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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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<C> <S>
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
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/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
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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)
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<S> <C>
DELAWARE 77-0319159
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
3380 CENTRAL EXPRESSWAY, SANTA CLARA, CALIFORNIA 95051
(Address of principal executive offices) (Zip Code)
</TABLE>
(408) 731-5000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $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. Yes /X/ 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 20, 2000) was approximately $4,106.7 million. As of
March 20, 2000, 27,313,517 shares of common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the Proxy Statement to be filed in connection with the
2000 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, 1999
TABLE OF CONTENTS
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ITEM PAGE NO.
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PART I
1. Business.................................................... 1
2. Properties.................................................. 28
3. Legal Proceedings........................................... 29
4. Submissions of Matters to a Vote of Security Holders........ 31
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 31
6. Selected Financial Data..................................... 32
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 33
7A. Quantitative and Qualitative Disclosure About Market Risk... 38
8. Financial Statements and Supplementary Data................. 39
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 65
PART III
10. Directors and Executive Officers of the Registrant.......... 65
11. Executive Compensation...................................... 65
12. Security Ownership of Certain Beneficial Owners and
Management................................................ 65
13. Certain Relationships and Related Transactions.............. 65
PART IV
14. Exhibits, Financial Statement Schedule, and Reports on
Form 8-K.................................................. 66
Signatures.................................................. 71
</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 primarily in the United States and Europe.
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 a wholly owned
subsidiary of Affymax and in September 1998 was reincorporated as a Delaware
corporation.
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.
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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
over 100,000 genes within the human genome. This effort is being led by the
Human Genome Project and related academic, government and industry research
projects. Once the genes and their nucleotide sequences are identified, it is
anticipated that many years of additional research will be required to
understand the specific function and role in disease of each of these genes.
This research, commonly referred to as genomics, is expected to lead to a new
health care paradigm where disease is 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 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 currently 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
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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 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 the disease
management and 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.
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GENE EXPRESSION MONITORING
Gene expression monitoring is a valuable tool for identifying correlations
between genes, their biological function and disease. To facilitate the
monitoring of gene expression, the Company designs and manufactures probe arrays
with single stranded DNA molecules that are complementary to sequences within a
gene of interest. By synthesizing specific probes for multiple genes on a single
probe array, the Company enables researchers to quickly, quantitatively and
simultaneously monitor the expression of a large number of genes of interest. By
monitoring the expression of such genes under different conditions and at
different times, researchers can use the probe arrays to understand the dynamic
relationship between gene expression and 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, rat and yeast organisms. Affymetrix
has also developed 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, and
AcademicAccess-TM- subscription packages.
All of the Company's sales programs for its expression monitoring
applications center around a pricing model that reflects performance
specifications, the number of data points represented on the array, and the
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 commitment 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
payments to Affymetrix in exchange for preferential access to GeneChip arrays
and new product offerings, custom design services, intellectual property
licenses, research, development and other customer support for a defined period
of time. The Company currently has more than 400 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 SELECTED AFFYMETRIX EXPRESSION PROFILING CUSTOMERS
<TABLE>
<CAPTION>
CUSTOMER ACCESS PACKAGE
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Aventis Pharma Ltd.......................................... EasyAccess Gold
EOS Biotechnology, Inc...................................... EasyAccess Gold
F. Hoffmann-La Roche, Ltd................................... EasyAccess Gold
Gene Logic, Inc............................................. EasyAccess Gold
Genetics Institute/American Home Products Corporation....... EasyAccess Gold
Novartis Agriculture Discovery Institute.................... EasyAccess Gold
Novartis Institute for Functional Genomics.................. EasyAccess Gold
The Scripps Research Institute.............................. EasyAccess Gold
AstraZeneca PLC............................................. EasyAccess Silver
Bayer Corporation........................................... EasyAccess Silver
Boehringer Ingelheim GmbH................................... EasyAccess Silver
Eli Lilly and Company....................................... EasyAccess Silver
Novartis Pharmaceuticals Corporation........................ EasyAccess Silver
Parke-Davis (a division of the Warner-Lambert Company)...... EasyAccess Silver
Pfizer, Inc................................................. EasyAccess Silver
Sankyo Co., Ltd............................................. EasyAccess Silver
SmithKline Beecham.......................................... EasyAccess Silver
Howard Hughes Medical Institute............................. AcademicAccess Preferred
Case Western Reserve University............................. AcademicAccess
Dana Farber Cancer Institute................................ AcademicAccess
Harvard University.......................................... AcademicAccess
National Institutes of Health............................... AcademicAccess
Stanford University......................................... AcademicAccess
University of California.................................... AcademicAccess
University of Colorado...................................... AcademicAccess
University of Pennsylvania.................................. AcademicAccess
University of Wisconsin (Madison)........................... AcademicAccess
Washington University....................................... AcademicAccess
</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.
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 array was launched during 1999.
In December 1999, the Company entered into a collaboration with Orchid
BioSciences, Inc. to develop reagent kits for its GenFlex-Registered Trademark-
Tag array, which is designed to give researchers the flexibility to
simultaneously analyze large numbers of polymorphisms of their choosing.
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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.
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 develop probe array-based
diagnostic products. Under the terms of the agreement, the parties are
collaborating to develop mutually agreed upon arrays directed to 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. The GeneChip system is designed to be used by
pharmaceutical and biotechnology companies, academic research centers and
clinical reference laboratories.
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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.
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
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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 Agilent Technologies, Inc. ("Agilent Technologies"), formerly
Hewlett-Packard Company 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.
In February 2000, the Company completed its acquisition of Woburn,
Massachusetts based Genetic MicroSystems, Inc. ("GMS"), a privately-held DNA
instrumentation company specializing in DNA array technology. GMS manufactures
and markets exportable instruments for both fabricating and analyzing DNA arrays
for use in life science research and development applications. At the end of
1999, GMS, together with its distributor network, has placed more than
200 array makers and scanners at academic, biotechnology and pharmaceutical
customer sites worldwide.
The current product offering from GMS consists of the Affymetrix 417 Arrayer
and Affymetrix 418 Array Scanner. The Affymetrix 417 Arrayer utilizes a
proprietary moving-reservoir, Pin-and-Ring-TM- arraying mechanism designed to
provide greater consistency of spotted array elements relative to other spotting
systems. The Affymetrix 418 Array Scanner uses a unique Flying Objective-TM-
laser optics system that rapidly captures images with superior speed and
sensitivity. The proprietary features of the Affymetrix arrayer and scanner are
designed to offer significant performance advantages over other "home-made" and
commercially available spotting robots and scanners. Because the instrumentation
is installed at the customer site, this product line, compared to service
alternatives, provides researchers with the flexibility to quickly fabricate
user-specific arrays while maintaining direct control over cloned materials,
sample preparation and hybridization conditions.
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 current
agreements, the related products and programs and the commencement dates of the
most recent agreement.
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TABLE 2. SUMMARY OF AFFYMETRIX SELECTED COLLABORATORS AND LICENSEES
<TABLE>
<CAPTION>
COMPANY TYPE DATE
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Agilent Technologies, Inc., a
subsidiary of Hewlett-Packard
Company............................ Scanner supply February 1997
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 July 1998
disease management products; non-
light directed array
commercialization license
bioMerieux Vitek, Inc................ Bacteriology and virology disease January 1998
management products; industrial and
food testing products
Bristol-Myers Squibb Company,
Millennium Pharmaceuticals, Inc.,
Whitehead Institute................ Functional genomics and polymorphism April 1997
discovery
Enzo Diagnostics, Inc................ Labeling kits April 1998
Genetic Analysis Technology
Consortium......................... Establish standards for DNA Array December 1997
based products
Spotted array commercialization
Molecular Dynamics, Inc.............. license December 1997
Orchid BioSciences, Inc.............. Genotyping assays December 1999
Roche Molecular Systems, Inc......... HIV and p53 disease management arrays February 1998
</TABLE>
AGILENT TECHNOLOGIES, INC., A SUBSIDIARY OF HEWLETT-PACKARD COMPANY
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, Agilent Technologies, a subsidiary of
Hewlett-Packard, manufactures and sells the array scanner to Affymetrix on an
OEM basis. The agreement also provides for cooperation between Affymetrix and
Agilent Technologies for worldwide distribution and instrument services.
Pursuant to the agreement, Agilent Technologies is required to supply all of the
Company's forecasted requirements for scanners until February 2003, and
Affymetrix is required to purchase an annual minimum number of scanners from
Agilent Technologies during the same period.
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 paid
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 July
and December 1999, the Company terminated its sales representation agreement
with Amersham Pharmacia Biotech in North America and Western Europe,
respectively.
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
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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 gave 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. Beckman will pay Affymetrix transfer prices and
royalties on sales of these products as specified in the agreements. The
agreements also provided 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. In June 1999, the
Company purchased the array business of Beckman that included a license to the
Southern DNA array patents owned by Oxford Gene Technology ("OGT") of Oxford,
England. OGT is contesting the transfer of this license (See "Legal
Proceedings").
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. Four 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 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.
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ENZO DIAGNOSTICS, INC.
In April 1998, Affymetrix and Enzo Diagnostics, Inc. ("Enzo") entered into a
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.
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.
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"), a wholly owned subsidiary of Amersham Pharmacia Biotech.
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.
ORCHID BIOSCIENCES, INC.
In December 1999, Affymetrix and Orchid Biosciences, Inc. ("Orchid") entered
into an agreement to develop and commercialize single nucleotide polymorphism
(SNP) genotyping assays that combine Orchid's proprietary
GBA-Registered Trademark- primer extension technology with Affymetrix' new
GenFlex Tag array product. These new assays will allow researchers to customize
high density SNP analyses solely by designing GBA primers for use on a standard
GenFlex Tag array.
The first GenFlex Tag array product to be commercialized by the alliance
will include reagent kits designed to perform thousands of user-defined SNP
analyses. The companies expect to follow this product launch with additional
genotyping products that increase the information capacity of the GenFlex Tag
arrays and include expanded GBA reagent offering. Orchid will develop and
manufacture GBA primer extension reagent kits that are directed to defined sets
of SNPs and that can be customized by the end user. Affymetrix will develop and
manufacture the GenFlex Tag arrays. Affymetrix will distribute and provide
marketing, sales and technical support for the standard and universal GenFlex
Tag assays. Orchid will manufacture, supply and support custom kits. As part of
the agreement, Affymetrix made an investment in a private placement of equity
offered by Orchid.
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. Under the terms of the agreement the parties
will collaborate to develop mutually agreed upon arrays, 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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GRANTS
The Company's research and development efforts have been supported in part
by government grants, including a grant from the U.S. Department of Commerce
Advanced Technology Program ("ATP").
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 was 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
provided for 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) required that these parties
assign the rights to any project inventions made by them to the Company, subject
to specified royalty payments. The ATP agreement provided that the Company and
Molecular Dynamics retain rights in their respective fields to intellectual
property developed as part of the project.
The ATP grant was administered by the United States Department of Commerce.
As of December 31, 1999, the Company had recognized $17.4 million in revenue
under the ATP grant. The grant was subject to yearly appropriations by the
United States Congress for the ATP program. Funding of the ATP grant expired in
January 2000.
MANUFACTURING
The Company's current strategy is to manufacture its disposable DNA probe
arrays, arrayers and scanners, fluidics stations and software in-house and
contract with third-party suppliers to manufacture certain GeneChip scanners,
hybridization ovens as well as 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 probe arrays for internal and
collaborative purposes and for sale in the research market. Probe arrays are
manufactured out of two manufacturing facilities located in Sunnyvale and West
Sacramento, California. Currently, the Company has physical capacity under
optimal conditions to produce more than 10,000 wafers annually. 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
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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, in
1999, the Company experienced difficulties in meeting 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 future
business, financial condition and results of operations. The Company will
continue to invest in additional capital equipment for its Sunnyvale and West
Sacramento facilities to both increase production capacity and increase the
flexibility of this capacity to produce a broader range of products. 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 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 Agilent Technologies to manufacture and service its
scanners. The Company's scanner, introduced in April 1997, is obtained from
Agilent Technologies under a supply agreement that expires in 2003. The Company
is dependent on Agilent Technologies for quality testing and service of this
instrument.
The Company relies on Enzo to manufacture and supply certain labeling kits
needed to process samples on GeneChip probe arrays 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
reagent kits and lithographic masks as well as certain raw materials and pieces
of manufacturing hardware 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, fabrication equipment
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 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.
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.
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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. The Company's
manufacturing facilities are subject to natural disasters such as earthquakes
and floods. The former are of particular significance since the Sunnyvale
manufacturing facility is located in an earthquake prone area. In the event that
its manufacturing facilities were to be affected by accidental or natural
disasters, the Company would be unable to manufacture sufficient quantities of
products for sale until the facilities were replaced or restored to operation,
which would have a material adverse effect on the Company's business, financial
condition and results of operations.
There can be no assurance that any of the foregoing problems with the
Company's GeneChip products will be solvable or that any solutions can be
achieved in a timely manner or at commercially reasonable costs.
SALES, MARKETING AND TECHNICAL SUPPORT
The base price of the Company's GeneChip system (scanner, software,
workstation, hybridization oven and fluidics station) starts at approximately
$188,000. 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 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 solicited 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 paid 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 July and December 1999, the Company terminated
its relationship with Amersham Phamacia Biotech in North America and Western
Europe, respectively.
In October 1998, the Company entered into a 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
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relies on third parties such as Agilent Technologies to service the GeneChip
scanner and to assist in its promotional activities.
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").
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 20-24
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, 1999, 1998 and 1997, were $40.5 million, $35.9 million and
$28.2 million, respectively.
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INTELLECTUAL PROPERTY
Affymetrix has been issued 75 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 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, Molecular Dynamics, Stanford University,
Scientific Generics, Ltd., Concordia University, Cooperative Research Centre for
Diagnostic Technologies, 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 ("PTO")
could substantially impact the scope of the Company's patent protection as well
as result in the expenditure of substantial funds in legal fees. In
September 1999, the PTO ruled in favor of Affymetrix in such an interferences
proceeding.
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.
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The Company is aware of patents and patent applications owned by OGT that
may relate to the Company's technology. The Company has opposed two such allowed
European patents and such patents have also been issued in the United States.
The Company is aware that other patents are pending and may issue. Certain of
the applications have broad claims to certain array related technology. In
July 1998, the Company entered into a series of agreements with Beckman that
were designed to provide it with a path to obtain a license to these patents and
patent applications. In June 1999, OGT filed suit in the UK and US asserting
that Affymetrix infringed these patents. Also in June 1999, Affymetrix purchased
the array business of Beckman which included a license to the OGT patents. As a
result of this purchase, Affymetrix asserted that infringement trials were not
called for because of this license assignment. In February 2000, the High Court
of Justice, Chancery Division, Patents Court held a trial to determine if
Affymetrix had acquired a Southern license. No decision of the court has been
entered. In addition, in February 2000, OGT asserted that Affymetrix and Beckman
were in breach of this license. If the agreements with Beckman are interpreted
adversely to the Company or if the Company is 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.
Affymetrix is a party to significant litigation, which will consume
substantial financial and managerial resources and which could adversely affect
its 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, 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, or
'231, and 5,525,464 or '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, '940. On August 18, 1998, Affymetrix filed a lawsuit in
United States District Court for the Northern District of California (San
Francisco Division) against Hyseq alleging infringement of U.S. Patent Nos.
5,795,716, or '716, and 5,744,305, or '305. On September 1, 1998, Affymetrix
added its U.S. Patent No. 5,800,992, or '992, to the complaint of infringement
against Hyseq. On October 26, 1999, Hyseq filed a third action in United States
District Court for the Northern District of California (San Francisco Division)
claiming that Affymetrix' products infringe a related patent, United States
Patent 5,972,619, or '619. The action also requests a declaration that the '716
Patent is invalid based on the '619 Patent. On November 23, 1998, Hyseq filed an
answer to Affymetrix' complaint, alleging that Affymetrix' three asserted
patents are invalid. On October 26, 1999, the United States District Court for
the Northern District of California issued a Claims Construction Order
interpreting various terms of the '231, '464, and '940 Patents.
On June 4, 1999, OGT filed suit against Affymetrix in the United States
District Court for the District of Delaware and in the United Kingdom alleging
infringement of United States Patent 5,700,637 and European Patent 0-373-203,
respectively. On June 4, 1999, an asset transfer agreement with Beckman Coulter
became effective, giving Affymetrix access to Beckman Coulter's microarray
business, including licenses to United States Patent 5,700,637 and European
Patent 0-373-203. On June 17, 1999, Affymetrix filed a complaint in the United
States District Court for the Northern District of California asking for, among
other things, a declaration that Affymetrix has a valid license to use the
patents and that, in light of this license, Affymetrix is not infringing on
these patents. This case has been consolidated with the Delaware action. In the
UK action, Affymetrix has counterclaimed for revocation of this patent and OGT
has applied to amend the patent. The patent infringement issues have been stayed
pending resolution of whether Affymetrix and Affymetrix UK Limited have a
license under the patent as a result of the purchase of Beckman Coulter's
microarray business. In February, 2000, the High Court of Justice, Chancery
Division, Patent Court held a hearing on the issue of whether Affymetrix UK has
valid license. A decision on this hearing is anticipated shortly. In addition,
in February 2000, OGT asserted that Affymetrix and Beckman were in breach of
this license.
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The Hyseq and the OGT actions seek damages based on the sale of Affymetrix'
products and processes and seek to enjoin commercial activities relating to
those products and processes. In addition to subjecting Affymetrix to potential
liability for damages, these actions, and any other similar legal actions
against Affymetrix or its collaborative partners, could require Affymetrix or
its collaborative partners to obtain a license in order to continue to
manufacture, market or use the affected products and processes. While Affymetrix
believes that the Hyseq and OGT complaints are without merit, Affymetrix may not
prevail in these actions and Affymetrix or its collaborative partners may not
prevail in any other related action. Moreover, in the event Affymetrix does not
prevail in the Hyseq and OGT actions and Affymetrix, its partners or its
customers are required to obtain a license to continue to manufacture, market or
use the affected products and processes, Affymetrix, its partners or its
customers may not be able to obtain such a license on commercially acceptable
terms, if at all. Furthermore, Affymetrix has expended and is likely to continue
to expend substantial financial and managerial resources in defending against
the claims filed by Hyseq and OGT.
On January 6, 1998, Affymetrix 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, or '934. On
September 1, 1998, Affymetrix 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 Affymetrix' patents and,
in regard to the '992 Patent, sought a preliminary injunction. Incyte and
Synteni moved for summary judgment that certain claims of the '992 Patent were
invalid. On May 4, 1999, the Court denied Affymetrix' motion for preliminary
injunction and denied Incyte/Synteni's motion for summary judgment.
In the High Court of Justice, Chancery Division, Patents Court, OGT has
applied in the United Kingdom to revoke Affymetrix' EP (UK) 0-619-321 Patent
(related to certain DNA arrays). This revocation action also includes an
application to revoke Affymetrix's related United Kingdom Patent GB 2248840.
Revocation and infringement actions typically are resolved in the first instance
in about twelve to eighteen months. The underlying patents can be declared
valid, invalid, or partially valid, often with claim amendments submitted during
the course of the proceedings.
Affymetrix may not prevail in asserting its patent rights against Hyseq,
Incyte, Synteni or others. Affymetrix has expended and is likely to continue to
expend substantial financial and managerial resources in asserting its patent
rights against Hyseq, Incyte, Synteni and others. Affymetrix' 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 Affymetrix' GeneChip technology.
The removal of such barriers could have a material adverse effect on Affymetrix'
business, financial condition and results of operations.
On April 17, 1998, Incyte filed a response and counterclaim to case number
C98-4507, asserting that the '934 Patent is invalid and not infringed. On
April 17, 1998, Incyte also filed a counterclaim alleging that a patent license
agreement Affymetrix entered into in December 1997 with Molecular Dynamics
interfered with an agreement between Incyte and Molecular Dynamics. In the
counterclaim, Incyte alleges that the terms of Affymetrix' patent license to
Molecular Dynamics prevented Molecular Dynamics from meeting its obligations to
Incyte. Incyte seeks 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,
including:
- a request for declaration of non-infringement and invalidity;
- an assertion of unfair competition;
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- 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; and
- a claim of slander of title of a patent and a claim of trade libel.
Affymetrix believes that the counterclaims are without merit. However,
Affymetrix has expended and is likely to continue to expend significant
financial and managerial resources defending against these and any other
counterclaims filed by Incyte and Synteni and others. Affymetrix' failure to
successfully enforce its patent rights or defend against counterclaims of
Incyte, Synteni, or others could result in a material adverse effect on
Affymetrix' business, financial condition and results of operations.
The United States Patent and Trademark Office, or USPTO, notified Affymetrix
that Stanford University presented claims that relate to substantially the same
subject matter as certain claims from the '992 Patent and all of the claims of
the '305 Patent. The Stanford application is alleged to be exclusively licensed
to Incyte. The USPTO notified Affymetrix on April 2, 1999 that it had declared
an interference proceeding relating to these patents and claims of patents. The
USPTO conducted proceedings to determine the priority of these claims and
determined that Incyte/Synteni did not meet the burden of proof required to
establish a case that the claims should be further evaluated in a full
interference proceeding. Incyte/Synteni has appealed this decision. In United
States District Court for the Northern District of California (case number
C99-2111). Affymetrix has expended, and expects in the future to continue to
expend, substantial financial and managerial resources as a result of these
proceedings. Moreover, Affymetrix may not prevail in such proceedings or in
similar proceedings relating to those or other patents. Affymetrix may not
prevail in the appeal of the Incyte/Synteni interference proceedings. A failure
to prevail could result in Affymetrix' inability to commercialize its products
and also would enable others to copy aspects of Affymetrix' products.
Affymetrix' intellectual property outside of the United States is expected
to be subject to significant additional administrative and litigation actions.
For example, in Europe and Japan, third parties are expected to oppose
significant patents owned or controlled by Affymetrix. Currently, OGT, Incyte,
Multilyte Ltd. and ProtoGene Laboratories, Inc. filed oppositions against
Affymetrix' EP 0-619-321 Patent in the European Patent Office. This procedure
will result in the patent being either upheld in its entirety, allowed to grant
in amended form in designated European countries, or revoked.
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, Incyte, Synteni and OGT actions
and any other such litigation will consume substantial managerial and financial
resources, which could have a material adverse effect on the Company's business,
financial condition and results of operations. Further, because of the
substantial amount of discovery required in connection with any such litigation,
there is a risk that confidential information could be compromised by
disclosure.
Others have filed and in the future are likely to file patent applications
that are similar or identical to those of the Company or those of its licensors.
To determine the priority of inventions, the Company will have to participate in
interference proceedings declared by the United States Patent and Trademark
Office that could result in substantial cost to the Company. No assurance can be
given that any such patent application will not have priority over patent
applications filed by the Company.
The enactment of legislation implementing the General Agreement on Trade and
Tariffs has resulted in certain changes in United States patent laws that became
effective on June 8, 1995. Most notably, the term of patent protection for
patent applications filed on or after June 8, 1995 is no longer a period of
seventeen years from the date of grant. The new term of United States patents
will commence on the date of issuance and terminate twenty years after the
earliest effective filing date of the application. Because the time from filing
to issuance of biotechnology patent applications in the Company's area of
interest is often more than three years, a twenty-year term after the effective
date
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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 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).
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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) 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.
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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.
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
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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 PE Biosystems and Amersham Pharmacia Biotech. Other
companies including Agilent Technologies, Axon Instruments, Clonetech, Inc.,
Corning, Inc., CuraGen, Inc., Digital Gene Technologies, Inc., Gene Logic, Inc.,
Genomic Solutions, Inc., Hyseq, Ilumina, Inc., 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.
In 1999, 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.
Similarly, Agilent Technologies supplies the Company with its scanners and
has publically announced its intention to commercialize its own DNA array
technology. There can be no assurance that Agilent Technologies' commercial
activity 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
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
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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, 1999, Affymetrix had 519 full-time employees, 52 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.
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 the Company's 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.
THE MARKET PRICE OF THE COMPANY'S COMMON STOCK IS EXTREMELY VOLATILE AND THE
VALUE OF ITS STOCK MAY DECREASE SUDDENLY AND SUBSTANTIALLY
For a number of reasons, the market price of our common stock is extremely
volatile and the value of your common stock may decrease substantially. This
extreme volatility also puts us at risk for securities class action litigation,
which would cause the Company to divert both financial and managerial resources,
which could reduce our profits.
To demonstrate the volatility of the Company's stock price, during the
twelve month period ending March 27, 2000, the volume of its common stock traded
on any given day has ranged from 48,700 to 5,372,400 shares, a 10,932%
difference. Moreover, during the same twelve months, its common stock has traded
as low as $31.75 per share and as high as $327.00 per share, a 930% difference.
The market price of its common stock has changed as much $67.00 per share in a
single day and its stock price has changed more than $20 in a single day
thirty-seven times in the last six months.
