as described in the Prospectus of
the Company; no proceeding has been instituted in any such jurisdiction,
revoking, limiting or curtailing, or seeking to revoke, limit or curtail, such
power and authority or qualification; the Company is in possession of and
operating in compliance with all authorizations, licenses, certificates,
consents, orders and permits from state, federal and other regulatory
authorities which are material to the conduct of its business, all of which are
valid and in full force and effect; the Company is not in violation of its
charter or bylaws or in default in the performance or observance of any
obligation, agreement, covenant or condition contained in any material bond,
debenture, note or other evidence of indebtedness, or in any material lease,
contract, indenture, mortgage, deed of trust, loan agreement, joint venture or
other agreement or instrument to which the Company is a party or by which it or
its properties may be bound; and the Company is not in violation of any material
law, order, rule, regulation, writ, injunction, judgment or decree of any court,
government or governmental agency or body, domestic or foreign, having
jurisdiction over the Company
-3-
<PAGE>
or over its properties of which it has knowledge. The Company does not own or
control, directly or indirectly, any corporation, association or other entity.
(d) The Company has full legal right, power and authority to enter
into this Agreement and perform the transactions contemplated hereby. This
Agreement has been duly authorized, executed and delivered by the Company and is
a valid and binding agreement on the part of the Company, enforceable in
accordance with its terms, except as rights to indemnification hereunder may be
limited by applicable law and except as the enforcement hereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws relating to or affecting creditors' rights generally or by general
equitable principles; the performance of this Agreement and the consummation of
the transactions herein contemplated will not result in a breach or violation of
any of the terms and provisions of, or constitute a default under, (i) any
material bond, debenture, note or other evidence of indebtedness, or under any
material lease, contract, indenture, mortgage, deed of trust, loan agreement,
joint venture or other agreement or instrument to which the Company is a party
or by which it or its properties may be bound, (ii) the charter or bylaws of the
Company, or (iii) any material law, order, rule, regulation, writ, injunction,
judgment or decree of any court, government or governmental agency or body,
domestic or foreign, having jurisdiction over the Company or over its
properties. No consent, approval, authorization or order of or qualification
with any court, government or governmental agency or body, domestic or foreign,
having jurisdiction over the Company or over its properties is required for the
execution and delivery of this Agreement and the consummation by the Company of
the transactions herein contemplated, except such as may be required under the
Act and the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
which will have been obtained prior to the Closing Date (as hereinafter defined)
and except such as may be required under state or other securities or Blue Sky
laws.
(e) There is not any pending or, to the Company's knowledge,
threatened action, suit, claim or proceeding against the Company or any of its
officers or any of its properties, assets or rights before any court, government
or governmental agency or body, domestic or foreign, having jurisdiction over
the Company or over its officers or properties or otherwise which (i) might
result in any material adverse change in the condition (financial or otherwise),
earnings, operations or business as described in the Prospectus of the Company
or might materially and adversely affect its properties, assets or rights,
(ii) might prevent consummation of the transactions contemplated hereby or
(iii) is required to be disclosed in the Registration Statement or Prospectus
and is not so disclosed; and there are no agreements, contracts, leases or
documents of the Company of a character required to be described or referred to
in the Registration Statement or Prospectus or to be filed as an exhibit to the
Registration Statement by the Act or the Rules and Regulations which have not
been accurately described in all material respects in the Registration Statement
or Prospectus or filed as exhibits to the Registration Statement.
(f) All outstanding shares of capital stock of the Company have been
duly authorized and validly issued and are fully paid and nonassessable, have
been issued in compliance with all federal and state securities laws, were not
issued in violation of or subject to any preemptive rights or other rights to
subscribe for or purchase securities, and the authorized and outstanding capital
stock of the Company is as set forth in the Prospectus under the caption
"Capitalization" and conforms in all material respects to the statements
relating thereto contained in the Registration Statement and the Prospectus (and
such statements correctly state the substance of the instruments defining the
capitalization of the Company); the Firm Shares and the Option Shares have been
duly authorized for issuance and sale to the Underwriters pursuant to this
Agreement and, when issued and delivered by the Company against payment therefor
in accordance with the terms of this Agreement, will be duly and validly issued
and
-4-
<PAGE>
fully paid and nonassessable, and will be sold free and clear of any pledge,
lien, security interest, encumbrance, claim or equitable interest; and no
preemptive right, co-sale right, registration right, right of first refusal or
other similar right of shareholders exists with respect to any of the Firm
Shares or Option Shares or the issuance and sale thereof other than those that
have been expressly waived prior to the date hereof and those that will
automatically expire upon and will not apply to the consummation of the
transactions contemplated on the Closing Date. No further approval or
authorization of any shareholder, the Board of Directors of the Company or
others is required for the issuance and sale or transfer of the Shares except as
may be required under the Act (which will have been obtained prior to the
Closing Date), state or other securities or Blue Sky laws. Except as disclosed
in the Prospectus and the financial statements of the Company, and the related
notes thereto, included in the Prospectus, the Company has no outstanding
options to purchase, or any preemptive rights or other rights to subscribe for
or to purchase, any securities or obligations convertible into, or any contracts
or commitments to issue or sell, shares of its capital stock or any such
options, rights, convertible securities or obligations. The description of the
Company's warrants, stock option, stock bonus and other stock plans or
arrangements, and the options or other rights granted and exercised thereunder,
set forth in the Prospectus accurately and fairly presents the information
required to be shown with respect to such warrants, plans, arrangements, options
and rights.
(g) Ernst & Young LLP, which has examined the financial statements of
the Company, together with the related schedules and notes, as of December 31,
1995 and 1994 and for each of the years in the three (3) years ended
December 31, 1995 filed with the Commission as a part of the Registration
Statement, which are included in the Prospectus, are independent accountants
within the meaning of the Act and the Rules and Regulations; the audited
financial statements of the Company, together with the related schedules and
notes, and the unaudited financial information, forming part of the Registration
Statement and Prospectus, fairly present the financial position and the results
of operations of the Company at the respective dates and for the respective
periods to which they apply; and all audited financial statements of the
Company, together with the related schedules and notes, and the unaudited
financial information, filed with the Commission as part of the Registration
Statement, have been prepared in accordance with generally accepted accounting
principles consistently applied throughout the periods involved except as may be
otherwise stated therein. The selected and summary financial and statistical
data included in the Registration Statement present fairly the information shown
therein and have been compiled on a basis consistent with the audited financial
statements presented therein. No other financial statements or schedules are
required to be included in the Registration Statement.
(h) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus, there has not been (i) any
material adverse change in the condition (financial or otherwise), earnings,
operations or business as described in the Prospectus of the Company, (ii) any
transaction that is material to the Company, except transactions entered into in
the ordinary course of business, (iii) any obligation, direct or contingent,
that is material to the Company, incurred by the Company, except obligations
incurred in the ordinary course of business, (iv) any change in the capital
stock or outstanding indebtedness of the Company that is material to the
Company, (v) any dividend or distribution of any kind declared, paid or made on
the capital stock of the Company, or (vi) any loss or damage (whether or not
insured) to the property of the Company which has been sustained or will have
been sustained which has a material adverse effect on the condition (financial
or otherwise), earnings, operations, business as described in the Prospectus of
the Company.
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(i) Except as set forth in the Registration Statement and Prospectus,
(i) the Company has good and marketable title to all properties and assets
described in the Registration Statement and Prospectus as owned by it, free and
clear of any pledge, lien, security interest, encumbrance, claim or equitable
interest, other than such as would not have a material adverse effect on the
condition (financial or otherwise), earnings, operations or business as
described in the Prospectus of the Company, (ii) the agreements to which the
Company is a party described in the Registration Statement and Prospectus are
valid agreements, enforceable by the Company, except as the enforcement thereof
may be limited by applicable bankruptcy, insolvency, reorganization, moratorium
or other similar laws relating to or affecting creditors' rights generally or by
general equitable principles and, to the Company's knowledge, the other
contracting party or parties thereto are not in material breach or material
default under any of such agreements, and (iii) the Company has valid and
enforceable leases and subleases for all properties described in the
Registration Statement and Prospectus as leased by it, except as the enforcement
thereof may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting creditors' rights
generally or by general equitable principles. Except as set forth in the
Registration Statement and Prospectus, the Company owns or leases all such
properties as are necessary to its operations as now conducted or as proposed to
be conducted.
(j) The Company has timely filed all necessary federal, state and
foreign income and franchise tax returns and has paid all taxes shown thereon as
due, and there is no tax deficiency that has been or, to the Company's
knowledge, might be asserted against the Company that might have a material
adverse effect on the condition (financial or otherwise), earnings, operations,
business as described in the Prospectus of the Company; and all tax liabilities
are adequately provided for on the books of the Company.
(k) The Company maintains insurance with insurers of recognized
financial responsibility of the types and in the amounts generally deemed
adequate for its business and consistent with insurance coverage maintained by
similar companies in similar businesses, including, but not limited to,
insurance covering real and personal property owned or leased by the Company
against theft, damage, destruction, acts of vandalism, product liability and all
other risks customarily insured against and with respect to the Company's
directors' and officers' insurance policy, the Company has obtained coverage for
up to $8 million, all of which insurance is in full force and effect; the
Company has not been refused any insurance coverage sought or applied for; and
the Company has no reason to believe that it will not be able to renew its
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a cost that would not materially and adversely affect the condition
(financial or otherwise), earnings, operations, business as described in the
Prospectus of the Company.
(l) To the Company's knowledge, no labor disturbance by the employees
of the Company exists or is imminent; and the Company is not aware of any
existing or imminent labor disturbance by the employees of any of its principal
suppliers, customers, manufacturers, partners or collaborators that might be
expected to result in a material adverse change in the condition (financial or
otherwise), earnings, operations or business as described in the Prospectus of
the Company. No collective bargaining agreement exists with any of the
Company's employees and, to the Company's knowledge, no such agreement is
imminent.
(m) Except as previously disclosed to you in writing, the Company
owns or possesses adequate rights to use all patents, patent rights, inventions,
trade secrets, know-how, trademarks, service marks, trade names and copyrights
which are necessary to conduct its business as described in the
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Registration Statement and Prospectus; the expiration of any patents, patent
rights, trade secrets, trademarks, service marks, trade names or copyrights
would not have a material adverse effect on the condition (financial or
otherwise), earnings, operations or business as described in the Prospectus of
the Company; except as previously disclosed to you in writing, the Company has
not received any notice of, and has no knowledge of, any infringement of or
conflict with asserted rights of the Company by others with respect to any
patent, patent rights, inventions, trade secrets, know-how, trademarks, service
marks, trade names or copyrights; and the Company has not received any notice
of, and has no knowledge of, any infringement of or conflict with asserted
rights of others with respect to any patent, patent rights, inventions, trade
secrets, know-how, trademarks, service marks, trade names or copyrights which,
singly or in the aggregate, if the subject of an unfavorable decision, ruling or
finding, might have a material adverse effect on the condition (financial or
otherwise), earnings, operations or business as described in the Prospectus of
the Company.
(n) The Common Stock has been approved for quotation on The Nasdaq
National Market, subject to official notice of issuance.
(o) The Company has been advised concerning the Investment Company
Act of 1940, as amended (the "1940 Act"), and the rules and regulations
thereunder, and has in the past conducted, and intends in the future to conduct,
its affairs in such a manner as to ensure that it will not become an "investment
company" or a company "controlled" by an "investment company" within the meaning
of the 1940 Act and such rules and regulations.
(p) The Company has not distributed and will not distribute prior to
the later of (i) the Closing Date, or any date on which Option Shares are to be
purchased, as the case may be, and (ii) completion of the distribution of the
Shares, any offering material in connection with the offering and sale of the
Shares other than any Preliminary Prospectuses, the Prospectus, the Registration
Statement and other materials, if any, permitted by the Act.
(q) The Company has not at any time during the last five (5) years
(i) made any unlawful contribution to any candidate for foreign office or failed
to disclose fully any contribution in violation of law, or (ii) made any payment
to any federal or state governmental officer or official, or other person
charged with similar public or quasi-public duties, other than payments required
or permitted by the laws of the United States or any jurisdiction thereof.
(r) The Company has not taken and will not take, directly or
indirectly, any action designed to or that might reasonably be expected to cause
or result in stabilization or manipulation of the price of the Common Stock to
facilitate the sale or resale of the Shares.
(s) Each officer and director of the Company and beneficial owner
of one percent or more of the Company's outstanding shares of capital
stock as of the date of this Agreement has agreed in writing that such person
will not, for a period of 180 days from the date that the Registration Statement
is declared effective by the Commission (the "Lock-up Period"), offer to sell,
contract to sell, or otherwise sell, dispose of, loan, pledge or grant any
rights with respect to (collectively, a "Disposition") any shares of Common
Stock, any options or warrants to purchase any shares of Common Stock (except
for options held by non-officer employees of the Company) or any securities
convertible into or exchangeable for shares of Common Stock (collectively,
"Securities") now owned or hereafter acquired directly by such person or with
respect to which such person has or hereafter acquires the power of disposition,
otherwise than (i) as a bona fide gift or gifts, provided the donee or
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donees thereof agree in writing to be bound by this restriction, (ii) as a
distribution to partners or shareholders of such person, provided that the
distributees thereof agree in writing to be bound by the terms of this
restriction, or (iii) with the prior written consent of Robertson, Stephens &
Company LLC. The foregoing restriction has been expressly agreed to preclude
the holder of the Securities from engaging in any hedging or other transaction
which is designed to or reasonably expected to lead to or result in a
Disposition of Securities during the Lock-up Period, even if such Securities
would be disposed of by someone other than such holder. Such prohibited hedging
or other transactions would include, without limitation, any short sale (whether
or not against the box) or any purchase, sale or grant of any right (including,
without limitation, any put or call option) with respect to any Securities or
with respect to any security (other than a broad-based market basket or index)
that includes, relates to or derives any significant part of its value from
Securities. Furthermore, such person has also agreed and consented to the entry
of stop transfer instructions with the Company's transfer agent against the
transfer of the Securities held by such person except in compliance with this
restriction. The Company has provided to counsel for the Underwriters a
complete and accurate list of all security holders of the Company and the number
and type of securities held by each security holder. The Company has provided
to counsel for the Underwriters true, accurate and complete copies of all of the
agreements pursuant to which its officers, directors and shareholders have
agreed to such or similar restrictions (the "Lock-up Agreements") presently in
effect or effected hereby. The Company understands and agrees that the Lock-Up
Agreements are for the benefit of the Underwriters and hereby assigns its rights
under such Lock-Up Agreements to Robertson , Stephens & Company LLC. The
Company hereby agrees to enforce such Lock-Up Agreements, to not release any of
its officers, directors or other shareholders (except for employees of the
Company who are not officers of the Company) from any Lock-up Agreements
currently existing or hereafter effected without the prior written consent of
Robertson, Stephens & Company LLC and to enter stop transfer instructions with
the Company's transfer agent against the transfer of any Securities held by such
persons except in compliance with the foregoing restriction.
(t) Except as set forth in the Registration Statement and Prospectus,
(i) the Company is in compliance with all rules, laws and regulations relating
to the use, treatment, storage and disposal of toxic substances and protection
of health or the environment ("Environmental Laws") which are applicable to its
business, (ii) the Company has received no notice from any governmental
authority or third party of an asserted claim under Environmental Laws, which
claim is required to be disclosed in the Registration Statement and the
Prospectus, (iii) the Company will not be required to make future material
capital expenditures to comply with Environmental Laws and (iv) no property
which is owned, leased or occupied by the Company has been designated as a
Superfund site pursuant to the Comprehensive Response, Compensation, and
Liability Act of 1980, as amended (42 U.S.C. Section 9601, et seq.), or
otherwise designated as a contaminated site under applicable state or local law.
(u) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are executed
in accordance with management's general or specific authorizations,
(ii) transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets, (iii) access to assets is permitted only in
accordance with management's general or specific authorization, and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(v) There are no outstanding loans, advances (except normal advances
for business expenses in the ordinary course of business) or guarantees of
indebtedness by the Company to or for the
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benefit of any of the officers or directors of the Company or any of the members
of the families of any of them, except as disclosed in the Registration
Statement and the Prospectus.
(w) The Company has complied with all provisions of Section 517.075,
Florida Statutes relating to doing business with the Government of Cuba or with
any person or affiliate located in Cuba.
3. PURCHASE, SALE AND DELIVERY OF SHARES. On the basis of the
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company agrees to sell to the
Underwriters, and each Underwriter agrees, severally and not jointly, to
purchase from the Company at a purchase price of $_____ per share, the
respective number of Firm Shares as hereinafter set forth except that any Firm
Shares to be sold by the Underwriters to Dr. Alejandro C. Zaffaroni shall be
purchased by the Underwriters from the Company at a purchase price per share
equal to the inital public offering price set forth on the front page of the
Prospectus. The obligation of each Underwriter to the Company shall be to
purchase from the Company that number of Firm Shares which is set forth opposite
the name of such Underwriter in Schedule A hereto (subject to adjustment as
provided in Section 10).
Delivery of definitive certificates for the Firm Shares to be
purchased by the Underwriters pursuant to this Section 3 shall be made against
payment of the purchase price therefor by the several Underwriters by wire
transfer of same-day funds paid to an account designated by the Company in
writing at the offices of Heller Ehrman White & McAuliffe, 525 University
Avenue, Palo Alto, California 94301-1908 (or at such other place as may be
agreed upon among the Representatives and the Company, at 7:00 A.M., San
Francisco time (a) on the third (3rd) full business day following the first day
that Shares are traded, (b) if this Agreement is executed and delivered after
1:30 P.M., San Francisco time, the fourth (4th) full business day following the
day that this Agreement is executed and delivered or -C- at such other time and
date not later than seven (7) full business days following the first day that
Shares are traded as the Representatives and the Company may determine (or at
such time and date to which payment and delivery shall have been postponed
pursuant to Section 10 hereof), such time and date of payment and delivery being
herein called the "Closing Date;" PROVIDED, HOWEVER, that if the Company has not
made available to the Representatives copies of the Prospectus within the time
provided in Section 4(d) hereof, the Representatives may, in their sole
discretion, postpone the Closing Date until no later than two (2) full business
days following delivery of copies of the Prospectus to the Representatives. The
certificates for the Firm Shares to be so delivered will be made available to
you at such office or such other location including, without limitation, in New
York City, as you may reasonably request for checking at least one (1) full
business day prior to the Closing Date and will be in such names and
denominations as you may request, such request to be made at least two (2) full
business days prior to the Closing Date. If the Representatives so elect,
delivery of the Firm Shares may be made by credit through full fast transfer to
the accounts at The Depository Trust Company designated by the Representatives.
It is understood that you, individually, and not as the
Representatives of the several Underwriters, may (but shall not be obligated to)
make payment of the purchase price on behalf of any Underwriter or Underwriters
whose check or checks (or wire transfers, as the case may be) shall not have
been received by you prior to the Closing Date for the Firm Shares to be
purchased by such Underwriter or Underwriters. Any such payment by you shall
not relieve any such Underwriter or Underwriters of any of its or their
obligations hereunder.
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After the Registration Statement becomes effective, the several
Underwriters intend to make an initial public offering (as such term is
described in Section 11 hereof) of the Firm Shares at an initial public offering
price of $_____ per share. After the initial public offering, the several
Underwriters may, in their discretion, vary the public offering price.
The information set forth in the last paragraph on the front cover
page (insofar as such information relates to the Underwriters), in the last two
paragraphs on the inside front cover concerning stabilization and over-allotment
by the Underwriters, and under the second, sixth and seventh paragraphs under
the caption "Underwriting" in any Preliminary Prospectus and in the Prospectus
constitutes the only information furnished by the Underwriters to the Company
for inclusion in any Preliminary Prospectus, the Prospectus or the Registration
Statement, and you, on behalf of the respective Underwriters, represent and
warrant to the Company that the statements made therein do not include any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading.
4. FURTHER AGREEMENTS OF THE COMPANY. The Company agrees with the
several Underwriters that:
(a) The Company will use its best efforts to cause the Registration
Statement and any amendment thereof, if not effective at the time and date that
this Agreement is executed and delivered by the parties hereto, to become
effective as promptly as possible; the Company will use its best efforts to
cause any abbreviated registration statement pursuant to Rule 462(b) of the
Rules and Regulations as may be required subsequent to the date the Registration
Statement is declared effective to become effective as promptly as possible; the
Company will notify you, promptly after it shall receive notice thereof, of the
time when the Registration Statement, any subsequent amendment to the
Registration Statement or any abbreviated registration statement has become
effective or any supplement to the Prospectus has been filed; if the Company
omitted information from the Registration Statement at the time it was
originally declared effective in reliance upon Rule 430A(a) of the Rules and
Regulations, the Company will provide evidence satisfactory to you that the
Prospectus contains such information and has been filed, within the time period
prescribed, with the Commission pursuant to subparagraph (1) or (4) of
Rule 424(b) of the Rules and Regulations or as part of a post-effective
amendment to such Registration Statement as originally declared effective which
is declared effective by the Commission; if the Company files a term sheet
pursuant to Rule 434 of the Rules and Regulations, the Company will provide
evidence satisfactory to you that the Prospectus and term sheet meeting the
requirements of Rule 434(b) or (c), as applicable, of the Rules and Regulations,
have been filed, within the time period prescribed, with the Commission pursuant
to subparagraph (7) of Rule 424(b) of the Rules and Regulations; if for any
reason the filing of the final form of Prospectus is required under
Rule 424(b)(3) of the Rules and Regulations, it will provide evidence
satisfactory to you that the Prospectus contains such information and has been
filed with the Commission within the time period prescribed; it will notify you
promptly of any request by the Commission for the amending or supplementing of
the Registration Statement or the Prospectus or for additional information;
promptly upon your request, it will prepare and file with the Commission any
amendments or supplements to the Registration Statement or Prospectus which, in
the opinion of counsel for the several Underwriters ("Underwriters' Counsel"),
may be necessary or advisable in connection with the distribution of the Shares
by the Underwriters; it will promptly prepare and file with the Commission, and
promptly notify you of the filing of, any
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amendments or supplements to the Registration Statement or Prospectus which may
be necessary to correct any statements or omissions, if, at any time when a
prospectus relating to the Shares is required to be delivered under the Act, any
event shall have occurred as a result of which the Prospectus or any other
prospectus relating to the Shares as then in effect would include any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements therein, in the light of the circumstances under which they were
made, not misleading; in case any Underwriter is required to deliver a
prospectus nine (9) months or more after the effective date of the Registration
Statement in connection with the sale of the Shares, it will prepare promptly
upon request, but at the expense of such Underwriter, such amendment or
amendments to the Registration Statement and such prospectus or prospectuses as
may be necessary to permit compliance with the requirements of Section 10(a)(3)
of the Act; and it will file no amendment or supplement to the Registration
Statement or Prospectus which shall not previously have been submitted to you in
a reasonable time prior to the proposed filing thereof or to which you shall
reasonably object in writing, subject, however, to compliance with the Act and
the Rules and Regulations and the provisions of this Agreement.
(b) The Company will advise you, promptly after it shall receive
notice or obtain knowledge, of the issuance of any stop order by the Commission
suspending the effectiveness of the Registration Statement or of the initiation
or threat of any proceeding for that purpose; and it will promptly use its best
efforts to prevent the issuance of any stop order or to obtain its withdrawal at
the earliest possible moment if such stop order should be issued.
(c) The Company will use its best efforts to qualify the Shares for
offering and sale under the securities laws of such jurisdictions as you may
designate and to continue such qualifications in effect for so long as may be
required for purposes of the distribution of the Shares, except that the Company
shall not be required in connection therewith or as a condition thereof to
qualify as a foreign corporation or to execute a general consent to service of
process in any jurisdiction in which it is not otherwise required to be so
qualified or to so execute a general consent to service of process. In each
jurisdiction in which the Shares shall have been qualified as above provided,
the Company will make and file such statements and reports in each year as are
or may be required by the laws of such jurisdiction.
(d) The Company will furnish to you, as soon as available, and, in
the case of the Prospectus and any term sheet or abbreviated term sheet under
Rule 434, in no event later than the first (1st) full business day following the
first day that Shares are traded, copies of the Registration Statement (three of
which will be signed and which will include all exhibits), each Preliminary
Prospectus, the Prospectus and any amendments or supplements to such documents,
including any prospectus prepared to permit compliance with Section 10(a)(3) of
the Act, all in such quantities as you may from time to time reasonably request.
Notwithstanding the foregoing, if Robertson, Stephens & Company LLC, on behalf
of the several Underwriters, shall agree to the utilization of Rule 434 of the
Rules and Regulations, the Company shall provide to you copies of a Preliminary
Prospectus updated in all respects through the date specified by you in such
quantities as you may from time to time reasonably request.
(e) The Company will make generally available to its security
holders as soon as practicable, but in any event not later than the forty-fifth
(45th) day following the end of the fiscal quarter first occurring after the
first anniversary of the effective date of the Registration Statement, an
earnings statement (which will be in reasonable detail but need not be audited)
complying with the provisions of Section 11(a) of the Act and covering a twelve
(12) month period beginning after the effective date of the Registration
Statement.
