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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 0-28218
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AFFYMETRIX, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0319159
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
3380 CENTRAL EXPRESSWAY, SANTA CLARA, 95051
CALIFORNIA (Zip Code)
(Address of principal executive offices)
(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, $0.01
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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. /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 Common Stock held by non-affiliates of
the registrant (based on the closing price for the Common Stock on the Nasdaq
National Market on March 24, 1999) was approximately $587.6 million. As of March
24, 1999, 24,156,308 shares of Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the Proxy Statement to be filed in connection with the
1999 Annual Meeting of Stockholders 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, 1998
TABLE OF CONTENTS
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ITEM -------------
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PART I
1. Business......................................................................................... 1
2. Properties....................................................................................... 40
3. Legal Proceedings................................................................................ 40
4. Submissions of Matters to a Vote of Security Holders............................................. 42
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters............................ 42
6. Selected Financial Data.......................................................................... 43
7. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 44
7A. Quantitative and Qualitative Disclosure About Market Risk........................................ 49
8. Financial Statements and Supplementary Data...................................................... 50
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............. 70
PART III
10. Directors and Executive Officers of the Registrant............................................... 70
11. Executive Compensation........................................................................... 70
12. Security Ownership of Certain Beneficial Owners and Management................................... 70
13. Certain Relationships and Related Transactions................................................... 70
PART IV
14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K.................................. 71
Signatures....................................................................................... 75
</TABLE>
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PART I
ITEM 1. BUSINESS
ALL STATEMENTS IN THIS DISCUSSION THAT ARE NOT HISTORICAL ARE
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 21E OF THE SECURITIES
EXCHANGE ACT, INCLUDING STATEMENTS REGARDING THE COMPANY'S "EXPECTATIONS",
"BELIEFS", "HOPES", "INTENTIONS", "STRATEGIES" OR THE LIKE. 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,
certain 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 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
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of these genes. This research, commonly referred to as genomics, is expected to
lead to a new health care paradigm where disease is 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. 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 or an undetectable 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 normally referred to as 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 genes of interest from a large number of healthy and diseased
persons, researchers are able to correlate specific gene polymorphisms 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, such high volume
polymorphism screening is performed with gel-based sequencing, which is labor
intensive and costly. The Company believes that its GeneChip technology will
have advantages over conventional gel-based techniques for performing large
genetic correlation studies and has initiated a high throughput polymorphism
discovery and database project as well as product development initiatives to
enable researchers 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 and validated 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. Before the advent of DNA array techniques, relative levels of gene
expression were monitored primarily through a costly and time-consuming process
of sequencing many copies of each gene. The Company believes new DNA array
technologies such as its GeneChip system
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will have significant advantages over older expression profiling techniques.
Furthermore, the Company believes its GeneChip technology offers significant
advantages over other DNA array technologies.
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 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 industries. 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 to three primary areas:
gene expression monitoring, polymorphism analysis and disease management. The
Company is commercializing its GeneChip probe array technology for sale to
pharmaceutical and biotechnology companies, academic research centers and
clinical reference laboratories by demonstrating its advantages over other tools
used for complex genetic analysis.
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
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different conditions and at different times, researchers can use the probe
arrays to understand the dynamic relationship between gene expression and
biological activity. 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 a portfolio of custom and standard
expression monitoring GeneChip arrays. The Company's current offering of
standard arrays include products that monitor the expression of the majority of
full length and partial gene sequences contained in publicly available sequence
databases that correspond to human, mouse and yeast organisms. Affymetrix is
also developing directed probe arrays to monitor the expression of specific
collections of genes believed to be highly relevant to particular biological
conditions such as cancer and toxicology.
Affymetrix is commercializing the expression monitoring applications of its
GeneChip technology for use in identifying and validating novel targets for drug
discovery broadly to pharmaceutical, biotechnology, and academic research
organizations. The Company offers a variety of sales programs to its GeneChip
technology, such as the high-volume EasyAccess-TM- Silver and Gold subscription
packages.
All of the Company's sales programs for its expression monitoring
applications center around a pricing model that reflects the performance
specifications, 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
and volume commitments to the Company, whether intellectual property is to be
retained, shared or disclosed, whether the Company provides custom chip design
or screening services to a customer, whether the customer intends to offer
screening services or sell databases and the amount of any up-front fees,
milestones, royalties or other payments to be received by the Company.
Under the Company's EasyAccess program, customers commit to make certain
cash payments to Affymetrix in exchange for the right to purchase GeneChip
arrays and related technologies and licenses from Affymetrix on preferred terms
for a defined period of time. In general, the larger the cash payment and the
longer the commitment made by a customer, the greater the discount Affymetrix
offers that customer on its products and technology. The Company currently has
more than 80 customers. Table 1 sets forth a selected list of customers with
whom the Company has existing supply agreements for GeneChip expression
monitoring arrays.
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TABLE 1. SUMMARY OF AFFYMETRIX EXPRESSION PROFILING CUSTOMERS
<TABLE>
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CUSTOMER ACCESS PACKAGE DATE
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F. Hoffmann-La Roche, Ltd........................... EasyAccess Gold August 1997
Genetics Institute/American Home Products
Corporation....................................... EasyAccess Gold January1998/March 1998
Hoechst Marion Roussel, Inc. ....................... EasyAccess Gold December 1998
Eos Biotechnology, Inc. ............................ EasyAccess Gold April 1998
Gene Logic Inc. .................................... GeneChip Databases and Service January 1999
Agreement
Rhone Poulenc Rorer, Inc. .......................... EasyAccess Silver April 1998
Parke-Davis (a division of the Warner-Lambert
Company).......................................... EasyAccess Silver July 1998
Astra AB............................................ EasyAccess Silver March 1999
Pfizer, Inc......................................... EasyAccess Silver March 1999
Howard Hughes Medical Institute..................... Academic EasyAccess April 1998
Eli Lilly and Company............................... Platform Access September 1998
Genencor International, Inc. ....................... Platform Access May 1998
Glaxo Wellcome, Inc. ............................... Platform Access April 1997
Merck & Co. ........................................ Platform Access September 1997
Pharmacia & Upjohn, Inc. ........................... Platform Access June 1998
Pioneer Hi-Bred International, Inc. ................ Platform Access May 1997
Sanofi Recherche.................................... Platform Access February 1998
Schering AG......................................... Platform Access September 1998
</TABLE>
POLYMORPHISM ANALYSIS
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 or
polymorphisms exist, and whether these variations 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 high-volume polymorphism analysis, which
is currently performed through more labor intensive sequencing techniques.
Affymetrix has initiated a high throughput screening effort aimed at
discovering some of the most common polymorphisms in full-length genes. Alone
and through a series of collaborations with academic and commercial partners,
the Company has identified approximately 10,000 polymorphisms to date,
principally in genes potentially implicated in disease, genes associated with
toxic drug reactions, and genes that are existing drug targets. As these efforts
progress, specific polymorphisms can be encoded on GeneChip probe arrays and
used for broad-based genotyping studies of these potentially important genes.
The Company has initiated product research and development efforts on
several genotyping probe arrays and formed collaborations to accelerate the
development of its polymorphism databases and genotyping products. The first
such GeneChip mapping array, the GeneChip HuSNP, is currently in beta testing.
If successful, the Company expects to commercialize the HuSNP probe array
broadly. The Company intends to market this and other polymorphism analysis
probe arrays to customers to facilitate genetic mapping and disease association
studies.
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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.
To further its disease management strategy, Affymetrix has established
partnerships and customer relationships with leading academic researchers,
clinical reference laboratories and pharmaceutical and biotechnology companies.
To date, the Company has introduced three disease management GeneChip assays for
the research and clinical reference markets: the HIV, p53 and CYP450 GeneChip
products. These products provide sequence variation information from the reverse
transcriptase and protease genes of HIV, the p53 tumor suppressor gene, and
variants of two human cytochrome p450 genes, respectively.
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
handling large volume testing anticipated in the clinical diagnostic setting.
The Company has formed collaborations and intends to further partner with, or
license technology to, established diagnostic companies to develop, seek
regulatory approval, and commercialize probe arrays and instrumentation for
broader clinical use of disease management probe arrays.
In bacteriology, the Company has entered into exclusive collaborative
development agreements and an associated supply agreement for probe arrays with
bioMerieux Vitek, Inc. ("bioMerieux") to identify the species and drug
resistance profiles of bacteria causing human infection. The agreements also
allow for the development of DNA probe arrays for clinical diagnostic tests in
the fields of HIV and food and industrial testing on a non-exclusive basis.
Under the collaboration, bioMerieux is expected to rely on the current
Affymetrix supplied instrumentation for its initial commercialization efforts
while it also develops next generation instrumentation for the use of these
probe arrays.
In the virology and cancer fields, the Company has entered into a
non-exclusive collaborative development agreement with Roche Molecular Systems,
Inc. ("Roche Molecular Systems") to initially develop probe array-based
diagnostic products that analyze genes present in the HIV virus and in the p53
tumor suppressor gene. Under the terms of the agreement the parties will
collaborate to develop these and other mutually agreed upon arrays directed to
other selected genes as well as associated instrumentation and reagents.
Affymetrix also entered into a series of agreements in July 1998 with
Beckman Coulter, Inc. ("Beckman") that gives Beckman the right to develop probe
array based diagnostic products that would use the Company's GeneChip
technology.
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 hybridization oven for optimizing the binding of samples
to the probe arrays, a scanner to read the fluorescent image from the probe
arrays, and software to control the instruments and to analyze and manage the
genetic information.
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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 or different 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 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. When scanned by the laser, the 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 is
known.
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INSTRUMENTATION
The fluidics station controls the exposure of the test sample to the probe
array and, in certain applications, the introduction of the 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. In certain applications, a
hybridization oven is used to control the temperature required for exposure of
the test sample to the probe array.
After completion of hybridization on the fluidics station, the technician
places the cartridge in the scanner which reads the probe array. The 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 ("Hewlett-Packard") and introduced in
April 1997, can read 1.28 cm by 1.28 cm probe arrays with up to 400,000 features
in a few minutes.
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 probe sequence and location of all the probes on the probe array to
determine the expression level of a particular gene or locate nucleotide
sequence variations of the test sample. The GeneChip Expression Data Mining Tool
("EDMT") and Laboratory Information Management System ("LIMS") software products
allow for sophisticated analyses of gene expression results and provide a means
of linking and integrating this information with other databases.
COLLABORATIVE PARTNERS AND LICENSEES
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, acquire access to complementary technologies and
resources, and enable complementary technologies in the gene expression
monitoring field by licensing third parties under its patent estate.
Accordingly, the Company has entered into and intends to enter into additional
collaborative and licensing agreements to further this strategy. Table 2 sets
forth a selected list of collaborators with whom the Company has existing
agreements, the related products and programs and the commencement dates of the
most recent agreement.
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TABLE 2. SUMMARY OF AFFYMETRIX COLLABORATORS AND LICENSEES
<TABLE>
<CAPTION>
COMPANY TYPE DATE
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<S> <C> <C>
Amersham Pharmacia Biotech, Ltd. Sales agency agreement December 1997
Amersham Pharmacia Biotech, KK Sales distribution agreement October 1998
Beckman Coulter, Inc. OEM supply of GeneChip arrays for disease July 1998
management products; non-light directed array
commercialization license
bioMerieux Vitek, Inc. Bacteriology and virology disease management January 1998
products; industrial and food testing products
Bristol-Myers Squibb Company, Millennium Functional genomics and polymorphism discovery April 1997
Pharmaceuticals, Inc., Whitehead Institute
Enzo Diagnostics, Inc. Labeling kits April 1998
Eos Biotechnology, Inc. Internal use license January 1999
Gene Logic, Inc. Oncology testing services; GeneChip databases January 1999
and services
Genetic Analysis Technology Consortium Establish standards for DNA Array based December 1997
products
Hewlett-Packard Company Scanner supply February 1997
Molecular Applications Group, Inc. Bioinformatics tools August 1998
Molecular Dynamics, Inc. Spotted array commercialization license December 1997
Roche Molecular Systems, Inc. HIV and p53 disease management arrays February 1998
Rosetta Inpharmatics, Inc. Internal use license December 1998
</TABLE>
AMERSHAM PHARMACIA BIOTECH, LTD.
In December 1997, the Company entered into a non-exclusive sales
representation agreement with Amersham Pharmacia Biotech, Ltd. ("Amersham
Pharmacia Biotech"). Under the agreement, Amersham Pharmacia Biotech's sales
representatives solicit orders for Affymetrix' products from prospective
customers in the pharmaceutical and biotechnology industries and the academic
research community in North America and Western Europe. The Company pays
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. In October
1998, the Company entered into a non-exclusive distribution agreement with
Amersham Pharmacia Biotech KK ("Amersham Pharmacia Biotech KK") for the
marketing and sale of the Company's products in Japan. Under this agreement,
Amersham Pharmacia Biotech KK purchases GeneChip technology directly from the
Company and is responsible for marketing and selling the technology to its
customers in Japan.
BECKMAN COULTER, INC.
In July 1998, the Company entered into a series of agreements with Beckman
that give Beckman licenses to commercialize probe arrays manufactured using
certain technologies other than light directed synthesis, and an original
equipment manufacturer ("OEM") supply agreement for products that use the
Company's GeneChip technology. BCI will pay Affymetrix transfer prices and
royalties on sales of these products as specified in the agreements. The
agreements also provide Affymetrix with a path to obtain a license to
commercialize DNA arrays under certain patents, including patents covering
inventions by Professor Edwin Southern of Oxford University.
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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 in a clinical setting. 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 made certain option exercise payments to the
Company.
BRISTOL-MYERS SQUIBB, MILLENNIUM PHARMACEUTICALS AND WHITEHEAD INSTITUTE
CONSORTIUM
In April 1997, the Company, Bristol-Myers Squibb Company ("BMS") and
Millennium Pharmaceuticals, Inc. ("Millennium") entered into a corporate
consortium to fund a five-year research program in functional genomics at the
Whitehead Institute of the Massachusetts Institute of Technology. The program,
under the direction of Dr. Eric S. Lander, Director of the Whitehead Institute,
seeks to advance the development of gene-based technologies for research and
health care.
Under the terms of the consortium agreement, Affymetrix, BMS and Millennium
are supporting 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, BMS and Millennium will receive certain
licensing rights to inventions made through efforts 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.
ENZO DIAGNOSTICS, INC.
In April, 1998, Affymetrix and Enzo Diagnostics ("Enzo") entered into an
collaboration and exclusive supply agreement for certain labeling kits used in
the preparation of samples to be analyzed on GeneChip arrays. Under the
agreement, Enzo is developing and supplying certain labeling kits to Affymetrix.
EOS BIOTECHNOLOGY, INC.
In January 1999, Affymetrix granted Eos Biotechnology, Inc. ("Eos") a
non-exclusive internal use license for DNA arrays manufactured with mechanical
spotting techniques. The license was granted to Eos under preferred terms that
are available to Affymetrix' EasyAccess customers.
GENE LOGIC, INC.
In January 1999, Affymetrix and Gene Logic, Inc. ("Gene Logic") entered into
an agreement to develop and commercialize GeneChip expression databases
generated using GeneChip arrays as well as to offer GeneChip expression
services. Under the agreement, Gene Logic pays Affymetrix annual
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subscription fees and purchases GeneChip arrays to be used in developing the
database. After the achievement of certain commercial milestones, Gene Logic
will pay Affymetrix a royalty on subscription fees paid in exchange for access
to the database. The agreement also allows Gene Logic to offer third parties a
screening service using GeneChip expression arrays.
GENETIC ANALYSIS TECHNOLOGY CONSORTIUM
In December 1997, the Company and Molecular Dynamics, Inc. formed the
Genetic Analysis Technology Consortium ("GATC"), 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
and March 1999, privately held Pangea, Inc., and Spotfire, Inc., announced their
intentions to produce software products that are GATC compliant.
HEWLETT-PACKARD
The Company entered into a collaborative agreement with Hewlett-Packard in
November 1994, which was amended in February 1997 and December 1998. Under the
terms of the amended agreement, Hewlett-Packard manufactures and sells the array
scanner to Affymetrix on an OEM basis. The agreement also provides for
cooperation between Affymetrix and Hewlett-Packard for worldwide distribution
and instrument services. Pursuant to the agreement, Hewlett-Packard is required
to supply all of the Company's forecasted requirements for scanners until
February 2003 and Affymetrix is required to purchase a minimum number of
scanners from Hewlett-Packard during the same period.
MOLECULAR APPLICATIONS GROUP, INC.
In August 1998, Affymetrix and Molecular Applications Group, Inc. ("MAG")
entered into a collaboration to develop GATC compliant bioinformatics tools to
facilitate the analysis of GeneChip expression data and other bioinformatic
applications. Under the collaboration, a portion of MAG's efforts are being
funded by Affymetrix under its Advanced Technology Program grant.
MOLECULAR DYNAMICS, INC.
In December 1997, the Company entered into a ten year, 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 and related instrumentation.
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.
ROCHE MOLECULAR SYSTEMS, INC.
In February 1998, the Company entered into a non-exclusive collaborative
development agreement with Roche Molecular Systems to initially develop probe
array-based diagnostic products that analyze genes present in the HIV virus and
in the p53 tumor suppressor gene. Under the terms of the agreement the parties
will collaborate to develop these and other mutually agreed upon arrays directed
to other selected genes, as well as associated instrumentation and reagents.
Affymetrix will manufacture arrays for use in the products and Roche Molecular
Systems will conduct clinical trials, manage regulatory submissions and market
and sell the products. Under the terms of the agreement, Roche Molecular Systems
and the Company are funding their respective work efforts as mutually agreed and
will share revenues and profits based on specified terms in the agreement.
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ROSETTA INPHARMATICS, INC.
In December 1998, Affymetrix granted Rosetta Inpharmatics, Inc. ("Rosetta")
a non-exclusive internal use license for DNA arrays manufactured with ink jet
and mechanical spotting techniques. Under the three year agreement, Rosetta has
and will make annual license payments to Affymetrix based on the number of
array-based experiments it intends to conduct and the magnitude of Rosetta's
research budget.
GRANTS
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").
ADVANCED TECHNOLOGY PROGRAM (UNITED STATES DEPARTMENT OF COMMERCE)
In October 1994, the Company and Molecular Dynamics, a wholly owned
subsidiary of Amersham Pharmacia Biotech were awarded a $31.5 million, five-year
matching grant under the ATP within the National Institute of Standards and
Technology to develop a miniaturized DNA diagnostic device. Pursuant to the
grant, up to $20.8 million is designated for the Company and its subcontractors
and partners 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 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 and
additional partners under the ATP grant (the University of California, Stanford
University, the University of Washington and MAG) require that these parties
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, 1998, the Company had recognized $12.2 million in revenue
under the ATP grant. The grant is subject to yearly appropriations by the United
States Congress for the ATP program. Funding of the ATP grant expires in January
2000 and the 1999 budget has not yet been approved. As a consequence, 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 August 1998, the
date of the expiration of the grant, the Company had recognized revenue of $5.4
million related to the grant. Under the project, the Company was developing
applications of DNA probe arrays for larger scale genetic analysis and
supporting a laboratory at the Company for use by outside researchers. The grant
also included a subcontract with Stanford University to research and develop
certain DNA probe array technology.
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SMALL BUSINESS INVESTMENT RESEARCH ("SBIR")
The Company receives limited funding from the SBIR program. In 1998, the
Company recognized $0.6 million in revenues under such programs. It is expected
that such programs will not continue significantly into the future as a result
of the Company's growth.
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, hybridization ovens and certain reagents for
its GeneChip system.
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 is currently manufacturing limited quantities of probe arrays
for internal and collaborative purposes and for sale to the research market.
Currently, the Company has physical capacity under optimal conditions to produce
more than 6,000 wafers annually at its existing manufacturing facility located
in Sunnyvale, California. Portions of the Company's production capacity are
limited to certain types of probe arrays. The actual number of probe arrays the
Company is able to sell or use depends on the utilization of this capacity and
the yield of probe arrays that pass quality control testing as well as the
number of probe arrays manufactured on each wafer. The Company has experienced
and continues to experience variability in the manufacturing yield of its
GeneChip products. 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 larger volumes. As a
consequence, the Company has experienced and anticipates that it will continue
to experience difficulties in meeting anticipated customer and internal demand
for certain of its probe array products. These difficulties in meeting probe
array demand have had an impact on the Company's gross margin and business in
the past and could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company has purchased and
intends to purchase additional capital equipment for its Sunnyvale facility to
both increase production capacity and increase the flexibility of this capacity
to produce a broader range of products. The Company has also purchased land and
built a second manufacturing facility in West Sacramento, California, which will
further increase the Company's manufacturing capacity and flexibility and reduce
operating risks. The Company expects this facility to be operational in the
second half of 1999. There can be no assurance that manufacturing and quality
control problems will not arise as the Company attempts to scale-up its
manufacturing facilities or that such scale-up can be achieved in a timely
manner or at commercially reasonable costs. 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
be materially adversely affected.
The GeneChip system is a complex set of products and includes DNA probe
arrays, which are produced in an innovative and complicated manufacturing
process. The Company tests only selected probe arrays from each wafer and only
selected probes on such probe arrays. The Company therefore relies on internal
quality control procedures, including controls on the manufacturing process and
sample testing, to verify the correct completion of the manufacturing process.
In addition, the Company and its customers rely on the accuracy of genetic
sequence information contained in databases upon
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which the Company's products are based. It is therefore possible that probe
arrays that do not meet all of the Company's performance specifications may not
be identified before they are shipped. After the probe arrays are shipped, only
selected probes may be tested by the customer. 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 inability of the
Company to timely deliver acceptable products would likely adversely affect the
Company's relationship with its customers, and have a material adverse effect on
its business, its financial condition and results of operations.
The Company relies on Hewlett-Packard to manufacture and service its
scanners and on Enzo to manufacture certain reagents used with probe arrays. The
Company's scanner, introduced in April 1997, is obtained from Hewlett-Packard
under a supply agreement that expires in 2003. The Company is dependent on
Hewlett-Packard for quality testing and service of this instrument. Certain
labeling kits needed to process samples on GeneChip probe arrays are supplied to
the Company by Enzo under a supply agreement that expires in 2001. Affymetrix is
obligated to purchase its requirements of certain labeling kits from Enzo.
Certain key parts of the GeneChip system, such as the scanner, certain
reagents kits and lithographic masks as well as certain raw materials used in
the synthesis of probe arrays, are currently available only from a single source
or a limited number of sources. No assurance can be given that scanners,
reagents, lithographic masks or other components of the GeneChip system will be
available in commercial quantities under acceptable terms. Even if alternative
sources of supply are available, it could be time consuming and expensive for
the Company to qualify new vendors. 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 Company must comply with the Food and Drug Administration's (FDA)
regulations for sale of analyte specific reagents (ASRs) in the United States,
International Standard Organization (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 has filed an application for the registration of the manufacturing site
for its arrays as ASRs, there can be no assurance that such registration can be
maintained at reasonable costs.
As the Company's technologies evolve, new manufacturing techniques and
systems will be required. For example, it is anticipated that additional
automated processing systems will be needed to meet the Company's future probe
array manufacturing needs. 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 as well as new
instrumentation, including new or modified scanners. Further, the Company's
manufacturing equipment requires significant capital investment. Although the
Company has built a second manufacturing facility, which it expects to become
operational in the second half of 1999, 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 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 have a material adverse
effect on the Company's business, financial condition and results of operations.
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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, MARKETING AND TECHNICAL SUPPORT
The base price of the Company's GeneChip system (scanner, software,
workstation, hybridization oven and fluidics station) starts at approximately
$175,000. The Company is offering different sales programs for its expression
monitoring and polymorphism analysis technologies centered upon a pricing model
that is based on the performance specifications, number of data points and value
of genetic information generated 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's HIV probe arrays,
currently being sold commercially for research use, are priced at $90 per array.
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 $120
per array.
The Company is currently directly marketing, and selling the GeneChip system
and probe arrays for genomics and disease management applications to its
customers and collaborators in North America and Western Europe. 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 solicit orders for
Affymetrix products from prospective customers in the pharmaceutical and
biotechnology industries and the academic research community in North America
and Western Europe. The Company pays 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. In October 1998, the Company entered into an
non-exclusive distribution agreement with Amersham Pharmacia Biotech KK for the
sale and marketing of the Company's products in Japan. Under this agreement,
Amersham Pharmacia Biotech KK purchases GeneChip technology directly from
Affymetrix and is responsible for marketing and selling the technology to its
customers in Japan.
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 diagnostics 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
diagnostic laboratories.
Affymetrix has marketing, selling and technical support groups that promote
and service its GeneChip products, which the Company intends to expand as
necessary. In addition, the Company relies on third parties such as
Hewlett-Packard to service the GeneChip scanner and to assist in its promotional
activities. The Company also relies on Amersham Pharmacia Biotech for logistical
support for product sales. The Company intends to expand its operations to
reduce its dependence on Amersham Pharmacia Biotech for this support.
The Company has experienced and anticipates long sales cycles to market the
GeneChip system to its potential customers. There can be no assurance that the
Company will be able to maintain existing relationships or establish additional
agency or distribution arrangements to market and sell its products or that any
such agreement will be successful. See "Risk Factors."
