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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED MARCH 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________.
COMMISSION FILE NO. 0-28218
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AFFYMETRIX, INC.
(Exact name of Registrant as specified in its charter)
CALIFORNIA 77-0319159
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3380 CENTRAL EXPRESSWAY, SANTA CLARA, 95051
CALIFORNIA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (408)731-5000
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
COMMON SHARES OUTSTANDING ON MARCH 31, 1998: 22,861,801
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AFFYMETRIX, INC.
TABLE OF CONTENTS
<TABLE>
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PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets at March 31, 1998 and December 31, 1997......................................... 3
Condensed Statements of Operations for the Three Months Ended March 31, 1998 and 1997.................... 4
Condensed Statements of Cash Flows for the Three Months Ended March 31, 1998 and 1997.................... 5
Notes to Condensed Financial Statements.................................................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............. 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................................. 11
Item 2. Use of Proceeds................................................................................... 11
Item 6. Exhibits and Reports on Form 8-K.................................................................. 11
SIGNATURES................................................................................................. 12
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2
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AFFYMETRIX, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
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<S> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash, cash equivalents and short-term investments................................... $ 62,563 $ 71,573
Accounts receivable................................................................. 5,078 6,216
Inventories......................................................................... 3,184 2,637
Other current assets................................................................ 853 748
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Total current assets.............................................................. 71,678 81,174
Net property and equipment............................................................ 22,578 19,088
Other assets.......................................................................... 904 908
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$ 95,160 $ 101,170
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities............................................ $ 9,258 $ 9,621
Noncurrent portion of capital lease obligation........................................ 452 513
Shareholders' equity:
Common stock........................................................................ 159,177 158,924
Accumulated deficit................................................................. (73,169) (67,269)
Other............................................................................... (558) (619)
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Total shareholders' equity........................................................ 85,450 91,036
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$ 95,160 $ 101,170
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</TABLE>
Note: The balance sheet at December 31, 1997 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See accompanying notes.
3
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AFFYMETRIX, INC.
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
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<S> <C> <C>
1998 1997
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Revenue:
Product................................................................................... $ 3,697 $ 420
Contract and grant........................................................................ 6,056 2,388
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Total revenue........................................................................... 9,753 2,808
Costs and expenses:
Cost of product revenue................................................................... 2,493 865
Research and development.................................................................. 8,511 5,812
Selling, general and administrative....................................................... 5,741 2,492
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Total costs and expenses................................................................ 16,745 9,169
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Loss from operations........................................................................ (6,992) (6,361)
Interest income, net........................................................................ 1,092 1,438
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Net loss.................................................................................... $ (5,900) $ (4,923)
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Basic and diluted net loss per share........................................................ $ (0.26) $ (0.22)
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Shares used in computing basic and diluted net loss per share............................... 22,831 22,575
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</TABLE>
See accompanying notes.
4
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AFFYMETRIX, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
<S> <C> <C>
1998 1997
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Cash flows from operating activities:
Net loss................................................................................. $ (5,900) $ (4,923)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization.......................................................... 1,058 402
Amortization of investment premiums, net............................................... (95) (189)
Amortization of deferred compensation.................................................. 106 190
Change in operating assets and liabilities:
Accounts receivable.................................................................. 1,138 (575)
Inventories.......................................................................... (547) 160
Other assets......................................................................... (101) 114
Accounts payable and other accrued liabilities....................................... (1,347) 1,084
Deferred revenue..................................................................... 978 (292)
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Net cash used in operating activities.............................................. (4,710) (4,029)
Cash flows from investing activities:
Capital expenditures..................................................................... (4,548) (1,746)
Proceeds from the sale of short-term investments......................................... 25,309 22,925
Proceeds from maturities of short-term investments....................................... (34) 5
Purchases of available-for-sale securities............................................... (19,496) (3,039)
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Net cash provided by investing activities.......................................... 1,231 18,145
Cash flows from financing activities:
Issuances of common stock................................................................ 253 47
Principal payments on capital lease obligation........................................... (55) (51)
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Net cash provided by (used in) financing activities................................ 198 (4)
Net (decrease) increase in cash and cash equivalents....................................... (3,281) 14,112
Cash and cash equivalents at beginning of period........................................... 4,779 14,143
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Cash and cash equivalents at end of period................................................. $ 1,498 $ 28,255
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</TABLE>
See accompanying notes.
5
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AFFYMETRIX, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring entries) considered necessary for a fair presentation have
been included. Operating results for the three months ended March 31, 1998 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1998. For further information, refer to the financial
statements and notes thereto included in the Annual Report on Form 10-K for the
year ended December 31, 1997 filed by Affymetrix, Inc. ("Affymetrix" or the
"Company").