THE COMPANY'S QUARTERLY RESULTS OF OPERATION HAVE HISTORICALLY FLUCTUATED
SIGNIFICANTLY PERIOD-TO-PERIOD, AND ITS STOCK MAY DECREASE IN VALUE
SIGNIFICANTLY FOLLOWING AN EARNINGS RELEASE
Although the Company believes that period-to-period comparisons of its
results of operations are not a good indication of its future performance, its
operating results will likely be below the expectations of public market
analysts or investors in future quarters and the market price of its common
stock may fall significantly.
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THE COMPANY HAS A LIMITED OPERATING HISTORY, HAS NEVER BEEN PROFITABLE AND MAY
NEVER DEVELOP A COMMERCIALLY SUCCESSFUL PRODUCT
The Company is a relatively new company and, for the most part, its
technologies are still in the early stages of development. The Company has just
begun to incorporate its technologies into commercial products. The Company
needs to make significant investments to ensure its products perform correctly
and are cost-effective. In addition, the Company must obtain additional
regulatory approvals to sell its product for purposes other than research use.
Even if the Company develops its products for commercial use and obtains all
necessary regulatory approval, it may not be able to develop products that:
- are accepted by the research, diagnostic or other market places;
- are accurate and effective;
- meet applicable regulatory standards in a timely manner;
- are protected from competition by others;
- do not infringe the intellectual property rights of others;
- can be manufactured in sufficient quantities or at a reasonable cost; or
- can be marketed successfully.
THE COMPANY MAY LOSE CUSTOMERS UNLESS IT IMPROVES ITS ABILITY TO MANUFACTURE ITS
PRODUCTS AND ENSURE THEIR PROPER PERFORMANCE
The Company produces its GeneChip products in an innovative and complicated
manufacturing process. It has experienced and continues to experience
significant variability in the manufacturing yield of its GeneChip products
which has reduced, and it believes will continue to reduce, its gross margins
and business. The Company has also experienced, and anticipates that it will
continue to experience, difficulties in meeting customer, collaborator and
internal demand for some of its probe array products. If the Company can't
deliver products in a timely manner, it could result in the loss of customers,
delay introduction of new products or cause demand for the Company's products to
decline. Furthermore, if the Company can't deliver products to its customers
that consistently meet their performance expectations, demand for its products
will decline.
Because the Company has a limited manufacturing history, it doesn't fully
understand all of the factors that affect its manufacturing processes. As a
result, manufacturing and quality control problems have arisen and the Company
expects them to continue to arise as it attempts to increase the production rate
at its manufacturing facilities. The Company may not be able to increase
production rates at these facilities in a timely and cost-effective manner or at
commercially reasonable costs.
THE COMPANY'S SURVIVAL DEPENDS ON ITS ABILITY TO AVOID INFRINGING THE
INTELLECTUAL PROPERTY RIGHTS OF OTHERS AS WELL AS MAINTAINING, ENFORCING AND
OBTAINING INTELLECTUAL PROPERTY RIGHTS OF ITS OWN
Intellectual property rights are essential to the Company's business. The
Company is engaged in significant litigation with its competitors regarding both
its intellectual property rights and their rights which consume, and will
continue to consume, substantial portions of the Company's financial and
managerial resources. A loss of a significant litigation could prevent the
Company from producing its current products or developing new ones and could
also result in the payment of significant penalties and royalties, which could
make it too costly to produce some or all of the products. If the Company can't
maintain, enforce or obtain intellectual property rights, competitors can design
probe array
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systems with similar competitive advantages to its GeneChip technology without
paying royalties to it. In order to continue its current business, the Company
must successfully:
- defend against third parties asserting that it infringes their
intellectual property rights;
- enforce its intellectual property rights against third parties infringing
its rights;
- obtain licenses to the intellectual property it needs to continue or
expand its business;
- obtain enforceable patent rights to its product and process innovations;
and
- defend the scope of its existing or pending patents in administrative
proceedings, such as oppositions or interferences.
Moreover, even if the Company defends and enforces its intellectual property
rights, others may independently develop similar or alternative technologies,
duplicate any of its technologies, or design around or invalidate its patented
technologies. These developments would reduce the value of the Company's
intellectual property assets.
IF THE COMPANY CAN'T CONTINUOUSLY DEVELOP AND INTRODUCE NEW PRODUCTS IT WON'T BE
ABLE TO COMPETE SUCCESSFULLY IN ITS HIGHLY COMPETITIVE AND RAPIDLY CHANGING
MARKET
The Company competes in markets that are new, intensely competitive, highly
fragmented and rapidly changing and many of its current and potential
competitors have significantly greater financial, technical, marketing and other
resources. In addition, many current and potential competitors have greater name
recognition, more extensive customer bases and access to proprietary genetic
content. The Company cannot survive if it fails to respond quickly to new or
emerging technologies and changes in customer requirements.
Currently, the Company's principal competition comes from existing DNA probe
array and other technologies that are used to perform many of the same functions
for which the Company markets its GeneChip products. In order to compete against
existing and newly developed technologies and maintain pricing and gross
margins, the Company needs to successfully demonstrate to potential customers
that its GeneChip products provide improved performance and capabilities. A
large number of publicly traded and privately held companies including Agilent
Technologies, Corning Inc., CuraGen, Gene Logic, Inc., General Scanning, Inc.,
Genome Solutions, Hitachi, Ltd., Illumina, Inc., Incyte/ Synteni, Lynx
Therapeutics, Motorola, Inc. and Sequenome, Inc. also are developing or have
developed DNA probe based assays or other products and services, some of which
may be competitive with the Company's.
THE COMPANY DEPENDS ON A LIMITED NUMBER OF SUPPLIERS AND IT WILL BE UNABLE TO
MANUFACTURE ITS PRODUCTS IF SHIPMENTS FROM THESE SUPPLIERS ARE DELAYED OR
INTERRUPTED
Key parts of the Company's GeneChip product line, as well as various
equipment and raw materials used in the synthesis of probe arrays, are currently
available only from a single source or a limited number of sources. The Company
relies on Agilent Technologies to manufacture, install and service its scanners
and on Enzo to manufacture key substances used with probe arrays and various
labeling kits needed to process samples. In addition, components of the
Company's manufacturing equipment are available from one of only a few
suppliers. In the event that supplies from these vendors were delayed or
interrupted for any reason, the Company wouldn't be able to get manufacturing
equipment, scanners or other components for its GeneChip product in a timely
fashion or in insufficient quantities or 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, it
is dependent on its vendors to provide components of appropriate quality and
reliability and to meet applicable regulatory requirements. Consequently, in
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the event that supplies from these vendors were delayed or interrupted for any
reason, the Company could be delayed in its ability to develop and deliver
products to its customers.
IF THE COMPANY IS UNABLE TO MAINTAIN ITS RELATIONSHIPS WITH COLLABORATIVE
PARTNERS, IT MAY HAVE DIFFICULTY SELLING ITS PRODUCTS AND SERVICES
The Company believes that its success in penetrating its target markets
depends in part on its ability to develop and maintain collaborative
relationships with key companies as well as with key academic researchers. The
Company's collaborative partners, however, may not be able to perform their
obligations as expected or devote sufficient resources to the development,
clinical testing, supply or marketing of its potential products developed under
these collaborations.
Currently, the Company's significant collaborative partners include Agilent
Technologies in the making of its scanners, Amersham Pharmacia Biotech KK in
distributing its products in Japan, and Roche Molecular Systems and bioMerieux
in the making of its diagnostic chip products. Relying on these or other
collaborative relationships is risky to the Company's future success because:
- its partners may develop technologies or components competitive with its
GeneChip product;
- its existing collaborations may preclude it from entering into additional
future arrangements;
- its partners may not obtain regulatory approvals necessary to continue the
collaborations in a timely manner;
- some of its agreements may prematurely terminate due to disagreements
between it and its partners;
- its partners may not devote sufficient resources to the development and
sale of its products;
- its partners may be unable to supply products to it on a timely basis;
- its collaborations may be unsuccessful; or
- it may not be able to negotiate future collaborative arrangements on
acceptable terms.
THE COMPANY'S CURRENT SALES, MARKETING AND TECHNICAL SUPPORT ORGANIZATION MAY
LIMIT ITS ABILITY TO SELL ITS PRODUCTS
The Company currently has limited sales, marketing and technical support
services. To assist its sales and support activities, it entered into a
nonexclusive distribution agreement covering Japan with Amersham Pharmacia
Biotech KK and a service agreement for its GeneArray scanner with Agilent
Technologies. Although the Company has invested significant other resources to
expand its direct sales force and its technical and support staff, it may not be
able to establish a sufficiently sized sales, marketing or technical support
organization to sell, market or support the Company's products.
Moreover, relying on third parties such as Amersham Pharmacia Biotech KK and
Agilent Technologies for sales, marketing and technical support is risky because
these third parties will sell competitive products or otherwise become the
Company's competitors.
THE LOSS OF A KEY CUSTOMER COULD SUBSTANTIALLY REDUCE OUR REVENUES AND BE
PERCEIVED AS A LOSS OF MOMENTUM IN THE COMPANY'S BUSINESS
The Company's customers are concentrated in a small number of pharmaceutical
and biotechnology companies, academic research centers and clinical reference
laboratories. The Company expects that a small number of customers, such as
Aventis, F. Hoffman-La Roche, Ltd., Genetics Institute, Gene Logic, Inc. and
other key customers, will continue to account for a substantial portion of
revenues for the foreseeable future. If the Company loses a major customer, its
revenues may be
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substantially reduced and investors may perceive this as a loss of momentum in
its business. Moreover, if consolidation in the pharmaceutical and biotechnology
industries continues, the Company's current and potential customers could
decrease or slow aggregate sales of its technology and shrink its target market.
BECAUSE THE COMPANY'S BUSINESS IS HIGHLY DEPENDENT ON KEY EXECUTIVES AND
SCIENTISTS, ITS INABILITY TO RECRUIT AND RETAIN THESE PEOPLE COULD HINDER ITS
BUSINESS EXPANSION PLANS
The Company is highly dependent on its executive officers and its senior
scientists and engineers, including scientific advisors. The Company's product
development and marketing efforts will be delayed or curtailed if it loses the
services of any of these people.
The Company relies on its scientific advisors and consultants to assist it
in formulating its research, development and commercialization strategy. All of
these individuals are engaged by employers other than the Company and have
commitments to other entities that may limit their availability to the Company.
Some of them also consult for companies that may be competitors of the
Company's. A scientific advisor's other obligations may prevent him or her from
assisting the Company in developing its technical and business strategies.
To expand its research, product development and sales efforts the Company
needs additional people skilled in areas such as bioinformatics, organic
chemistry, information services, regulatory affairs, manufacturing, sales,
marketing and technical support. Competition for these people is intense and
their turnover rate is high. The Company won't be able to expand its business if
it is unable to hire, train and retain a sufficient number of qualified
employees.
BECAUSE GLAXO WELLCOME OWNS A SUBSTANTIAL PORTION OF THE COMPANY'S OUTSTANDING
CAPITAL STOCK, GLAXO MAY BE ABLE TO INFLUENCE THE OUTCOME OF STOCKHOLDER VOTES
OR THE MARKET PRICE OF THE COMPANY'S STOCK
Glaxo Wellcome plc, ("Glaxo") and its affiliates currently beneficially own
approximately 31% of the Company's outstanding common stock. Although the
Company has executed a governance agreement with Glaxo, Glaxo nevertheless may
be able to influence the outcome of stockholder votes, including votes
concerning the election of directors, adoption of amendments to the Company's
certificate of incorporation and bylaws and approval of mergers and other
significant corporate transactions. Moreover, the Company's stock price may drop
if Glaxo sells a significant amount of the Company's stock or if investors
interpret any sale of the Company's stock by Glaxo as a sign of weakness in the
Company's business.
ITEM 2. PROPERTIES
Affymetrix leases two facilities in Santa Clara, California, totaling 93,000
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 2003. The Company also leases 31,000 square feet of
research and development space in Sunnyvale, California under a lease that
expires in 2002. 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.
In October 1999, Affymetrix acquired an additional 57,000 square feet of office
and light manufacturing space in Sunnyvale, California, under a lease that
expires in 2004. In November 1999, another new lease began comprising 3,000
square feet of office space in Abingdon, England. This space is used by
Affmetrix' European Sales Group under a lease expiring in 2002.
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ITEM 3. LEGAL PROCEEDINGS
Affymetrix is a party to significant litigation, which will consume
substantial financial and managerial resources and which could adversely affect
its 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, 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, or
'231, and 5,525,464 or '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, '940. On August 18, 1998, Affymetrix filed a lawsuit in
United States District Court for the Northern District of California (San
Francisco Division) against Hyseq alleging infringement of U.S. Patent Nos.
5,795,716, or '716, and 5,744,305, or '305. On September 1, 1998, Affymetrix
added its U.S. Patent No. 5,800,992, or '992, to the complaint of infringement
against Hyseq. On October 26, 1999, Hyseq filed a third action in United States
District Court for the Northern District of California (San Francisco Division)
claiming that Affymetrix' products infringe a related patent, United States
Patent 5,972,619, or '619. The action also requests a declaration that the '716
Patent is invalid based on the '619 Patent. On November 23, 1998, Hyseq filed an
answer to Affymetrix' complaint, alleging that Affymetrix' three asserted
patents are invalid. On October 26, 1999, the United States District Court for
the Northern District of California issued a Claims Construction Order
interpreting various terms of the '231, '464, and '940 Patents.
On June 4, 1999, Oxford Gene Technology, Ltd. ("OGT") filed suit against
Affymetrix in the United States District Court for the District of Delaware and
in the United Kingdom alleging infringement of United States Patent 5,700,637
and European Patent 0-373-203, respectively. On June 4, 1999, an asset transfer
agreement with Beckman Coulter, Inc. ("Beckman") became effective, giving
Affymetrix access to Beckman's microarray business, including licenses to United
States Patent 5,700,637 and European Patent 0-373-203. On June 17, 1999,
Affymetrix filed a complaint in the United States District Court for the
Northern District of California asking for, among other things, a declaration
that Affymetrix has a valid license to use the patents and that, in light of
this license, Affymetrix is not infringing on these patents. This case has been
consolidated with the Delaware action. In the UK action, Affymetrix has
counterclaimed for revocation of this patent and OGT has applied to amend the
patent. The patent infringement issues have been stayed pending resolution of
whether Affymetrix and Affymetrix UK Limited have a license under the patent as
a result of the purchase of Beckman's microarray business. In February, 2000,
the High Court of Justice, Chancery Division, Patent Court held a hearing on the
issue of whether Affymetrix UK had a valid license. A decision on this hearing
is anticipated shortly. In addition, in February 2000, OGT asserted that
Affymetrix and Beckman were in breach of this license.
The Hyseq and the OGT actions seek damages based on the sale of Affymetrix'
products and processes and seek to enjoin commercial activities relating to
those products and processes. In addition to subjecting Affymetrix to potential
liability for damages, these actions, and any other similar legal actions
against Affymetrix or its collaborative partners, could require Affymetrix or
its collaborative partners to obtain a license in order to continue to
manufacture, market or use the affected products and processes. While Affymetrix
believes that the Hyseq and OGT complaints are without merit, Affymetrix may not
prevail in these actions and Affymetrix or its collaborative partners may not
prevail in any other related action. Moreover, in the event Affymetrix does not
prevail in the Hyseq and OGT actions and Affymetrix, its partners or its
customers are required to obtain a license to continue to manufacture, market or
use the affected products and processes, Affymetrix, its partners or its
customers may not be able to obtain such a license on commercially acceptable
terms, if at all.
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Furthermore, Affymetrix has expended and is likely to continue to expend
substantial financial and managerial resources in defending against the claims
filed by Hyseq and OGT.
On January 6, 1998, Affymetrix 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, or '934. On
September 1, 1998, Affymetrix 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 Affymetrix' patents and,
in regard to the '992 Patent, sought a preliminary injunction. Incyte and
Synteni moved for summary judgment that certain claims of the '992 Patent were
invalid. On May 4, 1999, the Court denied Affymetrix' motion for preliminary
injunction and denied Incyte/Synteni's motion for summary judgment.
In the High Court of Justice, Chancery Division, Patents Court, OGT has
applied in the United Kingdom to revoke Affymetrix' EP (UK) 0-619-321 Patent
(related to certain DNA arrays). This revocation action also includes an
application to revoke Affymetrix's related United Kingdom Patent GB 2248840.
Revocation and infringement actions typically are resolved in the first instance
in about twelve to eighteen months. The underlying patents can be declared
valid, invalid, or partially valid, often with claim amendments submitted during
the course of the proceedings.
Affymetrix may not prevail in asserting its patent rights against Hyseq,
Incyte, Synteni or others. Affymetrix has expended and is likely to continue to
expend substantial financial and managerial resources in asserting its patent
rights against Hyseq, Incyte, Synteni and others. Affymetrix' 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 Affymetrix' GeneChip technology.
The removal of such barriers could have a material adverse effect on Affymetrix'
business, financial condition and results of operations.
On April 17, 1998, Incyte filed a response and counterclaim to case number
C98-4507, asserting that the '934 Patent is invalid and not infringed. On
April 17, 1998, Incyte also filed a counterclaim alleging that a patent license
agreement Affymetrix entered into in December 1997 with Molecular Dynamics
interfered with an agreement between Incyte and Molecular Dynamics. In the
counterclaim, Incyte alleges that the terms of Affymetrix' patent license to
Molecular Dynamics prevented Molecular Dynamics from meeting its obligations to
Incyte. Incyte seeks 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,
including:
- a request for declaration of non-infringement 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; and
- a claim of slander of title of a patent and a claim of trade libel.
Affymetrix believes that the counterclaims are without merit. However,
Affymetrix has expended and is likely to continue to expend significant
financial and managerial resources defending against these and any other
counterclaims filed by Incyte and Synteni and others. Affymetrix' failure to
successfully enforce its patent rights or defend against counterclaims of
Incyte, Synteni, or others could result in a material adverse effect on
Affymetrix' business, financial condition and results of operations.
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The United States Patent and Trademark Office, or USPTO, notified Affymetrix
that Stanford University presented claims that relate to substantially the same
subject matter as certain claims from the '992 Patent and all of the claims of
the '305 Patent. The Stanford application is alleged to be exclusively licensed
to Incyte. The USPTO notified Affymetrix on April 2, 1999 that it had declared
an interference proceeding relating to these patents and claims of patents. The
USPTO conducted proceedings to determine the priority of these claims and
determined that Incyte/Synteni did not meet the burden of proof required to
establish a case that the claims should be further evaluated in a full
interference proceeding. Incyte/Synteni has appealed this decision. In United
States District Court for the Northern District of California (case number
C99-2111). Affymetrix has expended, and expects in the future to continue to
expend, substantial financial and managerial resources as a result of these
proceedings. Moreover, Affymetrix may not prevail in such proceedings or in
similar proceedings relating to those or other patents. Affymetrix may not
prevail in the appeal of the Incyte/Synteni interference proceedings. A failure
to prevail could result in Affymetrix' inability to commercialize its products
and also would enable others to copy aspects of Affymetrix' products.
Affymetrix' intellectual property outside of the United States is expected
to be subject to significant additional administrative and litigation actions.
For example, in Europe and Japan, third parties are expected to oppose
significant patents owned or controlled by Affymetrix. Currently, OGT, Incyte,
Multilyte Ltd. and ProtoGene Laboratories, Inc. filed oppositions against
Affymetrix's EP 0-619-321 Patent in the European Patent Office. This procedure
will result in the patent being either upheld in its entirety, allowed to grant
in amended form in designated European countries, or revoked.
Affymetrix expects in the future to expend substantial financial and
managerial resources as a result of these proceedings. A failure to prevail
could result in an inability to commercialize its products and also would enable
others to copy aspects of its products.
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, 1999.
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>
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
1999
First Quarter.............................................. $23.62 $ 43.19
Second Quarter............................................. $32.50 $ 52.19
Third Quarter.............................................. $49.25 $127.00
Fourth Quarter............................................. $72.62 $195.12
</TABLE>
As of March 20, 2000, there were approximately 466 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.
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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, 1999 and 1998 and for each of the three years in the period ended
December 31, 1999 are derived from audited financial statements included 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,
-----------------------------------------------------
1999 1998 1997 1996 1995
--------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Product................................. $ 86,076 $ 36,644 $ 4,789 $ 1,389 $ --
Research................................ 7,932 14,522 14,976 10,583 4,625
License fees and royalties.............. 2,847 859 -- -- --
--------- -------- -------- -------- --------
Total revenue......................... 96,855 52,025 19,765 11,972 4,625
--------- -------- -------- -------- --------
Cost and expenses:
Cost of product revenue................. 35,333 14,858 4,559 2,178 --
Research and development................ 40,527 35,953 28,168 18,762 12,420
Selling, general and administrative..... 48,714 29,763 14,697 7,569 3,833
--------- -------- -------- -------- --------
Total costs and expenses................ 124,574 80,574 47,424 28,509 16,253
--------- -------- -------- -------- --------
Loss from operations...................... (27,719) (28,549) (27,659) (16,537) (11,628)
Interest income, net...................... 4,634 5,419 5,133 4,310 881
--------- -------- -------- -------- --------
Net loss.................................. (23,085) (23,130) (22,526) (12,227) (10,747)
Preferred Stock dividends................. (2,055) (2,321) -- -- --
--------- -------- -------- -------- --------
Net loss attributable to Common
Stockholders............................ $ (25,140) $(25,451) $(22,526) $(12,227) $(10,747)
========= ======== ======== ======== ========
Basic and diluted net loss per common
share(1)................................ $ (1.02) $ (1.11) $ (0.99) $ (0.61) $ (0.61)
Shares used in computing basic and diluted
net loss per common share(1)............ 24,623 22,915 22,644 20,131 17,664
BALANCE SHEET DATA:
Cash, cash equivalents, and
available-for-sale securities........... $ 225,043 $ 80,568 $ 71,573 $108,982 $ 38,883
Working capital........................... 228,757 80,387 71,553 107,668 36,070
Total assets.............................. 320,298 136,428 101,170 118,900 44,594
Long-term obligations(2).................. 155,000 5,261 513 741 948
Convertible Redeemable Preferred Stock.... -- 49,857 -- -- --
Accumulated deficit....................... (117,860) (92,720) (67,269) (44,743) (32,516)
Total stockholders' equity................ 131,342 66,750 91,036 112,533 38,561
</TABLE>
- ------------------------
(1) See Note 1 to the Financial Statements included in Item 8.
(2) In February 2000, the Company issued $225 million principal amount of 4.75%
convertible subordinated notes.
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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 primarily in the United States and Europe.
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. In
April 1998, the Company completed the sale of 1,634,522 shares of Series AA
Convertible Redeemable Preferred Stock to Glaxo Wellcome Americas, Inc. (a
wholly owned subsidiary of Glaxo) for net proceeds of approximately
$49.9 million and in August 1999, Glaxo elected to convert the Series AA
Convertible Redeemable Preferred Stock to 1,257,229 shares of Affymetrix common
stock at a conversion price of $40 per share. As of December 31, 1999, Glaxo's
ownership position is approximately 31%.
The Company has incurred operating losses in each year since its inception,
including a loss attributable to Common Stockholders of approximately
$25.1 million during the year ended December 31, 1999 and, as of such date, had
an accumulated deficit of approximately $117.9 million. The Company's losses
have resulted principally from costs incurred in research and development,
manufacturing and from selling, general and administrative costs associated with
the Company's operations. These costs have exceeded the Company's revenues and
interest income, which to date have been generated principally from product
sales, royalties and license fees and technology access fees, collaborative
research and development agreements, government research grants and from cash
and investment balances. The Company expects to incur additional operating
losses for at least the next year as a result of increases in its expenses for
expansion in its 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, design fees, royalties, license fees, and other research
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 manufacture the GeneChip system and probe arrays
cost-effectively 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.
In February 2000, the Company completed its acquisition of Genetic
MicroSystems, Inc. ("GMS") in a merger that will be accounted for as a pooling
of interests. Under the terms of the acquisition, the outstanding shares of GMS
common and preferred stock were converted into an aggregate of 969,899 shares of
the Company's common stock and the Company assumed all outstanding GMS options
and warrants. At the date of consummation, GMS had an aggregate 100,101 options
and warrants outstanding. The Company's financial statements will be restated in
2000 to include the accounts and operations of GMS.