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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 analysis and disease management fields. Affymetrix
focuses on four types of research and development: basic research to explore and
expand the potential uses of DNA probe arrays and to discover new technologies;
applied research, primarily aimed at generating polymorphism databases and
products; core technology development, such as the design of fully integrated
systems for complex genetic information management; and novel manufacturing
methods to improve the efficiency of the Company's probe array production
processes.
BASIC RESEARCH
Affymetrix' basic research efforts are focused on expanding the applications
of the GeneChip technology and developing related new technologies. These
efforts include development of new probe array products, improving the overall
performance 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 relationships
with several academic and commercial research organizations to identify genetic
markers that can be used to design probe arrays that rapidly obtain
high-resolution maps or genotypes of individual human genomes and thereby
identify differences among those genomes that are characteristic of particular
diseases.
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
ascertaining and analyzing 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.
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 24-50
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, 1998, 1997 and 1996, were $35.9 million, $28.2 million and $18.8 million,
respectively.
INTELLECTUAL PROPERTY
Affymetrix has been issued 49 patents in the United States and holds
numerous 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
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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 used
with the Company's GeneChip technology.
The Company is party to various option, supply and license agreements with
third parties (including Beckman, Enzo, Glaxo Wellcome, Molecular Dynamics,
Stanford University, Scientific Generics, Ltd., Concordia University, The
Imperial Cancer Research Foundation, New York Public Health Research Institute,
Gene Logic, the University of California and Xenometrix, Inc.) which give it
rights to use certain technologies. Failure of the Company to maintain rights to
such technology could have a material adverse effect on the Company's business,
financial condition and results of operations. For example, inability of the
Company to exercise the option for the University of California technology
relating to miniaturized Polymerase Chain Reaction ("PCR") devices or other
option agreements 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 or invalidate 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. In addition, administrative
proceedings such as "interferences," in the United States Patent Office could
substantially impact the scope of the Company's patent protection as well as
result in the expenditure of substantial funds in legal fees. The Company has
been notified that third parties are attempting to "copy" claims to provoke
interferences with two of its issued U.S. patents. There can be no assurance the
Company will prevail in such proceedings.
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 that 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, polynucleotide 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
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patents are pending and may issue. Certain of the applications have broad claims
to certain array related technology. The Company has entered into a series of
agreements with Beckman that it believes provide it with a path to obtain a
license to these patents and patent applications. There can be no assurance that
this series of agreements will not be challenged and that the Company will not
be subject to infringement claims under these or 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 agreements with Beckman were interpreted adversely to the
Company or if the Company were required to obtain a license to any other
patents, there can be no assurance that such licenses 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 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 Affymetrix' products infringe a related patent, United States Patent
5,695,940. On August 18, 1998, the Company filed a lawsuit in Federal District
Court in the Northern District of California (San Francisco Division) against
Hyseq alleging infringement of U.S. Patent Nos. 5,795,716 and 5,744,305
("'305"). On September 1, 1998 the Company added U.S. Patent No. 5,800,992
("'992") to the complaint of infringement against Hyseq. The Hyseq action, which
seeks damages based on the sale of Affymetrix' products and processes and seeks
to enjoin commercial activities relating to those products and processes, and
any other legal action against the Company or its collaborative partners
claiming damages from on account of the sale of Affymetrix products 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 required would be made available on
commercially acceptable terms, if at all. Furthermore, the Company has and is
likely to continue to incur substantial costs and expend substantial personnel
time in defending against the claims filed by Hyseq.
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 Pharmaceuticals, Inc.'s ("Incyte") and Synteni, Inc.'s
("Synteni") products infringe United States Patent 5,445,934 ("'934"). On
September 1, 1998, the Company filed a complaint against Synteni and Incyte in
Federal District Court in Delaware alleging infringement of the '305 Patent and
the '992 Patent. These actions were transferred to the United States District
Court for the Northern District of California on November 18, 1998 as case
numbers C98-4507 and C98-4508, respectively. The actions seek to enjoin
commercial activities of Incyte and Synteni relating to the Affymetrix patents
and, in regard to the '992 Patent, seek a preliminary injunction. The motion for
preliminary injunction is currently scheduled to be heard on April 30, 1999.
There can be no assurance that Affymetrix will prevail in asserting its
patent rights against Hyseq, Incyte, Synteni or others. The Company has and is
likely to continue to incur substantial costs and expend substantial personnel
time in asserting the Company's patent rights against Hyseq, Incyte, Synteni and
others. 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 probe array systems with similar competitive advantages to the
GeneChip technology, which could have a material adverse effect on the Company's
business, financial condition and operating results.
On April 17, 1998 Incyte filed a response and counterclaim asserting the
'934 Patent is invalid and not infringed. 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 interfered with
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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. On September 21, 1998, Incyte and Synteni filed an answer
asserting various defenses to the lawsuits in relation to the '992 Patent and
the '305 Patent, and asserted several counterclaims, namely a request for
declaration of noninfringement and invalidity, an assertion of unfair
competition, a request for a declaration that Synteni and Dari Shalon (a one
time employee of Synteni) have not misappropriated any of Affymetrix' trade
secrets, a claim of tortious interference with Incyte's and Synteni's economic
advantage, a claim of slander of title of a patent and a claim of trade libel.
Affymetrix believes the counterclaims are without merit. However, the Company
has and is likely to continue to incur substantial costs and expend substantial
personnel time in defending against any counterclaims filed by Incyte and
Synteni. Failure to successfully enforce its patent rights or defend against
counterclaims of Incyte, Synteni, or others 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. The Company has
been notified that third parties are attempting to "copy" claims to provoke
interferences with two of its issued U.S. patents. 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 business,
financial condition and results of operations.
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
copyrights, trade secrets or other proprietary information. In addition, there
can be no assurance that trade secrets and other proprietary information will
not be disclosed, that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to or
disclose the Company's trade secrets and other proprietary information. There
can be no assurance that the Company can effectively protect its copyrights,
trade secrets or other proprietary information.
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
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not adversely affect the Company's ability to obtain patent protection for
information in which it may have a commercial interest.
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 FDA regulates, as medical devices, most diagnostic
tests, including analyte specific 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 are regulated as medical devices.
The Food, Drug, and Cosmetic Act requires that medical devices introduced to
the United States market, unless exempted by regulation, be the subject of
either a premarket notification clearance (known as a "510(k)") or an approved
premarket approval ("PMA"). Some of the Company's products 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, the
FDA may impose restrictions on its marketing. For example, the 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)
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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 is required to register and
list its products with the FDA. In addition, the Company will be required to
comply with the FDA's GMP regulations, which require that medical devices be
manufactured and records be maintained in a prescribed manner with respect to
manufacturing, testing and control activities. Further, the Company would be
required to comply with FDA requirements for labeling and promotion of its
medical devices. For example, the FDA prohibits cleared or approved devices from
being marketed for uncleared or unapproved uses. In addition, the medical device
reporting regulation would require that the Company provide information to the
FDA whenever there is evidence to reasonably suggest that one of its devices may
have caused or contributed to a death or serious injury, or that there has
occurred a malfunction that would be likely to cause or contribute to a death or
serious injury if the malfunction were to recur.
Medical device manufacturers are subject to periodic inspections by the FDA
and state agencies. Additionally, 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's business, financial condition or results of
operations.
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
effect on the Company's business, financial condition or results of operations.
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 effect 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.
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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 or maintain the
necessary permits to operate its facilities, including its new manufacturing
facility in West Sacramento, California. Any violation of, and 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 analysis and disease
management is intense and expected to increase. Further, the technologies for
monitoring gene expression and discovering and analyzing 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 and other DNA array technologies
that are used to perform many of the same functions for which the Company plans
to market its GeneChip systems.
In the expression monitoring and polymorphism analysis 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. Other companies including Axon
Instruments, Clonetech, Inc., CuraGen, Inc., Digital Gene Technologies, Inc.,
Gene
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Logic, General Scanning Inc., Genetic MicroSystems, Inc, Genomic Solutions,
Inc., Hewlett Packard, Hyseq, Lynx Therapeutics, Inc., Molecular Dynamics,
Motorola Inc., Nanogen, Inc., NEN LifeSciences Products, Inc. Packard
Instruments Company, Protogene, Inc., Sequenome, Inc. Synteni (Incyte), Texas
Instruments, Inc., Visible Genetics, Inc. and Vysis 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. In order to compete against
existing technologies and maintain pricing and gross margins, the Company will
need to be successful in asserting its patents in the DNA array field and in
demonstrating to potential customers that the GeneChip system provides improved
performance and capabilities.
The Company's sales representative, Amersham Pharmacia Biotech and its
wholly owned subsidiary, Molecular Dynamics are competitors, suppliers of the
Company's reagents and licensees of the Company. There can be no assurance that
Amersham Pharmacia Biotech's and Molecular Dynamics' commercial activities will
not adversely impact the Company's sales and supply agreements.
Future competition in the expression monitoring, polymorphism analysis and
disease management 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., Gene Logic, Genome Therapeutics Corporation,
Genset S.A., Incyte, 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. In the diagnostic
field, competition will likely come from established diagnostic companies such
as Abbott Laboratories, Becton Dickinson, Bayer A.G., Roche Boehringer Mannheim
and Johnson & Johnson. These companies offer a variety of diagnostic
technologies including immunoassays, histochemistry, flow cytometry and culture,
and newer DNA probe diagnostics to analyze certain limited amounts of genetic
information. 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, 1998, Affymetrix had 321 full-time employees, 40 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 are 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.
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RISK FACTORS
All statements in this annual report that do not discuss past results are
forward-looking statements. Forward-looking statements are based on management's
current expectations and are therefore subject to certain risks and
uncertainties. Any of the following risks could seriously harm our business,
financial condition or results of operations. As a result, these risks could
cause the decline of the trading price of our Common Stock. The risks described
below, however, are not the only ones that we face. You should also refer to the
other information set forth in this annual report, including our financial
statements and the related notes.
WE ARE IN THE EARLY STAGES OF DEVELOPMENT AND COMMERCIALIZATION
For the most part, our technology is still in its early stages of
development and we have just begun to incorporate our technologies into
commercialized products. Our GeneChip system has thus far been sold solely for
research use. In order to further develop and commercialize the GeneChip system
and other potential products, we will need to make significant additional
investments, including funding efforts in bioinformatics, new product and
instrument design, manufacturing scale-up and quality testing to ensure our
products perform correctly and are cost-effective. In addition, while our
initial research product sales have either not required regulatory approval or
have been regulated only as analyte specific reagents, we expect that we and our
collaborators will need to obtain additional regulatory approvals in the future.
Obtaining such approvals, could be costly and time-consuming and we can not be
sure we will be able to obtain all necessary approvals. Even if we develop our
products for commercial use and obtain all necessary regulatory approval,
however, we may not be able to develop products that:
- Are accepted by the research, diagnostic or other marketplaces;
- Are accurate and effective;
- Meet applicable regulatory standards in a timely manner;
- Are protected from competition by others;
- Do not infringe on the intellectual proprietary rights of others;
- Are manufacturable in sufficient quantities or at a reasonable cost; or
- Can be marketed successfully.
Any failure to develop such products would seriously harm our business,
financial condition and results of operations.
WE HAVE A HISTORY OF LOSSES AND EXPECT TO INCUR LOSSES IN THE FUTURE
We have experienced significant operating losses each year since our
inception and expect these losses to continue for the next several years. For
example, we experienced net losses of approximately $23.1 million, $22.5 million
and $12.2 million during the years ended December 31, 1998, 1997 and 1996,
respectively. As of December 31, 1998, we had an accumulated deficit of
approximately $92.7 million. Our losses have resulted principally from costs
incurred in research and development and from general and administrative costs
associated with our operations. These costs have exceeded our revenues and
interest income, which, to date, have been generated principally from product
sales and technology access fees, collaborative research and development
agreements, government research grants and from cash and investment balances. We
expect to incur substantial additional operating losses for at least the next
two years as a result of increases in expenses for manufacturing, marketing and
sales capabilities, research and product development and general and
administrative costs. We may never achieve profitability.
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Among other things, our ability to manage the transition to a commercially
successful company will depend upon our ability to:
- Establish our commercial manufacturing capability for probe arrays and
consistently achieve acceptable yields from those facilities;
- Cost-effectively manufacture components of the GeneChip system;
- Develop our marketing capabilities;
- Establish sales and distribution capabilities;
- Enter into supply agreements with customers desiring to use our products;
- Develop products that are accepted by the marketplace;
- Create a product mix that is appealing to pharmaceutical and biotechnology
companies, academic research centers and clinical reference laboratories;
- Not infringe the intellectual property rights of others;
- Enforce our intellectual property rights against others;
- Obtain necessary regulatory approvals; and
- Hire and retain qualified key personnel.
In addition, any delays in receipt of any necessary regulatory approvals or any
adverse developments with respect to our ability to enforce our intellectual
property relative to our competitors could seriously affect the successful
commercialization of our technologies. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
OUR QUARTERLY REVENUES AND OPERATING RESULTS ARE VOLATILE AND DIFFICULT TO
PREDICT
Our quarterly operating results depend upon:
- The volume and timing of orders for GeneChip products;
- The timing of probe array and instruments deliveries;
- Our manufacturing capabilities;
- Variations in gross margins of our products;
- Variations in revenue recognized under our supply and collaborative
agreements, including license fees, product sales, design fees,
milestones, royalties and other contract revenues;
- Our mix of products sold;
- The timing of new product introductions by us; and
- Variations in expenses incurred in connection with the operations of our
business, including legal fees, manufacturing facility start-up costs and
capital expenditures.
Our quarterly operating results may also fluctuate significantly depending
on factors out of our control, including:
- The introduction of new products by our competitors;
- Variation in product yield;
- Regulatory actions;
- Market acceptance of the GeneChip system and other potential products;
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- The cost, quality and availability of reagents and components required to
manufacture or use our products;
- Changes in commercial and government funding of research using our
products; and
- Third-party reimbursement policies.
Because our revenues and operating results are volatile and difficult to
predict, we believe that period-to-period comparisons of our results of
operations are not a good indication of our future performance. It is likely
that in some future quarter or quarters, our operating results will be below the
expectations of public market analysts or investors. In such event, the market
price of our common stock may fall significantly.
WE CURRENTLY HAVE LIMITED MANUFACTURING CAPACITY AND CONTINUE TO EXPERIENCE
VARIABILITY IN MANUFACTURING YIELDS
We are currently manufacturing limited quantities of probe arrays for
internal and collaborative purposes and for sale to the research market. We
currently have one manufacturing facility located in Sunnyvale, California. The
actual number of probe arrays we are able to sell or use depends on the
utilization of the capacity at this facility and the yield of probe arrays that
pass quality control testing as well as the number of probe arrays manufactured
on each wafer. Furthermore, portions of our production capacity are limited to
certain types of probe arrays. We have experienced and continue to experience
variability in the manufacturing yield of our GeneChip products which has
adversely impacted, and may continue to adversely impact, the Company's gross
margins and business. We have also experienced and anticipate that we will
continue to experience difficulties in meeting anticipated customer and internal
demand for certain of our probe array products. Our inability to timely deliver
products could have a material adverse effect on our relationship with our
customers and our business, financial condition and results of operations
Our manufacturing equipment requires significant capital investment.
Although we have built a second manufacturing facility, which we expect to
become operational in the second half of 1999, we presently rely on a single
manufacturing facility for our probe arrays, fluidics stations and software.
This manufacturing facility is subject to natural disasters such as earthquakes
and floods. Earthquakes are of particular significance since the manufacturing
facility is located in an earthquake prone area. In the event that our
manufacturing facilities were affected by accidental or natural disasters, the
Company could be unable to manufacture products for sale or its capacity could
be significantly decreased until the facility was replaced or restored to
operation. If manufacturing operations were curtailed or ceased it would have a
material adverse effect on our business, financial condition and results of
operations. See "Business--Manufacturing."
WE HAVE A LIMITED HISTORY IN MANUFACTURING OUR PRODUCTS AND WE MAY ENCOUNTER
PROBLEMS AS WE SCALE-UP MANUFACTURING
The GeneChip system is a complex set of products and includes DNA probe
arrays, which are produced in an innovative and complicated manufacturing
process. We test only selected probe arrays from each wafer and only selected
probes on such probe arrays. We therefore rely on internal quality control
procedures to verify the correct completion of the manufacturing process. Also,
we and our customers rely on the accuracy of genetic sequence information
contained in databases upon which our products are based. It is therefore
possible that probe arrays that do not meet all of our performance
specifications may not be identified before they are shipped. After the probe
arrays are shipped, only selected probes may be tested by the customer. Due to
the complexity and limited operating history of these products, we have
experienced technical problems and anticipate that additional technical problems
will occur and be discovered as more systems are placed into operation.
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There are certain aspects of our manufacturing processes that are not fully
understood and that may not be readily scalable to allow for production of probe
arrays in larger volumes. As a result, manufacturing and quality control
problems may arise as the Company attempts to scale-up its manufacturing
facilities and such scale-up may not be able to be achieved in a timely manner
or at commercially reasonable cost. If we are unable to consistently manufacture
probe arrays on a timely basis because of these or other factors, our business,
financial condition and results of operations could be materially adversely
affected. See "Business--Manufacturing."
OUR INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS ARE ESSENTIAL TO OUR FUTURE
Our competitive position in the future will depend in large part on our
ability to do the following:
- strengthen and defend our patent position;
- preserve our copyrights and trade secrets;
- operate without infringing the proprietary rights of third parties; and
- acquire licenses related to enabling technology or products used with our
GeneChip technology.
If we fail to successfully do any of these things it will have a material
adverse effect on our business, financial condition and results of operations.
WE MAY HAVE TO RELY ON LICENSES FROM THIRD PARTIES FOR CERTAIN TECHNOLOGY
Our commercial success also depends in part on us neither infringing patents
or proprietary rights of third parties nor breaching any licenses that may
relate to our technologies and products. For example, we or our collaborators
and customers may need to acquire a license for an amplification technology to
use the GeneChip system in certain applications. Such license may not be
available on commercially reasonable terms. Furthermore, we are aware of
third-party patents that may relate to the Company's technology. In addition, we
have received and may in the future receive notices claiming that we infringe
third party rights as well as invitations to take licenses under third party
patents. We cannot guarantee that we will not be determined to infringe on
patents or proprietary rights of third parties or that we would be able to
obtain a license to such patents or proprietary rights on commercially
acceptable terms, if at all.
We are aware of patents and patent applications owned by Oxford Gene
Technology, Ltd. that may relate to our technology. We have opposed two such
allowed European patents and such patents have also been issued in the United
States. We are aware that other patents are pending and may issue. Certain of
the applications have broad claims to certain array related technology. We have
entered into a series of agreements with Beckman which we believe provides us
with a path to obtain a license to these patents and patent applications. This
series of agreements may be challenged and we could be subject to infringement
claims under these or other patents that could delay or preclude sales of some
or all of our products. Any such delay or constraint would have a material
adverse effect on our business, financial condition and results of operations.
If the agreements with Beckman were interpreted adversely to us or we were
required to obtain a license to any other patents, we may not be able to obtain
such licenses on commercially acceptable terms, if at all.
We have various option, supply and license agreements with third parties
which give us rights to use certain technologies. If we fail to maintain rights
to such technology it could have a material adverse effect on our 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 or other option agreements under reasonable
terms could have an adverse effect on the ability of the Company to sell
integrated device products. See "Business--Intellectual Property."
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WE HAVE SIGNIFICANT PENDING LITIGATION
We are parties to significant litigation which will consume substantial
managerial and financial resources and which could have a material adverse
effect on our 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.
On March 3, 1997, Hyseq filed a lawsuit in United States District Court for
the Northern District of California (San Jose Division) alleging that our
products infringe United States Patents 5,202,231 and 5,525,464. In addition, in
December 1997, Hyseq filed a second action claiming that our products infringe a
related patent, United States Patent 5,695,940. On August 18, 1998 we filed a
lawsuit in Federal District Court in the Northern District of California (San
Francisco Division) against Hyseq alleging infringement of U.S. Patent Nos.
5,795,716 and 5,744,305 ("'305"). On September 1, 1998 the Company added U.S.
Patent No. 5,800,992 ("'992") to the complaint of infringement against Hyseq.
The Hyseq action, which seeks damages and injunctive relief could, in addition
to subjecting us to potential liability for damages, require us or our
collaborative partners to obtain a license in order to continue to manufacture
or market the affected products and processes. We can not guarantee that we will
prevail in this litigation. If we do not prevail, a license may not be made
available on commercially acceptable terms, if at all.
On January 6, 1998, we filed a patent infringement action in the United
States District Court for the District of Delaware (No. 98-6) alleging that
certain of Incyte's and Synteni's products infringe United States Patent
5,445,934 ("'934"). On September 1, 1998, we filed a complaint against Incyte
and Synteni in Federal District Court in Delaware alleging infringement of the
'305 Patent and the '992 Patent. These actions were transferred to the United
States District Court for the Northern District of California on November 18,
1998. The actions seek to enjoin commercial activities of Incyte and Synteni
relating to our patents and, in regard to the '992 Patent, seek a preliminary
injunction. The motion for preliminary injunction is currently scheduled to be
heard on April 30, 1999. We cannot guarantee that we will prevail in this
litigation.
On April 17, 1998 Incyte filed a response and counterclaim asserting the
'934 Patent is invalid and not infringed. Also, on April 17 1998, Incyte filed a
counterclaim alleging that a patent license agreement entered into in December
1997 between us and 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 us. On
September 21, 1998, Incyte and Synteni filed an answer asserting various
defenses to the lawsuits in relation to the '992 Patent and the '305 Patent, and
asserted several counterclaims, namely a request for declaration of
noninfringement and invalidity, an assertion of unfair competition, a request
for a declaration that Synteni and Dari Shalon (a one time employee of Synteni)
have not misappropriated any of our trade secrets, a claim of tortious
interference with Incyte's and Synteni's economic advantage, a claim of slander
of title of a patent and a claim of trade libel. Failure to successfully defend
against counterclaims of Incyte, Synteni, or others could have a material
adverse effect on the Company's business, financial condition and operating
results.
Failure to successfully enforce our patent rights or the loss of these
patent rights against Hyseq, Incyte, Synteni or others would remove a legal
obstacle to competitors in designing probe array systems with similar
competitive advantages to our GeneChip technology, which could have a material
adverse effect on our business, financial condition and operating results.
We have and are likely to continue to incur substantial costs and expend
substantial personnel time in asserting our patent rights and defending against
claims of others. See "Legal Proceedings."
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OUR MARKETS ARE UNDERGOING RAPID CHANGE AND WE NEED TO KEEP PACE WITH THE LATEST
TECHNOLOGICAL CHANGES
Expression monitoring, polymorphism analysis and disease management
technologies have undergone and are expected to continue to undergo rapid and
significant change. Our future success will depend in large part on our ability
to maintain a competitive position with respect to these and future
technologies. Rapid technological development by us or others may result in our
products or technologies becoming obsolete. In addition, products offered by us
could 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 the information our products generate.
Moreover, our efforts to develop research and disease management products
based on our technologies will be subject to the risks of failure inherent in
the development of products based on new technologies. These risks include:
- The potential discovery that these technologies will be found to be
ineffective, unreliable or unsafe;
- Difficulties in manufacturing our products cost effectively;
- Difficulties in marketing our products on a large scale;
- The existence of third party proprietary rights precluding us or our
collaborative partners from marketing products;
- The development of superior products by third parties; or
- The failure to receive necessary regulatory clearances.
If we are unable to develop the enhancements to our technology necessary to
compete successfully with newly emerging technologies, or if we are unable to
develop products based on these technologies, our business, financial condition
and results of operations will suffer.
OUR SUCCESS DEPENDS ON MARKET ACCEPTANCE OF OUR PRODUCTS AS AN ALTERNATIVE TO
CURRENT TECHNOLOGIES
The commercial success of our 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 other technologies for the acquisition, analysis and
management of genetic information;
- The ability to manufacture products with acceptable variations in quality
or performance;
- The cost of the GeneChip system and access to probe arrays, which may
deter certain potential customers of our products;
- Any failure to place and service sufficient quantities of the GeneChip
system;
- Limitations in funding for commercial and academic research organizations
that are the potential customers for the GeneChip system;
- The receipt of regulatory clearances in the United States, Europe, Japan
and elsewhere;
- The availability of genetic content including proprietary markers that may
be important for incorporation into our probe arrays;
- Ethical concerns, which may limit the use of the GeneChip system for
certain disease management applications or the analysis of genetic
information;
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- The ability of laboratories to license other technologies, such as
amplification technologies that may be required to use the GeneChip system
for certain applications; and
- The inability of potential customers to employ skilled laboratory
technicians necessary to operate the GeneChip system.
Because of these and other factors, there can be no assurance that our products
will gain market acceptance.
WE FACE INTENSE COMPETITION IN OUR CURRENT AND POTENTIAL MARKETS
Competition in our existing and potential markets is intense and expected to
increase. Currently, our principal competition comes from existing technologies
and other DNA array technologies that are used to perform many of the same
functions for which we plan to market our GeneChip systems. In order to compete
against existing and newly developed technologies and maintain pricing and gross
margins, we will need to be successful in asserting our patents in the DNA array
field and in demonstrating to potential customers that the GeneChip system
provides improved performance and capabilities.