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(f) During a period of five (5) years after the date hereof or until
an Acquisition of the Company, the Company will furnish to its shareholders as
soon as practicable after the end of each respective period, annual reports
(including financial statements audited by independent certified public
accountants) and unaudited quarterly reports of operations for each of the first
three quarters of the fiscal year, and will furnish to you and the other several
Underwriters hereunder, upon request (i) concurrently with furnishing such
reports to its shareholders, statements of operations of the Company for each of
the first three (3) quarters in the form furnished to the Company's
shareholders, (ii) concurrently with furnishing to its shareholders, a balance
sheet of the Company as of the end of such fiscal year, together with statements
of operations, of shareholders' equity, and of cash flows of the Company for
such fiscal year, accompanied by a copy of the certificate or report thereon of
independent certified public accountants, (iii) as soon as they are available,
copies of all reports (financial or other) mailed to shareholders, (iv) as soon
as they are available, copies of all reports and financial statements furnished
to or filed with the Commission, any securities exchange or the National
Association of Securities Dealers, Inc. ("NASD"), (v) every material press
release and every material news item or article in respect of the Company or its
affairs which was generally released to shareholders or prepared by the Company,
and (vi) any additional information of a public nature concerning the Company,
or its business which you may reasonably request. During such five (5) year
period, if the Company shall have active subsidiaries, the foregoing financial
statements shall be on a consolidated basis to the extent that the accounts of
the Company and its subsidiaries are consolidated, and shall be accompanied by
similar financial statements for any significant subsidiary which is not so
consolidated. An "Acquisition of the Company" shall mean the closing of an
acquisition or merger of the Company (i) whereby all or substantially all of the
capital stock of the Company is sold, directly or indirectly, by the Company's
shareholders of record immediately prior to such closing and (ii) which results
in the Company no longer being required to comply with the reporting
requirements of the Exchange Act.
(g) The Company will apply the net proceeds from the sale of the
Shares being sold by it in the manner set forth under the caption "Use of
Proceeds" in the Prospectus.
(h) The Company will maintain a transfer agent and, if necessary
under the jurisdiction of incorporation of the Company, a registrar (which may
be the same entity as the transfer agent) for its Common Stock.
(i) The Company will file Form SR in conformity with the requirements
of the Act and the Rules and Regulations.
(j) If the transactions contemplated hereby are not consummated by
reason of any failure, refusal or inability on the part of the Company to
perform any agreement on its part to be performed hereunder or to fulfill any
condition of the Underwriters' obligations hereunder, or if the Company shall
terminate this Agreement pursuant to Section 11(a) hereof, or if the
Underwriters shall terminate this Agreement pursuant to Section 11(b)(i), the
Company will reimburse the several Underwriters for all reasonable out-of-pocket
expenses (including fees and disbursements of Underwriters' Counsel) incurred by
the Underwriters in investigating or preparing to market or marketing the
Shares.
(k) If at any time during the ninety (90) day period after the
Registration Statement becomes effective, any rumor, publication or event
relating to or affecting the Company shall occur as a result of which in your
opinion the market price of the Common Stock has been or is likely to be
materially affected (regardless of whether such rumor, publication or event
necessitates a supplement
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<PAGE>
to or amendment of the Prospectus), the Company will, after written notice from
you advising the Company to the effect set forth above, forthwith prepare,
consult with you concerning the substance of and disseminate a press release or
other public statement, reasonably satisfactory to you, responding to or
commenting on such rumor, publication or event.
(l) During the Lock-up Period, the Company will not, without the
prior written consent of Robertson Stephens & Company LLC, effect the
Disposition of, directly or indirectly, any Securities other than the (i) sale
of the Firm Shares and the Option Shares hereunder, (ii) the Company's issuance
of options or Common Stock under the Company's presently authorized 1993 Stock
Plan and 1996 Non-Employee Directors Stock Option Plan (the "Option Plans") or
upon exercise of any warrants of the Company outstanding as of the date of this
Agreement (the "Warrants") and (iii) the Company's issuance of shares to a
strategic partner of the Company in conjunction with an agreement involving a
technical, manufacturing and/or marketing collaboration, provided that the
Company shall give you ten days prior written notice of any such collaboration
during such period. The Company understands and agrees that the Lock-Up
Agreements are for the benefit of the Underwriters and hereby assigns its rights
under such Lock-Up Agreements to Robertson , Stephens & Company LLC. The
Company hereby agrees to enforce such Lock-Up Agreements, to not release any of
its officers, directors or other shareholders (except for employees of the
Company who are not officers of the Company) from any Lock-up Agreements
currently existing or hereafter effected without the prior written consent of
Robertson, Stephens & Company LLC and to enter stop transfer instructions with
the Company's transfer agent against the transfer of any Securities held by such
persons except in compliance with the foregoing restriction.
(m) During a period of ninety (90) days from the effective date of
the Registration Statement, the Company will not file a registration statement
registering shares under the Option Plans or any other employee benefit plan.
5. EXPENSES.
(a) The Company agrees with each Underwriter that:
(i) The Company will pay and bear all costs and expenses in
connection with the preparation, printing and filing of the Registration
Statement (including financial statements, schedules and exhibits), Preliminary
Prospectuses and the Prospectus and any amendments or supplements thereto; the
printing of this Agreement, the Agreement Among Underwriters, the Selected
Dealer Agreement, the Preliminary Blue Sky Survey and any Supplemental Blue Sky
Survey, the Underwriters' Questionnaire and Power of Attorney, and any
instruments related to any of the foregoing; the issuance and delivery of the
Shares hereunder to the several Underwriters, including transfer taxes, if any,
the cost of all certificates representing the Shares and transfer agents' and
registrars' fees; the fees and disbursements of counsel for the Company; all
fees and other charges of the Company's independent certified public
accountants; the cost of furnishing to the several Underwriters copies of the
Registration Statement (including exhibits), Preliminary Prospectus and the
Prospectus, and any amendments or supplements to any of the foregoing; NASD
filing fees and the cost of qualifying the Shares under the laws of such
jurisdictions as you may designate (including filing fees and fees and
disbursements of Underwriters' Counsel in connection with such NASD filings and
Blue Sky qualifications); and all other expenses directly incurred by the
Company in connection with the performance of their obligations hereunder.
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(ii) In addition to its other obligations under Section 8(a)
hereof, the Company agrees that, as an interim measure during the pendency of
any claim, action, investigation, inquiry or other proceeding described in
Section 8(a) hereof, it will reimburse the Underwriters on a monthly basis for
all reasonable legal or other expenses incurred in connection with investigating
or defending any such claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to the propriety and
enforceability of the Company's obligation to reimburse the Underwriters for
such expenses and the possibility that such payments might later be held to have
been improper by a court of competent jurisdiction. To the extent that any such
interim reimbursement payment is so held to have been improper, the Underwriters
shall promptly return such payment to the Company together with interest,
compounded daily, determined on the basis of the prime rate listed from time to
time in The Wall Street Journal which represents the base rate on corporate
loans posted by a substantial majority of the nation's thirty (30) largest banks
(the "Prime Rate"). Any such interim reimbursement payments which are not made
to the Underwriters within thirty (30) days of a request for reimbursement shall
bear interest at the Prime Rate from the date of such request.
(b) In addition to their other obligations under Section 8(b) hereof,
the Underwriters severally and not jointly agree that, as an interim measure
during the pendency of any claim, action, investigation, inquiry or other
proceeding described in Section 8(b) hereof, they will reimburse the Company on
a monthly basis for all reasonable legal or other expenses incurred in
connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the
Underwriters' obligation to reimburse the Company for such expenses and the
possibility that such payments might later be held to have been improper by a
court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the Company shall
promptly return such payment to the Underwriters together with interest,
compounded daily, determined on the basis of the Prime Rate. Any such interim
reimbursement payments which are not made to the Company within thirty (30) days
of a request for reimbursement shall bear interest at the Prime Rate from the
date of such request.
(c) It is agreed that any controversy arising out of the operation of
the interim reimbursement arrangements set forth in Sections 5(a)(ii) and 5(b)
hereof, including the amounts of any requested reimbursement payments, the
method of determining such amounts and the basis on which such amounts shall be
apportioned among the reimbursing parties, shall be settled by arbitration
conducted under the provisions of the Constitution and Rules of the Board of
Governors of the New York Stock Exchange, Inc. or pursuant to the Code of
Arbitration Procedure of the NASD. Any such arbitration must be commenced by
service of a written demand for arbitration or a written notice of intention to
arbitrate, therein electing the arbitration tribunal. In the event the party
demanding arbitration does not make such designation of an arbitration tribunal
in such demand or notice, then the party responding to said demand or notice is
authorized to do so. Any such arbitration will be limited to the operation of
the interim reimbursement provisions contained in Sections 5(a)(ii) and 5(b)
hereof and will take place in San Francisco or Santa Clara, California and will
not resolve the ultimate propriety or enforceability of the obligation to
indemnify for expenses which is created by the provisions of Sections 8(a)and
8(b) hereof or the obligation to contribute to expenses which is created by the
provisions of Section 8(d) hereof.
6. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the
several Underwriters to purchase and pay for the Shares as provided herein shall
be subject to the accuracy, as of the date hereof and the Closing Date and any
later date on which Option Shares are to be purchased, as the case may be,
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of the representations and warranties of the Company herein, to the performance
by the Company of its obligations hereunder and to the following additional
conditions:
(a) The Registration Statement shall have become effective not later
than 2:00 P.M., San Francisco time, on the date following the date of this
Agreement, or such later date as shall be consented to in writing by you; and no
stop order suspending the effectiveness thereof shall have been issued and no
proceedings for that purpose shall have been initiated or, to the knowledge of
the Company or any Underwriter, threatened by the Commission, and any request of
the Commission for additional information (to be included in the Registration
Statement or the Prospectus or otherwise) shall have been complied with to the
satisfaction of Underwriters' Counsel.
(b) All corporate proceedings and other legal matters in connection
with this Agreement, the form of Registration Statement and the Prospectus, and
the registration, authorization, issue, sale and delivery of the Shares, shall
have been reasonably satisfactory to Underwriters' Counsel, and such counsel
shall have been furnished with such papers and information as they may
reasonably have requested to enable them to pass upon the matters referred to in
this Section.
(c) Subsequent to the execution and delivery of this Agreement and
prior to the Closing Date, or any later date on which Option Shares are to be
purchased, as the case may be, there shall not have been any change in the
condition (financial or otherwise), earnings, operations, business as described
in the Prospectus of the Company from that set forth in the Registration
Statement or Prospectus, which, in your sole judgment, is material and adverse
and that makes it, in your sole judgment, impracticable or inadvisable to
proceed with the public offering of the Shares as contemplated by the
Prospectus.
(d) You shall have received on the Closing Date and on any later date
on which Option Shares are to be purchased, as the case may be, the following
opinion of Heller Ehrman White & McAuliffe, counsel for the Company, dated the
Closing Date or such later date on which Option Shares are to be purchased
addressed to the Underwriters and with reproduced copies or signed counterparts
thereof for each of the Underwriters, to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the jurisdiction of
its incorporation;
(ii) The Company has the corporate power and corporate authority
to own, lease and operate its properties and to conduct its business as
described in the Prospectus;
(iii) The Company is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction, if any, in which the
ownership or leasing of its properties or the conduct of its business requires
such qualification, except where the failure to be so qualified or be in good
standing would not have a material adverse effect on the condition (financial or
otherwise), earnings, operations or business of the Company. To such counsel's
knowledge, the Company does not own or control, directly or indirectly, any
corporation, association or other entity;
(iv) The authorized, issued and outstanding capital stock of the
Company is as set forth in the Prospectus under the caption "Capitalization" as
of the dates stated therein, the issued and outstanding shares of capital stock
of the Company have been duly and validly issued and are fully paid and
nonassessable, have not been issued in violation of preemptive rights set forth
in the Company's
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charter, and to such counsel's knowledge, will not have been issued in violation
of or subject to any co-sale right, registration right, right of first refusal
or other similar right granted by the Company;
(v) The Firm Shares or the Option Shares, as the case may be,
to be issued by the Company pursuant to the terms of this Agreement have been
duly authorized and, upon issuance and delivery against payment therefor in
accordance with the terms hereof, will be duly and validly issued and fully paid
and nonassessable, have not been issued in violation of preemptive rights set
forth in the Company's charter, and will not have been issued in violation of or
subject to any co-sale right, registration right, right of first refusal or
other similar right granted by the Company.
(vi) The Company has the corporate power and corporate authority
to enter into this Agreement and to issue, sell and deliver to the Underwriters
the Shares to be issued and sold by it hereunder;
(vii) This Agreement has been duly authorized by all necessary
corporate action on the part of the Company and has been duly executed and
delivered by the Company and, assuming due authorization, execution and delivery
by you, is a valid and binding agreement of the Company, enforceable in
accordance with its terms, except insofar as indemnification provisions may be
limited by applicable law and except as enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws relating to
or affecting creditors' rights generally or by general equitable principles;
(viii) The Registration Statement has become effective under the
Act and, to such counsel's knowledge, no stop order suspending the effectiveness
of the Registration Statement has been issued and no proceedings for that
purpose have been instituted or are pending or threatened under the Act;
(ix) The Registration Statement and the Prospectus, and each
amendment or supplement thereto (other than the financial statements (including
supporting schedules) and financial data derived therefrom as to which such
counsel need express no opinion), as of the effective date of the Registration
Statement, complied as to form in all material respects with the requirements of
the Act and the applicable Rules and Regulations;
(x) The information in the Prospectus under the caption
"Description of Capital Stock," to the extent that it constitutes matters of law
or legal conclusions, has been reviewed by such counsel and is a fair summary of
such matters and conclusions; and the form of certificates evidencing the Common
Stock and filed as an exhibit to the Registration Statement complies with
California law;
(xi) The description in the Registration Statement and the
Prospectus of the charter and bylaws of the Company and of statutes (other than
statutes opined upon in Section 6(e) by Townsend and Townsend and Crew and in
Section 5(f) by Buc Levitt & Beardsley) is accurate and fairly presents the
information required to be presented by the Act and the applicable Rules and
Regulations;
(xii) To such counsel's knowledge, there are no agreements,
contracts, leases or documents to which the Company is a party of a character
required to be described or referred to in the Registration Statement or
Prospectus or to be filed as an exhibit to the Registration Statement which are
not described or referred to therein or filed as required;
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<PAGE>
(xiii) The performance of this Agreement and the consummation of
the transactions herein contemplated (other than performance of the Company's
indemnification obligations hereunder, concerning which no opinion need be
expressed) will not (a) result in any violation of the Company's charter or
bylaws or (b) to such counsel's knowledge, result in a breach or violation of
any of the terms and provisions of, or constitute a default under, any material
bond, debenture, note or other evidence of indebtedness, or any material lease,
contract, indenture, mortgage, deed of trust, loan agreement, joint venture or
other agreement or instrument known to such counsel to which the Company is a
party or by which its properties are bound, or any applicable material statute,
rule or regulation known to such counsel or, to such counsel's knowledge, any
material order, writ or decree of any court, government or governmental agency
or body having jurisdiction over the Company, or over any of its properties or
operations;
(xiv) No consent, approval, authorization or order of or
qualification with any court, government or governmental agency or body having
jurisdiction over the Company, or over any of its properties or operations is
necessary in connection with the consummation by the Company of the transactions
herein contemplated, except such as have been obtained under the Act or the
Exchange Act or such as may be required under state or other securities or Blue
Sky laws in connection with the purchase and the distribution of the Shares by
the Underwriters;
(xv) To such counsel's knowledge, there are no legal or
governmental proceedings pending or threatened against the Company of a
character required to be disclosed in the Registration Statement or the
Prospectus by the Act or the Rules and Regulations, other than those described
therein;
(xvi) To such counsel's knowledge, the Company is not presently
(a) in violation of its charter or bylaws, or (b) in breach of any applicable
material statute, rule or regulation known to such counsel or, to such counsel's
knowledge, any material order, writ or decree of any court or governmental
agency or body having jurisdiction over the Company, or over any of its
properties or operations; and
(xvii) To such counsel's knowledge, except as set forth in the
Registration Statement and Prospectus, no holders of Common Stock or other
securities of the Company have registration rights with respect to securities of
the Company and, except as set forth in the Registration Statement and
Prospectus, all holders of securities of the Company having rights known to such
counsel to registration of such shares of Common Stock or other securities,
because of the filing of the Registration Statement by the Company have, with
respect to the offering contemplated thereby, waived such rights or such rights
have expired by reason of lapse of time following notification of the Company's
intent to file the Registration Statement.
In addition, such counsel shall state that such counsel has
participated in conferences with officials and other representatives of the
Company, the Representatives, Underwriters' Counsel and the independent
certified public accountants of the Company, at which such conferences the
contents of the Registration Statement and Prospectus and related matters were
discussed, and although they have not verified the accuracy or completeness of
the statements contained in the Registration Statement or the Prospectus,
nothing has come to the attention of such counsel which leads such counsel to
believe that, at the time the Registration Statement became effective and at all
times subsequent thereto up to and on the Closing Date and on any later date on
which Option Shares are to be purchased, the Registration Statement and any
amendment or supplement thereto (other than the financial statements including
supporting schedules and other financial and statistical information derived
therefrom, as to which such counsel need express no comment) contained any
untrue statement of a material fact or omitted to state
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<PAGE>
a material fact required to be stated therein or necessary to make the
statements therein not misleading, or at the Closing Date or any later date on
which the Option Shares are to be purchased, as the case may be, the
Registration Statement, the Prospectus and any amendment or supplement thereto
(except as aforesaid) contained any untrue statement of a material fact or
omitted to state a material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
Counsel rendering the foregoing opinion may rely as to questions of
law not involving the laws of the United States or the State of California upon
opinions of local counsel, and as to questions of fact upon representations or
certificates of officers of the Company and of government officials, in which
case their opinion is to state that they are so relying and that they have no
knowledge of any material misstatement or inaccuracy in any such opinion,
representation or certificate. Copies of any opinion, representation or
certificate so relied upon shall be delivered to you, as Representatives of the
Underwriters, and to Underwriters' Counsel.
(e) Townsend and Townsend and Crew ("Townsend"), outside patent
counsel for the Company, shall have expertised the statements set forth in the
Prospectus under the caption "Risk Factors--- Dependence on Proprietary
Technology and Unpredictability of Patent Protection" and "Business-Intellectual
Property". In addition, you shall have received on the Closing Date and on any
later date on which Option Shares are purchased, as the case may be, the
following opinion of Townsend, dated the Closing Date or such later date on
which Option Shares are purchased, addressed to the Underwriters and with
reproduced copies or signed counterparts thereof for each of the Underwriters,
stating that such counsel is familiar with the technology used by the Company,
its business and the manner of its technology's use thereof, and to the effect
that:
(i) To such counsel's knowledge, except as set forth on Exhibit
1, the Company owns or possesses sufficient licenses or other rights to use all
necessary patents, patent rights, trade secrets, trademarks, service marks,
trade names and copyrights (hereinafter called "Intellectual Property Rights," )
to conduct the business now being or proposed to be conducted by the Company as
described in the Prospectus;
(ii) To such counsel's knowledge, except as otherwise set forth
on Exhibit 1, there are no actions, suits, proceedings, claims or other legal
actions or governmental proceedings relating to (a) any Intellectual Property
Rights owned or licensed by the Company pending against the Company, Affymax or
any licensor, or (b) a third party's Intellectual Property Rights pending
against the Company or of which the Company has received notice;
(iii) To such counsel's knowledge, except as set forth in
Exhibit 1 to the opinion, the Company is not infringing or otherwise violating
any Intellectual Property Rights of others and there are no infringements by
others of any Intellectual Property Rights owned or licensed by the Company
which, in the judgment of such counsel, could affect materially the use thereof
by the Company;
(iv) We are not aware of any facts which would preclude the
Company from having clear title to or a valid license to each foreign or
domestic patent and patent application listed on Exhibit 2 (the "Patent
Portfolio") to such opinion, and the Company is the sole assignee or exclusive
licensee thereof, except as indicated on the Patent Portfolio;
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<PAGE>
(v) We are not aware of any material defect of form in
preparation or filing of the applications in the Patent Portfolio;
(vi) The patent applications in the Patent Portfolio are being
diligently pursued; and
(vii) The information in the Registration Statement and
Prospectus under the captions "Risk Factors--Dependence on Proprietary
Technology and Unpredictability of Patent Protection and Business--Intellectual
Property" and "--Collaborative Agreements" (the "Intellectual Property
Information") to the extent it constitutes matters of law or legal conclusions,
has been reviewed by such counsel and is a fair and accurate summary of such
matters;
In addition, such counsel shall state that such counsel has
participated in conferences with officials and other representatives of the
Company, the Representatives, Underwriters' Counsel and the independent
certified public accountants of the Company, at which such conferences the
contents of the Registration Statement and Prospectus and related matters were
discussed, and although they have not verified the accuracy or completeness of
the statements contained in the Registration Statement or the Prospectus,
nothing has come to the attention of such counsel which leads such counsel to
believe that, at the time the Registration Statement became effective and at all
times subsequent thereto up to and on the Closing Date and on any later date on
which Option Shares are to be purchased, the Intellectual Property Information
in the Registration Statement and any amendment or supplement thereto (other
than financial statements including supporting schedules and other financial and
statistical information derived therefrom, as to which such counsel need express
no comment) did not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, or at the Closing Date or any later date on
which Option Shares are to be purchased, as the case may be, the Intellectual
Property Information in the Prospectus, and any amendment or supplement thereto,
(except aforesaid) did not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading.
(f) You shall have received on the Closing Date and on any later date
on which Option Shares are purchased, as the case may be, the following opinion
of Buc Levitt & Beardsley, regulatory counsel for the Company, dated the Closing
Date or such later date on which Option Shares are purchased, addressed to the
Underwriters and with reproduced copies or signed counterparts thereof for each
of the Underwriters stating that such counsel is familiar with the technology
used by the Company, its business and the manner of its technology's use thereof
and has read the Registration Statement and the Prospectus including
particularly the portions of the Registration Statement and the Prospectus
referring to regulatory matters, and to the effect that:
(i) The information in the Registration Statement and the
Prospectus under the captions "Risk Factors--Government Regulation; No Assurance
of Regulatory Approval," and "Business--Government Regulation" (the "Regulatory
Information"), to the extent that it constitutes matters of law or legal
conclusions, has been reviewed by such counsel and is a fair and accurate
summary of such matters;
(ii) In addition, such counsel shall state that such counsel has
participated in conferences with officials and other representatives of the
Company, at which such conferences the Regulatory Information and related
matters were discussed, and although they have not verified the
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accuracy or completeness of the statements contained in the Registration
Statement or the Prospectus, nothing has come to the attention of such counsel
which leads such counsel to believe that, at the time the Registration Statement
became effective and at all times subsequent thereto up to and on the Closing
Date and on any later date on which Option Shares are to be purchased, the
Regulatory Information in the Registration Statement and any amendment or
supplement thereto (other than financial statements including supporting
schedules and other financial and statistical information derived therefrom, as
to which such counsel need express no comment) did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading, or at
the Closing Date or any later date on which Option Shares are to be purchased,
as the case may be, the Regulatory Information in the Prospectus, and any
amendment or supplement thereto, (except aforesaid) did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(g) You shall have received on the Closing Date and on any later date
on which Option Shares are to be purchased, as the case may be, an opinion of
Wilson Sonsini Goodrich & Rosati, in form and substance satisfactory to you,
with respect to the sufficiency of all such corporate proceedings and other
legal matters relating to this Agreement and the transactions contemplated
hereby as you may reasonably require, and the Company shall have furnished to
such counsel such documents as they may have requested for the purpose of
enabling them to pass upon such matters.
(h) You shall have received on the Closing Date and on any later date
on which Option Shares are to be purchased, as the case may be, a letter from
Ernst & Young LLP addressed to the Underwriters, dated the Closing Date or such
later date on which Option Shares are to be purchased, as the case may be,
confirming that they are independent certified public accountants with respect
to the Company within the meaning of the Act and the applicable published Rules
and Regulations and based upon the procedures described in such letter delivered
to you concurrently with the execution of this Agreement (herein called the
"Original Letter"), but carried out to a date not more than five (5) business
days prior to the Closing Date or such later date on which Option Shares are to
be purchased, as the case may be, (i) confirming, to the extent true, that the
statements and conclusions set forth in the Original Letter are accurate as of
the Closing Date or such later date on which Option Shares are to be purchased,
as the case may be, and (ii) setting forth any revisions and additions to the
statements and conclusions set forth in the Original Letter which are necessary
to reflect any changes in the facts described in the Original Letter since the
date of such letter, or to reflect the availability of more recent financial
statements, data or information. The letter shall not disclose any change in
the condition (financial or otherwise), earnings, operations or business as
described in the Prospectus of the Company from that set forth in the
Registration Statement or Prospectus, which, in your sole judgment, is material
and adverse and that makes it, in your sole judgment, impracticable or
inadvisable to proceed with the public offering of the Shares as contemplated by
the Prospectus. The Original Letter from Ernst & Young LLP shall be addressed
to or for the use of the Underwriters in form and substance satisfactory to the
Underwriters and shall (i) represent, to the extent true, that they are
independent certified public accountants with respect to the Company within the
meaning of the Act and the applicable published Rules and Regulations, (ii) set
forth their opinion with respect to their examination of the balance sheet of
the Company as of December 31, 1995 and related statements of operations,
shareholders' equity, and cash flows for the twelve (12) months ended
December 31, 1995, and(iii) state that Ernst & Young, LLP has performed the
procedure set out in Statement on Auditing Standards No. 71 ("SAS 71") for a
review of interim financial information and providing the report of Ernst &
Young LLP as described in SAS 71 in the financial statements for each of the
quarters in the three month period ending March 31, 1996
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and 1995 (the "Quarterly Financial Statements"), (iv) state that in the course
of such review, nothing came to their attention that leads them to believe that
any material modifications need be made to any of the Quarterly Financial
Statements in order for them to be in compliance with generally accepted
accounting principles consistently applied across the periods presented and
(v) address other matters agreed upon by Ernst & Young, LLP and you. In
addition, you shall have received from Ernst & Young LLP, a letter addressed to
the Company and made available to you for the use of the Underwriters stating
that their review of the Company's system of internal accounting controls, to
the extent they deemed necessary in establishing the scope of their examination
of the Company's financial statements as of December 31, 1995, did not disclose
any weaknesses in internal controls that they considered to be material
weaknesses.
