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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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Commission file number 0-28218
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AFFYMETRIX, INC.
(Exact name of registrant as specified in its charter)
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CALIFORNIA 77-0319159
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3380 CENTRAL EXPRESSWAY, SANTA CLARA, CALIFORNIA 95051
(Address of principal executive offices) (Zip Code)
</TABLE>
(408) 731-5000
(Registrant's telephone number including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, no par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. /X/ Yes / / No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value of voting stock held by non-affiliates of the
registrant (based on the closing price for the Common Stock on the Nasdaq
National Market on March 16, 1998) was approximately $473.5 million. As of March
16, 1998, 22,857,488 shares of Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Company's Financial Statements and Management's Discussion and Analysis
of Financial Condition and Results of Operations for the year ended December 31,
1997 are incorporated by reference into Parts II and IV of this Form 10-K Report
and are filed as Exhibit 13 to this Form 10-K Report.
Certain sections of the Proxy Statement to be filed in connection with the
1998 Annual Meeting of Shareholders are incorporated by reference into Part III
of this Form 10-K Report where indicated.
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AFFYMETRIX, INC.
FORM 10-K
DECEMBER 31, 1997
TABLE OF CONTENTS
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ITEM PAGE NO.
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PART I
1. Business.......................................... 3
2. Properties........................................ 30
3. Legal Proceedings................................. 30
4. Submissions of Matters to a Vote of Security
Holders......................................... 30
PART II
5. Market for Registrant's Common Equity and Related
Shareholder Matters............................. 31
6. Selected Financial Data........................... 31
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............. 32
8. Financial Statements and Supplementary Data....... 32
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............. 33
PART III
10. Directors and Executive Officers of the
Registrant...................................... 33
11. Executive Compensation............................ 33
12. Security Ownership of Certain Beneficial Owners
and Management.................................. 33
13. Certain Relationships and Related Transactions.... 33
PART IV
14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K............................. 34
Signatures........................................ 36
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PART I
ITEM 1. BUSINESS
ALL STATEMENTS IN THIS ANNUAL REPORT ON FORM 10-K THAT ARE NOT HISTORICAL
ARE FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO CERTAIN RISKS AND
UNCERTAINTIES. SUCH STATEMENTS ARE BASED ON MANAGEMENT'S CURRENT EXPECTATIONS
AND ARE SUBJECT TO A NUMBER OF FACTORS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE DESCRIBED IN THE FORWARD-LOOKING
STATEMENTS. THE COMPANY CAUTIONS INVESTORS THAT THERE CAN BE NO ASSURANCE THAT
ACTUAL RESULTS OR BUSINESS CONDITIONS WILL NOT DIFFER MATERIALLY FROM THOSE
PROJECTED OR SUGGESTED IN SUCH FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS
FACTORS, INCLUDING, BUT NOT LIMITED TO, THE RISK FACTORS DISCUSSED IN THIS
ANNUAL REPORT ON FORM 10-K. AFFYMETRIX EXPRESSLY DISCLAIMS ANY OBLIGATION OR
UNDERTAKING TO RELEASE PUBLICLY ANY UPDATES OR REVISIONS TO ANY FORWARD-LOOKING
STATEMENTS CONTAINED HEREIN TO REFLECT ANY CHANGE IN AFFYMETRIX' EXPECTATIONS
WITH REGARD THERETO OR ANY CHANGE IN EVENTS, CONDITIONS, OR CIRCUMSTANCES ON
WHICH ANY SUCH STATEMENTS ARE BASED.
Affymetrix is recognized as a worldwide leader in the field of DNA chip
technology. The Company has developed and intends to establish its
GeneChip-Registered Trademark- 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, a
scanner and other instruments to process the probe arrays, and software to
analyze and manage genetic information from the probe arrays. The Company
commenced commercial sales of the GeneChip system for research use in April 1996
and currently sells its products to pharmaceutical and biotechnology companies,
academic research centers and clinical reference laboratories.
BACKGROUND
GENES AND DISEASE
The entire genetic content of an organism is known as its genome. DNA is the
molecule that makes up genes and encodes 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 bases on the other strand. Only certain pairs of
nucleotide bases can form these bonds: C always pairs with G, and A always pairs
with T. Such paired DNA strands are said to be complementary. When two DNA
strands are complementary, they can bind together to form a double helix in a
process called hybridization. The Company's GeneChip technology relies on this
principle of hybridization to analyze complex genetic information.
Cells carry out their normal biological functions through the genetic
instructions encoded in their DNA. This genetic 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. An organism's characteristics are thus ultimately determined
by proteins encoded by its DNA.
Increased awareness of the role of genes in regulating the functions of
living organisms has generated a worldwide effort to identify and sequence genes
of many organisms, including the estimated three billion nucleotide pairs and
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 and role in disease of each of these genes. This research,
commonly referred to as genomics, is expected to lead to a new health care
paradigm where disease is
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understood at the molecular level, allowing patients to be diagnosed according
to their genetic profile and then treated with drugs designed to work on
specific molecular targets.
GENETIC VARIABILITY
The diversity of living organisms results from variability in their genomes.
Variability stems from differences in the sequences of genes and from
differences in levels of gene expression. In order to understand how genetic
variation causes disease, scientists must compare both sequence variation and
expression patterns of genes from healthy and diseased individuals. Currently,
these efforts are laborious, time consuming and expensive, requiring the
repeated sequencing of the same genes from a large number of persons. The
Company believes that its GeneChip technology will simplify, accelerate and
reduce the cost of analyzing genetic variability (both sequence and expression)
and lead to new opportunities in disease management.
SEQUENCE VARIABILITY
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 biology of the
organism. However, in other cases, polymorphisms can result in the altered
function or expression 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 sickle cell anemia, while mutations in
multiple genes have been associated with diseases such as cancer and diabetes.
By screening for polymorphisms, 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
correlate specific gene mutations with the disease. However, a typical
polymorphism association project on one disease might require sequencing 100
genes of 3,000 nucleotide bases each in up to 500 patients, or a total of 150
million bases. Currently, the polymorphism screening process uses gel-based
sequencing which is labor intensive and costly. The Company believes that its
GeneChip technology will have advantages over conventional gel based techniques
and has initiated a large scale polymorphism discovery and database project to
identify these correlations.
EXPRESSION VARIABILITY
Differences in the genes expressed in a given cell, as well as the timing
and levels of their expression, are another basis for genetic variability.
Although most cells contain an organism's full set of genes, each cell expresses
only a small fraction of this set in different quantities and at different
times. The expression of the wrong or defective genes, or the overexpression or
underexpression of normal genes have been associated with human diseases, as
well as treatment failures in specific patient populations. By identifying genes
that are differentially expressed in particular diseases or patient populations,
new targets can be identified for which new therapies can then be developed.
Expression monitoring may also help demonstrate the likely effectiveness of new
as well as existing therapeutic agents and lead to the development of new
therapeutics and diagnostic tools. The effectiveness of monitoring gene
expression is a function of the quality of the cell population being studied,
the number of genes that can be monitored simultaneously, the sensitivity of the
method (ability to measure small changes or low levels of gene expression) and
the ability of the method used to provide quantitative information. Relative
levels of gene expression are currently monitored primarily through a costly and
time-consuming process of sequencing many copies of each gene. By contrast, the
company believes its GeneChip technology will have significant advantages over
other expression profiling techniques.
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OPPORTUNITIES ARISING FROM GENETIC VARIABILITY
The analysis of genetic variability in organisms is revealing polymorphisms
and differences in gene expression levels that correlate with diseases,
prognoses for those diseases, and likely therapeutic outcomes. Understanding
this variability provides new opportunities for therapeutic intervention that
can be more narrowly focused and therefore safer and more efficacious than drugs
that affect more biological pathways. The Company believes that by providing a
powerful tool to identify appropriate pathways for therapeutic intervention,
evaluate lead compounds and assess the efficacy and toxicology of these
compounds on biological systems, the GeneChip system can facilitate the drug
discovery process and improve the effectiveness and efficiency of health care.
In addition to revealing opportunities for the discovery and development of
new therapeutics, understanding of sequence and expression variability in
organisms may have the potential to effect a major paradigm shift in disease
management and the diagnostics industry. These highly competitive industries are
currently characterized by low margins and large barriers to entry, with
substantial pressure to reduce prices exerted by health care providers. Further,
information available from many current diagnostic tests often provides
insufficient information as to the etiology, prognosis, and potential treatment
options for a particular clinical presentation.
Access to complex genetic information, such as changes in gene sequences or
expression levels that have previously been correlated with particular outcomes,
has the potential to provide guidance on appropriate therapeutic regimens. The
value of this information in reducing total health care costs and improving the
quality of life is very high. For example, by determining that an HIV-infected
patient on a triple drug combination therapy is resistant to one or two of these
drugs, the health care provider may change the therapeutic regimen to replace or
eliminate drugs to which the patient is resistant and thereby improve the
patient's health while reducing costs.
The use of complex genetic information to manage disease is in its infancy.
Current techniques for gathering complex genetic information are time-consuming,
require skilled labor, and can analyze only limited lengths of contiguous DNA
sequences in a given run. This has prevented any large scale systematic study of
how sequence variability and expression variability correlate with particular
disease outcomes. The Company believes that new technology, such as the
Company's GeneChip system, will be required to utilize complex genetic
information in health care.
BUSINESS STRATEGY
Affymetrix' strategy is to capitalize on its leadership position in the DNA
probe array field by applying its GeneChip technology primarily to expression
analysis, polymorphism discovery and disease management. The Company intends to
commercialize its GeneChip probe array technology for sale to pharmaceutical and
biotechnology companies, academic research centers and clinical reference
laboratories by demonstrating its advantages over conventional tools used for
DNA sequence and expression monitoring analysis. The Company offers both custom
and standard configurations of its GeneChip probe arrays to customers under a
variety of access plans tailored to meet customer needs, such as the high-volume
EasyAccess-TM- program subscribed to by F. Hoffmann La Roche Ltd. ("Roche") and
Genetics Institute, Inc. ("Genetics Institute"). In addition, the Company
intends to continue to enter into collaborations to expand the utilization and
applications of its GeneChip technology.
APPLICATIONS
Currently, there are three principal applications of the Company's
technology: gene expression monitoring, polymorphism discovery and disease
management.
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GENE EXPRESSION MONITORING
Gene expression monitoring is a valuable tool for identifying correlations
between genes, their biological function and disease. To facilitate the
monitoring of gene expression, the Company designs and manufactures probe arrays
with single stranded DNA molecules that are complementary to sequences within a
gene of interest. By synthesizing specific probes for multiple genes on a single
probe array, the Company 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 under different conditions and at
different times, researchers can use the probe arrays to understand the dynamic
relationship between gene expression and disease. The Company believes that such
information will be an important tool in the understanding of gene function and
the development of new drugs and disease management tools.
The Company is currently selling expression monitoring GeneChip arrays, each
capable of analyzing approximately 1,600 human, mouse or yeast genes. Affymetrix
is also developing next generation probe arrays that will monitor the expression
of up to 40,000 genes per probe array. For example, a probe array is currently
being developed to monitor the expression of the approximately 6,800 human genes
for which full length sequences are currently in public databases.
Affymetrix intends to commercialize the expression monitoring applications
of its GeneChip technology for use in identifying and validating novel targets
for drug discovery broadly to pharmaceutical, biotechnology, academic research
organizations and clinical reference laboratories. The Company is offering
different access plans to its technology centered around a pricing model that is
based on the number of data points and value of the gene collections being
monitored on a particular GeneChip probe array. Actual pricing of the GeneChip
expression probe arrays under this model depends on a number of additional
factors, including the magnitude of the customer's research effort, whether the
genes being monitored are human or from other organisms, whether intellectual
property is to be retained, shared or disclosed and whether the Company provides
custom chip design or screening services to a customer, and the amount of any
up-front fees, milestones, royalties or other payments to be received by the
Company. For example, the Company's largest supply arrangements to date are with
Roche and Genetics Institute, pursuant to which these companies have gained
broad access to the Company's gene expression probe arrays under the EasyAccess
plan designed to incent high-volume use.
To date, the Company has more than a dozen commercial customers for its
GeneChip expression probe arrays, including Genetics Institute, Glaxo Wellcome
plc ("Glaxo"), Hoechst Marion Roussel, Inc. ("Hoechst"), Merck & Co., Inc.
("Merck"), Parke-Davis division of Warner Lambert Company ("Parke-Davis"),
Pfizer, Inc. ("Pfizer"), Pioneer Hi-Bred International Inc. ("Pioneer Hi-Bred"),
Novartis Pharma AG ("Novartis"), Rhone Poulenc Rorer Pharmaceuticals, Inc.
("Rhone Poulenc Rorer"), Roche and Sanofi Recherche ("Sanofi").
POLYMORPHISM DISCOVERY
As genes in the human genome are identified, sequenced and mapped, the value
of understanding the variability of sequences in these genes increases.
Researchers must determine the normal sequence of the gene, which mutations
exist and whether these mutations correlate with a disease. This currently
requires the sequencing of samples from a large number of affected and
unaffected individuals. Furthermore, during clinical trials, the Company
believes that pharmacogenomics (the understanding of the impact that genetic
variation has on therapeutic effectiveness and toxicity) will become
increasingly important. Using sequence checking strategies developed by the
Company, Affymetrix believes that its GeneChip probe arrays could significantly
reduce the cost and time required for polymorphism screening, which is currently
performed through more labor intensive sequencing techniques.
Affymetrix has recently initiated a major effort aimed at discovering the
most common polymorphisms in full length genes. Through a number of customized
applications of its GeneChip technology, the
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Company believes it is uniquely positioned both to identify a large number of
polymorphisms and to detect their presence across broad populations to help link
these genetic variations to disease. These customized applications may provide
rapid analysis of (i) genetic markers, (ii) selected candidate genes potentially
implicated in disease, (iii) genes associated with toxic drug reactions and (iv)
genes that are existing drug targets. As these efforts are advanced and the
variability of these genes is stored in databases, specific polymorphisms can be
encoded on GeneChip probe arrays and used for broad-based genotyping. The
Company intends to use these genotyping probe arrays to develop large,
disease-specific databases correlating mutations with disease. The Company has
formed collaborations and intends to form additional collaborations to
accelerate the development of its polymorphism databases. The Company intends to
offer access to these databases and genotyping probe arrays to its customers and
collaborators.
As an initial step in its polymorphism discovery efforts, the Company has
entered into a consortium with Bristol-Myers Squibb Company ("Bristol-Myers")
and Millennium Pharmaceuticals Inc. ("Millennium") to fund research at the
Whitehead Institute of the Massachusetts Institute of Technology ("Whitehead
Institute") to identify novel markers and study their role in disease, along
with other research programs. Affymetrix has also entered into polymorphism
discovery collaborations with academic and commercial partners. The Company
intends to use certain of these markers, as well as publicly available markers
and markers discovered by Affymetrix, to develop GeneChip probe arrays that can
be used to map genes to their chromosomal locations more rapidly and
cost-effectively than is possible with existing technologies. The first such
GeneChip mapping array, the GeneChip Poly 2000, is currently under development.
The Company intends to market this and other polymorphism probe arrays to
customers to facilitate genetic mapping and disease association studies.
DISEASE MANAGEMENT
Disease management is an emerging field that seeks to improve the
effectiveness of health care by collecting information on patients from the time
of diagnosis to the end of therapy and subsequently measuring the outcomes of
various treatment protocols. Affymetrix believes that genetic analysis will be a
core component of disease management. The Company has therefore developed
GeneChip assays for this purpose and believes that such assays will facilitate
more efficient and effective patient management. The Company is focusing on the
development and commercialization of disease management products in infectious
diseases, cancer and other areas, including drug metabolism.
Affymetrix has established partnerships and customer relationships with
leading diagnostic companies, clinical reference laboratories and medical
research centers to further its disease management strategy. To date, the
Company has introduced three disease management GeneChip assays for the research
and clinical reference markets: the HIV, p53 and p450 GeneChip products. These
products provide sequence information from the reverse transcriptase and
protease genes of HIV, the p53 tumor suppressor gene, and the cytochrome p450
metabolic gene family, respectively. The Company is working with commercial and
academic researchers to correlate specific mutations in these genes with
therapeutic outcomes. In the case of HIV, the Company and Glaxo, a world leader
in sales of HIV antivirals, have developed a pilot database correlating patient
outcomes under varied therapeutic drug regimens with specific mutations in the
HIV virus. In oncology, the Company has a collaboration with OncorMed, Inc.
("OncorMed"), a genetic testing reference laboratory business. In bacteriology,
the Company has formed a collaboration with bioMerieux Vitek, Inc.
("bioMerieux"), a world leader in providing bacterial identification and
antibiotic resistance testing.
Affymetrix believes that before its GeneChip probe arrays can become widely
used tools in disease management, significant additional research including
clinical trials supporting FDA registration may be required. Furthermore,
additional instrumentation and automation will need to be developed to allow for
the handling of the large volumes of testing anticipated in the clinical
diagnostic setting. bioMerieux is obligated to develop such instrumentation as
part of its collaboration with the Company. Affymetrix is also
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seeking to partner with, or license technology to, other established diagnostic
companies to develop, seek regulatory approval, and commercialize probe arrays
and instrumentation for broader clinical use.
TECHNOLOGY
Affymetrix' GeneChip probe array technology and systems integrate
semiconductor fabrication techniques, solid phase chemistry, molecular biology,
software and robotics. The Company's GeneChip system consists of several
integrated components: disposable DNA probe arrays containing genetic
information on a chip housed in a cartridge, reagents for extracting and
labeling target nucleic acid, 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 and to analyze and manage the genetic
information. The GeneChip system is designed to be used by pharmaceutical and
biotechnology companies, academic research centers and clinical reference
laboratories.
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 glass chip. 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.
The Company uses photolithography to synthesize a large variety of
predetermined DNA sequences simultaneously in specific locations on a glass
chip. Photolithography is a technique which uses light to create exposure
patterns on the glass chip and induce chemical reactions. The process begins by
coating the chip with light-sensitive chemical compounds that prevent chemical
coupling. The light sensitive compounds are called protecting groups.
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 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 high density arrays
of many diverse DNA sequences in a small area. The Company can manufacture a
large number of identical DNA probe arrays on a glass wafer, which is then diced
into individual probe arrays.
Currently, each probe array can be manufactured with hundreds of thousands
of "features." Each feature can contain 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.
The Company's GeneChip technology enables it to synthesize with high density
a large number of chemically diverse DNA sequences. Unlike conventional
synthesis techniques, which generally use a linear process to create compounds,
the Company's synthesis technology is combinatorial, in that the number of
different compounds synthesized grows exponentially with the number of cycles in
the synthesis. For example, in a 40 cycle process, Affymetrix has produced a
prototype probe array with over one million features, each containing multiple
copies of a unique DNA sequence. This process would take over ten million cycles
using conventional 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 a biological sample.
Each feature on the GeneChip probe array
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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
labeled test sample is then washed over the probe array surface to bind or
hybridize 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. Sequence variation or the concentration of the
nucleic acid sample can be determined by detecting the relative strength of
these signals since the sequence and position of each complementary DNA probe on
the probe array are known.
INSTRUMENTATION
The fluidics station controls the hybridization of the test sample to the
probe array and, in certain applications, the introduction of sample on to the
probe array. A technician uses the fluidics station 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.
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 exposed to
the light from the laser. The intensity of the fluorescent signal is recorded by
the scanner and stored in the computer. The current scanner, which was developed
in collaboration with Hewlett Packard Company ("HP") and introduced in April
1997, can read 1.28 cm by 1.28 cm probe arrays with up to 400,000 features.
SOFTWARE
The GeneChip operating system software is supplied as part of the integrated
system and runs on an IBM compatible 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 GeneChip HIV product, the
analysis takes less than 90 seconds for one probe array and the results are
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. Other GeneChip software applications enable custom probe
array users to simultaneously evaluate the relative expression levels of
thousands of genes.
CUSTOMERS, COLLABORATIVE PARTNERS AND GRANTS
The Company's strategy is to establish the GeneChip system as the platform
of choice for analyzing complex genetic information, expand the applications of
the Company's technology and acquire access to complementary technologies and
resources, such as manufacturing, distribution and marketing, from its
collaborative partners. Accordingly, the Company's agreements emphasize selling
probe arrays, preserving the Company's rights to technological improvements and
obtaining support for the development of applications of GeneChip technology.
The Company's research and development efforts have been supported in part by
government grants, including grants from the U.S. Department of Commerce
Advanced Technology Program ("ATP") and the National Institutes of Health
("NIH"). The following table sets forth a selected list of customers and
collaborators with whom the Company has existing agreements, the related
products and programs and the commencement dates of the most recent agreement
with each customer or collaborator.
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SUMMARY OF AFFYMETRIX CUSTOMERS AND COLLABORATORS
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CUSTOMER/COLLABORATOR PRODUCT/PROGRAM DATE
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Amersham Pharmacia Biotech.... Sales agency agreement November 1997
bioMerieux.................... Bacteriology and virology
diagnostics January 1998
Bristol-Myers, Millennium,
Whitehead Institute......... Functional genomics and
polymorphism discovery April 1997
DNAX (Schering-Plough)........ GeneChip expression technology July 1997
Genetics Institute............ GeneChip expression
technology-- EasyAccess
Program January 1998
Glaxo......................... HIV disease management January 1997
Hewlett-Packard............... Scanner supply February 1997
Hoechst....................... GeneChip expression technology April 1997
Merck......................... GeneChip expression technology September 1997
Millennium.................... GeneChip expression technology November 1997
OncorMed...................... Oncology testing services and
GeneChip databases and
services March 1998
Parke-Davis
(Warner-Lambert)............ GeneChip expression technology October 1996
Pfizer........................ GeneChip expression technology July 1997
Pioneer Hi-Bred............... GeneChip expression technology April 1997
Rhone Poulenc Rorer........... GeneChip expression technology March 1998
Roche......................... GeneChip expression
technology-- EasyAccess
Program August 1997
Sanofi........................ GeneChip expression technology March 1998
Tularik....................... GeneChip expression technology September 1997
</TABLE>
F. HOFFMANN-LA ROCHE LTD.
In August 1997, the Company entered into a three-year agreement with Roche
and its affiliates for supply of standard and custom expression arrays for use
in Roche's worldwide pharmaceutical research and development activities.
Pursuant to the agreement, Roche became the Company's first EasyAccess customer,
which will allow Roche access to up to tens of thousands of probe arrays and the
opportunity to create up to 100 million or more expression datapoints. Under the
terms of the agreement, Roche will pay the Company annual subscription fees for
such access to the GeneChip expression technology, per-probe-array fees and fees
for any custom designs ordered by Roche.
Prior to the 1997 agreement, the Company had entered into two gene
expression-related agreements with Roche. In October 1996, the Company signed a
demonstration agreement with Roche for the development and supply of a single
custom probe array containing bacterial genes. In December 1996, the Company
signed a pilot agreement with Roche Bioscience, a division of Syntex (U.S.A.)
Inc., for the development and supply of a single custom probe array containing
human, rat and mouse genes. The milestones of these agreements were met and the
agreements have been concluded.
GENETICS INSTITUTE INC.
In January 1998, the Company entered into a three-year agreement with
Genetics Institute for the supply of standard and custom expression arrays for
use in Genetic Institute's research and development
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activities. Pursuant to the agreement, Genetics Institute became the Company's
second EasyAccess customer. Under the terms of the agreement, Genetics Institute
will pay the Company annual subscription fees for such access to the GeneChip
expression technology, per-probe-array fees and any custom design fees.
Prior to the 1998 agreement, the Company had entered into two agreements
with Genetics Institute. In December 1995, the Company entered into a supply
agreement under which Affymetrix agreed to manufacture and supply custom probe
arrays based on specific genes identified and selected by Genetics Institute.
Many of the terms and conditions of this agreement were superceded by the
January 1998 agreement. In November 1994 the Company and Genetics Institute
entered into a collaboration agreement that provided for research funding to the
Company for the development of DNA probe arrays to enable Genetics Institute to
discover new genes and uses for genes. The Company has completed performance of
the 1994 agreement and, accordingly, development funding under the collaboration
agreement has been discontinued. Affymetrix has agreed to supply custom probe
arrays developed under the collaboration agreement to Genetics Institute in
accordance with the EasyAccess agreement.
OTHER SUPPLY AGREEMENTS
The Company has supply agreements in genomics with several other
pharmaceutical and biotechnology companies that cover either standard or custom
probe arrays for gene expression or both. Under the terms of these agreements,
the Company will receive fees for each probe array, as well as, in some cases,
revenue from probe array design fees, instrument and software sales and other
fees. Current customers include DNAX Research Institute of Molecular & Cellular
Biology, Inc. (a subsidiary of Schering-Plough Corporation) ("DNAX"), Glaxo,
Hoechst, Merck, Metabolex, Inc. ("Metabolex"), Millennium, Novartis, OncorMed,
Parke-Davis, Pfizer, Pioneer Hi-Bred, Rhone Poulenc Rorer, Sanofi and Tularik,
Inc.
AMERSHAM PHARMACIA BIOTECH
In December 1997, the Company entered into a worldwide, non-exclusive sales
representation agreement with Amersham Pharmacia Biotech Ltd ("Amersham
Pharmacia Biotech"). Under the agreement, Amersham Pharmacia Biotech's sales
representatives will solicit orders for Affymetrix' products from prospective
customers in the pharmaceutical and biotechnology industries and the academic
research community worldwide. The Company will pay Amersham Pharmacia Biotech
transaction processing fees as well as a percentage of product sales up to a
maximum annual amount as a sales agency fee.
MOLECULAR DYNAMICS
In December 1997, the Company entered into a non-exclusive, worldwide,
royalty bearing license agreement with Molecular Dynamics, Inc. ("Molecular
Dynamics"). Under the license agreement, Molecular Dynamics was granted rights
to certain Affymetrix technology for commercializing low and medium density
mechanically spotted DNA arrays. Affymetrix also obtained rights to certain
Molecular Dynamics patents. Molecular Dynamics is obligated to pay Affymetrix
royalties on sales of its products covered by the licenses.