In the expression monitoring and polymorphism analysis fields, existing
competitive technologies include gel-based sequencing performed using
instruments provided by companies such as the Applied Biosystems division of The
Perkin-Elmer Corporation and Amersham Pharmacia Biotech. A large number of
publicly-traded and privately-held companies including CuraGen, Gene Logic,
General Scanning Inc., Genetic MicroSystems, Inc., Genome Solutions, Inc. and
Incyte/Synteni 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.
Our principal sales representative, Amersham Pharmacia Biotech and its
wholly owned subsidiary, Molecular Dynamics, offer products that are competitive
with our products. There can be no assurance that Amersham Pharmacia Biotech's
and Molecular Dynamics' commercial activities with respect to their competing
products will not adversely impact our sales and supply agreements. See
"Business-- Competition."
WE EXPECT TO FACE INCREASING COMPETITION IN THE FUTURE
Future competition in our existing and potential markets 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 have significant needs for genomic
information and may choose to develop or acquire competing technologies to meet
these needs.
In the disease management field, competition will likely come from
established diagnostic companies, companies developing and marketing DNA probe
tests for genetic and other diseases and other companies conducting research on
new technologies to ascertain and analyze genetic information.
Established diagnostic companies such as Abbott Laboratories, Becton
Dickinson, Bayer A.G., Roche Boehringer Mannheim and Johnson & Johnson could
compete with us by developing 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 and could deter acceptance of our products. 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. See "Business--Competition."
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WE HAVE RELIED AND EXPECT TO CONTINUE TO RELY ON A LIMITED NUMBER OF CUSTOMERS
FOR A SIGNIFICANT PORTION OF OUR REVENUES
Our customers are concentrated in a small number of pharmaceutical and
biotechnology companies, academic research centers and clinical reference
laboratories. For example, in 1998, two of our customers accounted for 20% and
16% of total revenues, respectively. As a result of the significance of a few
customers, our business, financial condition and results of operations may be
adversely affected by a limited number of customers. Furthermore, there are only
three major reference laboratories in the United States, two of which are
associated with large pharmaceutical companies. For a variety of reasons, these
affiliations may cause the laboratories to elect not to purchase GeneChip
systems. A decision by these reference laboratories to not purchase our GeneChip
technology could adversely impact our business, results of operations and
financial condition. In addition, our dependence on sales to a few customers may
strengthen the negotiating position of our potential customers, which, in turn,
could reduce the sales price of the GeneChip system and may have a material
adverse impact on our business, financial condition and results of operations.
Several of our current customers have announced plans to merge, and further
consolidation in the pharmaceutical and biotechnology industries is generally
expected to occur. Planned or future consolidation among our current and
potential customers could decrease or slow aggregate sales of our technology and
shrink the research market our products target. Any such consolidation could
have a serious adverse effect on our business, financial condition and results
of operations.
In addition, we believe that the sales cycle for the GeneChip system will be
lengthy due to the need to educate potential customers about its
characteristics. Our failure to gain additional customers, the loss of any
customer or a significant reduction in the level of sales to any customer would
have a serious adverse effect on our business, financial condition and results
of operations.
RISKS ASSOCIATED WITH EXPORT SALES AND OPERATIONS
We intend to expand our international presence in order to increase our
export sales. Export sales to international customers entail a number of risks,
including:
- unexpected changes in, or impositions of, legislative or regulatory
requirements;
- delays resulting from difficulty in obtaining export licenses for certain
technology, tariffs, quotas and other trade barriers and restrictions;
- longer payment cycles and greater difficulty in accounts receivable
collection;
- potentially adverse taxes;
- currency exchange fluctuations;
- the burdens of complying with a variety of foreign laws; and
- other factors beyond the Company's control.
We are also subject to general geopolitical risks in connection with
international operations, such as political, social and economic instability,
potential hostilities and changes in diplomatic and trade relationships.
Although we have not to date experienced any material adverse effect on our
operations as a result of such regulatory, geopolitical and other factors, we
cannot assure you that such factors will not adversely affect our operations in
the future or require us to modify our current business practices. We cannot
assure you that one or more of the foregoing factors will not have a material
adverse effect on our business, financial condition and operating results or
require us to modify our current business practices.
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OUR EXISTING PRODUCTS MAY NOT BE COMMERCIALLY VIABLE
We first introduced our GeneChip system in April 1996 with its first
commercial disease management application, 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 station, a scanner, a workstation, a
hybridization oven and related software. In July 1997, we introduced our second
commercially available disease management product, the p53 tumor suppressor gene
assay for research use, which was developed in collaboration with Gene Logic. In
November 1997, we introduced our third commercially available disease management
product, the p450 assay for determining variations in two members of the CYP450
gene family. We have also entered into several supply and collaborative
agreements pursuant to which we are supplying GeneChip systems and expression
probe arrays for research purposes.
Because our products and systems have been in operation for a limited period
of time, their accuracy and efficacy have not been fully established.
Accordingly, any of the following adverse events may occur, each of which would
seriously undermine our business, financial condition and results of operations:
- The accuracy of the probe arrays in providing sequence information may not
be equal to or better than current technologies, such as gel-based
sequencing techniques;
- The probe arrays may not provide commercially useful information;
- The probe arrays or the GeneChip system may experience operational
difficulties;
- We may experience manufacturing problems or marketing difficulties selling
the probe arrays to pharmaceutical and biotechnology companies, academic
research centers and clinical reference laboratories;
- Cost containment pressures for biomedical research and patient management
may limit the price we may be able to charge potential customers for our
probe arrays;
- Newly identified genetic information or incorrect genetic information
deposited in the sequence databases upon which we and our customers rely
may require us to redesign our current probe arrays or develop new probe
arrays;
- Technicians may not have adequate training to use the GeneChip system or
interpret the results generated from the system;
- The probe arrays and associated reagents may not gain regulatory approval
for clinical use; or
- Advanced therapies could be discovered that obviate the need for certain
probe arrays.
WE RELY HEAVILY ON OUR COLLABORATIVE PARTNERS
An important element of our business strategy involves collaborations with
pharmaceutical, diagnostic, biotechnology, bioinformatics, analytical instrument
and reagent companies as well as with academic researchers to help develop,
test, manufacture, sell and service our GeneChip technology. We have significant
collaborations with Amersham Pharmacia Biotech, Amersham Pharacia Biotech KK,
Hewlett Packard, bioMerieux and Roche Molecular Systems and we have entered into
a consortium with the Whitehead Institute, Millennium Pharmaceuticals and
Bristol-Myers Squibb.
We have received a material portion of our revenue since inception from
these and other collaborative partners. We also intend to enter into
collaborative arrangements with other companies to expand our operations, apply
our technology, and commercialize potential future products. Our present or
future collaborative partners may not be able to perform their obligations as
expected or devote
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sufficient resources to the development, clinical testing, supply or marketing
of our potential products developed under these collaborations. Moreover, any of
the following developments could seriously adversely effect our business,
financial condition and results of operations:
- One of our partners develops technologies or components competitive with
our GeneChip system;
- Our existing collaborations preclude us from entering into additional
arrangements;
- Failure of our partners to obtain timely regulatory approvals;
- Premature termination of an agreement;
- One of our partners' failure to devote sufficient resources to the
development and commercialization of our products; or
- Inability of one of our partners to supply products to us.
In addition, our agreements with our collaborators may have provisions that
allow for termination or give rise to disputes regarding the rights and
obligations of the parties. These and other possible disagreements could lead to
termination of the agreement or delays in collaborative research, development,
supply or commercialization of certain products, or could require or result in
litigation or arbitration. Any such delay, litigation or arbitration could
result in a serious adverse effect on our business, financial condition and
results of operations. Accordingly, any of our collaborations may prove to be
unsuccessful. Likewise, we may not be able to negotiate future collaborative
arrangements on acceptable terms, if at all.
PATENT POSITIONS IN OUR INDUSTRY ARE GENERALLY UNCERTAIN AND LITIGATION IS
PREVALENT
The patent positions of pharmaceutical and biotechnology companies are
generally uncertain and involve complex legal and factual questions. In
addition, we believe that there will continue to be significant litigation in
the industry regarding patent and other intellectual property rights. As a
result, we cannot guarantee any of the following:
- that any of our pending patent applications will result in issued patents;
- that we will develop additional technologies that are patentable;
- that any patents issued to us or our strategic partners will provide a
basis for commercially viable products;
- that any patents issued to us or our strategic partners will provide the
Company with any competitive advantages;
- that any patents issued to us or our strategic partners will not be
challenged by third parties; or
- that the patents of others will not have an adverse effect on our ability
to do business.
In addition, patent law relating to the scope of claims in the technology
fields in which we operate is still evolving and the extent of future protection
for our proprietary rights is uncertain.
Others may independently develop similar or alternative technologies,
duplicate any of our technologies, or design around or invalidate our patented
technologies. In addition, we have and expect to continue to incur substantial
costs in litigation to defend against the patent suits brought by third parties
and when we initiate such suits. In addition, administrative proceedings such as
"interferences," in the United States Patent Office could substantially impact
the scope of our patent protection as well as result in the expenditure of
substantial funds in legal fees. We have been notified that third parties are
attempting to "copy" claims to provoke interferences with two of our issued U.S.
patents. We may not prevail in such proceedings.
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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. We cannot assure
you that any such patent applications will not have priority over our patent
applications. See "Business--Intellectual Property."
WE RELY ON THIRD PARTY SUPPLIERS FOR MANY COMPONENTS OF OUR GENECHIP SYSTEM
We rely on Hewlett-Packard to manufacture and service our scanners and on
Enzo to manufacture certain reagents used with probe arrays. Our scanner,
introduced in April 1997, is obtained from Hewlett-Packard under a supply
agreement that expires in 2003. We are dependent on Hewlett-Packard for quality
testing and service of this instrument. Certain labeling kits needed to process
samples on GeneChip probe arrays are supplied to us by Enzo under a supply
agreement that expires in 2001. We are obligated to purchase our requirements of
certain labeling kits from Enzo.
Certain key parts of the GeneChip system, such as the scanner, certain
reagents kits and lithographic masks as well as certain raw materials used in
the synthesis of probe arrays, are currently available only from a single source
or a limited number of sources. No assurance can be given that scanners,
reagents, lithographic masks or other components of the GeneChip system will be
available in commercial quantities under acceptable terms. Even if alternative
sources of supply are available, it could be time consuming and expensive for us
to qualify new vendors. In addition, we are dependent on our 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, we could be delayed in our
ability to develop and deliver products to our customers. Any such delay could
have a material adverse effect on our business, financial condition and results
of operations. See "Business--Manufacturing."
WE MAY NEED TO RAISE ADDITIONAL CAPITAL THAT MAY NOT BE AVAILABLE
We anticipate that our existing capital resources, including the proceeds of
approximately $32.5 million from the private placement of 1,000,000 shares of
common stock in March 1999, will enable us to maintain currently planned
operations through at least the year 2000. However, this expectation is based on
our current operating plan, which is expected to change as a result of many
factors, and we may need additional funding sooner than anticipated. In
addition, we may choose to raise additional capital due to market conditions or
strategic considerations even if we believe we have sufficient funds for our
current or future operating plans. 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 our stockholders.
We have no credit facility or other committed sources of capital. To the
extent operating and capital resources are insufficient to meet future
requirements, we will have to raise additional funds to continue the development
and commercialization of our technologies. Moreover, such funds may not be
available on favorable terms, or at all. If adequate funds are not available on
attractive terms, we may be required to curtail operations significantly or to
obtain funds by entering into financing, supply or collaboration agreements on
unattractive terms. Our inability to raise capital would have a serious adverse
effect on our business, financial condition and results of operations.
OUR MANUFACTURING IS SUBJECT TO REGULATORY COMPLIANCE AND MAY BE AFFECTED BY THE
INTRODUCTION OF NEW TECHNOLOGY
We must comply with the FDA's regulations for sale of analyte specific
reagents (ASRs) in the United States, ISO standards for sale of products in
Europe, as well as other standards prescribed by
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various federal, state and local regulatory agencies in the United States and
other countries. Although we have filed an application for the registration of
the manufacturing site for our arrays as ASRs, we cannot guarantee that we will
be able to comply with the regulations at reasonable costs.
As our technologies evolve, new manufacturing techniques and systems will be
required. For example, it is anticipated that additional automated processing
systems will be needed to meet our future probe array manufacturing needs.
Further, as products requiring increased density are developed, miniaturization
of the features on the arrays will be necessary. This will require new or
modified manufacturing equipment and processes. We cannot be sure that we will
be able to develop or access new manufacturing technologies. See
"Business--Manufacturing."
WE HAVE LIMITED SALES, MARKETING AND TECHNICAL SUPPORT EXPERIENCE, WHICH MAY
HURT OUR EFFORTS AT SELLING OUR PRODUCTS
We are marketing our products to pharmaceutical and biotechnology companies,
academic research centers and clinical reference laboratories. We currently have
a limited direct sales, marketing and technical support organization and we have
entered into a non-exclusive sales agency agreement with Amersham Pharmacia
Biotech, a distribution agreement with Amersham Pharmacia Biotech KK, and a
service agreement with Hewlett Packard for our GeneArray scanner. Our existing
organization and relationships may not be sufficient and we may be required to
expand our organization and enter into additional collaboration or distribution
arrangements to commercialize our products both inside and outside the United
States. There can be no assurance that:
- we will be able to establish a sufficiently sized sales, marketing or
technical support organization;
- Amersham Pharmacia Biotech or Amersham Pharmacia Biotech KK will be
successful in distributing our products;
- Amersham Pharmacia Biotech or Amersham Pharmacia Biotech KK will not sell
competitive products;
- Hewlett Packard will be successful in servicing our instruments and not
become a competitor of the Company; or
- we will be able to establish additional collaborative or distribution
arrangements to sell, market and service our products.
Failure to develop our sales, market and technical support capabilities would
have a material adverse effect on our business, financial condition and results
of operations.
CHANGES IN GOVERNMENT FUNDING OF RESEARCH INSTITUTIONS COULD AFFECT OUR BUSINESS
A significant portion of our 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 National Institute of Health. Research funding by the government,
however, may be significantly reduced in the future. Any such reduction may
seriously affect the ability of our existing and prospective research customers
to purchase our products for research use. In addition, we have received and
expect to continue to receive significant funds under various United States
government research and technology programs including the ATP. Funding of the
ATP grant expires in January 2000 and the 1999 budget has not yet been approved.
Consequently, there can be no assurance that we will complete work under the ATP
and we may not receive any of the $8.6 million funding remaining on the grant
and any funding that is not spent before completion of the grant will no longer
be available to us. Our failure to receive this funding from the ATP could have
a serious adverse effect on our business. There can be no assurance that
additional grants or other sources of funding will be available following
completion of the ATP grant to allow for
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commercialization of products resulting from this funded research. Our failure
to obtain sources of future funding for this research could have a serious
adverse effect on our business, financial condition and results of operations.
THERE ARE SERIOUS ETHICAL, LEGAL AND SOCIAL IMPLICATIONS OF GENETIC TESTING
Our success will depend in part upon our ability to develop tests for
specific genetic information discovered by us and others. These genetic tests
have given rise to some difficult issues, including:
- Genetic tests such as certain of our GeneChip assays may be difficult to
perform and interpret and may lead to misinformation or misdiagnosis;
- 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 a particular disease or condition;
- Once available, such tests may be subject to ethical concerns or
reluctance to administer or pay for tests for conditions that are not
treatable; and
- The possibility that specific gene-based diagnostic tests marketed by
other companies could encounter public resistance, thereby 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:
- An increase in 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 limit the use of genetic testing or prohibit testing for
genetic predisposition to certain conditions which could adversely affect the
use of our products. As a result, ethical concerns about genetic testing may
seriously affect market acceptance of our GeneChip system or give rise to
legislative restrictions in some countries adversely affecting markets, and
thereby adversely affect our business, financial condition and results of
operations.
WE DEPEND ON CERTAIN KEY PERSONNEL
We are highly dependent on the principal members of our management and
scientific staff. The loss of services of any of these persons could have a
serious adverse effect on our product development and commercialization efforts.
In addition, research, product development and commercialization will require
additional skilled personnel in areas such as bioinformatics, organic chemistry
information services, regulatory affairs, manufacturing, sales, marketing and
technical support.
There is a shortage of such skilled personnel, which is likely to continue
for some time. As a result, competition for these people, particularly for
employees with technical expertise, is intense and the turnover rate for these
people is high. If we are unable to hire, train and retain a sufficient number
of qualified employees, our business, financial condition and results of
operations could be seriously harmed. This inability could also hinder the
planned expansion of our business.
In addition, we rely on our scientific advisors and consultants to assist us
in formulating our research, development and commercialization strategy. All of
the scientific advisors and consultants are
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engaged by employers other than us and have commitments to other entities that
may limit their availability to us. Some of our scientific advisors and
consultants also consult for companies that may be our competitors. If we are
unable to retain our scientific advisors and consultants, our business,
financial condition and results of operations could be adversely harmed.
WE MAY BE EXPOSED TO LIABILITY DUE TO PRODUCT DEFECTS
Our business exposes us to potential product liability claims that are
inherent in the testing, manufacturing, marketing and sale of human diagnostic
and therapeutic products. We intend to acquire additional insurance, should it
be desirable, for clinical liability risks. We may not be able to obtain such
insurance or general product liability insurance on acceptable terms or at
reasonable costs. In addition, such insurance may not be in sufficient amounts
to provide us with adequate coverage against potential liabilities. A product
liability claim or recall could have a serious adverse effect on our business,
financial condition and results of operations.
GLAXO OWNS A SUBSTANTIAL PORTION OF OUR OUTSTANDING STOCK
Glaxo Wellcome, plc and its affiliates ("Glaxo") currently beneficially owns
approximately 32% of our outstanding Common Stock. In March 1998, we sold Glaxo
$49.9 million of Series AA Preferred Stock, which is convertible subject to
certain conditions into an additional 1,257,229 shares of Common Stock. On an as
converted basis, Glaxo owns approximately 35% of our Common Stock. Our executive
officers, directors and principal shareholders (other than Glaxo) beneficially
own approximately 5% of our outstanding Common Stock. Although we have executed
a Governance Agreement and Voting Trust Agreement with Glaxo, Glaxo nevertheless
may be able to influence the outcome of shareholder votes, including votes
concerning the election of directors, adoption of amendments to our Certificate
of Incorporation and Bylaws and approval of mergers and other significant
corporate transactions.
WE HAVE VARIOUS MECHANISMS IN PLACE TO DISCOURAGE TAKEOVER ATTEMPTS
In October 1998, we adopted a stockholder rights plan and change of control
policy. The purpose of the stockholder rights plan is to allow us and our Board
of Directors an opportunity to deal responsibly with parties that attempt to
gain a control position in our company without the approval of the Board of
Directors. The purpose of the change of control policy is to ensure that our
employees are treated fairly in the event of a change of control of Affymetrix.
Our stockholder rights plan and change of control policy may discourage, delay
or prevent a change in control of Affymetrix that a stockholder may consider
favorable.
In addition, certain provisions of our Certificate of Incorporation and
Bylaws may discourage, delay or prevent a change in control of Affymetrix that a
stockholder may consider favorable. These provisions include:
- Authorizing the issuance of "blank check" preferred stock;
- Prohibiting cumulative voting in the election of directors;
- Requiring the super-majority voting to effect certain amendments to our
certificate of incorporation and bylaws;
- Limiting the persons who may call special meetings of stockholders;
- Prohibiting stockholder action by written consent; and
- Establishing advance notice requirements for nominations for election to
the board of directors or for proposing matters that can be acted upon by
stockholders at stockholder meetings.
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In addition, certain provisions of Delaware law and our stock incentive
plans as well as recent and anticipated rulings from the Securities and Exchange
Commission relating to the accounting for of acquisitions may discourage, delay
or prevent a change in control.
OUR STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE VOLATILE
The market price of our Common Stock since our initial public offering in
June 1996 has increased dramatically and has been highly volatile. This
volatility has been caused by the following factors, some of which are beyond
our control:
- Announcements of our results of research activities;
- Quarterly variations in our operating results;
- New collaborative agreements;
- Technological innovations by ourselves and our competitors;
- Announcements of new commercial products and initiatives by us,
collaborative partners or competitors;
- Changes in government regulation or new regulatory actions;
- Changes in patent laws;
- Developments concerning proprietary rights;
- Developments in litigation initiated against us or by us; and
- Fluctuations in the stock market price and volume of traded shares
generally, especially fluctuations in the traditionally volatile
technology and biotechnology sectors.
WE ARE AT RISK OF SECURITIES CLASS ACTION LITIGATION DUE TO STOCK PRICE
VOLATILITY
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. Due to the potential volatility of our stock price, we may be the
target of such litigation in the future. Securities litigation could result in
substantial costs and divert management's attention and resources, which could
seriously harm our business, financial condition and results of operations.
OUR BUSINESS COULD BE AFFECTED BY YEAR 2000 COMPUTER PROBLEMS
We are assessing the potential impact of the Year 2000 computer problem on
our products (including GeneChip systems and software), information systems,
embedded systems (including computers used in its manufacturing process) and on
the ability of certain third parties to supply critical materials and services
as well as the readiness of certain customers. We expect to complete the
assessment of our products, computer systems, embedded systems, certain third
party suppliers and major customers by the end of the second quarter of 1999,
and to take necessary remediation action by the end of 1999. While we do not
anticipate a material business interruption to result from the Year 2000
problem, we cannot guarantee that our products or systems will be Year 2000
ready. In addition, we could be seriously affected by the lack of Year 2000
readiness of key third party suppliers and service providers and major
customers. We cannot guarantee that we or third parties will be Year 2000 ready.
Finally, we are also subject to external forces that might generally affect
industry and commerce, such as utility and transportation failures. We have not
yet developed a contingency plan to address situations that may result if we or
certain third parties are unable to achieve Year 2000 readiness. If any of our
products, information systems, embedded systems, key third party suppliers and
services providers and major customers are not Year 2000 ready, we may
experience a business interruption
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which would have a material adverse impact on our business, results of
operations and financial condition. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Impact of Year 2000."
COMPLIANCE WITH GOVERNMENT REGULATION IS CRITICAL TO OUR BUSINESS
Many of our products, including our diagnostic products, will be regulated
as medical devices and therefore be subject to approval by the United States
FDA. Unless exempted by government regulation, there are two primary methods for
securing FDA approval.
First, the FDA determines that the proposed medical device can be marketed
in the United States because it is substantially equivalent to an existing
medical device already in the United States market and issues what is known as a
510(k) pre-market notification clearance. Second, the FDA may require that the
new device satisfy a more in depth approval process, known as pre-market
approval, or PMA. Both the 510(k) clearance and the PMA processes may require
the presentation of a substantial volume of clinical data, as well as a
substantial review, thereby delaying the introduction of the new device into the
market. Moreover, the PMA process requires extensive clinical studies,
manufacturing information (including demonstration of compliance with quality
systems requirements) and likely review by a panel of experts outside the FDA.
FDA review of a PMA application could take significantly longer than that for a
510(k) application, thereby further delaying the introduction of the new medical
device into the market. Finally, even if the FDA approves the new device, it may
impose restrictions on our ability to market the device.
We cannot assure you that we will or our collaborators will be able to meet
the FDA's requirements or receive FDA clearance for our products. Moreover, even
if we are exempt from approval or even if we receive clearance, the FDA may
impose restrictions on our marketing efforts. Finally, delays in the approval
process may cause us to introduce our products into the market later than
anticipated. Any failure to obtain regulatory approval, restrictions on our
ability to market our products, or delay in the introduction of our products to
the market could have a serious adverse effect on our business, financial
condition and results of operations.
Moreover, medical device manufacturers are subject to periodic inspections
by the FDA and state agencies. If the FDA believes that a company is not in
compliance with applicable laws or regulations, it can take any of the following
actions:
- issue a warning or other letter notifying the particular manufacturer of
improper conduct;
- impose civil penalties;
- detain or seize products;
- issue a recall;
- ask a court to seize products;
- enjoin future violations;
- withdraw clearances or approvals; or
- assess civil and criminal penalties against us, our officers or our
employees.
If we fail to comply with the FDA's requirements and are subject to any of the
actions mentioned above, we would suffer a serious adverse effect on our
business, financial condition or results of operations.
Medical device laws and regulations are also in effect in many of the
countries in which we may do business outside the United States. These laws and
regulations range from comprehensive device approval requirements for some or
all of our medical device products to requests for product data or
39
<PAGE>
certifications. The number and scope of these requirements are increasing. We
may not be able to obtain regulatory approvals in such countries and we may be
required to incur significant costs in obtaining or maintaining our foreign
regulatory approvals. In addition, the export of certain of our products which
have not yet been cleared for domestic commercial distribution may be subject to
FDA export restrictions. Any failure to obtain product approvals in a timely
fashion or to comply with state or foreign medical device laws and regulations
may have a serious adverse effect on our business, financial condition or
results of operations.
We are 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. We may
not be able to obtain the necessary permits to construct new facilities,
including our planned facility near Sacramento, California. Any violation of,
and the cost of compliance with, these regulations or permit requirements could
have a serious adverse effect on our business, financial condition and results
of operations. See "Business--Government Regulation."