(i) You shall have received on the Closing Date and on any later
date on which Option Shares are to be purchased, as the case may be, a
certificate of the Company, dated the Closing Date or such later date on which
Option Shares are to be purchased, as the case may be, signed by the Chief
Executive Officer and Chief Financial Officer of the Company, to the effect
that, and you shall be satisfied that:
(i) The representations and warranties of the Company in this
Agreement are true and correct, as if made on and as of the Closing Date or any
later date on which Option Shares are to be purchased, as the case may be, and
the Company has complied with all the agreements and satisfied all the
conditions on its part to be performed or satisfied at or prior to the Closing
Date or any later date on which Option Shares are to be purchased, as the case
may be;
(ii) No stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that purpose have
been instituted or are pending or threatened under the Act;
(iii) When the Registration Statement became effective and at
all times subsequent thereto up to the delivery of such certificate, the
Registration Statement and the Prospectus, and any amendments or supplements
thereto, contained all material information required to be included therein by
the Act and the Rules and Regulations and in all material respects conformed to
the requirements of the Act and the Rules and Regulations, the Registration
Statement, and any amendment or supplement thereto, did not and does not include
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading, the Prospectus, and any amendment or supplement thereto, did not and
does not include any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, and, since the
effective date of the Registration Statement, there has occurred no event
required to be set forth in an amended or supplemented Prospectus which has not
been so set forth; and
(iv) Subsequent to the respective dates as of which
information is given in the Registration Statement and Prospectus, there has not
been (a) any material adverse change in the condition (financial or otherwise),
earnings, operations or business as described in the Prospectus of the Company,
(b) any transaction that is material to the Company, except transactions entered
into in the ordinary course of business, (c) any obligation, direct or
contingent, that is material to the Company incurred by the Company, except
obligations incurred in the ordinary course of business, (d) any change in the
capital stock or outstanding indebtedness of the Company that is material to the
Company, (e) any dividend or distribution of any kind declared, paid or made on
the capital stock of the Company, or (f)
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any loss or damage (whether or not insured) to the property of the Company which
has been sustained or will have been sustained which has a material adverse
effect on the condition (financial or otherwise), earnings, operations or
business as described in the Prospectus of the Company.
(j) The Company shall have obtained and delivered to you an agreement
from each officer and director of the Company, and each beneficial owner
of one percent or more of the Company's outstanding shares of capital stock
as of the date of this Agreement in writing prior to the date hereof that such
person will not, during the Lock-up Period, effect the Disposition of any
Securities now owned or hereafter acquired directly by such person or with
respect to which such person has or hereafter acquires the power of disposition,
otherwise than (i) as a bona fide gift or gifts, provided the donee or donees
thereof agree in writing to be bound by this restriction, (ii) as a distribution
to partners or shareholders of such person, provided that the distributees
thereof agree in writing to be bound by the terms of this restriction, or
(iii) with the prior written consent of Robertson, Stephens & Company LLC. The
foregoing restriction shall have been expressly agreed to preclude the holder of
the Securities from engaging in any hedging or other transaction which is
designed to or reasonably expected to lead to or result in a Disposition of
Securities during the Lock-up Period, even if such Securities would be disposed
of by someone other than the such holder. Such prohibited hedging or other
transactions would including, without limitation, any short sale (whether or not
against the box) or any purchase, sale or grant of any right (including, without
limitation, any put or call option) with respect to any Securities or with
respect to any security (other than a broad-based market basket or index) that
includes, relates to or derives any significant part of its value from
Securities. Furthermore, such person will have also agreed and consented to the
entry of stop transfer instructions with the Company's transfer agent against
the transfer of the Securities held by such person except in compliance with
this restriction.
(k) The Company shall have furnished to you such further certificates
and documents as you shall reasonably request (including certificates of
officers) of the Company as to the accuracy of the representations and
warranties of the Company herein, as to the performance by the Company of its
obligations hereunder and as to the other conditions concurrent and precedent to
the obligations of the Underwriters hereunder.
All such opinions, certificates, letters and documents will be in
compliance with the provisions hereof only if they are reasonably satisfactory
to Underwriters' Counsel. The Company will furnish you with such number of
conformed copies of such opinions, certificates, letters and documents as you
shall reasonably request.
7. OPTION SHARES.
(a) On the basis of the representations, warranties and agreements
herein contained, but subject to the terms and conditions herein set forth, the
Company hereby grants to the several Underwriters, for the purpose of covering
over-allotments in connection with the distribution and sale of the Firm Shares
only, a nontransferable option to purchase up to an aggregate of 750,000 Option
Shares at the purchase price per share of $_______. Such option may be
exercised by the Representatives on behalf of the several Underwriters on one
(1) occasion in whole or in part during the period of thirty (30) days after the
date on which the Firm Shares are initially offered to the public, by giving
written notice to the Company. The number of Option Shares to be purchased by
each Underwriter upon the exercise of such option shall be the same proportion
of the total number of Option Shares to be purchased by the several Underwriters
pursuant to the exercise of such option as the number of Firm Shares purchased
by such Underwriter (set forth in Schedule A hereto) bears to the total number
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of Firm Shares purchased by the several Underwriters (set forth in Schedule A
hereto), adjusted by the Representatives in such manner as to avoid fractional
shares.
Delivery of definitive certificates for the Option Shares to be
purchased by the several Underwriters pursuant to the exercise of the option
granted by this Section 7 shall be made against payment of the purchase price
therefor by the several Underwriters by wire transfer of same-day funds paid to
an account designated by the Company in writing. Such delivery and payment
shall take place at the offices of Heller Ehrman White & McAuliffe, 525
University Avenue, Palo Alto, California 94301-1908, or at such other place as
may be agreed upon among the Representatives and the Company (i) on the Closing
Date, if written notice of the exercise of such option is received by the
Company at least two (2) full business days prior to the Closing Date, or
(ii) on a date which shall not be later than the third (3rd) full business day
following the date the Company receives written notice of the exercise of such
option, if such notice is received by the Company less than two (2) full
business days prior to the Closing Date.
The certificates for the Option Shares to be so delivered will be
made available to you at such office or such other location including, without
limitation, in New York City, as you may reasonably request for checking at
least one (1) full business day prior to the date of payment and delivery and
will be in such names and denominations as you may request, such request to be
made at least two (2) full business days prior to such date of payment and
delivery. If the Representatives so elect, delivery of the Option Shares may be
made by credit through full fast transfer to the accounts at The Depository
Trust Company designated by the Representatives.
It is understood that you, individually, and not as the
Representatives of the several Underwriters, may (but shall not be obligated to)
make payment of the purchase price on behalf of any Underwriter or Underwriters
whose check or checks (or wire transfers as the case may be) shall not have been
received by you prior to the date of payment and delivery for the Option Shares
to be purchased by such Underwriter or Underwriters. Any such payment by you
shall not relieve any such Underwriter or Underwriters of any of its or their
obligations hereunder.
(b) Upon exercise of any option provided for in Section 7(a) hereof,
the obligations of the several Underwriters to purchase such Option Shares will
be subject (as of the date hereof and as of the date of payment and delivery for
such Option Shares) to the accuracy of and compliance with the representations,
warranties and agreements of the Company herein, to the accuracy of the
statements of the Company and officers of the Company made pursuant to the
provisions hereof, to the performance by the Company of its obligations
hereunder, to the conditions set forth in Section 6 hereof, and to the condition
that all proceedings taken at or prior to the payment date in connection with
the sale and transfer of such Option Shares shall be satisfactory in form and
substance to you and to Underwriters' Counsel, and you shall have been furnished
with all such documents, certificates and opinions as you may request in order
to evidence the accuracy and completeness of any of the representations,
warranties or statements, the performance of any of the covenants or agreements
of the Company or the satisfaction of any of the conditions herein contained.
8. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company agrees to indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject (including, without
limitation, in its capacity as an Underwriter or as a "qualified independent
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underwriter" within the meaning of Schedule E of the Bylaws of the NASD), under
the Act, the Exchange Act or otherwise, specifically including, but not limited
to, losses, claims, damages or liabilities (or actions in respect thereof)
arising out of or based upon (i) any breach of any representation, warranty,
agreement or covenant of the Company herein contained, (ii) any untrue statement
or alleged untrue statement of any material fact contained in the Registration
Statement or any amendment or supplement thereto, or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or (iii) any untrue
statement or alleged untrue statement of any material fact contained in any
Preliminary Prospectus or the Prospectus or any amendment or supplement thereto,
or the omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading, and agrees to
reimburse each Underwriter for any legal or other expenses reasonably incurred
by it in connection with investigating or defending any such loss, claim,
damage, liability or action; PROVIDED, HOWEVER, that the Company shall not be
liable in any such case to the extent that any such loss, claim, damage,
liability or action arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in the
Registration Statement, such Preliminary Prospectus or the Prospectus, or any
such amendment or supplement thereto, in reliance upon, and in conformity with,
written information relating to any Underwriter furnished to the Company by such
Underwriter, directly or through you, specifically for use in the preparation
thereof and, PROVIDED FURTHER, that the indemnity agreement provided in this
Section 8(a) with respect to any Preliminary Prospectus shall not inure to the
benefit of any Underwriter from whom the person asserting any losses, claims,
damages, liabilities or actions based upon any untrue statement or alleged
untrue statement of material fact or omission or alleged omission to state
therein a material fact purchased Shares, if a copy of the Prospectus in which
such untrue statement or alleged untrue statement or omission or alleged
omission was corrected had not been sent or given to such person within the time
required by the Act and the Rules and Regulations, unless such failure is the
result of noncompliance by the Company with Section 4(d) hereof.
The indemnity agreement in this Section 8(a) shall extend upon
the same terms and conditions to, and shall inure to the benefit of, each
person, if any, who controls any Underwriter within the meaning of the Act or
the Exchange Act. This indemnity agreement shall be in addition to any
liabilities which the Company may otherwise have.
(b) Each Underwriter, severally and not jointly, agrees to indemnify
and hold harmless the Company against any losses, claims, damages or
liabilities, joint or several, to which the Company may become subject under the
Act, the Exchange Act or otherwise, specifically including, but not limited to,
losses, claims, damages or liabilities (or actions in respect thereof) arising
out of or based upon (i) any breach of any representation, warranty, agreement
or covenant of such Underwriter herein contained, (ii) any untrue statement or
alleged untrue statement of any material fact contained in the Registration
Statement or any amendment or supplement thereto, or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or (iii) any untrue
statement or alleged untrue statement of any material fact contained in any
Preliminary Prospectus or the Prospectus or any amendment or supplement thereto,
or the omission or alleged omission to state therein a material fact necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading, in the case of subparagraphs (ii) and (iii) of
this Section 8(b) to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission was made
in reliance upon and in conformity with written information furnished to the
Company by such Underwriter, directly or through you, specifically for use in
the preparation thereof, and agrees to reimburse the Company for
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any legal or other expenses reasonably incurred by the Company in connection
with investigating or defending any such loss, claim, damage, liability or
action.
The indemnity agreement in this Section 8(b) shall extend upon
the same terms and conditions to, and shall inure to the benefit of, each
officer of the Company who signed the Registration Statement and each director
of the Company, and each person, if any, who controls the Company within the
meaning of the Act or the Exchange Act. This indemnity agreement shall be in
addition to any liabilities which each Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against any indemnifying
party under this Section 8, notify the indemnifying party in writing of the
commencement thereof but the omission so to notify the indemnifying party will
not relieve it from any liability which it may have to any indemnified party
otherwise than under this Section 8. In case any such action is brought against
any indemnified party, and it notified the indemnifying party of the
commencement thereof, the indemnifying party will be entitled to participate
therein and, to the extent that it shall elect by written notice delivered to
the indemnified party promptly after receiving the aforesaid notice from such
indemnified party, to assume the defense thereof, with counsel reasonably
satisfactory to such indemnified party; PROVIDED, HOWEVER, that if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that there may be legal defenses available to it and/or other indemnified
parties which are different from or additional to those available to the
indemnifying party, the indemnified party or parties shall have the right to
select separate counsel to assume such legal defenses and to otherwise
participate in the defense of such action on behalf of such indemnified party or
parties. Upon receipt of notice from the indemnifying party to such indemnified
party of the indemnifying party's election so to assume the defense of such
action and approval by the indemnified party of counsel, the indemnifying party
will not be liable to such indemnified party under this Section 8 for any legal
or other expenses subsequently incurred by such indemnified party in connection
with the defense thereof unless (i) the indemnified party shall have employed
separate counsel in accordance with the proviso to the next preceding sentence
(it being understood, however, that the indemnifying party shall not be liable
for the expenses of more than one separate counsel (together with appropriate
local counsel) approved by the indemnifying party representing all the
indemnified parties under Section 8(a) or 8(b) hereof who are parties to such
action), (ii) the indemnifying party shall not have employed counsel
satisfactory to the indemnified party to represent the indemnified party within
a reasonable time after notice of commencement of the action or (iii) the
indemnifying party has authorized the employment of counsel for the indemnified
party at the expense of the indemnifying party. In no event shall any
indemnifying party be liable in respect of any amounts paid in settlement of any
action unless the indemnifying party shall have approved the terms of such
settlement; PROVIDED that such consent shall not be unreasonably withheld. No
indemnifying party shall, without the prior written consent of the indemnified
party, effect any settlement of any pending or threatened proceeding in respect
of which any indemnified party is or could have been a party and indemnification
could have been sought hereunder by such indemnified party, unless such
settlement includes an unconditional release of such indemnified party from all
liability on all claims that are the subject matter of such proceeding.
(d) In order to provide for just and equitable contribution in any
action in which a claim for indemnification is made pursuant to this Section 8
but it is judicially determined (by the entry of a final judgment or decree by a
court of competent jurisdiction and the expiration of time to appeal or the
denial of the last right of appeal) that such indemnification may not be
enforced in such case
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<PAGE>
notwithstanding the fact that this Section 8 provides for indemnification in
such case, all the parties hereto shall contribute to the aggregate losses,
claims, damages or liabilities to which they may be subject (after
contribution from others) in such proportion so that the Underwriters
severally and not jointly are responsible pro rata for the portion
represented by the percentage that the underwriting discount bears to the
initial public offering price, and the Company is responsible for the
remaining portion, PROVIDED, HOWEVER, that (i) no Underwriter shall be
required to contribute any amount in excess of the amount by which the
underwriting discount applicable to the Shares purchased by such Underwriter
exceeds the amount of damages which such Underwriter has otherwise required
to pay and (ii) no person guilty of a fraudulent misrepresentation (within
the meaning of Section 11(f) of the Act) shall be entitled to contribution
from any person who is not guilty of such fraudulent misrepresentation. The
contribution agreement in this Section 8(d) shall extend upon the same terms
and conditions to, and shall inure to the benefit of, each person, if any,
who controls any Underwriter, the Company within the meaning of the Act or
the Exchange Act and each officer of the Company who signed the Registration
Statement and each director of the Company.
(e) The parties to this Agreement hereby acknowledge that they are
sophisticated business persons who were represented by counsel during the
negotiations regarding the provisions hereof including, without limitation, the
provisions of this Section 8, and are fully informed regarding said provisions.
They further acknowledge that the provisions of this Section 8 fairly allocate
the risks in light of the ability of the parties to investigate the Company and
its business in order to assure that adequate disclosure is made in the
Registration Statement and Prospectus as required by the Act and the Exchange
Act.
9. REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS TO SURVIVE
DELIVERY. All representations, warranties, covenants and agreements of the
Company and the Underwriters herein or in certificates delivered pursuant
hereto, and the indemnity and contribution agreements contained in Section 8
hereof shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter within the meaning of the Act or the Exchange Act, or by or on
behalf of the Company or any of its officers, directors or controlling persons
within the meaning of the Act or the Exchange Act, and shall survive the
delivery of the Shares to the several Underwriters hereunder or termination of
this Agreement.
10. SUBSTITUTION OF UNDERWRITERS. If any Underwriter or Underwriters
shall fail to take up and pay for the number of Firm Shares agreed by such
Underwriter or Underwriters to be purchased hereunder upon tender of such Firm
Shares in accordance with the terms hereof, and if the aggregate number of Firm
Shares which such defaulting Underwriter or Underwriters so agreed but failed to
purchase does not exceed 10% of the Firm Shares, the remaining Underwriters
shall be obligated, severally in proportion to their respective commitments
hereunder, to take up and pay for the Firm Shares of such defaulting Underwriter
or Underwriters.
If any Underwriter or Underwriters so defaults and the aggregate
number of Firm Shares which such defaulting Underwriter or Underwriters agreed
but failed to take up and pay for exceeds 10% of the Firm Shares, the remaining
Underwriters shall have the right, but shall not be obligated, to take up and
pay for (in such proportions as may be agreed upon among them) the Firm Shares
which the defaulting Underwriter or Underwriters so agreed but failed to
purchase. If such remaining Underwriters do not, at the Closing Date, take up
and pay for the Firm Shares which the defaulting Underwriter or Underwriters so
agreed but failed to purchase, the Closing Date shall be postponed for twenty-
four (24) hours to allow the several Underwriters the privilege of substituting
within twenty-four (24) hours
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(including non-business hours) another underwriter or underwriters (which may
include any nondefaulting Underwriter) satisfactory to the Company. If no such
underwriter or underwriters shall have been substituted as aforesaid by such
postponed Closing Date, the Closing Date may, at the option of the Company, be
postponed for a further twenty-four (24) hours, if necessary, to allow the
Company the privilege of finding another underwriter or underwriters,
satisfactory to you, to purchase the Firm Shares which the defaulting
Underwriter or Underwriters so agreed but failed to purchase. If it shall be
arranged for the remaining Underwriters or substituted underwriter or
underwriters to take up the Firm Shares of the defaulting Underwriter or
Underwriters as provided in this Section 10, (i) the Company shall have the
right to postpone the time of delivery for a period of not more than seven (7)
full business days, in order to effect whatever changes may thereby be made
necessary in the Registration Statement or the Prospectus, or in any other
documents or arrangements, and the Company agrees promptly to file any
amendments to the Registration Statement, supplements to the Prospectus or other
such documents which may thereby be made necessary, and (ii) the respective
number of Firm Shares to be purchased by the remaining Underwriters and
substituted underwriter or underwriters shall be taken as the basis of their
underwriting obligation. If the remaining Underwriters shall not take up and
pay for all such Firm Shares so agreed to be purchased by the defaulting
Underwriter or Underwriters or substitute another underwriter or underwriters as
aforesaid and the Company shall not find or shall not elect to seek another
underwriter or underwriters for such Firm Shares as aforesaid, then this
Agreement shall terminate.
In the event of any termination of this Agreement pursuant to the
preceding paragraph of this Section 10, neither the Company shall be liable to
any Underwriter (except as provided in Sections 5 and 8 hereof) nor shall any
Underwriter (other than an Underwriter who shall have failed, otherwise than for
some reason permitted under this Agreement, to purchase the number of Firm
Shares agreed by such Underwriter to be purchased hereunder, which Underwriter
shall remain liable to the Company and the other Underwriters for damages, if
any, resulting from such default) be liable to the Company (except to the extent
provided in Sections 5 and 8 hereof).
The term "Underwriter" in this Agreement shall include any person
substituted for an Underwriter under this Section 10.
11. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION.
(a) This Agreement shall become effective at the earlier of (i) 6:30
A.M., San Francisco time, on the first full business day following the effective
date of the Registration Statement, or (ii) the time of the initial public
offering of any of the Shares by the Underwriters after the Registration
Statement becomes effective. The time of the initial public offering shall mean
the time of the release by you, for publication, of the first newspaper
advertisement relating to the Shares, or the time at which the Shares are first
generally offered by the Underwriters to the public by letter, telephone,
telegram or telecopy, whichever shall first occur. By giving notice as set
forth in Section 12 before the time this Agreement becomes effective, you, as
Representatives of the several Underwriters, or the Company, may prevent this
Agreement from becoming effective without liability of any party to any other
party, except as provided in Sections 4(j), 5 and 8 hereof.
(b) You, as Representatives of the several Underwriters, shall have
the right to terminate this Agreement by giving notice as hereinafter specified
at any time on or prior to the Closing Date or on or prior to any later date on
which Option Shares are to be purchased, as the case may be, (i) if the Company
shall have failed, refused or been unable to perform any agreement on its part
to be performed,
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<PAGE>
or because any other condition of the Underwriters' obligations hereunder
required to be fulfilled is not fulfilled, including, without limitation, any
change in the condition (financial or otherwise), earnings, operations or
business as described in the Prospectus of the Company from that set forth in
the Registration Statement or Prospectus, which, in your sole judgment, is
material and adverse, or (ii) if additional material governmental restrictions,
not in force and effect on the date hereof, shall have been imposed upon trading
in securities generally or minimum or maximum prices shall have been generally
established on the New York Stock Exchange or on the American Stock Exchange or
in the over the counter market by the NASD, or trading in securities generally
shall have been suspended on either such exchange or in the over the counter
market by the NASD, or if a banking moratorium shall have been declared by
federal, New York or California authorities, or (iii) if the Company shall have
sustained a loss by strike, fire, flood, earthquake, accident or other calamity
of such character as to interfere materially with the conduct of the business
and operations of the Company regardless of whether or not such loss shall have
been insured, or (iv) if there shall have been a material adverse change in the
general political or economic conditions or financial markets as in your
reasonable judgment makes it inadvisable or impracticable to proceed with the
offering, sale and delivery of the Shares, or (v) if there shall have been an
outbreak or escalation of hostilities or of any other insurrection or armed
conflict or the declaration by the United States of a national emergency which,
in the reasonable opinion of the Representatives, makes it impracticable or
inadvisable to proceed with the public offering of the Shares as contemplated by
the Prospectus. In the event of termination pursuant to subparagraph (i) above,
the Company shall remain obligated to pay costs and expenses pursuant to
Sections 4(j), 5 and 8 hereof. Any termination pursuant to any of subparagraphs
(ii) through (v) above shall be without liability of any party to any other
party except as provided in Sections 5 and 8 hereof.
If you elect to prevent this Agreement from becoming effective or to
terminate this Agreement as provided in this Section 11, you shall promptly
notify the Company by telephone, telecopy or telegram, in each case confirmed by
letter. If the Company shall elect to prevent this Agreement from becoming
effective, the Company shall promptly notify you by telephone, telecopy or
telegram, in each case, confirmed by letter.
12. NOTICES. All notices or communications hereunder, except as herein
otherwise specifically provided, shall be in writing and if sent to you shall be
mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and
confirmed by letter) to you c/o Robertson, Stephens & Company LLC,
555 California Street, Suite 2600, San Francisco, California 94104, telecopier
number (415) 781-0278, Attention: General Counsel with a copy to Wilson Sonsini
Goodrich & Rosati, 650 Page Mill Road, Palo Alto, California 94304-1050,
telecopier number (415) 493-6811, Attention: Alan K. Austin; if sent to the
Company, such notice shall be mailed, delivered, telegraphed (and confirmed by
letter) or telecopied (and confirmed by letter) to Affymetrix, Inc., 3380
Central Expressway, Santa Clara, California 95051, telecopier number (408) 481-
0920, Attention: John D. Diekman, Ph.D., Chief Executive Officer with a copy to
Heller Ehrman White & McAuliffe, 525 University Avenue, Palo Alto, California
94301-1908 , telecopier number (415) 324-0638, Attention: Julian N. Stern.
13. PARTIES. This Agreement shall inure to the benefit of and be binding
upon the several Underwriters and the Company and its executors, administrators,
successors and assigns. Nothing expressed or mentioned in this Agreement is
intended or shall be construed to give any person or entity, other than the
parties hereto and their respective executors, administrators, successors and
assigns, and the controlling persons within the meaning of the Act or the
Exchange Act, officers and directors referred to in Section 8 hereof, any legal
or equitable right, remedy or claim in respect of this Agreement or any
provisions herein contained, this Agreement and all conditions and provisions
hereof being
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<PAGE>
intended to be and being for the sole and exclusive benefit of the parties
hereto and their respective executors, administrators, successors and assigns
and said controlling persons and said officers and directors, and for the
benefit of no other person or entity. No purchaser of any of the Shares from
any Underwriter shall be construed a successor or assign by reason merely of
such purchase.