GENETIC ANALYSIS TECHNOLOGY CONSORTIUM ("GATC")
In December 1997, the Company and Molecular Dynamics formed the Genetic
Analysis Technology Consortium, a standards setting body charted to define a
uniform set of specifications to allow for the interoperability of chips,
readers, reagents, software and data generated using GATC compliant products.
The GATC has been formed to allow for additional members to join the GATC and
participate in setting interoperability standards, as well as to certify
non-members' products as GATC compliant. In January 1998, Pangea Corp., a
privately held bioinformatics company, announced its intention to produce
software products that are GATC compliant.
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WHITEHEAD INSTITUTE CONSORTIUM
In April 1997, the Company, Bristol-Myers and Millennium entered into a
corporate consortium to fund a five-year research program in functional genomics
at the Whitehead Institute. The program, under the direction of Dr. Eric S.
Lander, Director of the Whitehead Institute of the Massachusetts Institute of
Technology, seeks to advance the development of gene-based technologies for
research and health care.
Under the terms of the consortium agreement, Affymetrix, Bristol-Myers and
Millennium will support a program of research initiated by scientists at the
Whitehead Institute to develop the next generation of genomics technologies for
the scientific community. The three companies will provide funds and technology
totaling approximately $8.0 million per year for five years to the Whitehead
Institute. Scientists at the companies will also collaborate with scientists at
the Whitehead Institute to identify novel genetic markers and develop new
genomics tools. In return, Affymetrix, Bristol-Myers and Millennium will receive
certain licensing rights to inventions funded by the consortium or emerging from
the use of contributed technology, subject to the payment of cross royalties.
Affymetrix has exclusive rights to commercialize consortium inventions related
to nucleic acid probe arrays and joint rights with Millennium to commercialize
diagnostic products and services and certain other products that may arise from
the consortium.
BIOMERIEUX VITEK, INC.
In September 1996, the Company and bioMerieux entered into a five-year
collaborative development agreement and associated supply agreement for probe
arrays to identify the species and drug resistance profiles of bacteria causing
human infection. As part of the collaboration, bioMerieux is developing
instrumentation for the use of these probe arrays in a clinical diagnostic
setting. The agreement provides that the Company will not market or provide
probe arrays for such tests to others that are in a format that would reasonably
be considered approvable by the FDA for clinical diagnostic use. Under the terms
of the agreements, bioMerieux provides research and development support and will
make payments to Affymetrix upon achievement of certain milestones. Three such
milestones have been met to date. In addition, bioMerieux will pay specified
prices for the supply of probe arrays and royalties on any resulting products.
In December 1997 and January 1998, bioMerieux and the Company expanded their
collaboration to include the non-exclusive development of DNA probe arrays for
clinical diagnostics tests in the fields of HIV and food and industrial testing,
respectively. As a result of this expansion of the collaboration, bioMerieux has
and will make certain option exercise payments to the Company.
HEWLETT-PACKARD COMPANY
The Company entered into a collaborative agreement with HP in November 1994,
which was amended in February 1997. Under the terms of the agreement, HP
manufactures scanners for Affymetrix. Affymetrix retains all marketing rights
for its GeneChip products, including the scanners. The agreement provides for
cooperation between Affymetrix and HP for worldwide distribution and instrument
services. Pursuant to the agreement, HP is required to supply all the Company's
forecasted requirements for scanners until February 2000 and Affymetrix is
required to purchase a minimum number of scanners from HP during the same
three-year period.
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 ATP. 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 analysis. The device would be intended for use in
point-of-care settings, such as hospitals, clinics and doctors' offices and
would require FDA approval. The Company has
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developed a prototype of the device and is pursuing further development. There
can be no assurance that the device will be successfully developed or, if
developed, that it will receive regulatory approval or be successfully marketed.
The research agreements between the Company and its subcontractors under the
ATP grant (the University of 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 December 31, 1997, the Company had recognized $7.8 million in revenue
under the ATP grant. The grant is subject to yearly appropriations by the United
States Congress for the ATP 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 was awarded a $5.5 million, three-year grant
from the NIH National Center for Human Genome Research. As of December 31, 1997,
the Company had recognized revenue of $3.6 million related to the grant. Under
the project, the Company is developing applications of DNA probe arrays for
larger scale genetic analysis 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. There can be no assurance that the NIH will obtain the necessary
funding from the United States Congress to continue to fund this grant.
MANUFACTURING
The Company's current strategy is to manufacture its disposable DNA probe
arrays, fluidics stations and software in-house and contract with third-party
suppliers to manufacture scanners for its GeneChip system.
The Company is currently manufacturing limited quantities of probe arrays
for internal and collaborative purposes and for initial research use only
product sales. Currently, the Company has the capacity to produce at a rate of
up to 200,000 probe arrays annually at its existing manufacturing facility
located in Sunnyvale, California. Expansion is underway to increase this
facility's capacity to a rate of up to 400,000 probe arrays annually by late
1998. The Company has also purchased land and is currently planning to build a
second manufacturing site near Sacramento, California, which will further
increase its manufacturing capacity and reduce operating risks. The Company
expects this facility to be operative in late 1999.
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. Affymetrix has developed software programs that
partially automate the design of photolithographic masks used in probe array
manufacturing and that control the probe array manufacturing lines. 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 relies on outside vendors to manufacture and service its
scanners. The Company's first generation scanner, which can read up to 64,000
features per 1.28 cm by 1.28 cm probe array was manufactured for the Company by
Molecular Dynamics. The Company's second generation scanner, developed in
collaboration with HP and introduced in April 1997, can read probe arrays with
up to 400,000 features per 1.28 cm by 1.28 cm probe array. Certain key parts of
the GeneChip system, such as the scanner
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and certain reagents, are currently available only from a single source or a few
sources. The Company currently obtains the scanners for its GeneChip probe
arrays from HP. The Company is dependent on HP for quality testing and service
of this instrument. No assurance can be given that scanners, reagents or other
components of the GeneChip system 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 vendors 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 products and includes DNA probe
arrays, which are produced in an innovative and complicated manufacturing
process. Due to the complexity and limited operating history of these products,
the Company has experienced technical problems and anticipates that additional
technical problems will occur and be discovered as more systems are placed into
operation. The Company has experienced and continues to experience variability
in the manufacturing yield of its GeneChip products which has, and may continue
to, adversely impact the Company's gross margins. While the Company plans for
excess manufacturing capability to mitigate the effects of this variability,
there can be no assurance that such variability will not impact the Company's
ability to meet its commitment to deliver product in a timely manner. The
inability of the Company to timely deliver products would likely adversely
affect the Company's relationship with its customers, its business, its
financial condition and results of operations.
The Company tests only selected probe arrays from each wafer and only
selected probes on such probe arrays. It is therefore possible that defective
probe arrays might not be identified before they are shipped. After the probe
arrays are shipped, only selected probes may be tested by the customer. 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 are certain aspects of the
Company's manufacturing processes that are not fully understood and that may not
be readily scalable to allow for production of probe arrays in commercial
quantities. 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 cost. If the Company is unable to consistently
manufacture probe arrays on a timely basis because of these or other factors,
its business, financial condition and results of operations would likely be
adversely affected.
The Company will also need to comply with the FDA's Good Manufacturing
Practices ("GMP") regulations 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 only, it will need to be GMP compliant to sell these products to
clinical reference laboratories and for clinical use. There can be no assurance
that such GMP compliance will be obtained or that such compliance can be
obtained at reasonable prices.
As the Company's technologies evolve, new manufacturing techniques and
systems will be required. For example, it is anticipated that automated
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.
Although the Company is planning to build a second manufacturing facility, the
Company presently relies on a single manufacturing facility for its probe
arrays, fluidics stations and software. This manufacturing facility is subject
to natural disasters such as earthquakes and floods. The former are of
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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 which would likely adversely affect the Company's business, its
financial condition and results of operations.
There can be no assurance that any of the foregoing problems with the
Company's GeneChip products will be solvable or that any solutions can be
achieved in a timely manner or at commercially reasonable costs.
SALES AND MARKETING
The base price of the Company's GeneChip system (scanner, software,
workstation and fluidics station) starts at approximately $160,000. The
Company's HIV probe arrays, currently being sold commercially for research use,
are priced at $45 per array, with two arrays (one for each strand of DNA)
presently used per test. The Company's p53 GeneChip assay is being sold for
research use at $100 per array. The Company's p450 GeneChip assay is being sold
for research use at $145 per array. The Company is offering different access
plans for its expression and polymorphism technology centered upon a pricing
model that is based on the number of data points and value of the collection of
genetic information being analyzed on a particular GeneChip probe array. Actual
pricing depends on several factors, including: the magnitude of the research
effort, whether the genes being analyzed are human or those of other organisms,
whether intellectual property is to be retained, shared or disclosed, whether
the Company provides custom probe array design or screening services to a
customer and the amount of any up-front fees, volume commitments, milestones or
other payments to be received by the Company.
The Company is currently directly marketing the GeneChip system and probe
arrays for genomics and disease management applications to its customers and
collaborators. To augment these efforts the Company entered into a non-exclusive
sales representation agreement with Amersham Pharmacia Biotech in December 1997.
Under this agreement, Amersham Pharmacia Biotech's sales representatives will
solicit orders for Affymetrix' products from prospective customers in the
pharmaceutical and biotechnology industries and the academic research community
worldwide. The Company will pay Amersham Pharmacia Biotech transaction
processing fees as well as a percentage of product sales up to a maximum annual
amount as a sales agency fee.
The Company's near term strategy is to commercialize the GeneChip system for
research use only and to seek regulatory approval for and to commercialize
GeneChip probe arrays for clinical use through partnerships with established
firms in the health care industry. The Company believes that the primary
near-term market for genomics and disease management GeneChip applications will
be pharmaceutical and biotechnology companies, academic research centers and
clinical reference laboratories. Longer term, the Company believes that the
primary market for its disease management GeneChip applications will be clinical
reference laboratories.
Affymetrix has marketing and technical support groups to promote and service
its GeneChip products, which the Company intends to expand as necessary. In
addition, the Company has retained a marketing communications firm with
expertise in biotechnology to assist it in its promotional activities.
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 agency or distribution arrangements to market its products or that
any such agreement will be successful. See "Risk Factors--Limited Sales and
Marketing Experience."
RESEARCH AND DEVELOPMENT
The Company believes that substantial investment in research and development
is essential to obtaining a long-term competitive position in the expression
monitoring, polymorphism discovery and
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disease management fields. Affymetrix focuses on four types of research and
development: applied research, primarily aimed at generating polymorphism
databases; core technology development, such as the design of fully integrated
systems for complex genetic information management; novel manufacturing methods
to improve the efficiency of the Company's probe array production processes; and
basic research to explore and expand the potential uses of DNA probe arrays and
to discover new technologies.
CORE TECHNOLOGY DEVELOPMENT
The Company conducts research in several core areas, including the
development of miniaturized immobilized nucleic acid detection devices. The
intent of these development programs is to create advanced systems for complex
genetic information and products that can eventually be developed by diagnostic
partners for use in hospitals, clinical reference laboratories and point-of-care
testing.
BASIC RESEARCH
Affymetrix' basic research efforts are focused on expanding the applications
of the GeneChip technology and developing related new technologies. These
efforts include improving the sensitivity of the GeneChip assays, increasing
information capacity per probe array and simplifying the process for conducting
highly complex assays.
APPLIED RESEARCH
Affymetrix is focusing its applied research efforts on the development of
assays and databases to link genetic polymorphisms to human disease. The Company
believes that such databases will ultimately lead to the discovery of novel
therapeutics and the identification of diagnostic markers useful in
cost-effective disease management. The Company has established a relationship
with the Whitehead Institute to identify genetic markers that can be used to
rapidly obtain high-resolution maps of individual human genomes and thereby
identify differences among those genomes that are characteristic of particular
diseases. The Company has also entered into several commercial and academic
collaborations to accelerate the pace of polymorphism discovery.
NOVEL MANUFACTURING METHODS
The Company conducts research aimed at improving the photolithographic
manufacturing process currently employed in the production of the Company's
GeneChip probe arrays. The Company is also pursuing research aimed at further
improving its manufacturing technology. In the Company's photoresist
manufacturing research program, the Company has demonstrated an ability to
manufacture probe arrays with 5 micron feature sizes, as compared to the 50
micron feature sizes used on most of the Company's current probe arrays.
The Company's research and development expenses for the years ended December
31, 1997, 1996, and 1995 were $28.2 million, $18.8 million, and $12.4 million,
respectively.
INTELLECTUAL PROPERTY
Affymetrix has been issued 28 patents in the United States and holds several
pending United States patent applications. 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 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 copyrights and trade secrets, to operate without infringing the
proprietary rights of third parties and to acquire licenses related to enabling
technology or products.
The Company is party to various option and license agreements with third
parties (including Glaxo, Molecular Dynamics, Stanford University, Scientific
Generics, Ltd., Concordia University, New York Public Health Research Institute,
OncorMed, and the University of California) which give it rights to use
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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 University of California technology
relating to miniaturized PCR devices under reasonable terms could have an
adverse effect on the ability of the Company to sell integrated device products.
The patent positions of pharmaceutical 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 expects to incur substantial
costs in litigation to defend itself in patent suits brought by third parties
and when 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 in certain
applications, and there is no assurance such a license will be available on
commercially reasonable terms. Furthermore, 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.
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. There can be no assurance that the Company will not
infringe on these patents or other patents or proprietary rights of third
parties or that the Company would be able to obtain a license to such patents or
proprietary rights on commercially acceptable terms, if at all.
The Company is aware of patents and patent applications owned by Oxford Gene
Technology, Ltd that may relate to the Company's technology. The Company has
opposed two such allowed European patents and such patents have also been issued
in the United States. The Company is aware that other patents are pending and
may issue. Certain of the applications have broad claims to certain array
related technology. The Company could be subject to infringement claims from
this and other patents that could delay or preclude sales of some or all of its
products, which would have a material adverse effect on the Company's business,
financial condition and results of operations. If the Company were required to
obtain a license to any such patents, there can be no assurance that such
license could be acquired on commercially acceptable terms, if at all.
On March 3, 1997, Hyseq, Inc. ("Hyseq") filed a lawsuit in United States
District Court for the Northern District of California (San Jose Division)
alleging that certain Affymetrix products infringe United States patents
5,202,231 and 5,525,464. In addition, in December 1997, Hyseq filed a second
action claiming that certain Affymetrix products infringe a related patent,
United States patent 5,695,940. The Hyseq actions and any other 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 partners to obtain a license in order
to continue to manufacture or market the affected products and processes. While
the Company believes that the Hyseq complaints are without merit, there can be
no assurance that the Company will prevail in the Hyseq actions or that the
Company or its
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collaborative partners will prevail in any other action, nor can there be any
assurance that any license (including licenses proposed by third parties)
required would be made available on commercially acceptable terms, if at all.
On January 6, 1998, the Company filed a patent infringement action in the
United States District Court for the District of Delaware (No. 98-6) alleging
that certain of Incyte, Inc.'s ("Incyte") and Synteni, Inc.'s ("Synteni")
products infringe Affymetrix' United States patent 5,445,934. The action seeks
to enjoin commercial activities of Incyte and Synteni relating to the Affymetrix
patent. There can be no assurance that Affymetrix will prevail in such
litigation or be successful in asserting its patent rights. The Company will
incur substantial costs and expend substantial personnel time in asserting the
Company's patent rights against Incyte and Synteni. Failure to successfully
enforce its patent rights or the loss of these patent rights or others would
remove a legal obstacle to competitors in designing systems with similar
competitive advantages, which could have a material adverse effect on the
Company's business, financial condition and operating results.
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 will be significant litigation in the industry regarding patent and
other intellectual property rights. The Hyseq and Incyte and Synteni actions and
any other such litigation will consume substantial managerial and financial
resources, which could have a material adverse effect on the Company's business,
financial condition and results of operations. Further, because of the
substantial amount of discovery required in connection with any such litigation,
there is a risk that confidential information could be compromised by
disclosure.
Others have filed and in the future are likely to file patent applications
that are similar or identical to those of the Company or those of its licensors.
To determine the priority of inventions, the Company will 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 is expected to 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 effectively 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 information in
which it may have a commercial interest.
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GOVERNMENT REGULATION
The manufacturing, labeling, distribution and marketing of some or all of
the Company's disease management products are subject to government regulation
in the United States and in certain other countries.
In the United States, the Food and Drug Administration ("FDA") regulates, as
medical devices, most diagnostic tests, including in vitro reagents and other
components of the tests, including those sold to laboratories certified under
the Clinical Laboratory Improvement Amendments of 1988 ("CLIA"). The Company
intends to market some diagnostic products as finished test kits or equipment
and others as individual components; consequently, 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 (known as a "PMA"). Some of the Company's products and those
of its collaborators 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 (including demonstration of compliance with quality systems
requirements) 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).
Even where a device is exempted from 510(k) clearance or PMA approval, FDA
may impose restrictions on its marketing. For example, FDA has exempted many in
vitro reagents not sold as finished test kits from obtaining 510(k) clearance or
PMA approval. These reagents, however, may be marketed by the Company only to
clinical reference laboratories certified under CLIA as high complexity
laboratories and are subject to a number of requirements, including labeling and
the FDA's GMP regulations.
There can be no assurance that the Company or its collaborators 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 GMP clearance, 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 GMP clearance, 510(k) clearance or PMA approval, 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 will be
required to comply with the FDA's GMP
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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, the 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 or other letter
apprising of violative conduct, impose civil penalties, detain or seize
products, issue a recall, ask a court to seize products, enjoin future
violations or assess civil and criminal penalties against the company, its
officers or its employees. In addition, clearances or approvals could be
suspended or 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. 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. Medical device laws and regulations are also in effect in
some states in which the Company does business.
In addition, federal, state and foreign laws and regulations regarding the
manufacture and sale of medical devices are subject to future changes. 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 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
diagnostic products. In addition, the FDA has promulgated regulation of certain
"analyte specific reagents" used in clinical reference laboratories. There can
be no assurance that the CLIA regulations and future administrative
interpretations of CLIA or future regulatory requirements of the FDA will not
have a material adverse impact on the Company by imposing new regulatory
requirements or 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, storage and disposal of
hazardous and biological materials, and construction of new facilities. There
can be no assurance that the Company will be able to obtain the necessary
permits to construct new facilities, including the planned facility near
Sacramento, California. Any violation of, and
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the cost of compliance with, these regulations or permit requirements could have
a material adverse effect on the Company's business, financial condition and
results of operations.
REIMBURSEMENT
The ability of the Company, its collaborators and other pharmaceutical and
biotechnology companies to successfully commercialize their products may depend
on their ability to obtain adequate levels of reimbursement for certain health
care products and services in the United States, Europe and other countries. The
availability of third-party reimbursement for such products and services may be
limited or uncertain, particularly with respect to genetic tests and other
disease management products.
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 health care product or service
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 ability of the
Company, its collaborators and other pharmaceutical and biotechnology companies
to commercialize certain of their products and services successfully may depend
on the extent to which appropriate reimbursement levels for the costs of such
products and services 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
health care 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 products
and services, as well as legislative proposals to reform health care or reduce
government insurance programs, may all result in lower prices for health care
products and services commercialized by customers and collaborative partners of
the Company. This could reduce the amount of future royalty payments that may be
due to the Company on such product sales or services. The cost containment
measures that health care providers are instituting and the impact of any health
care reform may also adversely affect the profits of the Company's customers and
collaborative partners. As a result, pharmaceutical and biotechnology companies
may choose to reduce or eliminate certain research and development programs that
utilize the Company's products. A reduction of royalty payments to the Company
or the reduction or cancellation of research programs that utilize the Company's
products could have a material adverse effect on the Company's business,
financial condition and results of operations.
COMPETITION
Competition in expression monitoring, polymorphism discovery and disease
management is intense and expected to increase. Further, the technologies for
monitoring gene expression and discovering polymorphisms 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, Roche Boehringer Mannheim, 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 and polymorphism discovery fields, existing competitive
technologies include gel-based sequencing using instruments provided by
companies such as the Applied Biosystems division of The Perkin-Elmer
Corporation and Amersham Pharmacia Biotech. The Company's sales representative,
Amersham Pharmacia Biotech, is a competitor and a supplier of reagents to the
Company. There can be no assurance that Amersham Pharmacia Biotech's commercial
activities will not adversely impact the
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Company's sales and supply agreements. 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. Future
competition in these fields 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 Axys Pharmaceuticals, Inc., Clonetech, Inc., Genome
Therapeutics Corporation, Genset S.A., Genome Systems, Inc., Human Genome
Sciences, Inc., Millennium, and Myriad Genetics, Inc. have significant needs for
genomic information and may choose to develop or acquire competing technologies
to meet these needs. Other companies including CuraGen, Inc., Digital Gene
Technologies, Inc., Gene Logic, Inc., Hyseq, Lynx, Molecular Dynamics, Nanogen,
Inc., Protogene, Inc., Synteni (Incyte), and Visible Genetics, Inc. also are
developing or have developed DNA probe based assays or other products and
services, some of which may be competitive with those of the Company.
The market for disease management 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
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.
EMPLOYEES
As of December 31, 1997, Affymetrix had 242 full-time employees, 48 of whom
hold Ph.D. or M.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 and
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 it maintains good relationships with its employees.
Affymetrix' success will depend in large part on its ability to attract and
retain skilled and experienced employees. There can be no assurance that the
Company will be successful in hiring or retaining qualified personnel, and its
failure to do so could have a material adverse impact on the Company's business,
financial condition and results of operations.
ADDITIONAL RISK FACTORS
All statements in this Annual Report on Form 10-K that are not historical
are forward-looking statements that are subject to certain risks and
uncertainties. Such statements are based on management's current expectations
and are subject to a number of factors and uncertainties that could cause actual
results to differ materially from those described in the forward-looking
statements. The Company cautions investors that there can be no assurance that
actual results or business conditions will not differ materially from those
projected or suggested in such forward-looking statements as a result of various
factors, including, but not limited to, the following risk factors and factors
discussed elsewhere in this Annual Report on Form 10-K. Affymetrix expressly
disclaims any obligation or undertaking to release publicly any updates or
revisions to any forward-looking statements contained herein to reflect any
change in Affymetrix' expectations with regard thereto or any change in events,
conditions, or circumstances on which any such statements are based.
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EARLY STAGE OF DEVELOPMENT
The Company has not commercialized significant quantities of products based
on its technologies. As of December 31, 1997, the Company had placed 55 GeneChip
systems, all of which have been solely for research use. 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 for some applications in the future. The Company
or its partners may need to undertake costly and time-consuming efforts to
obtain this approval. There can be no assurance that any future 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 sales and distribution capabilities, as well as entering into
supply agreements with customers desiring to use the Company's 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.
TECHNOLOGICAL UNCERTAINTY; RAPID TECHNOLOGICAL CHANGE
The Company is developing its GeneChip system for expression monitoring,
polymorphism discovery and disease management applications. The GeneChip system
involves several new technologies, including a complex chemical synthesis
process necessary to create DNA probe arrays. 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. Further, in order for the Company to address new applications
for the GeneChip system, the Company may be required to increase the number of
features on these arrays and design software capable of managing the information
generated from such probe arrays. 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 continued successful commercialization.
The development of research and disease management 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 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 manufacture and 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 continue to result in any commercially viable
products.
Expression monitoring, polymorphism discovery and disease management
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 can be no assurance that the
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Company will be able to make the enhancements to its technology necessary to
compete successfully with newly emerging technologies.
INTENSE COMPETITION
See the discussion under the heading "COMPETITION" elsewhere in this Annual
Report on Form 10-K.
UNCERTAINTY OF MARKET ACCEPTANCE; DEPENDENCE ON SIGNIFICANT CUSTOMERS
The commercial success of the Company's GeneChip system will depend upon
market acceptance by pharmaceutical and biotechnology companies, academic
research centers and clinical 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 into the
Company's probe arrays. Further, ethical concerns may limit the use of the
GeneChip system for certain disease management 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.
The cost of the GeneChip system and access to probe arrays may deter certain
potential customers of the Company's products. The Company may be required to
reduce or discount the price of its GeneChip system or probe arrays.
Furthermore, 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
pharmaceutical or biotechnology companies, academic research centers or clinical
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's customers are concentrated in a small number of pharmaceutical
and biotechnology companies, academic research centers and clinical 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 market successfully 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 customers 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.
UNCERTAINTIES RELATED TO COMMERCIAL VIABILITY OF EXISTING PRODUCTS
The first commercial application of the Company's GeneChip system is an HIV
probe assay 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
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station, a scanner and related software. In April 1996, the Company introduced
the HIV probe array for research purposes only. In July 1997, the Company
introduced its second commercially available product, the p53 tumor suppressor
gene assay for research use, which was developed in collaboration with OncorMed.
In November 1997, the Company introduced its third commercially available
product, the p450 assay for research use only. The Company has also entered into
several supply and collaborative agreements pursuant to which it is supplying
GeneChip systems and expression probe arrays for research purposes. As of
December 31, 1997 the Company had placed 55 GeneChip systems at customer sites.
These systems have been in operation for a limited period of time, and their
accuracy and efficacy have not been fully demonstrated. There can be no
assurance that the accuracy of the probe arrays in providing sequence
information will be equal to or better than current technologies, such as
gel-based sequencing techniques.
There can be no assurance that the probe arrays will provide commercially
useful information, that the arrays or the GeneChip system will operate without
difficulties, that technicians will have adequate training to use the GeneChip
system, or that the Company will not experience manufacturing problems or
marketing difficulties selling the probe arrays to pharmaceutical and
biotechnology companies, academic research centers and clinical reference
laboratories. Furthermore, there can be no assurance that the HIV, p53 or p450
assays will gain regulatory approval for clinical use. 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 HIV 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. Similarly, new mutations identified in the p53 and p450 genes
may require the Company to redesign its current p53 and p450 probe assays or
develop new probe assays. Cost containment pressures for treating diseases,
including HIV and cancer, may limit the price the Company may be able to charge
potential customers for these assays. Failure of the Company to successfully
commercialize its HIV, p53, p450 and gene expression assays 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 future products.
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 Amersham Pharmacia Biotech, HP, bioMerieux,
and OncorMed, and has entered into a consortium with the Whitehead Institute,
Millennium and Bristol-Myers.