WE DEPEND ON REIMBURSEMENT BY HEALTH CARE ORGANIZATIONS
Our ability to commercialize certain products and services successfully may
depend on the extent to which we are able to secure reimbursement from
government authorities, such as Medicare and Medicaid, private health insurers,
and other organizations, such as health maintenance organizations. These
third-party payors are increasingly likely to challenge the prices charged for
health care products and services. The cumulative effect of the trend towards
managed health care in the United States, legislative proposals to reform health
care or reduce government insurance programs, and the concurrent growth of
organizations such as HMOs, which could control or significantly influence the
purchase of health care products and services, may result in lower prices for
health care products and services commercialized by us, our customers and our
collaborative partners. This reduction in turn could reduce the amount our
future revenues or royalty payments that may be due to us. The lower prices
could also adversely affect our profits and the profits of our customers and
collaborative partners. As a result, pharmaceutical, diagnostic and
biotechnology companies may choose to reduce or eliminate certain research and
development programs that utilize our products. Any such reduction of our
revenues or royalty payments or the reduction or cancellation of research
programs that utilize our products could have a serious adverse effect on our
business, financial condition and results of operations. See
"Business--Reimbursement."
ITEM 2. PROPERTIES
Affymetrix leases two facilities in Santa Clara, California, totaling
101,000 square feet for research and development laboratories and administrative
offices under leases 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 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 in West Sacramento, California, upon which the
Company has built a 52,000 square foot manufacturing facility. The Company
expects to continue to expand its manufacturing and other operating 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
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
Affymetrix' products infringe a related patent, United States Patent 5,695,940.
On August 18, 1998, the Company filed a lawsuit in Federal District Court in the
Northern District of California (San Francisco
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Division) against Hyseq alleging infringement of U.S. Patent Nos. 5,795,716 and
5,744,305 ("'305"). On September 1, 1998, the Company added U.S. Patent No.
5,800,992 ("'992") to the complaint of infringement against Hyseq. The Hyseq
action, which seeks damages based on the sale of Affymetrix' products and
processes and seeks to enjoin commercial activities relating to those products
and processes, and any other legal action against the Company or its
collaborative partners claiming damages on account of the sale of Affymetrix
products 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 required would
be made available on commercially acceptable terms, if at all. Furthermore, the
Company has and is likely to continue to incur substantial costs and expend
substantial personnel time in defending against the claims filed by Hyseq.
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's and Synteni's products infringe United States Patent
5,445,934 ("'934"). On September 1, 1998, the Company filed a complaint against
Incyte and Synteni in Federal District Court in Delaware alleging infringement
of the '305 Patent and the '992 Patent. These actions were transferred to the
United States District Court for the Northern District of California on November
18, 1998, as case numbers C98-4507 and C98-4508, respectively. The actions seek
to enjoin commercial activities of Incyte and Synteni relating to the Affymetrix
patents and, in regard to the '992 Patent, seek a preliminary injunction. The
motion for preliminary injunction is currently scheduled to be heard on April
30, 1999.
There can be no assurance that Affymetrix will prevail in asserting its
patent rights against Hyseq, Incyte, Synteni or others. The Company has and is
likely to continue to incur substantial costs and expend substantial personnel
time in asserting the Company's patent rights against Hyseq, Incyte, Synteni and
others. 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 probe array systems with similar competitive advantages to the
GeneChip technology, which could have a material adverse effect on the Company's
business, financial condition and operating results.
On April 17, 1998, Incyte filed a response and counterclaim asserting the
'934 Patent is invalid and not infringed. 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 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. On September 21, 1998, Incyte and Synteni filed an answer asserting
various defenses to the lawsuits in relation to the '992 Patent and the '305
Patent, and asserted several counterclaims, namely a request for declaration of
noninfringement and invalidity, an assertion of unfair competition, a request
for a declaration that Synteni and Dari Shalon (a one time employee of Synteni)
have not misappropriated any of Affymetrix' trade secrets, a claim of tortious
interference with Incyte's and Synteni's economic advantage, a claim of slander
of title of a patent and a claim of trade libel. Affymetrix believes the
counterclaims are without merit. However, the Company has and is likely to
continue to incur substantial costs and expend substantial personnel time in
defending against any counterclaims filed by Incyte and Synteni. Failure to
successfully enforce its patent rights or defend against counterclaims of
Incyte, Synteni, or others could have a material adverse effect on the Company's
business, financial condition and operating results.
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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, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER 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>
1997
First Quarter.............................................................. $ 19.75 $ 36.38
Second Quarter............................................................. $ 20.38 $ 35.25
Third Quarter.............................................................. $ 29.13 $ 49.38
Fourth Quarter............................................................. $ 29.75 $ 47.63
1998
First Quarter.............................................................. $ 24.63 $ 35.25
Second Quarter............................................................. $ 21.13 $ 34.88
Third Quarter.............................................................. $ 16.13 $ 30.38
Fourth Quarter............................................................. $ 19.50 $ 28.38
</TABLE>
As of December 31, 1998, there were approximately 412 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. The Company pays a semi-annual, cumulative dividend of 6.5% per year on
the Series AA Preferred Stock held by Glaxo.
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 & Company, LLC,
CS First Boston and Montgomery Securities.
From the effective date of the Registration Statement to December 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 December 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,
$80.6 million; and (ii) working capital, $11.7 million.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected historical information has been derived from the
audited financial statements of the Company. The financial information as of
December 31, 1998 and 1997 and for each of the three years in the period ended
December 31, 1998 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,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Product.................................. $ 22,847 $ 4,789 $ 1,389 $ -- $ --
Contract................................. 22,328 7356 6078 2,365 535
Grant.................................... 6,850 7620 4,505 2,260 1,039
--------- --------- --------- --------- ---------
Total revenue.......................... 52,025 19,765 11,972 4,625 1,574
--------- --------- --------- --------- ---------
Costs and expenses:
Cost of product revenue.................. 14,858 4,559 2,178 -- --
Research and development................. 35,953 28,168 18,762 12,420 9,483
Selling, general and Administrative...... 29,763 14,697 7,569 3,833 2,303
--------- --------- --------- --------- ---------
Total costs and expenses................. 80,574 47,424 28,509 16,253 11,786
--------- --------- --------- --------- ---------
Loss from operations....................... (28,549) (27,659) (16,537) (11,628) (10,212)
Interest income, net....................... 5,419 5,133 4,310 881 532
--------- --------- --------- --------- ---------
Net loss................................... (23,130) (22,526) (12,227) (10,747) (9,680)
Preferred Stock dividends.................. (2,321) -- -- -- --
--------- --------- --------- --------- ---------
Net loss attributable to Common
Stockholders............................. $ (25,451) $ (22,526) $ (12,227) $ (10,747) $ (9,680)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Basic and diluted net loss per common
share(1)................................. $ (1.11) $ (0.99) $ (0.61) $ (0.61) $ (0.55)
Shares used in computing basic and diluted
net loss per common share(1)............. 22,915 22,644 20,131 17,664 17,563
BALANCE SHEET DATA:
Cash, cash equivalents, and short-term
investments.............................. $ 80,568 $ 71,573 $ 108,982 $ 38,883 $ 17,805
Working capital............................ 80,387 71,553 107,668 36,070 15,677
Total assets............................... 136,428 101,170 118,900 44,594 19,945
Long-term obligations...................... 5,261 513 741 948 7,135
Convertible Redeemable Preferred Stock..... 49,857 -- -- -- --
Accumulated deficit........................ (92,720) (67,269) (44,743) (32,516) (21,769)
Total stockholders' equity................. 66,750 91,036 112,533 38,561 9,254
</TABLE>
- ------------------------
(1) See Note 1 to the Financial Statements included in Item 8.
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ITEM 7. 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 within the meaning of Section 21E of the Securities
Exchange Act, including statements regarding the Company's "expectations",
"beliefs", "hopes", "intentions", "strategies" or the like. 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 and litigation. 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,
certain 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 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.
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 and in September 1998 was reincorporated as a Delaware corporation.
In March 1995, Glaxo plc, now Glaxo Wellcome plc ("Glaxo"), acquired Affymax,
including its ownership interest in Affymetrix. Beginning in September 1993, the
Company issued equity securities, including an initial public offering in June
1996, which diluted Affymax' and then Glaxo's ownership in 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 $49.9 million. The Preferred Stock is
convertible into Affymetrix Common Stock at approximately $40.00 per share.
Glaxo's acquisition of the Series AA Preferred Stock increased Glaxo's
beneficial ownership of Affymetrix to approximately 37%. In March 1999, the
Company sold 1,000,000 shares of common stock to a third party in a private
placement, which reduced Glaxo's ownership position to 35%.
The Company has incurred operating losses in each year since its inception,
including a loss attributable to common stockholders of approximately $25.5
million during the year ended December 31, 1998 and, as of such date, had an
accumulated deficit of approximately $92.7 million. The Company's losses have
resulted principally from costs incurred in research and development and from
selling, 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 product sales and
technology access fees, collaborative research and development agreements
(including technology access fees), government research grants and from cash and
investment balances. The Company expects to incur substantial additional
operating losses for at least the next two years as a result of increases in its
expenses for manufacturing, marketing and sales capabilities, research and
product development and general and administrative costs. The Company's
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quarterly operating results will depend upon the volume and timing of orders
received for GeneChip systems and probe arrays 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; the outcome of on-going or future litigation; 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 and successfully 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 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
manufacture and 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.
IMPACT OF YEAR 2000
The Company is assessing the potential impact of the Year 2000 computer
problem on its products (including GeneChip systems and software), information
systems, embedded systems (including computers used in its manufacturing
process) and on the ability of certain third parties to supply critical
materials and services as well as the readiness of certain customers. The
Company has initiated the assessment of its products, identified certain
software code that needs to be revised and is in the process of updating this
code for existing and future products. The Company believes that with this
update, its products will be Year 2000 ready. The Company expects to complete
the assessment of its computer systems, embedded systems, certain third party
suppliers and major customers by the end of the second quarter of 1999, and to
take necessary remediation action by the end of 1999. Expenditures to date have
not been material and have consisted solely of the limited use of outside
consultants and the time of certain company personnel. Based on the partial
assessment completed through December 31, 1998, the Company does not currently
expect the future costs of completing the assessment, modifying its products,
making system modifications, purchasing replacement computer systems and
assessing the Year 2000 readiness of material third party suppliers and major
customers to be material. While the Company does not anticipate a material
business interruption to result from the Year 2000 problem, the Company gives no
assurances that its products or systems will be Year 2000 ready and the Company
cannot guarantee the Year 2000 readiness of key third party suppliers and
service providers and major customers. Pending the completion of the assessment
of the Company's Year 2000 readiness, the Company may make certain contingency
plans (for example the stockpile of critical raw materials in late 1999), but
currently such plans have not been developed. If any of the Company's products
or information systems, embedded systems, key third party suppliers and services
providers and major customers are not Year 2000 ready, the Company may
experience a business interruption which would have a material adverse impact on
the Company's business, results of operations and financial condition.
45
<PAGE>
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997
PRODUCT REVENUE AND COST OF PRODUCT REVENUE. Product sales increased to
$22.8 million in 1998, up from $4.8 million in 1997. The increase primarily
resulted from growth in placements of GeneChip systems and sales of GeneChip
probe arrays and related products. Cost of product revenue increased to $14.9
million in 1998, up from $4.6 million in 1997. The increase in cost of product
revenue is due to the cost of selling more GeneChip systems and probe arrays and
increased manufacturing costs arising from variations in manufacturing capacity
and yield. The Company has experienced, and continues to experience, variation
in manufacturing capacity and yield of its GeneChip products which has impacted,
and will continue to impact, the Company's ability to meet its commitments to
deliver certain products 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. In addition,
margins will continue to fluctuate as the Company continues development and
expansion of its manufacturing capabilities and as the Company incurs costs
associated with the start-up of the planned West Sacramento, California facility
throughout 1999. Margins also fluctuate as a result of changes in the mix of
products sold. In addition, the Company sells products in certain foreign
countries and thus revenue and margins will fluctuate due to changes in currency
exchange rates. However, the impact of changing currency rates to date has been
immaterial and the Company does not currently engage in hedging activities.
CONTRACT REVENUE. Contract revenue includes subscription fees earned under
EasyAccess-TM- contracts, custom probe array design fees, milestones, research
and development funding, royalties and license fees earned under commercial
contracts. Contract revenue increased to $22.3 million for 1998 from $7.4
million for 1997 primarily due to fees earned under the Company's EasyAccess
subscription-based supply agreements, increased custom array design fees,
including revenue of $2.0 million earned from the completion of a custom array
project in September 1998 and achievement of milestones under other commercial
contracts.
GRANT REVENUE. Grant revenue decreased to $6.9 million for 1998 from $7.6
million for 1997. The decrease is primarily due to lower activity under
government grants including grants from the Advanced Technology Program ("ATP")
and National Institutes of Health ("NIH") National Center for Human Genome
Research, which was completed in 1998. The Company expects grant revenues to
fluctuate in the future due to the level of activity performed under existing
grants and the timing of new grant awards. After 1999, the Company expects grant
revenues to decline substantially due to the completion of the ATP grant.
RESEARCH AND DEVELOPMENT. Research and development expenses, which primarily
consist of new technology, product and manufacturing process development,
increased to $36.0 million for 1998 compared to $28.2 million for 1997. The
increase in research and development expenses was attributable primarily to the
hiring of additional research and development personnel and associated purchases
of research supplies. The Company expects research and development spending to
increase over the next several years as product development and core research
efforts continue to expand.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $29.8 million in 1998 compared to $14.7
million for 1997. The increase in selling, general and administrative expenses
resulted primarily from the Company's expansion of commercial activities and
significantly increased legal costs arising from ongoing patent litigation.
Selling, general and administrative expenses are expected to continue to
increase as the Company expands sales, marketing, and technical support,
prosecutes and defends its intellectual property position and defends against
claims made by third parties in ongoing litigation, and adds other management
and support staff. In particular, the Company expects legal costs to increase as
on-going
46
<PAGE>
patent litigation with Hyseq, Inc. and with Incyte Pharmaceuticals, Inc. and
Synteni, Inc. approach their respective trial dates.
INTEREST INCOME. Interest income was $5.5 million for 1998 compared to $5.2
million for 1997. Interest expense of approximately $0.1 million for both 1998
and 1997 is related to a capital equipment lease.
NET LOSS PER COMMON SHARE. The net loss per common share includes the impact
of $2.3 million of preferred stock dividends paid to Glaxo.
YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996
PRODUCT REVENUE AND COSTS OF 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 and related products.
CONTRACT REVENUE. Contract revenue increased to $7.4 million for 1997 from
$6.1 million for 1996 primarily due to increased custom probe array design and
supply fees earned and milestone payments received.
GRANT REVENUE. Grant revenue increased to $7.6 million for 1997 from $4.5
million for 1996 primarily due to increased activity under government grants.
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.
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.
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.
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 $32.5 million from the private
placement of 1,000,000 shares of common stock in March 1999, $49.9 million from
the sales of Series AA Convertible Redeemable Preferred Stock to Glaxo in April
1998, 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.
Net cash used in operating activities was $16.9 million in 1998 compared to
$21.4 million in 1997 and $11.8 million for 1996. The cash used for operations
was primarily to fund the Company's operating losses. The Company expects net
cash used in operating activities to increase in 1999 as the Company expands its
operating activities.
47
<PAGE>
The Company's investing activities, other than purchases, sales and
maturities of available-for-sale securities, consisted of capital expenditures,
which totaled $16.6 million in 1998, $16.0 million in 1997, and $3.5 million in
1996. Capital expenditures during 1998 included investments in land, facilities,
and production and laboratory equipment. The Company expects to spend an
additional $5.0 million to $10 million during 1999 to complete the new
manufacturing facility in West Sacramento, California. Also included in
investing activities is a $5.9 million payment made to Beckman Coulter, Inc.
("BCI") pursuant to a series of agreements with BCI that provides Affymetrix
with a path to obtain a license to commercialize DNA arrays under certain
patents owned by or licensed to BCI, including certain patents covering
inventions by Professor Edwin Southern of Oxford University. Under the
agreements, Affymetrix has granted BCI licenses to commercialize probe arrays
manufactured using technologies other than light directed synthesis and an OEM
supply agreement for products that use certain of the Company's GeneChip
technology. BCI will pay Affymetrix royalties and transfer prices on sales of
these products as specified in the agreements. Affymetrix will also provide
services and make certain future payments to BCI and will pay royalties on sales
of certain products.
Net cash provided by financing activities was $47.8 million in 1998, $30,000
in 1997 and $85.0 million in 1996. These cash flows from financing activities
are primarily the result of the sale of Series AA Convertible Redeemable
Preferred Stock to Glaxo in 1998 and the Company's initial public offering in
1996. The Series AA Convertible Redeemable Preferred Stock requires the Company
to make semi-annual dividend payments of $1.6 million to Glaxo.
As of December 31, 1998, Affymetrix had cash, cash equivalents, and
short-term investments of approximately $80.6 million. The Company anticipates
that its existing capital resources, including proceeds of $32.5 million from a
private placement of 1,000,000 shares of common stock in March 1999, will enable
it to maintain currently planned operations and planned capital expenditures
through at least 2000. However, this expectation is based on the Company's
current operating plan and capital expenditure plan, which is expected to
change, and therefore the Company could require additional funding sooner than
anticipated. In addition, the Company expects its capital requirements will
remain substantial and may 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
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 progress of its
research and development programs; initiation or expansion of research programs
and collaborations; the costs involved in preparing, filing, prosecuting,
defending and enforcing intellectual property rights; the effectiveness of
product commercialization activities and arrangements; the purchase of patent
licenses; and other factors. 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 stockholders. 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.
As of December 31, 1998, Affymetrix had federal net operating loss
carryforwards for income tax purposes of approximately $75.0 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
48
<PAGE>
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
INTEREST RATE RISK
The Company's exposure to interest rate risk relates primarily to its
investment portfolio. Investments in fixed rate securities may have their fair
market value adversely impacted due to fluctuations in interest rates, while
floating rate securities may produce less income than expected if interest rates
fall. Due in part to these factors, the Company's future investment income may
fall short of expectations due to changes in interest rates or the Company may
suffer losses in principal if forced to sell securities which have declined in
market value due to changes in interest rates.
The primary objective of the Company's investment activities is to preserve
principal while at the same time maximize yields without significantly
increasing risk. To achieve this objective, the Company invests its excess cash
in debt instruments of the U.S. Government and its agencies and high-quality
corporate issuers, and, by policy, restricts its exposure to any single
corporate issuer by imposing concentration limits. To minimize the exposure due
to adverse shifts in interest rates, the Company maintains investments at an
average maturity of two years.
The table below presents the principal amounts and weighted-average interest
rates by year of maturity for the Company's investment portfolio:
<TABLE>
<CAPTION>
FAIR VALUE AT
(DOLLAR AMOUNTS IN THOUSANDS) 1999 2000 2001 2002 TOTAL DECEMBER 31, 1998
--------- --------- --------- --------- --------- -----------------
(DETAILS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Available-for-sale securities............ $ 15,735 $ 43,547 $ 14,000 $ 4,000 $ 77,282 $ 79,267
Average interest rate.................... 6.6% 5.8% 5.4% 6.6%
</TABLE>
49
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
AFFYMETRIX, INC.
<TABLE>
<CAPTION>
PAGE NO.
-----------
<S> <C>
Report of Ernst & Young LLP, Independent Auditors....................................................... 51
Balance Sheets.......................................................................................... 52
Statements of Operations................................................................................ 53
Statements of Stockholders' Equity...................................................................... 54
Statements of Cash Flows................................................................................ 55
Notes to Financial Statements........................................................................... 56
</TABLE>
50
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
Affymetrix, Inc.
We have audited the accompanying balance sheets of Affymetrix, Inc. as of
December 31, 1998 and 1997, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1998. Our audits also included the financial statement
schedule listed in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule 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, 1998 and 1997, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
Ernst & Young LLP
Palo Alto, California,
January 29, 1999,
except for Note 11, as to
which the date is March 25, 1999
51
<PAGE>
AFFYMETRIX, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents............................................................... $ 1,301 $ 4,779
Short-term investments.................................................................. 79,267 66,794
---------- ----------
80,568 71,573
Accounts receivable, net of allowances for doubtful accounts of $408 in 1998 and
$300 in 1997.......................................................................... 8,919 6,216
Inventories............................................................................. 3,276 2,637
Prepaid expenses........................................................................ 2,184 748
---------- ----------
Total current assets.................................................................. 94,947 81,174
Property and equipment
Construction-in-progress................................................................ 9,512 2,760
Land.................................................................................... 1,310 --
Equipment and furniture................................................................. 16,761 10,732
Leasehold improvements.................................................................. 13,213 10,762
---------- ----------
40,796 24,254
Less accumulated depreciation and amortization.......................................... (9,931) (5,166)
---------- ----------
Net property and equipment............................................................ 30,865 19,088
Acquired technology rights, net of accumulated amortization of $375 (Note 3).............. 9,625 --
Notes receivable from employees........................................................... 991 908
---------- ----------
$ 136,428 $ 101,170
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable and accrued liabilities................................................ $ 12,791 $ 8,729
Deferred revenue........................................................................ 1,517 664
Current portion of capital lease obligation............................................. 252 228
---------- ----------
Total current liabilities............................................................. 14,560 9,621
Noncurrent portion of capital lease obligation............................................ 261 513
Obligation to Beckman Coulter, Inc. ...................................................... 5,000 --
Commitments and contingencies
Convertible Redeemable Preferred Stock, $0.01 par value; 27,500,000 shares authorized;
1,634,522 Series AA shares issued and outstanding at December 31, 1998 (aggregate
redemption value of $50,000)............................................................ 49,857 --
Stockholders' equity:
Common Stock, $0.01 par value (1997 no par value); 50,000,000 shares authorized;
23,017,409 and 22,786,945 shares issued and outstanding at December 31, 1998 and 1997,
respectively.......................................................................... 230 158,924
Additional paid-in-capital.............................................................. 159,147 --
Accumulated other comprehensive income.................................................. 435 125
Deferred compensation................................................................... (342) (744)
Accumulated deficit..................................................................... (92,720) (67,269)
---------- ----------
Total stockholders' equity............................................................ 66,750 91,036
---------- ----------
$ 136,428 $ 101,170
---------- ----------
---------- ----------
</TABLE>
See Accompanying Notes
52
<PAGE>
AFFYMETRIX, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
REVENUE:
Product..................................................................... $ 22,847 $ 4,789 $ 1,389
Contract.................................................................... 22,328 7,356 6,078
Grant....................................................................... 6,850 7,620 4,505
---------- ---------- ----------
Total revenue............................................................. 52,025 19,765 11,972
---------- ---------- ----------
COSTS AND EXPENSES:
Cost of product revenue..................................................... 14,858 4,559 2,178
Research and development.................................................... 35,953 28,168 18,762
Selling, general and administrative......................................... 29,763 14,697 7,569
---------- ---------- ----------
Total costs and expenses (includes related-party expense of $6, $52 and
$1,422, respectively)................................................... 80,574 47,424 28,509
---------- ---------- ----------
Loss from operations...................................................... (28,549) (27,659) (16,537)
Interest income........................................................... 5,484 5,218 4,416
Interest expense.......................................................... (65) (85) (106)
---------- ---------- ----------
Net loss.................................................................. (23,130) (22,526) (12,227)
Preferred Stock dividends................................................. (2,321) -- --
---------- ---------- ----------
Net loss attributable to Common Stockholders.............................. $ (25,451) $ (22,526) $ (12,227)
---------- ---------- ----------
---------- ---------- ----------
Basic and diluted net loss per common share............................... $ (1.11) $ (0.99) $ (0.61)
---------- ---------- ----------
---------- ---------- ----------
Shares used in computing basic and diluted net loss per common share...... 22,915 22,644 20,131
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See Accompanying Notes
53
<PAGE>
AFFYMETRIX, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
ACCUMULATED
CONVERTIBLE ADDITIONAL OTHER TOTAL
PREFERRED COMMON PAID-IN DEFERRED COMPREHENSIVE ACCUMULATED STOCKHOLDERS'
STOCK STOCK CAPITAL COMPENSATION INCOME DEFICIT EQUITY
----------- --------- ---------- ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995....... $ 70,439 $ 2,717 $ -- $(2,360) $ 281 $(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
Comprehensive loss:
Unrealized loss on
available-for-sale
securities of $172, net of
reclassification
adjustments for gains
included in net loss of
$60........................ -- -- -- -- (232) -- (232)
Net loss..................... -- -- -- -- -- (12,227) (12,227)
-------------
Comprehensive loss............. (12,459)
----------- --------- ---------- ------------ ----- ----------- -------------
Balance, December 31, 1996....... -- 158,687 -- (1,460) 49 (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
Comprehensive loss:
Unrealized loss on
available-for-sale
securities of $107, net of
reclassification
adjustments for losses
included in net income of
$183....................... -- -- -- -- 76 -- 76
Net loss..................... -- -- -- -- -- (22,526) (22,526)
-------------
Comprehensive loss............. (22,450)
----------- --------- ---------- ------------ ----- ----------- -------------
Balance, December 31, 1997....... -- 158,924 -- (744) 125 (67,269) 91,036
----------- --------- ---------- ------------ ----- ----------- -------------
Reincorporation in Delaware.... (158,696) 158,696 -- -- -- --
Issuance of 230,464 shares of
Common Stock upon exercise of
stock options................ -- 2 276 -- -- -- 278
Issuance of warrants to
purchase 12,542 shares of
common stock for services.... -- -- 175 -- -- -- 175
Amortization of deferred
compensation................. -- -- -- 402 -- -- 402
Comprehensive loss:
Unrealized gain on
available-for-sale
securities of $627, net of
reclassification
adjustments for gains
included in net loss of
$317....................... -- -- -- -- 310 -- 310
Net loss..................... -- -- -- -- (23,130) (23,130)
-------------
Comprehensive loss............. (22,820)
Preferred stock dividends...... -- -- -- -- -- (2,321) (2,321)
----------- --------- ---------- ------------ ----- ----------- -------------
Balance, December 31, 1998....... $ -- $ 230 $159,147 $ (342) $ 435 $(92,720) $ 66,750
----------- --------- ---------- ------------ ----- ----------- -------------
----------- --------- ---------- ------------ ----- ----------- -------------
</TABLE>
See Accompanying Notes
54
<PAGE>
AFFYMETRIX, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
----------- ---------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................................. $ (23,130) $ (22,526) $ (12,227)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization........................................... 4,765 2,310 1,286
Amortization of acquired technology rights.............................. 375 -- --
Amortization of investment premiums..................................... (270) 159 (518)
Amortization of deferred compensation................................... 577 716 1,235
Changes in operating assets and liabilities:
Accounts receivable................................................... (2,703) (4,328) (546)
Inventories........................................................... (639) (736) (1,231)
Prepaid expenses and notes receivable from employees.................. (619) (924) (292)
Accounts payable and other accrued liabilities........................ 4,062 3,706 2,465
Deferred revenue...................................................... 853 268 (1,944)
----------- ---------- -----------
Net cash used in operating activities............................... (16,729) (21,355) (11,772)
----------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................................... (16,542) (16,001) (3,488)
Payment to Beckman Coulter, Inc. for acquired technology rights........... (5,900) --
Proceeds from sale of available-for-sale securities....................... 143,639 98,452 48,417
Proceeds from maturities of available-for-sale securities................. -- 12,183 42,859
Purchases of available-for-sale securities................................ (155,532) (82,673) (149,363)
----------- ---------- -----------
Net cash provided by (used in) investing activities................. (34,335) 11,961 (61,575)
----------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of Common Stock, net............................................. 278 237 85,196
Issuance of Redeemable Preferred Stock, net............................... 49,857 -- --
Preferred Stock dividends................................................. (2,321) -- --
Principal payments on capital lease obligation............................ (228) (207) (187)
----------- ---------- -----------
Net cash provided by financing activities........................... 47,586 30 85,009
----------- ---------- -----------
Net increase (decrease) in cash and cash equivalents................ (3,478) (9,364) 11,662
Cash and cash equivalents at beginning of year.............................. 4,779 14,143 2,481
----------- ---------- -----------
Cash and cash equivalents at end of year.................................... $ 1,301 $ 4,779 $ 14,143
----------- ---------- -----------
----------- ---------- -----------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Obligation to Beckman Coulter, Inc for acquired technology rights......... $ 5,000 $ -- $ --
----------- ---------- -----------
----------- ---------- -----------
Issuance of warrants for services........................................... $ 175 $ -- $ --
----------- ---------- -----------
----------- ---------- -----------
</TABLE>
See Accompanying Notes
55
<PAGE>
NOTE 1-- NATURE OF OPERATION
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,
certain 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 Company currently sells its products to pharmaceutical and
biotechnology companies, academic research centers and clinical reference
laboratories.