In all dealings with the Company under this Agreement, you shall act
on behalf of each of the several Underwriters, and the Company shall be entitled
to act and rely upon any statement, request, notice or agreement made or given
by you jointly or by Robertson, Stephens & Company LLC, on behalf of you.
14. APPLICABLE LAW. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of California.
15. COUNTERPARTS. This Agreement may be signed in several counterparts,
each of which will constitute an original.
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<PAGE>
If the foregoing correctly sets forth the understanding among the
Company and the several Underwriters, please so indicate in the space provided
below for that purpose, whereupon this letter shall constitute a binding
agreement among the Company and the several Underwriters.
Very truly yours,
AFFYMETRIX, INC.
By:
---------------------------
Name:
-------------------------
Title:
------------------------
Accepted as of the date first above written:
ROBERTSON, STEPHENS & COMPANY LLC
CS FIRST BOSTON CORPORATION
MONTGOMERY SECURITIES
On their behalf and on behalf of each of the
several Underwriters named in Schedule A hereto.
By ROBERTSON, STEPHENS & COMPANY LLC
By ROBERTSON, STEPHENS & COMPANY GROUP, L.L.C.
By
---------------------------------------
Authorized Signatory
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<PAGE>
SCHEDULE A
Number of Firm
shares To Be
Underwriters Purchased
------------ ---------------
ROBERTSON, STEPHENS & COMPANY LLC. . . . . . . . . . . . . . . . .
CS FIRST BOSTON CORPORATION. . . . . . . . . . . . . . . . . . . .
MONTGOMERY SECURITIES. . . . . . . . . . . . . . . . . . . . . . .
---------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000,000
---------
---------
<PAGE>
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE -- NET
1. Basic Provisions ("Basic Provisions")
1.1 Parties: This Lease ("Lease"), dated for reference purposes only,
December 5, 1994, is made by and between Harry Locklin ("Lessor") and
Affymetrix, a California Corporation ("Lessee"), (collectively the "Parties," or
individually a "Party").
1.2 Premises: That certain real property, including all improvements
therein or to be provided by Lessor under the terms of this Lease, and commonly
known by the street address of 1145 Sonora Court, Sunnyvale, located in the
County of Santa Clara, State of California and generally described as (describe
briefly the nature of the property) approximately 19,900 square feet of an
office/R&D building together with parking areas and landscaping (if any)
appurtenant thereto.
1.3 Term: Five (5) years and 0 months ("Original Term") commencing
three (3) months after the date of delivery ("Commencement Date") and ending
April 30, 2000 ("Expiration Date"). (See Paragraph 3 for further provisions).
1.4 Early Possession: February 1, 1995, ("Early Possession Date")
however if National Semiconductor vacates building at an earlier date, access
shall be granted. (See Paragraphs 3.2 and 3.3 for further provisions.)
1.5 Base Rent: $14,992.50 per month ("Base Rent"), payable on the first
day of each month commencing three (3) months after access is granted. (See
Paragraph 4 for further provisions.)
/X/ If this box is checked, there are provisions in this Lease for the Base Rent
to be adjusted.
1.6 Base Rent Paid Upon Execution: $14,992.50 as Base Rent for the first
full calendar month of the term.
1.7 Security Deposit: $15,000.00 ("Security Deposit"). (See Paragraph 5
for further provisions.)
1.8 Permitted Use: Administrative offices, laboratory, research and
development facility, manufacturing and clean room areas. (See Paragraph 6 for
further provisions.)
1.9 Insuring Party: Lessor is the "Insuring Party" unless otherwise
stated herein. (See Paragraph 8 for further provisions.)
1.10 Real Estate Brokers: The following real estate brokers
(collectively, the "Brokers") and brokerage relationships exist in this
transaction and are consented to by the Parties (check applicable boxes):
Cornish & Carey Commercial Oncor International represents Lessor exclusively
("Lessor's Broker"), and Cornish & Carey Commercial Oncor International and
Catalyst Real Estate Group represents Lessee exclusively ("Lessee's Broker").
1.11 Guarantor. The obligations of the Lessee under this Lease are to be
guaranteed by ___________________ ("Guarantor"). (See Paragraph 37 for further
provisions.)
1.12 Addenda. Attached hereto is an Addendum or Addenda consisting of
Paragraphs 1 through 13 and Exhibits A and B, all of which constitute a part of
this Lease.
<PAGE>
2. Premises.
2.1 Letting. Lessor hereby leases to Lessee, and Lessee hereby leases
from Lessor, the Premises, for the term, at the rental, and upon all of the
terms, covenants and conditions set forth in this Lease. Unless otherwise
provided herein, any statement of square footage set forth in this Lease, or
that may have been used in calculating rental, is an approximation which Lessor
and Lessee agree is reasonable and the rental based thereon is not subject to
revision whether or not the actual square footage is more or less.
2.2 Deleted.
2.3 Deleted.
2.4 Acceptance of Premises. Lessee hereby acknowledges: (a) that it
has been advised by the Brokers to satisfy itself with respect to the condition
of the Premises (including but not limited to the electrical and fire sprinkler
systems, security, environmental aspects, compliance with Applicable Law, as
defined in Paragraph 6.3) and the present and future suitability of the Premises
for Lessee's intended use and (c) that neither Lessor, nor any of Lessor's
agents, has made any oral or written representations or warranties with respect
to the said matters other than as set forth in this Lease.
2.5 Lessee Prior Owner/Occupant. The warranties made by Lessor in this
Paragraph 2 shall be of no force or effect if immediately prior to the date set
forth in Paragraph 1.1 Lessee was the owner or occupant of the Premises. In
such event, Lessee shall, at Lessee's sole cost and expense, correct any
non-compliance of the Premises with said warranties.
3. Term.
3.1 Term. The Commencement Date, Expiration Date and Original Term of
this Lease are as specified in Paragraph 13.
3.2 Early Possession. If Lessee totally or partially occupies the
Premises prior to the Commencement Date, the obligation to pay Base Rent shall
be abated for the period of such early possession. All other terms of this
Lease, however, (including but not limited to the obligations to pay Real
Property Taxes and insurance premiums and to maintain the Premises) shall be in
effect during such period. Any such early possession shall not affect nor
advance the Expiration Date of the Original Term.
3.3 Delay in Possession. If for any reason Lessor cannot deliver
possession of the Premises to Lessee as agreed herein by the Early Possession
Date if one is specified in Paragraph 1.4, or, if no Early Possession Date is
specified. by the Commencement Date, Lessor shall not be subject to any
liability therefor, nor shall such failure affect the validity of this Lease, or
the obligations of Lessee hereunder, or extend the term hereof, but in such
case, Lessee shall not, except as otherwise provided herein, be obligated to pay
rent or perform any other obligation of Lessee under the terms of the Lease
until Lessor delivers possession of the Premises to Lessee, if possession of the
Premises is not delivered to Lessee within sixty (60) days after the
Commencement Date, Lessee may, at its option, by notice in writing to Lessor
within ten (10) days thereafter, cancel this Lease, in which event the Parties
shall be discharged from all obligations hereunder; provided, however, that if
such written notice by Lessee is not received by Lessor within said ten (10) day
period, Lessee's right to cancel this Lease shall terminate and be of no further
force or effect. Except as may be otherwise provided, and regardless of when
the term actually commences, if possession is not tendered to Lessee when
required by this Lease and Lessee does not terminate this Lease as aforesaid,
the period free of the obligation to pay Base Rent, if any, that Lessee would
otherwise have enjoyed shall run from the date of delivery
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of possession and continue for a period equal to what Lessee would otherwise
have enjoyed under the terms hereof, but minus any days of delay caused by the
acts, changes or omissions of Lessee.
4. Rent.
4.1 Base Rent. Lessee shall cause payment of Base Rent and other rent
or charges, as the same may be adjusted from time to time, to be received by
Lessor in lawful money of the United States, without offset or deduction, on or
before the day on which it is due under the terms of this Lease. Base Rent and
all other rent and charges for any period during the term hereof which is for
less than one (1) full calendar month shall be prorated based upon the actual
number of days of the calendar month involved. Payment of Base Rent and other
charges shall be made to Lessor at its address stated herein or to such other
persons or at such other addresses as Lessor may from time to time designate in
writing to Lessee.
5. Security Deposit. Lessee shall deposit with Lessor upon execution hereof
the Security Deposit set forth in Paragraph 1.7 as security for Lessee's
faithful performance of Lessee's obligations under this Lease. If Lessee fails
to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults
under this Lease (as defined in Paragraph 13.1), Lessor may use, apply or retain
all or any portion of said Security Deposit for the payment of any amount due
Lessor or to reimburse or compensate Lessor for any liability, cost, expense,
loss or damage (including attorneys' fees) which Lessor may suffer or incur by
reason thereof. If Lessor uses or applies all or any portion of said Security
Deposit, Lessee shall within ten (10) days after written request therefor
deposit moneys with Lessor sufficient to restor said Security Deposit to the
full amount required by this Lease. Any time the Base Rent increases during the
term of this Lease, Lessee shall, upon written request from Lessor, deposit
additional moneys with Lessor sufficient to maintain the same ratio between the
Security Deposit and the Base Rent as those amounts are specified in the Basic
Provisions. Lessor shall not be required to keep all or any part of the
Security Deposit separate from its general accounts. Lessor shall, at the
expiration or earlier termination of the term hereof and after Lessee has
vacated the Premises, return to Lessee (or, at Lessor's option, to the last
assignee, if any, of Lessee's interest herein), that portion of the Security
Deposit not used or applied by Lessor. Unless otherwise expressly agreed in
writing by Lessor, no part of the Security Deposit shall be considered to be
held in trust, to bear interest or other increment for its use, or to be
prepayment for any moneys to be paid by Lessee under this Lease.
6. Use.
6.1 Use. Lessee shall use and occupy the Premises only for the purposes
set forth in Paragraph 1.8, or any other use which is comparable thereto, and
for no other purpose. Lessee shall not use or permit the use of the Premises in
a manner that creates waste or a nuisance, or that disturbs owners and/or
occupants of, or causes damage to, neighboring premises or properties. Lessor
hereby agrees to no unreasonably withhold or delay its consent to any written
request by Lessee, Lessees assignees or subtenants, and by prospective assignees
and subtenants of the Lessee, its assignees and subtenants, for a modification
of said permitted purpose for which the premises may be used or occupied, so
long as the same will not impair the structural integrity of the improvements on
the Premises, the mechanical or electrical systems therein, is not significantly
more burdensome to the Premises and the improvements thereon, and is otherwise
permissible pursuant to this Paragraph 6. If Lessor elects to withhold such
consent, Lessor shall within five (5) business days give a written notification
of same, which notice shall include an explanation of Lessor's reasonable
objections to the change in use.
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6.2 Hazardous Substances.
(a) Reportable Uses Require Consent. Hazardous Substance shall
include, but not be limited to, hydrocarbons, petroleum, gasoline, crude oil or
any products, by-products or factions thereof. Lessee shall not engage in any
activity in, on or about the Premises which constitutes a Reportable Use (as
hereinafter defined) of Hazardous Substances without the express prior written
consent of Lessor and compliance in a timely manner (at Lessee's sole cost and
expense) with all Applicable Law (as defined in Paragraph 6.3). "Reportable
Use" shall mean (i) the installation or use of any above or below ground storage
tank, (ii) the generation, possession, storage, use, transportation, or disposal
of a Hazardous Substance that requires a permit from, or with respect to which a
report, notice, registration or business plan is required to be filed with, any
governmental authority. Reportable Use shall also include Lessee's being
responsible for the presence in, on or about the Premises of a Hazardous
Substance with respect to which any Applicable Law requires that a notice be
given to persons entering or occupying the Premises or neighboring properties.
Notwithstanding the foregoing, Lessee may, without Lessor's prior consent, but
in compliance with all Applicable Law, use any ordinary and customary materials
reasonably required to be used by Lessee in the normal course of Lessee's
business permitted on the Premises, so long as such use is not a Reportable Use
and does not expose the Premises or neighboring properties to any meaningful
risk of contamination or damage or expose Lessor to any liability therefor. In
addition, Lessor may (but without any obligation to do so) condition its consent
to the use or presence of any Hazardous Substance, activity or storage tank by
Lessee upon Lessee's giving Lessor such additional assurances as Lessor, in its
reasonable discretion, deems necessary to protect itself, the public, the
Premises and the environment against damage, contamination or injury and/or
liability therefrom or therefor, including, but not limited to, the installation
(and removal on or before Lease expiration or earlier termination) of reasonably
necessary protective modifications to the Premises (such as concrete
encasements) and/or the deposit of an additional Security Deposit under
paragraph 5 hereof.
(b) Duty to Inform Lessor. If Lessee knows, or has reasonable
cause to believe, that a Hazardous Substance, or a condition involving or
resulting from same, has come to be located in, on, under or about the Premises,
other than as previously consented to be Lessor, Lessee shall immediately give
written notice of such fact to Lessor. Lessee shall also immediately give
Lessor a copy of any statement, report, notice, registration, application,
permit, business plan, license, claim, action or proceeding given to, or
received from, any governmental authority or private party, or persons entering
or occupying the Premises, concerning the Presence, spill, release, discharge
of, or exposure to, any Hazardous Substance or contamination in, on, or about
the Premises, including but not limited to all such documents as may be involved
in any Reportable Uses involving the Premises.
(c) Indemnification. Lessee shall indemnify, protect, defend and
hold Lessor, its agents, employees, lenders and ground Lessor, if any, and the
Premises, harmless from and against any and all loss of rents and/or damages,
liabilities, judgments, costs, claims, liens, expenses, penalties, permits and
attorney's and consultant's fees arising out of or involving any Hazardous
Substance or storage tank brought onto the Premises by or for Lessee or under
Lessee's control. Lessee's obligations under this Paragraph 6 shall include,
but not be limited to, the effects of any contamination or injury to person,
property or the environment created or suffered by Lessee, and the cost of
investigation (including consultant's and attorney's fees and testing), removal,
remediation, restoration and/or abatement thereof, or of any contamination
therein involved, and shall survive the expiration or earlier termination of
this Lease. No termination, cancellation or release agreement entered into by
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Lessor and Lessee shall release Lessee from its obligations under this Lease
with respect to Hazardous Substances or storage tanks, unless specifically so
agreed by Lessor in writing at the time of such agreement.
6.3 Lessee's Compliance with Law. Except as otherwise provided in this
Lease, Lessee, shall, at Lessee's sole cost and expense, fully, diligently and
in a timely manner, comply with all "Applicable Law," which term is used in this
Lease to include all laws, rules, regulations, ordinances, directives,
covenants, easements and restrictions of record, permits, the requirements of
any applicable fire insurance underwriter or rating bureau, and the
recommendations of Lessor's engineers and/or consultants, relating in any manner
to the Premises (including but not limited to matters pertaining to
(i) industrial hygiene, (ii) environmental conditions on, in, under or about the
Premises, including soil and groundwater conditions, and (iii) the use,
generation, manufacture, production, installation, maintenance, removal,
transportation, storage, soil or release of any Hazardous Substance or storage
tank), now in effect or which may hereafter come into effect, and whether or not
reflecting a change in policy from any previously existing policy, Lessee shall,
within five (5) days after the receipt of Lessor's written request, provide
Lessor with copies of all documents and information, including, but not limited
to, permits, registrations, manifests, applications, reports and certificates,
evidencing Lessee's compliance with any Applicable Law specified by Lessor, and
shall immediately, upon receipt notify Lessor in writing (with copies of any
documents involved) of any threatened or actual claim notice citation, warning,
complaint or report pertaining to or involving failure by Lessee or the Premises
to comply with any Applicable Law.
6.4 Inspection; Compliance. Lessor and Lessor's Lender(s) (as defined
in Paragraph 8.3(a)) shall have the right to enter the Premises at any time, in
the case of an emergency, and otherwise at reasonable times, for the purpose of
inspecting the condition of the Premises and for verifying compliance by Lessee
with this Lease and all Applicable Laws (as defined in Paragraph 6.3), and to
employ experts and/or consultants in connection therewith and/or to advise
Lessor with respect to Lessee's activities, including but not limited to the
installation, operation, use, monitoring, maintenance, or removal of any
Hazardous Substance or storage tank on or from the Premises. The costs and
expenses of any such inspections shall be paid by the party requesting same
unless a Default or breach of this Lease, violation of Applicable Law, or a
contamination, caused or materially contributed to by Lessee is found to exist
or be imminent, or unless the inspection is requested or ordered by a
governmental authority as the result of any such existing or imminent violation
or contamination. In any such case, Lessee shall upon request reimburse Lessor
or Lessor's Lender, as the case may be, for the costs and expenses of such
inspections.
7. Maintenance; Repairs, Utility Installations; Trade Fixtures and
Alternations.
7.1 Lessee's Obligations.
(a) Subject to the provisions of Paragraphs 2.2 (Lessor's
warranty as to condition), 2.3 (Lessor's warranty as to compliance with
covenants, etc.), 7.2 (Lessors obligations to repair), 9 (damage and
destruction), and 14 (condemnation). Lessee shall at Lessee's sole cost and
expense and at all times keep the Premises and every part thereof in good order
condition and repair structural and non-structural (whether or not such portion
of the Premises requiring repairs or the means of repairing the same, are
reasonably or readily accessible to Lessee, and whether or not the need for such
repairs occurs as a result of Lessee's use any prior use, the elements or the
age of such portion of the Premises), including without limiting the generality
of the foregoing all equipment or facilities serving the Premises, such as
plumbing, heating, air conditioning,
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ventilating, electrical, lighting facilities, boiler, fired or unfired pressure
vessels, fire sprinkler and/or standpipe and hose or other automatic fire
extinguishing system, including fire alarm and/or smoke detection systems and
equipment, fire hydrants, fixtures, walls (interior and exterior), foundations,
ceilings, roofs, floors, windows, doors, plate glass, skylights, landscaping,
driveways, parking lots, fences, retaining walls, signs, sidewalks and parkways
located in, on, about, or adjacent to the Premises Lessee shall not cause or
permit any Hazardous Substance to be spilled or released in, on, under or about
the Premises (including through the plumbing or sanitary sewer system) and shall
promptly, at Lessee's expense, take all investigatory and/or remedial action
reasonably recommended, whether or not formally ordered or required, for the
cleanup of any contamination of, and for the maintenance, security and/or
monitoring of the Premises, the elements surrounding same, or neighboring
properties, that was caused or materially contributed to by Lessee, or
pertaining to or involving any Hazardous Substance and/or storage tank brought
onto the Premises by or for Lessee or under its control. Lessee, in keeping the
Premises in good order, condition and repair, shall exercise and perform good
maintenance practices Lessee's obligations shall include restorations,
replacements or renewals when necessary to keep the Premises and all
improvements thereon or a part thereof in good order, condition and state of
repair.
(b) Lessee shall, at Lessee's sole cost and expense, procure and
maintain contracts, with copies to Lessor, in customary form and substance for,
and with contractors specializing and experienced in, the inspection,
maintenance and service of the following equipment and improvements, if any,
located on the Premises: (i) heating, air conditioning and ventilation
equipment, (ii) boiler, fired or unfired pressure vessels, (iii) fire sprinkler
and/or standpipe and hose or other automatic fire extinguishing systems,
including fire alarm and/or smoke detection, (iv) landscaping and irrigation
systems, (v) roof covering and drain maintenance and (vi) asphalt and parking
lot maintenance.
7.2 Lessor's Obligations. Except for the warranties and agreements of
Lessor contained in Paragraphs 2.2 (relating to condition of the Premises), 2.3
(relating to compliance with covenants, restrictions and building code), 9
(relating to destruction of the Premises) and 14 (relating to condemnation of
the Premises), it is intended by the Parties hereto that Lessor have no
obligation, in any manner whatsoever, to repair and maintain the Premises, the
improvements located thereon, or the equipment therein, whether structural or
nonstructural, all of which obligations are intended to be that of the Lessee
under Paragraph 7.1 hereof. It is the intention of the Parties that the terms
of this Lease govern the respective obligations of the Parties as to maintenance
and repair of the Premises. Lessee and Lessor expressly waive the benefit of
any statute now or hereafter in effect to the extent it is inconsistent with the
terms of this Lease with respect to, or which affords Lessee the right to make
repairs at the expense of Lessor or to terminate this Lease by reason of any
needed repairs.
7.3 Utility Installations; Trade Fixtures; Alterations.
(a) Definitions; Consent Required. The term "Utility
Installations" is used in this Lease to refer to all carpeting, window
coverings, air lines, power panels, electrical distribution, security, fire
protection systems, communication systems, lighting fixtures, heating,
ventilating, and air conditioning equipment, plumbing, and fencing in, on or
about the Premises. The term "Trade Fixture" shall mean Lessee's machinery and
equipment that can be removed without doing material damage to the Premises.
The term "Alterations" shall mean any modification of the improvements on the
Premises from that which are provided by Lessor under the terms of this Lease,
other than Utility Installations or Trade Fixtures, whether by addition or
deletion. "Lessee Owned Alterations and/or Utility
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Installations" are defined as Alterations and/or Utility Installations made by
Lessee that are not yet owned by Lessor as defined in Paragraph 7.4(a). Lessee
shall not make any Alterations or Utility Installations in, on, under or about
the Premises without Lessor's prior written consent.
(b) Consent. Any Alterations or Utility Installations that
Lessee shall desire to make and which require the consent of the Lessor shall be
presented to Lessor in written form with proposed detailed plans. All consents
given by Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific
consent, shall be deemed conditioned upon A: (i) Lessee's acquiring all
applicable permits required by governmental authorities, (ii) the furnishing of
copies of such permits together with a copy of the plans and specifications for
the Alteration or Utility Installation to Lessor prior to commencement of the
work thereon, and (iii) the compliance by Lessee with all conditions of said
permits in a prompt and expeditious manner. Any Alterations or Utility
Installations by Lessee during the term of this Lease shall be done in a good
and workmanlike manner, with good and sufficient materials, and in compliance
with all Applicable Law. Lessee shall promptly upon completion thereof furnish
Lessor with as-built plans and specifications therefor.
(c) Indemnification. Lessee shall pay, when due, all claims for
labor or materials furnished or alleged to have been furnished to or for Lessee
at or for use on the Premises, which claims are or may be secured by any
mechanics' or materialmen's lien against the Premises or any interest therein.
Lessee shall give Lessor not less than ten (10) days' notice prior to the
commencement of any work in, on or about the Premises, and Lessor shall have the
right to post notices of non-responsibility in or on the Premises as provided by
law. If Lessee shall, in good faith, contest the validity of any such lien,
claim or demand, then Lessee shall at its sole expense defend and protect
itself, Lessor and the Premises against the same and shall pay and satisfy any
such adverse judgment that may be rendered thereon before the enforcement
thereof against the Lessor or the Premises. If Lessor shall require, Lessee
shall furnish to Lessor a surety bond satisfactory to Lessor in an amount equal
to one and one-half times the amount of such contested lien claim or demand,
indemnifying Lessor against liability for he same, as required by law for the
holding of the Premises free from the effect of such lien or claim. In
addition, Lessor may require Lessee to pay Lessor's attorney's fees and costs in
participating in such action if Lessor shall decide it is to its best interest
to do so.
7.4 Ownership; Removal; and Restoration.
(a) Ownership. Subject to Lessor's right to require their
removal or become the owner thereof as hereinafter provided in this Paragraph
7.4, all Alterations and Utility Additions made to the Premises by Lessee shall
be the property of and owned by Lessee, but considered a part of the Premises.
Lessor may, at any time and at its option, elect in writing to Lessee to be the
owner of all or any specified part of the Lessee Owned Alterations and Utility
Installations. Unless otherwise instructed per subparagraph 7.4(b) hereof, all
Lessee Owned Alterations and Utility Installations shall, at the expiration or
earlier termination of this Lease, become the property of Lessor and remain upon
and be surrendered by Lessee with the Premises.
(b) Removal. Unless otherwise agreed in writing, Lessor may
require that any or all Lessee Owned Alterations or Utility Installations be
removed by the expiration or earlier termination of the Lease, notwithstanding
their installation may have been consented to by Lessor. Lessor may require the
removal at any time of all or any part of any Lessee Owned Alterations or
Utility Installations made without the required consent of Lessor.
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(c) Surrender/Restoration. Lessee shall surrender the Premises
by the end of the last day of the Lease term or any earlier termination date,
with all of the improvements, parts and surfaces thereof clean and free of
debris and in good operating order, condition and state of repair, ordinary wear
and tear excepted. "Ordinary wear and tear" shall not include any damage or
deterioration that would have been prevented by good maintenance practice or by
Lessee performing all of its obligations under this Lease. Except as otherwise
agreed or specified in writing by Lessor, the Premises, as surrendered, shall
include the Utility Installations. The obligation of Lessee shall include the
repair of any damage occasioned by the installation, maintenance or removal of
Lessee's Trade Fixtures, furnishings, equipment, and Alterations and/or Utility
Installations, as well as the removal of any storage tank installed by or for
Lessee, and the removal, replacement, or remediation of any soil, material or
ground water contaminated by Lessee, all as may then be required by Applicable
Law and/or good service practice. Lessee's Trade Fixtures shall remain the
property of Lessee and shall be removed by Lessee subject to its obligation to
repair and restore the Premises per this Lease.