IMPACT OF YEAR 2000
Prior to January 1, 2000, the Company completed an assessment of Year 2000
compliance of its internal and embedded computer systems, certain third parties
suppliers and major customers and undertook certain remediative actions. The
Company has not experienced any material Year 2000 problems as a result of
operating on and after January 1, 2000. However, there can be no assurance that
the Company will not experience problems in the future with the operation of its
internal and embedded systems and those of its third party suppliers and
customers. Any such problems could result in the Company experiencing a business
interruption and being subject to certain litigation, which could have a
material adverse impact on the Company's business, results of operations and
financial condition.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND DECEMBER 31, 1998
PRODUCT REVENUE AND COST OF PRODUCT REVENUE. Product sales increased to
$86.1 million in 1999, up from $36.6 million in 1998. The increase primarily
resulted from growth in placements of GeneChip systems, sales of GeneChip probe
arrays and related products and subscription fees earned under EasyAccess-TM-
contracts. Cost of product revenue increased to $35.3 million in 1999, up from
$14.9 million in 1998. The increase in cost of product revenue is due to the
higher revenue base, increased manufacturing costs from the start-up of the
Company's West
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<PAGE>
Sacramento facility and 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 may 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
expansion of its West Sacramento facility throughout 2000. Margins also
fluctuate as a result of changes in the mix of products sold. The Company also
sells products in certain foreign countries and thus revenue and margins will
fluctuate due to changes in currency exchange rates.
RESEARCH REVENUE. Research revenue includes custom probe array design fees,
milestones, FTE support and grant funding. Research revenue decreased to
$7.9 million for 1999 from $14.5 million for 1998. The decrease is primarily due
to timing of certain milestone payments and design fees and lower activity under
government grants including grants from the Advanced Technology Program ("ATP")
and the National Institutes of Health, National Center for Human Genome Project,
which was completed in 1998. The Company expects grant revenues to decline
substantially due to the completion of the ATP grant in January 2000.
LICENSE FEES AND ROYALTY REVENUES. License fees and royalty revenues
increased to $2.8 million in 1999, up from $0.9 million in 1998. The increase
was attributed primarily to the signing of additional licensees and the
expansion of existing licensing arrangements.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses, which
primarily consist of new technology, product and manufacturing process
development, increased to $40.5 million for 1999 compared to $36.0 million for
1998. 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 $48.7 million in 1999 compared to
$29.8 million for 1998. 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
litigations. Selling, general and administrative expenses are expected to
continue to increase as the Company expands sales, marketing, and technical
support functions, increases headcount in management and administrative
functions, prosecutes and defends its intellectual property position and defends
against claims made by third parties in ongoing litigation. In particular, the
Company expects legal costs to increase as on-going patent litigation with
Hyseq, Inc., Incyte Pharmaceuticals, Inc./ Synteni, Inc. and Oxford Gene
Technology, Ltd. approach their respective trial dates.
INTEREST INCOME. Interest income was $6.9 million for 1999 compared to
$5.5 million for 1998 due to higher cash investment balances from the sale of
common stock and convertible subordinated notes. Interest expense increased to
$2.3 million for 1999 compared to $0.1 million for 1998 primarily due to the
issuance of convertible subordinated notes.
YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997
PRODUCT REVENUE AND COST OF PRODUCT REVENUE. Product sales increased to
$36.6 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
35
<PAGE>
product revenue increased to $14.9 million in 1998, up from $4.6 million in
1997. The increase in cost of product revenue was due to the cost of selling
more GeneChip systems and probe arrays and increased manufacturing costs arising
from variations in manufacturing capacity and yield.
RESEARCH REVENUE. Research revenue includes custom probe array design fees,
milestones, FTE support and grant funding. Research revenue for 1998 and 1997
was approximately $14.5 million and $15.0 million, respectively.
RESEARCH AND DEVELOPMENT EXPENSES. 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 attributed to the
hiring of additional research and development personnel and associated purchases
of research supplies.
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 development of its commercial
capabilities and increased legal costs arising from ongoing patent litigation.
INTEREST INCOME AND EXPENSES. 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 was related to a capital equipment lease in
1998.
NET LOSS PER COMMON SHARE. The net loss per common share in 1998 included
the impact of $2.3 million of preferred stock dividends paid to Glaxo.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily through the sale of equity
and debt securities, government grants, collaborative agreements, interest
income and product sales. Proceeds raised through the sale of equity and debt
securities include net proceeds of $144.6 million from the private placement of
convertible subordinated notes issued in September 1999, $32.4 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 $29.0 million in 1999 compared to
$16.7 million in 1998 and $21.4 million in 1997. 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 2000 as the Company continues
to expand its operating activities.
The Company's investing activities, other than purchases, sales and
maturities of available-for-sale securities, consisted of capital expenditures,
which totaled $15.5 million in 1999, $16.5 million in 1998 and $16.0 million in
1997. Capital expenditures during 1999 included investments in facilities and
production and laboratory equipment.
Net cash provided by financing activities was $188.4 million in 1999,
$47.6 million in 1998 and $30,000 in 1997. These cash flows from financing
activities are primarily the result of the issuance of $150.0 million of
convertible subordinated notes in September 1999 and the sale of
1,000,000 shares of common stock in a private placement, net of Preferred Stock
dividends of $2.1 million. The convertible subordinated notes bear interest at
5% per annum and mature in 2006.
As of December 31, 1999, Affymetrix had cash, cash equivalents, and
available-for-sale securities of approximately $225.0 million. In February 2000,
the Company sold an additional $225 million of
36
<PAGE>
subordinated convertible notes in a private placement. These notes bear interest
at 4.75% and mature in 2007. The Company anticipates that its existing capital
resources will enable it to maintain currently planned operations and planned
capital expenditures through at least the foreseeable future. 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, 1999, Affymetrix had federal and state net operating loss
carryforwards for income tax purposes of approximately $116.9 million and
$6.1 million, respectively, which will expire at various dates beginning in 2000
through 2019, if not utilized. In addition, the Company has federal and state
research and development credit carryforwards of approximately $4.6 million and
$3.1 million, respectively, which expire at various dates beginning in 2007
through 2019, if not utilized. Utilization of the net operating loss and tax
credits may be subject to substantial annual limitation due to the ownership
change limitations provided by the Internal Revenue Code and similar state
provisions. Management believes the effect of such limitations will not result
in the expiration of the net operating loss and tax credit carry forward before
utilization.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("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. In June 1999, FASB
issued Statement of Financial Accounting Standards No. 137 which defers the
effective date of SFAS 133 to years beginning after June 15, 2000. The Company
does not anticipate SFAS 133 to have an impact on its results of operations or
financial condition when adopted.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements"
("SAB 101") which provides guidance related to revenue recognition based on
interpretations and practices followed by the SEC. SAB 101 requires companies to
report any changes in revenue recognition as a cumulative change in accounting
principle at the time of implementation in accordance with APB Opinion No. 20,
"Accounting Changes." Such changes, if necessary, are required to be made by
June 30, 2000. The Company is currently evaluating SAB 101 to determine whether
it would have any material impact on the Company's results of operations.
37
<PAGE>
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 and its convertible subordinated notes. Fixed rate
securities and borrowings 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 and floating rate
borrowings may lead to additional interest expense if interest rates increase.
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 generally less than 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
DECEMBER 31,
(DOLLAR AMOUNTS IN THOUSANDS) 2000 2001 2002 2003 2004 THEREAFTER TOTAL 1999
- ----------------------------- -------- -------- -------- -------- -------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Available-for-sale
securities................ $155,590 $48,866 $18,090 $-- $-- $ -- $222,546 $221,744
Average interest rate....... 1.7% 5.8% 6.2%
LIABILITIES:
5% convertible subordinated
notes due 2006............ $ -- $ -- $ -- $-- $-- $150,000 $150,000 $223,350
Average interest rate....... 5%
</TABLE>
38
<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........... 40
Balance Sheets.............................................. 41
Statements of Operations.................................... 42
Statements of Stockholders' Equity.......................... 43
Statements of Cash Flows.................................... 44
Notes to Financial Statements............................... 45
</TABLE>
39
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
Affymetrix, Inc.
We have audited the accompanying consolidated balance sheets of
Affymetrix, Inc. as of December 31, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1999. 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 auditing standards generally
accepted in the United States. 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 consolidated financial position of
Affymetrix, Inc. at December 31, 1999 and 1998, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States. 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,
February 2, 2000
40
<PAGE>
AFFYMETRIX, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1999 1998
--------- --------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents................................. $ 11,280 $ 1,301
Available-for-sale securities............................. 213,763 79,267
--------- --------
225,043 80,568
Accounts receivable, net of allowances for doubtful
accounts of $975 in 1999 and $408 in 1998............... 22,203 8,919
Inventories............................................... 11,362 3,276
Prepaid expenses.......................................... 4,105 2,184
--------- --------
Total current assets.................................... 262,713 94,947
Property and equipment:
Construction-in-progress.................................. 8,212 9,512
Land...................................................... 1,310 1,310
Equipment and furniture................................... 24,511 16,761
Building and leasehold improvements....................... 22,300 13,213
--------- --------
56,333 40,796
Less accumulated depreciation and amortization............ (16,459) (9,931)
--------- --------
Net property and equipment.............................. 39,874 30,865
Acquired technology rights, net of accumulated amortization
of $1,035 in 1999 and $375 in 1998 (Note 3)............... 8,965 9,625
Notes receivable from employees............................. 1,074 991
Other assets................................................ 7,672 --
--------- --------
$ 320,298 $136,428
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable and accrued liabilities.................. $ 28,053 $ 12,791
Deferred revenue.......................................... 5,642 1,517
Current portion of capital lease obligation............... 261 252
--------- --------
Total current liabilities............................... 33,956 14,560
Noncurrent portion of capital lease obligation.............. -- 261
Obligation to Beckman Coulter, Inc.......................... 5,000 5,000
Convertible subordinated notes.............................. 150,000 --
Commitments and contingencies
Convertible Redeemable Preferred Stock, $0.01 par value;
5,000,000 shares authorized; no and 1,634,522 Series AA
shares issued and outstanding at December 31, 1999 and
1998, respectively........................................ -- 49,857
Stockholders' equity:
Common stock, $0.01 par value; 75,000,000 shares
authorized; 26,185,064 and 23,017,409 shares issued and
outstanding at December 31, 1999 and 1998,
respectively............................................ 262 230
Additional paid-in-capital................................ 249,665 159,147
Deferred compensation..................................... (119) (342)
Accumulated other comprehensive (loss) income............. (606) 435
Accumulated deficit....................................... (117,860) (92,720)
--------- --------
Total stockholders' equity.............................. 131,342 66,750
--------- --------
$ 320,298 $136,428
========= ========
</TABLE>
See Accompanying Notes
41
<PAGE>
AFFYMETRIX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
REVENUE:
Product................................................... $ 86,076 $ 36,644 $ 4,789
Research.................................................. 7,932 14,522 14,976
License fees and royalties................................ 2,847 859 --
-------- -------- --------
Total revenue........................................... 96,855 52,025 19,765
-------- -------- --------
COSTS AND EXPENSES:
Cost of product revenue................................... 35,333 14,858 4,559
Research and development.................................. 40,527 35,953 28,168
Selling, general and administrative....................... 48,714 29,763 14,697
-------- -------- --------
Total costs and expenses (includes related-party expense
of $448, $48 and $52, respectively)................... 124,574 80,574 47,424
-------- -------- --------
Loss from operations........................................ (27,719) (28,549) (27,659)
Interest income............................................. 6,904 5,484 5,218
Interest expense............................................ (2,270) (65) (85)
-------- -------- --------
Net loss.................................................... (23,085) (23,130) (22,526)
Preferred Stock dividends................................... (2,055) (2,321) --
-------- -------- --------
Net loss attributable to Common Stockholders................ $(25,140) $(25,451) $(22,526)
======== ======== ========
Basic and diluted net loss per common share................. $ (1.02) $ (1.11) $ (0.99)
======== ======== ========
Shares used in computing basic and diluted net loss per
common share.............................................. 24,623 22,915 22,644
======== ======== ========
</TABLE>
See Accompanying Notes
42
<PAGE>
AFFYMETRIX, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN DEFERRED COMPREHENSIVE ACCUMULATED STOCKHOLDERS'
STOCK CAPITAL COMPENSATION INCOME DEFICIT EQUITY
--------- ---------- ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996........... $ 158,687 $ -- $(1,460) $ 49 $ (44,743) $112,533
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)
--------
Issuance of common stock upon
exercise of stock options.......... 237 -- -- -- -- 237
Amortization of deferred
compensation....................... -- -- 716 -- -- 716
--------- -------- ------- ------- --------- --------
Balance, December 31, 1997........... 158,924 -- (744) 125 (67,269) 91,036
--------- -------- ------- ------- --------- --------
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)
Reincorporation in Delaware.......... (158,696) 158,696 -- -- -- --
Issuance of common stock upon
exercise of stock options and
warrants........................... 2 451 -- -- -- 453
Amortization of deferred
compensation....................... -- -- 402 -- -- 402
--------- -------- ------- ------- --------- --------
Balance, December 31, 1998........... 230 159,147 (342) 435 (92,720) 66,750
--------- -------- ------- ------- --------- --------
Comprehensive loss:
Unrealized loss on
available-for-sale securities of
$1,106, net of reclassification
adjustments for losses included
in net loss of $65............... -- -- -- (1,041) -- (1,041)
Net loss........................... -- -- -- -- (23,085) (23,085)
--------
Comprehensive loss................... (24,126)
--------
Preferred stock dividends............ -- -- -- -- (2,055) (2,055)
Issuance of common stock upon
exercise of stock options and
warrants........................... 9 8,279 -- -- -- 8,288
Sale of common stock in private
placement.......................... 10 32,395 -- -- -- 32,405
Conversion of Series AA Redeemable
Preferred Stock to common stock.... 13 49,844 -- -- -- 49,857
Amortization of deferred
compensation....................... -- -- 223 -- -- 223
--------- -------- ------- ------- --------- --------
Balance, December 31, 1999........... $ 262 $249,665 $ (119) $ (606) $(117,860) $131,342
========= ======== ======= ======= ========= ========
</TABLE>
See Accompanying Notes
43
<PAGE>
AFFYMETRIX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
--------- --------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (23,085) $ (23,130)) $(22,526)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 6,528 4,765 2,310
Amortization of acquired technology rights.............. 660 375 --
Amortization of investment premiums..................... (1,650) (270) 159
Amortization of deferred compensation................... 223 577 716
Changes in operating assets and liabilities:
Accounts receivable................................... (13,284) (2,703) (4,328)
Inventories........................................... (8,086) (639) (736)
Prepaid expenses...................................... (1,921) (536) (225)
Accounts payable and other accrued liabilities........ 15,262 4,062 3,706
Deferred revenue...................................... 4,125 853 268
Other assets.......................................... (7,755) (83) (699)
--------- --------- --------
Net cash used in operating activities............... (28,983) (16,729) (21,355)
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (15,537) (16,542) (16,001)
Payment to Beckman Coulter, Inc. for acquired technology
rights.................................................. -- (5,900) --
Proceeds from sale of available-for-sale securities....... 63,064 143,639 98,452
Proceeds from maturities of available-for-sale
securities.............................................. -- -- 12,183
Purchases of available-for-sale securities................ (196,951) (155,532) (82,673)
--------- --------- --------
Net cash provided by (used in) investing
activities........................................ (149,424) (34,335) 11,961
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock, net............................. 40,693 278 237
Issuance of Redeemable Preferred Stock, net............... -- 49,857 --
Preferred Stock dividends................................. (2,055) (2,321) --
Issuance of convertible subordinated debt................. 150,000 -- --
Principal payments on capital lease obligation............ (252) (228) (207)
--------- --------- --------
Net cash provided by financing activities........... 188,386 47,586 30
--------- --------- --------
Net increase (decrease) in cash and cash
equivalents....................................... 9,979 (3,478) (9,364)
Cash and cash equivalents at beginning of year.............. 1,301 4,779 14,143
--------- --------- --------
Cash and cash equivalents at end of year.................... $ 11,280 $ 1,301 $ 4,779
========= ========= ========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Obligation to Beckman Coulter, Inc. for acquired
technology rights....................................... $ -- $ 5,000 $ --
========= ========= ========
Conversion of Series AA Convertible Redeemable Preferred
Stock................................................... $ 49,857 $ -- $ --
========= ========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid............................................. $ 40 $ 65 $ 85
========= ========= ========
</TABLE>
See Accompanying Notes
44
<PAGE>
AFFYMETRIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
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 primarily in the United States and Europe.
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. In
April 1998, the Company completed the sale of 1,634,522 shares of Series AA
Convertible Redeemable Preferred Stock to Glaxo Wellcome Americas, Inc. (a
wholly owned subsidiary of Glaxo) for net proceeds of approximately
$49.9 million and in August 1999, Glaxo elected to convert the Series AA
Convertible Redeemable Preferred Stock to 1,257,229 shares of Affymetrix common
stock at a conversion price of $40 per share. As of December 31, 1999, Glaxo's
ownership position is approximately 31%.
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.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Affymetrix and
its wholly-owned subsidiary, Affymetrix, UK Ltd. All significant intercompany
accounts and transactions have been eliminated.
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
Product revenues include sales of GeneChip instrumentation, software and
probe arrays as well as the associated subscription fees earned under
EasyAccess-TM- supply agreements. Instrumentation and probe array revenues are
recognized when earned, which is generally upon shipment and transfer of
45
<PAGE>
AFFYMETRIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
title to the customer. Software revenue is recognized upon completion of
performance obligations, which is generally upon installation. Reserves are
provided for anticipated returns and warranty expenses at the time the
associated revenue is recognized. Revenue from subscription fees earned under
EasyAccess supply agreements is 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.
Research revenue includes amounts earned, including milestones, from
services performed pursuant to commercial collaboration and supply agreements as
well as under government grants. Research revenue is 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.
License and royalty revenues include amounts earned from third parties
licensed under the Company's intellectual property and are recognized when
earned under the terms of the related agreements.
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.
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 and acquired technology
rights 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, 1999, there have
been no such losses.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising costs were
$0.4 million for 1999 and 1998 and not material for 1997.
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), Convertible Redeemable Preferred Stock and
convertible debt (calculated on an if-converted method) is the same as basic
loss per share because the Company is in a net loss position.
46
<PAGE>
AFFYMETRIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Outstanding securities which could potentially dilute basic earnings per
share in the future but were excluded from the computation of diluted net loss
per share as their effect would have been anti-dilutive were as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Options and warrants................................... 4,007 3,311 3,155
Subordinated convertible notes......................... 1,220 -- --
Convertible Redeemable Preferred Stock................. -- 1,635 --
</TABLE>
CASH, CASH EQUIVALENTS AND AVAILABLE-FOR-SALE SECURITIES
Cash equivalents and available-for-sale securities consist of debt
securities. Management determines the appropriate classification of debt
securities at the time of purchase. As of December 31, 1999 and 1998,
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. 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
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130") requires unrealized gains or losses on the
Company's available-for sale securities to be included in other comprehensive
income. Total comprehensive income/loss has been disclosed in the consolidated
statement of stockholders' equity.
FOREIGN CURRENCY TRANSLATION
The financial statements of Affymetrix, UK Ltd. are measured using the U.S.
dollar as the functional currency. Monetary assets and liabilities of this
subsidiary are translated at the rates of exchange at the balance sheet date.
Income and expense items are translated at average quarterly rates of exchange.
The resultant translation adjustments are included in the consolidated
statements of operations.
47
<PAGE>
AFFYMETRIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost (as determined by the first-in,
first-out method) or market and consist of the following at December 31, 1999
and 1998 (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Raw materials.............................................. $ 4,484 $1,775
Work in process............................................ 706 70
Finished goods............................................. 6,172 1,431
------- ------
Total.................................................. $11,362 $3,276
======= ======
</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
three to twenty-five years. Leasehold improvements are amortized over the useful
lives of the assets or the lease-term, whichever is shorter.
STOCK-BASED COMPENSATION
As permitted by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), the Company has elected
to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"), and related interpretations, in accounting for
its employee and director stock option and stock incentive plan. Under APB 25,
if the exercise price of the Company's stock options is not less than the market
price of the underlying stock on the date of grant, no compensation expense is
recognized. Options granted to non-employees are accounted for using the
Black-Scholes method prescribed by SFAS 123 and, in accordance with Emerging
Issues Task Force Consensus No. 96-18, the options are subject to periodic
re-valuation over their vesting terms.
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities as of December 31, 1999 and 1998,
consist of the following (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Accounts payable.......................................... $10,696 $ 7,334
Accrued compensation and related liabilities.............. 3,631 1,213
Accrued interest on convertible subordinated notes........ 2,221 --
Accrued sales and use tax................................. 1,143 --
Accrued warranty.......................................... 1,522 937
Accrued legal............................................. 6,067 2,707
Other..................................................... 2,773 600
------- -------
Total................................................. $28,053 $12,791
======= =======
</TABLE>
48
<PAGE>
AFFYMETRIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("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. In June 1999, FASB
issued Statement of Financial Accounting Standards No. 137 which defers the
effective date of SFAS 133 to years beginning after June 15, 2000. The Company
does not anticipate SFAS 133 to have an impact on its results of operations or
financial condition when adopted.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements"
("SAB 101") which provides guidance related to revenue recognition based on
interpretations and practices followed by the SEC. SAB 101 requires companies to
report any changes in revenue recognition as a cumulative change in accounting
principle at the time of implementation in accordance with APB Opinion No. 20,
"Accounting Changes." Such changes, if necessary, are required to be made by
June 30, 2000. The Company is currently evaluating SAB 101 to determine whether
it would have any material impact on the Company's results of operations.
CONCENTRATIONS OF RISK
Cash equivalents and investments are financial instruments that potentially
subject Affymetrix to concentrations of risk to the extent of amounts recorded
in the consolidated 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 regular review of its
customer activity and associated credit risks and does not require collateral
from its customers.
Certain key parts of the GeneChip system, such as the scanner, certain
reagent 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 Agilent Technologies, Inc. ("Agilent
Technologies") under which Agilent Technologies 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 Agilent
Technologies each year 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.
49
<PAGE>
AFFYMETRIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
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, generally the Company and the
third-party collaborator would negotiate the right to commercialize products
resulting from such project.
AMERSHAM PHARMACIA BIOTECH, LTD. ("AMERSHAM PHARMACIA BIOTECH") AND AMERSHAM
PHARMACIA BIOTECH, KK ("AMERSHAM PHARMACIA BIOTECH KK")
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 July
and December 1999 the Company terminated its sales representation agreement with
Amersham Pharmacia Biotech in North America and Western Europe, respectively.
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. ("BECKMAN")
In July 1998, the Company entered into a series of agreements with Beckman
that gave 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. Beckman will pay Affymetrix transfer prices and
royalties on sales of these products as specified in the agreements. The
agreements also provided 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. In June 1999, the
Company purchased the array business of Beckman that included a license to the
Southern DNA array patents owned by Oxford Gene Technology ("OGT") of Oxford,
England. OGT is contesting the transfer of this license (See "Legal
Proceedings").
Under the agreements, Affymetrix made a $5.9 million payment to Beckman and
agreed to provide an additional $5.0 million in services, cash or stock to
Beckman over the next seven years. The payments and obligations to Beckman 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.
50
<PAGE>
AFFYMETRIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 3--COLLABORATIVE AGREEMENTS AND GRANTS (CONTINUED)
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. Research revenue under this contract
were approximately $0.6 million, $1.2 million and $3.4 million for the years
ended December 31, 1999, 1998 and 1997, respectively. The associated research
costs incurred approximated revenue for each of the years presented.
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.
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 and related technical support on preferential terms 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.
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 and related technical support on preferential terms in
return for annual subscription fees, custom design fees and revenue from the
sale of probe arrays.
Prior to the 1997 agreement, the Company had entered into two agreements
with Roche. In October 1996, the Company signed a demonstration agreement with
Roche for the development and supply of a single custom probe array containing
bacterial genes. In December 1996, the Company signed a pilot agreement with
Roche Bioscience, a division of Syntex (U.S.A.) Inc., for the development and
supply of a single custom probe array containing human, rat and mouse genes. The
milestones of these agreements were met and the agreements have been concluded.
51
<PAGE>
AFFYMETRIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 3--COLLABORATIVE AGREEMENTS AND GRANTS (CONTINUED)
In February 1998, the Company entered into 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.
ORCHID BIOSCIENCES, INC. ("ORCHID")
In December 1999, Affymetrix and Orchid entered into an agreement to develop
and commercialize single nucleotide polymorphism (SNP) genotyping assays that
combine Orchid's proprietary GBA-Registered Trademark- primer extension
technology with Affymetrix' new GenFlex-Registered Trademark- Tag array product
offering from Arrymetrix.
The first products to be commercialized by the alliance will include reagent
kits for use with Affymetrix' GenFlex Tag array designed to perform thousands of
user-defined SNP analyses. Orchid will develop and manufacture GBA primer
extension reagent kits that are directed to defined sets of SNPs and that can be
customized by the end user. Affymetrix will develop and manufacture the GenFlex
Tag arrays. Affymetrix will distribute and provide marketing, sales and
technical support for the standard and universal genotyping assays. Orchid will
manufacture, supply and support custom kits for use on GenFlex Tag arrays
developed and sold by Affymetrix. As part of the agreement, Affymetrix received
a promissory note from Orchid in the principal amount of $2.5 million, which is
convertible, under certain circumstances, into Orchid Series E Convertible
Preferred Stock, par value $.001 per share. As of December 31, 1999, the
transaction was accounted for as a short-term note receivable. In January 2000,
the promissory note was converted into shares of Orchid Preferred Stock and
Affymetrix purchased an additional $2.5 million of Series E Convertible
Preferred Stock of Orchid.