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 and in September 1998 was reincorporated as a Delaware corporation.
In March 1995, Glaxo plc, now Glaxo Wellcome plc ("Glaxo"), acquired Affymax,
including its ownership interest in Affymetrix. Beginning in September 1993, the
Company issued equity securities which diluted Affymax' and then Glaxo's
ownership in 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 $49.9
million. The Preferred Stock is convertible into Affymetrix Common Stock at
approximately $40.00 per share. Glaxo's acquisition of the Series AA Preferred
Stock increased Glaxo's beneficial ownership of Affymetrix to approximately 37%.
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 the 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 includes revenue earned from services performed
pursuant to commercial collaboration and supply agreements, subscription fees
earned under EasyAccess-TM- supply agreements, licensing, milestone and royalty
fees and government grants. Revenue from grants and research and development
reimbursements under collaboration agreements are recorded in the period in
which the costs are incurred or in which the revenue is earned as defined in the
related agreement. Direct costs associated with these contracts and grants are
reported as research and development expense. Revenue from subscription fees
earned under EasyAccess-TM- supply agreements are recorded ratably over the term
of the agreement subject to adjustments for anticipated reductions provided for
in certain agreements for late delivery of probe arrays. Payments received in
advance under these arrangements are recorded as deferred revenue until earned.
License, milestone and royalty income is recognized when earned under the terms
of the related agreements. Product revenue is recognized upon shipment. Reserves
are provided for anticipated returns and warranty expenses at the time the
associated revenue is recognized.
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.
56
<PAGE>
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with the provisions of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" ("SFAS 121"), the Company reviews
long-lived assets, including property and equipment, for impairment whenever
events or changes in business circumstances indicate that the carrying amount of
the assets may not be fully recoverable. Under SFAS 121, an impairment loss
would be recognized when estimated undiscounted future cash flows expected to
result from the use of the asset and its eventual disposition is less than its
carrying amount. Impairment, if any, is assessed using discounted cash flow.
Through December 31, 1998, there have been no such losses.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising costs were
$0.4 million for 1998 and not material for 1997 and 1996.
NET LOSS PER SHARE
Basic loss per share is calculated using the weighted average number of
common shares outstanding during the period. Diluted loss per share, which gives
effect to the dilutive effect of stock options and warrants (calculated based on
the treasury stock method) is the same as basic loss per share because the
Company is in a net loss position.
Options and warrants to purchase 3,311,479, 3,155,190 and 2,435,824 shares
of the Company's common stock in 1998, 1997 and 1996, 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 "Stockholders' Equity").
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, 1998 and 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 stockholders' equity.
Affymetrix reports all liquid securities with maturities at the 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.
COMPREHENSIVE INCOME
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. SFAS 130 requires unrealized gains or losses on the
Company's available-for sale securities, which prior to adoption were reported
separately in stockholders' equity, to be included in other comprehensive
income. Prior year financial statements have been reclassified to conform to the
requirements of SFAS 130.
57
<PAGE>
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, 1998
and 1997 (in thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Raw materials.............................................................. $ 1,775 $ 935
Work in process............................................................ 70 160
Finished goods............................................................. 1,431 1,542
--------- ---------
Total.................................................................... $ 3,276 $ 2,637
--------- ---------
--------- ---------
</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, 1998 and 1997,
consist of the following (in thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Accounts payable......................................................... $ 7,334 $ 4,647
Accrued compensation and related liabilities............................. 1,213 638
Accrued warranty......................................................... 937 1,456
Accrued legal............................................................ 2,707 1,581
Other.................................................................... 600 407
--------- ---------
Total.................................................................. $ 12,791 $ 8,729
--------- ---------
--------- ---------
</TABLE>
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 131, "Disclosure about Segments
of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 superseded
Statement of Financial Accounting Standards 14, "Financial Reporting for
Segments of a Business Enterprise." SFAS 131 establishes standards for the way
that public business enterprises report selected information about operating
segments in financial reports. SFAS 131 also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The adoption of SFAS 131 has no impact on Affymetrix's financial statements as
the Company only operates in one segment as defined under SFAS 131.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Financial Instruments and for Hedging
Activities" ("SFAS 133") which provides a comprehensive and consistent standard
for hedging activities. SFAS 133 is effective for years beginning after June 15,
1999 and is not anticipated to have an impact on Affymetrix's results of
operations or financial condition when adopted.
58
<PAGE>
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.
Certain key parts of the GeneChip system, such as the scanner, certain
reagents kits and lithographic masks as well as certain raw materials used in
the synthesis of probe arrays, are currently available only from a single source
or limited sources. No assurance can be given that scanners, reagents,
lithographic masks 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
1998, the Company entered into an agreement with the Hewlett-Packard Company
("HP") under which HP is required to supply all of the Company's forecasted
requirements for scanners until February 2003 and the Company is required to
purchase a minimum number of scanners from HP during the same period.
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 are
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.
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 may receive 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, LTD. ("AMERSHAM PHARMACIA BIOTECH") and
AMERSHAM PHARMACIA BIOTECH, KK ("AMERSHAM PHARMACIA BIOTECH KK")
In December 1997, the Company entered into a sales representation agreement
with Amersham Pharmacia Biotech for the non-exclusive sales and marketing of
certain of its GeneChip products. Under the sales representation agreement,
Amersham Pharmacia Biotech receives transaction processing fees and a percentage
of certain product sales up to a maximum annual amount. In October, 1998 the
company entered into a non-exclusive distribution agreement with Amersham
Pharmacia Biotech KK for the marketing and sale of the Company's products in
Japan. Under this agreement, Amersham Pharmacia Biotech KK purchases GeneChip
technology directly from the Company and is responsible for marketing and
selling the technology to its customers in Japan.
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<PAGE>
BECKMAN COULTER, INC. ("BCI")
In July 1998, the Company entered into a series of agreements with BCI that
provides Affymetrix with a path to obtain a license to commercialize DNA arrays
under certain patents, including patents owned by or licensed to BCI, including
certain patents covering inventions by Professor Edwin Southern of Oxford
University. Under the agreements, Affymetrix made a $5.9 million payment to BCI
and agreed to provide an additional $5.0 million in services, cash or stock to
BCI over the next seven years. In addition, Affymetrix has granted BCI certain
licenses to commercialize arrays manufactured using non-light directed
techniques and an OEM supply agreement for products that use the Company's
GeneChip technology. BCI will pay Affymetrix royalties and transfer prices on
sales of these products. The payments and obligations to BCI were accounted for
as the purchase of an intangible asset which will be amortized on a
straight-line basis over its estimated useful life of 15 years.
BIOMERIEUX VITEK, INC. ("bioMerieux")
In September 1996, bioMerieux and Affymetrix entered into a five year
collaborative development agreement and associated supply agreement to develop
and commercialize 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 is also 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 made certain
license payments to the Company.
GENETICS INSTITUTE ("GI")
In December 1995, Affymetrix and 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 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. In February 1998, this EasyAccess
agreement was expanded to include GI's parent, American Home Products, Inc. As
part of this new agreement, many of the terms and conditions under the 1995
supply agreement were superceded.
F. HOFFMANN-LA ROCHE LTD. ("Roche")
In August 1997, the Company and 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
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<PAGE>
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.
In February 1998, the Company entered into a collaboration with Roche
Molecular Systems, Inc., a subsidiary of Roche, for the development of
diagnostic products utilizing the Company's array technology. Under the terms of
the agreement, the Company and Roche will co-develop mutually agreed upon
products, Affymetrix will manufacture arrays for use in the products and Roche
will market and sell the products. Under the terms of the agreement Roche and
the Company are funding their respective work efforts as mutually agreed and
will share revenues and profits based on specified terms in the agreement.
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
$5.4 million through December 31, 1998. The grant expired in August 1998.
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 and commercial partners. Affymetrix expects to receive payments
monthly based on costs incurred and has recognized revenue of $12.2 million
through December 31, 1998.
The above grants are subject to audit by the granting authorities.
NOTE 4--AVAILABLE-FOR-SALE SECURITIES
The following is a summary of available-for-sale securities as of December
31, 1998 (in thousands):
<TABLE>
<CAPTION>
GROSS UNREALIZED GROSS UNREALIZED ESTIMATED FAIR
COST GAINS LOSSES VALUE
--------- ------------------- ------------------- --------------
<S> <C> <C> <C> <C>
U.S. Government obligations........................ $ 45,321 $ 324 $ (2) $ 45,643
U.S. Corporate securities.......................... 33,511 127 (14) 33,624
--------- ----- --- -------
Total securities............................... $ 78,832 $ 451 $ (16) $ 79,267
--------- ----- --- -------
--------- ----- --- -------
Amounts included in:
Short-term investments............................. $ 78,832 $ 451 $ (16) $ 79,267
--------- ----- --- -------
--------- ----- --- -------
</TABLE>
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<PAGE>
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 realized gains and losses on sales of available-for-sale securities were
immaterial for the years ended December 31, 1998, 1997 and 1996.
The following is a summary of the cost and estimated fair value of
available-for-sale securities at December 31, 1998, by contractual maturity (in
thousands):
<TABLE>
<CAPTION>
1998 1997
--------------------------- ---------------------------
<S> <C> <C> <C> <C>
AMORTIZED ESTIMATED FAIR AMORTIZED ESTIMATED FAIR
COST VALUE COST VALUE
----------- -------------- ----------- --------------
Mature in one year or less................................. $ 15,949 $ 16,037 $ 44,578 $ 44,632
Mature after one year through three years.................. 62,883 63,230 24,090 24,161
----------- ------- ----------- -------
Total.................................................. $ 78,832 $ 79,267 $ 68,668 $ 68,793
----------- ------- ----------- -------
----------- ------- ----------- -------
</TABLE>
NOTE 5--RELATED PARTY TRANSACTIONS
GLAXO
As mentioned in Note 1, Glaxo has a significant ownership interest in the
Company. Pursuant to a Governance Agreement, Glaxo is entitled to appoint a
specified number of directors to the Board of the Company depending on its
ownership position. The Company has entered into research and supply agreements
with Glaxo, resulting in revenue of $0.5 million in 1998, $1.7 million in 1997
and $0.3 million in 1996. In 1998, two Glaxo employees served as members of the
Company's Board of Directors.
EOS BIOTECHNOLOGY, Inc. ("Eos")
In April, 1998 the Company entered into a series of agreements with Eos
under which Eos became an EasyAccess supply customer of the Company. In return
for granting Eos access to certain technology and licenses, the Company received
3,750,000 shares of Series C Preferred Stock (resulting in approximately 15%
ownership) and the right to name one director of Eos. The shares received were
recorded at zero value as Eos is a development stage entity and realization of
this investment is uncertain. The shares are subject to repurchase by Eos in the
event the Company does not fulfill its obligations under the EasyAccess supply
agreement. In 1998, the Company earned revenue of $0.6 million from Eos under
the EasyAccess supply agreement.
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 payment of $1.3 million at the inception of the lease. The
leaseback contract includes a five-year term expiring January 2, 2000,
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<PAGE>
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.
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 $1.7
million in 1998, $1.4 million in 1997 and $1.0 million in 1996.
Future minimum lease obligations at December 31, 1998 under all leases are
as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
----------- -----------
<S> <C> <C>
1999......................................................................................... $ 292 $ 1,834
2000......................................................................................... 280 1,292
2001......................................................................................... -- 1,228
2002......................................................................................... -- 1,228
2003......................................................................................... -- 819
----- -----------
Total minimum lease payments................................................................. 572 $ 6,401
-----------
-----------
Less amount representing interest............................................................ (59)
-----
Present value of minimum lease payments...................................................... 513
Less current portion......................................................................... (252)
-----
Noncurrent obligation under capital lease.................................................... $ 261
-----
-----
</TABLE>
LITIGATION
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 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 Affymetrix' products infringe a related patent, United States Patent
5,695,940. On August 18, 1998, the Company filed a lawsuit in Federal District
Court in the Northern District of California (San Francisco Division) against
Hyseq alleging infringement of U.S. Patent Nos. 5,795,716 and 5,744,305
("'305"). On September 1, 1998, the Company added U.S. Patent No. 5,800,992
("'992") to the complaint of infringement against Hyseq. The Hyseq action, which
seeks damages based on the sale of Affymetrix products and processes and seeks
to enjoin commercial activities relating to those products and processes, and
any other legal action against the Company or its collaborative partners
claiming damages on account of the sale of Affymetrix' products 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 required would be made available on
commercially acceptable terms, if at all. Furthermore, the Company has and is
likely to continue to incur substantial costs and expend substantial personnel
time in defending against the claims filed by Hyseq.
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 Pharmaceuticals, Inc.'s
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<PAGE>
("Incyte") and Synteni, Inc.'s ("Synteni") products infringe United States
Patent 5,445,934 ("'934"). On September 1, 1998, the Company filed a complaint
against Incyte and Synteni in Federal District Court in Delaware alleging
infringement of the '305 Patent and the '992 Patent. These actions were
transferred to the United States District Court for the Northern District of
California on November 18, 1998 as case numbers C98-4507 and C98-4508,
respectively. The actions seek to enjoin commercial activities of Incyte and
Synteni relating to the Affymetrix patents and, in regard to the '992 Patent,
seek a preliminary injunction. The motion for preliminary injunction is
currently scheduled to be heard on April 30, 1999.
There can be no assurance that Affymetrix will prevail in asserting its
patent rights against Hyseq, Incyte, Synteni or others. The Company has and is
likely to continue to incur substantial costs and expend substantial personnel
time in asserting the Company's patent rights against Hyseq, Incyte, Synteni and
others. 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 probe array systems with similar competitive advantages to the
GeneChip technology, which could have a material adverse effect on the Company's
business, financial condition and operating results.
On April 17, 1998, Incyte filed a response and counterclaim asserting the
'934 Patent is invalid and not infringed. 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. On September 21, 1998, Incyte and Synteni
filed an answer asserting various defenses to the lawsuits in relation to the
'992 Patent and the '305 Patent, and asserted several counterclaims, namely a
request for declaration of noninfringement and invalidity, an assertion of
unfair competition, a request for a declaration that Synteni and Dari Shalon (a
one time employee of Synteni) have not misappropriated any of Affymetrix' trade
secrets, a claim of tortious interference with Incyte's and Synteni's economic
advantage, a claim of slander of title of a patent and a claim of trade libel.
Affymetrix believes the counterclaims are without merit. However, the Company
has and is likely to continue to incur substantial costs and expend substantial
personnel time in defending against any counterclaims filed by Incyte and
Synteni. Failure to successfully enforce its patent rights or defend against
counterclaims of Incyte, Synteni, or others could have a material adverse effect
on the Company's business, financial condition and operating results.
NOTE 7-- CONVERTIBLE REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
CONVERTIBLE REDEEMABLE PREFERRED STOCK
On April 14, 1998, the Company completed the sale of 1,634,522 shares of
Series AA Convertible Redeemable Preferred Stock ("Preferred Stock") to Glaxo
for net proceeds of approximately $49.9 million.
The Preferred Stock is convertible at the option of the preferred
stockholder into shares of Affymetrix Common Stock at approximately $40.00 per
share, subject to adjustments for stock splits and dividends.
The preferred stockholder is entitled to receive cumulative dividends at the
rate of $1.99 per share (as adjusted for stock splits, dividends, combinations
or recapitalizations), payable in two equal installments on June 30 and December
31 of each year. The dividends accrue each day whether or not earned or
declared. Additionally, the preferred stockholder is entitled to receive an
amount equal to any dividend declared on the Common Stock on an as-converted
basis.
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<PAGE>
At any time on or prior to March 9, 2001, and provided that the Company's
Common Stock has been trading at above $52.00 for a certain period, the Company
has the option to redeem the Preferred Stock at $30.59 per share, plus any
accrued but unpaid dividends. After March 9, 2001, the Company can redeem the
shares at any time for an amount equal to the liquidation preference.
At any time on or after March 9, 2005, the preferred stockholder has the
option to redeem the shares at an amount equal to $30.59 per share, plus any
accrued but unpaid dividends.
In the event of a liquidation of the Company, the preferred stockholder is
entitled to a liquidation preference of $30.59 per share together with any
accrued but unpaid dividends and an amount as determined by a set formula.
The preferred stockholder is entitled to the number of votes it would have
upon conversion of the Preferred Stock into Common Stock. The preferred
stockholder is required to vote these shares pursuant to a Voting Trust
Agreement for certain matters described in that agreement.
STOCK WARRANTS
At December 31, 1998, 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 and 12,542 shares at $25.00 per share
which expire in March 2000.
STOCKHOLDER RIGHTS PLAN
On October 15, 1998, the Board of Directors of the Company declared a
dividend of (i) one preferred share purchase right (a "Right") for each
outstanding share of common stock of the Company, and (ii) a number of Rights
for each share of Series AA Preferred Stock of the Company equal to the number
of shares of common stock into which such share of Series AA Preferred Stock was
convertible. The dividend is payable on October 27, 1998 (the "Record Date") to
the stockholders of record on that date. Each Right entitles the registered
holder to purchase from the Company one one-thousandth of a share of Series B
Junior Participating Preferred Stock, par value $.01 per share, of the Company
(the "Series B Preferred Stock") at a price of $125.00 per one one-thousandth of
a share of Series B Preferred Stock, subject to adjustment. The Rights will be
exercisable if a person or group hereafter acquires beneficial ownership of 15%
or more of the Common Stock of the Company or announces a tender offer for 15%
or more of the Common Stock. The Board of Directors will be entitled to redeem
the Rights at one cent per Right at any time before any such person hereafter
acquires beneficial ownership of 15% or more of the outstanding Common Stock. If
a person or group hereafter acquires 15% or more of the outstanding Common Stock
of the Company, each Right will entitle its holder to purchase, at the Right's
exercise price, a number of shares of Common Stock having a market value at that
time of twice the Right's exercise price. Rights held by the 15% holder will
become void and will not be exercisable to purchase shares at the bargain
purchase price. If the Company is acquired in a merger or other business
combination transaction after a person acquires 15% or more of the Company's
Common Stock, each Right will entitle its holder to purchase, at the Right's
then-current exercise price, a number of the acquiring company's common shares
having a market value at that time of twice the Right's exercise price. Glaxo,
which currently owns in excess of 15% of the aggregate voting power of the
Common Stock and Series AA Preferred Stock will not become an "Acquiring Person"
until it acquires beneficial ownership of additional shares of Common Stock. The
Rights will expire in ten years.
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<PAGE>
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, 1998, a total of 5,200,000
shares of Common Stock have been reserved for issuance under the Stock Plan and
no 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.
On September 29, 1998, the Board of Directors of the Company adopted a Stock
Incentive Plan for employees by providing for awards in the form of restricted
shares or nonqualified stock options. The aggregate number of options and
restricted shares shall not exceed 1,000,000 Common Shares. The plan is to be
administered by the Compensation Committee of the Board.
Activity under the stock plans through December 31, 1998 is as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
---------------------------
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE PER SHARE
---------- ---------------
<S> <C> <C>
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
----------
Options granted............................................... 892,900 26.34
Options exercised............................................. (230,464) 1.21
Options canceled.............................................. (510,158) 28.07
----------
Balance at December 31, 1998.................................... 3,103,587 13.58
----------
----------
</TABLE>
For options granted through June 6, 1996, Affymetrix recognized an aggregate
of $3.2 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.
In November 1998, the Company completed an option exchange program whereby
all employees (except for executive officers) were allowed to trade in their
original options for new options with a lower exercise price. The employees
received 80% of their original grants. The portion of the grant that replaced
vested options at the time of exchange and options scheduled to vest on or
before October 1, 1999 vest fully one year after the exchange with the remainder
of the exchanged grant vesting on the original vesting schedule. At the
completion of the stock exchange program, 277,250 options were
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<PAGE>
cancelled with exercise prices that ranged from $29.12 to $42.88 per share and
221,800 options were re-granted at $25.38 per share.
Exercise prices for options outstanding as of December 31, 1998 ranged from
$0.30 to $36.19 per share. The weighted-average contractual life of those
options is 7.67 years as summarized below:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ -------------------------
WEIGHTED- WEIGHTED-
WEIGHTED- AVERAGE AVERAGE
AVERAGE REMAINING EXERCISE EXERCISE
RANGE OF CONTRACTUAL LIFE PRICE PRICE
EXERCISE PRICES NUMBER (IN YEARS) PER SHARE NUMBER PER SHARE
- ------------------ ---------- --------------------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
$0.30 - 0.675.... 1,469,118 6.56 $ 0.63 871,751 $ 0.62
4.80 - 25.375.... 884,719 8.75 21.64 100,766 16.54
25.656 - 36.188... 749,750 8.59 29.46 82,900 29.88
---------- ----------
3,103,587 7.67 $ 13.59 1,055,417 $ 4.44
---------- ----------
---------- ----------
</TABLE>
PRO FORMA DISCLOSURE UNDER STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO.
123 ("SFAS 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 1998, 1997
and 1996: risk free interest rate of 4.7%, 5.4% and 5.4%, respectively; a
dividend yield of zero; volatility factors of the expected market price of the
Company's Common Stock price of $0.54, $0.55 and $0.55, respectively; 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 1998, 1997 and 1996 was $11.22, $14.01, and $4.72, 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, 1998, 1997 and 1996 is as
follows (in thousands except per share amounts):
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Pro forma net loss attributable to common stockholders.... $ (29,471) $ (26,515) $ (12,345)
---------- ---------- ----------
---------- ---------- ----------
Pro forma basic and diluted net loss per common share..... $ (1.29) $ (1.17) $ (0.62)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The pro forma information above is not representative of the effects on
reported net loss for future years.
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<PAGE>
RESERVED SHARES
At December 31, 1998, shares reserved for future issuance are as follows:
<TABLE>
<S> <C>
Convertible redeemable preferred stock................... 1,257,230
Warrants................................................. 216,423
Stock option plans:
Options outstanding.................................... 3,103,587
Options available for future grants.................... 935,180
Stock incentive plan................................... 1,000,000
---------
6,512,420
---------
---------
</TABLE>
NOTE 8--INCOME TAXES
Due the Company's loss position, there is no provision for income taxes for
1998, 1997 or 1996.