8. Insurance; Indemnity.
8.1 Payment For Insurance. Regardless of whether the Lessor or Lessee
is the Insuring Party, Lessee shall pay for all insurance required under this
Paragraph 8. Premiums for policy periods commencing prior to or extending
beyond the Lease term shall be prorated to correspond to the Lease term.
Payment shall be made by Lessee to Lessor within ten (10) days following receipt
of an invoice for any amount due.
8.2 Liability Insurance.
(a) Carried by Lessee. Lessee shall obtain and keep in force
during the term of this Lease a Commercial General Liability policy of insurance
protecting Lessee and Lessor (as an additional insured) against claims for
bodily injury, personal injury and property damage based upon, involving or
arising out of the ownership, use, occupancy or maintenance of the Premises and
all areas appurtenant thereto. Such insurance shall be on an occurrence basis
providing single limit coverage in an amount not less than $1,000,000 per
occurrence with an "Additional Insured-Managers or Lessors of Premises"
Endorsement and contain the "Amendment of the Pollution Exclusion" for damage
caused by heat, smoke, or fumes from a hostile fire. The policy shall not
contain any intra-insured exclusions as between insured persons or
organizations, but shall include coverage for liability assumed under this Lease
as an "insured contract" for the performance of Lessee's indemnity obligations
under this Lease. The limits of said insurance required by this Lease or as
carried by Lessee shall not, however, limit the liability of Lessee nor relieve
Lessee of any obligation hereunder. All insurance to be carried by Lessee shall
be primary to and not contributory with any similar insurance carried by Lessor,
whose insurance shall be considered excess insurance only.
(b) Carried By Lessor. In the event Lessor is in the Insuring
Party, Lessor shall also maintain liability insurance described in Paragraph
8.2(a), above. In addition to, and not in lieu of, the insurance required to be
maintained by Lessee. Lessee shall not be named as an additional insured
therein
8.3 Property Insurance - Building, Improvements and Rental Value.
(a) Building and Improvements. The Insuring Party shall obtain
and keep in force during the term of this Lease a policy or policies in the name
of Lessor, with loss payable to Lessor and to the holders of any mortgages,
deeds of trust or ground leases on the Premises ("Leader(s)"), insuring loss or
damage to the Premises. The amount of such insurance shall be equal to the full
replacement cost of the Premises, as the same
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shall exist from time to time, or the amount required by the Lenders, but in no
event more than the commercially reasonable and available insurable value
thereof if by reason of the unique nature or age of the improvements involved,
such latter amount is less than full replacement cost. If Lessor is the
Insuring Party, however, Lessee Owned Alterations and Utility Installations
shall be insured by Lessee under Paragraph 8.4 rather than by Lessor if the
coverage is available and commercially appropriate such policy or policies shall
insure against all risks of direct physical loss or damage (except the perils of
flood unless required by a Lender), including coverage for any additional costs
resulting from debris removal and reasonable amounts of coverage for the
enforcement of any ordinance or law regulating the reconstruction or replacement
of any undamaged sections of the Premises required to be demolished or removed
by reason of the enforcement of any building, zoning, safety or land use laws as
the result of a covered cause of loss. Said policy or policies shall also
contain an agreed valuation provision in lieu of any coinsurance clause, waiver
of subrogation, and inflation guard protection causing an increase in the annual
property insurance coverage amount by a factor of not less than the adjusted
U.S. Department of Labor Consumer Price Index for All Urban Consumers for the
city nearest to where the Premises are located. If such insurance coverage has
a deductible clause, the deductible amount shall not exceed $1,000 per
occurrence, and Lessee shall be liable for such deductible amount in the event
of an Insured Loss, as defined in Paragraph 9.1(c).
(b) Rental Value. The Insuring Party shall, in addition, obtain
and keep in force during the term of this Lease a policy or policies in the name
of Lessor with loss payable to Lessor and Lender(s), insuring the loss of the
full rental and other charges payable by Lessee to Lessor under this Lease for
one (1) year (including all real estate taxes, insurance costs, and any
scheduled rental increases). Said insurance shall provide that in the event the
Lease is terminated by reason of an insured loss, the period of indemnity for
such coverage shall be extended beyond the date of the completion of repairs or
replacement of the Premises, to provide for one full year's loss of rental
revenues from the date of any such loss. Said insurance shall contain an agreed
valuation provision in lieu of any coinsurance clause, and the amount of
coverage shall be adjusted annually to reflect the projected rental income
property taxes, insurance premium costs and other expenses, if any, otherwise
payable by Lessee, for the next twelve (12) month period. Lessee shall be
liable for any deductible amount in the event of such loss.
(c) Adjacent Premises. If the Premises are part of a larger
building, or if the Premises are part of a group of buildings owned by Lessor
which are adjacent to the Premises, the Lessee shall pay for any increase in the
premiums for the property insurance of such building or buildings if said
increase is caused by Lessee's acts, omissions, use or occupancy of the
Premises.
(d) Tenant's Improvements. If the Lessor is the Insuring Party,
the Lessor shall not be required to insure Lessee Owned Alterations and Utility
Installations unless the item in question has become the property of Lessor
under the terms of this Lease. If Lessee is the Insuring Party, the policy
carried by Lessee under this Paragraph 8.3 shall insure Lessee Owned Alterations
and Utility Installations.
8.4 Lessee's Property Insurance. Subject to the requirements of
Paragraph 8.5, Lessee at its cost shall either by separate policy or, at
Lessor's option, by endorsement to a policy already carried, maintain insurance
coverage on all of Lessee's personal property, Lessee Owned Alterations and
Utility Installations in, on, or about the Premises similar in coverage to that
carried by the Insuring Party under Paragraph 8.3. SUCH INSURANCE SHALL BE FULL
REPLACEMENT COST COVERAGE WITH A
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DEDUCTIBLE OF NOT TO EXCEED $1,000 PER OCCURRENCE. The proceeds from any such
insurance shall be used by Lessee for the replacement of personal property or
the restoration of Lessee Owned Alterations and Utility Installations. Lessee
shall be the Insuring Party with respect to the insurance required by this
Paragraph 8.4 and shall provide Lessor with written evidence that such Insurance
is in force.
8.5 Insurance Policies. Insurance required hereunder shall be in
companies duly licensed to transact business in the state where the Premises are
located and maintaining during the policy term a "General Policyholders Rating"
of at least B+, V, or such other rating as may be required by a Lender having a
lien on the Premises, as set forth in the most current issue of "Best's
Insurance Guide." Lessee shall not do or permit to be done anything which shall
invalidate the insurance policies referred to in this Paragraph 8. If Lessee is
the Insuring Party, Lessee shall cause to be delivered to Lessor certified
copies of policies of such insurance or certificate evidencing the existence and
amounts of such Insurance with the insureds and loss payable clauses as required
by this Lease. No such policy shall be cancelable or subject to modification
except after thirty (30) days prior written notice to Lessor. Lessee shall at
least thirty (30) days prior to the expiration of such policies, furnish Lessor
with evidence of renewals or "insurance binders" evidencing renewal thereof, or
Lessor may order such insurance and charge the cost thereof to Lessee, which
amount shall be payable by Lessee to Lessor upon demand. If the Insuring Party
shall fail to procure and maintain the insurance required to be carried by the
Insuring Party under this Paragraph 8, the other Party may, but shall not be
required to, procure and maintain the same, but at Lessee's expense.
8.6 Waiver of Subrogation. Without affecting any other rights or
remedies, Lessee and Lessor ("Waiving Party") each hereby release and relieve
the other, and waive their entire right to recover damages (whether in contract
or in tort) against the other, for loss of or damage to the Waiving Party's
property arising out of or incident to the perils required to be insured against
under Paragraph 8. The effect of such releases and waivers of the right to
recover damages shall not be limited by the amount of insurance carried or
required, or by any deductibles applicable thereto.
8.7 Indemnity. Except for Lessor's negligence and/or breach of express
warranties, Lessee shall indemnify, protect, defend and hold harmless the
Premises. Lessor and its agents, Lessor's master or ground lessor, partners and
Lenders, from and against any and all claims, loss of rents and/or damages,
costs, liens, judgments, penalties, permits, attorney's and consultant's fees,
expenses and/or liabilities arising out of, involving, or in dealing with, the
occupancy of the Premises by Lessee, the conduct of Lessee's business, any act,
omission or neglect of Lessee, its agents, contractors, employees or invitees,
and out of any Default or Breach by Lessee in the performance in a timely manner
of any obligation on Lessee's part to be performed under this Lease. The
foregoing shall include, but not be limited to, the defense or pursuit of any
claim or any action or proceeding involved therein, and whether or not (in the
case of claims made against Lessor) litigated and/or reduced to judgment, and
whether well founded or not. In case any action or proceeding be brought
against Lessor by reason of any of the foregoing matters, Lessee upon notice
from Lessor shall defend the same at Lessee's expense by counsel reasonably
satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense.
Lessor need not have first paid any such claim in order to be so indemnified.
8.8 Exemption of Lessor from Liability. Lessor shall not be liable for
injury or damage to the person or goods, wares, merchandise or other property of
Lessee. Lessee's employees, contractors, invitees, customers, or any other
person in or about the Premises, whether such damage or injury is caused by or
results from fire, steam, electricity, gas, water or rain, or
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from the breakage, leakage, obstruction or other defects of pipes, fire
sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures,
or from any other cause, whether the said injury or damage results from
conditions arising upon the Premises or upon other portions of the building of
which the Premises are a part, or from other sources or places, and regardless
of whether the cause of such damage or injury or the means of repairing the same
is accessible or not. Lessor shall not be liable for any damages arising from
any act or neglect of any other tenant of Lessor. Notwithstanding Lessor's
negligence or breach of this Lease, Lessor shall under no circumstances be
liable for injury to Lessee's business or for any loss of income or profit
therefrom.
9. DAMAGE OR DESTRUCTION.
9.1 Definitions.
(a) "Premises Partial Damage" shall mean damage or destruction to
the improvements on the Premises, other than Lessee Owned Alterations and
Utility Installations, the repair cost of which damage or destruction is less
than 50% of the then Replacement Cost of the Premises immediately prior to such
damage or destruction, excluding from such calculation the value of the land and
Lessee Owned Alterations and Utility Installations.
(b) "Premises Total Destruction" shall mean damage or destruction
to the Premises, other than Lessee Owned Alterations and Utility Installations
the repair cost of which damage or destruction is 50% or more of the then
Replacement Cost of the Premises immediately prior to such damage or
destruction, excluding from such calculation the value of the land and Lessee
Owned Alterations and Utility Installations.
(c) "Insured Loss" shall mean damage or destruction to
improvements on the Premises, other than Lessee Owned Alterations and Utility
Installations, which was caused by an event required to be covered by the
insurance described in Paragraph 8.3(a), irrespective of any deductible amounts
of coverage limits involved.
(d) "Replacement Cost" shall mean the cost to repair or rebuild
the improvements owned by Lessor at the time of the occurrence to their
condition existing immediately prior thereto, including demolition, debris
removal and upgrading required by the operation of applicable building codes,
ordinances or laws, and without deduction for depreciation.
(e) "Hazardous Substance Condition" shall mean the occurrence or
discovery of a condition involving the presence of, or a contamination by, a
Hazardous Substance as defined in Paragraph 6.2(a), in, or, under the Premises.
9.2 Partial Damage - Insured Loss. If a Premises Partial Damage that is
an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such
damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility
Installations) as soon as reasonably possible and this Lease shall continue in
full force and effect; provided, however, that Lessee shall, at Lessor's
election, make the repair of any damage or destruction the total cost to repair
of which is $10,000 or less, and, in such event, Lessor shall make the insurance
proceeds available to Lessee on a reasonable basis for that purpose.
Notwithstanding the foregoing, if the required insurance was not in force or the
insurance proceeds are not sufficient to effect such repair the Insuring Party
shall promptly contribute the shortage in proceeds (except as to the deductible
which is Lessee's responsibility) as and when required to complete said repairs.
9.3 Partial Damage - Uninsured Loss. If a Premises Partial Damage that
is not an Insured Loss occurs, unless caused by a negligent or wilful act of
Lessee (in which event Lessee shall make the repairs at Lessee's expense and
this Lease shall
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continue in full force and effect, but subject to Lessor's rights under
Paragraph 13), Lessor may at Lessor's option, either (i) repair such damage as
soon as reasonably possible at Lessor's expense, in which event this Lease shall
continue in full force and effect, or (ii) give written notice to Lessee within
thirty (30) days after receipt by Lessor of knowledge of the occurrence of such
damage of Lessor's desire to terminate this Lease as of the date sixty (60) days
following the giving of such notice. In the event Lessor elects to give such
notice of Lessor's intention to terminate this Lease, Lessee shall have the
right within ten (10) days after the receipt of such notice to give written
notice to Lessor of Lessee's commitment to pay for the repair of such damage
totally at Lessee's expense and without reimbursement from Lessor. Lessee shall
provide Lessor with the required funds or satisfactory assurance thereof within
thirty (30) days following Lessee's said commitment. In such event this Lease
shall continue in full force and effect, and Lessor shall proceed to make such
repairs as soon as reasonably possible and the required funds are available. If
Lessee does not give such notice and provide the funds or assurance thereof
within the times specified above, this Lease shall terminate as of the date
specified in Lessor's notice of termination.
9.4 Total Destruction. Notwithstanding any other provision hereof, if a
Premises Total Destruction occurs (including any destruction required by any
authorized public authority), this Lease shall terminate sixty (60) days
following the date of such Premises Total Destruction, whether or not the damage
or destruction is an Insured Loss or was caused by a negligent or willful act of
Lessee. In the event, however, that the damage or destruction was caused by
Lessee, Lessor shall have the right to recover Lessor's damages from Lessee
except as released and waived in Paragraph 8.6.
9.5 Damage Near End of Term. If at any time during the last six (6)
months of the term of this Lease there is damage for which the cost to repair
exceeds one (1) month's Base Rent, whether or not an Insured Loss, Lessor may,
at Lessor's option, terminate this Lease effective sixty (60) days following the
date of occurrence of such damage by giving written notice to Lessee of Lessor's
election to do so within thirty (30) days after the date of occurrence of such
damage. Provided, however, if Lessee at that time has an exercisable option to
extend this Lease or to purchase the Premises, then Lessee may preserve this
Lease by, within twenty (20) days following the occurrence of the damage, or
before the expiration of the time provided in such option for its exercise,
whichever is earlier ("Exercise Period"), (i) exercising such option and (ii)
providing Lessor with any shortage in insurance proceeds (or adequate assurance
thereof) needed to make the repairs. If Lessee duly exercises such option
during said Exercise Period and provides Lessor with funds (or adequate
assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at
Lessor's expense repair such damage as soon as reasonably possible and this
Lease shall continue in full force and effect. If Lessee fails to exercise such
option and provide such funds or assurance during said Exercise Period, then
Lessor may at Lessor's option terminate this Lease as of the expiration of said
sixty (60) day period following the occurrence of such damage by giving written
notice to Lessee of Lessor's election to do so within ten (10) days after the
expiration of the Exercise Period, notwithstanding any term or provision in the
grant of option to the contrary.
9.6 Abatement of Rent; Lessee's Remedies.
(a) In the event of damage described in Paragraph 9.2 (Partial
Damage - Insured), whether or not Lessor or Lessee repairs or restores the
Premises, the Base Rent, Real Property Taxes, insurance premiums, and other
charges, if any, payable by Lessee hereunder for the period during which such
damage, its repair or the restoration continues (not to exceed the period for
which rental value insurance is required under Paragraph 8.3(b)), shall be
abated in proportion to the degree to which Lessee's use
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of the Premises is impaired. Except for abatement of Base Rent, Real Property
Taxes, insurance premiums, and other charges, if any, as aforesaid, all other
obligations of Lessee hereunder shall be performed by Lessee, and Lessee shall
have no claim against Lessor for any damage suffered by reason of any such
repair or restoration.
(b) If Lessor shall be obligated to repair or restore the
Premises under the provisions of this Paragraph 9 and shall not commence, in a
substantial and meaningful way, the repair or restoration of the Premises within
ninety (90) days after such obligation shall accrue, Lessee may, at any time
prior to the commencement of such repair or restoration, give written notice to
Lessor and to any Lenders of which Lessee has actual notice of Lessee's election
to terminate this Lease on a date not less than sixty (60) days following the
giving of such notice. If Lessee gives such notice to Lessor and such Lenders
and such repair or restoration is not commenced within thirty (30) days after
receipt of such notice, this Lease shall terminate as of the date specified in
said notice. If Lessor or a Lender commences the repair or restoration of the
Premises within thirty (30) days after receipt of such notice, this Lease shall
continue in full force and effect. "Commence" as used in this Paragraph shall
mean either the unconditional authorization of the preparation of the required
plans, or the beginning of the actual work on the Premises, whichever first
occurs.
9.7 Hazardous Substance Conditions. If a Hazardous Substance Condition
occurs, unless Lessee is legally responsible therefor (in which case Lessee
shall make the investigation and remediation thereof required by Applicable Law
and this Lease shall continue in full force and effect, but subject to Lessor's
rights under Paragraph 13), Lessor may at Lessor's option either (i) investigate
and remediate such Hazardous Substance Condition, if required, as soon as
reasonably possible at Lessor's expense, in which event this Lease shall
continue in full force and effect, or (ii) if the estimated cost to investigate
and remediate such condition exceeds twelve (12) times the then monthly Base
Rent or $100,000, whichever is greater, give written notice to Lessee within
thirty (30) days after receipt by Lessor of knowledge of the occurrence of such
Hazardous Substance Condition of Lessor's desire to terminate this Lease as of
the date sixty (60) days following the giving of such notice. In the event
Lessor elects to give such notice of Lessor's intention to terminate this Lease,
Lessee shall have the right within ten (10) days after the receipt of such
notice to give written notice to Lessor of Lessee's commitment to pay for the
investigation and remediation of such Hazardous Substance Condition totally at
Lessee's expense and without reimbursement from Lessor except tot he extent of
an amount equal to twelve (12) times the then monthly Base Rent or $100,000,
whichever is greater. Lessee shall provide Lessor with the funds required of
Lessee or satisfactory assurance thereof within thirty (30) days following
Lessee's said commitment. In such event this Lease shall continue in full force
and effect, and Lessor shall proceed to make such investigation and remediation
as soon as reasonably possible and the required funds are available. If Lessee
does not give such notice and provide the required funds or assurance thereof
within the times specified above, this Lease shall terminate as of the date
specified in Lessor's notice of termination. If a Hazardous Substance Condition
occurs for which Lessee is not legally responsible, there shall be abatement of
Lessee's obligations under this Lease to the same extent as provided in
Paragraph 9.6(a) for a period of not to exceed twelve (12) months.
9.8 Termination - Advance Payments. Upon termination of this Lease
pursuant to this Paragraph 9, an equitable adjustment shall be made concerning
advance Base Rent and any other advance payments made by Lessee to Lessor.
Lessor shall, in addition, return to Lessee so much of Lessee's Security Deposit
as has not been, or is not then required to be used by Lessor under the terms of
this Lease.
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9.9 Waive Statutes. Lessor and Lessee agree that the terms of this
Lease shall govern the effect of any damage to or destruction of the Premises
with respect to the termination of this Lease and hereby waive the provisions of
any present or future statute to the extent inconsistent herewith.
10. Real Property Taxes.
10.1 (a) Payment of Taxes. Lessee shall pay the Real Property Taxes,
as defined in Paragraph 10.2, applicable to the Premises during the term of this
Lease. Subject to Paragraph 10.1(b), all such payments shall be made at least
ten (10) days prior to the delinquency date of the applicable installment.
Lessee shall promptly furnish Lessor with satisfactory evidence that such taxes
have been paid. If any such taxes to be paid by Lessee shall cover any period
of time prior to or after the expiration or earlier termination of the term
hereof, Lessee's share of such taxes shall be equitably prorated to cover only
the period of time within the tax fiscal year this Lease is in effect, and
Lessor shall reimburse Lessee for any over payment after such proration. If
Lessee shall fail to pay any Real Property Taxes required by this Lease to be
paid by Lessee, Lessor shall have the right to pay the same, and Lessee shall
reimburse Lessor therefor upon demand.
(b) Advance Payment. In order to insure payment when due and
before delinquency of any or all Real Property Taxes, Lessor reserves the right,
at Lessor's option, to estimate the current Real Property Taxes applicable to
the Premises, and to require such current year's Real Property Taxes to be paid
in advance to Lessor by Lessee, either: (i) in a lump sum amount equal to the
installment due, at least twenty (20) days prior to the applicable delinquency
date, or (ii) monthly in advance with the payment of the Base Rent. If Lessor
elects to require payment monthly in advance, the monthly payment shall be that
equal monthly amount which, over the number of months remaining before the month
in which the applicable tax installment would become delinquent (and without
interest thereon), would provide a fund large enough to fully discharge before
delinquency the estimated installment of taxes to be paid. When the actual
amount of the applicable tax bill is known, the amount of such equal monthly
advance payment shall be adjusted as required to provide the fund needed to pay
the applicable taxes before delinquency. If the amounts paid to Lessor by
Lessee under the provisions of this Paragraph are insufficient to discharge the
obligations of Lessee to pay such Real Property Taxes as the same become due,
Lessee shall pay to Lessor, upon Lessor's demand, such additional sums as are
necessary to pay such obligations. All moneys paid to Lessor under this
Paragraph may be intermingled with other moneys of Lessor and shall not bear
interest. In the event of a Breach by Lessee in the performance of the
obligations of Lessee under this Lease, then any balance of funds paid to Lessor
under the provisions of this Paragraph may, subject to proration as provided in
Paragraph 10.1(a), at the option of Lessor, be treated as an additional Security
Deposit under Paragraph 5.
10.2 Definition of "Real Property Taxes." As used herein, the term "Real
Property Taxes" shall include any form of real estate tax or assessment general,
special, ordinary or extraordinary, and any license fee, commercial rental tax,
improvement bond or bonds, levy or tax (other than inheritance, personal income
or estate taxes) imposed upon the Premises by any authority having the direct or
indirect power to tax, including any city, state or federal government, or any
school, agricultural, sanitary, fire, street, drainage or other improvement
district thereof, levied against any legal or equitable interest of Lessor in
the Premises or in the real property of which the Premises are a part, Lessor's
right to rent or other income therefrom, and/or Lessor's business of leasing the
Premises. The term "Real Property Taxes" shall also include any tax, fee, levy,
assessment or charge, or any increase therein, imposed by reason of events
occurring, or changes in
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applicable law taking effect, during the term of this Lease, including but not
limited to a change in the ownership of the Premises or in the improvements
thereon, the execution of this Lease, or any modification, amendment or transfer
thereof, and whether or not contemplated by the Parties.
10.3 Joint Assessment. If the Premises are not separately assessed,
Lessee's liability shall be an equitable proportion of the Real Property Taxes
for all of the land and improvements included within the tax parcel assessed,
such proportion to be determined by Lessor from the respective valuations
assigned in the Lessor's work sheets or such other information as may be
reasonably available Lessor's reasonable determination thereof, in good faith,
shall be conclusive.
10.4 Personal Property Taxes. Lessee shall pay prior to delinquency all
taxes assessed against and levied upon Lessee Owned Alternations, Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee contained in the Premises or elsewhere. When possible, Lessee shall
cause its Trade Fixtures, furnishings, equipment and all other personal property
to be assessed and billed separately from the real property of Lessor if any of
Lessee's said personal property shall be assessed with Lessor's real property.
Lessee shall pay Lessor the taxes attributable to Lessee within ten (10) days
after receipt of a written statement setting forth the taxes applicable to
Lessee's property or, at Lessor's option, as provided in Paragraph 10.1(b).
11. Utilities. Lessee shall pay for all water, gas, heat, light, power,
telephone, trash disposal and other utilities and services supplied to the
Premises, together with any taxes thereon. If any such services are not
separately metered to Lessee, Lessee shall pay a reasonable proportion, to be
determined by Lessor, of all charges jointly metered with other premises.
12. Assignment and Subletting.
12.1 Lessor's Consent Required.
(a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or otherwise transfer or encumber (collectively,
"assignment") or sublet all or any part of Lessee's interest in this Lease or in
the Premises without Lessor's prior written consent given under the subject to
the terms of Paragraph 36.
(b) Deleted.
(c) Deleted.
(d) Deleted.
(e) Lessee's remedy for any breach of this Paragraph 12.1 by
Lessor shall be limited to compensatory damages and injunctive relief.
12.2 Terms and Conditions Applicable to Assignment and Subletting.
(a) Regardless of Lessor's consent, any assignment or subletting
shall not: (i) be effective without the express written assumption by such
assignee or sublessee of the obligations of Lessee under this Lease,
(ii) release Lessee of any obligations hereunder, or (iii) alter the primary
liability of Lessee for the payment of Base Rent and other sums due Lessor
hereunder or for the performance of any other obligations to be performed by
Lessee under this Lease.
(b) Lessor may accept any rent or performance of Lessee's
obligations from any person other than Lessee pending approval or disapproval of
an assignment. Neither a delay in the
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approval or disapproval of such assignment nor the acceptance of any rent or
performance shall constitute a waiver or estoppel of Lessor's right to exercise
its remedies for the Default or Breach by Lessee of any of the terms, covenants
or conditions of this Lease.
(c) The consent of Lessor to any assignment or subletting shall
not constitute a consent to any subsequent assignment or subletting by Lessee or
to any subsequent or successive assignment or subletting by the sublessee.