The Company has received a material portion of its revenue 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 technologies or components competitive with 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 its collaborators may have provisions that
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
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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.
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 $22.5 million, $12.2 million and $10.7
million during the years ended December 31, 1997, 1996 and 1995, respectively.
At December 31, 1997, the Company had an accumulated deficit of approximately
$67.3 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 cash and investment balances, collaborative research and
development agreements, supply 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.
The Company may have to reduce or 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, its product mix and the degree of price discounts or reductions required
to market its products to pharmaceutical and biotechnology companies, academic
research centers and clinical 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 customer supply
agreements and 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 ever achieve profitability.
FLUCTUATIONS IN OPERATING RESULTS
The Company's quarterly operating results depend upon the volume and timing
of orders for GeneChip systems and probe arrays received and delivered during
the quarter, variations in revenue recognized under supply and collaborative
agreements, including license fees, product sales, milestones, royalties and
other contract revenues, as well as 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.
DEPENDENCE ON PROPRIETARY TECHNOLOGY AND UNPREDICTABILITY OF PATENT
PROTECTION
See the discussion under the heading "INTELLECTUAL PROPERTY" elsewhere in
this Annual Report on Form 10-K.
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NEED FOR ADDITIONAL FUNDING; UNCERTAINTY OF ACCESS TO CAPITAL
The Company anticipates that its existing capital resources, together with
the expected proceeds of approximately $50 million from the pending sale of
Series AA Preferred Stock to Glaxo, will enable it to maintain currently planned
operations. However, this expectation is based on the Company's current
operating plan, which is expected to 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 capital will be substantial and will depend on
many factors, including payments received under existing and possible future
supply and collaborative agreements; the availability of government research
grant payments; the progress of the Company's collaborative and independent
research and development projects; the cost 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 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 by 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.
LIMITED MANUFACTURING CAPABILITY; SOLE SOURCE SUPPLIERS
See the discussion under the heading "MANUFACTURING" elsewhere in this
Annual Report on Form 10-K.
LIMITED SALES AND MARKETING EXPERIENCE
The Company does not have a direct sales force and has only limited
experience in sales and marketing. The Company intends to market its products to
pharmaceutical and biotechnology companies, academic research centers and
clinical reference laboratories. The Company has entered into a non-exclusive
sales agency agreement with Amersham Pharmacia Biotech and may be required to
enter into additional collaboration or distribution arrangements to
commercialize its products both inside and outside the United States. There can
be no assurance that the Company will be able to establish a direct sales force,
that Amersham Pharmacia Biotech will be successful in distributing the Company's
products or that the Company will be able to establish additional 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.
UNCERTAINTIES RELATED TO CONTINUED 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 grants from
government agencies such as the NIH. Research funding by the government,
however, may be significantly reduced in the future. Any such reduction may
materially affect the ability of the Company's existing and 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. There can be no assurance that the
Company will receive the $15.5 million remaining funding designated for it under
the ATP grant, and termination of the ATP grant could have a material adverse
effect on the Company's
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business, financial condition and results of operations. The Company's ATP and
NIH grants 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.
UNCERTAINTIES RELATED TO THIRD-PARTY REIMBURSEMENT
See the discussion under the heading "REIMBURSEMENT" elsewhere in this
Annual Report on Form 10-K.
GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY APPROVAL
See the discussion under the heading "GOVERNMENT REGULATION" elsewhere in
this Annual Report on Form 10-K.
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 assays, 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 specific gene-based diagnostic tests marketed by other
companies could encounter public resistance, resulting in societal and
governmental concerns regarding genetic testing in general.
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 genetic predisposition to develop a particular disease. 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
adversely affect market acceptance of the Company's GeneChip system.
ATTRACTION AND RETENTION OF KEY EMPLOYEES AND SCIENTIFIC ADVISORS
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 efforts. 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
28
<PAGE>
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.
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 additional
insurance, should it be desirable, for clinical liability risks. 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.
CONTROL BY GLAXO, MANAGEMENT AND RELATED PERSONS
Glaxo currently beneficially owns approximately 33% of the Company's
outstanding Common Stock and executive officers, directors and principal
shareholders (other than Glaxo) beneficially own approximately 2% of the
Company's outstanding Common Stock. In March 1998, the Company agreed to sell
and Glaxo agreed to purchase $50 million of Series AA Preferred Stock, subject
to certain conditions. If such sale is completed, Glaxo will own approximately
37% of the then outstanding Common Stock and Common Stock equivalents of the
Company. 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.
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 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.
VOLATILITY OF STOCK PRICE
The market price of the Company's Common Stock since the Company's initial
public offering in June 1996 has increased dramatically and has been highly
volatile. In addition to overall stock market fluctuations, factors such as
announcements of results of research activities, collaborative agreements,
technological innovations, or new commercial products by the Company,
collaborative partners or competitors, changes in government regulation,
regulatory actions, changes in patent laws, developments concerning proprietary
rights, quarterly variations in operating results, litigation and other events
may have a significant impact on the market price of the Company's Common Stock.
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
29
<PAGE>
particular companies. Further, there has been particular volatility in the
market prices of securities of biotechnology and other life sciences companies.
ITEM 2. PROPERTIES
Affymetrix leases two facilities in Santa Clara, California, totaling
101,000 square feet for research laboratories and administrative offices under a
lease expiring in 2003. The Company has an option to renew the leases on these
facilities for an additional three 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. In February 1998, the Company purchased approximately ten acres
of land near Sacramento, California, upon which the Company plans to build
additional manufacturing facilities. The Company expects to continue to expand
its manufacturing facilities as well as its research and development facilities
over the next few years.
ITEM 3. LEGAL PROCEEDINGS
On March 3, 1997, Hyseq filed a lawsuit in United States District Court for
the Northern District of California (San Jose Division) alleging that certain
Affymetrix products infringe United States patents 5,202,231 and 5,525,464. In
addition, in December 1997, Hyseq filed a second action claiming that certain
Affymetrix products infringe a related patent, United States patent 5,695,940.
The Hyseq actions and any other 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 partners to obtain a license in order to continue to
manufacture or market the affected products and processes. While the Company
believes that the Hyseq complaints are without merit, there can be no assurance
that the Company will prevail in the Hyseq actions or that the Company or its
collaborative partners will prevail in any other action, nor can there be any
assurance that any license (including licenses proposed by third parties)
required would be made available on commercially acceptable terms, if at all.
On January 6, 1998, the Company filed a patent infringement action in the
United States District Court for the District of Delaware (No. 98-6) alleging
that certain of Incyte, Inc.'s ("Incyte") and Synteni, Inc.'s ("Synteni")
products infringe United States Patent 5,445,934. The action seeks to enjoin
commercial activities of Incyte and Synteni relating to the Affymetrix patent.
There can be no assurance that Affymetrix will prevail in such litigation or be
successful in asserting its patent rights. The Company is likely to incur
substantial costs and expend substantial personnel time in asserting the
Company's patent rights against Incyte and Synteni. Failure to successfully
enforce its patent rights or the loss of these patent rights or others would
remove a legal obstacle to competitors in designing systems with similar
competitive advantages, which could have a material adverse effect on the
Company's business, financial condition and operating results.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the year ended
December 31, 1997.
30
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market System
under the symbol of AFFX. The following table sets forth, for the periods
indicated, the low and high bid prices per share for the Company's Common Stock
as reported by the Nasdaq National Market.
<TABLE>
<CAPTION>
LOW HIGH
------ ------
<S> <C> <C>
1996
- --------------------------------------------------
Second Quarter
(BEGINNING JUNE 6, 1996)........................ $14.50 $17.88
Third Quarter..................................... $ 9.00 $19.00
Fourth Quarter.................................... $15.88 $23.50
1997
- --------------------------------------------------
First Quarter..................................... $19.75 $36.38
Second Quarter.................................... $20.38 $35.25
Third Quarter..................................... $29.13 $49.88
Fourth Quarter.................................... $29.75 $47.63
</TABLE>
As of December 31, 1997, there were approximately 372 holders of record of
the Company's Common Stock.
No dividends have been paid on the Common Stock. The Company currently
intends to retain all future earnings, if any, for use in its business and does
not anticipate paying any cash dividends on its common stock in the foreseeable
future. If the sale of the Series AA Preferred Stock to Glaxo is completed, the
Company will pay a semi-annual, cumulative dividend of 6.5% per year on the
Series AA Preferred Stock.
USE OF PROCEEDS
On June 6, 1996, a Registration Statement on Form S-1 (No. 333-3648) was
declared effective by the Securities and Exchange Commission, pursuant to which
6,153,000 shares of the Company's Common Stock, no par value, were offered and
sold for the account of the Company at a price of $15.00 per share, generating
gross offering proceeds of $92.3 million for the account of the Company. The
managing underwriters for the offering were Robertson Stephens, CS First Boston
and Montgomery Securities.
From the effective date of the Registration Statement to December 31, 1997,
the Company incurred $6.2 million in underwriting discounts and commissions and
$1.0 million in other related expenses. Total expenses incurred in connection
with the offering were $7.2 million. The net proceeds of the offering, after
deducting the foregoing expenses, were $85.1 million. No direct or indirect
payments were made to directors, officers, or general partners of the Company or
their associates, or to persons owning 10% or more of any class of equity
securities of the Company and its affiliates.
From the effective date of the Registration Statement to December 31, 1997,
the Company estimates that it has used a portion of the net proceeds of the
offering as follows: (i) temporary investment in marketable debt securities,
$71.6 million; and (ii) working capital, $13.5 million.
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical information has been derived from the
audited financial statements of the Company. The financial statements as of
December 31, 1997 and 1996 and for each of the three
31
<PAGE>
years in the period ended December 31, 1997 are derived from audited financial
statements and are included elsewhere in this Form 10-K. The table should be
read in conjunction with Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Item 8. "Financial Statements
and Supplementary Data."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Product............................... $ 4,789 $ 1,389 $ -- $ -- $ --
Contract and grant.................... 14,976 10,583 4,625 1,574 1,413
-------- -------- -------- -------- --------
Total revenue....................... 19,765 11,972 4,625 1,574 1,413
-------- -------- -------- -------- --------
Cost and expenses:
Cost of product revenue............... 4,559 2,178 -- -- --
Research and development.............. 28,168 18,762 12,420 9,483 6,566
Selling, general and administrative... 14,697 7,569 3,833 2,303 577
-------- -------- -------- -------- --------
Total cost and expenses............. 47,424 28,509 16,253 11,786 7,143
-------- -------- -------- -------- --------
Loss from operations.................... (27,659) (16,537) (11,628) (10,212) (5,730)
Interest income, net.................... 5,133 4,310 881 532 138
-------- -------- -------- -------- --------
Net loss................................ $(22,526) $(12,227) $(10,747) $ (9,680) $ (5,592)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Basic and diluted net loss per share
(1)................................... $ (0.99) $ (0.62) $ (0.84) $ (0.94) $ (1.69)
Shares used in computing basic and
diluted net loss per share (1)........ 22,644 19,793 12,722 10,250 3,312
BALANCE SHEET DATA:
Cash, cash equivalents, and short-term
investments........................... $ 71,573 $108,982 $ 38,883 $ 17,805 $ 20,392
Working capital......................... 71,553 107,668 36,070 15,677 17,452
Total assets............................ 101,170 118,900 44,594 19,945 22,897
Long-term obligations................... 513 741 948 7,135 --
Accumulated deficit..................... (67,269) (44,743) (32,516) (21,769) (12,089)
Total shareholders' equity.............. 91,036 112,533 38,561 9,254 19,294
</TABLE>
- ------------------------
(1) In 1998, the Company adopted the provisions of Staff Accounting Bulletin No.
98 ("SAB 98") and Statement of Financial Accounting Standards No. 128
"Earnings Per Share" and restated all prior periods. SAB 98 eliminated the
impact of certain dilutive securities on the number of shares used to
determine basic and diluted net loss per share during the period prior to
the Company's initial public offering. See Note 1 to the Financial
Statements included in Exhibit 13.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information under the caption "Management's Discussion and Analysis of
Financial Conditions and Results of Operations" included in Exhibit 13 to this
Form 10-K Report is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and notes thereto included in Exhibit 13 to this
Form 10-K Report are incorporated herein by reference.
32
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference to the sections of the Company's proxy statement
for the 1998 Annual Meeting of Shareholders entitled "Election of Directors."
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the sections of the Company's proxy statement
for the 1998 Annual Meeting of Shareholders entitled "Executive Compensation,"
"Compensation Committee Report," "Certain Transactions" and "Compensation of
Directors."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the section of the Company's proxy statement
for the 1998 Annual Meeting of Shareholders entitled "Stock Ownership of
Principal Shareholders and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the section of the Company's proxy statement
for the 1998 Annual Meeting of Shareholders entitled "Certain Transactions."
33
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) The Financial Statements and notes thereto included in Exhibit 13 to this
Form 10-K Report are incorporated herein by reference.
(a)(2) The schedules have been omitted because they are not applicable or are
not required or the information required to be set forth therein is
included in the Financial Statements or notes thereto.
(a)(3) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------------------------------------------------------------------------------
<C> <S>
(1)3.1 Amended and Restated Articles of Incorporation
(1)3.2 Form of Amended and Restated Articles, to be effective upon closing
of the Registrant's initial public Offering
(1)3.3 Bylaws
(1)3.4 Form of Certificate of Amendment of Amended and Restated Articles of
Incorporation
(5)4.1 Certificate of Determination as filed with the Secretary of State of
the State of California on March 11, 1998
+(1)10.1 1993 Stock Plan, as amended
+(1)10.2 1996 Nonemployee Directors Stock Option Plan
*(1)10.3 Collaboration Agreement by and between Hewlett-Packard Company and
Affymetrix, Inc. dated November 11, 1994
*(1)10.4 Development and Supply Agreement between Affymetrix, Inc. and
Genetics Institute, Inc. dated November 15, 1994
*(1)10.5 Supply Agreement with Genetics Institute, Inc. dated December 8,
1995
*(1)10.6 Technology License Agreement among Affymax N.V., Affymax
Technologies, N.V., the Affymax Research Institute, and
Affymetrix, Inc. dated January 1, 1993
+(1)10.7 Severance Agreement and Release between Affymetrix, Inc. and David
B. Singer dated June 15, 1995
+(1)10.8 Loan and Pledge Agreement between David B. Singer and Affymetrix,
Inc. effective December 7, 1993
*(1)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.
(1)10.10 Amendment 1 to the ATP Participation Agreement between Affymetrix,
Inc. and Molecular Dynamics, Inc. effective January 13, 1996
*(1)10.11 Governance Agreement between Affymetrix, Inc. and Glaxo Wellcome plc
dated July 6, 1995
(1)10.12 Services Agreement between Affymax Research Institute and
Affymetrix, Inc. effective October 1, 1993
(1)10.13 Loan Agreement between Affymax Technologies N.V. and Affymetrix,
Inc. dated December 1, 1994
(1)10.14 Lease between Solar Oakmead Joint Venture and Affymetrix, Inc. dated
October 20, 1995
(1)10.15 Sublease between Salutar, Inc. and Affymetrix, Inc. dated October
20, 1995
(1)10.16 Sublease between Affymax Research Institute and Affymetrix, Inc.
dated February 1, 1994
*(1)10.17 Manufacturing and Supply Agreement between Affymetrix, Inc. and
RELA, Inc. dated November 27, 1995
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------------------------------------------------------------------------------
<C> <S>
+(1)10.18 Loan and Pledge Agreement between Stephen P.A. Fodor and Affymetrix,
Inc. effective December 7, 1993
+(1)10.19 Agreement between Stephen P.A. Fodor and Affymetrix, Inc. dated
November 1, 1994
+(1)10.20 Form of Director and Officer Indemnification Agreement
*(1)10.21 Demonstration Agreement between Affymetrix, Inc. and Glaxo Wellcome,
Inc. dated May 1, 1996
(1)10.22 Lease between Harry Locklin and Affymetrix, Inc. dated December 5,
1994
(2)10.23 Lease between Sobrato Interest and Affymetrix, Inc. dated May 31,
1996 (338040 Central Expressway, Santa Clara, CA)
(2)10.24 Lease between Sobrato Interest and Affymetrix, Inc. dated May 31,
1996 (34500 Central Expressway, Santa Clara, CA)
*(3)10.25 Collaboration Agreement between bioMerieux Vitek, Inc. and
Affymetrix, Inc. effective as of September 1, 1996
*(3)10.26 Manufacturing Agreement between bioMerieux Vitek, Inc. and
Affymetrix, Inc. effective as of September 1, 1996
(3)10.27 Collaboration Agreement between Incyte Pharmaceuticals, Inc. and
Affymetrix, Inc. made as of November 11, 1996
*(4)10.28 Supply Agreement among F. Hoffmann--La Roche Ltd., Hoffmann La-Roche
Inc., Syntex (U.S.A.) Inc. and Affymetrix, Inc. effective as of
August 15, 1997
**10.29 Sales Representation Agreement between Affymetrix, Inc. and Amersham
Pharmacia Biotech, Ltd. dated November 28, 1997
**10.30 License Agreement between Affymetrix, Inc. and Molecular Dynamics,
Inc. dated November 28, 1997
(6)10.31 Series AA Preferred Stock Purchase Agreement dated March 9, 1998 by
and between Affymetrix, Inc. and Glaxo Wellcome Americas, Inc.
with exhibits.
13 Financial Statements
23 Consent of Ernst & Young LLP, independent auditors (included on page
39)
24 Power of Attorney (included on page 36)
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedules
</TABLE>
- ------------------------
(1) Incorporated by reference to the same number exhibit filed with Registrant's
Registration Statement on Form S-1 (File No. 333-3648), as amended
(2) Incorporated by reference to the same number exhibit filed with the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996
(File No. 000-28218)
(3) Incorporated by reference to the same number exhibit filed with the
Company's Report on Form 10-K for the year ended December 31, 1996 (File No.
000-28218)
(4) Incorporated by reference to the Exhibit 10.1 filed with the Registrant's
Registration Statement on Form S-3 (File No. 333-38167)
(5) Incorporated by reference to the Exhibit 4 filed with the Company's Current
Report on Form 8-K dated March 9, 1998 (File No. 000-28218)
(6) Incorporated by reference to the Exhibit 10 filed with the Company's Current
Report on Form 8-K dated March 9, 1998 (File No. 000-28218).
* Confidential treatment granted
** Confidential treatment requested
+ Management contract, compensatory plan or arrangement
(b) Reports on Form 8-K.
The Company filed a Report on Form 8-K dated October 24, 1997 reporting the
Company's financial results for the three and nine months ended September 1997.
35
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities
Exchange Act of 1934, the registrant has caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
<TABLE>
<CAPTION>
AFFYMETRIX, INC.
(Registrant)
<S> <C> <C>
March 31, 1998 By /s/ STEPHEN P.A. FODOR, PH.D.
------------------------------------------
Stephen P.A. Fodor, Ph.D.
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
DIRECTOR
March 31, 1998 By /s/ EDWARD M. HURWITZ
------------------------------------------
Edward M. Hurwitz
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER)
</TABLE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Stephen P.A. Fodor, Ph.D. and Edward M. Hurwitz,
or either of them, each with the power of substitution, his attorney-in-fact, to
sign any amendments to this Form 10-K (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 Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
---------------------------------------- -------------------------- -------------------
<S> <C> <C> <C>
President, Chief Executive
By /s/ STEPHEN P.A. FODOR, PH.D. Officer and Director
---------------------------------------- (Principal Executive March 31, 1998
Stephen P.A. Fodor, Ph.D. Officer)
Vice President and Chief
By /s/ EDWARD M. HURWITZ Financial Officer
---------------------------------------- (Principal Financial and March 31, 1998
Edward M. Hurwitz Accounting Officer)
By /s/ JOHN D. DIEKMAN, PH.D.
---------------------------------------- Chairman of the Board March 31, 1998
John D. Diekman, Ph.D.
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
---------------------------------------- -------------------------- -------------------
<S> <C> <C> <C>
By /s/ PAUL BERG, PH.D.
---------------------------------------- Director March 31, 1998
Paul Berg, Ph.D.
By
---------------------------------------- Director March , 1998
Douglas M. Hurt
By /s/ VERNON R. LOUCKS, JR.
---------------------------------------- Director March 31, 1998
Vernon R. Loucks, Jr.
By /s/ BARRY C. ROSS, PH.D.
---------------------------------------- Director March 31, 1998
Barry C. Ross, Ph.D.
By /s/ DAVID B. SINGER
---------------------------------------- Director March 31, 1998
David B. Singer
By /s/ LUBERT STRYER, M.D.
---------------------------------------- Director March 31, 1998
Lubert Stryer, M.D.
By /s/ JOHN A. YOUNG
---------------------------------------- Director March 31, 1998
John A. Young
</TABLE>
37
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
Affymetrix, Inc.
We have audited the accompanying balance sheets of Affymetrix, Inc. as of
December 31, 1997 and 1996, and the related statements of operations,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1997. 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. at December
31, 1997 and 1996, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
Ernst & Young LLP
Palo Alto, California,
January 23, 1998
38
<PAGE>
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
of Affymetrix, Inc. (Form S-8 File Numbers 333-11299 and 333-35287) of our
report dated January 23, 1998, with respect to the financial statements of
Affymetrix, Inc. included in the Annual Report (Form 10-K) for the year ended
December 31, 1997.
Ernst & Young LLP
Palo Alto, California
March 27, 1998
39
<PAGE>
AFFYMETRIX, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Financial Statements and Notes.......... Incorporated by reference from Exhibit 13
pages 5-17.
<S> <C>
Report of Ernst & Young LLP, Independent
Auditors.............................. Page 38 of this Form 10-K Report.
</TABLE>
40
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------------------------------------------------------------------------------
<C> <S>
(1)3.1 Amended and Restated Articles of Incorporation
(1)3.2 Form of Amended and Restated Articles, to be effective upon closing
of the Registrant's initial public Offering
(1)3.3 Bylaws
(1)3.4 Form of Certificate of Amendment of Amended and Restated Articles of
Incorporation
(5)4.1 Certificate of Determination as filed with the Secretary of State of
the State of California on March 11, 1998
+(1)10.1 1993 Stock Plan, as amended
+(1)10.2 1996 Nonemployee Directors Stock Option Plan
*(1)10.3 Collaboration Agreement by and between Hewlett-Packard Company and
Affymetrix, Inc. dated November 11, 1994
*(1)10.4 Development and Supply Agreement between Affymetrix, Inc. and
Genetics Institute, Inc. dated November 15, 1994
*(1)10.5 Supply Agreement with Genetics Institute, Inc. dated December 8,
1995
*(1)10.6 Technology License Agreement among Affymax N.V., Affymax
Technologies, N.V., the Affymax Research Institute, and
Affymetrix, Inc. dated January 1, 1993
+(1)10.7 Severance Agreement and Release between Affymetrix, Inc. and David
B. Singer dated June 15, 1995
+(1)10.8 Loan and Pledge Agreement between David B. Singer and Affymetrix,
Inc. effective December 7, 1993
*(1)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.
(1)10.10 Amendment 1 to the ATP Participation Agreement between Affymetrix,
Inc. and Molecular Dynamics, Inc. effective January 13, 1996
*(1)10.11 Governance Agreement between Affymetrix, Inc. and Glaxo Wellcome plc
dated July 6, 1995
(1)10.12 Services Agreement between Affymax Research Institute and
Affymetrix, Inc. effective October 1, 1993
(1)10.13 Loan Agreement between Affymax Technologies N.V. and Affymetrix,
Inc. dated December 1, 1994
(1)10.14 Lease between Solar Oakmead Joint Venture and Affymetrix, Inc. dated
October 20, 1995
(1)10.15 Sublease between Salutar, Inc. and Affymetrix, Inc. dated October
20, 1995
(1)10.16 Sublease between Affymax Research Institute and Affymetrix, Inc.
dated February 1, 1994
*(1)10.17 Manufacturing and Supply Agreement between Affymetrix, Inc. and
RELA, Inc. dated November 27, 1995
+(1)10.18 Loan and Pledge Agreement between Stephen P.A. Fodor and Affymetrix,
Inc. effective December 7, 1993
+(1)10.19 Agreement between Stephen P.A. Fodor and Affymetrix, Inc. dated
November 1, 1994
+(1)10.20 Form of Director and Officer Indemnification Agreement
*(1)10.21 Demonstration Agreement between Affymetrix, Inc. and Glaxo Wellcome,
Inc. dated May 1, 1996
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------------------------------------------------------------------------------
<C> <S>
(1)10.22 Lease between Harry Locklin and Affymetrix, Inc. dated December 5,
1994
(2)10.23 Lease between Sobrato Interest and Affymetrix, Inc. dated May 31,
1996 (338040 Central Expressway, Santa Clara, CA)
(2)10.24 Lease between Sobrato Interest and Affymetrix, Inc. dated May 31,
1996 (34500 Central Expressway, Santa Clara, CA)
*(3)10.25 Collaboration Agreement between bioMerieux Vitek, Inc. and
Affymetrix, Inc. effective as of September 1, 1996
*(3)10.26 Manufacturing Agreement between bioMerieux Vitek, Inc. and
Affymetrix, Inc. effective as of September 1, 1996
(3)10.27 Collaboration Agreement between Incyte Pharmaceuticals, Inc. and
Affymetrix, Inc. made as of November 11, 1996
*(4)10.28 Supply Agreement among F. Hoffmann-La Roche Ltd., Hoffmann La-Roche
Inc., Syntex (U.S.A.) Inc. and Affymetrix, Inc. effective as of
August 15, 1997
**10.29 Sales Representation Agreement between Affymetrix, Inc. and Amersham
Pharmacia Biotech, Ltd. dated November 28, 1997
**10.30 License Agreement between Affymetrix, Inc. and Molecular Dynamics,
Inc. dated November 28, 1997.
(6)10.31 Series AA Preferred Stock Purchase Agreement dated March 9, 1998 by
and between Affymetrix, Inc. and Glaxo Wellcome Americas, Inc.
with exhibits.