Significant components of the Company's deferred tax assets as of December
31, 1998 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Net operating loss carryforwards.............................. $ 26,500 $ 17,853
Research credits.............................................. 3,000 2,586
Other--net.................................................... 6,500 5,287
--------- ---------
Total deferred tax assets..................................... 36,000 25,726
Valuation allowance for deferred tax assets................... (36,000) (25,726)
--------- ---------
Net deferred tax assets....................................... $ -- $ --
--------- ---------
--------- ---------
</TABLE>
SFAS No. 109, "Accounting for Income Taxes," provides for the recognition of
deferred tax assets if realization of such assets is more likely than not. Based
upon the weight of available evidence, which includes the Company's historical
operating performance and the reported cumulative net losses in all prior years,
the Company has provided a full valuation allowance against its net deferred tax
assets. The valuation allowance increased by $10.3 million, $11.0 million and
$3.9 million during 1998, 1997 and 1996, respectively. Included in the valuation
allowance balance is $2.6 million related to the exercise of stock options which
are not reflected as an expense for financial reporting purposes. Accordingly,
any future reduction in the valuation allowance relating to this amount will be
credited directly to equity and not reflected as an income tax benefit in the
statement of operations.
As of December 31, 1998, Affymetrix has federal net operating loss
carryforwards of approximately $75.0 million, which will expire at various dates
beginning in 2008, if not utilized. In addition, the Company has federal and
state research and development credit carryforwards of approximately $2.0
million and $1.5 million, respectively, which expire at various dates beginning
in 2007, 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.
68
<PAGE>
NOTE 9--GEOGRAPHIC SALES AND SIGNIFICANT CUSTOMERS
Affymetrix had product sales by region as follows for the years ended
December 31, 1998, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Customer location:
United States............................................... $ 16,556 $ 4,710 $ 1,264
Europe...................................................... 4,518 79 125
Other....................................................... 1,773 -- --
--------- --------- ---------
Total....................................................... $ 22,847 $ 4,789 $ 1,389
--------- --------- ---------
--------- --------- ---------
</TABLE>
Revenue from customers representing 10% or more of total revenue during
1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
CUSTOMER:
A.................................................................... -- 23% 18%
B.................................................................... -- -- 18%
C.................................................................... 16% 10% 15%
D.................................................................... -- 17% 19%
E.................................................................... -- 17% --
F.................................................................... 20% -- --
</TABLE>
NOTE 10--401K PLAN
The Company maintains a defined-contribution savings plan under Section
401(k) of the Internal Revenue Code. The plan covers substantially all full-time
U.S. employees. Participating employees may defer a portion of their pretax
earnings, up to the Internal Revenue Service annual contribution limit.
Beginning in 1998, the Company matched employee contributions according to a
specified formula. The Company's matching contributions totaled $0.6 million in
1998. Company contributions vest to employees ratably over five years.
NOTE 11--SUBSEQUENT EVENT
In March 1999, the Company raised approximately $32.5 million from the
private placement of 1,000,000 shares of common stock to a qualified
institutional investor. The Company intends to file a registration statement to
cover all of these shares.
69
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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 1999 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 1999 Annual Meeting of Stockholders 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 1999 Annual Meeting of Stockholders 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 1999 Annual Meeting of Stockholders entitled "Certain Transactions."
70
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements--See Index to Financial Statements and
Financial Statement Schedule at page 47 of this Form 10-K.
(a)(2) Financial Statement Schedule--Schedule II--Valuation and Qualifying
Accounts. See page 75.
(a)(3) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------------- ---------------------------------------------------------------------------------------------------
<C> <S>
(1)3.1 Certificate of Incorporation
(1)3.2 Bylaws
(2)3.3 Agreement and Plan of Merger Between Affymetrix, Inc., a California corporation, and Affymetrix,
Inc., a Delaware corporation
(3)3.4 Summary of Rights to Purchase Shares of Preferred Stock pursuant to the Rights Agreement dated as
of October 15, 1998
+(5)10.1 1993 Stock Plan, as amended
+(5)10.2 1996 Nonemployee Directors Stock Option Plan
*(5)10.3 Collaboration Agreement by and between Hewlett-Packard Company and Affymetrix, Inc. dated November
11, 1994
*(5)10.4 Development and Supply Agreement between Affymetrix, Inc. and Genetics Institute, Inc. dated
November 15, 1994
*(5)10.5 Supply Agreement with Genetics Institute, Inc. dated December 8, 1995
*(5)10.6 Technology License Agreement among Affymax N.V., Affymax Technologies, N.V., the Affymax Research
Institute, and Affymetrix, Inc. dated January 1, 1993
+(5)10.7 Severance Agreement and Release between Affymetrix, Inc. and David B. Singer dated June 15, 1995
+(5)10.8 Loan and Pledge Agreement between David B. Singer and Affymetrix, Inc. effective December 7, 1993
*(5)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.
(5)10.10 Amendment 1 to the ATP Participation Agreement between Affymetrix, Inc. and Molecular Dynamics,
Inc. effective January 13, 1996
*(5)10.11 Governance Agreement between Affymetrix, Inc. and Glaxo Wellcome plc dated July 6, 1995
(5)10.12 Services Agreement between Affymax Research Institute and Affymetrix, Inc. effective October 1,
1993
(5)10.13 Loan Agreement between Affymax Technologies N.V. and Affymetrix, Inc. dated December 1, 1994
(5)10.14 Lease between Solar Oakmead Joint Venture and Affymetrix, Inc. dated October 20, 1995
(5)10.15 Sublease between Salutar, Inc. and Affymetrix, Inc. dated October 20, 1995
</TABLE>
71
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------------- ---------------------------------------------------------------------------------------------------
<C> <S>
(5)10.16 Sublease between Affymax Research Institute and Affymetrix, Inc. dated February 1, 1994
*(5)10.17 Manufacturing and Supply Agreement between Affymetrix, Inc. and RELA, Inc. dated November 27, 1995
+*(5)10.18 Loan and Pledge Agreement between Stephen P.A. Fodor and Affymetrix, Inc. effective December 7,
1993
+*(5)10.19 Agreement between Stephen P.A. Fodor and Affymetrix, Inc. dated November 1, 1994
+*(5)10.20 Form of Director and Officer Indemnification Agreement
*(5)10.21 Demonstration Agreement between Affymetrix, Inc. and Glaxo Wellcome, Inc. dated May 1, 1996
(5)10.22 Lease between Harry Locklin and Affymetrix, Inc. dated December 5, 1994
(6)10.23 Lease between Sobrato Interest and Affymetrix, Inc. dated May 31, 1996 (3380 Central Expressway,
Santa Clara, CA)
(6)10.24 Lease between Sobrato Interest and Affymetrix, Inc. dated May 31, 1996 (3450 Central Expressway,
Santa Clara, CA)
*(7)10.25 Collaboration Agreement between bioMerieux Vitek, Inc. and Affymetrix, Inc. effective as of
September 1, 1996
*(7)10.26 Manufacturing Agreement between bioMerieux Vitek, Inc. and Affymetrix, Inc. effective as of
September 1, 1996
*(7)10.27 Collaboration Agreement between Incyte Pharmaceuticals, Inc. and Affymetrix, Inc. made as of
November 11, 1996
*(8)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
*(9)10.29 Sales Representation Agreement between Affymetrix, Inc. and Amersham Pharmacia Biotech, Ltd. Dated
November 28, 1997
*(9)10.30 License Agreement between Affymetrix, Inc. and Molecular Dynamics, Inc. dated November 28, 1997
(10)10.31 Series AA Preferred Stock Purchase Agreement dated March 9, 1998 by and between Affymetrix, Inc.
and Glaxo Wellcome Americas, Inc. with exhibits.
*(11)10.32 Agreement between Affymetrix, Inc. and Roche Molecular Systems, Inc. effective as of April 23, 1998
*(11)10.33 Agreement between Affymetrix, Inc. and Enzo Diagnostics, Inc. effective as of April 24, 1998.
*(12)10.34 Consortium Agreement between Beckman Coulter, Inc. and the Company dated July 31, 1998.
*(12)10.35 Letter Agreement between Beckman Coulter, Inc. and the Company dated July 29, 1998
+10.36 1998 Stock Incentive Plan
+10.37 Form of Officer and Director Indemnification Agreement
+10.38 Promissory Note between Karen H. Haynes and the Company dated February 26, 1999
+10.39 Promissory Note between Stephen P. A. Fodor and the Company dated April 27, 1997
+10.40 Promissory Note between Sue Siegel and the Company dated July 9, 1998
</TABLE>
72
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------------- ---------------------------------------------------------------------------------------------------
<C> <S>
21 List of Subsidiaries
23 Consent of Ernst & Young LLP, Independent Auditors
27 Financial Data Schedule
</TABLE>
- ------------------------
(1) Incorporated by reference to the same number exhibit filed with Registrant's
Form 8-K as filed on September 29, 1998 (File No. 000-28218).
(2) Incorporated by reference to Exhibit 2.1 filed with Registrant's Form 8-K as
filed on September 29, 1998 (File No. 000-28218).
(3) Incorporated by reference to Exhibit 3.3 filed with Registrant's Form 8-K as
filed on October 16, 1998 (File No. 000-28218).
(4) Incorporated by reference to the Exhibit 4 filed with the Company's Current
Report on Form 8-K dated March 24, 1998 (File No. 000-28218).
(5) Incorporated by reference to the same number exhibit filed with Registrant's
Registration Statement on Form S-1 (File No. 333-3648), as amended.
(6) 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).
(7) 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).
(8) Incorporated by reference to the Exhibit 10.1 filed with the Registrant's
Registration Statement on Form S-3 (File No. 333-38167).
(9) Incorporated by reference to the same number exhibit filed with the
Registrant's Report on Form 10-K for the year ended December 31, 1997 as
filed on March 31, 1998 (File No. 000-28218).
(10) Incorporated by reference to the Exhibit 10 filed with the Company's
Current Report on Form 8-K dated March 24, 1998 (File No. 000-28218).
(11) Incorporated by reference to the same number exhibit filed with
Registrant's Form 10-Q as filed on August 14, 1998 (File No. 000-28218).
(12) Incorporated by reference to the same number exhibit filed with
Registrant's Form 10-Q as filed on November 17, 1998 (File No. 000-28218).
* Confidential treatment granted
+ Management contract, compensatory plan or arrangement
(b) Reports on Form 8-K.
The Company filed a Report on Form 8-K dated October 16, 1998 reporting the
approval of a Rights Agreement including a "Summary of rights to purchase shares
of Preferred Stock pursuant to the Rights Agreement dated October 15, 1999.
73
<PAGE>
AFFYMETRIX, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER END OF
PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
--------------- ------------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998:
Allowance for doubtful accounts................... $ 300 $ 108 $ -- $ -- $ 408
----- ----- ----- ----- -----
----- ----- ----- ----- -----
Year ended December 31, 1997:
Allowance for doubtful accounts................... $ -- $ 300 $ -- $ -- $ 300
----- ----- ----- ----- -----
----- ----- ----- ----- -----
Year ended December 31, 1996:
Allowance for doubtful accounts................... $ -- $ -- $ -- $ -- $ --
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
74
<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>
<S> <C> <C>
AFFYMETRIX, INC.
(Registrant)
March 31, 1999 By /s/ STEPHEN P.A. FODOR, PH.D.
-----------------------------------------
Stephen P.A. Fodor, Ph.D.
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
DIRECTOR
March 31, 1999 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>
By /s/ STEPHEN P.A. FODOR, President, Chief Executive
PH.D. Officer and Director
------------------------------ (Principal Executive March 31, 1999
Stephen P.A. Fodor, Ph.D. Officer)
Vice President and Chief
By /s/ EDWARD M. HURWITZ Financial Officer
------------------------------ (Principal Financial and March 31, 1999
Edward M. Hurwitz Accounting Officer)
By /s/ JOHN D. DIEKMAN, PH.D.
------------------------------ Chairman of the Board March 31, 1999
John D. Diekman, Ph.D.
By /s/ PAUL BERG, PH.D.
------------------------------ Director March 31, 1999
Paul Berg, Ph.D.
</TABLE>
75
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------- -------------------------- -------------------
<S> <C> <C> <C>
By /s/ VERNON R. LOUCKS, JR.
------------------------------ Director March 31, 1999
Vernon R. Loucks, Jr.
By /s/ BARRY C. ROSS, PH.D.
------------------------------ Director March 31, 1999
Barry C. Ross, Ph.D.
By /s/ DAVID B. SINGER
------------------------------ Director March 31, 1999
David B. Singer
By /s/ LUBERT STRYER, M.D.
------------------------------ Director March 31, 1999
Lubert Stryer, M.D.
By /s/ JOHN A. YOUNG
------------------------------ Director March 31, 1999
John A. Young
</TABLE>
76
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------------- ---------------------------------------------------------------------------------------------------
<C> <S>
(1)3.1 Certificate of Incorporation
(1)3.2 Bylaws
(2)3.3 Agreement and Plan of Merger Between Affymetrix, Inc., a California corporation, and Affymetrix,
Inc., a Delaware corporation
(3)3.4 Summary of Rights to Purchase Shares of Preferred Stock pursuant to the Rights Agreement dated as
of October 15, 1998
+(5)10.1 1993 Stock Plan, as amended
+(5)10.2 1996 Nonemployee Directors Stock Option Plan
*(5)10.3 Collaboration Agreement by and between Hewlett-Packard Company and Affymetrix, Inc. dated November
11, 1994
*(5)10.4 Development and Supply Agreement between Affymetrix, Inc. and Genetics Institute, Inc. dated
November 15, 1994
*(5)10.5 Supply Agreement with Genetics Institute, Inc. dated December 8, 1995
*(5)10.6 Technology License Agreement among Affymax N.V., Affymax Technologies, N.V., the Affymax Research
Institute, and Affymetrix, Inc. dated January 1, 1993
+(5)10.7 Severance Agreement and Release between Affymetrix, Inc. and David B. Singer dated June 15, 1995
+(5)10.8 Loan and Pledge Agreement between David B. Singer and Affymetrix, Inc. effective December 7, 1993
*(5)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.
(5)10.10 Amendment 1 to the ATP Participation Agreement between Affymetrix, Inc. and Molecular Dynamics,
Inc. effective January 13, 1996
*(5)10.11 Governance Agreement between Affymetrix, Inc. and Glaxo Wellcome plc dated July 6, 1995
(5)10.12 Services Agreement between Affymax Research Institute and Affymetrix, Inc. effective October 1,
1993
(5)10.13 Loan Agreement between Affymax Technologies N.V. and Affymetrix, Inc. dated December 1, 1994
(5)10.14 Lease between Solar Oakmead Joint Venture and Affymetrix, Inc. dated October 20, 1995
(5)10.15 Sublease between Salutar, Inc. and Affymetrix, Inc. dated October 20, 1995
(5)10.16 Sublease between Affymax Research Institute and Affymetrix, Inc. dated February 1, 1994
*(5)10.17 Manufacturing and Supply Agreement between Affymetrix, Inc. and RELA, Inc. dated November 27, 1995
+*(5)10.18 Loan and Pledge Agreement between Stephen P.A. Fodor and Affymetrix, Inc. effective December 7,
1993
+*(5)10.19 Agreement between Stephen P.A. Fodor and Affymetrix, Inc. dated November 1, 1994
+*(5)10.20 Form of Director and Officer Indemnification Agreement
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------------- ---------------------------------------------------------------------------------------------------
<C> <S>
*(5)10.21 Demonstration Agreement between Affymetrix, Inc. and Glaxo Wellcome, Inc. dated May 1, 1996
(5)10.22 Lease between Harry Locklin and Affymetrix, Inc. dated December 5, 1994
(6)10.23 Lease between Sobrato Interest and Affymetrix, Inc. dated May 31, 1996 (3380 Central Expressway,
Santa Clara, CA)
(6)10.24 Lease between Sobrato Interest and Affymetrix, Inc. dated May 31, 1996 (3450 Central Expressway,
Santa Clara, CA)
*(7)10.25 Collaboration Agreement between bioMerieux Vitek, Inc. and Affymetrix, Inc. effective as of
September 1, 1996
*(7)10.26 Manufacturing Agreement between bioMerieux Vitek, Inc. and Affymetrix, Inc. effective as of
September 1, 1996
*(7)10.27 Collaboration Agreement between Incyte Pharmaceuticals, Inc. and Affymetrix, Inc. made as of
November 11, 1996
*(8)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
*(9)10.29 Sales Representation Agreement between Affymetrix, Inc. and Amersham Pharmacia Biotech, Ltd. Dated
November 28, 1997
*(9)10.30 License Agreement between Affymetrix, Inc. and Molecular Dynamics, Inc. dated November 28, 1997
(10)10.31 Series AA Preferred Stock Purchase Agreement dated March 9, 1998 by and between Affymetrix, Inc.
and Glaxo Wellcome Americas, Inc. with exhibits.
(11)*10.32 Agreement between Affymetrix, Inc. and Roche Molecular Systems, Inc. effective as of April 23, 1998
(11)*10.33 Agreement between Affymetrix, Inc. and Enzo Diagnostics, Inc. effective as of April 24, 1998.
*(12)10.34 Consortium Agreement between Beckman Coulter, Inc. and the Company dated July 31, 1998.
*(12)10.35 Letter Agreement between Beckman Coulter, Inc. and the Company dated July 29, 1998
+10.36 1998 Stock Incentive Plan
+10.37 Form of Officer and Director Indemnification Agreement
+10.38 Promissory Note between Karen H. Haynes and the Company dated February 26, 1999
+10.39 Promissory Note between Stephen P. A. Fodor and the Company dated April 27, 1997
+10.40 Promissory Note between Sue Siegel and the Company dated July 9, 1998
21 List of Subsidiaries
23 Consent of Ernst & Young LLP, Independent Auditors
27 Financial Data Schedule
</TABLE>
- ------------------------
(1) Incorporated by reference to the same number exhibit filed with Registrant's
Form 8-K as filed on September 29, 1998 (File No. 000-28218).
(2) Incorporated by reference to Exhibit 2.1 filed with Registrant's Form 8-K as
filed on September 29, 1998 (File No. 000-28218).
(3) Incorporated by reference to Exhibit 3.3 filed with Registrant's Form 8-K as
filed on October 16, 1998 (File No. 000-28218).
<PAGE>
(4) Incorporated by reference to the Exhibit 4 filed with the Company's Current
Report on Form 8-K dated March 24, 1998 (File No. 000-28218).
(5) Incorporated by reference to the same number exhibit filed with Registrant's
Registration Statement on Form S-1 (File No. 333-3648), as amended.
(6) 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).
(7) 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).
(8) Incorporated by reference to the Exhibit 10.1 filed with the Registrant's
Registration Statement on Form S-3 (File No. 333-38167).
(9) Incorporated by reference to the same number exhibit filed with the
Registrant's Report on Form 10-K for the year ended December 31, 1997 as
filed on March 31, 1998 (File No. 000-28218).
(10) Incorporated by reference to the Exhibit 10 filed with the Company's
Current Report on Form 8-K dated March 24, 1998 (File No. 000-28218).
(11) Incorporated by reference to the same number exhibit filed with
Registrant's Form 10-Q as filed on August 14, 1998 (File No. 000-28218).
(12) Incorporated by reference to the same number exhibit filed with
Registrant's Form 10-Q as filed on November 17, 1998 (File No. 000-28218).
* Confidential treatment granted
+ Management contract, compensatory plan or arrangement
<PAGE>
EXHIBIT 10.36
AFFYMETRIX, INC.
1998 STOCK INCENTIVE PLAN
(AS ADOPTED EFFECTIVE SEPTEMBER 29, 1998)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE 1. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
ARTICLE 2. ADMINISTRATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
2.1 Committee Composition. . . . . . . . . . . . . . . . . . . . . . . . . . .1
2.2 Committee Responsibilities . . . . . . . . . . . . . . . . . . . . . . . .1
ARTICLE 3. SHARES AVAILABLE FOR GRANTS. . . . . . . . . . . . . . . . . . . . . . .1
3.1 Basic Limitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
3.2 Additional Shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
ARTICLE 4. ELIGIBILITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
ARTICLE 5. OPTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
5.1 Stock Option Agreement . . . . . . . . . . . . . . . . . . . . . . . . . .2
5.2 Number of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
5.3 Exercise Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
5.4 Exercisability and Term. . . . . . . . . . . . . . . . . . . . . . . . . .2
5.5 Effect of Change in Control. . . . . . . . . . . . . . . . . . . . . . . .2
5.6 Modification or Assumption of Options. . . . . . . . . . . . . . . . . . .2
5.7 Buyout Provisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
ARTICLE 6. PAYMENT FOR OPTION SHARES. . . . . . . . . . . . . . . . . . . . . . . .3
6.1 General Rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
6.2 Surrender of Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
6.3 Exercise/Sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
6.4 Exercise/Pledge. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
6.5 Promissory Note. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
6.6 Other Forms of Payment . . . . . . . . . . . . . . . . . . . . . . . . . .3
ARTICLE 8. RESTRICTED SHARES. . . . . . . . . . . . . . . . . . . . . . . . . . . .4
8.1 Restricted Stock Agreement . . . . . . . . . . . . . . . . . . . . . . . .4
8.2 Payment for Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
8.3 Vesting Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
8.4 Voting and Dividend Rights . . . . . . . . . . . . . . . . . . . . . . . .4
ARTICLE 8. PROTECTION AGAINST DILUTION. . . . . . . . . . . . . . . . . . . . . . .4
8.1 Adjustments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
8.2 Dissolution or Liquidation . . . . . . . . . . . . . . . . . . . . . . . .5
8.3 Reorganizations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
ARTICLE 9. DEFERRAL OF DELIVERY OF SHARES . . . . . . . . . . . . . . . . . . . . .5
ARTICLE 10. AWARDS UNDER OTHER PLANS. . . . . . . . . . . . . . . . . . . . . . . .5
ARTICLE 11. LIMITATION ON RIGHTS. . . . . . . . . . . . . . . . . . . . . . . . . .5
11.1 Retention Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
11.2 Stockholders' Rights. . . . . . . . . . . . . . . . . . . . . . . . . . .6
11.3 Regulatory Requirements . . . . . . . . . . . . . . . . . . . . . . . . .6
ARTICLE 12. WITHHOLDING TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . .6
12.1 General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
12.2 Share Withholding . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
ARTICLE 13. FUTURE OF THE PLAN. . . . . . . . . . . . . . . . . . . . . . . . . . .6
13.1 Term of the Plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
13.2 Amendment or Termination. . . . . . . . . . . . . . . . . . . . . . . . .6
ARTICLE 14. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
ARTICLE 15. EXECUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
</TABLE>
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AFFYMETRIX, INC.
1998 STOCK INCENTIVE PLAN
ARTICLE 1. INTRODUCTION.
The Plan was adopted by the Board effective September 29, 1998.
The purpose of the Plan is to promote the long-term success of the Company and
the creation of stockholder value by (a) encouraging Employees and Consultants
to focus on critical long-range objectives, (b) encouraging the attraction and
retention of Employees and Consultants with exceptional qualifications and
(c) linking Employees and Consultants directly to stockholder interests through
increased stock ownership. The Plan seeks to achieve this purpose by providing
for Awards in the form of Restricted Shares or Options (which shall constitute
nonstatutory stock options).
The Plan shall be governed by, and construed in accordance with,
the laws of the State of Delaware (except their choice-of-law provisions).
ARTICLE 2. ADMINISTRATION.
2.1 COMMITTEE COMPOSITION. The Plan shall be administered by the
Committee. The Committee shall consist exclusively of one or more directors of
the Company, who shall be appointed by the Board.
2.2 COMMITTEE RESPONSIBILITIES. The Committee shall (a) select the
Employees and Consultants who are to receive Awards under the Plan,
(b) determine the type, number, vesting requirements and other features and
conditions of such Awards, (c) interpret the Plan and (d) make all other
decisions relating to the operation of the Plan. The Committee may adopt such
rules or guidelines as it deems appropriate to implement the Plan. The
Committee's determinations under the Plan shall be final and binding on all
persons.
ARTICLE 3. SHARES AVAILABLE FOR GRANTS.
3.1 BASIC LIMITATION. Common Shares issued pursuant to the Plan may be
authorized but unissued shares or treasury shares. The aggregate number of
Options and Restricted Shares awarded under the Plan shall not exceed (a) one
million plus (b) the additional Common Shares described in Section 3.2. The
limitation of this Section 3.1 shall be subject to adjustment pursuant to
Article 8.
3.2 ADDITIONAL SHARES. If Options are forfeited or terminate for any
other reason before being exercised, then the corresponding Common Shares shall
again become available for the grant of Options or Restricted Shares under the
Plan. If Restricted Shares or Common Shares
<PAGE>
issued upon the exercise of Options are forfeited, then such Common Shares
shall again become available for the grant of Options and Restricted Shares
under the Plan.
ARTICLE 4. ELIGIBILITY.
Employees and Consultants shall be eligible for the grant of
Awards, except that members of the Board and individuals who are considered
officers of the Company under the rules of the National Association of
Securities Dealers shall not be eligible for the grant of Awards.
ARTICLE 5. OPTIONS.
5.1 STOCK OPTION AGREEMENT. Each grant of an Option under the Plan
shall be evidenced by a Stock Option Agreement between the Optionee and the
Company. Such Option shall be subject to all applicable terms of the Plan and
may be subject to any other terms that are not inconsistent with the Plan. The
provisions of the various Stock Option Agreements entered into under the Plan
need not be identical. Options may be granted in consideration of a reduction
in the Optionee's other compensation. A Stock Option Agreement may provide that
a new Option will be granted automatically to the Optionee when he or she
exercises a prior Option and pays the Exercise Price in the form described in
Section 6.2.