REVENUE RECOGNITION
Contract and grant revenue is recorded as earned as defined within the
specific agreements. Payments received in advance under these arrangements are
recorded as deferred revenue until earned. Direct costs associated with these
contracts and grants are reported as "research and development" expense. Revenue
from subscription fees earned under EasyAccess supply agreements are recorded
ratably over the term of the agreement and are recorded in "contract and grant"
revenue. Product revenue is recognized upon shipment. Reserves are provided for
performance contingencies, anticipated returns and warranty expenses at the time
the associated revenue is recognized.
NOTE 2--CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
As of March 31, 1998, debt securities held by the Company are comprised of
U.S. Government obligations and U.S. Corporate debt securities. They are
classified as available-for-sale and are carried at fair value with unrealized
gains and losses reported in shareholders' equity.
NOTE 3--INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
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<S> <C> <C>
Raw material........................................................ $ 1,346 $ 934
Work in process..................................................... 86 160
Finished goods...................................................... 1,752 1,543
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Total........................................................... $ 3,184 $ 2,637
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</TABLE>
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AFFYMETRIX, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
(UNAUDITED)
NOTE 4--COMPREHENSIVE LOSS
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"), which
establishes standards for reporting comprehensive income and its components. The
adoption of SFAS 130 had no impact on the Company's results of operations or
financial condition.
The components of comprehensive loss for the three-month periods ended March
31, 1998 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
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<S> <C> <C>
Net Loss................................................................. $ (5,900) $ (4,923)
Unrealized gain (loss) on securities..................................... 80 (363)
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Comprehensive Loss....................................................... $ (5,820) $ (5,286)
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</TABLE>
NOTE 5--SUBSEQUENT EVENTS
On April 14, 1998 the Company completed the sale of 1,634,522 shares of
Series AA Preferred Stock to Glaxo Wellcome Americas, Inc. (a wholly owned
subsidiary of Glaxo Wellcome plc) for net proceeds of approximately $50.0
million. The Preferred Stock has a cumulative, annual dividend of 6.5%. The
Preferred Stock is convertible into Affymetrix Common Stock at approximately $40
per share.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results
of Operations as of March 31, 1998 and for the three month periods ended March
31, 1998 and 1997 should be read in conjunction with the Management's Discussion
and Analysis of Financial Condition and Results of Operations included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
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-Registered Trademark- 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 in Affymetrix' Annual Report on Form 10-K 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, Inc. 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 March 31, 1998 Glaxo owned approximately 33% of Affymetrix.
On April 14, 1998 the Company completed the sale of 1,634,522 shares of Series
AA Preferred Stock to Glaxo Wellcome Americas, Inc. (a wholly owned subsidiary
of Glaxo) for net proceeds of approximately $50.0 million. The Preferred Stock
has a cumulative annual dividend of 6.5%. The Preferred Stock is convertible
into Affymetrix Common Stock at approximately $40 per share, and gives Glaxo a
voting interest of approximately 37%.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
Product revenue increased to $3.7 million for the three months ended March
31, 1998, compared to $0.4 million for the three months ended March 31, 1997.
The increase was primarily due to increased placements of GeneChip instrument
systems at customer sites and increased sales of probe arrays. Contract and
grant revenue increased to $6.1 million for the three months ended March 31,
1998 from $2.4 million for the three months ended March 31, 1997. The increase
was primarily due to the commencement of EasyAccess subscription fee revenue
from F. Hoffmann-La Roche and Genetics Institute and the recognition of revenue
under a collaboration agreement with biomerieux Vitek, Inc. The Company
anticipates that revenues earned under collaboration and customer agreements
will fluctuate in the future depending upon the achievement of certain
milestones in existing contracts and upon the terms of any additional
collaboration and customer agreements.
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Cost of product revenue increased to $2.5 million for the three months ended
March 31, 1998, compared to $0.9 million for the three months ended March 31,
1997. The Company has experienced, and continues to experience, variation in the
manufacturing yield of its GeneChip products which has impacted, and will
continue to impact, the Company's ability to meet its commitments to deliver
product to its customers in a timely manner. Difficulty in providing timely
delivery of products adversely affects the Company's relationships with its
customers, its business, its financial condition and results of operations.
Margins have fluctuated, and will continue to fluctuate significantly, as a
result of 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 in 1998 and margins will be affected
by changes in currency exchange rates.
Research and development expenses increased to $8.5 million for the three
months ended March 31, 1998, compared to $5.8 million for the three months ended
March 31, 1997. The increase in research and development expenses was
attributable primarily to the hiring of additional research and development
personnel and the associated cost 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 increased to $5.7 million for
the three months ended March 31, 1998 compared to $2.5 million for the three
months ended March 31, 1997. The increase in selling, general and administrative
expenses was attributable primarily to the hiring of additional management
personnel, increased professional fees (primarily legal fees) and overall
scale-up of the Company's operations and marketing 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.