However, Lessor may consent to subsequent sublettings and assignments of the
sublease or any amendments or modifications thereto without notifying Lessee or
anyone else liable on the Lease or sublease and without obtaining their consent,
and such action shall not relieve such persons from liability under this Lease
or sublease.
(d) In the event of any Default or Breach of Lessee's obligations
under this Lease, Lessor may proceed directly against Lessee, any Guarantors or
any one else responsible for the performance of the Lessee's obligations under
this Lease, including the sublessee, without first exhausting Lessor's remedies
against any other person or entity responsible therefor to Lessor, or any
security held by Lessor or Lessee.
(e) Each request for consent to an assignment or subletting shall
be in writing, accompanied by information relevant to Lessor's determination as
to the financial and operational responsibility and appropriateness of the
proposed assignee or sublessee, including but not limited to the intended use
and/or required modification of the Premises, if any. Lessee agrees to provide
Lessor with such other or additional information and/or documentation as may be
reasonably requested by Lessor.
(f) Any assignee of, or sublessee under, this Lease shall, by
reason of accepting such assignment or entering into such sublease, be deemed
for the benefit of Lessor, to have assumed and agreed to conform and comply with
each and every term, covenant, condition and obligation herein to be observed or
performed by Lessee during the term of said assignment or sublease, other than
such obligations as are contrary to or inconsistent with provisions of an
assignment or sublease to which Lessor has specifically consented in writing.
(g) Deleted.
(h) Deleted.
12.3 Additional Terms and Conditions Applicable to Subletting. The
following terms and conditions shall apply to any subletting by Lessee of all or
any part of the Premises and shall be deemed included in all subleases under
this Lease whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all rentals and income arising from any sublease of all or a portion
of the Premises heretofore or hereafter made by Lessee, and Lessor may collect
such rent and income and apply same toward Lessee's obligations under this
lease; provided, however, that until a Breach (as defined in Paragraph 13.1)
shall occur in the performance of Lessee's obligations under this Lease. Lessee
may, except as otherwise provided in this Lease, receive, collect and enjoy the
rents accruing under such sublease. Lessor shall not, by reason for any failure
of Lessee to perform and comply with any of Lessee's obligations to such
sublessee under such sublease. Lessee hereby irrevocably authorizes and directs
any such sublessee, upon receipt of a written notice from Lessor stating that a
Breach exists in the performance of Lessee's obligations under this Lease, to
pay to Lessor the rents and other charges due and to become due under the
sublease. Sublessee shall rely upon any such statement and request from Lessor
and shall pay such rents and other charges to Lessor without any obligation or
right to
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inquire as to whether such Breach exists and notwithstanding any notice from or
claim from Lessee to the contrary. Lessee shall have no right or claim against
said sublessee or, until the Breach has been cured, against Lessor, for any such
rents and other charges so paid by said sublessee to Lessor.
(b) In the event of a Breach by Lessee in the performance of its
obligations under this Lease, Lessor, at its option and without any obligation
to do so, may require any sublessee to attorn to Lessor, in which event Lessor
shall undertake the obligations of the sublessor under such sublease from the
time of the exercise of said option to the expiration of such sublease;
provided, however, Lessor shall not be liable for any prepaid rents or security
deposit paid by such sublessee to such sublessor or for any other prior Defaults
or Breaches or such sublessor under such sublease.
(c) Any matter or thing requiring the consent of the sublessor
under a sublease shall also require the consent of Lessor herein.
(d) No sublessee shall further assign or sublet all or any part
of the Premises without Lessor's prior written consent.
(e) Lessor shall deliver a copy of any notice of Default or
Breach by Lessee to the sublessee, who shall have the right to cure the Default
of Lessee within the grace period, if any, specified in such notice. The
sublessee shall have a right or reimbursement and offset from and against Lessee
for any such Defaults cured by the sublessee.
13. Default; Breach; Remedies.
13.1 Default; Breach. A "Default" is defined as a failure by the Lessee
to observe comply with or perform any of the terms, covenants, conditions or
rules applicable to Lessee under this Lease. A "Breach" is defined as the
occurrence of any one or more of the following Defaults and where a grace period
for cure after notice is specified herein the failure by Lessee to cure such
Default prior to the expiration of the applicable grace period shall entitle
Lessor to pursue the remedies set forth in Paragraphs 13.2 and/or 13.3.
(a) The vacating of the Premises without the intention to
reoccupy same, or the abandonment of the Premises.
(b) Except as expressly otherwise provided in this Lease, the
failure by Lessee to make any payment of Base Rent or any other monetary payment
required to be made by Lessee hereunder, whether to Lessor or to a third party,
as and when due, the failure by Lessee to provide Lessor with reasonable
evidence of insurance or surety bond required under this Lease, or the failure
of Lessee to fulfill any obligation under this Lease which endangers or
threatens life or property, where such failure continues for a period of three
(3) days following written notice thereof by or on behalf of Lessor to Lessee.
(c) Except as expressly otherwise provided in this Lease, the
failure by Lessee to provide Lessor with reasonable written evidence (in duly
executed original form, if applicable) of (i) compliance with Applicable Law per
Paragraph 6.3, (ii) the inspection, maintenance and service contracts required
under Paragraph 7.1(b), (iii) the recession of an unauthorized assignment or
subletting per Paragraph 12.1(b), (iv) a Tenancy Statement per Paragraph 16 or
37, (v) the subordination or non-subordination of this Lease per Paragraph 30,
(vi) the guaranty of the performance of Lessee's obligations under this Lease if
required under Paragraphs 1.11 and 37, (vii) the execution of any document
requested under Paragraph 42 (easements), or (viii) any other documentation or
information which Lessor may reasonably required of Lessee under the terms of
this Lease, where any such failure continues for a period of ten
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(10) days following written notice by or on behalf of Lessor to Lessee.
(d) A Default by Lessee as to the terms, covenants, conditions or
provisions of this Lease, or of the rules adopted under Paragraph 40 hereof,
that are to be observed, complied with or performed by Lessee, other than those
described in subparagraphs (a), (b) or (c), above, where such Default continues
for a period of thirty (30) days after written notice thereof by or on behalf of
Lessor to Lessee; provided, however, that if the nature of Lessee's Default is
such that more than thirty (30) days are reasonably required for its cure, then
it shall not be deemed to be a Breach of this Lease by Lessee if Lessee
commences such cure within said thirty (30) days period and thereafter
diligently prosecutes such cure to completion.
(e) The occurrence of any of the following events: (i) The
making by Lessee of any general arrangement or assignment for the benefit of
creditors, (ii) Lessee's becoming a "debtor" as defined in 11 U.S.C. Section 101
or any successor statute thereto (unless, in the case of a petition filed
against Lessee, the same is dismissed within sixty (60) days); (iii) the
appointment of a trustee or receiver to take possession of substantially all of
Lessee's assets located at the Premises or of Lessee's interest in this Lease,
where possession is not restored to Lessee within thirty (30) days; or (iv) the
attachment, execution or other judicial seizure of substantially all of Lessee's
assets located at the Premises or of Lessee's interest in this Lease, where such
seizure is not discharged within thirty (30) days; provided, however, in the
event that any provision of this subparagraph (e) is contrary to any applicable
law, such provision shall be of no force or effect, and not affect the validity
of the remaining provisions.
(f) The discovery by Lessor that any financial statement given to
Lessor by Lessee or any Guarantor of Lessee's obligations hereunder was
materially false.
(g) If the performance of Lessee's obligations under this Lease
is guaranteed: (i) the death of a guarantor, (ii) the termination of a
guarantor's liability with respect to this Lease other than in accordance with
the terms of such guaranty, (iii) a guarantor's becoming insolvent or the
subject of a bankruptcy filing, (iv) a guarantor's refusal to honor the
guaranty, or (v) a guarantor's breach of its guaranty obligation on an
anticipatory breach basis, and Lessee's failure, within sixty (60) days
following written notice by or on behalf of Lessor to Lessee of any such event,
to provide Lessor with written alternative assurance or security, which, when
coupled with the then existing resources of Lessee, equals or exceeds the
combined financial resources of Lessee and the guarantors that existed at the
time of execution of this Lease.
13.2 Remedies. If Lessee fails to perform any affirmative duty or
obligation of Lessee under this Lease, within ten (10) days after written notice
to Lessee (or in case of an emergency, without notice), Lessor may at its option
(but without obligation to do so), perform such duty or obligation on Lessee's
behalf, including but not limited to the obtaining of reasonably required bonds,
insurance policies, or governmental licenses, permits or approvals. The costs
and expenses of any such performance by Lessor shall be due and payable by
Lessee to Lessor upon invoice therefor. If any check given to Lessor by Lessee
shall not be honored by the bank upon which it is drawn, Lessor, at its option,
may require all future payments to be made under this Lease by Lessee to be made
only by cashier's check. In the event of a Breach of this Lease by Lessee, as
defined in Paragraph 13.1, with or without further notice or demand, and without
limiting Lessor in the exercise of any right or remedy which Lessor may have by
reason of such Breach, Lessor may:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease and the
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term hereof shall terminate and Lessee shall immediately surrender possession of
the Premises to Lessor. In such event Lessor shall be entitled to recover from
Lessee: (i) the worth at the time of the award of the unpaid rent which had been
earned at the time of termination; (ii) the worth at the time of award of the
amount by which the unpaid rent which would have been earned after termination
until the time of award exceeds the amount of such rental loss that the Lessee
proves could have been reasonably avoided; (iii) the worth at the time of award
of the amount by which the unpaid rent for the balance of the term after the
time of award exceeds the amount of such rental loss that the Lessee proves
could be reasonably avoided; and (iv) any other amount necessary to compensate
Lessor for all the detriment proximately caused by the Lessee's failure to
perform its obligations under this Lease or which in the ordinary course of
things would be likely to result therefrom, including but not limited to the
cost of recovering possession of the Premises, expenses of reletting, including
necessary renovation and alteration of the Premises, reasonable attorneys' fees,
and that portion of the leasing commission paid by Lessor applicable to the
unexpired term of this Lease. The worth at the time of award of the amount
referred to in provision (iii) of the prior sentence shall be computed by
discounting such amount at the discount rate of the Federal Reserve Bank of San
Francisco at the time of award plus one percent (1%). Efforts by Lessor to
mitigate damages caused by Lessee's Default or Breach of this Lease shall not
waive Lessor's right to recover damages under this Paragraph. If termination of
this Lease is obtained through the provisional remedy of unlawful detainer,
Lessor shall have the right to recover in such proceeding the unpaid rent and
damages as are recoverable therein, or Lessor may reserve therein the right to
recover all or any part thereof in a separate suit for such rent and/or damages.
If a notice and grace period required under subparagraphs 13.1(b), (c) or (d)
was not previously given, a notice to pay rent or quit, or to perform or quit,
as the case may be, given to Lessee under any statute authorizing the forfeiture
of leases for unlawful detainer shall also constitute the applicable notice for
grace period purposes required by subparagraphs 13.1(b), (c) or (d). In such
case, the applicable grace period under subparagraphs 13.1(b), (c) or (d) and
under the unlawful detainer statute shall run concurrently after the one such
statutory notice, and the failure of Lessee to cure the Default within the
greater of the two such grace periods shall constitute both an unlawful detainer
and a Breach of this Lease entitling Lessor to the remedies provided for in this
Lease and/or by said statute.
(b) Continue the Lease and Lessee's right to possession in effect
(in California under California Civil Code Section 1951.4) after Lessee's Breach
and abandonment and recover the rent as it becomes due, provided Lessee has the
right to sublet or assign, subject only to reasonable limitations. See
Paragraphs 12 and 36 for the limitations on assignment and subletting which
limitations Lessee and Lessor agree are reasonable. Acts of maintenance or
preservation, efforts to relet the Premises, or the appointment of a receiver to
protect the Lessor's interest under the Lease, shall not constitute a
termination of the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available to Lessor
under the laws or judicial decisions of the state wherein the Premises are
located.
(d) The expiration or termination of this Lease and/or the
termination of Lessee's right to possession shall not relieve Lessee from
liability under any indemnity provisions of this Lease as to matters occurring
or accruing during the term hereof or by reason of Lessee's occupancy of the
Premises.
13.3 Late Charges. Lessee hereby acknowledges that late payment by
Lessee or Lessor of rent and other sums due hereunder will cause Lessor to incur
costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to
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ascertain. Such costs include, but are not limited to processing and accounting
charges, and late charges which may be imposed upon Lessor by the terms of any
ground lease, mortgage or trust deed covering the Premises. Accordingly, if any
installment of rent or any other sum due from Lessee shall not be received by
Lessor or Lessor's designee within five (5) days after such amount shall be due,
then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a
late charge equal to six percent (6%) of such overdue amount. The parties
hereby agree that such later charge represents a fair and reasonable estimate of
the costs Lessor will incur by reason of late payment by Lessee. Acceptance of
such late charge by Lessor shall in no event constitute a waiver of Lessee's
Default or Breach with respect to such overdue amount, not prevent Lessor from
exercising any of the other rights and remedies granted hereunder. In the event
that a late charge is payable hereunder, whether or not collected, for three (3)
consecutive installments of Base Rent, then notwithstanding Paragraph 4.1 or any
other provision of this Lease to the contrary. Base Rent Shall, at Lessor's
option, become due and payable quarterly in advance.
13.4 Breach by Lessor. Lessor shall not be deemed in breach of this
Lease unless Lessor fails within a reasonable time to perform an obligation
required to be performed by Lessor. For purposes of this Paragraph 13.5, a
reasonable time shall in no event be less than thirty (30) days after receipt by
Lessor, and by the holders of any ground lease, mortgage or deed of trust
covering the Premises whose name and address shall have been furnished Lessee in
writing for such purpose, of written notice specifying wherein such obligation
of Lessor has not been performed; provided, however, that if the nature of
Lessor's obligation is such that more than thirty (30) days after such notice
are reasonably required for its performance, then Lessor shall not be in breach
of this Lease if performance is commenced within such thirty (30) day period and
thereafter diligently pursued to completion.
14. Condemnation. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said power
(all of which are herein called "condemnation"), this Lease shall terminate as
to the part so taken as of the date the condemning authority takes title or
possession, whichever first occurs. If more than ten percent (10%) of the floor
area of the Premises, or more than twenty-five percent (25%) of the land area
not occupied by any building, is taken by condemnation, Lessee may, at Lessee's
option, to be exercised in writing within ten (10) days after Lessor shall have
given Lessee written notice of such taking (or in the absence of such notice,
within ten (10) days after the condemning authority shall have taken possession)
terminate this Lease as of the date the condemning authority takes such
possession. If Lessee does not terminate this Lease in accordance with the
foregoing, this Lease shall remain in full force and effect as to the portion of
the Premises remaining, except that the Base Rent shall be reduced in the same
proportion as the rentable floor area of the Premises taken bears to the total
rentable floor area of the building located on the Premises. No reduction of
Base Rent shall occur if the only portion of the Premises taken is land on which
there is no building. Any award for the taking of all or any part of the
Premises under the power of eminent domain or any payment made under threat of
the exercise of such power shall be the property of Lessor, whether such award
shall be made as compensation for diminution in value of the leasehold or for
the taking of the fee, or as severance damages; provided, however, that Lessee
shall be entitled to any compensation separately awarded to Lessee for Lessee's
relocation expenses and/or loss of Lessee's Trade Fixtures in the event that the
Lese is not terminated by reason of such condemnation. Lessor shall to the
extent of its net severance damages received over and above the legal and other
expenses incurred by Lessor in the condemnation matter, repair any damage to the
premises caused by such condemnation, except to the extent that Lessee has been
reimbursed therefor by the condemning authority. Lessee shall be
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responsible for the payment of any amount in excess of such net severance
damages required to complete such repair.
15. Broker's Fee
15.1 The Brokers named in Paragraph 1.10 are the procuring causes of this
Lease.
15.2 Upon execution of this Lease by both Parties, Lessor shall pay to
said Brokers jointly, or in such separate shares as they may mutually designate
in writing, a fee as set forth in a separate written agreement between Lessor
and said Brokers (or in the event there is no separate written agreement between
Lessor and said Brokers, the sum of $125% of Sched) for brokerage services
rendered by said Brokers to Lessor in this transaction.
15.3 Lessee and Lessor each represent and warrant to the other that it
has had no dealings with any person, firm, broker or finder (other than the
Brokers, if any named in Paragraph 1.10) in connection with the negotiation of
this Lease and/or the consummation of the transaction contemplated hereby, and
that no broker or other person, firm or entity other than said named Brokers is
entitled to any commission or finder's fee in connection with said transaction.
Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold
the other harmless from and against liability for compensation or charges which
may be claimed by any such unnamed broker, finder or other similar party by
reason by any dealings or actions of the indemnifying Party, including any
costs, expenses, attorneys' fees reasonably incurred with respect thereto.
15.4 Lessor and Lessee hereby consent to and approve all agency
relationships, including any dual agencies, indicated in Paragraph 1.10.
16. Tenancy Statement
16.1 Each Party (as "Responding Party") shall within ten (10) days after
written notice from the other Party (the "Requesting Party") execute,
acknowledge and deliver to the Requesting Party a statement in writing in form
similar to the most current "Tenancy Statement" form published by the American
Industrial Real Estate Association, plus such additional information,
confirmation and/or statements as may be reasonably requested by the Requesting
Party.
16.2 Lessor desires to finance, refinance, or sell the Premises, any part
thereof, or the building of which the Premises are a part, Lessee and all
Guarantors of Lessee's performance hereunder shall deliver to any potential
lender or purchase designated by Lessor such financial statements of Lessee and
such Guarantors as may be reasonably required by such lender or purchaser,
including but not limited to Lessee's financial statements for the past three
(3) years. All such financial statements shall be received by Lessor and such
lender or purchaser in confidence and shall be used only for the purposes herein
set forth.
17. Lessor's Liability. The term "Lessor" as used herein shall mean the owner
or owners at the time in question of the fee title to the Premises, or, if this
is a sublease, of the Lessee's interest in the prior lease. In the event of a
transfer of Lessor's title or interest in the Premises or in this Lease, Lessor
shall deliver to the transferee or assignee (in cash or by credit) any unused
Security Deposit held by Lessor at the time of such transfer or assignment.
Except as provided in Paragraph 15, upon such transfer or assignment and
delivery of the Security Deposit, as aforesaid, the prior Lessor shall be
relieved of all liability with respect to the obligations and/or covenants under
this Lease thereafter to be performed by the lessor. Subject to the foregoing,
the obligations and/or covenants in this Lease to be performed by the lessor
shall be binding only upon the Lessor as hereinabove defined.
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18. Severability. The invalidity of any provision of this Lease, as determined
by a court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof.
19. Interest on Past-Due Obligations. Any monetary payment due Lessor
hereunder, other than late charges, not received by lessor within thirty (30)
days following the date on which it was due, shall bear interest from the
thirty-first (31st) day after it was due at the rate of 12% per annum, but not
exceeding the maximum rate allowed by law, in addition to the late charge
provided for in Paragraph 13.4
20. Time of Essence. Time is of the essence with respect to the performance of
all obligations to be performed or observed by the Parties under this Lease.
21. Rent Defined. All monetary obligations of Lessee to Lessor under the terms
of this Lease are deemed to be rent.
22. No Prior or Other Agreements; Broker Disclaimer. This Lease contains all
agreements between the Parties with respect to any matter mentioned herein, and
no other prior or contemporaneous agreement or understanding shall be effective.
Lessor and Lessee each represents and warrants to the Brokers that it has made,
and is relying solely upon, its own investigation as to the nature, quality,
character and financial responsibility of the other Party to this Lease and as
to the nature, quality and character of the Premises. Brokers have no
responsibility with respect thereto or with respect to any default or breach
hereof by either Party.
23. Notices.
23.1 All notices required or permitted by this Lease shall be in writing
and may be delivered in person (by hand or by messenger or courier service) or
may be sent by regular, certified or registered mail or U.S. Postal Service
Express Mail, with postage prepaid, or by facsimile transmission, and shall be
deemed sufficiently given if served in a manner specified in this Paragraph 23.
The addresses noted adjacent to a Party's signature on this Lease shall be that
Party's address for delivery or mailing of notice purposes. Either Party may by
written notice to the other specify a different address for notice purposes,
except that upon Lessee's taking possession of the Premises, the Premises shall
constitute Lessee's address for the purpose of mailing or delivering notices to
Lessee. A copy of all notices required or permitted to be given to Lessor
hereunder shall be concurrently transmitted to such party or parties at such
addresses as Lessor may from time to time hereafter designate by written notice
to Lessee.
23.2 Any notice sent by registered or certified mail, return receipt
requested, shall be deemed given on the date of delivery shown on the receipt
card, or if no delivery date is shown, the postmark thereon. If sent by regular
mail the notice shall be deemed given forty-eight (48) hours after the same is
addressed as required herein and mailed with postage prepaid. Notices delivered
by United States Express Mail or overnight courier that guarantees next day
delivery shall be deemed given twenty-four (24) hours after delivery of the same
to the United States Postal Service or courier. If any notice is transmitted by
facsimile transmission or similar means, the same shall be deemed served or
delivered upon telephone confirmation of receipt of the transmission thereof,
provided a copy is also delivered via delivery or mail. If notice is received
on a Sunday or legal holiday, it shall be deemed received on the next business
day.
24. Waivers. No waiver by Lessor of the Default or Breach of any term,
covenant or condition hereof by Lessee, shall be deemed a waiver of any other
term, covenant or condition hereof, or of any subsequent Default or Breach by
Lessee of the same or of any other term, covenant or condition hereof. Lessor's
consent to, or approval of, any act shall not be deemed to render unnecessary
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the obtaining of Lessor's consent to, or approval of, any subsequent or similar
act by Lessee, or be construed as the basis of an estoppel to enforce the
provision or provisions of this Lease requiring such consent. Regardless of
Lessor's knowledge of a Default or Breach at the time of accepting rent, the
acceptance of rent by Lessor shall not be a waiver of any preceding Default or
Breach by Lessee of any provision hereof, other than the failure of Lessee to
pay the particular rent so accepted. any payment given Lessor by Lessee may be
accepted by Lessor on account of moneys or damages due Lessor, notwithstanding
any qualifying statements or conditions made by Lessee in connection therewith,
which such statements and/or conditions shall be of no force or effect
whatsoever unless specifically agreed to in writing by Lessor at or before the
time of deposit of such payment.
25. Recording. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees or taxes applicable thereto.
26. No Right To Holdover. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of
this Lease.
27. Cumulative Remedies. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible be cumulative with all other remedies at
or in equity.
28. Covenants and Conditions. All provisions of this Lease to be observed or
performed by Lessee are both covenants and conditions.
29. Binding Effect; Choice of Law. This Lease shall be binding upon the
parties, their personal representatives, successors and assigns and be governed
by the laws of the state in which the Premises are located. Any litigation
between the Parties hereto concerning this Lease shall be initiated in the
county in which the Premises are located.
30. Subordination; Attornment; Non-Disturbance.
30.1 Subordination. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "Security Device"), now or
hereafter placed by Lessor upon the real property of which the Premises are a
part, to any and all advances made on the security thereof, and to all renewals,
modifications, consolidations, replacements and extensions thereof Lessee agrees
that the lenders holding any such Security Device shall have no duty, liability
or obligation to perform any of the obligations of Lessor under this Lease, but
that in the event of Lessor's default with respect to any such obligation,
Lessee will give any Lender whose name and address have been furnished Lessee in
writing for such purpose notice of Lessor's default and allow such Lender thirty
(30) days following receipt of such notice for the cure of said default before
invoking any remedies Lessee may have by reason thereof. If any Lender shall
elect to have this Lease and/or any Option granted hereby superior to the lien
of its Security Device and shall give written notice thereof to lessee, this
Lease and such Options hslal be deemed prior to such Security Device,
notwithstanding the relative dates of the documentation or recordation thereof.
30.2 Attornment. Subject to the non-disturbance provisions of
Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who
acquires ownership of the Premises by reason of a foreclosure of a Security
Device, and that in the event of such foreclosure, such new owner shall not: (i)
be liable for any act or omission of any prior lessor or with respect to events
occurring prior to acquisition of ownership, (ii) be subject to any offsets or
defenses which Lessee might have against any prior
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lessor, or (iii) be bound by prepayment of more than one (1) month's rent.
30.3 Non-Disturbance. With respect to Security Devices entered into by
Lessor after the execution of this Lease, Lessee's subordination of this Lease
shall be subject to receiving assurance (a "non-disturbance agreement") from the
Lender that Lessee's possession and this Lease, including any options to extend
the term hereof, will not be disturbed so long as Lessee is not in Breach hereof
and attorns to the record owner of the Premises.
30.4 Self-Executing. The agreements contained in this Paragraph 30 shall
be effective without the execution of any further documents; provided, however,
that, upon written request from Lessor or a Lender in connection with a sale,
financing or refinancing of the Premises, Lessee and Lessor shall execute such
further writings as may be reasonably required to separately document any such
subordination or non-subordination, attornment and/or non-disturbance agreement
as is provided for herein.