5.2 NUMBER OF SHARES. Each Stock Option Agreement shall specify the
number of Common Shares subject to the Option and shall provide for the
adjustment of such number in accordance with Article 8.
5.3 EXERCISE PRICE. Each Stock Option Agreement shall specify the
Exercise Price; provided that the Exercise Price shall in no event be less than
100% of the Fair Market Value of a Common Share on the date of grant. A Stock
Option Agreement may specify an Exercise Price that varies in accordance with a
predetermined formula while the Option is outstanding.
5.4 EXERCISABILITY AND TERM. Each Stock Option Agreement shall specify
the date or event when all or any installment of the Option is to become
exercisable. The Stock Option Agreement shall also specify the term of the
Option. A Stock Option Agreement may provide for accelerated exercisability in
the event of the Optionee's death, disability or retirement or other events and
may provide for expiration prior to the end of its term in the event of the
termination of the Optionee's service.
5.5 EFFECT OF CHANGE IN CONTROL. The Committee may determine, at the
time of granting an Option or thereafter, that such Option shall become
exercisable as to all or part of the Common Shares subject to such Option in the
event that a Change in Control occurs with respect to the Company.
5.6 MODIFICATION OR ASSUMPTION OF OPTIONS. Within the limitations of
the Plan, the Committee may modify, extend or assume outstanding options or may
accept the cancellation of outstanding options (whether granted by the Company
or by another issuer) in return for the
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grant of new options for the same or a different number of shares and at the
same or a different exercise price. The foregoing notwithstanding, no
modification of an Option shall, without the consent of the Optionee, alter
or impair his or her rights or obligations under such Option.
5.7 BUYOUT PROVISIONS. The Committee may at any time (a) offer to buy
out for a payment in cash or cash equivalents an Option previously granted or
(b) authorize an Optionee to elect to cash out an Option previously granted, in
either case at such time and based upon such terms and conditions as the
Committee shall establish.
ARTICLE 6. PAYMENT FOR OPTION SHARES.
6.1 GENERAL RULE. The entire Exercise Price of Common Shares issued
upon exercise of Options shall be payable in cash or cash equivalents at the
time when such Common Shares are purchased, unless the Committee accepts payment
in any other form(s) described in this Article 6.
6.2 SURRENDER OF STOCK. To the extent that this Section 6.2 is
applicable, all or any part of the Exercise Price may be paid by surrendering,
or attesting to the ownership of, Common Shares that are already owned by the
Optionee. Such Common Shares shall be valued at their Fair Market Value on the
date when the new Common Shares are purchased under the Plan. The Optionee
shall not surrender, or attest to the ownership of, Common Shares in payment of
the Exercise Price if such action would cause the Company to recognize
compensation expense (or additional compensation expense) with respect to the
Option for financial reporting purposes.
6.3 EXERCISE/SALE. To the extent that this Section 6.3 is applicable,
all or any part of the Exercise Price and any withholding taxes may be paid by
delivering (on a form prescribed by the Company) an irrevocable direction to a
securities broker approved by the Company to sell all or part of the Common
Shares being purchased under the Plan and to deliver all or part of the sales
proceeds to the Company.
6.4 EXERCISE/PLEDGE. To the extent that this Section 6.4 is
applicable, all or any part of the Exercise Price and any withholding taxes may
be paid by delivering (on a form prescribed by the Company) an irrevocable
direction to pledge all or part of the Common Shares being purchased under the
Plan to a securities broker or lender approved by the Company, as security for a
loan, and to deliver all or part of the loan proceeds to the Company.
6.5 PROMISSORY NOTE. To the extent that this Section 6.5 is
applicable, all or any part of the Exercise Price and any withholding taxes may
be paid by delivering (on a form prescribed by the Company) a full-recourse
promissory note. However, the par value of the Common Shares being purchased
under the Plan, if newly issued, shall be paid in cash or cash equivalents.
6.6 OTHER FORMS OF PAYMENT. To the extent that this Section 6.6 is
applicable, all or any part of the Exercise Price and any withholding taxes may
be paid in any other form that is consistent with applicable laws, regulations
and rules.
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<PAGE>
ARTICLE 8. RESTRICTED SHARES.
7.1 RESTRICTED STOCK AGREEMENT. Each grant of Restricted Shares under
the Plan shall be evidenced by a Restricted Stock Agreement between the
recipient and the Company. Such Restricted Shares shall be subject to all
applicable terms of the Plan and may be subject to any other terms that are not
inconsistent with the Plan. The provisions of the various Restricted Stock
Agreements entered into under the Plan need not be identical.
7.2 PAYMENT FOR AWARDS. Subject to the following sentence, Restricted
Shares may be sold or awarded under the Plan for such consideration as the
Committee may determine, including (without limitation) cash, cash equivalents,
full-recourse promissory notes, past services and future services. To the
extent that an Award consists of newly issued Restricted Shares, the Award
recipient shall furnish consideration with a value not less than the par value
of such Restricted Shares in the form of cash, cash equivalents or past services
rendered to the Company (or a Parent or Subsidiary), as the Committee may
determine.
7.3 VESTING CONDITIONS. Each Award of Restricted Shares may or may not
be subject to vesting. Vesting shall occur, in full or in installments, upon
satisfaction of the conditions specified in the Restricted Stock Agreement. A
Restricted Stock Agreement may provide for accelerated vesting in the event of
the Participant's death, disability or retirement or other events. The
Committee may determine, at the time of granting Restricted Shares or
thereafter, that all or part of such Restricted Shares shall become vested in
the event that a Change in Control occurs with respect to the Company.
7.4 VOTING AND DIVIDEND RIGHTS. The holders of Restricted Shares
awarded under the Plan shall have the same voting, dividend and other rights as
the Company's other stockholders. A Restricted Stock Agreement, however, may
require that the holders of Restricted Shares invest any cash dividends received
in additional Restricted Shares. Such additional Restricted Shares shall be
subject to the same conditions and restrictions as the Award with respect to
which the dividends were paid.
ARTICLE 8. PROTECTION AGAINST DILUTION.
8.1 ADJUSTMENTS. In the event of a subdivision of the outstanding
Common Shares, a declaration of a dividend payable in Common Shares, a
declaration of a dividend payable in a form other than Common Shares in an
amount that has a material effect on the price of Common Shares, a combination
or consolidation of the outstanding Common Shares (by reclassification or
otherwise) into a lesser number of Common Shares, a recapitalization, a spin-off
or a similar occurrence, the Committee shall make such adjustments as it, in its
sole discretion, deems appropriate in one or more of (a) the number of Options
and Restricted Shares available for future Awards under Article 3, (b) the
number of Common Shares covered by each outstanding Option or (c) the Exercise
Price under each outstanding Option. Except as provided in this Article 8, a
Participant shall have no rights by reason of any issue by the Company of stock
of any class or securities convertible into stock of any class, any subdivision
or consolidation of
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<PAGE>
shares of stock of any class, the payment of any stock dividend or any
other increase or decrease in the number of shares of stock of any class.
8.2 DISSOLUTION OR LIQUIDATION. To the extent not previously
exercised, Options shall terminate immediately prior to the dissolution or
liquidation of the Company.
8.3 REORGANIZATIONS. In the event that the Company is a party to a
merger or other reorganization, outstanding Options and Restricted Shares shall
be subject to the agreement of merger or reorganization. Such agreement shall
provide for (a) the continuation of the outstanding Awards by the Company, if
the Company is a surviving corporation, (b) the assumption of the outstanding
Awards by the surviving corporation or its parent or subsidiary, (c) the
substitution by the surviving corporation or its parent or subsidiary of its own
awards for the outstanding Awards, (d) full exercisability or vesting and
accelerated expiration of the outstanding Awards or (e) settlement of the full
value of the outstanding Awards in cash or cash equivalents followed by
cancellation of such Awards.
ARTICLE 9. DEFERRAL OF DELIVERY OF SHARES.
The Committee (in its sole discretion) may permit or require an
Optionee to have Common Shares that otherwise would be delivered to such
Optionee as a result of the exercise of an Option converted into amounts
credited to a deferred compensation account established for such Optionee by the
Committee as an entry on the Company's books. Such amounts shall be determined
by reference to the Fair Market Value of such Common Shares as of the date when
they otherwise would have been delivered to such Optionee. A deferred
compensation account established under this Article 9 may be credited with
interest or other forms of investment return, as determined by the Committee.
An Optionee for whom such an account is established shall have no rights other
than those of a general creditor of the Company. Such an account shall
represent an unfunded and unsecured obligation of the Company and shall be
subject to the terms and conditions of the applicable agreement between such
Optionee and the Company. If the conversion of Options is permitted or
required, the Committee (in its sole discretion) may establish rules, procedures
and forms pertaining to such conversion, including (without limitation) the
settlement of deferred compensation accounts established under this Article 9.
ARTICLE 10. AWARDS UNDER OTHER PLANS.
The Company may grant awards under other plans or programs. Such
awards may be settled in the form of Common Shares issued under this Plan. Such
Common Shares shall be treated for all purposes under the Plan like Restricted
Shares and shall, when issued, reduce the number of Common Shares available
under Article 3.
ARTICLE 11. LIMITATION ON RIGHTS.
11.1 RETENTION RIGHTS. Neither the Plan nor any Award granted under the
Plan shall be deemed to give any individual a right to remain an Employee or
Consultant. The Company and its Parents, Subsidiaries and Affiliates reserve
the right to terminate the service of any
5
<PAGE>
Employee or Consultant at any time, with or without cause, subject to
applicable laws, the Company's certificate of incorporation and by-laws and a
written employment agreement (if any).
11.2 STOCKHOLDERS' RIGHTS. A Participant shall have no dividend rights,
voting rights or other rights as a stockholder with respect to any Common Shares
covered by his or her Award prior to the time when a stock certificate for such
Common Shares is issued or, in the case of an Option, the time when he or she
becomes entitled to receive such Common Shares by filing a notice of exercise
and paying the Exercise Price. No adjustment shall be made for cash dividends
or other rights for which the record date is prior to such time, except as
expressly provided in the Plan.
11.3 REGULATORY REQUIREMENTS. Any other provision of the Plan
notwithstanding, the obligation of the Company to issue Common Shares under the
Plan shall be subject to all applicable laws, rules and regulations and such
approval by any regulatory body as may be required. The Company reserves the
right to restrict, in whole or in part, the delivery of Common Shares pursuant
to any Award prior to the satisfaction of all legal requirements relating to the
issuance of such Common Shares, to their registration, qualification or listing
or to an exemption from registration, qualification or listing.
ARTICLE 12. WITHHOLDING TAXES.
12.1 GENERAL. To the extent required by applicable federal, state,
local or foreign law, a Participant or his or her successor shall make
arrangements satisfactory to the Company for the satisfaction of any withholding
tax obligations that arise in connection with the Plan. The Company shall not
be required to issue any Common Shares or make any cash payment under the Plan
until such obligations are satisfied.
12.2 SHARE WITHHOLDING. The Committee may permit a Participant to
satisfy all or part of his or her withholding or income tax obligations by
having the Company withhold all or a portion of any Common Shares that otherwise
would be issued to him or her or by surrendering all or a portion of any Common
Shares that he or she previously acquired. Such Common Shares shall be valued
at their Fair Market Value on the date when taxes otherwise would be withheld in
cash.
ARTICLE 13. FUTURE OF THE PLAN.
13.1 TERM OF THE PLAN. The Plan, as set forth herein, shall become
effective on September 29, 1998. The Plan shall remain in effect until it is
terminated under Section 13.2.
13.2 AMENDMENT OR TERMINATION. The Board may, at any time and for any
reason, amend or terminate the Plan. An amendment of the Plan shall be subject
to the approval of the Company's stockholders only to the extent required by
applicable laws, regulations or rules. No Awards shall be granted under the
Plan after the termination thereof. The termination of the Plan, or any
amendment thereof, shall not affect any Award previously granted under the Plan.
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<PAGE>
ARTICLE 14. DEFINITIONS.
14.1 "AFFILIATE" means any entity other than a Subsidiary, if the
Company and/or one or more Subsidiaries own not less than 50% of such entity.
14.2 "AWARD" means any award of an Option or a Restricted Share under
the Plan.
14.3 "BOARD" means the Company's Board of Directors, as constituted from
time to time.
14.4 "CHANGE IN CONTROL" shall mean:
(a) The consummation of a merger or consolidation of the
Company with or into another entity or any other corporate
reorganization, if more than 50% of the combined voting power of the
continuing or surviving entity's securities outstanding immediately
after such merger, consolidation or other reorganization is owned by
persons who were not stockholders of the Company immediately prior to
such merger, consolidation or other reorganization; or
(b) The sale, transfer, exchange or other disposition of
all or substantially all of the Company's assets; or
(c) A change in the composition of the Board, as a result
of which fewer than 80% of the directors are directors who either
(i) had been directors of the Company on the date 24 months prior to
the date of the event that may constitute a Change in Control (the
"original directors") or (ii) were elected, or nominated for election,
to the Board with the affirmative votes of at least a majority of the
aggregate of the original directors who were still in office at the
time of the election or nomination and the directors whose election or
nomination was previously so approved; or
(d) Any transaction as a result of which any person is the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Company representing at
least 50% of the total voting power represented by the Company's then
outstanding voting securities. For purposes of this Subsection (d),
the term "person" shall have the same meaning as when used in sections
13(d) and 14(d) of the Exchange Act but shall exclude (i) a trustee or
other fiduciary holding securities under an employee benefit plan of
the Company, a Parent or Subsidiary and (ii) a corporation owned
directly or indirectly by the stockholders of the Company in
substantially the same proportions as their ownership of the common
stock of the Company.
A transaction shall in no event constitute a Change in Control if its sole
purpose is to change the state of the Company's incorporation or to create a
holding company that will be owned in
7
<PAGE>
substantially the same proportions by the persons who held the Company's
securities immediately before such transaction.
14.5 "CODE" means the Internal Revenue Code of 1986, as amended.
14.6 "COMMITTEE" means a committee of the Board, as described in
Article 2.
14.7 "COMMON SHARE" means one share of the common stock of the Company.
14.8 "COMPANY" means Affymetrix, Inc., a Delaware corporation.
14.9 "CONSULTANT" means a consultant or adviser who provides bona fide
services to the Company, a Parent, a Subsidiary or an Affiliate as an
independent contractor, including (without limitation) a member of the Company's
Scientific Advisory Board. Service as a Consultant shall be considered
employment for all purposes of the Plan.
14.10 "EMPLOYEE" means a common-law employee of the Company, a Parent, a
Subsidiary or an Affiliate.
14.11 "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
14.12 "EXERCISE PRICE" means the amount for which one Common Share may be
purchased upon exercise of such Option, as specified in the applicable Stock
Option Agreement.
14.13 "FAIR MARKET VALUE" means the market price of Common Shares,
determined by the Committee in good faith on such basis as it deems
appropriate. Whenever possible, the determination of Fair Market Value by the
Committee shall be based on the prices reported in THE WALL STREET JOURNAL.
Such determination shall be conclusive and binding on all persons.
14.14 "NSO" means a stock option not described in sections 422 or 423 of
the Code.
14.15 "OPTION" means an NSO granted under the Plan and entitling the
holder to purchase Common Shares.
14.16 "OPTIONEE" means an individual or estate who holds an Option.
14.17 "PARENT" means any corporation (other than the Company) in an
unbroken chain of corporations ending with the Company, if each of the
corporations other than the Company owns stock possessing 50% or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain. A corporation that attains the status of a Parent
on a date after the adoption of the Plan shall be considered a Parent commencing
as of such date.
14.18 "PARTICIPANT" means an individual or estate who holds an Award.
14.19 "PLAN" means this Affymetrix, Inc. 1998 Stock Incentive Plan, as
amended from time to time.
8
<PAGE>
14.20 "RESTRICTED SHARE" means a Common Share awarded under the Plan.
14.21 "RESTRICTED STOCK AGREEMENT" means the agreement between the
Company and the recipient of a Restricted Share that contains the terms,
conditions and restrictions pertaining to such Restricted Share.
14.22 "STOCK OPTION AGREEMENT" means the agreement between the Company
and an Optionee that contains the terms, conditions and restrictions pertaining
to his or her Option.
14.23 "SUBSIDIARY" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company, if each of the
corporations other than the last corporation in the unbroken chain owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain. A corporation that
attains the status of a Subsidiary on a date after the adoption of the Plan
shall be considered a Subsidiary commencing as of such date.
ARTICLE 15. EXECUTION.
To record the adoption of the Plan by the Board, the Company has
caused its duly authorized officer to execute this document in the name of the
Company.
AFFYMETRIX, INC.
By:
---------------------------------------
Title:
---------------------------------------
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EXHIBIT 10.37
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT (the "Agreement") is entered into as of this
______ day of _________, 1999, by and between Affymetrix, Inc., a Delaware
corporation (the "Company"), and____________, an individual ("Indemnitee").
BACKGROUND
A. Indemnitee is a member of the Board of Directors or an officer of
the Company and, in that capacity, performs a valuable service for the
Company. For a variety of reasons, including the frequency, magnitude and
often baseless nature of claims and actions brought against corporate
directors and officers generally, it is difficult for corporations to attract
and retain highly competent persons as directors and officers. In addition,
there exists uncertainty, both as to matters of "substance" and "procedure,"
about the protection against such claims provided by statutory, charter and
bylaw provisions and through "director and officer" insurance.
B. Affymetrix, Inc., a California corporation, the predecessor of the
Company (the "Predecessor Company"), previously entered into an
indemnification agreement with the Indemnitee (the "Prior Agreement") which
the Company has assumed and which continues as a valid and binding obligation
of the Company as of the date hereof. However, in light of the Predecessor
Company's reincorporation into the State of Delaware, both the Company and
Indemnitee desire to restate and clarify each party's indemnification rights
and obligations by entering into this Agreement.
C. The Company's Bylaws also provide for indemnification of, and
advancement of expenses to, the directors and officers of the Company to the
maximum extent authorized by the Delaware General Corporation Law, as amended
(the "DGCL"), and, together with the DGCL, permit, by their nonexclusive
nature, the establishment of indemnification agreements between the Company
and its directors and officers.
D. In order to induce Indemnitee to continue to serve as a member of
the Board of Directors or as an officer of the Company, to restate and
clarify each party's respective rights and obligations under the Prior
Agreement and to clarify the specific procedure for addressing
indemnification matters if and as they arise, the Company and the Indemnitee
hereby agree to contractual indemnification arrangements on the terms set
forth in this Agreement.
THE PARTIES AGREE AS FOLLOWS:
1. DEFINITIONS. For purposes of this Agreement, the following terms
have the following meanings:
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<PAGE>
(a) "Agent" means any person (i) who is or was a director,
officer, employee or other agent of the Company or (ii) who is or was serving
at the request of the Company, or otherwise as a result of that person's
relationship with the Company, as a director, officer, employee or other
agent of another foreign or domestic corporation or of any partnership, joint
venture, trust or other enterprise (including, without limitation, service
with respect to employee benefit plans).
(b) "Change in Control" shall be deemed to have occurred if (i)
any "person" (as such term is used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended), other than a trustee or other
fiduciary holding securities under an employee benefit plan of the Company or
a corporation owned directly or indirectly by the stockholders of the Company
in substantially the same proportions as their ownership of stock of the
Company, becomes the "beneficial owner" (as defined in Rule 13d-3 under said
Act), directly or indirectly, of securities of the Company representing 20%
or more of the total voting power represented by the Company's then
outstanding Voting Securities, or (ii) during any period of two consecutive
years, individuals who at the beginning of such period constitute the Board
of Directors of the Company and any new director whose election by the Board
of Directors or nomination for election by the Company's stockholders was
approved by a vote of at least two-thirds (2/3) of the directors then still
in office who either were directors at the beginning of the period or whose
election or nomination for election was previously so approved, cease for any
reason to constitute a majority thereof, or (iii) the stockholders of the
Company approve a merger or consolidation of the Company with any other
corporation, other than a merger or consolidation which would result in the
Voting Securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being
converted into Voting Securities of the surviving entity) at least 80% of the
total voting power represented by the Voting Securities of the Company or
such surviving entity outstanding immediately after such merger or
consolidation, or the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
Company (in one transaction or a series of transactions) of all or
substantially all of the Company's assets.
(c) "Disinterested Director" means a director of the Company who
neither is nor was a party to the Proceeding in respect of which
indemnification is sought under this Agreement or otherwise.
(d) "Expenses" includes any and all direct and indirect costs
(including, without limitation, attorneys' fees and disbursements, court costs,
fees and expenses of witnesses, experts, professional advisers and private
investigators, arbitration expenses, costs of attachment, appeal or similar
bonds, travel expenses, duplicating, printing and binding costs, telephone
charges, postage, delivery service fees, and any and all other disbursements or
out-of-pocket expenses) actually and reasonably incurred by or on
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<PAGE>
behalf of Indemnitee in connection with either (i) the investigation,
defense, settlement or appeal of, or being a witness or participant in, a
Proceeding (including preparing for any of the foregoing) or (ii) the
establishment or enforcement of any right to indemnification under this
Agreement or otherwise or any right to recovery under any liability insurance
policy maintained by the Company; PROVIDED, HOWEVER, that "Expenses" shall
not include any judgments, fines or amounts paid in settlement.
(e) "Independent Counsel" means a law firm or attorney that
neither is presently nor in the past two years has been retained to
represent: (i) the Company or Indemnitee in any matter material to the
Company or Indemnitee, or (ii) any other party to the Proceeding in respect
of which indemnification is sought under this Agreement or otherwise. In
addition, the term "Independent Counsel" does not include any law firm or
attorney who, under the applicable standards of professional conduct then
prevailing, would have a conflict of interest in representing either the
Company or Indemnitee in an action to determine Indemnitee's right to
indemnification under this Agreement or otherwise.
(f) "Liabilities" means liabilities and losses of any type
whatsoever, including, without limitation, judgments, fines, excise taxes and
penalties (including, without limitation, ERISA excise taxes and penalties)
and amounts paid in settlement (including all interest, assessments and other
charges paid or payable in connection with or in respect of such liabilities
and losses), actually incurred by Indemnitee in connection with or as a
result of a Proceeding.
(g) "Potential Change in Control" shall be deemed to have occurred
if
(i) the Company enters into an agreement, the consummation
of which would result in the occurrence of a Change in Control; (ii) any
person (including the Company) publicly announces an intention to take or to
consider taking actions which, if consummated, would constitute a Change in
Control; (iii) any person, other than a trustee or other fiduciary holding
securities under an employee benefit plan of the Company or a corporation
owned, directly or indirectly, by the stockholders of the Company in
substantially the same proportions as their ownership of stock of the
Company, who is or becomes the beneficial owner, directly or indirectly, of
securities of the Company representing 9.5% or more of the combined voting
power of the Company's then outstanding Voting Securities, increases his
beneficial ownership of such securities by five percentage points or more
over the initial percentage of such securities equal to or exceeding 9.5% so
owned by such person; or (iv) the Board of Directors of the Company adopts a
resolution to the effect that, for purposes of this Agreement, a Potential
Change in Control has occurred.
(h) "Proceeding" means any threatened, pending or completed action,
suit or proceeding (including any inquiry, hearing, arbitration proceeding or
alternative
Page 3
<PAGE>
dispute resolution mechanism), whether civil, criminal, administrative or
investigative (including any action by or in the right of the Company), to
which Indemnitee is or was a party, witness or other participant, or is
threatened to be made a party, witness or other participant, by reason of the
fact that Indemnitee is or was an Agent, or by reason of anything done or not
done by Indemnitee in that capacity or in any other capacity while serving as
an Agent, whether before or after the date of this Agreement. "Proceeding"
shall not include any Proceeding initiated by Indemnitee (other than as
contemplated by Sections 3(d) or 6 of this Agreement) unless such Proceeding
was authorized or consented to by the Board of Directors of the Company.
(i) "Voting Securities" means any securities of the Company which
vote generally in the election of directors.
2. AGREEMENT TO INDEMNIFY. Subject to the terms and conditions of, and
in accordance with the procedures set forth in, this Agreement, the Company
shall hold Indemnitee harmless and indemnify Indemnitee (and Indemnitee's
spouse as provided below), to the fullest extent permitted by the provisions
of the DGCL and other applicable law, from and against all Expenses and
Liabilities, including, without limitation, Expenses and Liabilities arising
from any Proceeding brought by or in the right of the Company or its
stockholders. The Company and Indemnitee intend that this Agreement provide
for indemnification in excess of that expressly required, granted or
permitted by statute, including, without limitation, any indemnification
provided by the Company's Certificate of Incorporation or Bylaws, or by vote
of its stockholders or directors, or by applicable law. If, after the date
hereof, the DGCL or any other applicable law is amended to permit or
authorize indemnification of, or advancement of defense expenses to,
Indemnitee to a greater extent than is permitted on the date hereof,
references in this Agreement to the DGCL or any other applicable law shall be
deemed to refer to the DGCL or such applicable law as so amended.