Net interest income decreased to $1.1 million for the three months ended
March 31, 1998 from $1.4 million for the three months ended March 31, 1997. The
decrease in net interest income for the comparative three months was primarily
due to a decrease in cash balances available for investment.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998, the Company's cash, cash equivalents, and short-term
investments were $62.6 million compared to $71.6 million at December 31, 1997.
The decrease is primarily attributable to cash used to fund the Company's
operating loss and capital expenditures for expansion of manufacturing capacity.
Net cash used in operating activities was $4.7 million for the three months
ended March 31, 1998, as compared to $4.0 million for the three months ended
March 31, 1997. The increase in net cash used in operating activities resulted
primarily from increases in the Company's net loss and changes in operating
assets and liabilities. The Company's investing activities, other than
purchases, sales and maturities of available-for-sale securities, consisted of
capital expenditures, which totaled $4.5 million for the three months ended
March 31, 1998 and $1.7 million for the three months ended March 31, 1997. These
capital expenditures included investments in land, facilities and production and
laboratory equipment.
The Company anticipates that its existing capital resources, together with
the proceeds from the sale of Series AA Preferred Stock to Glaxo of
approximately $50 million, will enable it to maintain currently planned
operations through at least 2000. However, this expectation is based on the
Company's current operating plan, which could change, and therefore the Company
could require additional funding sooner than anticipated. In addition, the
Company expects its capital requirements to increase over the next several years
as it expands its facilities and acquires scientific equipment to support
expanded manufacturing and research and development efforts. The Company's
long-term capital expenditure requirements will depend on numerous factors,
including: the progress of its research and development programs; initiation
9
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or expansion of research programs; the development of commercial scale
manufacturing capabilities; its ability to maintain existing collaborative and
customer arrangements and establish and maintain new collaborative and customer
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.
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AFFYMETRIX, INC.
MARCH 31, 1998
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 as well as obtain damages and attorneys' fees. On April 17, 1998 Incyte
filed a response and counterclaim asserting the Affymetrix' patent is invalid
and not infringed. There can be no assurance that Affymetrix will prevail in
such litigation or be successful in asserting its patent rights. Also, on April
17 1998 Incyte filed a counterclaim alleging that a patent license agreement
entered into in December 1997 between Affymetrix and Molecular Dynamics, Inc.
("Molecular Dynamics") interfered with an agreement between Incyte and Molecular
Dynamics. In the counterclaim, Incyte alleges that the terms of the patent
license to Molecular Dynamics prevented Molecular Dynamics from meeting its
obligations to Incyte and is seeking damages from Affymetrix. Affymetrix
believes this counterclaim is without merit. The Company is likely to incur
substantial costs and expend substantial personnel time in asserting the
Company's patent rights against Incyte and Synteni and defending against any
counterclaims filed by Incyte and Synteni. Failure to successfully enforce its
patent rights or defend against counterclaims 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 2. 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 March 31, 1998, 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 March 31, 1998, 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, $62.6
million; (ii) working capital, $22.5 million.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
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27 Financial data schedule
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(b) Reports on Form 8-K.
On March 24, 1998 the Company filed a Report on Form 8-K reporting the
proposed sale of 1,634,522 shares of Series AA Preferred Stock to Glaxo Wellcome
plc for anticipated proceeds of $50 million.
11
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AFFYMETRIX, INC.
By: /s/ EDWARD M. HURWITZ
-----------------------------------------
Edward M. Hurwitz
VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
May 15, 1998
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AFFYMETRIX, INC.
EXHIBIT INDEX
MARCH 31, 1998
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
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<C> <S>
27 Financial data schedule
</TABLE>
<TABLE> <S> <C>
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ITEM 1 OF
THE COMPANY'S FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 1498
<SECURITIES> 61065
<RECEIVABLES> 5078
<ALLOWANCES> 0
<INVENTORY> 3184
<CURRENT-ASSETS> 71678
<PP&E> 28802
<DEPRECIATION> (6224)
<TOTAL-ASSETS> 95160
<CURRENT-LIABILITIES> 9258
<BONDS> 452
0
0
<COMMON> 159177
<OTHER-SE> (73727)
<TOTAL-LIABILITY-AND-EQUITY> 95160
<SALES> 3697
<TOTAL-REVENUES> 9753
<CGS> 2493
<TOTAL-COSTS> 2493
<OTHER-EXPENSES> 14252
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1092
<INCOME-PRETAX> (5900)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5900)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5900)
<EPS-PRIMARY> (0.26)
<EPS-DILUTED> (0.26)
</TABLE>