GOVERNMENT GRANT
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 ("ATP") within the National Institute of
Standards and Technology to develop a miniaturized DNA diagnostic device, of
which approximately $10.7 million is available to Molecular Dynamics. Under the
contract Affymetrix receives matching funding up to $20.8 million, some of which
is used to fund activities at collaborating academic institutions and commercial
partners. Affymetrix is to receive payments monthly based on costs incurred and
has recognized revenue of $17.4 million through December 31, 1999. The ATP grant
expired in January 2000 and is subject to audit by the granting authorities.
52
<PAGE>
AFFYMETRIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 4--AVAILABLE-FOR-SALE SECURITIES
The following is a summary of available-for-sale securities as of
December 31, 1999 (in thousands):
<TABLE>
<CAPTION>
GROSS UNREALIZED GROSS UNREALIZED
COST GAINS LOSSES FAIR VALUE
-------- ---------------- ---------------- ----------
<S> <C> <C> <C> <C>
U.S. Government obligations and U.S.
Government agency securities............. $ 28,049 $ -- $(252) $ 27,798
U.S. Corporate securities.................. 194,300 24 (378) 193,946
-------- --------- ----- --------
Total securities..................... $222,349 $ 24 $(630) $221,744
======== ========= ===== ========
Amounts included in:
Cash equivalents....................... $ 7,976 $ 4 $ -- $ 7,980
Available-for-sale securities.......... 214,373 20 (630) 213,763
-------- --------- ----- --------
$222,349 $ 24 $(630) $221,744
======== ========= ===== ========
</TABLE>
The following is a summary of available-for-sale securities as of
December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
GROSS UNREALIZED GROSS UNREALIZED
COST GAINS LOSSES FAIR VALUE
-------- ---------------- ---------------- ----------
<S> <C> <C> <C> <C>
U.S. Government obligations and U.S.
Government agency securities.............. $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>
The realized gains and losses on sales of available-for-sale securities were
immaterial for the years ended December 31, 1999, 1998, and 1997.
The following is a summary of the cost and estimated fair value of
available-for-sale securities at December 31, 1999 and 1998, by contractual
maturity (in thousands):
<TABLE>
<CAPTION>
1999 1998
---------------------- ----------------------
AMORTIZED AMORTIZED
COST FAIR VALUE COST FAIR VALUE
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Mature in one year or less........................... $154,616 $154,444 $15,949 $16,037
Mature in one to three years......................... 67,733 67,300 62,883 63,230
-------- -------- ------- -------
Total............................................ $222,349 $221,744 $78,832 $79,267
======== ======== ======= =======
</TABLE>
53
<PAGE>
AFFYMETRIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
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 $0.1 million in 1999, $0.5 million in 1998
and $1.7 million in 1997. In 1999, 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 and the right to name one director
of Eos. In September 1999, the Company purchased an additional 76,923 shares of
Series D Preferred Stock for approximately $0.1 million (at December 31, 1999,
Affymetrix owns approximately 9% of EOS' outstanding equity). 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. For the years ended December 31, 1999 and
1998, the Company earned revenue of $0.3 million and $0.6 million, respectively,
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, 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 2004. Rent expense related to operating leases was approximately
$2.2 million in 1999, $1.7 million in 1998 and $1.4 million in 1997.
54
<PAGE>
AFFYMETRIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 6--COMMITMENTS AND CONTINGENCIES (CONTINUED)
Future minimum lease obligations at December 31, 1999 under all leases are
as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
<S> <C> <C>
2000....................................................... $ 280 $ 3,330
2001....................................................... -- 3,316
2002....................................................... -- 3,371
2003....................................................... -- 2,271
2004....................................................... -- 1,121
----- -------
Total minimum lease payments............................... 280 $13,409
=======
Less amount representing interest.......................... (19)
=====
Present value of minimum lease payments.................... 261
Less current portion....................................... (261)
=====
Noncurrent obligation under capital lease.................. $ --
=====
</TABLE>
LITIGATION
Affymetrix is a party to significant litigation, which will consume
substantial financial and managerial resources and which could adversely affect
its 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, 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, or
'231, and 5,525,464 or '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, '940. On August 18, 1998, Affymetrix filed a lawsuit in
United States District Court for the Northern District of California (San
Francisco Division) against Hyseq alleging infringement of U.S. Patent Nos.
5,795,716, or '716, and 5,744,305, or '305. On September 1, 1998, Affymetrix
added its U.S. Patent No. 5,800,992, or '992, to the complaint of infringement
against Hyseq. On October 26, 1999, Hyseq filed a third action in United States
District Court for the Northern District of California (San Francisco Division)
claiming that Affymetrix' products infringe a related patent, United States
Patent 5,972,619, or '619. The action also requests a declaration that the '716
Patent is invalid based on the '619 Patent. On November 23, 1998, Hyseq filed an
answer to Affymetrix' complaint, alleging that Affymetrix' three asserted
patents are invalid. On October 26, 1999, the United States District Court for
the Northern District of California issued a Claims Construction Order
interpreting various terms of the '231, '464, and '940 Patents.
On June 4, 1999, Oxford Gene Technology, Ltd. ("OGT") filed suit against
Affymetrix in the United States District Court for the District of Delaware and
in the United Kingdom alleging infringement of United States Patent 5,700,637
and European Patent 0-373-203, respectively. On June 4, 1999, an asset transfer
agreement with Beckman became effective, giving Affymetrix access to
55
<PAGE>
AFFYMETRIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 6--COMMITMENTS AND CONTINGENCIES (CONTINUED)
Beckman's microarray business, including licenses to United States Patent
5,700,637 and European Patent 0-373-203. On June 17, 1999, Affymetrix filed a
complaint in the United States District Court for the Northern District of
California asking for, among other things, a declaration that Affymetrix has a
valid license to use the patents and that, in light of this license, Affymetrix
is not infringing on these patents. This case has been consolidated with the
Delaware action. In the UK action, Affymetrix has counterclaimed for revocation
of this patent and OGT has applied to amend the patent. The patent infringement
issues have been stayed pending resolution of whether Affymetrix and Affymetrix
UK Limited have a license under the patent as a result of the purchase of
Beckman's microarray business. In February, 2000, the High Court of Justice,
Chancery Division, Patent Court held a hearing on the issue of whether
Affymetrix UK had a valid license. A decision on this hearing is anticipated
shortly. In addition, in February 2000, OGT asserted that Affymetrix and Beckman
were in breach of this license.
The Hyseq and the OGT actions seek damages based on the sale of Affymetrix'
products and processes and seek to enjoin commercial activities relating to
those products and processes. In addition to subjecting Affymetrix to potential
liability for damages, these actions, and any other similar legal actions
against Affymetrix or its collaborative partners, could require Affymetrix or
its collaborative partners to obtain a license in order to continue to
manufacture, market or use the affected products and processes. While Affymetrix
believes that the Hyseq and OGT complaints are without merit, Affymetrix may not
prevail in these actions and Affymetrix or its collaborative partners may not
prevail in any other related action. Moreover, in the event Affymetrix does not
prevail in the Hyseq and OGT actions and Affymetrix, its partners or its
customers are required to obtain a license to continue to manufacture, market or
use the affected products and processes, Affymetrix, its partners or its
customers may not be able to obtain such a license on commercially acceptable
terms, if at all. Furthermore, Affymetrix has expended and is likely to continue
to expend substantial financial and managerial resources in defending against
the claims filed by Hyseq and OGT.
On January 6, 1998, Affymetrix 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, or '934. On
September 1, 1998, Affymetrix 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 Affymetrix' patents and,
in regard to the '992 Patent, sought a preliminary injunction. Incyte and
Synteni moved for summary judgment that certain claims of the '992 Patent were
invalid. On May 4, 1999, the Court denied Affymetrix' motion for preliminary
injunction and denied Incyte/Synteni's motion for summary judgment.
In the High Court of Justice, Chancery Division, Patents Court, OGT has
applied in the United Kingdom to revoke Affymetrix' EP (UK) 0-619-321 Patent
(related to certain DNA arrays). This revocation action also includes an
application to revoke Affymetrix's related United Kingdom Patent GB 2248840.
Revocation and infringement actions typically are resolved in the first instance
in about twelve to eighteen months. The underlying patents can be declared
valid, invalid, or partially valid, often with claim amendments submitted during
the course of the proceedings.
56
<PAGE>
AFFYMETRIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 6--COMMITMENTS AND CONTINGENCIES (CONTINUED)
Affymetrix may not prevail in asserting its patent rights against Hyseq,
Incyte, Synteni or others. Affymetrix has expended and is likely to continue to
expend substantial financial and managerial resources in asserting its patent
rights against Hyseq, Incyte, Synteni and others. Affymetrix' 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 Affymetrix' GeneChip technology.
The removal of such barriers could have a material adverse effect on Affymetrix'
business, financial condition and results of operations.
On April 17, 1998, Incyte filed a response and counterclaim to case number
C98-4507, asserting that the '934 Patent is invalid and not infringed. On
April 17, 1998, Incyte also filed a counterclaim alleging that a patent license
agreement Affymetrix entered into in December 1997 with Molecular Dynamics
interfered with an agreement between Incyte and Molecular Dynamics. In the
counterclaim, Incyte alleges that the terms of Affymetrix' patent license to
Molecular Dynamics prevented Molecular Dynamics from meeting its obligations to
Incyte. Incyte seeks 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,
including:
- a request for declaration of non-infringement 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; and
- a claim of slander of title of a patent and a claim of trade libel.
Affymetrix believes that the counterclaims are without merit. However,
Affymetrix has expended and is likely to continue to expend significant
financial and managerial resources defending against these and any other
counterclaims filed by Incyte and Synteni and others. Affymetrix' failure to
successfully enforce its patent rights or defend against counterclaims of
Incyte, Synteni, or others could result in a material adverse effect on
Affymetrix' business, financial condition and results of operations.
The United States Patent and Trademark Office, or USPTO, notified Affymetrix
that Stanford University presented claims that relate to substantially the same
subject matter as certain claims from the '992 Patent and all of the claims of
the '305 Patent. The Stanford application is alleged to be exclusively licensed
to Incyte. The USPTO notified Affymetrix on April 2, 1999 that it had declared
an interference proceeding relating to these patents and claims of patents. The
USPTO conducted proceedings to determine the priority of these claims and
determined that Incyte/Synteni did not meet the burden of proof required to
establish a case that the claims should be further evaluated in a full
interference proceeding. Incyte/Synteni has appealed this decision. In United
States District Court for the Northern District of California (case number
C99-2111). Affymetrix has expended, and expects in the future to continue to
expend, substantial financial and managerial resources as a result of these
proceedings. Moreover, Affymetrix may not prevail in such proceedings or in
similar proceedings relating to those or other patents. Affymetrix may not
prevail in the appeal of the Incyte/Synteni interference proceedings. A failure
to prevail could result in Affymetrix' inability to commercialize its products
and also would enable others to copy aspects of Affymetrix' products.
57
<PAGE>
AFFYMETRIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 6--COMMITMENTS AND CONTINGENCIES (CONTINUED)
Affymetrix' intellectual property outside of the United States is expected
to be subject to significant additional administrative and litigation actions.
For example, in Europe and Japan, third parties are expected to oppose
significant patents owned or controlled by Affymetrix. Currently, OGT, Incyte,
Multilyte Ltd. and ProtoGene Laboratories, Inc. filed oppositions against
Affymetrix' EP 0-619-321 Patent in the European Patent Office. This procedure
will result in the patent being either upheld in its entirety, allowed to grant
in amended form in designated European countries, or revoked.
Affymetrix expects in the future to expend substantial financial and
managerial resources as a result of these proceedings. A failure to prevail
could result in an inability to commercialize its products and also would enable
others to copy aspects of its products.
NOTE 7--CONVERTIBLE SUBORDINATED NOTES
On September 22, 1999, the Company completed the sale of $150 million
principal amount of 5% convertible subordinated notes due 2006 (the "5% Notes").
The 5% Notes mature on October 1, 2006 and bear interest at a rate of 5% per
annum, which is payable semi-annually on April 1 and October 1. The 5% Notes are
convertible, at any time prior to maturity or redemption, into shares of the
Company's common stock at a conversion price of $123.00 per share, subject to
adjustment. The Company can redeem some or all of the 5% Notes at any time after
October 7, 2002, and the debt holder has a right to require the Company to
purchase all or a portion of the 5% Notes upon a change in control. The 5% Notes
are subordinated to all of the Company's existing and future senior
indebtedness. The fair value of the 5% Notes at December 31, 1999 was
$223.3 million, based on the market value in the PORTAL market where the 5%
Notes are traded.
NOTE 8--CONVERTIBLE REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
SALE OF COMMON STOCK
On March 15, 1999, the Company completed the private placement of 1,000,000
shares of common stock for an aggregate purchase price of $32.5 million to the
Growth Fund of America, Inc., which is managed by Capital Research and
Management Company. The Company filed a registration statement with respect to
these shares on July 12, 1999.
CONVERTIBLE REDEEMABLE PREFERRED STOCK
On August 5, 1999, Glaxo elected to convert its 1,634,522 shares of Series
AA Convertible Redeemable Preferred Stock purchased in April 1998 into 1,257,229
shares of Affymetrix common stock at the original conversion price of
approximately $40 per share.
COMMON STOCK WARRANTS
During 1999, outstanding warrants to purchase 203,881 shares of common stock
at $8.25 per share and 12,542 shares at $25.00 per share were exercised in full.
At December 31, 1999, the Company had no warrants outstanding.
58
<PAGE>
AFFYMETRIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 8--CONVERTIBLE REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(CONTINUED)
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 will not become an "Acquiring Person" until it acquires beneficial
ownership of additional shares of common stock. The Rights will expire in ten
years. In February 2000, this plan was amended (See "Subsequent Events").
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, 1999, 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.
59
<PAGE>
AFFYMETRIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 8--CONVERTIBLE REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(CONTINUED)
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.
Activity under the stock plans through December 31, 1999 is as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
----------------------------
WEIGHTED
NUMBER OF AVERAGE EXERCISE
SHARES PRICE PER SHARE
--------- ----------------
<S> <C> <C>
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
---------
Options granted.................................. 1,784,750 49.09
Options exercised................................ (699,330) 9.45
Options canceled................................. (181,594) 23.01
---------
Balance at December 31, 1999....................... 4,007,413 $29.68
=========
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------- --------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE REMAINING AVERAGE AVERAGE
RANGE OF CONTRACTUAL LIFE EXERCISE PRICE EXERCISE PRICE
EXERCISE PRICES NUMBER (IN YEARS) PER SHARE NUMBER PER SHARE
- -------------------- --------- ----------------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
$0.30 - 0.67...... 996,909 5.59 $ 0.64 747,136 $ 0.63
4.80 - 25.37...... 674,471 7.85 21.94 117,593 19.91
25.66 - 35.87...... 954,783 8.16 30.06 140,091 29.97
36.01 - 48.87...... 1,155,750 9.46 47.55 -- --
49.44 - 79.50...... 72,750 9.54 64.77 -- --
82.00 - 187.37...... 152,750 9.80 99.12 -- --
--------- ---------
4,007,413 7.93 $29.68 1,004,820 $ 6.98
========= =========
</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.
60
<PAGE>
AFFYMETRIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 8--CONVERTIBLE REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(CONTINUED)
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 1999, 1998
and 1997: risk free interest rate of 6.5%, 4.7% and 5.4%, respectively; a
dividend yield of zero; volatility factors of the market price of the Company's
common stock price of 0.58, 0.54 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 1999, 1998 and 1997 was $23.62, $11.22 and $14.01, 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 Company's pro forma information as of December 31,
1999, 1998 and 1997 is as follows (in thousands except per share amounts):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Pro forma net loss attributable to Common
Stockholders................................. $(39,069) $(29,471) $(26,515)
Pro forma basic and diluted net loss per common
share........................................ $ (1.59) $ (1.29) $ (1.17)
</TABLE>
The pro forma information above is not representative of the effects on
potential pro forma effects on results for future years.
RESERVED SHARES
At December 31, 1999, shares reserved for future issuance are as follows:
<TABLE>
<S> <C>
Stock option plans:
Options outstanding....................................... 4,007,413
Options available for future grants....................... 623,493
Convertible subordinated notes............................ 1,219,515
---------
5,850,421
=========
</TABLE>
61
<PAGE>
AFFYMETRIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 9--INCOME TAXES
Due to operating losses and the Company's inability to recognize an income
tax benefit from these losses, there is no provision for income taxes for 1999,
1998 and 1997.
The difference between the provision for income taxes and the amount
computed by applying the Federal statuory income tax rate (35%) to income before
taxes is explained as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Tax at Federal statutory rate............................... $(8,080) $(8,095) $(7,884)
Loss for which no tax benefit is currently recognizable..... 8,080 8,095 7,884
------- ------- -------
Total provision............................................. $ -- $ -- $ --
======= ======= =======
</TABLE>
Significant components of the Company's deferred tax assets as of
December 31, 1999 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards...................... $ 40,100 $ 26,500
Tax credit carryforwards.............................. 7,100 3,000
Capitalized research and development.................. 4,300 2,400
Deferred revenue...................................... 2,700 1,000
Other-net............................................. 5,500 3,100
-------- --------
Total deferred tax assets............................... 59,700 36,000
Valuation allowance for deferred tax assets............. (59,700) (36,000)
-------- --------
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 $23.7 million, $10.3 million and
$11.0 million during 1999, 1998 and 1997, respectively. Included in the
valuation allowance balance is $15.3 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, 1999, the Company has federal and state net operating
loss carryforwards of approximately $116.9 million and $6.1 million,
respectively, which will expire at various dates beginning in 2000 through 2019,
if not utilized. In addition, the Company has federal and state research and
development credit carryforwards of approximately $4.6 million and
$3.1 million, respectively, which expire at various dates beginning in 2007
through 2019, if not utilized. Utilization of the net operating loss and tax
credits may be subject to substantial annual limitation due to the ownership
change limitations provided by the Internal Revenue Code and similar provisions.
Management believes the
62
<PAGE>
AFFYMETRIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 9--INCOME TAXES (CONTINUED)
effect of such limitations will not result in the expiration of the net
operating loss and tax credit carry forwards before utilization.
NOTE 10--GEOGRAPHIC SALES AND SIGNIFICANT CUSTOMERS
The Company has determined that, in accordance with Statement of Financial
Accounting Standards No. 133, it operates in one segment as it only reports
profit and loss information on an aggregate basis to chief operating decision
makers of the Company. The Company had product sales by region as follows for
the years ended December 31, 1999, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Customer location:
United States............................................. $56,933 $27,049 $4,710
Europe.................................................... 20,503 7,649 79
Other..................................................... 8,640 1,946 --
------- ------- ------
Total..................................................... $86,076 $36,644 $4,789
======= ======= ======
</TABLE>
Revenue from customers representing 10% or more of total revenue during
1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
CUSTOMER:
A........................................................ -- -- 23%
B........................................................ 10% 16% 10%
C........................................................ -- -- 17%
D........................................................ -- -- 17%
E........................................................ 12% 20% --
</TABLE>
NOTE 11--401(K) 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 $0.9 million in
1999, $0.6 million in 1998 and none in 1997. Company contributions vest to
employees ratably over five years.
NOTE 12--SUBSEQUENT EVENTS (UNAUDITED)
STOCKHOLDER RIGHTS PLAN
In February 2000, the Company's Board of the Directors approved an amendment
to its to stockholder rights plan initially adopted in 1998. The amendment
increases the exercise price of the Preferred Share Purchase Rights to $1,250.00
and extends the expiration date of the plan to February 2010. Under the amended
plan, each Preferred Share Purchase Right entitles stockholders to
63
<PAGE>
AFFYMETRIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 12--SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
buy one one-thousandth of a share of Series B Junior Participating Preferred
Stock of the Company at the new exercise price of $1,250.00. The Rights will be
exercisable if a person or group 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.
CONVERTIBLE SUBORDINATED NOTES
In February 2000, the Company completed the sale of $225 million principal
amount of 4.75% convertible subordinated notes due 2007 (the "4.75% Notes"). The
4.75% Notes mature on February 15, 2007 and bear interest at a rate of 4.75% per
annum, which is payable semi-annually. The 4.75% Notes are convertible, at any
time prior to maturity or redemption, into shares of the Company's common stock
at a conversion price of $321.00 per share, subject to adjustment. The Company
can redeem some or all of the 4.75% Notes at any time after February 20, 2003
and the debt holder has a right to require the Company to purchase all or a
portion of the 4.75% Notes upon a change in control. The 4.75% Notes are
subordinated to all of the Company existing and future senior indebtedness.
GENETIC MICROSYSTEMS, INC. ("GMS")
In February 2000, Affymetrix completed its merger with GMS, a privately-held
instrumentation company specializing in DNA array technology in Woburn,
Massachusetts. Under the terms of the merger, all outstanding shares of GMS
common and preferred stock were converted into 969,899 shares of the Company's
common stock at an exchange ratio of 0.2815 Affymetrix share for each GMS share.
In addition, Affymetrix assumed all outstanding GMS options and warrants. At the
date of consummation, GMS had an aggregate of 100,101 options and warrants
outstanding.
The merger is expected to be accounted for as a pooling of interest, and,
accordingly, the Company's financial statements and financial data will be
restated in 2000 to include the accounts and operations of GMS since inception.
The following unaudited pro forma data summarizes the combined results of the
Company and GMS as though the merger had occurred at the beginning of each
period presented:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues.................................................... $108,947 $ 52,413 $ 19,765
Net loss.................................................... (25,504) (22,780) (26,800)
Basic and diluted net loss per common share................. $ (1.15) $ (1.01) $ (1.24)
</TABLE>
64
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference to the sections of the Company's proxy statement
for the 2000 Annual Meeting of Stockholders entitled "Election of Directors."
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the sections of the Company's proxy statement
for the 2000 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 2000 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 2000 Annual Meeting of Shareholders entitled "Certain Transactions."
65
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements-See Index to Financial Statements and Financial
Statement Schedule at page 40 of this Form 10-K.
(a)(2) Financial Statement Schedule-Schedule II-Valuation and Qualifying
Accounts. All other schedules have been omitted as they are not applicable.
(a)(3) Exhibits:
<TABLE>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------------ ------------------------------------------------------------
(1)2.1 Agreement and Plan of Merger, dated as of September 10,
1999, among Affymetrix, Inc., GMS Acquisition, Inc. and
certain shareholders
<C> <S>
(2)3.1 Amended and Restated Certificate of Incorporation
(3)3.2 Bylaws
(4)3.3 Agreement and Plan of Merger Between Affymetrix, Inc., a
California corporation, and Affymetrix, Inc., a Delaware
corporation
(5)3.4 Summary of Rights to Purchase Shares of Preferred Stock
pursuant to the Rights Agreement dated as of October 15,
1998
(6)4.1 Rights Agreement, dated October 15, 1998, between
Affymetrix, Inc. and American Stock Transfer & Trust
Company, as Rights Agent
(7)4.2 Indenture dated as of September 22, 1999, between
Affymetrix, Inc. and The Bank of New York, as Trustee
4.3 Indenture, dated as of February 14, 2000, between
Affymetrix, Inc. and The Bank of New York, as Trustee
4.4 Registration Rights Agreement, dated as of February 14,
2000, between Affymetrix, Inc. and certain purchasers listed
on the signature page thereto
+ (8)10.1 1993 Stock Plan, as amended
+ (8)10.2 1996 Nonemployee Directors Stock Option Plan
*(8)10.3 Collaboration Agreement by and between Hewlett-Packard
Company and Affymetrix, Inc. dated November 11, 1994
*(8)10.4 Development and Supply Agreement between Affymetrix, Inc.
and Genetics Institute, Inc. dated November 15, 1994
*(8)10.5 Supply Agreement with Genetics Institute, Inc. dated
December 8, 1995
*(8)10.6 Technology License Agreement among Affymax N.V., Affymax
Technologies, N.V., the Affymax Research Institute, and
Affymetrix, Inc. dated January 1, 1993
+ (8)10.7 Severance Agreement and Release between Affymetrix, Inc. and
David B. Singer dated June 15, 1995
+ (8)10.8 Loan and Pledge Agreement between David B. Singer and
Affymetrix, Inc. effective December 7, 1993
*(8)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.