13 Financial Statements
23 Consent of Ernst & Young LLP, independent auditors (included on page
39)
24 Power of Attorney (included on page 36)
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedules
</TABLE>
- ------------------------
(1) Incorporated by reference to the same number exhibit filed with Registrant's
Registration Statement on Form S-1 (File No. 333-3648), as amended
(2) Incorporated by reference to the same number exhibit filed with the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996
(File No. 000-28218)
(3) Incorporated by reference to the same number exhibit filed with the
Company's Report on Form 10-K for the year ended December 31, 1996 (File No.
000-28218)
(4) Incorporated by reference to the Exhibit 10.1 filed with the Registrant's
Registration Statement on Form S-3 (File No. 333-38167)
(5) Incorporated by reference to the Exhibit 4 filed with the Company's Current
Report on Form 8-K dated March 9, 1998 (File No. 000-28218)
(6) Incorporated by reference to the Exhibit 10 filed with the Company's Current
Report on Form 8-K dated March 9, 1998 (File No. 000-28218).
* Confidential treatment granted
** Confidential treatment requested
+ Management contract, compensatory plan or arrangement
<PAGE>
Exhibit 10.29
SALES REPRESENTATION AGREEMENT
Affymetrix, Inc.
Amersham Pharmacia Biotech, Ltd
[THE SYMBOL "**" IS USED THROUGHOUT THIS EXHIBIT TO INDICATE THAT A PORTION OF
THE EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION.]
<PAGE>
CONTENTS
1. Appointment; Products; Start of Obligations.. . . . . . . . . . . . . .3
2. Representative Covenants and Representations. . . . . . . . . . . . . .4
3. Commissions, Collections and Payment; Supply Terms. . . . . . . . . . .7
4. Product Support.. . . . . . . . . . . . . . . . . . . . . . . . . . . .9
5. Limited Warranty. . . . . . . . . . . . . . . . . . . . . . . . . . . .9
6. Indemnity.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
7. Limited Liability.. . . . . . . . . . . . . . . . . . . . . . . . . . 11
8. Term and Termination. . . . . . . . . . . . . . . . . . . . . . . . . 11
9. General.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
<PAGE>
This Sales Representation Agreement (the "Agreement") is entered as of
November 28, 1997 by and between Affymetrix, Inc. ("Company"), a Delaware
corporation, with its principal place of business at 3380 Central Expressway,
Santa Clara, California and Amersham Pharmacia Biotech, Ltd ("Representative"),
with its principal place of business at Bjorkgatan 30, S-751, 84 Uppsala,
Sweden.
1. APPOINTMENT; PRODUCTS; START OF OBLIGATIONS.
a. Subject to all the terms and conditions of this Agreement, Company
hereby appoints Representative for the term of this Agreement as a worldwide,
nonexclusive agent of Company for soliciting, taking and filling orders for the
sale by Company (collectively, "solicits" or "solicitation") of Company's
products set forth in Attachment A (as modified from time to time), together
with the documentation therefor ("Products"), but for research, non-diagnostic
use only (the "Field of Use"), and only pursuant to the terms of the applicable
customer sales agreement for each Product as provided hereunder. The parties
anticipate that other generally, commercially available chip products for use in
expression, re-sequencing and mapping fields, and other non-chip products may be
added to Attachment A from time to time, by mutual agreement of the parties.
Company reserves the right to change, modify or discontinue any Product at any
time; provided, however, that Representative shall have the right to sell off
any remaining inventory of discontinued Products or, alternatively, return such
inventory to Company for a credit equal to any amount paid therefor. Nothing in
this Agreement shall be construed as limiting in any manner Company's marketing
or distribution activities or its appointment of dealers, distributors,
licensees or agents; or, with respect to any products other than the Products,
Representative's marketing or distribution activities. All Products shall be
distributed to customers only accompanied by Company's then-current sales
agreement or such other alternative sales agreement as is approved by the
Committee (as defined below) for such purpose. Prior to approval of an
alternative sales agreement by the Committee, nothing contained herein will
preclude Representative from using its commercial terms in dealing with
customers, provided that such terms are (i) fully consistent with (and as
protective of the Company, its intellectual property and its rights and
obligations as) the Company's then current sales agreement and (ii) fully
consistent with this Agreement and with the Company's role as principal (and
Representative's role as a sales representative) with respect of the sale of
Products.
b. Representative may solicit the Products by themselves, or bundled
with, or in conjunction with, other products; provided, however, that Products
bundled with or in conjunction with other products that compete with any Product
shall only be bundled with Company's prior written approval. All solicitation of
Products shall be directly to customers, and not through other agents or
representatives, and in any event only for the Field of Use. All Products shall
bear the names, logos, notices and other designations ("Designations") required
by Company. When Representative solicits Products bundled with or in conjunction
with other products, Representative may brand such other products with its own
Designations, but will ensure that Company's Designations are displayed in at
least as prominent location and shall be of equal size. Representative shall not
alter, remove, obscure, or deface any of Company's Designations. From time to
time, at Company's reasonable request, Representative shall supply samples of
products that are bundled with or offered in conjunction with Products to
Company for inspection, and Representative will comply with all reasonable
requests of Company for changes thereto to conform with Company standards.
Except to the extent expressly and
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<PAGE>
unambiguously set forth herein, Company retains all rights and licenses with
respect to the Products, and Representative has no right to use any Products
except to solicit orders as provided herein.
c. Products may be solicited by Representative, or by the affiliates of
Representative set forth on Attachment D ("Affiliates"), which will be completed
by Representative within thirty (30) days after execution of this Agreement.
Representative may propose additional affiliates in which Representative owns,
directly or indirectly, more than fifty percent (50%) of the outstanding shares
of securities (representing the right to vote for the election of directors or
other managing authority); such proposals shall be added to the list of
Affiliates upon Company's approval, which will not be withheld unreasonably.
Representative shall bind all Affiliates in writing to all the restrictions on
Representative contained in this Agreement, and Representative shall ensure that
the Affiliates only solicit Products subject to such restrictions.
d. Until February 1, 1998 ("Solicitation Date"), Representative
acknowledges that Company shall not be obliged to accept or fill any orders for
Products, and Company acknowledges that Representative shall not be obliged to
actively solicit orders for Products; all other obligations and requirements of
this Agreement shall be in full force during this time.
e. Sales will not be made in any country until such country has been
approved by Company as a supported region which approval will not be
unreasonably withheld.
2. REPRESENTATIVE COVENANTS AND REPRESENTATIONS.
Except as expressly and unambiguously provided herein, Representative
represents, warrants, and covenants:
a. to use all diligent efforts, on behalf of Company to solicit Products
to third parties in a manner intended to maximize Company sales of Products.
Without limiting the foregoing, Representative shall provide meaningful
incentives to its sales representatives to encourage them to continuously and
diligently solicit sales of Products, where such incentives shall be reasonable
and non-discriminatory to incentives that Representative provides for soliciting
competitive products. From time to time, the Committee (as defined below) may
propose, and Representative shall consider, possible incentives. Representative
shall be entitled to allocate its efforts between Products and other products in
a reasonable commercial manner; provided, however, that if Representative
solicits any products that compete, directly or indirectly, with Products, then
Representative shall not discriminate in any manner against Products, or favor
such competing products to the detriment of sales of Products. The Company will
not actively compete in order to undercut Representative with materially more
favorable terms as a whole (to the customer) for specific sales from those end
users of Products where Representative has made the principal sales efforts in
proportion to Company's efforts to make those specific sales, whereby a net
result is avoidance of commissions that would otherwise be due on account of
sales of those Products. In the event that Representative reasonably believes
that Company has systematically made such sales, Representative will bring the
issue to the Committee and the Committee will identify mechanisms to avoid such
competing sales. In the event that the Committee cannot resolve such issues,
any disputes will be resolved according to the procedures in Section 2.g. It is
understood that this Section shall not limit Company's ability to, INTER ALIA,
enter into academic
4
<PAGE>
collaborations for use of the Probe Arrays, enter into joint ventures or
other arrangements providing substantial intellectual property rights to
Company, or enter into agreements that stimulate interest and sales of the
Probe Arrays.
b. to at all times maintain an adequate inventory of all commercially
generally available Products at its Chicago, Illinois facility, and/or such
other facility in the United States or Europe as Representative may reasonably
designate from time to time ("Facility") (where the inventory levels shall be
determined and modified by the Committee, and where inventory levels may overlap
for a reasonable transition period when the location of the Facility changes),
solicit Products (whether or not bundled with other products) only at the prices
indicated on the Price List set forth on Attachment B (as modified by Company
from time to time at its sole discretion), ship Products from inventory or as
supplied by Company to fill orders, include a copy of the applicable customer
sales agreement with each Product shipped, invoice and collect from customers
payments for the Products and remit such collections to Company.
c. that it will not ship any Product from inventory with a remaining
shelf-life that is less than the time-period described in the warranty set forth
in the Company sales agreement accompanying such Product, with a reasonable
shelf life to be established for each Product by Company, and a difference
between warranted shelf life and remaining shelf life established for each
Product by the Committee.
d. as Company's agent hereunder, to act reasonably and in good faith with
respect to Company, and comply with good business practices and all laws and
regulations and standards of industry and professional conduct relevant to this
Agreement or the subject matter hereof.
e. to fulfill the marketing and promotional activities (alone or in
conjunction with Company) set forth on Attachment C, pursuant to a detailed
sales and marketing plan to be developed by the Committee ("Marketing
Activities") at their expense, where the Marketing Activities will be reviewed
and modified from time to time by the Committee, and any such modifications
suggested by a party will not be objected to unreasonably by the other party.
Representative shall submit all promotional materials that reference Products or
Company by name to Company at least 30 days prior to the date of introduction,
for prior approval before use. In those cases where literature is to be
provided to Representative, Company will provide necessary original materials,
and Representative will perform needed production activities.
f. to provide Company within five (5) days of the beginning of each
calendar quarter with a good faith forecast of Representative's quantity
requirements for each Product for the next four (4) quarters.
g. to appoint an employee with appropriate skills and authority to a
committee comprised of representatives of both parties that shall manage certain
interactions between the parties hereto ("Committee"). Such employee (or a proxy
that is reasonably acceptable to Company) shall attend all Committee meetings,
including, but not limited to, regularly scheduled meetings that will be held at
least once each calendar quarter at Company's offices or another mutually agreed
upon location. Such employee shall participate fully in fulfilling Committee
functions, including, but not limited to, establishing bundling specifications,
determining Support Terms (as described below), managing Products introduction
through Representative
5
<PAGE>
(including, but not limited to, any special Product order lead time
requirements, shipping and delivery procedures and any adjustments to the
forecast and order mechanism set forth in the preceding paragraph), joint
Marketing Activities, reporting formats, and other functions to maximize
sales of Products, and shall, on behalf of Representative, keep the parties
informed of the requirements of the end users and the marketplace. All
decisions taken by the Committee shall be unanimous. In the event that the
Committee is unable to reach a decision by unanimous action with respect to
any matter for which it is clearly responsible and such inability continues
for a period of forty-five (45) days after the date on which the matter is
first submitted to the Committee, Company and Representative shall, on such
date, each refer the matter to its chief operating or executive officers for
resolution. Each party shall set forth in writing and provide to the other a
proposed solution to the impasse at the time that the matter is referred to
its chief operating officer or executive officers. The chief operating
officer or executive officers of the parties shall within fifteen (15) days
thereafter meet and confer in good faith for the purpose of achieving a
compromise solution. In the absence of agreement upon a detailed sales and
marketing plan by 30 days before a due date set by the Committee for which
the plan must be available for implementation in the following year, either
Party may submit the outstanding issues to expedited binding arbitration such
that such issues may be resolved before the due date earlier set by the
Committee. All other disputes shall be resolved by arbitration according to
Section 9.
h. to immediately notify Company of any adverse or unexpected results or
any actual or potential government action relevant to a Product and, if and to
the extent requested by Company in writing, to suspend sales of that Product.
i. to keep for two (2) years after termination of this Agreement records
of all Product sales and customers sufficient to adequately administer a recall
of any Product and to cooperate fully in any decision by Company to recall,
retrieve and/or replace any Product.
j. to regularly inform Company as to any desired improvements or
modifications to the Products suggested by Representative or any end user
customers, and to advise Company periodically with respect to competitors and
the introduction and/or success of products that are competitive with the
Products as long as such disclosures do not violate any confidentiality
obligations that Representative has to any third party; in addition,
Representative will allow Company to make a presentation to Representative's
sales representatives at least once each calendar year.
k. to keep Company informed as to any problems encountered with the
Products and any resolutions arrived at for those problems, and to communicate
promptly to Company any and all modifications, design changes or improvements of
the Products suggested by any customer, employee or agent, as long as such
disclosures do not violate any confidentiality obligations that Representative
has to any third party, Representative to use reasonable efforts to obtain the
right to disclose such information. Representative further agrees that, and
hereby grants to, Company a non-exclusive, worldwide, royalty-free right and
license to any and all such suggested modifications, design changes, or
improvements of the Products ("Improvements"), to use, incorporate and otherwise
exploit such Improvements in connection with the Products; provided that such
license shall not grant Company any rights to any of Representative's
intellectual property to reagents, array development products, or any other
intellectual property that is not
6
<PAGE>
developed or acquired in connection with an Improvement. Representative will
also endeavor to notify Company of any infringement of any patents or other
proprietary rights relating to the Products.
1. to comply with the U.S. Foreign Corrupt Practices Act and all
applicable export laws, restrictions, and regulations of the United States or
foreign agency or authority, and not export, or allow the export or re-export
of any Product in violation of any such laws, restrictions or regulations,
and to obtain, and bear all expenses relating to, any necessary licenses
and/or exemptions with respect to the export from the U.S. of any Product to
any location.
3. COMMISSIONS, COLLECTIONS AND PAYMENT; SUPPLY TERMS.
a. Representative shall comply with the following provisions in
connection with paying Company, invoicing customers and collecting payments from
customers on behalf of Company hereunder:
i. For each shipment of Product by Company to Representative,
Representative shall pay to Company, in US dollars, within sixty (60) days of
the later of receipt of the shipment or receipt of Company's invoice the
amount due for such shipment, less the applicable Order Fees and commissions
shown on Attachment F, except that any "drop shipped" Products shall be
subject to [**]. If the Order Fee. Representative will consolidate orders
when reasonable. Company will have the right to contest the processing fee in
those circumstances where such orders are not reasonably consolidated.
ii. As part of its duties hereunder, Representative shall be
responsible for promptly invoicing customers for all Products shipped at the
prices set forth on the Price List, and for collecting the amounts shown in
such invoices. Representative shall use best efforts to collect from
customers payments of all invoices and Representative shall be entitled to
retain the amount collected from the applicable customer as reimbursement to
Representative for any payments made by Representative to Company pursuant to
paragraph (i) above.
iii. Notwithstanding the provisions of paragraph (i) above,
Company shall retain the risk of collectibility of accounts receivable
relating to all Products sold under this Agreement. With respect to any
invoice for which Representative has not received a collection from the
customer within 180 days after the date of such invoice (an "Uncollected
Invoice"), (A) Representative shall turn over to Company for collection the
Uncollected Invoice and (B) Company shall credit to Representative's future
commissions (I) the amount of the Uncollected Invoice that was previously
paid by Representative to Company pursuant to paragraph (i) above plus
(II) the Order Fee that Representative was entitled to for such Uncollected
Invoice plus (III) 120 days' interest on the amount specified in (I) at an
annual rate of 12% or, if lower, the maximum rate allowed by law. Thirty days
after the expiration or termination of this Agreement, any outstanding
invoices shall become Uncollected Invoices subject to the foregoing, except
that Company shall pay Representative the amounts that would otherwise have
been credited on such post-termination Uncollected Invoices. Representative
will use reasonable efforts to avoid shipment to those customers with poor
collection histories provided that Representative is aware of such poor
collection history.
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<PAGE>
iv. Within fifteen (15) days following the end of each calendar
quarter, Representative shall provide Company with a detailed statement
setting forth (A) all sales and solicitations of Products, identity of the
customer, and amounts invoiced and collected thereon, (B) the quantity of
Products that Representative retains in inventory, (C) the amounts of
warranty returns processed by Representative (if any) during such quarter
relating to sales of Products pursuant to this Agreement, (D) the percentage
of sales of Products pursuant to this Agreement that such warranty returns
represented during such quarter and (E) if the percentage referred to in
clause (C) above is greater than [**], reasonable support or documentation as
to the cause of all such warranty returns. Products which are returned to
Representative shall be returned to Company at Company's expense.
v. Representative shall use reasonable efforts to match
invoices to applicable customer payments, but if more than one invoice is
outstanding with respect to such customer's account, and Representative is
unable to match any payment to a particular invoice, Representative shall
apply the "first-in, first-out" principle in determining the invoice to which
such payments applies. One or more invoices issued on the same date shall be
aggregated and treated as a single invoice for purposes of this paragraph.
vi. For any sales, ad valorem or similar taxes or duties,
customs fees or duties and other governmental assessments that arise in
connection with sales of Products by Representative, Representative shall:
(A) collect such amount on behalf of Company from the customer and remit it
to the appropriate taxing authority or jurisdiction in Company's name;
(B) show such taxes, duties or other governmental assessments separately on
customer invoices and on reports to Company; (C) provide a separate report to
Company no later than the fifteenth (15th) calendar day of each month for the
previous month indicating the customer, amount invoiced, taxes, duties and
other governmental assessments invoiced and collected, and the taxing
authority or jurisdiction. Company shall hold Representative harmless for any
liability that arises in connection with such taxes, duties and other
governmental assessments unless such liability arises due to a failure of
Representative to comply with a provision of this Agreement, including, but
not limited to, the foregoing provisions. To the extent that Representative
receives any refund on any such payments made to taxing authorities, it will
remit such refund to Company.
vii. As between Representative and Company, Representative shall
be responsible for all shipping, transportation, insurance and other charges
related to shipping Products from its Facility to customers, as well as all
taxes (except sales taxes and taxes on Company's income), duties and other
governmental assessments related to the foregoing.
b. During the term of this Agreement, subject to the other terms and
conditions of this Agreement, Company shall use its reasonable commercial
efforts to fill promptly (by full or partial shipment) Representative's written
orders for Products, which are accepted by Company at its main office, insofar
as practical and consistent with then-current Company's lead-time schedule,
shipping schedule, access to supplies on acceptable terms and allocation of
available products and capacity among Company customers. In deciding which
orders to accept, and the schedule for filling them, Company shall not
discriminate between Representative and other similarly situated agents for the
Products. Each order for a Product must comply with the minimum quantity
requirement for such Product as set forth on the Price List. Company will
8
<PAGE>
provide reasonable lead time estimates and minimum quantity requirements to
the Committee for each Product. Company will deliver all Products F.O.B.
Representative's Facility, or as the parties mutually agree, F.O.B. Company's
manufacturing facility with arrangements to ship to the customer at
customer's expense. All Products will be packaged according to Company's
standard packaging. Orders may not be changed or canceled without Company's
written approval.
c. Company will not accept returns except pursuant to Company's warranty
policy set forth in the applicable Product sales agreement and subject to the
terms, conditions and restrictions on such warranty returns in such agreement.
Representative will coordinate all returns through a designated Company contact.
Company will not accept returns from Representative valued at over [**] (based
on the original sale price of the Products) unless the designated Company
contact has given prior approval to such returns, which approval shall not be
withheld unreasonably. In the event that the returns for any country, for any
period, exceed [**] of the volume of Product sold in that country for that
period, the Committee shall investigate the reasons for excessive returns, and
shall attempt to correct and minimize such returns for future periods.
d. Company or its authorized representatives shall be entitled to review
and audit Representative's books, records and facilities, as they relate to
activities under this Agreement, from time to time during normal business hours
upon reasonable notice to Representative and at Company's expense to confirm
sales activity and compliance with the terms of this Agreement.
4. PRODUCT SUPPORT.
Company will install the relevant portions of the Product(s), at its
expense, at customer's location. Representative will provide high quality first
line support for Products to all customers through properly trained service
personnel. At a minimum, first line support shall include training, problem
diagnosis and, where feasible, problem correction. Company will provide
Representative (and only designated service personnel of Representative) with
second line support for the Products. Within sixty (60) days of the Solicitation
Date, the Committee will determine and define the levels, priorities, response
times, and other terms of such first line and second line support, including an
appropriate mechanism for referring support issues that have been ("Support
Terms"), which shall be attached hereto as Attachment E. Company shall be
responsible for any cost associated with any Product recall or government action
related to the Products, provided that Representative shall not directly or
indirectly incur any cost in connection with a recall without Company's prior
written consent, which will not be unreasonably withheld. Company will train
designated Representative personnel in a "train the trainer" format regarding
the use, applications, and other aspects of the Products.
5. LIMITED WARRANTY.
Company's sole warranty for the Products shall be the standard customer
warranty (which shall be limited to warranting the shelf-life of such Product
for a limited period of time) included in the sale agreement that Representative
shall provide to each customer as part of the sale of such Products.
Representative shall have no authority to offer, and Company shall have no
obligation to honor or liability for, any other warranty. THE PARTIES
ACKNOWLEDGE
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<PAGE>
THAT THIS IS AN AGREEMENT FOR SERVICES, NOT FOR THE SALE OF GOODS, AND THAT,
EXCEPT FOR THE WARRANTY OFFERED ABOVE, COMPANY DOES NOT OFFER ANY OTHER
WARRANTY OF THE PRODUCTS, EXPRESS OR IMPLIED, AND IN PARTICULAR COMPANY DOES
NOT WARRANT THE MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OF THE
PRODUCTS OR THE PERFORMANCE OR NONINFRINGEMENT THEREOF, DOES NOT MAKE ANY
WARRANTY, EXPRESS OR IMPLIED, WITH RESPECT TO PRODUCTS, SPECIFICATIONS,
SUPPORT, SERVICE OR ANYTHING ELSE. COMPANY HAS NOT AUTHORIZED ANYONE TO MAKE
ANY REPRESENTATION OR WARRANTY OTHER THAN AS PROVIDED ABOVE.
6. INDEMNITY.
a. INFRINGEMENT INDEMNITY. Company is responsible and shall hold
Representative and its officers, directors, agents and employees harmless
from liability resulting from claims, liabilities, damages, debts,
settlements, costs, attorneys' fees, expenses, and liabilities of any type
whatsoever that may arise on account of infringement by the Products of any
US patent issued as of the date of this Agreement, provided Company is
promptly notified of any and all threats, claims and proceedings related
thereto and given reasonable assistance and the opportunity to assume sole
control over the defense and all negotiations for a settlement or compromise;
Company will not be responsible for any settlement it does not approve in
writing. The foregoing obligation of Company does not apply with respect to
Products or portions or components (i) not supplied by Company, (ii) made in
whole or in part in accordance to Representative specifications or requests,
(iii) which are modified by Representative after shipment by Company, if the
alleged infringement relates to such modification, (iv) combined, processed
or used with other products, processes or materials where the alleged
infringement relates to such combination, process or use, (v) where
Representative continues allegedly infringing activity after being notified
thereof or after being informed of modifications that would have avoided the
alleged infringement, or (vi) where the infringement is incident to use of
the Product but does not result primarily from the Product. The foregoing
indemnity shall be Representative's sole and exclusive remedy for claims of
infringement relating to the Products.
b. PRODUCT LIABILITY INDEMNITY. Company is responsible and shall hold
Representative and its officers, directors, agents and employees harmless
from any claims, liabilities, damages, debts, settlements, costs, attorneys'
fees, expenses, and liabilities of any type whatsoever that may arise on
account of damage to property, economic loss or injury to any person arising
from use of the Products; provided Company is promptly notified of any and
all threats, claims and proceedings related thereto and given reasonable
assistance and the opportunity to assume sole control over the defense and
all negotiations for a settlement or compromise; Company will not be
responsible for any settlement it does not approve in writing. The foregoing
obligation shall not apply if the injury under which indemnity is being
claimed is due to Representative, or its officers, directors, agents or
employees provision of unauthorized representations, unauthorized warranties,
or incorrect instructions in connection with such Product, or failure to
provide correct instructions for use of such Product.
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<PAGE>
c. EXCEPTION. Notwithstanding the foregoing, the indemnity set forth
in this Section 6 shall not apply to liability arising from Representative's
negligence or willful misconduct.
7. LIMITED LIABILITY.
NOTWITHSTANDING ANYTHING ELSE IN THIS AGREEMENT OR OTHERWISE, EXCEPT AS SET
FORTH IN SECTIONS 6, 9.c, 9.i, NEITHER PARTY WILL BE LIABLE WITH RESPECT TO ANY
SUBJECT MATTER OF THIS AGREEMENT UNDER ANY CONTRACT, NEGLIGENCE, STRICT
LIABILITY, OR OTHER LEGAL OR EQUITABLE THEORY FOR (I) ANY AMOUNTS IN EXCESS IN
THE AGGREGATE OF THE AMOUNTS PAID HEREUNDER DURING THE TWELVE-MONTH PERIOD PRIOR
TO THE DATE THE CAUSE OF ACTION AROSE OR (II) ANY INCIDENTAL OR CONSEQUENTIAL
DAMAGES, OR LOST PROFITS OR (III) COST OF PROCUREMENT OF SUBSTITUTE GOODS,
TECHNOLOGY, OR SERVICES. NEITHER PARTY SHALL HAVE ANY LIABILITY FOR ANY FAILURE
OR DELAY DUE TO MATTERS BEYOND ITS REASONABLE CONTROL. THIS SECTION DOES NOT
LIMIT LIABILITY FOR BODILY INJURY OF A PERSON.