31. Attorney's Fees. If any Party or Broker brings an action or proceeding to
enforce the terms hereof or declare rights hereunder, the Prevailing Party (as
hereafter defined) or Broker in any such proceeding action, or appeal thereon,
shall be entitled to reasonable attorney's fees. Such fees may be awarded in
the same suit or recovered in a separate suit, whether or not such action or
proceeding is pursued to decision or judgment. The term, "Prevailing Party"
shall include, without limitation, a Party or Broker who substantially obtains
or defeats the relief south, as the case may be, whether by compromise,
settlement, judgment, or the abandonment by the other Party or Broker of its
claim or defense. The attorney's fees award shall not be computed in accordance
with any court fee schedule, but shall be such as to fully reimburse all
attorney's fees reasonably incurred. Lessor shall be entitled to attorney's
fees, costs and expenses incurred in the preparation and service of notices of
Default and consultations in connection therewith, whether or not a legal action
is subsequently commenced in connection with such Default or resulting Breach.
32. Lessor's Access; Showing Premises; Repairs. Lessor and Lessor's agents
shall have the right to enter the Premises at any time, in the case of an
emergency, and otherwise at reasonable times for the purpose of showing the same
to prospective purchasers, lenders, or lessees, and making such alterations,
repairs, improvements or additions to the Premises or to the building of which
they are a part, as Lessor may reasonably deem necessary. Lessor may at any
time place on or about the premises or building any ordinary "For Sale" signs
and Lessor may at any time during the last one hundred twenty (120) days of the
term hereof place on or about the Premises any ordinary "For Lease" signs. All
such activities of Lessor shall be without abatement of rent or liability to
Lessee.
33. Auctions. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first having
obtained Lessor's prior written consent. Notwithstanding anything to the
contrary in this Lease, Lessor shall not be obligated to exercise any standard
of reasonableness in determining whether to grant such consent.
34. Signs. Lessee shall not place any sign upon the Premises, except that
Lessee may, with Lessor's prior written consent, install (but not on the roof)
such signs as are reasonably required to advertise Lessee's own business. The
installation of any sign on the Premises by or for Lessee shall be subject to
the provisions of Paragraph 7 (Maintenance, Repairs, Utility Installations,
Trade Fixtures and Alterations). Unless otherwise expressly agreed herein.
Lessor reserves all rights to the use of the roof and the right to install, and
all revenues from the installation, of such advertising signs on the Premises
including
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the roof, as do not unreasonably interfere with the conduct of Lessee's
business.
35. Termination; Merger. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by Lessee, shall automatically terminate any sublease or lesser estate in the
Premises; provided, however, Lessor shall, in the event of any such surrender,
termination or cancellation, have the option to continue any one or all of any
existing substances. Lessor's failure within ten (10) days following any such
event to make a written election to the contrary by written notice of any
existing subtenancies. Lessor's failure within ten (10) days following any such
event to make a written election to the contrary by written notice to the holder
of any such lesser interest, shall constitute Lessor's election to have such
event constitute the termination of such interest.
36. Consents.
(a) Except for Paragraph 33 hereof (Auctions) or as otherwise
provided herein, wherever in this Lease the consent of a Party is required to an
act by or for the other Party, such consent shall not be unreasonably withheld
or delayed. Lessor's actual reasonable costs and expenses (including but not
limited to architects', attorneys', engineers' or other consultants' fees)
incurred in the consideration of, or response to, a request by Lessee for any
Lessor consent pertaining to this Lease or the Premises, including but not
limited to consents to an assignment, a subletting or the presence or use of a
Hazardous Substance, practice or storage tank, shall be paid by Lessee to Lessor
upon receipt of an invoice and supporting documentation therefor. Subject to
Paragraph 12.2(e) (applicable to assignment or subletting), Lessor may, as a
condition to considering any such request by Lessee, require that Lessee deposit
with Lessor an amount of money (in addition to the Security Deposit held under
Paragraph 5) reasonably calculated by Lessor to represent the cost Lessor will
incur in considering and responding to Lessee's request. Except as otherwise
provided, any unused portion of said deposit shall be refunded to Lessee without
interest. Lessor's consent to any act, assignment of this Lease or subletting
of the Premises by Lessee shall not constitute an acknowledgement that no
Default or Breach by lessee of this Lease exists, nor shall such consent be
deemed a waiver of any then existing Default or Breach, except as may be
otherwise specifically stated in writing by Lessor at the time of such consent.
(b) All conditions to Lessor's consent authorized by this Lease
are acknowledged by Lessee as being reasonable. The failure to specify herein
any particular condition to Lessor's consent shall not preclude the imposition
by Lessor at the time of consent of such further or other conditions as are then
reasonable with reference to the particular matter for which consent is being
given.
37. Guarantor.
37.1 If there are to be any Guarantors of this Lease per Paragraph 1.11,
the form of the guaranty to be executed by each such Guarantor shall be in the
form most recently published by the American Industrial Real Estate Association,
and each said Guarantor shall have the same obligations as Lessee under this
Lease, including but not limited to the obligation to provide the Tenancy
Statement and information called for by Paragraph 16.
37.2 It shall constitute a Default of the Lessee under this Lease if any
such Guarantor fails or refuses, upon reasonable request by Lessor to give, (a)
evidence of the due execution of the guaranty called for by this Lease,
including the authority of the Guarantor (and of the party signing on
Guarantor's behalf) to obligate such Guarantor on said guaranty, and including
in the
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case of a corporate Guarantor, a certified copy of a resolution of its board of
directors authorizing the making of such guaranty, together with a certificate
of incumbency showing the signature of the persons authorized to sign on its
behalf, (b) current financial statements of Guarantor as may from time to time
be requested by Lessor, (c) a Tenancy Statement or a written confirmation that
the guaranty is still in effect.
38. Quiet Possession. Upon payment by Lessee of the rent for the Premises and
the observance and performance of all of the covenants, conditions and
provisions on Lessee's part to be observed and performed under this Lease,
Lessee shall have quiet possession of the Premises for the entire term hereof
subject to all of the provisions of this Lease.
39. Options.
39.1 Deleted.
39.2 Deleted.
39.3 Deleted
39.4 Effect of Default on Options.
(a) Lessee shall have no right to exercise an Option,
notwithstanding any provision in the grant of Option to the contrary; (i) during
the period commencing with the giving of any notice of Default under Paragraph
13.1 and continuing until the noticed Default is cured, or (ii) during the
period of time any monetary obligation due Lessor from Lessee is unpaid (without
regard to whether notice thereof is given Lessee), or (iii) during the time
Lessee is in Breach of this Lease, or (iv) in the event that Lessor has given to
Lessee three (3) or more notices of Default under Paragraph 13.1, whether or not
the Defaults are cured, during the twelve (12) month period immediately
preceding the exercise of the Option.
(b) The period of time within which an Option may be exercised
shall not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of Paragraph 39.4(a).
(c) All rights of Lessee under the provisions of an Option shall
terminate and be of no further force or effect, notwithstanding Lessee's due and
timely exercise of the Option, if, after such exercise and during the term of
this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee
for a period of thirty (30) days after such obligation becomes due (without any
necessity of Lessor to give notice thereof to Lessee), or (ii) Lessor gives to
Lessee three (3) or more notices of Default under Paragraph 13.1 during any
twelve (12) month period, whether or not the Defaults are cured, or (iii) if
Lessee commits a Breach of this Lease.
40. Multiple Buildings. If the Premises are part of a group of buildings
controlled by Lessor, Lessee agrees that it will abide by, keep and observe all
reasonable rules and regulations which Lessor may make from time to time for the
management, safety, care, and cleanliness of the grounds, the parking and
unloading of vehicles and the preservation of good order, as well as for the
convenience of other occupants or tenants of such other buildings and their
invitees, and that Lessee will pay its fair share of common expenses incurred in
connection therewith.
41. Security Measures. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.
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42. Reservations. Lessor reserves to itself the right, from time to time, to
grant, without the consent or joinder of Lessee, such easements, rights and
dedications that Lessor deems necessary, and to cause the recordation of parcel
maps and restrictions, so long as such easements, rights, dedications, maps and
restrictions do not unreasonably interfere with the use of the Premises by
Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to
effectuate any such easement rights, dedication, map or restrictions.
43. Performance Under Protest. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one Party to the other under the provisions
hereof, the Party against whom the obligation to pay the money is asserted shall
have the right to make payment "under protest" and such payment shall not be
regarded as a voluntary payment and there shall survive the right on the part of
said Party to institute suit for recovery of such sum. If it shall be adjudged
that there was no legal obligation on the part of said Party to pay such sum or
any part thereof, said Party shall be entitled to recover such sum or so much
thereof as it was not legally required to pay under the provisions of this
Lease.
44. Authority. If either Party hereto is a corporation, trust, or general or
limited partnership, each individual executing this Lease on behalf of such
entity represents and warrants that he or she is duly authorized to execute and
deliver this Lease on its behalf. If Lessee is a corporation, trust or
partnership, Lessee shall, within thirty (30) days after request by Lessor,
deliver to Lessor evidence satisfactory to Lessor of such authority.
45. Conflict. Any conflict between the printed provisions of this Lease and
the typewritten or handwritten provisions shall be controlled by the typewritten
or handwritten provisions.
46. Offer. Preparation of this Lease by Lessor or Lessor's agent and
submission of same to Lessee shall not be deemed an offer to lease to Lessee.
This Lease is not intended to be binding until executed by all Parties hereto.
47. Amendments. This Lease may be modified only in writing, signed by the
Parties in interest at the time of the modification. The parties shall amend
this Lease from time to time to reflect any adjustments that are made to the
Base Rent or other rent payable under this Lease. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by an institutional, insurance company, or pension plan Lender in
connection with the obtaining of normal financing or refinancing of the property
of which the Premises are a part.
48. Multiple Parties. Except as otherwise expressly provided herein, if more
than one person or entity is named herein as either Lessor or Lessee, the
obligations of such Multiple Parties shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or Lessee.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR SUBMISSION
TO YOUR ATTORNEY FOR HIS APPROVAL. FURTHER, EXPERTS SHOULD BE
CONSULTED TO EVALUATE THE CONDITION OF THE PROPERTY AS TO THE POSSIBLE
PRESENCE OF ASBESTOS, STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO
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REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL
ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKER(S) OR THEIR AGENTS OR
EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF
THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES; THE PARTIES SHALL RELY
SOLELY UPON THE ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL AND TAX
CONSEQUENCES OF THIS LEASE. IF THE SUBJECT PROPERTY IS LOCATED IN A STATE
OTHER THAN CALIFORNIA, AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS
LOCATED SHOULD BE CONSULTED.
The parties hereto have executed this Lease at the place on the dates specified
above to their respective signatures.
Executed at Lafayette, CA by LESSOR: /s/ Harry Locklin
By
Name Printed
Title
Address: 956 Reliez Station Lane
Lafayette, CA 94949
Tel. No. (510) 939-5666 Fax No. (510) 935-7678
by LESSEE: Affymetrix, a California Corporation
By: /s/ David B. Singer
Name Printed: David B. Singer
Title: President & Chief Executive Officer
By: /s/ Stephen P. A. Fodor
Name Printed: Stephen P. A. Fodor
3380 Central Expressway
Santa Clara, CA 95051
Tel No. (408) 522-6030 Fax No. (408) 481-0422
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National Semiconductor
September 13, 1994
Mr. Harry Locklin
956 Reliez Station Lane
Lafayette, CA 94949
Dear Harry,
In follow up to our conversation of September 12, 1994, I am confirming National
Semiconductor Corporation's (NSC) position on the physical condition of the
property upon termination of the lease November 31, 1994.
1. NSC will require a minimum of one (1) additional month to effectively
vacate. This will make the lease termination date December 31, 1994.
2. Recognizing the requirements of Building Departments and Government
Planning Agencies don't always coincide with private industry planning
criteria. I would like the flexibility of an additional month (January
1995) for a holdover if we cannot meet current schedules. I would give you
forty-five (45) days notice if I needed this flexibility.
3. Referencing letter of September 9, 1994 forwarded by Affymetrix (Dan
Lazare), NSC agrees to all provisions of the letter except the following
points - A to E.
OFFICE AREAS
A. All Projection Screens - NSC may remove one or two screens in the
reception area conference rooms.
B. NSC reserves the right to remove their conference room furniture in
the reception area rooms.
C. Other - NSC would prefer this work to be the responsibility of the
Owner or Affymetrix. NSC will perform the work, however, if an
alternate solution is not agreed upon between Owner and Affymetrix.
A. PLANS.
1. PRELIMINARY PLANS. Within thirty (30) days after execution of this
lease, Lessee shall, through an architect approved by Lessor, prepare plans and
specifications (the "Preliminary Plans") which shall indicate fully the specific
requirements of Lessee's space and the Tenant Improvements, as hereinafter
defined, required by Lessee, all adequate in scope to obtain a building permit
for construction of the Tenant Improvements. "Tenant Improvements" shall mean
all improvements to the reality which constitutes the Premises, including,
without any limitation, interior portions of the Leased Premises such as
interior partitions, the floor coverings, reflected ceiling plan, interior
painting, types of materials and colors to be used within the Leased Premises,
signs (if any), plumbing fixtures, electrical requirements and mechanical
requirements including the heating, ventilating and air conditioning
requirements of Lessee, modifications to increase sprinkler system capacities
and communications systems wiring plans, among other things.
The Preliminary Plans shall be subject to Lessor's prior written
approval (not to be unreasonably withheld), and
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within ten (10) business days after receipt of the Preliminary Plans, Lessor
shall notify Lessee of its approval or disapproval. Lessee's architect shall,
at Lessee's expense, revise the Preliminary Plans in accordance with Lessor's
objections and comments and resubmit them to Lessor within ten (10) days after
receipt of any disapproval by Lessor, in conformity with Lessor's comments.
2. FINAL PLANS. The Preliminary Plans, approved or as modified
pursuant to paragraph 1, are hereinafter referred to as the "Final Plans."
Collectively, the Preliminary Plans, Final Plans and all changes thereto are
hereinafter referred to as the "Plans."
B. CONSTRUCTION. Lessor, at its own cost and expense, as soon as practicable
after the Final Plans have been adopted and approved and all other conditions to
Lessor's Work (if any) have been fulfilled, and unless prevented or delayed by
conditions over which it has no control, will arrange for the performance of
Lessor's Work (if any) either by Lessor or by contract with a contractor of its
choice. If there is no Lessor's Work to be performed, Lessee will accept the
Premises in accordance with Paragraph D hereof and proceed with Lessee's Work
accordingly.
1. LESSOR'S WORK. Lessor's Work shall be limited to that described in
Schedule 1 attached hereto.
2. LESSEE'S WORK. Lessee's Work is described in Schedule 1 attached
hereto and shall be performed by Lessee at Lessee's sole cost and expense,
unless otherwise specifically provided in Schedule 2, if attached hereto.
C. CHANGE ORDERS. Any changes, modifications or alterations ("Change Orders")
requested by Lessee after approval of the Final Plans, shall be processed by the
Lessee's architect at Lessee's expense, and be subject to Lessor's prior written
approval.
Upon revision of the Plans to accommodate any requested Change Order,
Lessor shall proceed with Lessor's Work, if any, as changed, provided any
additional Construction Costs resulting therefrom shall be paid in full by
Lessee to Lessor prior to adoption of such change, modification or alteration.
No such changes, modifications or alterations in the Plans and no changes in the
construction required by the Plans shall be made without the written consent of
Lessor after written request therefor by Lessee. In the event Lessee rescinds
its request for a Change Order, Lessee shall remain liable for all increased
Construction Costs resulting from Lessor's processing of the requested Change
Order and any subsequent processing necessary to eliminate the Change Order from
Plans.
D. ACCEPTANCE OF LEASED PREMISES. Lessee agrees that upon substantial
completion of the Lessor's Work, if any, Lessee will accept the Premises. After
acceptance of the Premises by Lessee, Lessee shall save and hold Lessor harmless
from liability as provided in the Lease.
Upon acceptance of the Premises by Lessee, Lessee shall forthwith proceed
to perform all of Lessee's Work at its sole cost and expense as Lessee may
desire in order to prepare the Premises for Lessee's use thereof, provided any
such work to be performed by Lessee shall be performed in accordance with the
provisions set forth in the Lease regarding Alterations and only after receipt
of the approvals required by this Lease.
E. RULES IN RESPECT OF ALTERATIONS. All work performed by the Lessee shall be
subject to compliance with the provisions of that Article of the Lease dealing
with Alterations, except where expressly in conflict with the Exhibit B.
F. INSURANCE. Prior to the commencement of Lessee's Work and until completion
thereof, or commencement of the Lease Term, whichever is the last to occur,
Lessee shall effect and maintain
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Builder's Risk Insurance covering Lessor, Lessee and Lessee's contractors, as
their interest may appear, against loss or damage by fire, vandalism and
malicious mischief and such other risks as are customarily covered by a standard
"All Risk" policy of insurance protecting against all risk of physical loss or
damage to Lessee's Work in place and all materials stored at the site of
Lessee's Work, and all materials, equipment, supplies and temporary structures
of all kinds of incidental to Lessee's Work, and equipment, all while forming a
part of or contained in such improvements or temporary structures, or while on
the premises all to the actual replacement cost thereof at all times on a
completed value basis. Lessee shall provide Lessor with certificates, or at
Lessor's request, a copy of the policy, evidencing that such insurance is in
full force and effect and stating the term thereof. In addition, Lessee agrees
to indemnify and hold Lessor harmless against any and all claims for injury to
persons or damage to property by reason of the use of the Premises for the
performance of Lessee' Work, and claims, fines and penalties arising out of any
failure of Lessee or its agents, contractors and employees to comply with any
law, ordinance, code requirements, regulations or other requirements applicable
to Lessee's Work. Lessee agrees to require all contractors and subcontractors
engaged in the performance of Lessee's Work to effect and maintain and deliver
to Lessee and Lessor certificates evidencing the existence of, and covering
Lessor, Lessee and Lessee's contractors, prior to commencement of Lessee's Work
and until completion thereof, the following insurance coverages:
1. Worker's Compensation and Occupational Disease Insurance in
accordance with the laws of the State in which the work is performed, including
Employer's Insurance to the limit of ONE HUNDRED THOUSAND DOLLARS ($100,000.00).
2. Commercial General Liability Insurance (excluding "Automobile
Liability") with independent contractors, contractual liability and completed
operations endorsements, covering personal injury, including death, with a limit
of THREE MILLION DOLLARS ($3,000,000.00) for any one (1) occurrence and property
damage with a limit of ONE MILLION DOLLARS ($1,000,000.00) for any one (1)
occurrence or a combined single limit policy of THREE MILLION DOLLARS
($3,000,000.00) per occurrence.
3. Comprehensive Automobile Insurance, including "nonowned"
automobiles, against bodily injury, including death resulting therefrom, with
limits of ONE MILLION DOLLARS ($1,000,000.00) for any one occurrence and TWO
HUNDRED FIFTY THOUSAND DOLLARS ($250,000) property damage or a combined single
limit of ONE MILLION DOLLARS ($1,000,000.00).
4. Owner's protective liability coverage for an amount not less than
THREE MILLION DOLLARS ($3,000,000.00).
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ADDENDUM TO LEASE
This is an Addendum to that certain Standard Industrial/Commercial
Single-Tenant Lease (the "Form Lease") by and between Harry Locklin, as Lessor,
and Affymetrix, Inc., a California corporation, as Lessee, dated December 5,
1994. Should there be any conflict between the provisions of this Addendum and
the provisions of the Form Lease, the provisions of this Addendum shall control.
1. LESSEE'S INSPECTION:
a. INSPECTION: Subsequent to vacation of the Premises by NSC, but
within forty-five (45) days of the Early Possession Date Lessee may, at its own
risk and expense, upon reasonable notice to Lessor, and subject to such
conditions as Lessor may impose, conduct such reasonable soils and other
investigations on the Premises as Lessee may require. Lessee shall rely upon
its own inspections and its own professional advisors in its examinations of the
property and all improvements thereon. Lessee shall repair all damage to the
Premises resulting from Lessee's or Lessee's representatives coming upon the
Premises to perform such inspections, tests or analyses. Lessee shall indemnify,
defend by counsel acceptable to Lessor, and hold Lessor harmless from and
against any cost, claims, damages or liabilities, including but not limited to,
attorneys' fees and court costs that may arise in connection with any testing
done on the Premises. Lessee's obligations under this Paragraph 1 shall survive
termination of this Lease.
b. NOTICE: Within forty-five (45) days of the Early Possession Date,
Lessee shall notify Lessor in writing of any repair, replacements, and/or
alterations reasonably necessary to cause compliance with Paragraph 2 hereof.
2. CONDITION OF PREMISES:
a. Lessor will replace and/or repair all floor damage resulting from
equipment removal wear and tear from the previous Lessee. The cost of such
repair will not be deducted from the Allowance referenced in Schedule 2 of
Exhibit B hereof. Upon occupancy of the Premises by Lessee, the roof and all
building systems, including but not limited to HVAC, electrical and plumbing
systems, and the NSC Equipment described in this Addendum, shall be in good
condition. The Premises shall be delivered to Lessee in accordance with all
local and state codes and ordinances and comply with the Americans With
Disabilities Act ("ADA") requirements. In the event that the upgrades that
Lessee proposes causes increased requirements for ADA, that cost shall be the
sole responsibility of the Lessee. After Lessor has completed any items which
Lessee has identified as requiring repair, replacement or alteration in
accordance with Paragraph 1, or after forty-five (45) days from the Early
Possession Date without any notice from Lessee, Lessor shall have no further
obligation with respect thereto except as otherwise expressly
<PAGE>
provided in the Lease as amended by this Addendum. If at any time during the
term of the Lease the HVAC units need to be replaced, the Lessee shall only be
responsible for its prorata share of the unit's useful life (the term of the
Lease remaining divided by the expected life of the units).
b. ROOF: Lessor shall maintain the structural portions of the roof
and, provided Lessee has maintained the roof membrane as herein required, be
responsible for roof membrane replacement as and when required. Lessor shall
effect such repairs as are noted on Lessee's notice delivered pursuant to
Paragraph 1 hereof and thereafter Lessee shall maintain the roof membrane in
good condition, reasonable wear and tear and damage by fire and other casualty
excepted but shall not be required to replace the same unless replacement
becomes required as a result of improper maintenance. Lessee shall have access
to all appropriate past inspection records in Lessor's possession.
3. INSURANCE: Property insurance maintained by Lessor shall include
earthquake coverage but with respect to such earthquake coverage, Lessee shall
only be obligated to reimburse Lessor for 50% of that portion of the premium
applicable thereto. Lessee shall have the right to review and reasonably
approve the property insurance maintained by Lessor for compliance with the
terms of this Lease and with respect to the amount of the deductible provided
therein.
4. OPERATING EXPENSES: Except to the extent that the Form Lease or this
Addendum expressly provides that Lessor shall pay such expenses, Lessee shall be
responsible for all operating expenses of the Premises.
5. RENT SCHEDULE:
MONTHS LEASE RATE/MONTH PER SQ. FT.
------ ---------------- -----------
01-30 $14,992.50 $.75 NNN
31-60 $15,992.00 $.80 NNN
6. OPTION TO EXTEND THE TERM:
a. NOTICE OF EXERCISE. Provided that Lessee is not in Breach of this
Lease at the time of exercise, Lessee shall have two options to extend the
initial term hereof for additional and consecutive periods of three (3) years
each upon the same terms and conditions as stated herein, except for Minimum
Monthly Rent. The number of additional periods shall be reduced by one for each
option that is exercised. Each such extension is herein referred to as an
"Extended Term." Failure to timely exercise the first option hereunder shall
cause both options to become immediately null and void. Lessee must exercise
its right, if at all, by written notification (the "Notice of Exercise") to
Lessor not less than six (6) months prior to the expiration of the initial term
hereof, or the then current Extended Term, if any.
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b. OPTIONS ARE NOT PERSONAL. In the event that Lessee assigns its
interest under the Lease as permitted hereunder, Lessee shall have the right to
assign the Option to such assignee and in the event Lessee sublets all or part
of the Premises as permitted hereunder, Lessee shall continue to have the right
to exercise its Option.
c. STRICT COMPLIANCE. Lessor grants the rights contained herein to
Lessee in consideration of Lessee's strict compliance with the provisions
hereof, including, without limitation, the manner of exercise of this option.
d. FAIR MARKET RENTAL. If Lessee exercises the right to extend the
term then the Minimum Monthly Rent shall be adjusted to equal the Fair Market
Rental for the premises as of the date of the commencement of each such Extended
Term, pursuant to the procedures hereinafter set forth. In determining the
"Fair Market Rental" for the Leased Premises the following factors applicable to
the Leased Premises or any comparable premises shall be considered:
i. Rental rates being charged for comparable premises in the
same geographical location.
ii. The relative locations of the comparable premises.
iii. The fact that Lessor will be providing no improvement
allowance.
iv. Rental adjustments, if any, or rental concessions.
v. Services and utilities provided or to be provided.
vi. Use limitations or restrictions.
vii. Any other relevant Lease terms or conditions.
viii. The fact that Lessor will not be paying a
commission.