(8)10.10 Amendment 1 to the ATP Participation Agreement between
Affymetrix, Inc. and Molecular Dynamics, Inc. effective
January 13, 1996
*(8)10.11 Governance Agreement between Affymetrix, Inc. and Glaxo
Wellcome plc dated July 6, 1995
</TABLE>
66
<PAGE>
<TABLE>
<C> <S>
(8)10.12 Services Agreement between Affymax Research Institute and
Affymetrix, Inc. effective October 1, 1993
(8)10.13 Loan Agreement between Affymax Technologies N.V. and
Affymetrix, Inc. dated December 1, 1994
(8)10.14 Lease between Solar Oakmead Joint Venture and Affymetrix,
Inc. dated October 20, 1995
(8)10.15 Sublease between Salutar, Inc. and Affymetrix, Inc. dated
October 20, 1995
(8)10.16 Sublease between Affymax Research Institute and Affymetrix,
Inc. dated February 1, 1994
*(8)10.17 Manufacturing and Supply Agreement between Affymetrix, Inc.
and RELA, Inc. dated November 27, 1995
+*(8)10.18 Loan and Pledge Agreement between Stephen P.A. Fodor and
Affymetrix, Inc. effective December 7, 1993
+*(8)10.19 Agreement between Stephen P.A. Fodor and Affymetrix, Inc.
dated November 1, 1994
+*(8)10.20 Form of Director and Officer Indemnification Agreement
*(8)10.21 Demonstration Agreement between Affymetrix, Inc. and Glaxo
Wellcome, Inc. dated May 1, 1996
(8)10.22 Lease between Harry Locklin and Affymetrix, Inc. dated
December 5,1994
(9)10.23 Lease between Sobrato Interest and Affymetrix, Inc. dated
May 31, 1996 (3380 Central Expressway, Santa Clara, CA)
(9)10.24 Lease between Sobrato Interest and Affymetrix, Inc. dated
May 31, 1996 (3450 Central Expressway, Santa Clara, CA)
*(10)10.25 Collaboration Agreement between bioMerieux Vitek, Inc. and
Affymetrix, Inc. effective as of September 1, 1996
*(10)10.26 Manufacturing Agreement between bioMerieux Vitek, Inc. and
Affymetrix, Inc. effective as of September 1, 1996
*(10)10.27 Collaboration Agreement between Incyte Pharmaceuticals, Inc.
and Affymetrix, Inc. made as of November 11, 1996
*(11)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
*(12)10.29 Sales Representation Agreement between Affymetrix, Inc. and
Amersham Pharmacia Biotech, Ltd. Dated November 28, 1997
*(12)10.30 License Agreement between Affymetrix, Inc. and Molecular
Dynamics, Inc. dated November 28, 1997
(13)10.31 Series AA Preferred Stock Purchase Agreement dated March 9,
1998 by and between Affymetrix, Inc. and Glaxo Wellcome
Americas, Inc. with exhibits.
*(14)10.32 Agreement between Affymetrix, Inc. and Roche Molecular
Systems, Inc. effective as of April 23, 1998
*(14)10.33 Agreement between Affymetrix, Inc. and Enzo Diagnostics,
Inc. effective as of April 24, 1998.
*(15)10.34 Consortium Agreement between Beckman Coulter, Inc. and the
Company dated July 31, 1998.
*(15)10.35 Letter Agreement between Beckman Coulter, Inc. and the
Company dated July 29, 1998
+10.36 1998 Stock Incentive Plan (Incorporated by reference)
+10.37 Form of Officer and Director Indemnification Agreement
(Incorporated by reference)
+10.38 Promissory Note between Karen H. Haynes and the Company
dated February 26, 1999 (Incorporated by reference)
+10.39 Promissory Note between Stephen P. A. Fodor and the Company
dated April 27, 1997 (Incorporated by reference)
+10.40 Promissory Note between Sue Siegel and the Company dated
July 9, 1998 (Incorporated by reference)
+10.41 Promissory Note between Rich Rava and the Company dated
April 3, 1997 (Incorporated by reference)
</TABLE>
67
<PAGE>
<TABLE>
<C> <S>
(16)10.42 Lease Agreement by and between the Company and Aetna Life
Insurance Company dated as of July 30, 1999
(17)10.43 Promissory Note between Sue Siegel and the Company dated
July 9, 1999
(18)10.44 Amendment to Lease by and between Affymetrix, Inc. and Harry
Locklin dated as of May 12, 1999
(19)10.46 First Addendum to Lease by and between Solar Oakmead Joint
Venture and Affymetrix, Inc.
(20)10.47 Amendment No. 1 to the 1996 Nonemployee Directors Stock
Option Plan of Affymetrix, Inc.
21 List of Subsidiaries
23 Consent of Ernst & Young LLP, Independent Auditors
27 Financial Data Schedule
</TABLE>
- ------------------------
(1) Incorporated by reference to the Registrant's registration statement on
Form S-4 as filed on October 14, 1999 (File No. 333-88987).
(2) Incorporated by reference to the same number exhibit filed with the
Registrant's registration statement on Form S-3 as filed on July 12, 1999
(File No. 333-82685).
(3) 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).
(4) Incorporated by reference to Exhibit 2.1 filed with Registrant's Form 8-K
as filed on September 29, 1998 (File No. 000-28218).
(5) Incorporated by reference to Exhibit 3.3 filed with Registrant's Form 8-K
as filed on October 16, 1998 (File No. 000-28218).
(6) Incorporated by reference to Exhibit 1 of the Registrant's Form 8-A as
filed on October 16, 1998 (file No. 000-28218).
(7) Incorporated by reference to the Registrant's registration statement on
Form S-4 as filed on October 14, 1999 (File No. 333-88987).
(8) Incorporated by reference to the same number exhibit filed with
Registrant's Registration Statement on Form S-1 (File No. 333-3648), as
amended.
(9) 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).
(10) 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).
(11) Incorporated by reference to the Exhibit 10.1 filed with the Registrant's
Registration Statement on Form S-3 (File No. 333-38167).
(12) 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).
(13) 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).
(14) 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).
(15) 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).
68
<PAGE>
(16) Incorporated by reference to the same number exhibit filed with
Registrant's Form 10-Q as filed on August 16, 1999 (File No. 000-28218).
(17) Incorporated by reference to the Exhibit 10.10 filed with Registrant's
Registration Statement on Form S-3 (File No. 333-82685).
(18) Incorporated by reference to the Exhibit 10.11 filed with Registrant's
Registration Statement on Form S-3 (File No. 333-82685).
(19) Incorporated by reference to the Exhibit 10.12 filed with Registrant's
Registration Statement on Form S-3 (File No. 333-82685).
(20) Incorporated by reference to the Exhibit 10.13 filed with Registrant's
Registration Statement on Form S-3 (File No. 333-82685).
* Confidential treatment granted
+ Management contract, compensatory plan or arrangement
(b) Reports on Form 8-K.
None.
69
<PAGE>
AFFYMETRIX, INC.
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING OF COSTS AND OTHER AT END OF
PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
------------ ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1999:
Allowance for doubtful accounts........ $408 $567 $ -- $ -- $975
==== ==== ========= ========= ====
Year ended December 31, 1998:
Allowance for doubtful accounts........ $300 $108 $ -- $ -- $408
==== ==== ========= ========= ====
Year ended December 31, 1997:
Allowance for doubtful accounts........ $ -- $300 $ -- $ -- $300
==== ==== ========= ========= ====
</TABLE>
70
<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 30, 2000 By /s/ STEPHEN P.A. FODOR, PH.D.
---------------------------------------
Stephen P.A. Fodor, Ph.D.
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
March 30, 2000 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, PH.D. Chairman of the Board and March 30, 2000
-------------------------------------- Chief Executive Officer
Stephen P.A. Fodor, PH.D. (Principal Executive
Officer)
By /s/ EDWARD M. HURWITZ Vice President and Chief March 30, 2000
-------------------------------------- Financial Officer
Edward M. Hurwitz (Principal Financial and
Accounting Officer)
By /s/ JOHN D. DIEKMAN, PH.D. Vice Chairman, Director March 30, 2000
--------------------------------------
John D. Diekman, PH.D.
</TABLE>
71
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C> <C>
By /s/ PAUL BERG, PH.D. Director March 30, 2000
--------------------------------------
Paul Berg, Ph.D.
By /s/ ADRIAN HENNAH Director March 30, 2000
--------------------------------------
Adrian Hennah
By /s/ VERNON R. LOUCKS, JR. Director March 30, 2000
--------------------------------------
Vernon R. Loucks, Jr.
By /s/ BARRY C. ROSS, PH.D. Director March 30, 2000
--------------------------------------
Barry C. Ross, Ph.D.
By /s/ DAVID B. SINGER Director March 30, 2000
--------------------------------------
David B. Singer
By /s/ LUBERT STRYER, M.D. Director March 30, 2000
--------------------------------------
Lubert Stryer, M.D.
By /s/ JOHN A. YOUNG Director March 30, 2000
--------------------------------------
John A. Young
</TABLE>
72
<PAGE>
INDEX TO EXHIBITS
<TABLE>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------------ ------------------------------------------------------------
(1)2.1 Agreement and Plan of Merger, dated as of September 10,
1999, among Affymetrix, Inc., GMS Acquisition, Inc. and
certain shareholders
<C> <S>
(2)3.1 Amended and Restated Certificate of Incorporation
(3)3.2 Bylaws
(4)3.3 Agreement and Plan of Merger Between Affymetrix, Inc., a
California corporation, and Affymetrix, Inc., a Delaware
corporation
(5)3.4 Summary of Rights to Purchase Shares of Preferred Stock
pursuant to the Rights Agreement dated as of October 15,
1998
(6)4.1 Rights Agreement, dated October 15, 1998, between
Affymetrix, Inc. and American Stock Transfer & Trust
Company, as Rights Agent
(7)4.2 Indenture dated as of September 22, 1999, between
Affymetrix, Inc. and The Bank of New York, as Trustee
4.3 Indenture, dated as of February 14, 2000, between
Affymetrix, Inc. and The Bank of New York, as Trustee
4.4 Registration Rights Agreement, dated as of February 14,
2000, between Affymetrix, Inc. and certain purchasers listed
on the signature page thereto
+ (8)10.1 1993 Stock Plan, as amended
+ (8)10.2 1996 Nonemployee Directors Stock Option Plan
*(8)10.3 Collaboration Agreement by and between Hewlett-Packard
Company and Affymetrix, Inc. dated November 11, 1994
*(8)10.4 Development and Supply Agreement between Affymetrix, Inc.
and Genetics Institute, Inc. dated November 15, 1994
*(8)10.5 Supply Agreement with Genetics Institute, Inc. dated
December 8, 1995
*(8)10.6 Technology License Agreement among Affymax N.V., Affymax
Technologies, N.V., the Affymax Research Institute, and
Affymetrix, Inc. dated January 1, 1993
+ (8)10.7 Severance Agreement and Release between Affymetrix, Inc. and
David B. Singer dated June 15, 1995
+ (8)10.8 Loan and Pledge Agreement between David B. Singer and
Affymetrix, Inc. effective December 7, 1993
*(8)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.
(8)10.10 Amendment 1 to the ATP Participation Agreement between
Affymetrix, Inc. and Molecular Dynamics, Inc. effective
January 13, 1996
*(8)10.11 Governance Agreement between Affymetrix, Inc. and Glaxo
Wellcome plc dated July 6, 1995
(8)10.12 Services Agreement between Affymax Research Institute and
Affymetrix, Inc. effective October 1, 1993
(8)10.13 Loan Agreement between Affymax Technologies N.V. and
Affymetrix, Inc. dated December 1, 1994
(8)10.14 Lease between Solar Oakmead Joint Venture and Affymetrix,
Inc. dated October 20, 1995
(8)10.15 Sublease between Salutar, Inc. and Affymetrix, Inc. dated
October 20, 1995
(8)10.16 Sublease between Affymax Research Institute and Affymetrix,
Inc. dated February 1, 1994
*(8)10.17 Manufacturing and Supply Agreement between Affymetrix, Inc.
and RELA, Inc. dated November 27, 1995
+*(8)10.18 Loan and Pledge Agreement between Stephen P.A. Fodor and
Affymetrix, Inc. effective December 7, 1993
+*(8)10.19 Agreement between Stephen P.A. Fodor and Affymetrix, Inc.
dated November 1, 1994
+*(8)10.20 Form of Director and Officer Indemnification Agreement
</TABLE>
<PAGE>
<TABLE>
<C> <S>
*(8)10.21 Demonstration Agreement between Affymetrix, Inc. and Glaxo
Wellcome, Inc. dated May 1, 1996
(8)10.22 Lease between Harry Locklin and Affymetrix, Inc. dated
December 5, 1994
(9)10.23 Lease between Sobrato Interest and Affymetrix, Inc. dated
May 31, 1996 (3380 Central Expressway, Santa Clara, CA)
(9)10.24 Lease between Sobrato Interest and Affymetrix, Inc. dated
May 31, 1996 (3450 Central Expressway, Santa Clara, CA)
*(10)10.25 Collaboration Agreement between bioMerieux Vitek, Inc. and
Affymetrix, Inc. effective as of September 1, 1996
*(10)10.26 Manufacturing Agreement between bioMerieux Vitek, Inc. and
Affymetrix, Inc. effective as of September 1, 1996
*(10)10.27 Collaboration Agreement between Incyte Pharmaceuticals, Inc.
and Affymetrix, Inc. made as of November 11, 1996
*(11)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
*(12)10.29 Sales Representation Agreement between Affymetrix, Inc. and
Amersham Pharmacia Biotech, Ltd. Dated November 28, 1997
*(12)10.30 License Agreement between Affymetrix, Inc. and Molecular
Dynamics, Inc. dated November 28, 1997
(13)10.31 Series AA Preferred Stock Purchase Agreement dated March 9,
1998 by and between Affymetrix, Inc. and Glaxo Wellcome
Americas, Inc. with exhibits.
*(14)10.32 Agreement between Affymetrix, Inc. and Roche Molecular
Systems, Inc. effective as of April 23, 1998
*(14)10.33 Agreement between Affymetrix, Inc. and Enzo Diagnostics,
Inc. effective as of April 24, 1998.
*(15)10.34 Consortium Agreement between Beckman Coulter, Inc. and the
Company dated July 31, 1998.
*(15)10.35 Letter Agreement between Beckman Coulter, Inc. and the
Company dated July 29, 1998
+10.36 1998 Stock Incentive Plan (Incorporated by reference)
+10.37 Form of Officer and Director Indemnification Agreement
(Incorporated by reference)
+10.38 Promissory Note between Karen H. Haynes and the Company
dated February 26, 1999 (Incorporated by reference)
+10.39 Promissory Note between Stephen P. A. Fodor and the Company
dated April 27, 1997 (Incorporated by reference)
+10.40 Promissory Note between Sue Siegel and the Company dated
July 9, 1998 (Incorporated by reference)
+10.41 Promissory Note between Rich Rava and the Company dated
April 3, 1997 (Incorporated by reference)
(16)10.42 Lease Agreement by and between the Company and Aetna Life
Insurance Company dated as of July 30, 1999
(17)10.43 Promissory Note between Sue Siegel and the Company dated
July 9, 1999
(18)10.44 Amendment to Lease by and between Affymetrix, Inc. and Harry
Locklin dated as of May 12, 1999
(19)10.46 First Addendum to Lease by and between Solar Oakmead Joint
Venture and Affymetrix, Inc.
(20)10.47 Amendment No. 1 to the 1996 Nonemployee Directors Stock
Option Plan of Affymetrix, Inc.
21 List of Subsidiaries
23 Consent of Ernst & Young LLP, Independent Auditors
27 Financial Data Schedule
</TABLE>
- ------------------------
(1) Incorporated by reference to the Registrant's registration statement on
Form S-4 as filed on October 14, 1999 (File No. 333-88987).
<PAGE>
(2) Incorporated by reference to the same number exhibit filed with the
Registrant's registration statement on Form S-3 as filed on July 12, 1999
(File No. 333-82685).
(3) 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).
(4) Incorporated by reference to Exhibit 2.1 filed with Registrant's Form 8-K
as filed on September 29, 1998 (File No. 000-28218).
(5) Incorporated by reference to Exhibit 3.3 filed with Registrant's Form 8-K
as filed on October 16, 1998 (File No. 000-28218).
(6) Incorporated by reference to Exhibit 1 of the Registrant's Form 8-A as
filed on October 16, 1998 (file No. 000-28218).
(7) Incorporated by reference to the Registrant's registration statement on
Form S-4 as filed on October 14, 1999 (File No. 333-88987).
(8) Incorporated by reference to the same number exhibit filed with
Registrant's Registration Statement on Form S-1 (File No. 333-3648), as
amended.
(9) 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).
(10) 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).
(11) Incorporated by reference to the Exhibit 10.1 filed with the Registrant's
Registration Statement on Form S-3 (File No. 333-38167).
(12) 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).
(13) 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).
(14) 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).
(15) 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).
(16) Incorporated by reference to the same number exhibit filed with
Registrant's Form 10-Q as filed on August 16, 1999 (File No. 000-28218).
(17) Incorporated by reference to the Exhibit 10.10 filed with Registrant's
Registration Statement on Form S-3 (File No. 333-82685).
(18) Incorporated by reference to the Exhibit 10.11 filed with Registrant's
Registration Statement on Form S-3 (File No. 333-82685).
(19) Incorporated by reference to the Exhibit 10.12 filed with Registrant's
Registration Statement on Form S-3 (File No. 333-82685).
(20) Incorporated by reference to the Exhibit 10.13 filed with Registrant's
Registration Statement on Form S-3 (File No. 333-82685).
* Confidential treatment granted
+ Management contract, compensatory plan or arrangement
<PAGE>
================================================================================
INDENTURE
AFFYMETRIX, INC.
to
THE BANK OF NEW YORK
Trustee
4.75% Convertible Subordinated Notes Due 2007
Dated as of February 14, 2000
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
Page
------
ARTICLE I DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
<S> <C> <C>
SECTION 1.01. Definitions..........................................................1
SECTION 1.02. Compliance Certificates and Opinions.................................9
SECTION 1.03. Form of Documents Delivered to Trustee...............................9
SECTION 1.04. Acts of Holders; Record Dates.......................................10
SECTION 1.05. Notices, etc. to Trustee and Company................................12
SECTION 1.06. Notice to Holders; Waiver...........................................12
SECTION 1.07. Conflict with Trust Indenture Act...................................12
SECTION 1.08. Effect of Headings and Table of Contents............................12
SECTION 1.09. Successors and Assigns..............................................12
SECTION 1.10. Severability Clause.................................................13
SECTION 1.11. Benefits of Indenture...............................................13
SECTION 1.12. Governing Law.......................................................13
SECTION 1.13. Legal Holidays......................................................13
ARTICLE II SECURITY FORMS
SECTION 2.01. Forms Generally.....................................................13
SECTION 2.02. Form of Face of Security............................................14
SECTION 2.03. Form of Reverse of Security.........................................18
SECTION 2.04. Form of Trustee's Certificate of Authentication.....................23
SECTION 2.05. Form of Conversion Notice...........................................23
SECTION 2.06. Form of Purchase Notice.............................................24
SECTION 2.07. Form of Certification...............................................25
ARTICLE III THE SECURITIES
SECTION 3.01. Title and Terms.....................................................26
SECTION 3.02. Denominations.......................................................26
SECTION 3.03. Execution, Authentication, Delivery and Dating......................26
SECTION 3.04. Global and Non-Global Securities....................................27
SECTION 3.05. Registration; Registration of Transfer and Exchange.................28
SECTION 3.06. Mutilated, Destroyed, Lost and Stolen Securities....................32
SECTION 3.07. Payment of Interest; Interest Rights Preserved......................33
<PAGE>
SECTION 3.08. Persons Deemed Owners...............................................34
SECTION 3.09. Cancellation........................................................34
SECTION 3.10. Computation of Interest.............................................34
SECTION 3.11 CUSIP Numbers.......................................................34
ARTICLE IV SATISFACTION AND DISCHARGE
SECTION 4.01. Satisfaction and Discharge of Indenture.............................35
SECTION 4.02. Application of Trust Money..........................................36
ARTICLE V REMEDIES
SECTION 5.01. Events of Default...................................................36
SECTION 5.02. Acceleration of Maturity; Rescission and Annulment..................38
SECTION 5.03. Collection of Indebtedness and Suits for Enforcement by
Trustee........................................................39
SECTION 5.04. Trustee May File Proofs of Claim....................................39
SECTION 5.05. Trustee May Enforce Claims Without Possession of Securities.........40
SECTION 5.06. Application of Money Collected......................................40
SECTION 5.07. Limitation on Suits.................................................40
SECTION 5.08. Unconditional Right of Holders To Receive Principal,
Premium and Interest and To Convert............................41
SECTION 5.09. Restoration of Rights and Remedies..................................41
SECTION 5.10. Rights and Remedies Cumulative......................................41
SECTION 5.11. Delay or Omission Not Waiver........................................42
SECTION 5.12. Control by Holders..................................................42
SECTION 5.13. Waiver of Past Defaults.............................................42
SECTION 5.14. Undertaking for Costs...............................................42
SECTION 5.15. Waiver of Usury, Stay or Extension Laws.............................42
ARTICLE VI THE TRUSTEE
SECTION 6.01. Certain Duties and Responsibilities.................................43
SECTION 6.02. Notice of Defaults..................................................44
SECTION 6.03. Certain Rights of Trustee...........................................44
SECTION 6.04. Not Responsible for Recitals or Issuance of Securities..............45
SECTION 6.05. May Hold Securities.................................................45
SECTION 6.06. Money Held in Trust.................................................45
<PAGE>
SECTION 6.07. Compensation and Reimbursement......................................45
SECTION 6.08. Disqualification; Conflicting Interests.............................46
SECTION 6.09. Corporate Trustee Required; Eligibility.............................46
SECTION 6.10. Resignation and Removal; Appointment of Successor...................46
SECTION 6.11. Acceptance of Appointment by Successor..............................48
SECTION 6.12. Merger, Conversion, Consolidation or Succession to Business.........48
SECTION 6.13. Preferential Collection of Claims Against Company...................48
SECTION 6.14. Appointment of Authenticating Agent.................................48
SECTION 6.15. Appointment of Co-Trustee...........................................50
ARTICLE VII HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY
SECTION 7.01. Company To Furnish Trustee Names and Addresses of Holders...........50
SECTION 7.02. Preservation of Information; Communications to Holders..............51
SECTION 7.03. Reports by Trustee..................................................51
SECTION 7.04. Reports by Company..................................................51
ARTICLE VIII CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE
SECTION 8.01. Company May Consolidate, etc., Only on Certain Terms................52
SECTION 8.02. Successor Substituted...............................................53
ARTICLE IX SUPPLEMENTAL INDENTURES
SECTION 9.01. Supplemental Indentures Without Consent of Holders..................53
SECTION 9.02. Supplemental Indentures with Consent of Holders.....................54
SECTION 9.03. Execution of Supplemental Indentures................................55
SECTION 9.04. Effect of Supplemental Indentures...................................55
SECTION 9.05. Conformity with Trust Indenture Act.................................55
SECTION 9.06. Reference in Securities to Supplemental Indentures..................55
ARTICLE X COVENANTS
SECTION 10.01. Payment of Principal, Premium and Interest..........................55
SECTION 10.02. Maintenance of Office or Agency.....................................55
SECTION 10.03. Money for Security Payments To Be Held in Trust.....................56
SECTION 10.04. Statement by Officers as to Default.................................57
SECTION 10.05. Existence...........................................................57
SECTION 10.06. Maintenance of Properties...........................................57
<PAGE>
SECTION 10.07. Payment of Taxes and Other Claims...................................58
SECTION 10.08. Waiver of Certain Covenants.........................................58
SECTION 10.09. Delivery of Certain Information.....................................58
SECTION 10.10. Resale of Certain Securities; Reporting Issuer......................58
SECTION 10.11. Registration Rights.................................................58
ARTICLE XI REDEMPTION OF SECURITIES
SECTION 11.01. Right of Redemption.................................................60
SECTION 11.02. Applicability of Article............................................60
SECTION 11.03. Election to Redeem; Notice to Trustee...............................60
SECTION 11.04. Selection by Trustee of Securities to Be Redeemed...................61
SECTION 11.05. Notice of Redemption................................................61
SECTION 11.06. Deposit of Redemption Price.........................................62
SECTION 11.07. Securities Payable on Redemption Date...............................62
SECTION 11.08. Securities Redeemed in Part.........................................63
SECTION 11.09. Conversion Arrangement on Call for Redemption.......................63
ARTICLE XII SUBORDINATION OF SECURITIES
SECTION 12.01. Securities Subordinate to Senior Indebtedness.......................64
SECTION 12.02. Payment over of Proceeds upon Dissolution, Etc......................64
SECTION 12.03. No Payment When Senior Indebtedness in Default......................65
SECTION 12.04. Payment Permitted If No Default.....................................65
SECTION 12.05. Subrogation to Rights of Holders of Senior Indebtedness.............65
SECTION 12.06. Provisions Solely To Define Relative Rights.........................66
SECTION 12.07. Trustee to Effectuate Subordination.................................66
SECTION 12.08. No Waiver of Subordination Provisions...............................66
SECTION 12.09. Notice to Trustee...................................................67
SECTION 12.10. Reliance on Judicial Order or Certificate of Liquidating Agent......68
SECTION 12.11. Trustee Not Fiduciary for Holders of Senior Indebtedness............68
SECTION 12.12. Rights of Trustee as Holder of Senior Indebtedness;
Preservation of Trustee's Rights...............................68
SECTION 12.13. Article Applicable to Paying Agents.................................68
SECTION 12.14. Certain Conversions Deemed Payment..................................68
ARTICLE XIII CONVERSION OF SECURITIES
SECTION 13.01. Conversion Privilege and Conversion Price...........................69
</TABLE>
<PAGE>
<TABLE>
<S> <C>
SECTION 13.02. Exercise of Conversion Privilege....................................70
SECTION 13.03. Fractions of Shares.................................................71
SECTION 13.04. Adjustment of Conversion Price......................................71
SECTION 13.05. Notice of Adjustments of Conversion Price...........................76
SECTION 13.06. Notice of Certain Corporate Action..................................76
SECTION 13.07. Company to Reserve Common Stock.....................................77
SECTION 13.08. Taxes on Conversions................................................77
SECTION 13.09. Covenant as to Common Stock.........................................78
SECTION 13.10. Cancellation of Converted Securities................................78
SECTION 13.11. Provisions in Case of Reclassification, Consolidation, Merger
or Sale of Assets..............................................78
SECTION 13.12. Trustee Adjustment Disclaimer.......................................78
ARTICLE XIV RIGHT TO REQUIRE PURCHASE
SECTION 14.01. Right to Require Purchase...........................................79
SECTION 14.02. Conditions and Procedures Relating to the Company's Election
to Pay the Purchase Price in Common Stock......................79
SECTION 14.03. Notice, Method of Exercising Purchase Right.........................81
SECTION 14.04. Deposit of Purchase Price...........................................81
SECTION 14.05. Securities Not Purchased on Purchase Date...........................82
SECTION 14.06. Securities Purchased in Part........................................82
SECTION 14.07. Certain Definitions.................................................82
ARTICLE XV DEFEASANCE AND COVENANT DEFEASANCE
SECTION 15.01. Company's Option to Effect Defeasance or Covenant
Defeasance.....................................................83
SECTION 15.02. Defeasance and Discharge............................................83
SECTION 15.03. Covenant Defeasance.................................................84
SECTION 15.04. Conditions to Defeasance or Covenant Defeasance.....................84
SECTION 15.05. Deposited Money and U.S. Government Obligations to Be
Held in Trust; Other Miscellaneous Provisions..................86
SECTION 15.06. Reinstatement.......................................................86
ARTICLE XVI IMMUNITY
SECTION 16.01. Personal Immunity of Incorporators, Shareholders, Directors
and Officers...................................................87
</TABLE>
<PAGE>
1
INDENTURE dated as of February 14, 2000, between
AFFYMETRIX, INC., a corporation duly organized and
existing under the laws of the State of Delaware (herein
called the "Company"), having its principal office at 3380
Central Expressway, Santa Clara, California 95051, and THE
BANK OF NEW YORK, as Trustee (herein called the
"Trustee").