3. PROCEDURAL MATTERS.
(a) INITIAL REQUEST. Whenever Indemnitee believes that, in a
specific case, Indemnitee is then entitled to indemnification under this
Agreement or under the Company's Certificate of Incorporation or Bylaws, the
DGCL or otherwise, Indemnitee shall submit a written notice to the Company
requesting an authorization and determination by the Company to that effect.
The notice shall describe the matter giving rise to the request and be
accompanied by all appropriate supporting documentation reasonably available
to Indemnitee.
(b) DETERMINATION AND PAYMENT. The Company shall make a
determination about Indemnitee's entitlement to indemnification in the
specific case no later than 90 days after receipt of Indemnitee's request. In
making that determination, the
Page 4
<PAGE>
person or persons making the determination shall presume that Indemnitee met
any applicable standard of conduct required for indemnification, unless the
Company shall have affirmatively shown by clear and convincing evidence that
Indemnitee did not meet that standard. The determination shall be made by the
Board of Directors by a majority vote of a quorum consisting of Disinterested
Directors. If such a quorum is not obtainable, or, even if obtainable, a
quorum of Disinterested Directors so directs, the determination shall be made
by Independent Counsel in a written opinion obtained at the Company's
expense. Notwithstanding the foregoing, if there has been a Change in Control
(other than a Change in Control which has been approved by a majority of the
Company's Board of Directors who were directors immediately prior to such
Change in Control), the determination shall be made by Independent Counsel in
a written opinion obtained at the Company's expense. If the person or persons
empowered to make the determination either: (i) affirmatively makes a
determination of Indemnitee's entitlement to indemnification or (ii) fails to
make any determination at all within the 90-day period, indemnification shall
be considered as authorized and proper in the circumstances, and Indemnitee
shall be absolutely entitled to such indemnification, and shall receive
payment as promptly as practicable, in the absence of any misrepresentation
of a material fact by Indemnitee in the request for indemnification, or a
specific determination by a court of competent jurisdiction that all or any
part of such indemnification is prohibited by applicable law. If the person
or persons empowered to make the determination find that the Indemnitee is
not entitled to indemnification, the Indemnitee shall have the right to apply
to a court of competent jurisdiction for the purpose of enforcing
Indemnitee's right to indemnification pursuant to this Agreement. The
termination of any Proceeding by judgment, order, settlement, arbitration
award, conviction or upon a plea of NOLO CONTENDERE or its equivalent shall
not, of itself, create a presumption that Indemnitee did not act in good
faith and in a manner which he reasonably believed to be in or not opposed to
the best interests of the Company, or that, with respect to any criminal
Proceeding, Indemnitee had reasonable cause to believe his conduct was
unlawful.
(c) ADVANCEMENT OF EXPENSES. If so requested in a writing by
Indemnitee accompanied by appropriate supporting documentation, the Company
shall, within ten days after receipt of the request, advance funds for the
payment of Expenses, whether that request is made before or after the final
disposition of a Proceeding (including, without limitation, any criminal
Proceeding or any Proceeding brought by or in the right of the Company or its
stockholders), unless there has been a final determination that Indemnitee is
not entitled to indemnification for those Expenses. If required by law at the
time of the advance, the payment of the advance shall be conditioned upon the
receipt from Indemnitee of an undertaking (which need not be secured) to
repay the advance to the extent that it is ultimately determined that
Indemnitee is not entitled to such indemnification by the Company. Any
dispute concerning the advancement of Expenses may, at the election of the
Indemnitee, be resolved by arbitration before an arbitrator selected by
Indemnitee and approved by the Company. If
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the parties cannot agree on a single arbitrator, then the claim shall be
heard by a panel of three arbitrators, with one selected by Indemnitee, one
selected by the Company and one selected jointly by the foregoing two
arbitrators. Each of the arbitrators shall be a litigation or corporate
attorney with experience in the field of officer and director
indemnification. The arbitrators shall be selected within (15) days after
demand for arbitration and shall render a decision within (45) days after
selection, unless good cause is shown for requiring a longer decision period.
The Company shall act in utmost good faith to provide timely information to
the arbitrators and to insure Indemnitee a full opportunity to defend against
the Company's claim that Indemnitee is not entitled to an advance of
Expenses. The Company shall indemnify Indemnitee against all Expenses
incurred by Indemnitee under the dispute resolutions proceedings set forth in
this Subsection 3(c), unless a court of competent jurisdiction finds that
each of the claims and/or defenses by Indemnitee in the action or proceeding
for which an advance is sought was frivolous or made in bad faith.
(d) ENFORCEMENT. If Indemnitee has not received a determination of
entitlement to indemnification or an advance, as the case may be, within the
applicable time periods for such actions specified in this Agreement, or if
it has been determined that Indemnitee substantively would not be permitted
to be indemnified in whole or in part under applicable law, Indemnitee shall
be entitled to commence an action in any court of competent jurisdiction
(including the court in which the Proceeding (as to which Indemnitee seeks
indemnification) is or was pending) (i) in the former case, seeking
enforcement of Indemnitee's rights under this Agreement or otherwise, or
seeking an initial determination by the court, or (ii) in the latter case,
challenging any such determination or any aspect thereof, including the legal
or factual bases therefor. The Company hereby consents to service of process
and to appear generally in any such proceeding. It shall be a defense to any
such action that applicable law does not permit the Company to indemnify
Indemnitee for the amount claimed. In any such action, the Company shall have
the burden of proving that indemnification or advances are not proper in the
circumstances of the specific case. Neither the failure of the Company to
have made a determination prior to the commencement of such action that
indemnification is proper under the circumstances because Indemnitee has met
the standard of conduct under applicable law, nor an actual determination by
the Company that Indemnitee has not met such standard of conduct, shall be a
defense to the action or create a presumption that Indemnitee has not met
that standard of conduct. The Company shall indemnify Indemnitee for Expenses
incurred by Indemnitee in connection with the successful establishment or
enforcement, in whole or in part, by Indemnitee of his right to
indemnification or advances.
(e) NOTICE BY INDEMNITEE AND DEFENSE OF PROCEEDINGS. Indemnitee
shall promptly notify the Company in writing upon being served with any
summons, citation, subpoena, complaint, indictment, information or other
document relating to any
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<PAGE>
matter which may give rise to a claim for indemnification under this
Agreement or otherwise; PROVIDED, HOWEVER, that a failure of Indemnitee to
provide that notice shall relieve the Company from liability only if and to
the extent that the failure materially prejudices the Company's ability to
adequately defend Indemnitee in the Proceeding. With respect to any
Proceeding as to which Indemnitee so notifies the Company:
(i) The Company shall be entitled to participate at its own
expense.
(ii) Except as otherwise provided below, the Company, jointly
with any other indemnifying party similarly notified, shall be entitled to
assume the defense of such Proceeding, with counsel reasonably satisfactory
to Indemnitee. After notice from the Company to Indemnitee of the Company's
election to assume the defense, the Company shall not be liable to Indemnitee
under this Agreement for any Expenses subsequently incurred by Indemnitee,
other than as provided below. Indemnitee shall have the right to employ his
own counsel in that Proceeding, but the fees and expenses of such counsel
incurred after notice from the Company of its election so to assume the
defense shall be borne by Indemnitee, except to the extent that (x) the
employment of counsel by Indemnitee has been authorized by the Company, (y)
Indemnitee has reasonably concluded that there may be a conflict of interest
between the Company and Indemnitee in the conduct of the defense of such
Proceeding or that counsel selected by the Company may not be adequately
representing Indemnitee, or (z) the Company has not in fact employed counsel
to assume the defense of such Proceeding. In those cases, the fees and
expenses of Indemnitee's own counsel shall be paid by the Company.
(iii) Neither the Company nor Indemnitee shall unreasonably
withhold its or his consent to any proposed settlement. The Company has no
obligation to indemnify and hold Indemnitee harmless under this Agreement for
any amounts paid in settlement of any Proceeding effected without its written
consent. The Company shall not settle any Proceeding in any manner which
would impose any penalty or limitation on Indemnitee without Indemnitee's
written consent.
(f) CHANGE IN CONTROL. If there is a Change in Control (other than
a Change in Control which has been approved by a majority of the Company's
Board of Directors who were directors immediately prior to such Change in
Control), then with respect to all matters thereafter arising concerning the
rights of Indemnitee to indemnification and advances under this Agreement or
otherwise, the Company shall seek legal advice only from Independent Counsel
selected by Indemnitee and approved by the Company, which approval shall not
be unreasonably withheld. Such Independent Counsel, among other things, shall
render its written opinion to the Company and Indemnitee as to whether and to
what extent Indemnitee would be permitted to be
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<PAGE>
indemnified under applicable law. The Company shall pay the reasonable fees
and expenses of such Independent Counsel.
(g) ESTABLISHMENT OF TRUST. In the event of a Potential Change in
Control, the Company shall, upon written request by Indemnitee, create a
trust for the benefit of Indemnitee and from time to time upon written
request of Indemnitee shall fund such trust in an amount sufficient to
satisfy any and all Expenses reasonably anticipated at the time of each such
request to be incurred in connection with investigating, preparing for and
defending any Proceeding, and any and all Liabilities from time to time
actually paid or claimed, reasonably anticipated or proposed to be paid;
provided that in no event shall more than $100,000 be required to be
deposited in any trust created hereunder in excess of amounts deposited in
respect of reasonably anticipated Expenses. The amount or amounts to be
deposited in the trust pursuant to the foregoing funding obligation shall be
determined by the person or persons empowered to make the determination about
Indemnitee's entitlement to indemnification pursuant to the provisions of
Section 3(b) hereof. The terms of the trust shall provide that (i) the trust
shall be irrevocable, (ii) the trustee shall advance, within ten days after
receipt of a request from Indemnitee, any and all Expenses to Indemnitee (and
Indemnitee hereby agrees to reimburse the trust under the circumstance under
which Indemnitee would be required to reimburse the Company under Section
3(c) hereof), (iii) the trust shall continue to be funded by the Company in
accordance with the funding obligation set forth above, (iv) the trustee
shall promptly pay to Indemnitee all amounts for which Indemnitee shall be
entitled to indemnification pursuant to this Agreement or otherwise and (v)
upon a final determination by either the person or persons referred to in the
preceding sentence or a court of competent jurisdiction, as the case may be,
that Indemnitee has been fully indemnified under the terms of this Agreement,
all unexpended funds in such trust shall be returned to the Company. The
trustee shall be chosen by Indemnitee. Notwithstanding anything in this
Agreement to the contrary, to the extent of the amount of funds in the trust
corpus, the Company shall have no obligation to indemnify Indemnitee under
this Agreement.
4. NONEXCLUSIVITY. The indemnification provided by this Agreement is
not exclusive of or inconsistent with any rights to which Indemnitee may be
entitled under the Company's Certificate of Incorporation or Bylaws, any
other agreement, any vote of stockholders or directors, the DGCL, or
otherwise, both as to action in Indemnitee's official capacity and otherwise.
If and to the extent that a change in the DGCL (whether by statute or
judicial decision) permits greater indemnification by agreement than would be
afforded currently under the Company's Bylaws or under this Agreement, it is
the intent of the parties hereto that Indemnitee shall enjoy by this
Agreement the greater benefits so afforded by such change.
5. PARTIAL INDEMNIFICATION. If Indemnitee is entitled to
indemnification by the Company for some or a portion of Expenses or
Liabilities but not for the total amount,
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<PAGE>
the Company shall nevertheless indemnify Indemnitee for the portion of such
Expenses and Liabilities to which Indemnitee is entitled to be indemnified.
Moreover, notwithstanding any other provision of this Agreement, to the
extent that Indemnitee has been successful on the merits or otherwise in
defense of any Proceeding or in defense of any claim, issue or matter
therein, including dismissal without prejudice, Indemnitee shall be
indemnified against all Expenses incurred by Indemnitee in connection
therewith.
6. LIABILITY INSURANCE. To the extent the Company maintains an
insurance policy or policies providing directors' and officers' liability
insurance, Indemnitee shall be covered by such policy or policies, in
accordance with its or their terms, to the maximum extent of the coverage
available for any Company director or officer, as the case may be. If
Indemnitee serves as a fiduciary of any employee benefit plan of the Company
or any of its subsidiary or affiliated corporations, then to the extent that
the Company maintains an insurance policy or policies providing fiduciaries'
liability insurance, Indemnitee shall be covered by such policy or policies
in accordance with its or their terms, to the maximum extent of the coverage
available for any fiduciary. In the event of a Potential Change in Control,
the Company shall maintain in force any and all insurance policies then
maintained by the Company providing directors' and officers' liability
insurance or fiduciaries' liability insurance, in respect of indemnitee, for
a period of six years thereafter. Upon notice to the Company, either from
Indemnitee or from any other source, of the commencement or threat of
commencement of any Proceeding or matter which may give rise to a claim for
indemnification of Indemnitee and which may be covered by any insurance
policy maintained by the Company, the Company shall promptly give notice to
the insurer in accordance with the procedures prescribed by such policy and
shall thereafter take all necessary or appropriate action to cause such
insurer to pay, to or on behalf of Indemnitee all Liabilities and Expenses
payable under such policy with respect to such Proceeding or matter. The
Company shall indemnify Indemnitee for Expenses incurred by Indemnitee in
connection with any successful action brought by Indemnitee for recovery
under any insurance policy referred to in this Section 6 and shall advance to
Indemnitee the Expenses of such action in the manner provided in Section 3(c)
above.
7. OTHER SOURCES. Indemnitee shall not be required to exercise any
rights Indemnitee may have against any other parties (for example, under an
insurance policy purchased by Indemnitee, the Company or any other person or
entity) before Indemnitee exercises or enforces Indemnitee's rights under
this Agreement. However, to the extent the Company actually indemnifies
Indemnitee or advances Indemnitee funds in respect of Expenses, the Company
shall be entitled to enforce any such rights which Indemnitee may have
against third parties. Indemnitee shall assist the Company in enforcing those
rights if it pays Indemnitee's costs and expenses of doing so. If Indemnitee
is actually indemnified or advanced Expenses by any such third party, then,
for so long as Indemnitee is not required to disgorge the amounts so
received, to that extent the
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<PAGE>
Company shall be relieved of its obligation to indemnify Indemnitee or to
advance Expenses.
8. CERTAIN RELATIONSHIPS. The obligations and rights created under this
Agreement shall not be affected by any amendment to the Company's Certificate
of Incorporation or Bylaws or any other agreement or instrument to which
Indemnitee is not a party, and shall not diminish any other rights which
Indemnitee now or in the future has against the Company or any other person
or entity.
9. SEVERABILITY. If any provision of this Agreement is determined to be
unenforceable for any reason, it shall be adjusted rather than voided, if
possible, in order to achieve the intent of the Company and Indemnitee. In
any event, the remaining provisions of this Agreement shall remain
enforceable to the maximum extent possible.
10. CONTRIBUTION. If the indemnification provided in Section 2 of this
Agreement is unavailable, then, in respect of any Proceeding in which the
Company is jointly liable with Indemnitee (or would be if joined in the
Proceeding), the Company shall contribute to the amount of Expenses and
Liabilities as appropriate to reflect: (i) the relative benefits received by
the Company, on the one hand, and Indemnitee, on the other hand, from the
transaction from which the Proceeding arose, and (ii) the relative fault of
the Company, on the one hand, and of Indemnitee, on the other, in connection
with the events which resulted in such Expenses and Liabilities, as well as
any other relevant equitable considerations. The relative fault of the
Company, on the one hand, and of Indemnitee, on the other, shall be
determined by reference to, among other things, the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent the
circumstances resulting in such Expenses and Liabilities. The Company agrees
that it would not be just and equitable if contribution pursuant to this
Section 10 were determined by pro rata allocation or any other method of
allocation which does not take account of the equitable considerations
described in this Section 10.
11. GOVERNING LAW. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of Delaware applicable to
contracts made and to be performed in such state without giving effect to the
principles of conflicts of laws. This Agreement is intended to be an
agreement of the type contemplated by Section 145(f) of the DGCL.
12. NOTICES. All notices and other communications under this Agreement
shall be in writing and shall be given by personal or courier delivery,
confirmed facsimile or telex transmission or first class mail, and shall be
deemed to have been duly given upon receipt if personally delivered or
delivered by courier, on the date of transmission if transmitted by facsimile
or telex, or three days after mailing if mailed, to the addresses set forth
below:
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<PAGE>
If to Indemnitee:
-------------
c/o Affymetrix, Inc.
3380 Central Expressway
Santa Clara, CA 95051
If to the Company:
Affymetrix, Inc.
3380 Central Expressway
Santa Clara, CA 95051
Attn: General Counsel
or to such other address as either party may designate by notice to the other
from time to time.
13. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall constitute an original.
14. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the
Company and its successors and assigns, and shall inure to the benefit of
Indemnitee and Indemnitee's spouse, estate, heirs, executors, administrators,
personal or legal representatives and assigns. The Company shall require any
successor corporation (whether by merger, consolidation, or otherwise) by
written agreement in form and substance satisfactory to Indemnitee, expressly
to assume and agree to perform this Agreement in the same manner and to the
same extent that the Company would be required to perform if no such
succession had taken place.
15. AMENDMENT AND WAIVER. This Agreement may not be amended except by a
writing executed by both the Company and Indemnitee. No waiver of any
provision of this Agreement shall be effective unless in writing and signed
by the party to be charged therewith. A waiver of, or a failure to insist on,
complete compliance with any provision of this Agreement shall not be
construed as a waiver of a subsequent or different non-compliance, breach or
default of that or any other provision of this Agreement.
16. ACKNOWLEDGMENT. The Company expressly acknowledges that it has
entered into this Agreement and assumed the obligations imposed on the
Company under this Agreement in order to induce Indemnitee to serve or to
continue to serve as a director or officer and acknowledges that Indemnitee
is relying on this Agreement in serving or continuing to serve in such
capacity. The Company further agrees to stipulate in any court proceeding
that the Company is bound by all of the provisions of this Agreement.
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<PAGE>
17. PERIOD OF LIMITATIONS. No legal action shall be brought and no cause
of action shall be asserted by or in the right of the Company against
Indemnitee, estate, heirs, executors, administrators or personal or legal
representatives after the expiration of two years from the date of accrual of
such cause of action, and any claim or cause of action of the Company shall
be extinguished and deemed released unless asserted by the timely filing of a
legal action within such two-year period; provided, however, that if any
shorter period of limitations is otherwise applicable to any such cause of
action, such shorter period shall govern.
18. DURATION OF AGREEMENT. This Agreement shall continue in effect for
so long as Indemnitee is subject to any possible Proceeding, regardless of
whether Indemnitee continues to serve as an Agent.
19. ENTIRE AGREEMENT. This document contains the final, complete and
exclusive statement of the agreement between the Company and Indemnitee with
respect to the subject matter of this Agreement and supersedes any prior or
contemporaneous understandings, agreements, communications, correspondence or
representations by or between the parties, whether written or oral, relating
to the subject matter of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date set forth in its first paragraph.
AFFYMETRIX, INC.
By:
--------------------------------
Title:
-----------------------------
-----------------------------------
, Indemnitee
-----------
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<PAGE>
EXHIBIT 10.38
PROMISSORY NOTE
Santa Clara, California $200,000.00
February 26, 1999
1. FOR VALUE RECEIVED, the undersigned, Karen H. Haynes ("Haynes")
unconditionally promises to pay to the order of Affymetrix, Inc.
("Affymetrix") at 3380 Central Expressway, Santa Clara, California (or at
such other address as the holder of this Note may designate by notice to
Haynes), the sum of Two Hundred Thousand Dollars ($200,000.00) with
interest from the date hereof at 4.67% simple interest per annum. Such
interest shall be paid quarterly.
2. This note shall become immediately due and payable in full upon the first
to occur of 1) the stock trading window opening for sale of stock by an
executive officer, 2) one year, or 3) when Haynes leaves the Company.
3. Haynes requests and authorizes Affymetrix to withhold any amount due
Affymetrix hereunder from any salary, vacation, or other compensation due
or payable to Haynes.
4. Haynes agrees to pay all reasonable costs of collection of this Note if
payments are not made when due. If any legal action is necessary to enforce
or collect this Note, such costs shall include, without limitation,
reasonable attorney's fees. Interest shall accrue on all past due payments
at the rate of 10% per annum or the highest rate permitted by law if lower.
5. This Note shall be governed by and construed in accordance with the
internal laws of the State of California. Haynes consents to personal
jurisdiction in any court in Santa Clara County, California.
/s/ Karen H. Haynes 2/26/99
- ---------------------------------------- ---------------------
Date
Witness:
--------------------------------
<PAGE>
EXHIBIT 10.39
PROMISSORY NOTE
Santa Clara, California $500,000.00
April 11, 1997
1. FOR VALUE RECEIVED, the undersigned STEPHEN P.A. FODOR AND JANELLE B. FODOR,
HUSBAND AND WIFE, jointly and severally ("FODOR") unconditionally promise to
pay to the order of Affymetrix Inc. ("Affymetrix") at 3380 Central
Expressway, Santa Clara, California (or at such other addresss as the holder
of this Note may designate by notice to -), the sum Five Hundred Thousand
Dollars ($500,000.00) with interest from the date hereof at 6.49% simple
interest per annum.
2. This Note, including all outstanding principal and any interest due hereon
shall be paid in full five years from the date of this Note.
3. This Note shall become immediately due and payable in full: upon sale of
FODOR'S residence at 1120 PARKINSON AVENUE, PALO ALTO, CA; if any payment is
not made when due; or upon termination of FODOR'S employment for any reason.
FODOR requests and authorizes Affymetrix to withhold any such balance due
from any salary, sale of Affymetrix stock, stock options or other
compensation due or payable to Fodor.
4. FODOR agrees to pay all reasonable costs of collection of this Note if
payments are not paid when due. If legal action is necessary to enforce or
collect this Note, such costs shall include, without limitation, reasonable
attorney's fees. Interest shall accrue on all past due payments at the rate
of 10% per annum or the highest rate permitted by law if lower.
5. This Note shall be governed by and construed in accordance with the internal
laws of the State of California. FODOR consents to personal jurisdiction in
any court in Santa Clara County, California.
/s/ STEPHEN P.A. FODOR
----------------------------
Witness: Date: 4/11/97
---------------------------- ----------
<PAGE>
EXHIBIT 10.40
PROMISSORY NOTE
Santa
Clara,
California $60,000
July 9, 1998
1. FOR VALUE RECEIVED, the undersigned SUE SIEGEL ("SIEGEL") unconditionally
promises to pay to the order of Affymetrix Inc. ("Affymetrix") at 3380
Central Expressway, Santa Clara, California (or at such other address as the
holder of this Note may designate by notice to SIEGEL), the sum SIXTY
THOUSAND DOLLARS ($60,000) with interest from the date hereof at 5.49%
simple interest per annum. Such interest shall be forgiven so long as SIEGEL
shall remain an employee in good standing.
2. The balance due on this Note and the interest hereon shall be due and
payable in full five years from the date hereof or upon sale of SEIGEL's
residence 580 Patrol Road, Woodside, CA 94062, whichever comes first.
3. This note shall become immediately due and payable in upon termination of
SIEGEL's employment for any reason. SIEGEL requests and authorizes
Affymetrix to withhold any such balance due from any salary or vacation pay
due or payable to SIEGEL.
4. SIEGEL agrees to pay all reasonable costs of collection of this Note if
payments are not paid when due. If legal action is necessary to enforce or
collect this Note, such costs shall include, without limitation, reasonable
attorney's fees. Interest shall accrue on all past due payments at the rate
of 12% per annum or the highest rate permitted by law if lower.
5. This Note shall be governed by and construed in accordance with the internal
laws of the State of California. SIEGEL consents to personal jurisdiction in
any court in Santa Clara County, California.
/s/ SUE 7/9/98
SIEGEL -
- -Date
Sue
Siegel
<PAGE>
EXHIBIT 21
LIST OF SUBSIDIARIES
Affymetrix UK, Ltd., incorporated in the United Kingdom and doing business under
such name.
<PAGE>
EXHIBIT 23
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Forms S-8 No. 333-11299 and No. 333-35287), pertaining to the 1993 Stock Option
Plan and the 1996 Non-employee Directors Stock Option Plan of Affymetrix, Inc.,
of our report dated January 29, 1999 (except for Note 11, as to which the date
is March 16, 1999) with respect to the financial statements and schedule of
Affymetrix, Inc. included in this Annual Report (Form 10-K) for the year ended
December 31, 1998.
Ernst & Young LLP
Palo Alto, California
March 29, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ITEM 1 OF
THE COMPANY'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,301
<SECURITIES> 79,267
<RECEIVABLES> 8,919
<ALLOWANCES> 408
<INVENTORY> 3,276
<CURRENT-ASSETS> 94,947
<PP&E> 40,796
<DEPRECIATION> (9,931)
<TOTAL-ASSETS> 136,428
<CURRENT-LIABILITIES> 14,560
<BONDS> 261
49,857
0
<COMMON> 230
<OTHER-SE> (66,520)
<TOTAL-LIABILITY-AND-EQUITY> 136,428
<SALES> 22,847
<TOTAL-REVENUES> 52,025
<CGS> 14,858
<TOTAL-COSTS> 14,858
<OTHER-EXPENSES> 65,716
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,098
<INCOME-PRETAX> (23,130)
<INCOME-TAX> 0
<INCOME-CONTINUING> (23,130)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (25,451)
<EPS-PRIMARY> (1.11)
<EPS-DILUTED> (1.11)
</TABLE>