8. TERM AND TERMINATION.
a. Unless terminated earlier or extended as provided herein, this
Agreement shall have a term of three (3) years extending from the Solicitation
Date, and shall automatically renew for additional two (2) year terms unless
either party notifies the other of its desire to terminate the Agreement within
six (6) months of the end of the then-current term, unless the Agreement
terminates sooner as set forth below. Commencing on the second anniversary of
the date of this Agreement, the parties agree to begin good faith negotiations
(with no further obligation) with respect to extending the term of this
Agreement. Either party may discontinue such negotiations at any time upon
written notice to the other party; provided, however, that such termination of
such negotiations shall not otherwise affect the termination of this Agreement.
b. This Agreement may be terminated by a party for cause immediately by
written notice upon the occurrence of any of the following events:
i. if the other ceases to do business, or otherwise terminates
its business operations; or
ii. if the other shall fail to promptly secure or renew any
license, registration, permit, authorization or approval for the conduct of
its business in the manner contemplated by this Agreement or if any such
license, registration, permit, authorization or approval is revoked or
suspended and not reinstated within sixty (60) days; or
iii. if the other materially breaches any material provision of
this Agreement and fails to substantially cure such breach within 30 days
(10 days in the case of a failure to pay) of written notice describing the
breach, provided, however, that in the case of a material breach by an
Affiliate, Company may elect, in its sole discretion, to terminate this
Agreement only with respect to such Affiliate; or
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<PAGE>
iv. if the other seeks protection under any bankruptcy,
insolvency, receivership, trust deed, creditors arrangement, composition or
comparable proceeding, or if any such proceeding is instituted against the
other (and not dismissed within 90 days).
c. Each party understands that the rights of termination hereunder are
absolute and that it has no rights to a continued relationship with the other
after termination except as expressly stated herein. Neither party shall
incur any liability whatsoever for any damage, loss or expenses of any kind
suffered or incurred by the other (or for any compensation to the other)
arising from or incident to any termination of this Agreement by such party
that complies with the terms of the Agreement whether or not such party is
aware of any such damage, loss or expenses. Upon termination: (i) Company
and Representative shall mutually agree on whether to continue or terminate
any order then pending; (ii) Representative shall have the right to sell off
any remaining inventory of Products or, alternatively, return such inventory
to Company for a credit equal to the amount paid therefor, but such right to
return only applies to Products with a remaining shelf-life that is less than
the time-period described in the warranty set forth in the Company sales
agreement accompanying such Products; and (iii) Representative shall provide
Company with copies of all account and business information, including,
without limitation, (A) customer lists, (B) account records, (C) account
balances, (D) current inventory levels and (E) other records or information
relating to the business conducted under this Agreement that Company may
request. Termination is not the sole remedy under this Agreement and, whether
or not termination is effected, all other remedies will remain available.
Sections 2(d), 2(h), 2(i), 2(l), Sections 3(a), 3(d), and Sections 5 through
9, and any accrued rights to payment, shall survive termination of this
Agreement.
9. GENERAL.
a. AMENDMENT AND WAIVER--Except as otherwise expressly provided herein,
any provision of this Agreement may be amended and the observance of any
provision of this Agreement may be waived (either generally or any particular
instance and either retroactively or prospectively) only with the written
consent of the parties signed by a duly authorized officer. However, it is the
intention of the parties that this Agreement be controlling over additional or
different terms of any order, confirmation, invoice or similar document, even if
accepted in writing by both parties, and that waivers and amendments shall be
effective only if made by non-preprinted agreements clearly understood by both
parties to be an amendment or waiver.
b. ASSIGNMENT--This Agreement and the rights hereunder are not
transferable or assignable without the prior written consent of the parties
hereto (and any attempt to do so shall be void), except for rights to payment
and except to a person or entity who acquires all or substantially all of the
assets or business of a party, whether by sale, merger or otherwise.
c. RELATIONSHIP OF PARTIES--The parties hereto intend that no
partnership, joint venture or similar relationship be created pursuant to this
Agreement. Representative is solely responsible for all of its employees and its
labor costs and expenses arising in connection with this Agreement and is
responsible for and will indemnify Company from any and all claims, liabilities,
damages, debts, settlements, costs, attorneys' fees, expenses, and liabilities
of any type whatsoever that may arise on account of Representative's activities,
including without limitation, providing unauthorized representations or
warranties (or failing to disclose all limitations on
12
<PAGE>
warranties and liabilities set forth herein on behalf of Company) to its
customers or breaching any term, representation or warranty of this
Agreement, provided that Company promptly notifies Representative of any and
all threats, claims and proceedings related thereto and gives Representative
reasonable assistance and the opportunity to assume sole control of the
defense and all negotiations for a settlement or a compromise. Representative
will not be responsible for any settlement that it does not approve in
writing. Notwithstanding the foregoing, the indemnity set forth in this
Section 9.c shall not apply to liability incurred as a result of Company's
negligence or willful misconduct.
d. GOVERNING LAW AND LEGAL ACTIONS--This Agreement shall be governed by
and construed under the laws of the State of California and the United States
without regard to conflicts of laws provisions thereof and without regard to the
United Nations Convention on Contracts for the International Sale of Goods.
Unless waived by Company in writing for the particular instance (which Company
may do at its option), the sole jurisdiction and venue for actions related to
the subject matter hereof shall be the California state and U.S. federal courts
having within their jurisdiction the location of Company's principal place of
business. In any action or proceeding to enforce rights under this Agreement,
the prevailing party shall be entitled to recover costs and attorneys' fees.
e. ARBITRATION--In the event of any controversy or claim relating to,
arising out of or in any way connected to any provision of this Agreement
("Dispute"), the Parties shall seek to settle their differences amicably between
themselves and as otherwise set forth herein. Any unresolved Dispute shall be
finally resolved by final and binding arbitration. Whenever a Party shall
decide to institute arbitration proceedings, it shall give written notice to
that effect to the other Parties. The Party giving such notice shall refrain
from instituting the arbitration proceedings for a period of ten (10) days
following such notice to allow the Parties to attempt to resolve the Dispute
between themselves. If the Parties are still unable to resolve the dispute, the
Party giving notice may institute the arbitration proceeding under the rules of
the International Chamber of Commerce ("ICC Rules"). Arbitration shall be held
in Palo Alto, California. The arbitration shall be conducted before a single
arbitrator mutually chosen by the Parties, but if the parties have not agreed
upon a single arbitrator within fifteen (15) days after notice of the
institution of the arbitration proceeding, then the arbitration will be
conducted by a panel of three arbitrators, each chosen by one Party. All
arbitrator(s) eligible to conduct the arbitration must undertake in writing as a
condition of service to render their opinion(s) promptly after the final
arbitration hearing. No arbitrator (nor the panel of arbitrators) shall have
the power to award punitive damages or any award of multiple damages under this
Agreement and such awards are expressly prohibited. Decisions of the
arbitrator(s) shall be final and binding on the Parties.
f. HEADINGS--Headings and captions are for convenience only and are not
to be used in the interpretation of this Agreement.
g. NOTICES--Notices under this Agreement shall be sufficient only if
personally delivered, delivered by telecopy, delivered by a major commercial
rapid delivery courier service or mailed by certified or registered mail, return
receipt requested to a party at its addresses and telecopy number first set
forth herein or as amended by notice pursuant to this subsection. If not
received sooner, notice by mail shall be deemed received ten (10) days after
deposit in the U.S.
13
<PAGE>
mails. Notice by telecopy shall be deemed received at the time sent unless
such time is not during a business day, in which case telecopy shall be
deemed received on the next business day.
h. ENTIRE AGREEMENT--This Agreement supersedes all proposals, oral or
written, all negotiations, conversations, or discussions between or among
parties relating to the subject matter of this Agreement and all past dealing or
industry custom.
i. FORCE MAJEURE--A party shall not be liable for nonperformance or delay
in performance (other than of obligations regarding payment of money or
confidentiality) caused by any event reasonably beyond the control of such party
including, but not limited to wars, hostilities, revolutions, riots, civil
commotion, national emergency, strikes, lockouts, unavailability of supplies,
epidemics, fire, flood, earthquake, force of nature, explosion, embargo, or any
other Act of God, or any law, proclamation, regulation, ordinance, or other act
or order of any court, government or governmental agency.
j. CONFIDENTIALITY--Except as required by law, neither party will
disclose the terms of this Agreement or any attachment to any third party. Any
business, technical, financial or other information provided by a party to this
Agreement (the "Disclosing Party") to the other (the "Receiving Party") and
designated as confidential or proprietary ("Confidential Information") shall be
held in confidence and not disclosed or, except as expressly permitted under
this Agreement, used by the Receiving Party. For the avoidance of doubt, all
technical information related to the Products is hereby deemed to be
Confidential Information of Company. The obligations of this subsection will not
apply to information that is generally and freely publicly available through no
fault of the Receiving Party, or that the Receiving Party otherwise rightfully
obtains from third parties without restriction, or that the Receiving Party
develops independently through employees without access to or use of
Confidential Information. The Receiving Party acknowledges that failure to
fulfill the provisions of this subsection may cause the Disclosing Party
immediate irreparable harm and, therefore, the Disclosing Party shall, in
addition to other remedies and without necessity of posting bond, be entitled to
seek immediate equitable and injunctive relief to prevent to resolve such a
failure.
k. SEVERABILITY--If any provision of this Agreement is held by a court of
competent jurisdiction to be illegal, invalid or unenforceable, that provision
shall be limited or eliminated to the minimum extent necessary so that this
Agreement shall otherwise remain in full force and effect and enforceable.
Affymetrix, Inc. Amersham Pharmacia Biotech, Ltd
Signed: /s/ Stephen P.A. Fodor Signed: /s/ Ron Long
--------------------------- ---------------------------
Printed: Stephen P.A. Fodor Printed: Ron Long
-------------------------- --------------------------
Title: President & CEO Title: CEO
---------------------------- ----------------------------
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<PAGE>
Attachment A
PRODUCTS
GENECHIP-Registered Trademark- PRODUCTS - FALL 1997
INSTRUMENTS
Hewlett-Packard GeneArray scanner
GeneChip fluidics station
GeneChip workstation (Dell pentium computer system)
SOFTWARE
GeneChip 3.0 operating system
GeneChip expression analysis window
ASSAYS AND REAGENTS
[**
**
**
**]
* Estimated launch: [**]
** Custom products (reorders) added to the
product list upon completion of mutually
agreed order, processing, quality control,
quality assurance, marketing, documentation,
software and procedures. EasyAccess
customers to be included upon approval of
the relevant customer and Affymetrix.
15
<PAGE>
Attachment B
PRICE LIST
GENECHIP ANALYSIS SYSTEMS (US PRICING - NOVEMBER 1997)
Part # Product Price (US$)
GENECHIP SEQUENCE ANALYSIS SYSTEMS
GENECHIP EXPRESSION ANALYSIS SYSTEMS
900136 GeneChip Expression Analysis System [**]
Hewlett-Packard GeneArray Scanner
GeneChip Fluidics Station
GeneChip Workstation
GeneChip Expression Analysis Software - Single user license
GENECHIP EXPRESSION ANALYSIS WINDOW
GENECHIP SOFTWARE 2.1
800114 GeneChip Expression Analysis Workstation [**]
GeneChip Workstation
GeneChip Expression Analysis Software - Single user license
GENECHIP EXPRESSION ANALYSIS WINDOW
GENECHIP SOFTWARE 2.1
GENECHIP INSTRUMENTATION
800101 GeneChip Fluidics Station [**]
GENECHIP SOFTWARE
610003 GeneChip Expression Analysis Software - Single user license [**]
GENECHIP EXPRESSION ANALYSIS WINDOW
GENECHIP SOFTWARE 2.1
16
<PAGE>
GENECHIP SERVICE AND SUPPORT
000107 Training/Technical Support [**]
000108 Yearly service contract on instrumentation [**]
including specific minor software upgrades
GENECHIP ASSAYS
ESTIMATED U.S. PRICING FOR ITEMS NOT CONTAINED ON THE NOVEMBER 1997 AFFYMETRIX
PRICE LIST (US $) (REQUIRING THE USE OF SIGNED CONTRACTS WITH THE END USER)
[** **
** **
** **]
17
<PAGE>
Attachment C
MARKETING ACTIVITIES
A) SALES AND MARKETING PROMOTIONAL ELEMENTS.
1. [**]
2. [**]
3. [**]
4. [**]
5. [**]
6. [**]
7. [**]
8. [**]
9. [**]
10. [**]
11. [**]
12. [**]
(i) [**]
(ii) [**]
(iii) [**]
18
<PAGE>
B) MARKETING AND SUPPORT STAFF.
1. [**]
2. [**]
3. [**]
4. [**]
5. [**]
6. [**]
7. [**]
8. [**]
9. [**]
10. [**]
11. [**]
C) WORLD-WIDE SALESFORCE ACTIVITY.
[**]
19
<PAGE>
Attachment D
AFFILIATES
To be provided within 30 days of execution by Representative and reasonably
approved by Company.
20
<PAGE>
Attachment E
SUPPORT TERMS
To be determined in good faith by the Committee by February 1, 1998.
21
<PAGE>
Attachment F
COMMISSIONS
For Products shipped pursuant to a single Product order, Representative
shall be entitled to an Order Fee of [**], plus applicable value-added tax
assessed on the services provided by Representative (and not on the Product
itself), provided that Representative shall provide Company with
documentation of such tax payments, and the forms needed, and other
reasonable assistance requested, by Company for claiming refund,
reimbursement, or offset of such taxes. Orders solicited by Representative
from a single end-user customer shall be consolidated where feasible, so as
to minimize the number of separate orders for each customer. In each year
during the term of this Agreement, Representative shall be entitled to
Commissions on Net Sales of Products as set forth below. "Net Sales" shall
mean [**] Commissions after Year 3 will be negotiated by the parties prior
to commencement of any renewal period.
*MAXIMUM
COMMISSIONS COMMISSION AMOUNT
Year 1 [**] Net Sales [**]
Year 2 [**] Net Sales [**]
Year 3 [**] Net Sales [**]
* Maximum Commission Amount does not include the Order Fee.
22
<PAGE>
<PAGE>
Exhibit 10.30
LICENSE AGREEMENT
Affymetrix, Inc.
and
Molecular Dynamics, Inc.
[THE SYMBOL "**" IS USED THROUGHOUT THIS EXHIBIT TO INDICATE THAT A PORTION OF
THE EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION.]
1
<PAGE>
CONTENTS
DEFINITIONS 3
RECITALS 6
TECHNICAL INFORMATION 6
GRANTS 8
RECORDS, ACCOUNTS AND PAYMENTS 16
DURATION OF AGREEMENT 17
MISCELLANEOUS 18
EXHIBIT 1 21
EXHIBIT 2 23
EXHIBIT 3 24
EXHIBIT 4 25
EXHIBIT 5 28
EXHIBIT 6 29
2
<PAGE>
THIS AGREEMENT is effective as of November 28, 1997 ("Effective Date")
between Affymetrix, Inc., a California corporation, hereinafter referred to
as "Affymetrix" and Molecular Dynamics, Inc., a Delaware corporation,
hereinafter referred to as "MD".
1 DEFINITIONS
Whenever used in this Agreement, the following terms shall have the
meanings set forth below:
1.1 "Affiliates" as applied to Affymetrix shall mean Affymetrix, Inc., a
California U.S.A. corporation, and all present and future companies (other
than Affymetrix) whose outstanding stock carrying the right to vote for or
appoint directors thereof is fifty percent (50%) or more owned or
controlled, directly or indirectly, by Affymetrix. "Affiliates" as applied
to MD shall mean Molecular Dynamics, Inc., a Delaware corporation, and all
present and future companies (other than MD) whose outstanding stock
carrying the right to vote for or appoint directors thereof is eighty
percent (80%) or more owned or controlled, directly or indirectly, by MD,
but only for so long as such ownership or control exists. In the case of
non-corporate entities, "Affiliates" shall refer to those entities where
the power to control and direct management of the entity is eighty percent
(80%) or more owned or controlled, directly or indirectly, by the
referenced entity.
1.2 "Array Maker" shall mean a device designed to fabricate Nucleic Acid Arrays
by Mechanical Fabrication Methods and specifically configured to fabricate
only Nucleic Acid Arrays only by Mechanical Fabrication Methods, and
otherwise subject to the restrictions herein.
1.3 "Category 1 Patent" shall refer to a United States Patent issuing on U.S.
Ser. No. [**] reciting, inter alia, [**], or a United States patent
claiming substantively the subject matter of such application.
1.4 "Category 2 Patent" shall refer to a) a United States Patent issuing on
U.S. Ser. No. [**] reciting, inter alia, [**], or a United States patent
claiming substantively the subject matter of such application; or b) a
United States Patent issuing on U.S. Ser. No. [**] reciting, inter alia,
[**]; or c) a United States Patent issuing on U.S. Ser. No. [**] reciting,
inter alia, [**], or a United States patent claiming substantively the
subject matter of such application; or d) a United States Patent issuing on
U.S. Ser. No. [**] reciting, inter alia, [**], or a United States patent
claiming substantively the subject matter of such application.
1.5 "Expression Analysis" means the measurement of the presence, absence, or
level of an expressed messenger RNA in cells.
3
<PAGE>
1.6 "GATC Compliant" shall refer to Nucleic Acid Arrays, software, or Systems
meeting the standards set forth in the GATC Agreement executed on a
substantially even date herewith, provided that Nucleic Acid Arrays or
Systems need not meet such standards when delivered before [**]. In the
event that one or both Parties cease to be a party to such GATC Agreement,
the Parties will negotiate in good faith to provide substitute
specifications for interoperability of their respective Systems, Nucleic
Acid Arrays, and associated software. In the event that the GATC Agreement
is not executed by the Parties on a substantially even date, the Parties
will agree upon specifications for interoperability substantially based on
the draft of the GATC Agreement in place on the Effective Date, such
agreement to be reached in good faith by the Parties by [**].
1.7 "Gene" shall refer to a nucleic acid sequence encoding a distinct messenger
RNA and protein as well as polymorphic variants of such sequence, provided
that such polymorphic variants must have at least 99.9% homology with the
underlying gene.
1.8 "Initial Period" shall mean, with respect to a particular Array Maker, the
time period beginning upon the contractual commitment of MD to transfer
such Array Maker to a third party (provided that such time must begin
before [**]), and a) ending [**] from the date of such commitment, when
such commitment is made between [**] and [**], or b) ending [**] for those
Array Makers for which contractual commitments of MD are made before [**].
For those Array Makers for which MD contractually commits on or after [**],
there shall be no Initial Period.
1.9 "Mechanical Fabrication Methods" shall mean any method for the fabrication
of Nucleic Acid Arrays on a solid support by placement of fully synthesized
nucleic acids (clonal polynucleotides or other presynthesized
polynucleotides) having more than [**] bases each, solely through
mechanically isolated deposition of such fully synthesized nucleic acids at
specific locations on the array. Without limiting the above, it is
understood that the synthesis of an array in which regions of an array are
activated or prepared for placement of materials by means of controlled
direction of electromagnetic energy at a portion of a support is not a
Mechanical Fabrication Method.
1.10 "Metered Period" shall mean any period other than the Initial Period.
1.11 "Nucleic Acid Array" shall mean an array of diverse nucleic acids, each
having at least [**], at defined locations on a solid support and
fabricated by Mechanical Fabrication Methods, provided that in no part of
such solid support may such diverse nucleic acids be arranged at a density
of more than [**] locations per square centimeter, and all of the nucleic
acids in any one Nucleic Acid Array may represent no more than [**] Genes.
1.12 "Party(ies)" shall refer to Affymetrix and/or MD.
1.13 "Patent Rights" shall mean claims, or the equivalent of claims of
"Affymetrix' Patent Rights" or "MD's Patent Rights," as appropriate,
directed to and/or primarily useful in
4
<PAGE>
connection with Nucleic Acid Arrays. "Affymetrix' Patent Rights" shall
be those arising from, and only those arising from, the patents and
applications listed in Exhibit 1, as well as the inventions disclosed
and claimed therein, and all continuations, continuations-in-part,
divisions, reexaminations, and reissues thereof, and any corresponding
foreign patent applications that may be filed in the future claiming
priority thereto and any patents, patents of addition, or other
equivalent foreign patent rights issuing, granted or registered thereon
that are based on one or more of the patents or applications in
Exhibit 1, including the patent rights of third parties for which
Affymetrix obtains the right to grant sublicenses pursuant to
sublicensing rights in connection with and obtained as part of a license
grant of the Affymetrix Patent Rights to such third party pursuant to
terms equivalent to Section 4. "MD's Patent Rights" shall be those
arising from, and only those arising from, the patents and applications
listed in Exhibit 2, as well as and the inventions disclosed and claimed
therein, and all continuations, continuations-in-part, divisions, and
reissues thereof, and any corresponding foreign patent applications that
may be filed in the future claiming priority thereto and any patents,
patents of addition, or other equivalent foreign patent rights issuing,
granted or registered thereon. The term "Patent Rights" as defined
above includes only said claims under which the herein-designated
company has the right at any time during the life of this Agreement to
make the herein-contained grants, in each instance to the extent, and
subject to the terms and conditions, including the obligation to account
to or make payments to others, under which the herein-designated company
shall have such right.
1.14 "Research Market Array Maker" shall mean an Array Maker designed,
manufactured, or sold to (and only to) not-for-profit research
institutions, specifically including university and government research
institutions, (without right of subsequent transfer) for lower-throughput
and lower density research purposes than Array Makers otherwise licensed
hereunder. Research Market Array Makers shall not be available for sale or
transfer to third parties before [**]. Research Market Array Makers shall
be subject to the terms and conditions herein relating to Array Makers
except that a) such Research Market Array Makers shall be adapted to make
Nucleic Acid Arrays not be configured to fabricate Nucleic Acid Arrays
having more than [**] genes per array and not more than [**] array elements
per square centimeter, and b) shall be subject to the lower royalty
provisions of Section 5.9 herein.
1.15 "System" shall mean one or more readers, hybridization devices, computer
work stations, and/or single copies of software associated therewith
specifically configured (but not necessarily exclusively configured) for
use with Nucleic Acid Arrays and to be used for extraction and processing
of data from such Nucleic Acid Arrays (and not including, for example,
Array Makers).
1.16 "Technical Information" shall mean: (a) the software identified in Exhibit
3 in object code form; (b) associated documentation related to such
software directed to and/or primarily useful in connection with Nucleic
Acid Arrays; and (c) reasonable enhancements thereto heretofore or
hereafter acquired by the designated party prior to
5
<PAGE>
[**] after the Effective Date of the Agreement, as well as the copyright
and trade secret rights therein. Notwithstanding the above, "Technical
Information" includes only such software, associated documentation, and
enhancements as the herein-designated party has the right at any time
during the life of this Agreement to disclose, and in each instance only
to the extent that and subject to the terms and conditions, including
the obligation to account to or make payments to others, under which the
herein-designated party shall have the right to disclose such
information to others.
2 RECITALS
2.1 MD has requested that Affymetrix grant MD a license under Affymetrix's
Patent Rights and Technical Information to make, use, import, lease,
distribute, and sell Nucleic Acid Arrays, as well as associated Systems
and Array Makers. Affymetrix is willing to grant such a license to MD on
the provisions herein set forth.
3 TECHNICAL INFORMATION
3.1 Affymetrix has developed Affymetrix' Technical Information which includes a
software suite for data extraction and image processing. Affymetrix shall,
promptly following execution of this Agreement and in accordance herewith,
permit MD to utilize Affymetrix' Technical Information for the purpose of
the commercial development of Nucleic Acid Arrays and associated Systems.
Affymetrix shall thereafter, from time to time and upon MD's request, make
available to MD any additional Technical Information developed by or on
behalf of Affymetrix. Affymetrix will deliver object code versions of
the software associated with the Technical Information to MD. MD will
license software only in object code form.
3.2 Affymetrix and MD agree: (a) to use reasonable efforts to protect the
confidential nature of the other Party's Technical Information; (b) not
to disclose the same to others, except to the extent reasonably
necessary to carry out operations licensed hereunder; and (c) to use the
same only pursuant to the terms of this Agreement. However, the
foregoing commitments shall not extend to any portion of Technical
Information (i) which was in the possession of the receiving Party prior
to receipt of same without an obligation of confidentiality; (ii) which
is now, or hereafter becomes through no act or failure to act on the
part of the receiving Party, generally known to the nucleic acid array
industry on a non-confidential basis; or (iii) which is hereafter
disclosed to the disclosing Party by others if said others have imposed
no restriction on disclosure by the disclosing Party; or (iv) is
independently developed by the Party; or (v) is required to be disclosed
pursuant to court or agency order.
3.3 From time to time during the life of this Agreement, at Affymetrix'
request, MD shall make MD's Technical Information available to Affymetrix.
6
<PAGE>
3.4 Affymetrix and MD will advise the other with reasonable promptness and
detail of Technical Information developed after the Effective Date.
7
<PAGE>
4 GRANTS
4.1 Subject to the terms and conditions of this Agreement, Affymetrix grants to
MD a nontransferable, nonexclusive, worldwide, royalty bearing license
under Affymetrix' Patent Rights and Technical Information to make, (but not
have made), use for internal array development programs and pharmaceutical
or diagnostic research (such use rights not including the right to license
or distribute expression databases, or perform therapeutic or
pharmaceutical development on a service or similar basis), import, lease,
distribute, offer for sale, and sell (in the case of products other than
software) a) GATC Compliant Nucleic Acid Arrays, and b) GATC Compliant
Systems for use with and only for use with GATC Compliant Nucleic Acid
Arrays licensed hereunder, all to the extent that such Nucleic Acid Arrays
or Systems are covered by Affymetrix' Patent Rights and/or Affymetrix's
Technical Information. Such license shall not include the right to
sublicense, except that MD shall have the right to sublicense single copies
of Affymetrix' Technical Information (without the right to further
sublicense) for use with GATC Compliant Systems leased, sold, or
transferred by MD pursuant to this Agreement. It is understood that the
rights conveyed herein do not include the right for MD to use, have used,
or license or otherwise permit any third party to use the Nucleic Acid
Arrays (including those made by Array Makers) for database development for
external distribution, service based target or drug discovery, or product
development of other nucleic acid analysis technologies. It is further
understood that while the sale of Systems or licensing of Technical
Information to third parties is permitted even though such Systems are or
may be useful to read, prepare, or process data from nucleic acid arrays
having a density greater than the density of Nucleic Acid Arrays licensed
herein or in applications other than the Nucleic Acid Arrays licensed
herein (such as those made by Affymetrix), no express or implied license to
make, have made, use, import, lease, distribute, offer for sale, sell or
transfer such higher density nucleic acid arrays or nucleic acid arrays for
other applications is granted or is to be inferred or implied hereunder
except as to those nucleic acid arrays made by Affymetrix or licensed by
Affymetrix. Notwithstanding anything to the contrary in this Section 4.1,
Nucleic Acid Arrays are licensed hereunder only to the extent that such
Nucleic Acid Arrays are a) used, leased, distributed, or sold only for
research use only; and b) designed and marketed only for use and used in
Expression Analysis studies; and c) are for single use only, and d) are
sold, leased, or otherwise transferred with contractual and label
restrictions on use consistent with this agreement, which provisions may be
reasonably reviewed by Affymetrix. It is understood that MD may have
subassemblies made under this license that would not, but for this license,
infringe the intellectual property rights granted herein. The Parties will
agree to appropriate royalty and support terms for additional copies of the
Technical Information to be used in the Systems.