The Company has duly authorized the execution and delivery of
this Indenture to provide for the issuance of its 4.75% Convertible Subordinated
Notes due 2007 (herein called the "Securities"), to be issued as in this
Indenture provided.
All things necessary to make the Securities, when executed by the
Company and authenticated and delivered hereunder and duly issued by the
Company, the valid obligations of the Company, and to make this Indenture a
valid agreement of the Company, in accordance with their and its terms, have
been done.
W I T N E S S E T H :
For and in consideration of the premises and the purchase of the
Securities by the Holders thereof, it is mutually agreed, for the equal and
proportionate benefit of all Holders of the Securities or of any series thereof,
as follows:
ARTICLE I
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
SECTION 1.01. DEFINITIONS. For all purposes of this Indenture,
except as otherwise expressly provided or unless the context otherwise requires:
1. The terms defined in this Article have the meanings assigned
to them in this Article and include the plural as well as the singular.
2. All other terms used herein which are defined in the Trust
Indenture Act, either directly or by reference therein, have the meanings
assigned to them therein.
3. All accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with generally accepted accounting
principles, and, except as otherwise herein expressly provided, the term
"generally accepted accounting
<PAGE>
2
principles" with respect to any computation required or permitted hereunder
shall mean such accounting principles as are generally accepted at the date
of such computation.
4. Unless the context otherwise requires, any reference to an
"Article" or a "Section" refers to an Article or Section, as the case may be, of
this Indenture.
5. The words "herein", "hereof" and "hereunder" and other words
of similar import refer to this Indenture as a whole and not to any particular
Article, Section or other subdivision.
6. Unless the context otherwise requires, each reference to
"premium" includes the Make-Whole Payment, if any.
Certain terms used in Article XIV have the meanings specified
therein.
"Act", when used with respect to any Holder, has the meaning
specified in Section 1.04.
"Additional Interest" has the meaning specified in Section 10.11.
"Affiliate" of any specified Person means any other Person who
directly, or indirectly through one or more intermediaries, controls, is
controlled by, or is under common control with, such specified Person. For the
purposes of this definition, "control" when used with respect to any specified
Person means the power to direct the management and policies of such Person,
directly or indirectly, whether through the ownership of voting securities, by
contract or otherwise; and the terms "controlling" and "controlled" have
meanings correlative to the foregoing.
"Agent Member" means any member of, or participant in, the
Depositary.
"Applicable Procedures" means, with respect to any transfer or
transaction involving a Global Security or beneficial interest therein, the
rules and procedures of the Depositary for such Security, in each case to the
extent applicable to such transaction and as in effect from time to time.
"Authenticating Agent" means any Person authorized by the Trustee
pursuant to Section 6.14 to act on behalf of the Trustee to authenticate
Securities.
"Beneficial Owner" has the meaning specified in Section 14.07.
"Board of Directors" means either the board of directors of the
Company or any duly authorized committee of that board.
"Board Resolution" means a copy of a resolution certified by the
Secretary or an Assistant Secretary of the Company to have been duly adopted by
the Board of
<PAGE>
3
Directors and to be in full force and effect on the date of such certification,
and delivered to the Trustee.
"Business Day" means a day on which banking institutions are open
for business and carrying out transactions in Dollars at the relevant place of
payment.
"Change in Control" has the meaning specified in Section 14.07.
"Closing Price" on any Trading Day with respect to the per share
price of Common Stock means the last reported sales price regular way or, in
case no such reported sale takes place on such Trading Day, the average of
the reported closing bid and asked prices regular way, in either case on the
New York Stock Exchange or, if the Common Stock is not listed or admitted to
trading on the New York Stock Exchange, on the principal national securities
exchange on which the Common Stock is listed or admitted to trading, or, if
not listed or admitted to trading on any national securities exchange, on
Nasdaq or, if the Common Stock is not listed or admitted to trading on any
national securities exchange or Nasdaq, the average of the closing bid and
asked prices in the over-the-counter market as furnished by any New York
Stock Exchange member firm that is selected from time to time by the Company
for that purpose and is reasonably acceptable to the Trustee.
"Commencement Date" has the meaning specified in Section 13.04.
"Commission" means the Securities and Exchange Commission, as
from time to time constituted, created under the Exchange Act, or, if at any
time after the execution of this instrument such Commission is not existing and
performing the duties now assigned to it under the Trust Indenture Act, then the
body performing such duties at such time.
"Common Stock" includes any stock of any class of the Company
which has no preference in respect of dividends or of amounts payable in the
event of any voluntary or involuntary liquidation, dissolution or winding-up of
the Company and which is not subject to redemption by the Company. However,
subject to the provisions of Section 13.11, shares issuable on conversion of
Securities shall include only shares of the class designated as Common Stock of
the Company at the date of this instrument or shares of any class or classes
resulting from any reclassification or reclassifications thereof and which have
no preference in respect of dividends or of amounts payable in the event of any
voluntary or involuntary liquidation, dissolution or winding-up of the Company
and which are not subject to redemption by the Company; PROVIDED that if at any
time there shall be more than one such resulting class, the shares of each such
class then so issuable shall be substantially in the proportion which the total
number of shares
<PAGE>
4
of such class resulting from all such reclassifications bears to the total
number of shares of all such classes resulting from all such
reclassifications.
"Company" means the Person named as the "Company" in the first
paragraph of this instrument until a successor Person shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter
"Company" shall mean such successor Person.
"Company Order" has the meaning specified in the definition of
Company Request in this Section 1.01.
"Company Request" or "Company Order" means a written request or
order signed in the name of the Company by its Chairman of the Board, its Vice
Chairman of the Board, its President or a Vice President, and by its Treasurer,
an Assistant Treasurer, its Secretary or an Assistant Secretary, and delivered
to the Trustee.
"Corporate Trust Office" means the principal office of the
Trustee in the city at which at any particular time its corporate trust business
shall be administered. As of the date hereof, the Corporate Trust Office of the
Trustee is located at 101 Barclay Street, Floor 21 West, New York, New York
10286.
"Corporation" means a corporation, association, company,
joint-stock company or business trust.
"Current Event" has the meaning specified in Section 13.04.
"Defaulted Interest" has the meaning specified in Section 3.07.
"Depositary" means, with respect to the Securities issued in
whole or in part in the form of one or more Global Securities, a clearing agency
registered under the Exchange Act that is designated to act as Depositary for
such Securities as contemplated by Section 2.01 (or any successor securities
clearing agency so registered).
"Distribution Date" has the meaning specified in Section 13.04.
"Dollar" or "U.S.$" means a Dollar or other equivalent unit in
such coin or currency of the United States as at the time shall be legal tender
for the payment of public and private debts.
"DTC" means The Depository Trust Company, a New York corporation.
"Event of Default" has the meaning specified in Section 5.01.
<PAGE>
5
"ex date" has the meaning specified in Section 13.04.
"Exchange Act" means the Securities Exchange Act of 1934 as it
may be amended from time to time, and any successor act thereto, and the rules
and regulations of the Commission promulgated thereunder.
"Expiration Date" has the meaning specified in Section 1.04.
"Expiration Time" has the meaning specified in Section 13.04.
"Global Security" means a Security that is registered in the
Security Register in the name of a Depositary or a nominee thereof.
"Group" has the meaning specified in Section 14.07.
"Holder" means a Person in whose name a Security is registered in
the Security Register.
"Indenture" means this instrument as originally executed or as it
may from time to time be supplemented or amended by one or more indentures
supplemental hereto entered into pursuant to the applicable provisions hereof,
including, for all purposes of this instrument and any such supplemental
indenture, the provisions of the Trust Indenture Act that are deemed to be a
part of and govern this instrument and any such supplemental indenture,
respectively.
"Initial Purchasers" means Credit Suisse First Boston
Corporation, FleetBoston Robertson Stephens Inc., ING Barings LLC and Merrill
Lynch, Pierce, Fenner & Smith Incorporated.
"Interest Payment Date" means the Stated Maturity of an
installment of interest on the Securities.
"Issue Date" means the date of first issuance of the Securities
under this Indenture.
"junior securities" has the meaning specified in Section 12.14.
"Make-Whole Payment" has the meaning specified in Section 11.01.
"Maturity", when used with respect to any Security, means the
date on which the principal of such Security or an installment of principal
becomes due and
<PAGE>
6
payable as therein or herein provided, whether at the Stated Maturity or by
declaration of acceleration, call for redemption, exercise of the purchase right
or otherwise.
"Nasdaq" means Nasdaq Stock Market, Inc.
"Notice of Default" means a written notice of the kind specified
in Section 5.01(4) or 5.01(5).
"Officers' Certificate" means a certificate signed by any of the
Chairman of the Board, a Vice Chairman of the Board, the Chief Executive
Officer, the President or a Vice President, and by any of the Treasurer, an
Assistant Treasurer, the Secretary or an Assistant Secretary, of the Company,
and delivered to the Trustee. One of the officers signing an Officers'
Certificate given pursuant to Section 10.04 shall be the principal executive,
financial or accounting officer of the Company.
"Opinion of Counsel" means a written opinion of counsel, who may
be internal counsel for the Company.
"Other Event" has the meaning specified in Section 13.04.
"Outstanding", when used with respect to Securities, means, as of
the date of determination, all Securities theretofore authenticated and
delivered under this Indenture, except:
(i) Securities theretofore cancelled by the Trustee or delivered
to the Trustee for cancellation;
(ii) Securities for whose payment or redemption money in the
necessary amount has been theretofore deposited with the Trustee or any
Paying Agent (other than the Company) in trust or set aside and
separated in trust by the Company (if the Company shall act as its own
Paying Agent) for the Holders of such Securities; PROVIDED that, if such
Securities are to be redeemed, notice of such redemption shall have been
duly given pursuant to this Indenture or provision therefor satisfactory
to the Trustee shall have been made;
(iii) Securities which have been paid pursuant to Section 3.07 or
in exchange for or in lieu of which other Securities have been
authenticated and delivered pursuant to this Indenture, other than any
such Securities in respect of which there shall have been presented to
the Trustee proof satisfactory to it that such Securities are held by a
bona fide purchaser in whose hands such Securities are valid obligations
of the Company; and
<PAGE>
7
(iv) Securities which have been defeased pursuant to Section
15.02;
PROVIDED, HOWEVER, that in determining whether the Holders of the requisite
principal amount of the Outstanding Securities have given, made or taken any
request, demand, authorization, direction, notice, consent, waiver or other
action hereunder as of any date, Securities owned by the Company or any other
obligor upon the Securities or any Affiliate of the Company or of such other
obligor shall be disregarded and deemed not to be Outstanding, except that, in
determining whether the Trustee shall be protected in relying upon any such
request, demand, authorization, direction, notice, consent, waiver or other
action, only Securities which a Responsible Officer of the Trustee knows to be
so owned shall be so disregarded. Securities so owned which have been pledged in
good faith may be regarded as Outstanding if the pledgee establishes to the
satisfaction of the Trustee the pledgee's right so to act with respect to such
Securities and that the pledgee is not the Company or any other obligor upon the
Securities or any Affiliate of the Company or of such other obligor.
"Paying Agent" means any Person authorized by the Company to pay
the principal of (and premium, if any) or interest on any Securities on behalf
of the Company.
"Person" means any individual, corporation, limited liability
company, partnership, joint venture, trust, unincorporated organization or
government or any agency or political subdivision thereof.
"Predecessor Security" of any particular Security means every
previous Security evidencing all or a portion of the same debt as that evidenced
by such particular Security; and, for the purposes of this definition, any
Security authenticated and delivered under Section 3.06 in exchange for or in
lieu of a mutilated, destroyed, lost or stolen Security shall be deemed to
evidence the same debt as the mutilated, destroyed, lost or stolen Security.
"Provisional Redemption" has the meaning specified in Section
11.01.
"Provisional Redemption Date" has the meaning specified in
Section 11.01.
"Purchase Date" has the meaning specified in Section 14.01.
"Purchase Price" has the meaning specified in Section 14.01.
"Purchased Shares" has the meaning specified in Section 13.04.
<PAGE>
8
"Qualified Institutional Buyer" means a "qualified institutional
buyer" as defined in Rule 144A.
"Redemption Date", when used with respect to any Security to be
redeemed, means the date fixed for such redemption by or pursuant to this
Indenture.
"Redemption Price", when used with respect to any Security to be
redeemed, means the price at which it is to be redeemed as set forth in the
Securities.
"Reference Date" has the meaning specified in Section 13.04.
"Registration Default" has the meaning specified in Section
10.11.
"Registration Rights Agreement" has the meaning specified in
Section 10.11.
"Regular Record Date" for the interest payable on any Interest
Payment Date means the February 1 or August 1 (whether or not a Business Day),
as the case may be, next preceding such Interest Payment Date.
"Responsible Officer", when used with respect to the Trustee,
means any officer in the corporate trust department of the Trustee, including
any vice president, assistant vice president, assistant secretary, assistant
treasurer, trust officer or any other officer of the Trustee who customarily
performs functions similar to those performed by the Persons who at the time
shall be such officers, respectively, or to whom any corporate trust matter is
referred because of such person's knowledge of and familiarity with the
particular subject and who shall have direct responsibility for the
administration of this Indenture.
"Restricted Global Security" has the meaning specified in Section
2.01.
"Restricted Security" means a Security required to bear the
restricted securities legend set forth in Section 2.02.
"Rule 144A" means Rule 144A under the Securities Act (or any
successor provision), as it may be amended from time to time.
"Rule 144A Information" has the meaning specified in Section
10.09.
"Securities" has the meaning stated in the first recital of this
Indenture and more particularly means any Securities authenticated and delivered
under this Indenture and "Security" means one of such Securities.
<PAGE>
9
"Securities Act" means the Securities Act of 1933 as it may be
amended from time to time, and any successor act thereto, and the rules and
regulations of the Commission promulgated thereunder.
"Security Register" has the meaning specified in Section 3.05.
"Security Registrar" has the meaning specified in Section 3.05.
"Senior Indebtedness" means the principal of and premium, if any,
and interest on all indebtedness of the Company for money borrowed, other than
the Securities, whether outstanding on the date of execution of the Indenture or
thereafter created, incurred, guaranteed or assumed, except such indebtedness
that by the terms of the instrument or instruments by which such indebtedness
was created or incurred expressly provides that it (i) is junior in right of
payment to the Securities or (ii) ranks PARI PASSU in right of payment to the
Securities; provided, that the 5% Subordinated Convertible Notes due 2006 issued
pursuant to the Indenture dated as of September 22, 1999, between the Company
and the Trustee shall not constitute Senior Indebtedness. The term "indebtedness
for money borrowed" when used with respect to the Company is defined to mean (i)
any obligation of, or any obligation guaranteed by, the Company for the
repayment of borrowed money, whether or not evidenced by bonds, debentures,
notes or other written instruments, (ii) all obligations of the Company with
respect to interest rate hedging agreements to hedge interest rates, (iii) any
deferred payment obligation of, or any such obligation guaranteed by, the
Company for the payment of the purchase price of property or assets evidenced by
a note or similar instrument, and (iv) any obligation of, or any such obligation
guaranteed by, the Company for the payment of rent or other amounts under a
lease of property or assets which obligation is required to be classified and
accounted for as a capitalized lease on the balance sheet of the Company under
generally accepted accounting principles.
"Shelf Registration Statement" has the meaning specified in
Section 10.11.
"Special Record Date" for the payment of any Defaulted Interest
means a date fixed by the Trustee pursuant to Section 3.07.
"Stated Maturity", when used with respect to any Security or any
installment of principal thereof or interest thereon, means the date specified
in such Security as the fixed date on which the principal of such Security or
such installment of principal or interest is due and payable.
"Subsidiary" means a corporation more than 50% of the outstanding
voting stock of which is owned, directly or indirectly, by the Company or by one
or more other Subsidiaries, or by the Company and one or more other
Subsidiaries. For the
<PAGE>
10
purposes of this definition, "voting stock" means stock
which ordinarily has voting power for the election of directors, whether at all
times or only so long as no senior class of stock has such voting power by
reason of any contingency.
"Surrendered Securities" has the meaning specified in Section
2.07.
"Trading Day" means each Monday, Tuesday, Wednesday, Thursday and
Friday, other than any day on which securities are not traded on the applicable
securities exchange or in the applicable securities market.
"Transfer Restricted Securities" has the meaning specified in the
Registration Rights Agreement.
"Trust Indenture Act" means the Trust Indenture Act of 1939 as in
force at the date as of which this instrument was executed and the rules and
regulations thereunder; PROVIDED, HOWEVER, that in the event the Trust Indenture
Act of 1939 or such rules and regulations are amended after such date, "Trust
Indenture Act" means, to the extent required by any such amendment, the Trust
Indenture Act of 1939 and such rules and regulations as so amended.
"Trustee" means the Person named as the "Trustee" in the first
paragraph of this instrument until a successor Trustee shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter
"Trustee" shall mean such successor Trustee.
"United States" means the United States of America (including the
States thereof and the District of Columbia), its territories, its possessions
and other areas subject to its jurisdiction.
"U.S. Government Obligation" has the meaning specified in Section
15.04.
"Vice President", when used with respect to the Company or the
Trustee, means any vice president, whether or not designated by a number or a
word or words added before or after the title "vice president".
SECTION 1.02. COMPLIANCE CERTIFICATES AND OPINIONS. Upon any
application or request by the Company to the Trustee to take any action under
any provision of this Indenture, the Company shall furnish to the Trustee an
Officers' Certificate, if to be given by an officer of the Company, or an
Opinion of Counsel, if to be given by counsel, stating that all conditions
precedent, if any, provided for in this Indenture relating to the proposed
action have been complied with.
<PAGE>
11
Every certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture shall include:
(a) a statement that each individual signing such certificate or
opinion has read such covenant or condition and the definitions herein
relating thereto;
(b) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions
contained in such certificate or opinion are based;
(c) a statement that, in the opinion of each such individual, he
has made such examination or investigation as is necessary to enable him
to express an informed opinion as to whether or not such covenant or
condition has been complied with; and
(d) a statement as to whether, in the opinion of each such
individual, such condition or covenant has been complied with.
SECTION 1.03. FORM OF DOCUMENTS DELIVERED TO TRUSTEE. In any case
where several matters are required to be certified by, or covered by an opinion
of, any specified Person, it is not necessary that all such matters be certified
by, or covered by the opinion of, only one such Person, or that they be so
certified or covered by only one document, but one such Person may certify or
give an opinion with respect to some matters and one or more other such Persons
as to other matters, and any such Person may certify or give an opinion as to
such matters in one or several documents.
Any certificate or opinion of an officer of the Company may be
based, insofar as it relates to legal matters, upon a certificate or opinion of,
or representations by, counsel, unless such officer knows, or in the exercise of
reasonable care should know, that the certificate or opinion or representations
with respect to the matters upon which his certificate or opinion is based are
erroneous. Any such certificate or Opinion of Counsel may be based, insofar as
it relates to factual matters, upon a certificate or opinion of, or
representations by, an officer or officers of the Company stating that the
information with respect to such factual matters is in the possession of the
Company, unless such counsel knows, or in the exercise of reasonable care should
know, that the certificate or opinion or representations with respect to such
matters are erroneous.
Where any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Indenture, they may, but need not, be consolidated and
form one instrument.
SECTION 1.04. ACTS OF HOLDERS; RECORD DATES. Any request, demand,
authorization, direction, notice, consent, waiver or other action provided or
permitted by
<PAGE>
12
this Indenture to be given or taken by Holders may be embodied in and
evidenced by one or more instruments of substantially similar tenor signed by
such Holders in person or by an agent duly appointed in writing; and, except
as herein otherwise expressly provided, such action shall become effective
when such instrument or instruments are delivered to the Trustee and, where
it is hereby expressly required, to the Company. Such instrument or
instruments (and the action embodied therein and evidenced thereby) are
herein sometimes referred to as the "Act" of the Holders signing such
instrument or instruments. Proof of execution of any such instrument or of a
writing appointing any such agent shall be sufficient for any purpose of this
Indenture and (subject to Section 6.01) conclusive in favor of the Trustee
and the Company, if made in the manner provided in this Section 1.04.
The fact and date of the execution by any Person of any such
instrument or writing may be proved by the affidavit of a witness of such
execution or by a certificate of a notary public or other officer authorized by
law to take acknowledgments of deeds, certifying that the individual signing
such instrument or writing acknowledged to him the execution thereof. Where such
execution is by a signer acting in a capacity other than his individual
capacity, such certificate or affidavit shall also constitute sufficient proof
of his authority. The fact and date of the execution of any such instrument or
writing, or the authority of the Person executing the same, may also be proved
in any other manner which the Trustee deems sufficient.
The ownership of Securities shall be proved by the Security
Register.
Any request, demand, authorization, direction, notice, consent,
waiver or other Act of the Holder of any Security shall bind every future Holder
of the same Security and the Holder of every Security issued upon the
registration of transfer thereof or in exchange therefor or in lieu thereof in
respect of anything done, omitted or suffered to be done by the Trustee or the
Company in reliance thereon, whether or not notation of such action is made upon
such Security.
The Company may set any day as a record date for the purpose of
determining the Holders of Outstanding Securities entitled to give or take any
request, demand, authorization, direction, notice, consent, waiver or other
action provided or permitted by this Indenture to be given or taken by Holders
of Securities; PROVIDED that the Company may not set a record date for, and the
provisions of this paragraph shall not apply with respect to, the giving or
making of any notice, declaration, request or direction referred to in the next
paragraph. If any record date is set pursuant to this paragraph, the Holders of
Outstanding Securities on such record date, and no other Holders, shall be
entitled to take the relevant action, whether or not such Holders remain Holders
after such record date; PROVIDED that no such action shall be effective
hereunder unless taken on or prior to the applicable Expiration Date by Holders
of the requisite principal amount of
<PAGE>
13
Outstanding Securities on such record date; and PROVIDED FURTHER, that for
the purpose of determining whether Holders of the requisite principal amount
of such Securities have taken such action, no Security shall be deemed to
have been Outstanding on such record date unless it is also Outstanding on
the date such action is to become effective. Nothing in this paragraph shall
prevent the Company from setting a new record date for any action for which a
record date has previously been set pursuant to this paragraph (whereupon the
record date previously set shall automatically and with no action by any
Person be cancelled and of no effect), nor shall anything in this paragraph
be construed to render ineffective any action taken by Holders of the
requisite principal amount of Outstanding Securities on the date such action
is taken. Promptly after any record date is set pursuant to this paragraph,
the Company, at its own expense, shall cause notice of such record date, the
proposed action by Holders and the applicable Expiration Date to be given to
the Trustee in writing and to each Holder of Securities in the manner set
forth in Section 1.06.