The Minimum Monthly Rent payable during the pendency of any
appraisal period shall continue to be the Minimum Monthly Rent payable at the
end of the previous Term.
e. DETERMINATION OF FAIR MARKET RENTAL. Upon exercise of the right to
extend the term, and included within the Notice of Exercise, Lessee shall notify
Lessor of its opinion of Fair Market Rental as above defined for the Extended
Term. If Lessor disagrees with Lessee's opinion of the Fair Market Rental, it
shall so notify Lessee ("Lessor's Value Notice") within thirty (30) days after
receipt of Lessee's Notice of Exercise.
f. APPRAISAL. If the parties cannot resolve any disagreement regarding
the Fair Market Rent within ten (10) days after receipt by Lessee of Lessor's
Value Notice, then, within
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twenty (20) days after Lessee's receipt of Lessor's Value Notice, Lessor and
Lessee each, and by giving notice to the other party, shall appoint a real
estate appraiser with at least five (5) years' full-time appraisal experience in
the geographical area of the Premises and with the leasing of properties of a
similar use as the Premises (i.e. research, development and production) to
appraise and set the Fair Market Rental for the Extended Term. If either Lessor
or Lessee does not appoint an appraiser within twenty (20) days after the other
party has given notice of the name of its appraiser, the single appraiser
appointed shall be the sole appraiser and shall set the Fair Market Rental for
the Extended Term. If two (2) appraisers are appointed by Lessor and Lessee
they shall meet promptly and attempt to set the Fair Market Rental for the
Extended Term. If the two (2) appraisers are unable to agree within thirty (30)
days after the second appraiser has been appointed, they shall select a third
appraiser meeting the qualifications stated hereinabove within ten (10) days
after the last day the two (2) appraisers are given to set the Fair Market
Rental. The third appraiser shall be a person who has not previously acted in
any capacity for either Lessor or Lessee. The cost of appointing all of the
appraisers shall be shared equally by the parties. Within thirty (30) days
after the selection of the third appraiser, a majority of the appraisers shall
set the Fair Market Rental for the Extended Term. If a majority of the
appraisers is unable to set the Fair Market Rental within the stipulated period
of time, the three (3) appraisals shall be added together and their total
divided by three (3); the resulting quotient shall be the Fair Market Rental for
the Premises during the Extended Term. However, if the low appraisal is more
than ten percent (10%) lower than the middle appraisal, the low appraisal shall
be disregarded; if the high appraisal is more than ten percent (10%) higher than
the middle appraisal, the high appraisal shall be disregarded. If only one (1)
appraisal is disregarded, the remaining two (2) appraisals shall be added
together and their total divided by two (2); the resulting quotient shall be the
Fair Market Rental for the Premises during the Extended Term. If both the low
appraisal and the high appraisal are disregarded as stated hereinabove, the
middle appraisal shall be the Fair Market Rental for the Premises during the
Extended Term. After the Fair Market Rental for the Extended Term has been set,
the appraisers immediately shall notify Lessor and Lessee, and Lessor and Lessee
immediately shall execute an amendment to the Lease stating the Fair Market
Rental.
7. EXISTING EQUIPMENT TO REMAIN IN FACILITY: Lessor has received, in the form
of Exhibit A attached (see letters of September 9, 1994 and September 13, 1994),
a commitment from National Semiconductor Corporation ("NSC") that, on their
departure from the Premises, they will leave all mechanical and electrical
equipment in place and operating. Such equipment shall include an air
compressor(s), vacuum pump(s), process cooling water equipment ("NSC
Equipment"), deionized water system, acid waste treatment system, all roof top
equipment, 50 Herz generator & panel, all standard laboratory chemical benches
and fume hoods. Lessor shall request NSC to leave one half of
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the office cubicles and furniture in the facility. Lessor shall request that
all disconnections from NSC Equipment be made in a neat, workmanlike manner with
no loose or dangling wires and no hacksawed, cut or hammered pipes.
In the event that NSC does not abide by its commitment to leave all
mechanical and electrical equipment in place and operating, Lessee shall have
the right, as its sole remedy, exercisable within thirty (30) days after the
Early Possession Date, to terminate the Lease without any liability to Lessor.
8. INFORMATION AND REQUEST FROM PRIOR LESSEE: Lessor shall request that NSC
provide Affymetrix with the following information:
a. Operating and maintenance manuals for all equipment left in the
building.
b. Written preventive maintenance and repair records and identity of
contractors, if any, who performed such work.
c. Copies of building permits and inspections and copies of
decommissioning documents.
9. SIGNAGE/GRAPHICS: Lessee will have the right to display its corporate name
and logo on the face of the structure and at various locations surrounding the
building as long as Lessee is in compliance with ordinances of the City of
Sunnyvale. Lessee shall repair any damages made to the Premises due to the
installation, maintenance and/or removal of such signs.
10. RIGHTS TO ASSIGN OR SUBLEASE: Lessee shall have the right to assign all or
any portion of its interest under this Lease or sublet the entire Premises
without Lessor's consent to any parent, wholly-owned, subsidiary or affiliate of
Lessee, any party which results from any merger, consolidation or other business
organization of Lessee, and/or any party which acquires all or substantially all
the assets or stock of Lessee; provided, however, that Lessee shall give Lessor
at least thirty (30) days' prior written notice thereof; that Lessee shall not
be released from its obligations under the lease by reason of any such
assignment; that the Transferee have a net worth at least equal to that of
Affymetrix at lease execution; and that the Transferee has sufficient working
capital to meet all lease obligations as they accrue.
11. NO REPRESENTATIONS: Lessee acknowledges that Lessor's Broker has not made
any independent investigation of the Premises or determination with respect to
the physical and environmental condition of the Premises including without
limitation the existence of any underground tanks, pumps, piping, toxic or
hazardous substances on the Premises.
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Likewise, no investigation has been made to ensure compliance with the
"American With Disabilities Act" (ADA). This Act may require a variety of
changes to a facility, including potential removal of barriers to access by
disabled persons and provision of auxiliary aids and services for hearing,
vision or speech impaired persons. Lessee is advised to obtain independent
legal and technical advise with respect to the physical and environmental
condition and ADA compliance of the Premises. Lessee agrees that it will rely
solely on its own investigations and/or that of a licensed professional
specializing in such matters and not on Lessor's Broker. Lessor's Broker does
not represent or warrant the accuracy or completeness of any documents or
information reviewed or received by any of the parties in connection with this
transaction, including reports, structural, geological or engineering studies,
and plans and specifications. Except as expressly provided herein, Lessor makes
no representation or warranty as to the Premises or the condition thereof, or
the suitability for Lessee's use or compliance with governmental regulations.
12. CONTINGENCY: Lessee's improvement of the Premises in accordance with plans
approved by Lessor is subject to the receipt of permits from the City of
Sunnyvale. Promptly after approval of its plans by Lessor, Lessee shall apply
for such permits and diligently pursue such application. If such permits are
not received by February 28, 1995, Lessee may thereafter terminate this Lease
upon notice to the Lessor given not later than March 31, 1995.
13. EXPIRATION DATE: Notwithstanding Section 1.3 of the Form Lease to the
contrary, if the Commencement Date occurs after May 1, 1995, the Expiration Date
shall occur five (5) years and zero (0) months after the Commencement Date.
(Therefore, for example, if the Commencement Date does not occur until June 1,
1995, then the Expiration Date shall be May 31, 2000.)
14. NOTICE OF DELIVERY OF EARLY POSSESSION; COMMENCEMENT DATE MEMORANDUM:
Lessor shall provide ten (10) business days prior written notice to Lessee in
the event that Lessor desires to deliver possession of the Premises to Lessee
prior to February 1, 1995. Further, within ten (10) days after delivery the
parties shall execute a memorandum setting forth the Commencement Date and
Expiration Date of the Lease.
15. REAL ESTATE BROKERS: The following information is specified to clarify
Section 1.10 of the Form Lease:
Lessor has dealt exclusively with Jim Binsacca at Cornish & Carey
Commercial Oncor International. Lessee has dealt exclusively with R. Randolph
Scott at Cornish & Carey Commercial Oncor International and Mark Pearson at
Catalyst Real Estate Group.
16. DELAY IN POSSESSION: Notwithstanding Section 3.3 of the Form Lease to the
contrary, and in addition to any termination
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rights Lessee may have thereunder, if possession of the Premises is not
delivered to Lessee by March 1, 1995, Lessee shall have the right, as its sole
remedy, to terminate this Lease.
17. HAZARDOUS SUBSTANCE: For the purposes of the Lease "Hazardous Substance"
shall mean and include any hazardous or toxic substance, material or waste which
is or becomes regulated by any local governmental or regulatory authority, the
state of California or the United States government. Lessor makes the following
representations and warranties to Lessee as of the date of the Lease (which
representations and warranties will survive the termination of the Lease) with
respect to Hazardous Substances: (i) except as disclosed in the letter of
Advanced Safety Applications, Inc. dated September 13, 1983 addressed to James
Schlosser of Printed Circuits International, Inc. which was delivered to Lessee
by Lessor, to Lessor's actual knowledge without inquiry there is no
contamination from any Hazardous Substances on the Premises; (ii) to Lessor's
actual knowledge without inquiry, the Premises is in compliance with all laws
relating to Hazardous Substances including, but not limited to, those relating
to soil and groundwater conditions; (iii) there are no claims or actions pending
or threatened against Lessor or any portion of the Premises by any governmental
entity or agency or any other person or entity relating to Hazardous Substances
or pursuant to laws concerning Hazardous Substances; (iv) there is to Lessor's
actual knowledge without inquiry no occurrence or condition on any other real
property that could cause the Premises or any part thereof to be otherwise
subject to any restrictions on ownership, occupancy, transferability or use
which would interfere with Lessee's intended use thereof as proposed in this
Lease under any laws concerning Hazardous Substances.
a. Lessor shall indemnify, protect, defend and hold harmless Lessee,
its directors, officers, employees, and agents, and any assignees, subtenants,
or successors to Lessee's interest in the Premises and their directors,
officers, employees, and agents, from and against any and all damages,
liabilities, judgments, costs, claims, liens, expenses and penalties including
reasonable attorneys' fees arising out of or attributable to the use,
generation, production, maintenance, storage, disposal, discharge, release, or
transportation of Hazardous Substances on the Premises prior to the date of
delivery of the Premises; and from and against the cost of any investigation,
removal, remediation, restoration or abatement thereof. Nothing herein
contained shall make Lessor responsible for Lessee's business interruption or
loss of profits under the provisions of this indemnity.
b. If any such investigation, removal, remediation, restoration or
abatement or similar action is required by any governmental authority ("Remedial
Activity"), and such action requires that Lessee be closed for business or
access be denied in whole or in part for greater than a twenty-four (24) hour
period, then:
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i. If the Remedial Activity materially interferes with Lessee's
production, such as the loss of the use of the production floor and systems that
support production activity ("Essential Activities") all payments due under the
Lease, including Base Rent, shall be abated entirely during the period beyond
twenty-four (24) hours and if the closure or denial of access persists in excess
of sixty (60) days then Lessee shall have the right to terminate the Lease.
ii. If the Remedial Activity materially interferes with Lessee's
use which is not an Essential Activity all payments due under the Lease,
including Base Rent, shall be abated (on a square footage basis) only to the
extent that Lessee is deprived of the use of a portion of the Premises during
the period beyond twenty-four (24) hours and if the closure or denial of access
persists in excess of one hundred twenty (120) days then Lessee shall have the
right to terminate the Lease.
c. Notwithstanding any provision of the Lease to the contrary, Lessee
shall have no obligation whatsoever, including no financial obligations, with
respect to or otherwise attributable to the use, generation, production,
maintenance, storage, disposal, discharge, release or transportation of
Hazardous Substances on neighboring properties unless caused by Lessee.
18. CAPITAL IMPROVEMENTS: Notwithstanding Section 7.1 of the Form Lease to the
contrary, the cost of each capital expenditure made for reasonably necessary (as
opposed to elective) repairs and/or replacements to the parking lot or the HVAC
systems made by Lessee shall be amortized over the period of its useful life and
Lessor shall be responsible to pay upon demand by Lessee the amortized portion
attributable to any period after expiration of the Term. For the purposes of
calculating Lessor's obligations hereinabove the Term shall not be deemed to
include any then unexercised Option terms. In the event that Lessee exercises
an Option to extend the Term after any payment by Lessor hereunder has already
taken place, the parties shall recalculate Lessor's obligation and the
appropriate amount shall be returned to Lessor, upon the exercise of such Option
to extend.
19. ALTERATIONS: Notwithstanding Section 7.3 of the Form Lease to the
contrary, Lessee may make any Alterations in, on, under or about the Premises
without Lessor's prior written consent provided that the cumulative cost thereof
in any calendar year does not exceed $50,000 and provided further that such
Alterations are not Utility Installations, do not affect the structural portions
of the Premises or the exterior of the building.
20. REMOVAL OF TENANT IMPROVEMENT WORK: Notwithstanding any provision of
Section 7.4 of the Form Lease to the contrary, Lessee shall not be obligated to
remove from the Premises at the expiration of the Term any part of its initial
improvements approved by Lessor, including the Tenant Improvement Work
-8-
<PAGE>
identified in Schedules 1 and 2 to the Addendum. As to any alterations or
additions during the Term of the Lease, Lessee shall be obligated to remove the
same only if Lessor has specified such removal at the time that required consent
of the Lessor to such alterations or additions is sought and obtained.
21. EXEMPTION OF LESSOR FROM LIABILITY: Lessor's exemption from liability in
Section 8.8 of the Form Lease shall not extend to any injury or damage to the
extent attributable to the negligence or wilful misconduct of Lessor or its
breach of the Lease.
22. REPAIR OF PARTIAL DAMAGE TO PREMISES:
a. Notwithstanding Section 9.6 of the Form Lease to the contrary,
Lessor's repair of Premises Partial Damage pursuant to Section 9.2 of the Form
Lease shall be completed no later than one hundred fifty (150) days after the
date of occurrence of the damage subject to delays beyond the reasonable control
of Lessor including strikes, acts of God, extraordinary weather conditions and
the like. If within thirty (30) days after the occurrence of the damage Lessee
reasonably estimates that the repair of the damage will take more than 150 days
to repair, Lessee shall have the right to terminate this Lease as of the date of
the damage by notice in writing to Lessor delivered within such thirty (30) day
period.
b. The provisions of Section 9.2 are limited to the extent that Lessee
shall not be required to contribute more than 50% of the deductible amount of
the property insurance policy toward the cost of repair or restoration, and
Lessor shall contribute the balance.
23. LESSOR'S OBLIGATION OF REMEDIATION: Notwithstanding provision (ii) of
Section 9.7 of the Form Lease to the contrary, Lessor shall bear the full cost
of investigation and remediation of any Hazardous Substance condition, and
Lessor shall have no right to terminate the Lease in connection therewith, if
such Hazardous Substance condition is attributable to, in whole or in part,
Hazardous Substances which were in existence in, on or under the Premises on or
prior to the date of delivery thereof.
24. PAYMENT OF TAXES: Lessor and Lessee agree that during the Term Lessee
shall make advance payments of Real Property Taxes along with payments of Base
Rent as provided in Section 10.1(b) of the Form Lease.
25. CURE PERIOD FOR CERTAIN DEFAULTS: The ten (10) day cure period for certain
defaults specified in the final line of Section 13.1(c) of the Form Lease shall
be replaced with the number fifteen (15).
26. MORTGAGEE NON-DISTURBANCE: Within Thirty (30) days following the full
execution of the Lease by both parties thereto, Lessor shall use its best
efforts to obtain a non-disturbance and recognition agreement from each present
mortgagee
-9-
<PAGE>
of Lessor having rights in the Premises appear to those of Lessee under this
Lease which agreement shall be reasonably acceptable to Lessee. Said agreement
shall provide, at a minimum, that Lessee's use and enjoyment of the Premises
shall not be disturbed so long as Lessee is not in Breach of the Lease. Lessee
shall have the right to terminate this lease if the non-disturbance agreement
has not been obtained within sixty (60) days of the execution of this lease.
27. NO GROUND LEASE: Lessor warrants that there is no ground lease in effect
with respect to the Premises.
28. LESSOR ACCESS: Notwithstanding any provision of Section 32 of the Form
Lease to the contrary, except in an emergency Lessor must provide reasonable
advance notice to Lessee of its desire to enter the Premises. Such entry (other
than in emergencies) may occur only during reasonable business hours as
determined by Lessee in its sole discretion. Any entry shall be for a
reasonable period of time only and shall cause as little interference to Lessee
and its business as reasonably necessary. Lessor acknowledges that Lessee may
impose reasonable security measures on or otherwise limit or restrict Lessor's
access to certain portions of the Premises in order to protect proprietary or
confidential information used by Lessee and its business provided however,
Lessor may obtain access to such restricted areas for legitimate business
purposes for persons who are not competitors of Lessee provided such non
competitors shall sign a confidentiality agreement in form and substance
reasonably satisfactory to Lessee.
29. RETURN OF DEPOSITS: Should this lease be terminated by either party as
permitted herein, Lessor promptly shall return to Lessee all payments and
deposits theretofore made by Lessee to Lessor.
LESSOR: HARRY LOCKLIN LESSEE: AFFYMETRIX
By: /S/ HARRY P. LOCKLIN By: /S/ DAVID B. SINGER
-------------------- -------------------
Date: 12/11/94 Its: PRESIDENT
---------- -------------
By: /S/ STEPHEN P. A. FODOR
--------------------------
Its: PRESIDENT
--------------------------
Date: 12/6/94
-----------
-10-
<PAGE>
SCHEDULE 1
LESSOR'S WORK: Except as to any work which is required to place the Premises
in the condition required for delivery as set forth in the
Lease, Lessor shall not be responsible for any work
whatsoever with respect to the Leased Premises. Lessee
agrees that, subject to the provisions of the Lease and
Addendum thereto, (i) it shall accept the Leased Premises in
AS-IS condition as of the date Lessee takes possession of the
Leased Premises with Lessor's consent; (ii) Lessor shall have
no responsibility to make any Tenant Improvements which may
be required to prepare the Leased Premises for Lessee's use;
(iii) Lessee, at its sole cost and expense, shall complete
any Tenant Improvements which may be required upon the Leased
Premises prior to Lessee's initial opening for business; and
(iv) all such Tenant Improvements shall be completed in
accordance with all applicable City, County, and State laws,
ordinances, rules and regulations relating thereto.
LESSEE'S WORK: Lessee shall cause to be prepared and submitted to Lessor for
its approval plans for Lessee's improvements to the Premises
("Tenant Improvements"). Lessor shall promptly approve or
disapprove such plans and Lessee shall make all changes which
may reasonably be requested by Lessor. When such plans have
been approved by Lessor they shall be referred to herein as
the Final Plans. Lessee's Work shall consist of all work
described in the Final Plans and any other work which is
approved by the Lessor or which may be required by Lessee or
governmental authority, or which may be necessary to ready
the Leased Premises for Lessee's occupancy.
-1-
<PAGE>
SCHEDULE 2
Lessor shall reimburse Lessee for all Construction Costs incurred by Lessee
in the construction of the Tenant Improvements, but not in any event to exceed
the sum of Ninety Thousand Dollars ($90,000), hereinafter referred to as the
"Improvement Allowance." The term "Construction Costs" shall mean building
permit fees and the amount of the contract for labor and materials paid to third
party contractors or subcontractors in the building trades for Tenant
Improvements. Construction Costs shall exclude all other costs and, further,
shall exclude costs that might otherwise be considered to be Construction Costs
but which are for professional services, insurance or bonds, licenses,
inspection, soils reports, signs, equipment, trade fixtures, interior
decorations, other improvements which are not of a permanent nature or which are
unique to Lessee's use and not readily usable by another tenant, nor utility
hook-up fees.
Upon Lessor's approval of Final Plans and following issuance of necessary
building permits, Lessor shall pay to Lessee the sum of Forty-Five Thousand
Dollars ($45,000) on account of the Improvement Allowance. The balance of the
Improvement Allowance shall be paid within thirty (30) days thereafter.
a. Following completion of the Tenant Improvements Lessee shall do the
following:
i. Certify to Lessor that the total cost of Lessee's Work equals
or exceeds the Improvement Allowance and deliver such evidence thereof as Lessor
shall reasonably request.
ii. Cause the Leased Premises to be discharged and released from
any and all claims or liens that may have accrued from the performance of
Lessee's Work.
iii. Deliver to Lessor or its designee copies of all guarantees
and warranties relating to the work performed.
iv. Deliver a written guaranty to Lessor from Lessee, and
certificate from Lessee's architect, that all work has been substantially
performed in accordance with the Final Plans, as amended by approved change
orders, if any.
v. Deliver to Lessor a copy of the certificate of Occupancy
issued by the appropriate governmental agency, if any.
vi. Furnish Lessor with one (1) set of as-built plans which
incorporate all changes in the Final Plans made during the course of
construction, and which accurately describe the work as in fact built.
b. If at any time during the progress of the work or before the final
payment is made any lien or claim of lien is filed or notification to withhold
money for labor or material
-2-
<PAGE>
furnished by Lessee or the contractor is served on Lessor, Lessor shall have the
right to withhold from any payment otherwise due Lessee an amount sufficient to
discharge any and all such liens or claims. Documentation in form satisfactory
to Lessor that such liens or claims have been released must be furnished to
Lessor by Lessee or Lessee's contractor before the retained money will be paid
to Lessee, or if Lessee or its contractor have not settled the liens or claims
within a reasonable time, not to exceed ten (10) business days, from and after
the date on which such lien or claim is made, Lessor shall have the right, but
not the obligation, to discharge any or all such liens or claims out of the
withheld money.
-3-
<PAGE>
EXHIBIT 11.1
AFFYMETRIX, INC.
STATEMENT OF COMPUTATION OF NET LOSS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED
------------------------------- MARCH 31,
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net loss................................................... $ (5,592) $ (9,680) $ (10,747) $ (2,174) $ (3,921)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Historical primary and fully diluted number of shares:
Weighted average common shares........................... 19 398 409 408 409
Shares related to SAB Topic 4D:
Common shares.......................................... 201 201 201 201 201
Stock options and warrants............................. 1,424 1,424 1,424 1,424 1,424
Preferred shares....................................... 5,778 5,778 5,778 5,778 5,778
--------- --------- --------- --------- ---------
Shares used in computing net loss per share................ 7,422 7,801 7,812 7,811 7,812
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net loss per share......................................... $ (0.75) $ (1.24) $ (1.38) $ (0.28) $ (0.50)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Pro forma number of shares:
Weighted average common shares........................... 19 398 409 408 409
Shares related to SAB Topic 4D:
Common shares.......................................... 201 201 201 201 201
Stock options and warrants............................. 1,424 1,424 1,424 1,424 1,424
Preferred shares....................................... 5,778 5,778 5,778 5,778 5,778
Convertible preferred shares, as if converted............ 3,293 9,852 9,852 9,852 9,852
--------- --------- --------- --------- ---------
Shares used in computing pro forma net loss per share...... 10,715 17,653 17,664 17,663 17,664
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Pro forma net loss per share............................... $ (0.52) $ (0.55) $ (0.61) $ (0.12) $ (0.22)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Financial Data" and "Experts" and to the use of our report dated February 9,
1996 (except for the first paragraph of Note 9, as to which the date is
, 1996), in Amendment No. 2 to the Registration Statement (Form S-1
No. 333-3648) and related Prospectus of Affymetrix, Inc. for the registration of
5,750,000 shares of its common stock.
ERNST & YOUNG LLP
Palo Alto, California
, 1996
--------------------------------------------------------------------------------
The foregoing consent is in the form that will be signed upon the completion of
the reverse stock split described in Note 9 to the financial statements.
/s/ Ernst & Young LLP
Palo Alto, California
May 20, 1996
<PAGE>
EXHIBIT 23.3
CONSENT OF TOWNSEND AND TOWNSEND AND CREW LLP
We consent to the reference to our firm under the caption "Experts" in
the Registration Statement (Form S-1) and related Prospectus of Affymetrix,
Inc. for the registraion of 5,750,000 shares of its common stock.
TOWNSEND AND TOWNSEND AND CREW LLP
By: /s/ Paul C. Haughey
------------------------------------
Paul C. Haughey
Partner
Palo Alto, California
May 20, 1996
<PAGE>
EXHIBIT 24.3
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints John D. Diekman, Ph.D. and Kenneth J. Nussbacher,
or either of them, each with the power of substitution, his attorney-in-fact, to
sign any amendments to this Registration Statement (including post-effective
amendments), and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form S-1 has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<C> <S> <C>
SIGNATURE CAPACITY DATE
----------------------------------------------------- ------------------------------------------ ---------------
Director, and Chief Executive
------------------------------------------ Officer (Principal Executive Officer) May , 1996
John D. Diekman, Ph.D.
------------------------------------------ Director and President May , 1996
Stephen P.A. Fodor, Ph.D.
------------------------------------------ Director May , 1996
Paul Berg, Ph.D.
------------------------------------------ Director May , 1996
Douglas M. Hurt
------------------------------------------ Director May , 1996
Vernon R. Loucks, Jr.
/s/ BARRY C. ROSS, PH.D.
------------------------------------------ Director May 10, 1996
Barry C. Ross, Ph.D.
------------------------------------------ Director May , 1996
David B. Singer
------------------------------------------ Director May , 1996
John A. Young
------------------------------------------ Director May , 1996
Alejandro C. Zaffaroni, Ph.D.
Chief Financial Officer
------------------------------------------ (Principal Financial and May , 1996
Kenneth J. Nussbacher Accounting Officer)
</TABLE>