4.2 Subject to the terms and conditions of this Agreement, Affymetrix grants to
MD a nontransferable, nonexclusive, worldwide, royalty-free license under
Affymetrix' Patent Rights to make (but not have made), and use Array Makers
for internal array
8
<PAGE>
development and manufacturing development programs. It is understood that
MD may have subassemblies made under this license that would not, but for
this license, infringe the intellectual property rights granted herein.
4.3 During the term and subject to the terms and conditions of this Agreement
and during the Initial Period or the Metered Period as applicable (if any),
Affymetrix grants to MD a nontransferable, nonexclusive, worldwide, royalty
bearing license under Affymetrix' Patent Rights and Technical Information
to make, (but not have made), use for internal array development programs
and pharmaceutical or diagnostic research (such use rights not including
the right to license or distribute expression databases, or perform
therapeutic or pharmaceutical development on a service or similar basis),
import, lease, distribute, offer for sale, and sell (in the case of
licensed products other than software) Array Makers for the manufacture of
GATC Compliant Nucleic Acid Arrays to the extent that such Array Makers or
the use of such Arrays Makers or Nucleic Acid Arrays made therewith (or use
thereof) are covered by Affymetrix' Patent Rights and/or Affymetrix'
Technical Information. Such license shall not include the right to
sublicense. Such license shall be considered to include a license for the
Array Makers sold prior to the date of this Agreement only to the entities
in Exhibit 5. It is understood that the rights conveyed herein do not
include the right for MD or those acquiring Array Makers pursuant to this
Agreement to use, have used, or license or otherwise permit any third party
to use the Nucleic Acid Arrays made with such Array Makers for database
development for external distribution, for service based target or drug
discovery, or manufacture Nucleic Acid Arrays for resale or other transfer
to third parties. Nucleic Acid Arrays made with the Array Makers licensed
hereunder will be licensed only to the extent that such Nucleic Acid Arrays
are a) used, leased, distributed, or sold for research use only; and
b) designed, marketed and used only in Expression Analysis studies; and
c) are for single use only, and d) are sold or otherwise transferred with
contractual and label restrictions on use consistent with this agreement,
which provisions may be reasonably reviewed by Affymetrix. In no event may
MD transfer more than [**] Array Makers pursuant to the license hereunder
to a single third party or its Affiliates, except as to [**], to which MD
will not transfer more than [**] Array Makers pursuant to the license
hereunder when such Array Makers are to be licensed in an Initial Period.
During the Metered Period, MD may provide additional Array Makers to its
customers. It is understood that a particular customer of MD may wish to
order more than the above recited [**] or [**] Array Makers, and when MD is
contractually obligated to provide such Array Makers they may be provided
by MD, provided that any such Array Makers in excess of the above limits
will be considered as being in the Metered Period upon their delivery to
the customer of MD. In the event that MD is committed to deliver more than
the above numbers of Array Makers before the Effective Date to the
customers in Exhibit 5, MD and Affymetrix will negotiate for appropriate
metering rates for such Array Makers pursuant to Section 5, upon which such
Array Makers will be licensed hereunder. It is understood that MD may have
subassemblies made under this license that would not, but for this license,
infringe the intellectual property rights granted herein.
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4.4 Research Market Array Makers will be subject to the provisions of this
Agreement related to Arrays Makers. In addition, Research Market Array
Makers may be used and are licensed only to the extent they are used in the
generation of scientific information for general publication, and without
pursuit of intellectual property rights thereon. Any further uses,
including the patenting of information or discoveries created with the
Research Market Array Maker, the creation of arrays for sale to third
parties, the performance of services or tests on a paid basis for third
parties, and the creation of database or informatics products for sale to
third parties will not be licensed hereunder except to the extent that any
such purchaser agrees to abide by the terms of Affymetrix' then current
Academic User Center (or then equivalent) agreement providing for
Affymetrix rights to either a) have access to such intellectual property,
or b) share in royalties generated by such intellectual property. Each
Research Market Array Maker sold, leased, or otherwise transferred by MD
will be sold with written consent to and conditioned upon such terms.
4.5 It is understood that MD may wish to perform a service business using
Nucleic Acid Arrays during the Term of this Agreement. Affymetrix will
negotiate in good faith to license such service business at rates otherwise
consistent with its then current pricing models.
4.6 MD may grant sublicenses (without the right to further sublicense) to the
Technical Information in association with the bona fide sale, lease, or
transfer of Systems or Nucleic Acid Arrays, provided that any such license
of the Technical Information: a) will allow any sublicensee access only to
object code versions of any software included within such grant; and b) any
such grant includes provisions the same as or substantially identical to
those in Exhibit 4. MD will maintain all trademark and copyright notices
of Affymetrix in such Technical Information sublicensed to a third party.
4.7 Affymetrix shall provide support for the Technical Information commensurate
with standard industry practices (under standard terms and conditions) to
MD, its Affiliates, and their customers who have received Technical
Information in connection with the bona fide sale, lease, or transfer of
Systems or Nucleic Acid Arrays by MD or its Affiliates pursuant to the
licenses granted hereunder. In addition, upon MD's request, Affymetrix
shall escrow a source code version of the Technical information with an
escrow agent mutually agreeable to the parties, which escrowed source code
shall be accessible to MD in the event that Affymetrix shall default on or
be unable to perform its support obligations, or as a result of insolvency,
bankruptcy, or if Affymetrix otherwise ceases in the relevant business.
4.8 MD and Affymetrix will reasonably meet and confer to determine if it is
reasonably feasible to retrofit Systems that are not GATC Compliant, but
which are licensed hereunder, to permit such Systems to utilize probe
arrays of low and/or high density made by Affymetrix.
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4.9 In the event that a third party brings a lawsuit or is otherwise involved
in administrative or other similar disputes with a Party regarding
intellectual property rights, the Party that is subject to such action may
provide written notification of such action, along with notification that
it wishes to discontinue sales, if any, of products that would otherwise
have been licensed hereunder to such third party, and terminating the
licenses herein with respect to such third party. The Party receiving such
notice will, subject to prior contractual commitments, use reasonable
efforts to discontinue sales of products licensed hereunder to such third
party or, if no such sales have occurred, to prevent such sales in the
future. MD acknowledges that Affymetrix has provided notice of two such
third parties, and MD understands that any products transferred to such
third parties are not licensed hereunder.
4.10 Subject to the terms and conditions of this Agreement, MD grants to
Affymetrix, which grant is extendible by Affymetrix to its Affiliates
without accounting therefor to MD, a worldwide, nonexclusive license under
MD's Patent Rights to make, have made, use, import, lease, distribute,
offer for sale, and sell high density arrays of nucleic acids and systems
for use therewith to the extent used to analyze such high density arrays of
nucleic acids.
4.11 It is recognized that up to [**] may be sold by MD to [**] pursuant to an
existing contract between MD and [**] and in accordance with the rights and
obligations of this Agreement. The Parties recognize, however, that [**]
may not agree to be bound by all of the the terms of this license relating
to database distribution in Section 4.3. To the extent that [**] does not
comply with the database distribution restrictions in Section 4.3 and to
the extent that such [**] are otherwise sold by MD in accordance with this
Agreement, Affymetrix, on behalf of itself, and its Affiliates, heirs,
executors, assigns, agents and representatives hereby fully and forever
releases MD and its heirs, executors, assigns, agents, and representatives
from any claim or cause of action, under any theory of liability, known or
unknown, fixed or contingent, that any of them may have arising from or
relating to Affymetrix Patent Rights and/or Technical Information from the
beginning of time up to the Effective Date on account of [**] lack of
non-compliance, performance, or lack of agreement to comply with such
database distribution restrictions with respect to such three instruments.
Such release shall in no manner be construed to extend to [**] whether by
implication, license, or otherwise and, further, shall not extend to
future acts of MD beyond the supply of such [**] to [**].
4.12 MD, on behalf of itself, and its Affiliates, heirs, executors, assigns,
agents and representatives hereby fully and forever releases Affymetrix and
its heirs, executors, assigns, agents and representatives from any claim or
cause of action, under any theory of liability, known or unknown, fixed or
contingent, that any of them may have arising from or relating to MD Patent
Rights from the beginning of time up to the Effective Date on account of
the manufacture, use, or sale of high density nucleic acid arrays and
systems to analyze such high density nucleic acid arrays.
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4.13 Subject to the terms and conditions of this Agreement, MD grants to
Affymetrix the royalty-free right to grant nonexclusive licenses under MD's
Patent Rights to others licensed by Affymetrix under Affymetrix' Patent
Rights for use with Nucleic Acid Arrays and Systems; provided, however,
that Affymetrix may grant such licenses under MD's Patent Rights only to
others whose Patent Rights are included within the Affymetrix Patent
Rights.
4.14 Nothing in this Agreement shall be construed to obligate either party to
sue alleged infringers under such party's Patent Rights and Technical
Information. Any determination to take any action against such alleged
infringers shall be in such party's sole discretion.
4.15 MD shall include with all Nucleic Acid Arrays (including Nucleic Acid
Arrays made with Array Makers) and Systems leased, distributed, sold, or
otherwise transferred hereunder reasonable package markings, product
markings, contractual restrictions, and/or user manual instructions
indicating that such products are licensed: (a) for research purposes
only; (b) only for Expression Analysis studies or studies otherwise
licensed by Affymetrix (it being understood that the Parties may chooses
upon mutual written consent to modify this limitation); and (c) for single
use only, and (d) with restrictions on the distribution of databases or
services based on the use of arrays herein, and (e) only consistent with
the licenses herein. MD shall diligently police and enforce such
restrictions.
4.16 MD shall attach a label on each Nucleic Acid Array, System and/or
associated documentation sold, leased, or otherwise transferred hereunder
reasonably reflecting patent numbers of a) issued US device patents
covering such product, and b) other appropriate intellectual property
rights notices, and will reasonably modify such label periodically at the
direction of Affymetrix. Affymetrix shall attach a label on each Nucleic
Acid Array, System and/or associated documentation reasonably reflecting
patent numbers of a) issued US device patents covering such product, and
b) other appropriate intellectual property rights notices, and will
reasonably modify such label periodically at the direction of MD.
4.17 The licenses granted herein are granted on the understanding that MD will
use commercially reasonable efforts to develop, manufacture, and market
Nucleic Acid Arrays and Systems, and MD agrees to use such commercially
reasonable efforts to develop, manufacture, and market Nucleic Acid Arrays,
and Systems. If during the term of this Agreement Affymetrix reasonably
believes that MD has discontinued commercially reasonable efforts to
develop, manufacture, and market Nucleic Acid Arrays and/or Systems,
Affymetrix may provide written notice to MD of such reasonable belief,
along with notification that it intends to terminate the licenses herein
In the event that MD disagrees with such assertions by Affymetrix, MD may
provide reasonable evidence of its continued reasonable commercial efforts
under suitable terms of
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confidentiality. In the absence of such reasonable evidence, Affymetrix
may, thereafter, on 6 months written notice, terminate this Agreement.
4.18 MD may extend the licenses granted herein to its Affiliates provided such
Affiliates agree in writing to be bound by the terms and conditions of this
Agreement, and further provided that MD agrees to be liable and indemnify
Affymetrix for the activities of such Affiliates.
5 FEES
5.1 At the time and in the manner hereinafter provided, MD shall pay to
Affymetrix for each Nucleic Acid Array a) leased, sold, or otherwise
transferred pursuant to the license granted under Section 4 hereof, or
b) used for internal pharmaceutical research and development purposes
(but not used solely for development of Arrays Makers, Systems or Nucleic
Acid Arrays), a royalty pursuant to Table 1. The royalty shall be payable
based on [**] prices in Table 1 are the number of dollars to be paid to
Affymetrix [**].
<TABLE>
<CAPTION>
- --------------------------------------------------------------
Royalty [**]
- --------------------------------------------------------------
[**] [**]
- --------------------------------------------------------------
<S> <C> <C> <C> <C>
[**] [**] [**] [**]
- --------------------------------------------------------------
[**] [**] [**] [**] [**]
- --------------------------------------------------------------
[**] [**] [**] [**] [**]
- --------------------------------------------------------------
[**] [**] [**] [**] [**]
- --------------------------------------------------------------
[**] [**] [**] [**] [**]
- --------------------------------------------------------------
[**] [**] [**] [**] [**]
- --------------------------------------------------------------
[**] [**] [**] [**] [**]
- --------------------------------------------------------------
[**] [**] [**] [**] [**]
- --------------------------------------------------------------
[**] [**] [**] [**] [**]
- --------------------------------------------------------------
[**] [**] [**] [**] [**]
- --------------------------------------------------------------
[**] [**] [**] [**] [**]
- --------------------------------------------------------------
</TABLE>
5.2 The royalties and operating fees, and the licenses herein, cover arrays
made with up to [**]. In the event that MD reasonably believes at a
future date that [**] are reasonably required to competitively market
Nucleic Acid Arrays or Array Makers, MD and
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Affymetrix will reasonably confer and agree upon appropriate royalty
levels for such Nucleic Acid Arrays and/or Array Makers using the
royalty and operating fee structures set forth herein as guiding
factors, provided that in no event will the licenses granted herein
cover Nucleic Acid Arrays representing more than [**] unless agreed to
in writing by Affymetrix. In addition, if MD is required to license
probe array based intellectual property from third parties that make the
above royalty rates unsupportable, MD and Affymetrix will negotiate in
good faith with each other to modify the above royalty structure and/or
the third party royalty rates that should be paid.
5.3 In the event that a) MD reasonably believes that it cannot support the
above royalty rates and operating fees under a reasonable business model
for the sale, lease, or transfer of Nucleic Acid Arrays sold pursuant to
this Agreement after commercial efforts to implement such business model
as a result of such royalty rates, and b) Affymetrix is not taking
reasonable efforts to mitigate infringement of its intellectual property
rights, MD will provide written notification to Affymetrix, along with
reasonable documentation of the basis of such assertion. MD and
Affymetrix will reasonably confer and identify alternative license fees
and or structures to support a reasonable business model for the sale of
Nucleic Acid Arrays licensed pursuant to this Agreement.
5.4 If in any calendar year following the [**] anniversary of this Agreement
the royalties and operating fees generated by MD's licensed operations
hereunder are less than [**], then Affymetrix shall have the right,
exercisable within the period of ninety (90) days following the end of
the said year, to terminate this Agreement on sixty (60) days' written
notice to MD; provided, however, that MD shall have the right but not
the obligation, before the expiration of the said sixty (60) days
following the date of said notice of termination, to pay any differences
between the royalties and operating fees so accruing and the foregoing
amount and maintain this Agreement and the license granted to MD in full
force and effect, subject to Affymetrix' rights to terminate this
Agreement pursuant to any of Sections 7.3 through 7.5 hereunder.
5.5 In partial consideration of the rights and waivers herein MD shall pay
to Affymetrix [**] upon MD's execution of this Agreement. Such payment
shall be subject to refund as follows: a) if a Category 1 patent has not
issued by [**] shall be refunded, and b) if a Category 2 patent has not
issued by [**] shall be refunded.
5.6 During the Initial Period, and as to Array Makers (excluding Research
Array Makers) transferred to third parties under contracts in which MD
has committed to transfer such Array Makers pursuant to agreements
effective before [**] MD will pay to Affymetrix an operating license fee
for the usage of the Array Makers during the period beginning when the
Category 1 and/or 2 Patents, as applicable, are issued: a) [**] per
calendar year for each calendar year in which a Category 1 Patent is
issued, pro-rated for the number of months in such calendar year in
which such Category 1 Patent is issued, and provided that this payment
shall not be payable with respect to Array Makers specifically
configured to make Nucleic Acid Arrays at a density of less than [**],
and b) [**] per
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calendar year for each calendar year in which a Category 2 Patent is
issued, pro-rated for the number of months in such calendar year in
which such Category 2 Patent is issued. The foregoing operating license
fees are a proxy for usage fees for the Array Makers. The fees recited
in this Section may be made in equal quarterly installments during the
applicable calendar year in which such payments are due.
5.7 MD will reasonably gather data regarding the Array Makers (excluding
Research Array Makers) sold pursuant to this Agreement to determine the
approximate use rate and type of use (density of arrays, etc.) by users
of such Array Makers. Before [**] the Parties will meet and confer
regarding an appropriate and reasonable metering system (such as, for
example, monitoring of reagent usage, software usage monitoring, etc.)
that may be used to apply reasonable royalties and operating fees to the
use of such Array Makers reflective of the rates recited herein for
Array Makers and Nucleic Acid Arrays. During the Metering Period, the
royalties and operating fees payable on any such Array Makers will be
based upon such agreed metering mechanism.
5.8 Until such time as Affymetrix provides MD written notification of the
issuance of a Category 1 Patent, MD may discount the royalties and
operating fees payable on Nucleic Acid Arrays pursuant to Sections 5.1
and 5.6 herein by [**]. Until such time as Affymetrix provides MD
written notification of the issuance of a Category 2 Patent, MD may
discount the royalties and operating fees payable on Nucleic Acid Arrays
pursuant to Sections 5.1 and 5.6 herein by [**]. It is understood
during such time as neither a Category 1 Patent or a Category 2 Patent
is issued, MD may discount the royalties and operating fees payable on
Nucleic Acid Arrays pursuant to Sections 5.1 and 5.6 herein by [**].
5.9 Molecular Dynamics shall pay to Affymetrix a one-time royalty on each
Research Market Array Maker and reagents sold therefor equal to [**] of
the net sales revenue (F.O.B. Sunnyvale) of such Research Market Array
Makers and reagents sold therefor.
5.10 MD may discount the royalties/operating fees payable pursuant to Section
5.1 herein on the sale of Nucleic Acid Arrays by [**] in those cases
where the Genes represented on the Nucleic Acid Arrays are from an
organism listed in Exhibit 6.
5.11 If, under similar conditions and on substantially the same terms as
this Agreement, other than royalty terms, Affymetrix shall hereafter
enter into another agreement making available to any person, firm or
company (other than any national government or branches or agencies of
any national government, or any Affiliate(s) of Affymetrix) a license or
immunity from suit for any country or countries, otherwise of the same
scope as the licenses and immunities granted MD under this Agreement,
wherein the terms taken as a whole are more favorable than those granted
in this Agreement, then MD shall, at MD's election to be exercised
within ninety (90) days from the date of Affymetrix' notification, be
entitled to the benefit of such more favorable terms in such country or
countries as of and subsequent to the effective date of the grant by
Affymetrix of such
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more favorable terms, so long as such more favorable terms shall be
available to such other licensee, provided that in any such event MD
shall at the same time accept any and all other terms, conditions and
limitations imposed on such other licensee, whether or not they are
directly related to such more favorable terms. Affymetrix shall
reasonably notify MD of any agreement which provides Affymetrix of the
benefits of this paragraph.
6 RECORDS, ACCOUNTS AND PAYMENTS
6.1 The royalties and operating fees payable by MD to Affymetrix as provided
in Article 5 shall be paid on or before the last day of February, May,
August and November in each calendar year for MD's operations hereunder
during the respective immediately preceding calendar quarter. MD will
at the same time deliver to Affymetrix a certified statement of one of
MD's officers, on forms which may be provided or prescribed therefor by
Affymetrix, accounting for royalties and operating fees payable
hereunder, or showing that no royalty is payable.
6.2 In keeping with established bookkeeping and accounting practices, MD
shall maintain, for a period of two (2) years following the end of the
calendar year in which any royalties and operating fees are payable,
appropriate books and records fully adequate to show the full amount of
royalty payable under this Agreement, including, but not limited to,
books and records showing each sale, lease, or other transfer of Nucleic
Acid Arrays or Systems, the net invoice price for said sale, lease,
other transfer, and sublicense, the name and address of the purchaser,
lessee, transferee and/or sublicensee, as appropriate. Affymetrix shall
have the right, at any time during regular business hours and upon 10
days notice, to make such examination as Affymetrix deems necessary to
verify said records and books of account. In the event that such
examination reveals a discrepancy between the royalties and operating
fees payable hereunder and the royalties and operating fees actually
paid, all such additional royalties and operating fees, together with
interest from the date when such additional royalties and operating fees
would have been due, shall be paid to Affymetrix within thirty (30) days
of written notice from Affymetrix of such discrepancy. Such notice
shall be deemed to be notice of default under Section 7.5 hereunder.
Any such audit shall be at Affymetrix sole expense and performed by a
nationally recognized accounting firm under reasonable obligations of
confidentiality. In the event that a deficiency of more than [**] is
discovered, the audit shall be at MD expense.
6.3 All payments provided for in this Agreement refer to lawful money of the
United States of America. All payments shall be made by MD to
Affymetrix at the office of Affymetrix designated in Section 8 and shall
be made in the full amounts as herein specified; provided, however, that
deduction may be made from such payments by MD for amounts lawfully
required to be withheld and paid by MD in respect of any income tax
levied or assessed upon such payments by, and in accordance with the
laws of, any foreign government but only in respect to sales and leases
by MD in the foreign country imposing such income tax. Affymetrix shall
have the right at any time or from time-to-
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time to contest by appropriate proceedings the validity or amount of any
such income tax withheld. If so requested by Affymetrix, MD will make
such payments under protest, and, on behalf and at the expense of
Affymetrix, take such other action and render all reasonable assistance
that may be required by Affymetrix in the prosecution of any such
proceedings. MD will obtain and forward to Affymetrix tax credit
receipts or vouchers for all income taxes thus withheld and paid by MD.
As used herein, "income tax" shall mean a tax on income imposed by a
country other than the United States of America or by any possession or
territory of the United States of America, for which a foreign tax
credit is allowed by the Government of the United States of America.
All late payments shall bear interest at the rate of 1.5% per month,
unless the maximum amount allowed by law is lower, in which case all
late payments shall bear interest at the maximum permitted rate.
6.4 If one or more of the payments required to be made herein is not made by
its due date, and if such payment or payments, plus interest, is not
made prior to forty five (45) days after notice from Affymetrix of such
delinquency, then Affymetrix may, at its sole option, terminate this
Agreement on the fifteenth day after written notice is given to MD that
it intends to terminate this Agreement.
6.5 All payments herein shall be made in United States of America dollars in
the form of a check drawn on a United States bank.
7 DURATION OF AGREEMENT
7.1 Unless earlier terminated as provided below, this Agreement shall remain
in full force and effect until January 1, 2008.
7.2 At any time after one (1) year following the Effective Date of this
Agreement, MD may terminate this Agreement upon sixty (60) days' prior
written notice to Affymetrix.
7.3 In the event that MD intends to file any petition, answer, or other
proceeding in bankruptcy, MD will use reasonable efforts to give
Affymetrix reasonable advance written notice prior to filing such
petition and provide Affymetrix reasonable adequate opportunity to
review and oversee any reorganization or disposal of MD's relevant
assets (to the extent applicable to the intellectual property rights
herein granted) to ensure strict compliance with this Agreement.
Failure to comply with this Section shall be considered a material
breach which may not be remedied.
7.4 In the event that MD files, or intends to file any petition, answer, or
other proceeding in bankruptcy, Affymetrix will have the right, but not
the obligation, to terminate this Agreement by providing written notice.
7.5 If either party should fail to perform any obligations under this
Agreement, the other party may give written notice to the defaulting
party calling attention to the default. In the
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event of a material breach or default, unless said breach or default is
corrected within thirty (30) days after such notice, said other party
shall thereafter have the right to terminate this Agreement upon thirty
(30) days' prior written notice to said defaulting party. Said right to
terminate for default shall be in addition to, and without prejudice to
the exercise of, any other remedies available in law or equity.
7.6 No termination of this Agreement shall in any way affect MD's
obligations pursuant to Articles 5 and 6 to pay royalties and operating
fees, deliver statements, and maintain books and records under this
Agreement accrued prior to such termination, or MD's or Affymetrix's
obligations pursuant to Section 3.2. Furthermore, no termination of
this Agreement shall in any way affect Affymetrix's rights under
Sections 4 above.
8 MISCELLANEOUS
8.1 MD and Affymetrix will appropriately mark all licensed products
hereunder with applicable intellectual property rights notices as may be
reasonably be provided from time to time by the other Party. In
addition, all product manuals and instruments to be sold as or in
conjunction with Nucleic Acid Arrays, Systems, or Array Makers shall
include the following notice, such notice to be reasonably modified upon
notice from Affymetrix provided that any such modification is consistent
with the terms and conditions of this Agreement:
LIMITED LICENSE: NUCLEIC ACID ARRAYS, ARRAY MAKERS, SYSTEMS
(INSTRUMENTS, SOFTWARE, AND REAGENTS) ARE LICENSED FOR RESEARCH USE
ONLY. NO IMPLIED RIGHT TO MAKE, USE, HAVE MADE, OFFER TO SELL,
LEASE, DISTRIBUTE, SELL, OR IMPORT NUCLEIC ACID PROBE ARRAYS OR
ANY OTHER PRODUCT IN WHICH AFFYMETRIX OR MOLECULAR DYNAMICS HAS
PATENT RIGHTS IS CONVEYED BY THE SALE OF PROBE ARRAYS,
INSTRUMENTS, SOFTWARE, OR REAGENTS HEREUNDER. THIS LIMITED LICENSE
PERMITS ONLY THE USE OF THE PARTICULAR PRODUCT(S) THAT THE USER HAS
PURCHASED FROM AFFYMETRIX OR LICENSED AND SOLD BY MOLECULAR
DYNAMICS, OR PERMITTED LICENSEES, AND MAY NOT BE USED IN DATABASE
GENERATION FOR EXTERNAL LICENSE OR SALE, OR FOR SERVICE BASED
PHARMACEUTICAL RESEARCH.