The Trustee may set any day as a record date for the purpose of
determining the Holders of Outstanding Securities entitled to join in the giving
or making of (i) any Notice of Default, (ii) any declaration of acceleration
referred to in Section 5.02, (iii) any request to institute proceedings referred
to in Section 5.07(2), or (iv) any direction referred to in Section 5.12. If any
record date is set pursuant to this paragraph, the Holders of Outstanding
Securities on such record date, and no other Holders, shall be entitled to join
in such notice, declaration, request or direction, whether or not such Holders
remain Holders after such record date; PROVIDED that no such action shall be
effective hereunder unless taken on or prior to the applicable Expiration Date
by Holders of the requisite principal amount of Outstanding Securities on such
record date; and PROVIDED, FURTHER, that for the purpose of determining whether
Holders of the requisite principal amount of such Securities have taken such
action, no Security shall be deemed to have been Outstanding on such record date
unless it is also Outstanding on the date such action is to become effective.
Nothing in this paragraph shall be construed to prevent the Trustee from setting
a new record date for any action (whereupon the record date previously set shall
automatically and without any action by any Person be cancelled and of no
effect), nor shall anything in this paragraph be construed to render ineffective
any action taken by Holders of the requisite principal amount of Outstanding
Securities on the date such action is taken. Promptly after any record date is
set pursuant to this paragraph, the Trustee, at the Company's expense, shall
cause notice of such record date, the proposed action by Holders and the
applicable Expiration Date to be given to the Company in writing and to each
Holder of Securities in the manner set forth in Section 1.06.
With respect to any record date set pursuant to this Section, the
party hereto that sets such record date may designate any day as the "Expiration
Date" and from time to time may change the Expiration Date to any earlier or
later day; PROVIDED that no
<PAGE>
14
such change shall be effective unless notice of the proposed new Expiration
Date is given to the other party hereto in writing, and to each Holder of
Securities in the manner set forth in Section 1.06, on or before the existing
Expiration Date. Notwithstanding the foregoing, no Expiration Date shall be
later than the 180th day after the applicable record date and, if an
Expiration Date is not designated with respect to any record date set
pursuant to this Section, the party hereto that set such record date shall be
deemed to have designated the 180th day after such record date as the
Expiration Date with respect thereto.
Without limiting the foregoing, a Holder entitled hereunder to
take any action hereunder with regard to any particular Security may do so with
regard to all or any part of the principal amount of such Security or by one or
more duly appointed agents, each of which may do so pursuant to such appointment
with regard to all or any part of such principal amount.
SECTION 1.05. NOTICES, ETC. TO TRUSTEE AND COMPANY. Any request,
demand, authorization, direction, notice, consent, waiver or Act of Holders or
other document provided or permitted by this Indenture to be made upon, given or
furnished to, or filed with,
(1) the Trustee by any Holder or by the Company shall be
sufficiently given if made, given, furnished or filed in writing to or with the
Trustee at its Corporate Trust Office, Attention: Corporate Trust
Administration, or at any other address previously furnished in writing to the
Company by the Trustee, or
(2) the Company by the Trustee or by any Holder shall be
sufficiently given (unless otherwise herein expressly provided) if in writing
and mailed, first-class postage prepaid, to the Company, addressed to it at the
address of its principal office specified in the first paragraph of this
instrument or at any other address previously furnished in writing to the
Trustee by the Company.
SECTION 1.06. NOTICE TO HOLDERS; WAIVER. Where this Indenture
provides for notice to Holders of any event, such notice shall be sufficiently
given (unless otherwise herein expressly provided) if in writing and mailed,
first-class postage prepaid, to each Holder affected by such event, at his
address as it appears in the Security Register, not later than the latest date
(if any), and not earlier than the earliest date (if any), prescribed for the
giving of such notice. In any case where notice to Holders is given by mail,
neither the failure to mail such notice, nor any defect in any notice so mailed,
to any particular Holder shall affect the sufficiency of such notice with
respect to other Holders. Where this Indenture provides for notice in any
manner, such notice may be waived in writing by the Person entitled to receive
such notice, either before or after the event, and such waiver shall be the
equivalent of such notice. Waivers of notice by
<PAGE>
15
Holders shall be filed with the Trustee, but such filing shall not be a
condition precedent to the validity of any action taken in reliance upon such
waiver.
In case by reason of the suspension of regular mail service or by
reason of any other cause it shall be impracticable to give such notice by mail,
then such notification as shall be made with the approval of the Trustee shall
constitute a sufficient notification for every purpose hereunder.
SECTION 1.07. CONFLICT WITH TRUST INDENTURE ACT. If any provision
hereof limits, qualifies or conflicts with a provision of the Trust Indenture
Act which is required under such Act to be a part of and govern this Indenture,
the latter provision shall control. If any provision of this Indenture modifies
or excludes any provision of the Trust Indenture Act which may be so modified or
excluded, the latter provision shall be deemed to apply to this Indenture as so
modified or to be excluded, as the case may be. To the extent a Security
conflicts with a provision in the Indenture, the Indenture governs.
SECTION 1.08. EFFECT OF HEADINGS AND TABLE OF CONTENTS. The
Article and Section headings herein and the Table of Contents are for
convenience only and shall not affect the construction hereof.
SECTION 1.09. SUCCESSORS AND ASSIGNS. All covenants and
agreements in this Indenture by the Company shall bind its successors and
assigns, whether so expressed or not.
SECTION 1.10. SEVERABILITY CLAUSE. In case any provision in this
Indenture or in the Securities shall be invalid, illegal or unenforceable, the
validity, legality and enforceability of the remaining provisions shall not in
any way be affected or impaired thereby.
SECTION 1.11. BENEFITS OF INDENTURE. Nothing in this Indenture or
in the Securities, express or implied, shall give to any Person, other than the
parties hereto and their successors hereunder, the holders of Senior
Indebtedness and the Holders of Securities, any benefit or any legal or
equitable right, remedy or claim under this Indenture.
SECTION 1.12. GOVERNING LAW. THIS INDENTURE AND THE SECURITIES
SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF
NEW YORK WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES.
SECTION 1.13. LEGAL HOLIDAYS. In any case where any Interest
Payment Date, Redemption Date, Purchase Date or Stated Maturity of any
Security or the last date
<PAGE>
16
on which a Holder has the right to convert his Securities shall not be a
Business Day then (notwithstanding any other provision of this Indenture or
of the Securities) payment of interest or principal (and premium, if any) or
conversion of the Securities need not be made on such date, but may be made
on the next succeeding Business Day with the same force and effect as if made
on the Interest Payment Date, Redemption Date, Purchase Date or at the Stated
Maturity, or on such last day for conversion; PROVIDED that no interest shall
accrue for the period from and after such Interest Payment Date, Redemption
Date, Purchase Date or Stated Maturity, as the case may be.
ARTICLE II
SECURITY FORMS
SECTION 2.01. FORMS GENERALLY. The Securities, the conversion
notice and the Trustee's certificates of authentication shall be in
substantially the forms set forth in this Article, with such appropriate
insertions, omissions, substitutions and other variations as are required or
permitted by this Indenture, and may have such letters, numbers or other marks
of identification and such legends or endorsements placed thereon as may be
required to comply with the rules of any securities exchange or Depositary
therefor or as may, consistently herewith, be determined by the officers
executing such Securities, as evidenced by their execution of the Securities.
The definitive Securities shall be printed, lithographed or
engraved on steel engraved borders or may be produced in any other manner, all
as determined by the officers executing such Securities, as evidenced by their
execution of such Securities.
In certain cases described elsewhere herein, the legends set
forth in the first four paragraphs of Section 2.02 may be omitted from
Securities issued hereunder.
Upon their original issuance, Securities offered and sold as
provided in the Purchase Agreement, shall be issued in the form of a single
Global Security in definitive, fully registered form without interest
coupons, substantially in the form of Security set forth in Sections 2.02 and
2.03, with such applicable legends as are provided for in Section 2.02,
except as otherwise permitted herein. Such Global Security shall be
registered in the name of DTC, as Depositary, or its nominee or successor,
duly executed by the Company and authenticated by the Trustee as hereinafter
provided, and deposited with the Trustee, as custodian for DTC, for credit by
DTC to the respective accounts of beneficial owners of the Securities
represented thereby (or such other accounts as they may direct). Such Global
Security, together with its Successor Securities which are Global Securities,
are collectively herein called the "Restricted Global Security".
<PAGE>
17
Except as provided in this Section 2.01 or Section 3.05, owners
of beneficial interests in Global Securities will not be entitled to receive
physical delivery of certificated Securities. Upon transfer of definitive
Securities to a Qualified Institutional Buyer, such definitive Securities will,
unless the Restricted Global Security has previously been exchanged, be
exchanged for an interest in the Restricted Global Security pursuant to the
provisions of Section 3.05.
Neither the Company nor the Trustee shall have any responsibility
for any defect in the CUSIP number that appears on any Security, check, advice
of payment or redemption or purchase notice, and any such document may contain a
statement to the effect that CUSIP numbers have been assigned by an independent
service for convenience of reference and that neither the Company nor the
Trustee shall be liable for any inaccuracy in such numbers.
SECTION 2.02. FORM OF FACE OF SECURITY.
[INCLUDE IF SECURITY IS A RESTRICTED SECURITY OR A DEFINITIVE SECURITY OTHER
THAN A RESTRICTED GLOBAL SECURITY:
THIS SECURITY (OR ITS PREDECESSOR) WAS ORIGINALLY ISSUED IN A
TRANSACTION EXEMPT FROM REGISTRATION UNDER THE UNITED STATES SECURITIES ACT OF
1933 (THE "SECURITIES ACT"), AND THIS SECURITY AND THE COMMON STOCK ISSUABLE
UPON THE CONVERSION THEREOF MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN
THE ABSENCE OF SUCH REGISTRATION OR IN A TRANSACTION EXEMPT FROM, OR NOT SUBJECT
TO, THE SECURITIES ACT. EACH PURCHASER OF THIS SECURITY IS HEREBY NOTIFIED THAT
THE SELLER OF THIS SECURITY, AND THE COMMON STOCK ISSUABLE UPON THE CONVERSION
THEREOF, MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE
SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER.
THE HOLDER OF THIS SECURITY AGREES FOR THE BENEFIT OF THE COMPANY
THAT (A) THIS SECURITY AND THE COMMON STOCK ISSUABLE UPON THE CONVERSION THEREOF
MAY BE OFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, ONLY (I) TO A PERSON
WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS
DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE
REQUIREMENTS OF RULE 144A, (II) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER
THE SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF AVAILABLE) OR (III)
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
<PAGE>
18
SECURITIES ACT, IN EACH OF CASES (I) THROUGH (III) IN ACCORDANCE WITH ANY
APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES, AND (B) THE HOLDER
WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER OF THIS
SECURITY AND ANY SHARES OF COMMON STOCK ISSUABLE UPON THE CONVERSION THEREOF OF
THE RESALE RESTRICTIONS REFERRED TO IN (A) ABOVE.]
[INCLUDE IF SECURITY IS A RESTRICTED GLOBAL SECURITY:
THE SECURITIES EVIDENCED BY THIS GLOBAL SECURITY (OR ITS
PREDECESSOR) WERE ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION
UNDER THE UNITED STATES SECURITIES ACT OF 1933 (THE "SECURITIES ACT"), AND SUCH
SECURITIES AND THE COMMON STOCK ISSUABLE UPON THE CONVERSION THEREOF MAY NOT BE
OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR IN
A TRANSACTION EXEMPT FROM, OR NOT SUBJECT TO, THE SECURITIES ACT. EACH PURCHASER
OF ANY BENEFICIAL INTEREST IN THE SECURITIES IS HEREBY NOTIFIED THAT THE SELLER
OF SUCH BENEFICIAL INTEREST MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS
OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER.
EACH BENEFICIAL OWNER OF AN INTEREST IN ANY OF THE SECURITIES
EVIDENCED BY THIS GLOBAL SECURITY (INCLUDING ANY PARTICIPANT IN THE DEPOSITARY
HOLDING THE GLOBAL SECURITY THAT IS SHOWN AS HOLDING SUCH AN INTEREST ON THE
RECORDS OF SUCH DEPOSITARY AND EACH BENEFICIAL OWNER THAT HOLDS THROUGH SUCH
PARTICIPANT) AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) ANY BENEFICIAL
INTEREST IN THE SECURITIES AND THE COMMON STOCK ISSUABLE UPON THE CONVERSION
THEREOF MAY BE OFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, ONLY (I) TO A
PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER
(AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE
REQUIREMENTS OF RULE 144A, (II) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER
THE SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF AVAILABLE) OR (III)
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN
EACH OF CASES (I) THROUGH (III) IN ACCORDANCE WITH ANY APPLICABLE SECURITIES
LAWS OF ANY STATE OF THE UNITED STATES, AND (B) THE BENEFICIAL OWNER WILL, AND
EACH SUBSEQUENT BENEFICIAL OWNER OF THIS SECURITY OR ANY SHARES OF COMMON STOCK
ISSUABLE UPON CONVERSION THEREOF IS
<PAGE>
19
REQUIRED TO, NOTIFY ANY PURCHASER OF ANY BENEFICIAL INTEREST IN THE
SECURITIES AND ANY SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION THEREOF
FROM IT OF THE RESALE RESTRICTIONS REFERRED TO IN (A) ABOVE.]
[INCLUDE IF SECURITY IS A GLOBAL SECURITY:
THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE
INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A
DEPOSITARY OR A NOMINEE THEREOF. THIS SECURITY MAY NOT BE EXCHANGED IN WHOLE
OR IN PART FOR A SECURITY REGISTERED, AND NO TRANSFER OF THIS SECURITY IN
WHOLE OR IN PART MAY BE REGISTERED, IN THE NAME OF ANY PERSON OTHER THAN SUCH
DEPOSITARY OR A NOMINEE THEREOF, EXCEPT IN THE LIMITED CIRCUMSTANCES
DESCRIBED IN THE INDENTURE.
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"),
NEW YORK, NEW YORK, TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER,
EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF
CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE
OF DTC, AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC, ANY TRANSFER, PLEDGE OR OTHER
USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL BECAUSE THE
REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.]
<PAGE>
20
Affymetrix, Inc.
4.75% Convertible Subordinated Notes due 2007
CUSIP No. [ ]
No. ____ U. S. $______________
Affymetrix, Inc., a corporation duly organized and existing under
the laws of the State of Delaware (herein called the "Company", which term
includes any successor Person under the Indenture hereinafter referred to), for
value received, hereby promises to pay to ________, or registered assigns, the
principal sum of United States Dollars (U.S.$________ ) on February 15, 2007 and
to pay interest thereon from February 14, 2000, or from the most recent Interest
Payment Date to which interest has been paid or duly provided for, semi-annually
in arrears on February 15 and August 15 in each year, commencing August 15,
2000, at the rate of 4.75% per annum, until the principal hereof is paid or made
available for payment. The interest so payable, and punctually paid or duly
provided for, on any Interest Payment Date will, as provided in such Indenture,
be paid to the Person in whose name this Security (or one or more Predecessor
Securities) is registered at the close of business on the Regular Record Date
for such interest, which shall be the February 1 or August 1 (whether or not a
Business Day), as the case may be, next preceding such Interest Payment Date.
Any such interest not so punctually paid or duly provided for will forthwith
cease to be payable to the Holder on such Regular Record Date and may either be
paid to the Person in whose name this Security (or one or more Predecessor
Securities) is registered at the close of business on a Special Record Date for
the payment of such Defaulted Interest to be fixed by the Trustee, notice
whereof shall be given to Holders of Securities not less than 10 days prior to
such Special Record Date, or be paid at any time in any other lawful manner not
inconsistent with the requirements of any securities exchange on which the
Securities may be listed, and upon such notice as may be required by such
exchange, all as more fully provided in said Indenture.
Payment of the principal of, premium, if any, and interest
(including payment of any Additional Interest) on this Security will be made at
the Corporate Trust Office, in such coin or currency of the United States of
America as at the time of payment is legal tender for payment of public and
private debts by a U.S. Dollar check drawn on an account maintained with a bank
in the Borough of Manhattan, The City of New York;
<PAGE>
21
PROVIDED, HOWEVER, that upon written application by the Holder to the Security
Registrar setting forth wire instructions not later than 5 days prior to the
relevant payment date (in the case of payment of principal) or not later than
the relevant Record Date (in the case of payment of interest), such Holder may
receive payment by wire transfer of Dollars to a U.S. Dollar account maintained
by the payee with a bank in the United States or in Europe and designated by the
payee to the Security Registrar. [Include if a Global Security--All payments by
the Company in respect of the Global Security shall be by wire transfer.]
Reference is hereby made to the further provisions of this
Security set forth on the reverse hereof, which further provisions shall for all
purposes have the same effect as if set forth at this place.
Unless the certificate of authentication hereon has been executed
by the Trustee referred to on the reverse hereof by manual signature, this
Security shall not be entitled to any benefit under the Indenture or be valid or
obligatory for any purpose.
IN WITNESS WHEREOF, the Company has caused this instrument to be
duly executed.
AFFYMETRIX, INC.
By:_____________________________________
Name:
Title:
SECTION 2.03. FORM OF REVERSE OF SECURITY. This Security is one
of a duly authorized issue of Securities of the Company designated as its 4.75%
Convertible Subordinated Notes due 2007 (herein called the "Securities"),
limited in aggregate principal amount to U.S.$175,000,000 (subject to increase
as provided in this Indenture defined up to an additional U.S.$50,000,000
aggregate principal amount), issued and to be issued under an Indenture, dated
as of February 14, 2000 (herein called the "Indenture"), between the Company and
The Bank of New York, as Trustee for the Holders of Securities issued under said
Indenture (herein called the "Trustee", which term includes any successor
trustee under the Indenture), to which Indenture and all indentures supplemental
thereto reference is hereby made for a statement of the respective rights,
limitations of rights, duties and immunities thereunder of the Company, the
Trustee, the
<PAGE>
22
holders of Senior Indebtedness and the Holders of the Securities and of the
terms upon which the Securities are, and are to be, authenticated and delivered.
Subject to and upon compliance with the provisions of the
Indenture, the Holder of this Security is entitled, at his option, at any time
on or before the close of business on the Business Day immediately preceding
February 15, 2007, or in case this Security or a portion hereof is called for
redemption, then in respect of this Security or such portion hereof until and
including, but (unless the Company defaults in making the payment due upon
redemption or is otherwise due) not after, the close of business on the Business
Day immediately preceding the Redemption Date or Purchase Date, as the case may
be, to convert this Security (or any portion of the principal amount hereof
which is U.S.$1,000 or an integral multiple thereof), at the principal amount
hereof, or of such portion, into fully paid and non-assessable shares of Common
Stock of the Company at a conversion price equal to U.S.$321.00 aggregate
principal amount of Securities for each share of Common Stock (or at the current
adjusted conversion price if an adjustment has been made as provided in Article
XIII of the Indenture) by surrender of this Security, duly endorsed or assigned
to the Company or in blank, to the Company at its office or agency in the
Borough of Manhattan, The City of New York, accompanied by the conversion notice
hereon executed by the Holder hereof evidencing such Holder's election to
convert this Security, or if less than the entire principal amount hereof is to
be converted, the portion hereof to be converted, and, in case such surrender
shall be made during the period from the close of business on any Regular Record
Date to the opening of business on the corresponding Interest Payment Date
(unless this Security or the portion hereof being converted has been called for
redemption on a Redemption Date within such period between and including such
Regular Record Date and such Interest Payment Date), also accompanied by payment
in cash of an amount equal to the interest payable on such Interest Payment Date
on the principal amount of this Security then being converted. Subject to the
aforesaid requirement for payment of interest and, in the case of a conversion
after the close of business on any Regular Record Date and on or before the
corresponding Interest Payment Date, to the right of the Holder of this Security
(or any Predecessor Security) of record at such Regular Record Date to receive
an installment of interest (even if the Security has been called for redemption
on a Redemption Date within such period), no payment or adjustment is to be made
on conversion for interest accrued hereon or for dividends on the Common Stock
issued on conversion. No fractions of shares or scrip representing fractions of
shares will be issued on conversion, but instead of any fractional interest the
Company shall pay a cash adjustment or round up to the next higher whole share
as provided in Article XIII of the Indenture. The conversion price is subject
to adjustment as provided in Article XIII of the Indenture. In addition, the
Indenture provides that in case of certain reclassifications, consolidations,
mergers, sales or transfers of assets or other transactions pursuant to which
the Common Stock is converted into the right to receive other securities, cash
or other property, the Indenture shall be amended automatically, without the
consent of any
<PAGE>
23
Holders of Securities, so that this Security, if then outstanding, will be
convertible thereafter, during the period this Security shall be convertible as
specified above, only into the kind and amount of securities, cash and other
property receivable upon the transaction by a holder of the number of shares
of Common Stock into which this Security might have been converted immediately
prior to such transaction.
The Company will furnish to any Holder, upon request and without
charge, copies of the Certificate of Incorporation and By-laws of the Company
then in effect. Any such request may be addressed to the Company.
The Securities may be provisionally redeemed by the Company, in
whole or in part, at any time prior to February 20, 2003, at a Redemption Price
equal to $1,000 per security to be redeemed plus accrued and unpaid interest, if
any (including Additional Interest, if any) to the Redemption Date if (i) the
closing price of the common Stock shall have exceeded 150% of the conversion
price then in effect for at least 20 Trading Days in any consecutive 30-Trading
Day period ending on the Trading Day prior to the date of mailing of the notice
of Provisional Redemption, which date shall be no more than 60 nor less than 20
days prior to the Redemption Date and (ii) the Shelf Registration Statement is
effective and available for use and is expected to remain effective and
available for use for the 30 days immediately following the Redemption Date.
Upon any such Provisional Redemption, the Company shall make an additional
Make-Whole Payment in cash with respect to the Securities called for redemption
to Holders on the date of mailing of the notice of Provisional Redemption in an
amount equal to $142.50 per $1,000 Security, less the amount of any interest
actually paid on such Security prior to such date. The Company shall make the
Make-Whole Payment on all Securities called for Provisional Redemption,
including any Securities converted after the date of mailing of the notice of
Provisional Redemption and prior to the Redemption Date.
The Securities are subject to redemption at the option of the
Company upon not less than 30 days' or more than 60 days' notice by mail, as a
whole or from time to time in part, at any time on or after February 20, 2003
through February 14, 2004 at 102.38% of the principal amount, and thereafter, at
the following Redemption Prices (expressed as percentages of the principal
amount), if redeemed during the 12-month period beginning on February 15 of the
years indicated,
<TABLE>
<CAPTION>
Redemption
Year Price
- ---- ----------
<S> <C>
2004......................... 101.58%
2005......................... 100.79%
2006 and thereafter.......... 100%
</TABLE>
<PAGE>
24
together in the case of any such redemption with accrued and unpaid interest to
(but not including) the Redemption Date, but interest installments whose Stated
Maturity is on or prior to such Redemption Date will be payable to the Holders
of such Securities, or one or more Predecessor Securities, of record at the
close of business on the relevant Record Dates referred to on the face hereof,
all as provided in the Indenture.
In certain circumstances involving a Change in Control, each
Holder shall have the right to require the Company to redeem all or part of its
Securities at a purchase price equal to 100% of the principal amount thereof,
together with accrued and unpaid interest through the Purchase Date. The
Purchase Price is payable in cash or, at the Company's option but subject to the
satisfaction of certain conditions set forth in the Indenture, in shares of
Common Stock valued at 95% of the average Closing Prices of the Common Stock for
the five Trading Days preceding and including the third Trading Day prior to the
Purchase Date.
The Securities do not have the benefit of any sinking fund.
In the event of redemption, conversion or purchase of this
Security in part only, a new Security or Securities for the unredeemed,
unconverted or unpurchased portion hereof will be issued in the name of the
Holder hereof upon the cancellation hereof.
Subject to certain limitations in the Indenture, at any time when
the Company is not subject to Section 13 or 15(d) of the United States
Securities Exchange Act of 1934, as amended, upon the request of a Holder or the
holder of shares of Common Stock issued upon conversion thereof, the Company
will promptly furnish or cause to be furnished Rule 144A Information (as defined
below) to such Holder or such holder of shares of Common Stock issued upon
conversion, or to a prospective purchaser of any such security designated by any
such Holder or holder of shares of Common Stock, as the case may be, to the
extent required to permit compliance by such Holder or holder of shares of
Common Stock with Rule 144A under the United States Securities Act of 1933 (the
"Securities Act"), in connection with the resale of any such security. "Rule
144A Information" shall be such information as is specified pursuant to Rule
144A(d)(4) under the Securities Act (or any successor provision thereto).