8.2 Affymetrix warrants that the Technical Information does not infringe the
copyrights or trade secret rights of a third party, and will indemnify
MD against any claims based on the infringement of third party
copyrights or trade secret rights. THIS WARRANTY STATES THE ENTIRE
LIABILITY FOR INFRINGEMENT OF THIRD PARTY INTELLECTUAL RIGHTS ARISING
FROM THE SALE OF PRODUCTS UNDER THIS AGREEMENT.
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8.3 Nothing in this Agreement shall be construed as conferring any right to
use in advertising, publicity, or other promotional activities any
name, trade name, trademark, or other designation of either party hereto
without the express written approval of the other party.
8.4 Each of Affymetrix and MD represents and warrants that it neither owns
or controls any patent or patent application which would be necessary
for the other party to exercise the rights granted herein and which is
not licensed hereunder. MD and Affymetrix warrant that they each have
the full right to enter into this Agreement. Nothing in this Agreement
shall be construed as a warranty or representation by Affymetrix or MD
as to the validity or scope of any of the Patent Rights, a warranty or
representation by either party that any manufacture, sale, use, or other
disposition of the products licensed hereunder will be free from
infringement of patents, utility models, and/or design patents other
than those Patent Rights for which licenses are extended hereunder.
Nothing in this Agreement shall be considered as conferring any warranty
or representation as to the usefulness, marketability, or
merchantability of any products sold within the scope of the licenses
hereunder. Affymetrix and MD agree to hold the other harmless from any
personal injury or products liability claims made as a result of the
sale of products licensed hereunder.
8.5 The Parties will retain the terms of this Agreement in strict
confidence, except as may be required by regulatory agencies or courts,
and will then use all reasonable precautions to maintain the terms of
this Agreement confidential.
8.6 This Agreement is not assignable by MD by operation of law or otherwise
without the prior written consent of Affymetrix including in the event
of acquisition of the assets or stock of MD without the consent of
Affymetrix, which will not be unreasonably withheld, except in the case
of companies directly competitive with Affymetrix. Affymetrix may
assign this Agreement, without the prior written consent of MD, to any
entity acquiring all or substantially all of Affymetrix' Nucleic Acid
Array licensing business. No assignment of this Agreement shall be
valid until all obligations under this Agreement shall have been assumed
in writing by the assignee.
8.7 This Agreement is executed by the parties with the understanding that it
embodies the entire agreement between the parties pertaining to the
subject matter of this Agreement and there are no representations,
warranties or other commitments, written or oral, pertaining to the
subject matter of this Agreement which are not embodied in this
Agreement.
8.8 MD and Affymetrix represents that they are familiar with the Export
Administration Regulations comprising the compilation of official
regulations and policies governing the export licensing of commodities
and technical data promulgated by the United States Department of
Commerce, Bureau of International Commerce, Office of Export
Administration. Notwithstanding any other provisions of this Agreement,
and each
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assures the other that with respect to all information and licenses
furnished by or under this Agreement, that it will comply with such
official regulations.
8.9 It is understood and agreed between the parties that the Technical
Information made available to each Party shall all be provided "as is"
without any warranties, express or implied. THE IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE ARE EXPRESSLY
EXCLUDED FROM THIS WARRANTY AND FROM THE TERMS OF THIS CONTRACT BY
AGREEMENT OF THE PARTIES. In no event will Affymetrix or MD be liable
for lost or prospective profits or indirect or consequential damages
even if Affymetrix or MD has been advised of the possibility of such
damages.
8.10 The addresses of the parties hereto for all purposes of this Agreement
shall be as follows:
Affymetrix:
Affymetrix, Inc.
3380 Central Expressway
Santa Clara, CA 95051
Attn: President
MD:
Molecular Dynamics, Inc.
928 East Arques Avenue
Sunnyvale, CA 94086
Attn: President
All correspondence relating to this Agreement shall be deemed to have
been duly communicated to the addressee upon the confirmed facsimile
transmission or prepaid express mailing to the party entitled thereto at
its above address or at such address as it may from time-to-time
designate in writing to the other party.
8.11 In the event that any provision of this Agreement is held invalid or
unenforceable for any reason, such unenforeceability shall not affect
the enforceability of the remaining provisions of this Agreement, and
all provisions of this Agreement shall be construed so as to preserve
the enforceability hereof.
8.12 The waiver by either Party of a breach or a default of any provision of
this Agreement by the other Party shall not be construed as a waiver of
any succeeding breach of the same or any other provision, nor shall any
delay or omission on the part of either Party to exercise or avail
itself of any right, power or privilege that it has or may have
hereunder operate as a waiver of any right, power or privilege by such
Party.
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8.13 This Agreement is made and shall be construed in accordance with the
local laws of the State of California, U.S.A. without regard to the
doctrine of conflict of laws.
8.14 This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original but all of which together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have respectively caused this Agreement to be
executed on the dates hereinafter indicated.
Affymetrix, Inc.
By: /s/ Stephen P.A. Fodor
------------------------------
Title: President & CEO
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Date: November 28, 1997
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Molecular Dynamics, Inc.
By: /s/ Jay Flatley
------------------------------
Title: President & CEO
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Date: November 26, 1997
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EXHIBIT 1
AFFYMETRIX PATENT LISTING (BY AFFYMETRIX FILE NO.)
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EXHIBIT 2
MD PATENT LISTING (BY PATENT NO. OR MD FILE NO.)
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EXHIBIT 3
LICENSED SOFTWARE PACKAGES
GeneChip-Registered Trademark- System Software (current version)
GeneChip Expression Analysis Software (Cat No. 900136)
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EXHIBIT 4
SOFTWARE LICENSE PROVISION
END-USER LICENSE AGREEMENT
IMPORTANT-READ CAREFULLY: This End-User License Agreement ("Agreement") is a
legal agreement between you and Affymetrix, Inc. ("Licensor"), the licensor
of the software products ("Software Products") accompanying the diagnostic or
analytical system ("System") you have acquired from Affymetrix or a
distributor of the System ("Distributor"). The Software Products include
computer programs, associated storage media, associated documentation, and
any other information regarding the software products listed below. If the
Software Products are not accompanied with a System, you may not use, copy or
read the Software Products. By installing, copying, reading, or otherwise
using the Software Products, you agree to be bound by the terms of this
Agreement. If you do not agree to the terms of this Agreement, Licensor is
unwilling to license the Software Products to you. In such event, you may
not use, copy or Distributor for instructions on return of the Software
Products. This Agreement represents the entire agreement concerning the
Software Products between you and Licensor, and it supersedes any prior
proposal, representation, or understanding between the parties.
The Software Products are protected by copyright laws and international
copyright treaties, as well as other intellectual property laws and treaties.
The Software Products are licensed, not sold, to you by Licensor for use only
under the terms of this Agreement, and Licensor reserves any rights not
expressly granted to you.
1. License Grant. This Agreement grants to you, and you accept, a
nonexclusive license to use the Software Products. The computer programs of
the Software Products ("Computer Programs") may only be used on the System.
Further, the Computer Programs may only be used in their machine-readable,
object code form. You agree that you will not assign, sublicense, transfer,
pledge, lease, rent, or share your rights under this Agreement. You agree
that you may not modify or prepare derivative works of the Software Products.
You agree that you may not reverse engineer, decompile, disassemble, or
otherwise translate the Computer Programs. The Software Products are for
RESEARCH USE ONLY. You agree not to use the Software Products in any setting
requiring FDA or other regulatory approval.
The Computer Programs may be loaded on the System in both temporary and
permanent storage, and the associated storage media may be utilized for
backup purposes. In addition, you may make one copy of the Computer Programs
on a backup storage media for the purpose of backup. Except as authorized
under this paragraph, no copies of the Software Products or any portions
thereof may be made by you or any person under your authority or control.
2. Licensor's Rights. You acknowledge and agree that the Software Products
are proprietary products of Licensor protected under copyright and other
intellectual property laws. You further
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acknowledge and agree that all right, title, and interest in and to the
Software Products, including associated intellectual property rights, are and
shall remain with Licensor. This Agreement does not convey to you an
interest in or to the Software Products, but only a limited right of use
revocable in accordance with the terms of this Agreement. You agree to keep
confidential and use your reasonable efforts to prevent and protect the
Software Products from unauthorized disclosure or use. LIMITED LICENSE: PROBE
ARRAYS, INSTRUMENTS, SOFTWARE, AND REAGENTS ARE LICENSED FOR RESEARCH USE
ONLY. NO IMPLIED RIGHT TO MAKE, HAVE MADE, USE, LEASE, DISTRIBUTE, OFFER TO
SELL, SELL, OR IMPORT OLIGONUCLEOTIDE PROBE ARRAYS OR ANY OTHER PRODUCT IN
WHICH AFFYMETRIX HAS PATENT RIGHTS IS CONVEYED BY THE SOFTWARE. THIS
LIMITED LICENSE PERMITS ONLY THE USE OF THE PARTICULAR PRODUCT(S) THAT THE
USER HAS PURCHASED FROM AFFYMETRIX OR ITS LICENSEES OF PARTICULAR PATENT
RIGHTS.
3. Software Products. The Affymetrix software products covered by this
Agreement include, but are not limited to, the following:
[to be added]
4. Term. This Agreement shall continue until terminated. You may terminate
this Agreement at any time by destroying all copies of the Software Products,
including the associated storage media and documentation, and erasing all
copies of the Software Products in both temporary and permanent storage on
the System. Licensor may terminate this Agreement upon the breach by you of
any term hereof.
5. Limited Warranty. Licensor or its distributor warrants, for your benefit
alone, for a period of ninety (90) days from the date of commencement of this
Agreement ("Warranty Period") that the associated storage media on which the
Computer Programs reside will be free from defects in material and
workmanship. Licensor further warrants, for your benefit alone, that during
the Warranty Period the Computer Programs shall operate substantially in
accordance with the associated documentation. If during the Warranty Period,
a defect in the Computer Programs appears, you may return the Software
Products to Licensor for either replacement or, if so elected by Licensor,
refund of license fees paid by you to Distributor for use of the Software
Products. TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, AFFYMETRIX AND
ITS LICENSORS EXPRESSLY DISCLAIM ALL OTHER WARRANTIES, EITHER EXPRESS OR
IMPLIED, INCLUDING BUT NOT LIMITED TO WARRANTIES OF MERCHANTABILITY AND
FITNESS FOR A PARTICULAR PURPOSE WITH REGARD TO THE SOFTWARE PRODUCTS. SOME
JURISDICTIONS DO NOT ALLOW THE EXCLUSION OR LIMITATION OF IMPLIED WARRANTIES
SO THE ABOVE LIMITATION MAY NOT APPLY TO YOU.
6. Limitation of Liability. To the maximum extent permitted by applicable
law, Licensor's cumulative liability to you or any other party for any loss
or damages resulting from any claims, demands, or actions arising out of or
relating to this Agreement shall not exceed the license fees
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paid to Distributor for the use of the Software Products. In no event shall
Licensor be liable for any incidental, consequential, special, or exemplary
damages, or indirect damages for personal injury or lost profits, even if
Licensor has been advised of the possibility of such damages. SOME
JURISDICTIONS DO NOT ALLOW THE LIMITATION OR EXCLUSION OF LIABILITY FOR
INCIDENTAL OR CONSEQUENTIAL DAMAGES SO THE ABOVE LIMITATION OR EXCLUSION MAY
NOT APPLY TO YOU.
7. Governing Law. This Agreement shall be governed by and interpreted under
the laws of California, without regard to conflict of law provisions.
8. Severability. Should any term of this Agreement be declared void or
unenforceable by any court of competent jurisdiction, such declaration shall
have no effect on the remaining terms hereof.
9. U.S. Government Restricted Rights. The Software Products and
documentation are provided with RESTRICTED RIGHTS as follows:
a. Department of Defense Licensees. The Government's right to use,
modify, reproduce, release, perform, display, or disclose the Software
Products are restricted by paragraph (b)(3) of the Rights in Noncommercial
Computer Software and Noncommercial Computer Software Documentation clause
contained in the relevant contract between the Government and Affymetrix,
Inc, 3380 Central Expressway, Santa Clara, California 95051. Any
reproduction of the Software Products or portions thereof marked with this
legend must also reproduce the markings. Any person, other than the
Government, who has been provided access to the Software Products must
promptly notify Affymetrix.
b. Civilian Government Agency Licensees. Use, reproduction, or
disclosure is subject to restrictions set forth in the relevant contract
between the Government and Affymetrix, Inc, 3380 Central Expressway, Santa
Clara, California 95051.
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EXHIBIT 5
EXCUSED FABRICATION SYSTEMS
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EXHIBIT 6
DISCOUNTED ORGANISMS
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
All statements in this discussion that are not historical are
forward-looking statements. Such statements are subject to risks and
uncertainties that could cause actual results to differ materially for
Affymetrix from those projected, including, but not limited to, uncertainties
relating to technological approaches, product development, manufacturing and
market acceptance, uncertainties related to cost and pricing of Affymetrix
products, dependence on collaborative partners, uncertainties relating to
sole source suppliers, uncertainties relating to FDA and other regulatory
approvals, competition, risks relating to intellectual property of others and
the uncertainties of patent protection. These and other risk factors are
discussed under the heading "Additional Risk Factors" and elsewhere in the
Company's Form 10-K Report for the year ended December 31, 1997. Affymetrix
expressly disclaims any obligation or undertaking to release publicly any
updates or revisions to any forward-looking statements contained herein to
reflect any change in Affymetrix' expectations with regard thereto or any
change in events, conditions, or circumstances on which any such statements
are based.
OVERVIEW
Affymetrix has developed and intends to establish its GeneChip
- -Registered Trademark- 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,
reagents for use with the probe arrays, a scanner and other instruments to
process the probe arrays, and software to analyze and manage genetic
information.
The business and operations of the Company were commenced in 1991 by
Affymax N.V. ("Affymax") and were initially conducted within Affymax. In
March 1992, the Company was incorporated as a California corporation and
wholly owned subsidiary of Affymax. Beginning in September 1993, the Company
issued equity securities which diluted Affymax' ownership in Affymetrix. In
March 1995, Glaxo plc, now Glaxo Wellcome plc ("Glaxo"), acquired Affymax,
including its ownership interest in Affymetrix. As of December 31, 1997 Glaxo
owned approximately 33% of Affymetrix. On March 10, 1998, the Company
announced the planned sale of 1,634,522 shares of Series AA Preferred Stock
to Glaxo for expected proceeds of $50 million. The preferred stock is
convertible into Affymetrix common stock at a predetermined price of
approximately $40 per share, and if all of the preferred stock is converted,
would result in the issuance of approximately 1,250,000 shares of Affymetrix
common stock. The sale, which is subject to regulatory approval, is expected
to close during the second quarter of 1998, and, if completed, will increase
Glaxo's ownership interest in Affymetrix to approximately 37% assuming the
conversion of preferred stock into common shares.
Affymetrix 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 use
by pharmaceutical and biotechnology companies, academic research centers and
clinical reference laboratories. The Company commercially introduced its
first product, the research use only GeneChip system and the HIV probe array,
in April 1996. Payments received for certain systems prior to April 1996 were
recorded as contract revenues pursuant to development agreements. Failure of
the Company to successfully develop, manufacture and market additional
products 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 a net loss of approximately $22.5 million during the
year ended December 31, 1997 and, as of such date, had an accumulated deficit
of approximately $67.3 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 cash and investment balances,
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, general and administrative costs and
manufacturing, marketing and sales capabilities.
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The Company's quarterly operating results will depend upon the volume
and timing of orders for GeneChip systems and probe arrays received and the
timing of deliveries made 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.
Affymetrix may have to reduce or discount the price of its products 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 and probe arrays, product mix and the price at which it can successfully
market its products to academic research centers, pharmaceutical and
biotechnology companies and clinical reference laboratories. The amount of
future operating losses and time required by the Company to reach profitability
are 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 and supply 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.
The Company has substantially completed development of a plan to modify
its information systems to recognize the year 2000. The Company expects the
project to be substantially complete by mid-1999 and the cost of the project is
not expected to have a material impact on the Company's financial condition or
results of operations.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996
PRODUCT REVENUE. In April 1996, Affymetrix commenced commercial
sales of the GeneChip system and an HIV probe array for research use and
recorded sales of $1.4 million during 1996 with associated costs of product
revenue of $2.2 million. Product sales increased to $4.8 million in 1997, the
first full-year of sales with associated costs of product revenue of $4.6
million. Product sales revenue includes revenue from the sales of GeneChip
systems as well as various probe arrays, including arrays targeting HIV, p450
and p53 genes and custom and standard gene expression monitoring probe
arrays. Margins have, and will continue to, fluctuate significantly as the
Company experiences variation in manufacturing yields and as the Company
continues development of its manufacturing capabilities. In addition, the
Company expects to increase shipments to foreign customers during 1998 and
margins may fluctuate due to changes in currency exchange rates.
CONTRACT AND GRANT REVENUE. Contract and grant revenue increased to
$15.0 million for 1997 from $10.6 million for 1996 primarily due to increased
activity under government grants and increased custom probe array design and
supply fees earned and milestone payments received.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
to $28.2 million for 1997 compared to $18.8 million for 1996. The increase in
research and development expenses was attributable primarily to the hiring of
additional research and development personnel, costs incurred for further
product development and increased purchases of research supplies. The Company
expects research and development spending to increase over the next several
years as product development and research efforts continue to expand.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $14.7 million in 1997 compared to $7.6
million for 1996. The increase in selling, general and administrative expenses
was attributable primarily to the hiring of additional management personnel,
professional fees (primarily legal fees) and overall scale-up of the Company's
operations and business development efforts. Selling, general and administrative
expenses are expected to continue to increase as the Company expands sales and
marketing, prosecutes and defends its intellectual property position and
defends against claims made by third parties, and adds management and support
staff.
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INTEREST INCOME. Interest income was $5.2 million for 1997 compared to
$4.4 million for 1996. The increase resulted from the full year impact of
investment of net proceeds from the Company's initial public offering in June
1996. Interest expense of approximately $0.1 million for both 1997 and 1996 is
related to a capital equipment lease.
YEARS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1995
PRODUCT REVENUE. In April 1996, Affymetrix commenced commercial sales
of the GeneChip system and an HIV probe array for research use. Product revenue
of $1.4 million and costs of product revenue of $2.2 million were recognized in
the last nine months of 1996.
CONTRACT AND GRANT REVENUE. Contract and grant revenue increased to
$10.6 million for 1996 from $4.6 million for 1995 as a result primarily of the
Company's ATP grant, NIH grant and revenue earned from collaborative agreements.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
to $18.8 million for 1996 compared to $12.4 million for 1995. The increase in
research and development expenses was attributable primarily to the hiring of
additional research and development personnel, costs incurred to further product
development and increased purchases of research supplies.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $7.6 million in 1996 compared to $3.8
million for 1995. The increase in selling, 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. Interest income was $4.4 million for 1996 compared to
$1.3 million for 1995. The increase resulted from the investment of net proceeds
from Affymetrix' private placement of Series B Senior Convertible Preferred
Stock in August 1995 and net proceeds from its initial public offering in June
1996. Interest expense decreased to $0.1 million for 1996 from $0.4 million in
1995 as a result of the conversion of a $6.0 million subordinated convertible
promissory note held by Affymax in August 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily through the sale of
equity securities, contributions from Affymax, government grants, collaborative
agreements, interest income and product sales. Proceeds raised through the sale
of equity securities include net proceeds of $85.1 million from the Company's
initial public offering in June 1996 and aggregate net proceeds of $53.6 million
from private placements in August 1995 and September 1993.
Affymetrix' cash and cash equivalents decreased by $9.4 million during
1997. Net cash used in operating activities was $21.4 million in 1997 compared
to $11.8 million in 1996 and $10.2 million for 1995. The cash used for
operations was primarily to fund the Company's operating losses.
Net cash provided by investing activities was $12.0 million in 1997.
Net cash used in investing activities was $61.6 million for 1996 and $26.7
million in 1995. Capital expenditures totaled $16.0 million for 1997 compared to
$3.5 million in 1996 and $2.3 million in 1995. The increase in 1997 relates to
expansion of the Company's manufacturing, research, development and
administrative facilities as well as increased purchases of information systems
equipment. Purchases of available-for-sale securities were $82.7 million, $149.4
million and $38.4 million for 1997, 1996 and 1995, respectively. Proceeds from
sales and maturities of available-for-sale securities were $110.6 million, $91.3
million and $14.0 million for 1997, 1996 and 1995, respectively.
Net cash provided by financing activities was $30,000 in 1997 compared
to $85.0 million in 1996 and $32.7 million in 1995. These cash flows from
financing activities are primarily the result of the Company's initial public
offering in 1996 and private placements of securities in 1995.
On October 17, 1997 the Company filed a registration statement on
Form S-3 with the Securities and Exchange Commission for an underwritten
public offering of up to 1,725,000 shares of common stock. On November 4,
1997 the Company withdrew the offering.
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As of December 31, 1997, Affymetrix had cash, cash equivalents, and
short-term investments of approximately $71.6 million. The Company anticipates
that these existing capital resources, together with the expected proceeds of
approximately $50 million from the pending sale of Series AA Preferred Stock to
Glaxo, will enable it to maintain currently planned operations. However, this
expectation is based on the Company's current operating plan, which is expected
to 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
capital will be substantial and will depend on many factors, including payments
received under existing and possible future supply and collaborative
agreements; payments made under license agreements; the availability of
government research grant payments; the progress of the Company's
collaborative and independent research and development projects; the cost 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
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 by
entering into collaboration 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 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.
As of December 31, 1997, Affymetrix had federal net operating loss
carryforwards for income tax purposes of approximately $52 million, which will
expire at various dates beginning in 2008, if not utilized. 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. 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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AFFYMETRIX, INC.
BALANCE SHEETS
(In thousands, except share amounts)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................................... $ 4,779 $ 14,143
Short-term investments....................................................... 66,794 94,839
-------- --------
71,573 108,982
Accounts receivable ......................................................... 6,216 1,888
Inventories.................................................................. 2,637 1,901
Other current assets......................................................... 748 523
-------- --------
Total current assets....................................................... 81,174 113,294
Property and equipment
Construction-in-progress..................................................... 2,760 1,424
Equipment and furniture...................................................... 10,732 5,883
Leasehold improvements....................................................... 10,762 946
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24,254 8,253
Less accumulated depreciation and amortization............................... (5,166) (2,856)
-------- --------
Net property and equipment................................................. 19,088 5,397
Other assets.................................................................... 908 209
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$101,170 $118,900
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-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities..................................... $ 8,729 $ 5,023
Deferred revenue............................................................. 664 396
Current portion of capital lease obligation.................................. 228 207
-------- --------
Total current liabilities.................................................. 9,621 5,626
Noncurrent portion of capital lease obligation.................................. 513 741
Commitments and contingencies
Shareholders' equity:
Common stock, no par value; 50,000,000 shares authorized; 22,786,945 and
22,535,203 shares issued and outstanding at December 31, 1997 and 1996,
respectively................................................................. 158,924 158,687
Unrealized gain on available-for-sale securities............................. 125 49
Deferred compensation........................................................ (744) (1,460)
Accumulated deficit.......................................................... (67,269) (44,743)
-------- --------
Total shareholders' equity................................................. 91,036 112,533
-------- --------
$101,170 $118,900
-------- --------
-------- --------
</TABLE>
See Accompanying Notes
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AFFYMETRIX, INC.
STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
REVENUE:
Product............................................................... $ 4,789 $ 1,389 $ -
Contract and grant.................................................... 14,976 10,583 4,625
-------- -------- --------
Total revenue....................................................... 19,765 11,972 4,625
-------- -------- --------
COSTS AND EXPENSES:
Cost of product revenue............................................... 4,559 2,178 -
Research and development.............................................. 28,168 18,762 12,420
Selling, general and administrative................................... 14,697 7,569 3,833
-------- -------- --------
Total costs and expenses (includes related-party expense of
$52, $1,422 and $1,432, respectively)............................. 47,424 28,509 16,253
-------- -------- --------
Loss from operations................................................ (27,659) (16,537) (11,628)
Interest income..................................................... 5,218 4,416 1,301
Interest expense (includes related-party expense of $320 in
1995)............................................................. (85) (106) (420)
-------- -------- --------
Net loss............................................................ $(22,526) $(12,227) $(10,747)
-------- -------- --------
-------- -------- --------
Basic and diluted net loss per share (pro forma in 1996 and 1995)... $ (0.99) $ (0.62) $ (0.84)
-------- -------- --------
-------- -------- --------
Shares used in computing basic and diluted net loss per
share............................................................. 22,644 19,793 12,722
-------- -------- --------
-------- -------- --------
</TABLE>
See Accompanying Notes
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AFFYMETRIX, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except share amounts)
<TABLE>
<CAPTION>
CONVERTIBLE TOTAL
PREFERRED COMMON UNREALIZED DEFERRED ACCUMULATED SHAREHOLDERS'
STOCK STOCK GAIN/(LOSS) COMPENSATION DEFICIT EQUITY
----------- ------ ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994.................. $ 31,283 $ 122 $(382) $ - $(21,769) $ 9,254
-------- -------- ----- ------- -------- --------
Issuance of 7,333,333 shares of
Series B Senior Convertible
Preferred Stock, net of issuance
costs................................... 32,836 - - - - 32,836
Conversion of note payable to Affymax
into 1,333,333 shares of Series B
Senior Convertible Preferred Stock...... 6,000 - - - - 6,000
Issuance of 62,749 shares of Common
Stock upon exercise of stock options.... - 23 - - - 23
Issuance of 65,320 shares of
Common Stock for financing
commissions ............................ - 44 - - - 44
Issuance of warrants to Affymax for
202,441 shares of Series 2
Subordinated Convertible Preferred
Stock in lieu of interest............... 320 - - - - 320
Compensation from accelerated
options................................. - 40 - - - 40
Deferred compensation related to
grant of stock options.................. - 2,488 - (2,488) - -
Amortization of deferred
compensation............................ - - - 128 - 128
Unrealized gain on
available-for-sale securities........... - - 663 - - 663
Net loss................................. - - - - (10,747) (10,747)
-------- -------- ----- ------- -------- --------
Balance, December 31, 1995.................. 70,439 2,717 281 (2,360) (32,516) 38,561
-------- -------- ----- ------- -------- --------
Issuance of 215,945 shares of Common
Stock upon exercise of stock options.... - 127 - - - 127
Conversion of 23,166,166 shares of
Preferred Stock to 15,629,991 shares
of Common Stock........................ (70,119) 70,119 - - - -
Conversion of warrants to purchase
202,441 shares of Series 2
Subordinated Convertible Preferred
Stock to warrants to purchase
134,961 shares of Common Stock.......... (320) 320 - - - -
Issuance of 6,153,000 shares of
Common Stock , net of issuance
costs and commissions .................. - 85,069 - - - 85,069
Deferred compensation related to
grant of stock options.................. - 335 - (335) - -
Amortization of deferred
compensation............................ - - - 1,235 - 1,235
Unrealized loss on
available-for-sale securities........... - - (232) - - (232)
Net loss................................. - - - - (12,227) (12,227)
-------- -------- ----- ------- -------- --------
Balance, December 31, 1996.................. - 158,687 49 (1,460) (44,743) 112,533
-------- -------- ----- ------- -------- --------
Issuance of 253,074 shares of Common
Stock upon exercise of stock options.... - 237 - - - 237
Amortization of deferred
compensation............................ - - - 716 - 716
Unrealized gain on
available-for-sale securities........... - - 76 - - 76
Net loss................................. - - - - (22,526) (22,526)
-------- -------- ----- ------- -------- --------
Balance, December 31, 1997.................. $ - $158,924 $ 125 $ (744) $(67,269) $91,036
-------- -------- ----- ------- -------- --------
-------- -------- ----- ------- -------- --------
</TABLE>
See Accompanying Notes
-7-
<PAGE>
AFFYMETRIX, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
-------- --------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss...................................................... $(22,526) $ (12,227) $(10,747)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.............................. 2,310 1,286 701
Amortization of investment premiums........................ 159 (518) 357
Amortization of deferred compensation...................... 716 1,235 128
Changes in operating assets and liabilities:
Accounts receivable...................................... (4,328) (546) (1,252)
Inventories.............................................. (736) (1,231) (670)
Other assets............................................. (924) (292) (252)
Accounts payable and other accrued liabilities........... 4,019 856 1,098
Accrued warranty......................................... (313) 1,609 160
Deferred revenue......................................... 268 (1,944) 253
-------- --------- --------
Net cash used in operating activities.................. (21,355) (11,772) (10,224)
-------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.......................................... (16,001) (3,488) (2,283)
Proceeds from sale of available-for-sale securities........... 98,452 48,417 8,538
Proceeds from maturities of available-for-sale securities..... 12,183 42,859 5,485
Purchases of available-for-sale securities.................... (82,673) (149,363) (38,428)
-------- --------- --------
Net cash provided by (used in) investing activities.... 11,961 (61,575) (26,688)
-------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuances of Common Stock, net................................ 237 85,196 23
Issuances of Preferred Stock, net............................. - - 32,880
Principal payments on capital lease obligation................ (207) (187) (169)
-------- --------- --------
Net cash provided by financing activities.............. 30 85,009 32,734
-------- --------- --------
Net increase (decrease) in cash and cash equivalents... (9,364) 11,662 (4,178)
Cash and cash equivalents at beginning of year................... 14,143 2,481 6,659
-------- --------- --------
Cash and cash equivalents at end of year......................... $ 4,779 $ 14,143 $ 2,481
-------- --------- --------
-------- --------- --------
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Conversion of note payable and contributions from Affymax
to Preferred Stock.......................................... $ - $ - $ 6,000
-------- --------- --------
-------- --------- --------
</TABLE>
See Accompanying Notes
-8-
<PAGE>
NOTE 1 -- NATURE OF OPERATION
Affymetrix, Inc. ("Affymetrix" or the "Company") is focused on
developing GeneChip -Registered Trademark- 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. In March 1995, Glaxo plc, now Glaxo Wellcome plc
("Glaxo"), purchased Affymax, including its then 65% ownership interest in
Affymetrix. Affymetrix issued additional equity securities, which further
diluted Glaxo's ownership interest in Affymetrix to approximately 46% on
December 31, 1995. The issuance of common stock during the Company's initial
public offering in June 1996 further diluted Glaxo's ownership interest in
Affymetrix to approximately 33% at December 31, 1997. On March 10, 1998, the
Company announced the planned sale of 1,634,522 shares of Series AA Preferred
Stock to Glaxo for expected proceeds of $50 million. The preferred stock is
convertible into Affymetrix common stock at a predetermined price of
approximately $40 per share, and if all of the preferred stock is converted,
would result in the issuance of approximately 1,250,000 shares of Affymetrix
common stock. The sale, which is subject to regulatory approval, is expected
to close during the second quarter of 1998, and, if completed, will increase
Glaxo's ownership interest in Affymetrix to approximately 37% assuming
conversion of the Series AA Preferred Stock into common shares.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The summary of significant accounting policies is presented to assist
the reader in understanding and evaluating the financial statements. These
policies are in conformity with generally accepted accounting policies.
Certain amounts for prior years have been reclassified to conform to current
year presentation.
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.
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.
The Company recognizes product revenue from the sale of its products upon
shipment to its customers. Revenue from subscription fees earned under
EasyAccess agreements are recorded ratably over the term of the agreement and
are recorded in "Contract Revenue". Reserves are provided for anticipated
product returns and warranty expenses at the time of shipment.
Revenue from customers representing 10% or more of total revenue during
1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CUSTOMER:
A 23% 18% 25%
B - 18% 23%
C 10% 15% 22%
D 17% 19% 17%
E 17% - -
</TABLE>
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.
-9-
<PAGE>
NET LOSS PER SHARE
In 1997, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 128, "Earnings Per Share' ("SFAS 128") and Staff
Accounting Bulletin No. 98 ("SAB 98"), and restated all prior periods. Under
the provisions of SFAS 128, basic earnings per share is calculated based on
the weighted average number of common shares outstanding during the period.
Diluted earnings per share gives effect to the dilutive effect of stock
options and warrants (calculated based on the treasury stock method). SAB 98
eliminated the impact of certain dilutive securities during the period prior
to the Company's initial public offering in 1996.
Options and warrants to purchase 3,155,190, 2,435,824, and 2,363,005
shares of the Company's common stock in 1997, 1996 and 1995, respectively,
had an anti-dilutive impact on net loss per share and were therefore excluded
from the calculation of diluted net loss per share (See Note 7 "Shareholders'
Equity"). Shares used in computing pro forma net loss per share include
6,766,000 shares in 1996, and 12,274,000 shares in 1995 on an as-converted
basis for then outstanding preferred stock.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
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, 1997, Affymetrix' investments in
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.
INVENTORIES
Inventories are stated at the lower of cost (as determined by the
first-in, first-out method) or market and consist of the following at
December 31, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Raw materials................................................................ $ 935 $ 358
Work in process.............................................................. 160 178
Finished goods............................................................... 1,542 1,365
------ ------
Total...................................................................... $2,637 $1,901
------ ------
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment, including equipment under capital leases, are
recorded at cost and 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.
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities as of December 31, 1997 and
1996, consist of the following (in thousands):
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Accounts payable...................................................... $6,228 $1,875
Accrued compensation and related...................................... 638 445
Accrued warranty...................................................... 1,456 1,769
Collaborative research refund......................................... - 450
Other................................................................. 407 484
------ ------
Total............................................................... $8,729 $5,023
------ ------
------ ------
</TABLE>
-10-
<PAGE>
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income" ("SFAS 130") and SFAS No. 131 "Disclosure about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 130 establishes
standards for reporting comprehensive income and is effective for fiscal year
1998. SFAS 131 establishes standards for annual and interim disclosures of
operating segments, products and services, geographic areas and major
customers, and is also effective in 1998, with interim disclosures required
only subsequent to the initial year of application. The Company is in the
process of evaluating the disclosure requirements of the new standards, the
adoption of which is not expected to have a material impact on Affymetrix's
results of operations or financial condition.
CONCENTRATIONS OF RISK
Cash equivalents and investments are financial instruments which
potentially subject Affymetrix to concentrations of risk to the extent of
amounts recorded in the Balance Sheet. 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.
The Company has not experienced any significant credit losses from its
accounts receivable, from grants or from collaborative research agreements,
and none are currently expected. Affymetrix performs a quarterly review of
its customer activity and associated credit risks.
NOTE 3 -- COLLABORATIVE AGREEMENTS AND GRANTS
The Company has agreements with several entities to develop and test
probe arrays for the detection of certain gene sequences, mutations or
organisms. 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. 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.
AMERSHAM PHARMACIA BIOTECH
In December 1997, the Company entered into a sales representation
agreement with Amersham Pharmacia Biotech ("APB") for the non-exclusive sales
and marketing of certain of its GeneChip products. Under this sales
representation agreement, APB will receive a percentage commission based on
sales of certain GeneChip products, subject to annual maximum amounts.
BIOMERIEUX VITEK, INC.
In September 1996, bioMerieux Vitek, Inc. ("bioMerieux") and Affymetrix
executed a collaboration agreement to develop DNA probe arrays using the
Affymetrix GeneChip technology for clinical diagnostic kits for bacterial
identification and antibiotic resistance analysis. The agreement provides for
certain research funding, license and milestone payments. bioMerieux also is
funding certain research activities at Affymetrix for a minimum of three
years. Additionally, a manufacturing agreement was signed under which
Affymetrix will manufacture GeneChip probe arrays for sale to bioMerieux. The
agreement provides for royalties to Affymetrix on bioMerieux' sales of
GeneChip probe arrays. In December 1997 and January 1998, bioMerieux and the
Company expanded their collaboration to include the development of DNA probe
arrays using the Affymetrix GeneChip technology for clinical diagnostics
tests in the fields of HIV and food and industrial testing. As a result of this
expansion of the collaboration, bioMerieux has and will make certain license
payments to the Company.
GENETICS INSTITUTE
In December 1995, Affymetrix and Genetics Institute ("GI") entered into
a supply agreement in the field of genomics under which Affymetrix
manufactures and supplies custom probe arrays based on specific genes
identified and selected by GI. 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
-11-
<PAGE>
development of specified probe arrays. Affymetrix receives fees for the
design and delivery of the custom probe arrays, and may receive milestone
payments and royalties on any therapeutic compounds developed by GI using
these probe arrays. GI has exclusive rights to specific probe arrays supplied
by Affymetrix.
In January 1998, the Company and GI entered into a three-year EasyAccess
supply agreement under which the Company will supply GI with custom and
standard probe arrays in return for expected annual subscription fees, custom
design fees and revenue from the sale of probe arrays. As part of this new
agreement many of the terms and conditions under the 1995 supply agreement
were superceded.
F. HOFFMANN-LA ROCHE LTD.
In August 1997, the Company and F. Hoffmann-La Roche Ltd. ("Roche")
entered into a three-year EasyAccess supply agreement under which the Company
will supply Roche with custom and standard probe arrays in return for
expected annual subscription fees, custom design fees and revenue from the
sale of probe arrays.
Prior to the 1997 agreement, the Company had entered into two agreements
with Roche. In October 1996, the Company signed a demonstration agreement
with Roche for the development and supply of a single custom probe array
containing bacterial genes. In December 1996, the Company signed a pilot
agreement with Roche Bioscience, a division of Syntex (U.S.A.) Inc., for the
development and supply of a single custom probe array containing human, rat
and mouse genes. The milestones of these agreements were met and the
agreements have been concluded.
GOVERNMENT GRANTS
In August 1995, Affymetrix received a three-year grant from the National
Institutes of Health ("NIH") National Center for Human Genome Research for
approximately $5.5 million. The Company has recognized revenue of
approximately $3.6 million through December 31, 1997, and the remaining
amounts are subject to yearly appropriations by the NIH.
In October 1994, Affymetrix and Molecular Dynamics, Inc. ("Molecular
Dynamics") were awarded a five-year matching grant for a total of $31.5 million
under the Advanced Technology Program within the National Institute of
Standards and Technology to develop a miniaturized DNA diagnostic device, of
which approximately $10.7 million will be available to Molecular Dynamics.
The contract provides that Affymetrix will receive matching funding up to
$20.8 million, 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 and has recognized revenue of $7.8 million
through December 31, 1997.
NOTE 4 -- AVAILABLE-FOR-SALE SECURITIES
The following is a summary of available-for-sale securities as of
December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
GROSS UNREALIZED GROSS UNREALIZED ESTIMATED FAIR
COST GAINS LOSSES VALUE
------- ---------------- ---------------- --------------
<S> <C> <C> <C> <C>
U.S. Government obligations.............. $40,962 $ 40 $(4) $40,998
U.S. Corporate securities................ 27,706 89 - 27,795
------- ---- --- -------
Total securities..................... $68,668 $129 $(4) $68,793
------- ---- --- -------
------- ---- --- -------
Amounts included in:
Cash equivalents....................... $ 1,999 $ - $ - $ 1,999
Short-term investments................. 66,669 129 (4) 66,794
------- ---- --- -------
Total securities..................... $68,668 $129 $(4) $68,793
------- ---- --- -------
------- ---- --- -------
</TABLE>
The following is a summary of available-for-sale securities as of
December 31, 1996 (in thousands):
-12-
<PAGE>
<TABLE>
<CAPTION>
GROSS UNREALIZED GROSS UNREALIZED ESTIMATED FAIR
COST GAINS LOSSES VALUE
-------- ---------------- ---------------- --------------
<S> <C> <C> <C> <C>
U.S. Government obligations............... $ 88,758 $134 $(86) $ 88,806
U.S. Corporate securities................. 17,017 9 (8) 17,018
-------- ---- ---- --------
Total securities...................... $105,775 $143 $(94) $105,824
-------- ---- ---- --------
-------- ---- ---- --------
Amounts included in:
Cash equivalents........................ $ 10,985 $ - $ - $ 10,985
Short-term investments.................. 94,790 143 (94) 94,839
-------- ---- ---- --------
Total securities...................... $105,775 $143 $(94) $105,824
-------- ---- ---- --------
-------- ---- ---- --------
</TABLE>
The realized gains and losses on sales of available-for-sale securities
were immaterial for the years ended December 31, 1997, 1996 and 1995.
The following is a summary of the cost and estimated fair value of
available-for-sale securities at December 31, 1997, by contractual maturity
(in thousands):
<TABLE>
<CAPTION>
ESTIMATED FAIR
COST VALUE
------- --------------
<S> <C> <C>
Mature in one year or less.......................................... $44,578 $44,632
Mature after one year through three years........................... 24,090 24,161
------- -------
Total............................................................. $68,668 $68,793
------- -------
------- -------
</TABLE>
NOTE 5 -- RELATED PARTY TRANSACTIONS
In December 1994, Affymetrix issued a $6.0 million 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 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 connection
with the Company's initial public offering, the Preferred Stock converted to
888,888 shares of Common Stock and the warrants converted to warrants to
purchase 134,961 shares of Common Stock at $8.25 per share. Affymetrix and
Affymax are parties to a technology agreement providing consignment of
certain patents to Affymetrix and licenses to a limited number of patents.
Two directors of Affymetrix are each employees of a subsidiary of Glaxo.
See also the discussion regarding the planned sale of Series AA
Preferred Stock in Note 1.
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. In connection with the
Company's initial public offering, the warrant was converted to a warrant to
buy 68,921 shares of Common Stock at $8.25 per share.
NOTE 6 -- COMMITMENTS AND CONTINGENCIES
CAPITAL LEASE
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 $1.3 million
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 $1.2 million and
was fully depreciated as of December 31, 1996.
-13-
<PAGE>
OPERATING LEASES
Affymetrix leases laboratory, office and manufacturing facilities, and
equipment under noncancelable operating leases which expire at various times
through 2003. Rent expense related to operating leases was approximately
$1,355,000 in 1997, $950,000 in 1996 and $664,000 in 1995.
Future minimum lease obligation at December 31, 1997 under all leases
are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1998........................................................ $ 292 $1,723
1999........................................................ 291 1,834
2000........................................................ 280 1,292
2001........................................................ - 1,228
2002........................................................ - 1,228
Thereafter.................................................. - 819
----- -------
Total minimum lease payments.............................. 863 $8,124
-------
-------
Less amount representing interest........................... (122)
-----
Present value of minimum lease payments..................... 741
Less current portion........................................ (228)
-----
Noncurrent obligation under capital lease................. $ 513
-----
-----
</TABLE>
LITIGATION
The Company routinely receives communications from third parties
asserting patent or other rights covering its products and technologies.
Based upon the Company's evaluation, it may take no action or it may seek to
obtain a license. There can be no assurance in any given case that a license
will be available on terms the Company considers reasonable, or that
litigation will not ensue.
In March 1997, Hyseq Inc. ("Hyseq") filed a suit against Affymetrix in
the United States District Court alleging that Affymetrix infringes United
States patent 5,202,231 and 5,525,464 issued to Drs. Drmanac and Crkvenjakov.
In December 1997, Hyseq filed a second action claiming that certain
Affymetrix products infringe a related patent, United States patent
5,695,940. In the opinion of management, the outcome of these actions will
not have a material adverse effect on the Company's financial position.
On January 6, 1998, the Company filed a patent infringement action in
the United States District Court for the District of Delaware (No. 98-6)
alleging that certain of Incyte, Inc.'s ("Incyte") and Synteni,
Inc.'s ("Synteni") products infringe United States Patent 5,445,934. The
action seeks to enjoin commercial activities of Incyte and Synteni relating
to the Affymetrix patent. There can be no assurance that Affymetrix will
prevail in such litigation or be successful in asserting its patent rights.
The Company is likely to incur substantial costs and expend substantial
personnel time in asserting the Company's patent rights against Incyte and
Synteni. Failure to successfully enforce its patent rights or the loss of
these patent rights or others would remove a legal obstacle to competitors in
designing systems with similar competitive advantages, which could have a
material adverse effect on the Company's business, financial condition and
operating results.
NOTE 7 -- SHAREHOLDERS' EQUITY
PREFERRED SHARES
In March 1996, the Board authorized the filing of a registration
statement with the Securities and Exchange Commission permitting Affymetrix
to sell shares of its Common Stock to the public. In connection with the
offering all of the then outstanding Preferred Stock automatically converted
into 15,629,991 shares of Common Stock at the completion of the offering in
June 1996.
COMMON SHARES
The Company's initial public offering on June 6, 1996 generated net
proceeds of approximately $83.0 million from the sale of 6,000,000 shares of
Common Stock. In July 1996, the Company's underwriters purchased 153,000
shares of Common Stock pursuant to the over-allotment option, for additional
net proceeds of $2.1 million.
-14-
<PAGE>
STOCK WARRANTS
At December 31, 1997, there were outstanding warrants to purchase
203,881 shares of Common Stock at $8.25 per share which expire at various
dates beginning December 1999 through July 2000.
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. As of
December 31, 1997, a total of 5,200,000 shares of Common Stock have been
reserved for issuance under the Stock Plan and 53,335 shares were subject to
repurchase by the Company.
In March 1996, the Board adopted the 1996 Nonemployee Directors Stock
Option Plan (the "Directors Plan"). 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 only
nonstatutory stock options can be granted.
As of December 31, 1997, a total of 5,703,881 shares of common stock are
reserved for future issuance under the Directors Plan, the Stock Plan and for
outstanding warrants.
Activity under the stock plans through December 31, 1997 is as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
---------------------------
WEIGHTED
NUMBER OF AVERAGE PRICE
SHARES PER SHARE
--------- -------------
<S> <C> <C>
Balance at December 31, 1994.............. 901,988 $ 0.47
Options granted............................. 1,423,917 0.68
Options exercised........................... (62,749) 0.36
Options canceled............................ (104,032) 0.43
---------
Balance at December 31, 1995.............. 2,159,124 0.60
Options granted............................. 309,167 10.26
Options exercised........................... (215,945) 0.59
Options canceled............................ (20,403) 0.75
---------
Balance at December 31, 1996.............. 2,231,943 0.60
---------
---------
Options granted............................. 1,000,000 29.40
Options exercised........................... (253,074) 0.93
Options canceled............................ (27,560) 8.58
---------
Balance at December 31, 1997.............. 2,951,309 11.26
---------
---------
</TABLE>
For options granted through June 6, 1996, Affymetrix recognized an
aggregate of $2.8 million 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. The
deferred compensation expense is being recognized over the vesting period of
the options.
Exercise prices for options outstanding as of December 31, 1997 ranged
from $0.30 to $42.88 per share. The weighted-average contractual life of
those options is 8.09 years as summarized below:
-15-
<PAGE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ -------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE REMAINING AVERAGE AVERAGE
RANGE OF CONTRACTUAL LIFE EXERCISE PRICE EXERCISE PRICE
EXERCISE PRICES NUMBER (IN YEARS) PER SHARE NUMBER PER SHARE
- ---------------- --------- ----------------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.30 - 0.675 1,749,257 7.49 $ 0.609 697,068 $ 0.620
4.80 - 29.125 958,052 8.79 24.663 41,267 12.695
29.375 - 42.875 244,000 9.67 34.951 - -
- ---------------- --------- ----------------- -------------- ------- --------------
$ 0.30 - 42.875 2,951,309 8.09 $11.263 738,335 $ 1.282
- ---------------- --------- ----------------- -------------- ------- --------------
- ---------------- --------- ----------------- -------------- ------- --------------
</TABLE>
PRO FORMA DISCLOSURE UNDER STATEMENT NO. 123
In accordance with the provisions of SFAS 123, the Company is disclosing
pro forma information regarding net loss and net loss per share as if the
Company had accounted for its stock based compensation plans under the fair
value method of SFAS 123.
The fair value of options was estimated at the date of grant using a
Black-Scholes option pricing model with the following assumptions for 1997,
1996 and 1995: risk free interest rate of 5.42%; a dividend yield of zero;
volatility factors of the expected market price of the Company's Common Stock
price of .55; and a weighted average expected option term of one year from
vested date.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions including the expected
stock volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its
employee stock options.
Based on this calculation, the weighted average fair value of options
granted during 1997, 1996 and 1995 was $14.01, $4.72 and $0.30, respectively.
For purposes of pro forma disclosures the estimated fair value of the options
in excess of the expense recognized in conjunction with the amortization of
deferred compensation is amortized to expense over the options' vesting
period, generally five years. The pro forma effect on net loss is not
necessarily indicative of potential pro forma effects on results for future
years. The Company's pro forma information as of December 31, 1997, 1996 and
1995 is as follows (in thousands excepts per share amounts):
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Pro forma net loss $(26,515) $(12,345) $(10,747)
-------- -------- --------
-------- -------- --------
Pro forma net loss per share $ (1.17) $ (0.62) $ (0.84)
-------- -------- --------
-------- -------- --------
</TABLE>
NOTE 8 -- INCOME TAXES
As of December 31, 1997, Affymetrix has federal net operating loss
carryforwards of approximately $52 million, which will expire at various
dates beginning on 2008, if not utilized. In addition, the Company has
federal and state research and development credit carryforwards of
approximately $1.7 million and $1.3 million, respectively, which expire at
various dates beginning in 2008, 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,
1997 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Net operating loss carryforwards..................................... $ 17,853 $ 10,705
Research credits..................................................... 2,586 1,457
Other-net............................................................ 5,287 2,551
-------- --------
Total deferred tax assets............................................ 25,726 14,713
Valuation allowance for deferred tax assets.......................... (25,726) (14,713)
-------- --------
Net deferred tax assets.............................................. $ - $ -
-------- --------
-------- --------
</TABLE>
-16-
<PAGE>
The valuation allowance increased by $11.0 million, $3.9 million and
$4.9 million during 1997, 1996, and 1995, respectively.
-17-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY STATEMENTS FOR THE PERIOD ENDED DECEMBER 31, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,479
<SECURITIES> 66,794
<RECEIVABLES> 6,216
<ALLOWANCES> 0
<INVENTORY> 2,637
<CURRENT-ASSETS> 81,174
<PP&E> 19,088
<DEPRECIATION> (5,166)
<TOTAL-ASSETS> 101,170
<CURRENT-LIABILITIES> 9,621
<BONDS> 513
0
0
<COMMON> 158,924
<OTHER-SE> (67,888)
<TOTAL-LIABILITY-AND-EQUITY> 101,170
<SALES> 4,789
<TOTAL-REVENUES> 19,765
<CGS> 4,559
<TOTAL-COSTS> 4,559
<OTHER-EXPENSES> 42,865
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (5,133)
<INCOME-PRETAX> (22,526)
<INCOME-TAX> 0
<INCOME-CONTINUING> (22,526)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (22,526)
<EPS-PRIMARY> (0.99)
<EPS-DILUTED> (0.99)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 6-MOS 9-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1996 JAN-01-1996
<PERIOD-END> JUN-30-1996 SEP-30-1996 DEC-31-1996
<CASH> 21,309 53,217 14,143
<SECURITIES> 92,533 59,453 94,839
<RECEIVABLES> 1,265 643 1,888
<ALLOWANCES> 0 0 0
<INVENTORY> 1,550 1,518 1,901
<CURRENT-ASSETS> 117,309 115,461 113,294
<PP&E> 6,001 4,230 8,253
<DEPRECIATION> (2,149) 0 (2,856)
<TOTAL-ASSETS> 121,301 119,861 118,900
<CURRENT-LIABILITIES> 6,246 4,909 5,626
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 156,529 158,690 158,687
<OTHER-SE> (42,325) (44,533) (46,154)
<TOTAL-LIABILITY-AND-EQUITY> 121,301 119,861 118,900
<SALES> 457 858 1,389
<TOTAL-REVENUES> 3,715 6,366 11,972
<CGS> 707 1,089 2,178
<TOTAL-COSTS> 707 1,089 2,178
<OTHER-EXPENSES> 11,860 18,451 26,331
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> (1,154) (2,897) (4,310)
<INCOME-PRETAX> (7,698) (10,277) (12,227)
<INCOME-TAX> 0 0 0
<INCOME-CONTINUING> (7,698) (10,277) (12,227)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (7,698) (10,277) (12,227)
<EPS-PRIMARY> (0.45) (0.54) (0.62)
<EPS-DILUTED> (0.45) (0.54) (0.62)
</TABLE>