If this Security is a Transfer Restricted Security, then the
Holder of this Security [IF THIS SECURITY IS A GLOBAL SECURITY, THEN INSERT-
(including any Person that has a beneficial interest in this Security)] and the
Common Stock issuable upon conversion thereof is entitled to the benefits of a
Registration Rights Agreement, dated as of February 14, 2000 (the "Registration
Rights Agreement") executed by the Company. If a Registration Default occurs (as
defined in the Registration Rights Agreement and in the Indenture), Additional
Interest will accrue on this Security from
<PAGE>
25
and including the day following such Registration Default to but excluding
the day on which such Registration Default has been cured. Additional
Interest will be paid semi-annually in arrears, with the first semi-annual
payment due on the first Interest Payment Date in respect of the Securities
following the date on which such Additional Interest begins to accrue, and
will accrue at a rate per annum equal to an additional one-half of one
percent (0.50%) of the principal amount of the Securities.
Whenever in this Security there is a reference, in any context,
to the payment of the principal of, premium, if any, or interest on, or in
respect of, any Security, such mention shall be deemed to include mention of the
payment of Additional Interest payable as described in the preceding paragraph
to the extent that, in such context, Additional Interest is, was or would be
payable in respect of such Security and express mention of the payment of
Additional Interest (if applicable) in any provisions of this Security shall not
be construed as excluding Additional Interest in those provisions of this
Security where such express mention is not made.
The indebtedness evidenced by this Security is, to the extent
provided in the Indenture, subordinate and subject in right of payment to the
prior payment in full of all Senior Indebtedness, and this Security is issued
subject to the provisions of the Indenture with respect thereto. Each Holder of
this Security, by accepting the same, (a) agrees to and shall be bound by such
provisions, (b) authorizes and directs the Trustee on his behalf to take such
action as may be necessary or appropriate to effectuate the subordination so
provided and (c) appoints the Trustee his attorney-in-fact for any and all such
purposes.
If an Event of Default shall occur and be continuing, the
principal of all the Securities may be declared due and payable in the manner
and with the effect provided in Article V of the Indenture.
The Indenture permits, with certain exceptions as therein
provided, the amendment thereof and the modification of the rights and
obligations of the Company and the rights of the Holders of the Securities
under the Indenture at any time by the Company and the Trustee with the
written consent of the Holders of a majority in aggregate principal amount of
the Securities at the time Outstanding. The Indenture also contains
provisions permitting the Holders of a majority in aggregate principal amount
of the Securities at the time Outstanding, on behalf of the Holders of all
the Securities, to waive compliance by the Company with certain provisions of
the Indenture and certain past defaults under the Indenture and their
consequences. Any such consent or waiver by the Holder of this Security shall
be written, with a copy delivered to the Trustee, and shall be conclusive and
binding upon such Holder and upon all future Holders of this Security and of
any Security issued upon the registration of transfer hereof or in exchange
herefor
<PAGE>
26
or in lieu hereof, whether or not notation of such consent or waiver is made
upon this Security.
No reference herein to the Indenture and no provision of this
Security or of the Indenture shall alter or impair the obligation of the
Company, which is absolute and unconditional, to pay the principal of,
premium, if any, and interest on (including Additional Interest) this
Security at the times, place and rate, and in the coin or currency, herein
prescribed or to convert this Security as provided in the Indenture.
As provided in the Indenture and subject to certain limitations
therein set forth, the transfer of this Security is registrable in the Security
Register, upon surrender of this Security for registration of transfer at the
Corporate Trust Office duly endorsed by, or accompanied by a written instrument
of transfer in form satisfactory to the Company and the Security Registrar duly
executed by, the Holder hereof or his attorney duly authorized in writing, and
thereupon one or more new Securities, of authorized denominations and for the
same aggregate principal amount, will be issued to the designated transferee or
transferees.
The Securities are issuable only in registered form without
coupons in denominations of U.S.$1,000 and any integral multiple thereof. As
provided in the Indenture and subject to certain limitations therein set forth,
Securities are exchangeable for a like aggregate principal amount of Securities
of a different authorized denomination, as requested by the Holder surrendering
the same.
No service charge shall be made for any such registration of
transfer or exchange, but the Company may require payment of a sum sufficient to
cover any tax or other governmental charge payable in connection therewith.
Prior to due presentment of this Security for registration of
transfer, the Company, the Trustee and any agent of the Company or the Trustee
may treat the Person in whose name this Security is registered as the owner
hereof for all purposes, whether or not payment of or on this Security is
overdue, and neither the Company, the Trustee nor any such agent shall be
affected by notice to the contrary.
Interest on this Security shall be computed on the basis of a
360-day year of twelve 30-day months.
All terms used in this Security which are defined in the
Indenture shall have the meanings assigned to them in the Indenture.
THE INDENTURE AND THIS SECURITY SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF
<PAGE>
27
THE STATE OF NEW YORK WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES.
SECTION 2.04. FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION.
This is one of the Securities referred to in the within-mentioned
Indenture.
Dated: The Bank of New York, not in its
individual capacity but solely as
Trustee
By________________________________
AUTHORIZED SIGNATORY
SECTION 2.05. FORM OF CONVERSION NOTICE.
CONVERSION NOTICE
To: Affymetrix, Inc.
The undersigned Holder of this Security hereby irrevocably
exercises the option to convert this Security, or the portion hereof (which is
U.S.$1,000 or an integral multiple thereof) below designated, at any time
following the date of original issuance thereof, into shares of Common Stock in
accordance with the terms of the Indenture referred to in this Security, and
directs that the shares issuable and deliverable upon conversion, together with
any check in payment for a fractional share and any Security representing any
unconverted principal amount hereof, be issued and delivered to the registered
owner hereof unless a different name has been provided below. If shares or any
portion of this Security not converted are to be issued in the name of a person
other than the undersigned, the undersigned will pay all transfer taxes payable
with respect thereto and is delivering herewith a certificate in proper form
certifying that the applicable restrictions on transfer have been complied with.
Any amount required to be paid by the undersigned on account of interest
accompanies this Security.
<PAGE>
28
The Applicant hereby agrees that, promptly after request of the
Company, he or it will furnish such proof in support of this certification as
the Company or the Security Registrar for the Common Stock may, from time to
time, request.
Dated: ________________________________________
Signature*
__________________________________
Signature Guaranty
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<S> <C>
If shares or Securities are to be Principal amount to be
registered in the name of converted (if less than all): $____,000
Person other than the Holder,
please print such Person's
name and address:*
- --------------------------------------------------------------------------------
Name Social Security or
Taxpayer Identification Number
- --------------------------------------------------------------------------------
------------------------------------
Street Address
- --------------------------------------------------------------------------------
------------------------------------
City, state and Zip Code
- --------------------------------------------------------------------------------
</TABLE>
* Signature(s) must be guaranteed by an eligible guarantor institution (banks,
stock brokers, savings and loan associations and credit unions with membership
in an approved signature guarantee medallion program) pursuant to Securities and
Exchange Commission Rule 17Ad-15 if shares of Common Stock are to be delivered,
or unconverted Securities are to be issued, other than to and in the name of the
registered owner.
SECTION 2.06. FORM OF PURCHASE NOTICE.
ELECTION OF HOLDER TO REQUIRE PURCHASE
1. Pursuant to Section 14.01 of the Indenture, the undersigned
hereby elects to have this Security purchased by the Company.
<PAGE>
29
2. The undersigned hereby directs the Trustee or the Company to
pay it or ________________ an amount in cash, or, at the Company's election,
Common Stock valued as set forth in the Indenture, equal to 100% of the
principal amount to be purchased (as set forth below), plus interest accrued to
the Purchase Date, as provided in the Indenture.
Dated:__________________________________
________________________________________
Signature
________________________________________
Signature Guaranteed
Principal amount to be purchased (must be an integral multiple of U.S. $1,000):
Remaining principal amount following such purchase:
--------------
NOTICE: The signature to the foregoing Election must correspond to the Name as
written upon the face of this Security in every particular, without alteration
or any change whatsoever.
<PAGE>
30
SECTION 2.07. FORM OF CERTIFICATION. Whenever any certification
is required to be given to evidence compliance with certain restrictions
relating to transfers of Restricted Securities contemplated by Section
3.05(b)(iv), Section 3.05(c) or Section 13.02, such certification shall be
provided substantially in the form of the following certificate, with only such
changes as shall be approved by the Company and the Initial Purchasers,
TRANSFER CERTIFICATE
The undersigned Holder hereby certifies with respect to
U.S.$____ principal amount of the above-captioned securities presented or
surrendered on the date hereof (the "Surrendered Securities") for
registration of transfer, or for exchange or conversion where the securities
issuable upon such exchange or conversion are to be registered in a name
other than that of the undersigned Holder (each such transaction being a
"transfer"), that such transfer complies with the restrictive legend set
forth on the face of the Surrendered Securities for the reason checked below:
The transfer of the Surrendered Securities complies with
Rule 144 under the U.S. Securities Act of 1933 (the
"Securities Act"); or
The transfer of the Surrendered Securities complies with
Rule 144A under the Securities Act; or
The transfer of the Surrendered Securities is pursuant to
an effective registration statement under the Securities
Act, the prospectus delivery requirements under the
Securities Act have been satisfied with respect to such
transfer, the undersigned Holder is named as a "Selling
Securityholder" in the prospectus relating to such
registration statement, or in amendments or supplements
thereto, and the aggregate principal amount of Surrendered
Securities transferred are all or a portion of the
securities listed in such prospectus opposite the
undersigned's name.
Dated:_________________*
* To be dated the date of surrender.
________________________________________
Signature
(If the registered owner is a
corporation, partnership or fiduciary,
the title of the
<PAGE>
31
Person signing on behalf of such
registered owner must be stated.)
ARTICLE III
THE SECURITIES
SECTION 3.01. TITLE AND TERMS. The aggregate principal amount of
Securities which may be authenticated and delivered under this Indenture is
limited to (a) U.S.$175,000,000 plus (b) such aggregate principal amount (which
may not exceed U.S.$50,000,000 principal amount) of Securities as may be
purchased by the Initial Purchasers pursuant to the Initial Purchasers' option
pursuant to the Purchase Agreement dated February 8, 2000, between the Company
and the Initial Purchasers, except for Securities authenticated and delivered
upon registration of transfer of, or in exchange for, or in lieu of, other
Securities pursuant to Sections 3.04, 3.05, 3.06, 9.06, 11.08, 13.02 or 14.06
and except for Securities which, pursuant to Section 3.03, are deemed never to
have been authenticated and delivered hereunder.
The Stated Maturity of the Securities shall be February 15, 2007,
and they shall bear interest at the rate of 4.75% per annum, payable
semi-annually on February 15 and August 15 of each year commencing on August 15,
2000, until the principal thereof is paid or made available for payment.
Payment of the principal of, premium, if any, and interest
(including payment of any Additional Interest) on this Security will be made at
the Corporate Trust Office, in such coin or currency of the United States of
America as at the time of payment is legal tender for payment of public and
private debts by a U.S. Dollar check drawn on an account maintained with a bank
in the Borough of Manhattan, The City of New York; PROVIDED, HOWEVER, that upon
written application by the Holder to the Security Registrar setting forth wire
instructions not later than 15 days prior to the relevant payment date (in the
case of payment of principal) or not later than the relevant Record Date (in the
case of payment of interest), such Holder may receive payment by wire transfer
of Dollars to a U.S. Dollar account maintained by the payee with a bank in the
United States or in Europe and designated by the payee to the Security
Registrar.
The Securities shall be redeemable by the Company as provided in
Article XI.
The Securities shall be subordinated in right of payment to the
prior payment in full of Senior Indebtedness as provided in Article XII.
The Securities shall be convertible as provided in Article XIII.
<PAGE>
32
The Securities shall be subject to purchase by the Company at the
option of the Holder as provided in Article XIV.
SECTION 3.02. DENOMINATIONS. The Securities shall be issuable
only in registered form without coupons and only in denominations of U.S.$1,000
and any integral multiple thereof.
SECTION 3.03. EXECUTION, AUTHENTICATION, DELIVERY AND DATING. The
Securities shall be executed on behalf of the Company by any of its Chairman of
the Board, its Vice Chairman of the Board, its President or one of its Vice
Presidents. The signature of any of these officers on the Securities may be
manual or facsimile.
Securities bearing the manual or facsimile signatures of
individuals who were at any time the proper officers of the Company shall bind
the Company, notwithstanding that such individuals or any of them have ceased to
hold such offices prior to the authentication and delivery of such Securities or
did not hold such offices at the date of such Securities.
At any time and from time to time after the execution and
delivery of this Indenture, the Company may deliver Securities of any series
executed by the Company to the Trustee for authentication, together with a
Company Order for the authentication and delivery of such Securities; and the
Trustee in accordance with such Company Order shall authenticate and deliver
such Securities as in this Indenture provided and not otherwise.
Each Security shall be dated the date of its authentication.
No Security shall be entitled to any benefit under this Indenture
or be valid or obligatory for any purpose unless there appears on such Security
a certificate of authentication substantially in the form provided for herein
executed by the Trustee by manual signature, and such certificate upon any
Security shall be conclusive evidence, and the only evidence, that such Security
has been duly authenticated and delivered hereunder.
The Trustee shall have the right to decline to authenticate and
deliver any Securities under this Section if the Trustee, being advised by
counsel, determines that such action may not lawfully be taken or if the Trustee
in good faith shall determine that such action would expose the Trustee to
personal liability to existing Holders.
SECTION 3.04. GLOBAL AND NON-GLOBAL SECURITIES. (a) GLOBAL
SECURITIES. (i) Each Global Security authenticated under this Indenture shall be
registered in the name of the Depositary designated by the Company for such
Global
<PAGE>
33
Security or a nominee thereof and delivered to such Depositary or a nominee
thereof or custodian therefor, and each such Global Security shall constitute
a single Security for all purposes of this Indenture.
(ii) Notwithstanding any other provision in this Indenture, no
Global Security may be exchanged in whole or in part for Securities registered,
and no transfer of a Global Security in whole or in part may be registered, in
the name of any Person other than the Depositary for such Global Security or a
nominee thereof unless (A) such Depositary (1) has notified the Company and the
Trustee that it is unwilling or unable to continue as Depositary for such Global
Security or (2) has ceased to be a clearing agency registered as such under the
Exchange Act or announces an intention permanently to cease business or in fact
does so, in each case unless a successor Depositary is appointed by the Company,
(B) there shall have occurred and be continuing an Event of Default with respect
to such Global Security, or (C) the Company in its discretion at any time
determines not to have all the Securities represented by a Global Security. Any
Global Security exchanged pursuant to clause (i) above shall be so exchanged in
whole and not in part and any Global Security exchanged pursuant to clause (ii)
or (iii) above may be exchanged in whole or from time to time in part as
directed by the Depositary. Any Security issued in exchange for a Global
Security or any portion thereof shall be a Global Security; PROVIDED that any
such Security so issued that is registered in the name of a Person other than
the Depositary or a nominee thereof shall not be a Global Security.
(iii) If any Global Security is to be exchanged for other
Securities or cancelled in whole, it shall be surrendered by or on behalf of the
Depositary or its nominee to the Trustee, as Security Registrar, for exchange or
cancellation as provided in this Article III. If any Global Security is to be
exchanged for other Securities or cancelled in part, or if another Security is
to be exchanged in whole or in part for a beneficial interest in any Global
Security, in each case, as provided in Section 3.05, then either (i) such Global
Security shall be so surrendered for exchange or cancellation as provided in
this Article III or (ii) the principal amount thereof shall be reduced or
increased by an amount equal to the portion thereof to be so exchanged or
cancelled, or equal to the principal amount of such other Security to be so
exchanged for a beneficial interest therein, as the case may be, by means of an
appropriate adjustment made on the records of the Trustee, as Security
Registrar, whereupon the Trustee, in accordance with the Applicable Procedures,
shall instruct the Depositary or its authorized representative to make a
corresponding adjustment to its records. Upon any such surrender or adjustment
of a Global Security, the Trustee shall, subject to Section 3.05(c) and as
otherwise provided in this Article III, authenticate and deliver any Securities
issuable in exchange for such Global Security (or any portion thereof) to or
upon the order of, and registered in such names as may be directed by, the
Depositary or its authorized representative. Upon the request of the Trustee in
connection with the occurrence of any of the events specified in the preceding
paragraph, the Company shall promptly make available to the Trustee a reasonable
supply of Securities that are not in the form of Global Securities. The Trustee
<PAGE>
34
shall be entitled to rely upon any order, direction or request of the Depositary
or its authorized representative which is given or made pursuant to this Article
III if such order, direction or request is given or made in accordance with the
Applicable Procedures.
(iv) Every Security authenticated and delivered upon registration
of transfer of, or in exchange for or in lieu of, a Global Security or any
portion thereof, whether pursuant to this Article III or otherwise, shall be
authenticated and delivered in the form of, and shall be, a Global Security,
unless such Security is registered in the name of a Person other than the
Depositary for such Global Security or a nominee thereof, in which case such
Security shall be authenticated and delivered in definitive, fully registered
form, without interest coupons.
(v) The Depositary or its nominee, as registered owner of a
Global Security, shall be the Holder of such Global Security for all purposes
under the Indenture and the Securities, and owners of beneficial interests in a
Global Security shall hold such interests pursuant to the Applicable Procedures.
Accordingly, any such owner's beneficial interest in a Global Security will be
shown only on, and the transfer of such interest shall be effected only through,
records maintained by the Depositary or its nominee or its Agent Members and
such owners of beneficial interests in a Global Security will not be considered
the owners or holders thereof. Notwithstanding the foregoing, nothing herein
shall prevent the Company, the Trustee or any agent of the Company or the
Trustee from giving effect to any written certification, proxy or other
authorization furnished by the Depositary or such nominee, as the case may be,
or impair, as between the Depositary, its Agent Members and any other person on
whose behalf an Agent Member may act, the operation of customary practices of
such Persons governing the exercise of the rights of a holder of any Security.
SECTION 3.05. REGISTRATION; REGISTRATION OF TRANSFER AND
EXCHANGE. (a) The Company shall cause to be kept at the Corporate Trust
Office of the Trustee a register (the register maintained in such office and
in any other office or agency designated pursuant to Section 10.02 being
herein sometimes collectively referred to as the "Security Register") in
which, subject to such reasonable regulations as it may prescribe, the
Company shall provide for the registration of Securities and of transfers and
exchanges thereof. The Trustee is hereby appointed "Security Registrar" for
the purpose of registering Securities and transfers and exchanges thereof as
herein provided. Upon surrender for registration of transfer or exchange of
any Security at an office or agency of the Company designated pursuant to
Section 10.02 for such purpose, accompanied by a written instrument of
transfer or exchange in the form provided by the Company, the Company shall
execute, and the Trustee shall authenticate and deliver, in the name of the
designated transferee or transferees, one or more new Securities of any
authorized denominations and of a like aggregate principal amount.
<PAGE>
35
(b) Notwithstanding any other provisions of this Indenture or the
Securities, transfers and exchanges of Securities and beneficial interests in a
Global Security of the kinds specified in this Section 3.05(b) shall be made
only in accordance with this Section 3.05(b).
(i) TRANSFER OF GLOBAL SECURITY. Other than as set forth in
Section 3.04(a), a Global Security may not be transferred, in whole or
in part, to any Person other than the Depositary or a nominee thereof,
and no such transfer to any such other Person may be registered;
PROVIDED that this Section 3.05(b)(i) shall not prohibit any transfer of
a Security that is issued in exchange for a Global Security but is not
itself a Global Security. No transfer of a Security to any Person shall
be effective under this Indenture or the Securities unless and until
such Security has been registered in the name of such Person. Nothing in
this Section 3.05(b)(i) shall prohibit or render ineffective any
transfer of a beneficial interest in a Global Security effected in
accordance with the other provisions of this Section 3.05(b).
(ii) TRANSFER OF BENEFICIAL INTERESTS IN THE GLOBAL SECURITY.
Transfer of beneficial interests in the Global Security shall be
effected through the Depositary, in accordance with this Indenture
(including applicable restrictions on transfer set forth herein, if any)
and the procedures of the Depositary therefor, if applicable.
(iii) OTHER EXCHANGES. In the event that a Global Security or any
portion thereof is exchanged for Securities other than Global
Securities, such other Securities may in turn be exchanged (on transfer
or otherwise) for Securities that are not Global Securities or for
beneficial interests in a Global Security (if any is then outstanding)
only in accordance with such procedures, which shall be substantially
consistent with the provisions of this Section 3.05(b) (including the
certification requirements set forth on the reverse of the Security
intended to insure that transfers of beneficial interests in a Global
Security comply with Rule 144A or Rule 144 under the Securities Act, as
the case may be) and any Applicable Procedures, as may be from time to
time adopted by the Company and the Trustee.
(iv) TRANSFER AND EXCHANGE OF DEFINITIVE SECURITIES. When
definitive Securities are presented to the Security Registrar with a
request:
(A) to register the transfer of such definitive
Securities; or
<PAGE>
36
(B) to exchange such definitive Securities for an equal
principal amount of definitive Securities of other authorized
denominations, the Security Registrar shall register the transfer
or make the exchange as requested if its reasonable requirements
for such transaction are met; PROVIDED, HOWEVER, that the
definitive Securities surrendered for transfer or exchange:
(x) shall be duly endorsed or accompanied by a
written instrument of transfer in form reasonably
satisfactory to the Company and the Security Registrar,
duly executed by the Holder thereof or his attorney duly
authorized in writing; and
(y) are being transferred or exchanged pursuant to
an effective registration statement under the Securities
Act, pursuant to Section 3.05(b)(v), or pursuant to clause
(1), (2) or (3) below, and are accompanied by the
following additional information and documents, as
applicable:
(1) if such definitive Securities are being
delivered to the Security Registrar by a Holder for
registration in the name of such Holder, without
transfer, a certification from such Holder to that
effect (in the form set forth in Section 2.07); or
(2) if such definitive Securities are being
transferred to the Company, a certification to that
effect (in the form set forth in Section 2.07); or
(3) if such definitive Securities are being
transferred pursuant to an exemption from
registration in accordance with Rule 144, (i) a
certification to that effect (in the form set forth
in Section 2.07) and (ii) if the Company or
Security Registrar so requests, an opinion of
counsel or other evidence reasonably satisfactory
to them as to the compliance with the restrictions
set forth in the legend set forth in Section 2.02.
<PAGE>
37
(v) RESTRICTIONS ON TRANSFER OF A DEFINITIVE SECURITY FOR A
BENEFICIAL INTEREST IN A GLOBAL SECURITY. A definitive Security may not
be exchanged for a beneficial interest in a Global Security except upon
satisfaction of the requirements set forth below. Upon receipt by the
Trustee of a definitive Security, duly endorsed or accompanied by
appropriate instruments of transfer, in form satisfactory to the
Trustee, together with:
(A) certification in the form set forth on the reverse of
the Security that such definitive Security is being transferred
to a Qualified Institutional Buyer in accordance with Rule 144A;
and
(B) written instructions directing the Trustee to make, or
to direct the Securities Registrar to make, an adjustment on its
books and records with respect to such Global Security to reflect
an increase in the aggregate principal amount of the Securities
represented by the Global Security, such instructions to contain
information regarding the Depositary account to be credited with
such increase,
then the Trustee shall cancel such definitive Security and cause, or
direct the Securities Registrar to cause, in accordance with the
standing instructions and procedures existing between the Depositary and
the Securities Registrar, the aggregate principal amount of Securities
represented by the Global Security to be increased by the aggregate
principal amount of the definitive Security to be exchanged and shall
credit or cause to be credited to the account of the Person specified in
such instructions a beneficial interest in the Global Security equal to
the principal amount of the definitive Security so cancelled. If no
Global Securities are then outstanding, the Company shall issue and the
Trustee shall authenticate, upon written order of the Company in the
form of an Officers' Certificate, a new Global Security in the
appropriate principal amount.
(c) Subject to the succeeding paragraph, every Security shall be
subject to the restrictions on transfer provided in the legends required by
Section 2.02 to be applied to such Security. Whenever any Security is presented
or surrendered for registration of transfer or for exchange for a Security
registered in a name other than that of the Holder, such Security must be
accompanied by a certificate in substantially the form set forth in Section
2.07, dated the date of such surrender and signed by the Holder of such
Security, as to compliance with such restrictions on transfer. The Security
Registrar shall not be required to accept for such registration of transfer or
exchange any Security not so accompanied by a properly completed certificate.
(d) The restrictions imposed by the legend set forth in the first
or fourth paragraph, as the case may be, of Section 2.02 upon the
transferability of any Security
<PAGE>
38
shall cease and terminate when such Security has been sold pursuant to an
effective registration statement under the Securities Act, transferred in
compliance with Rule 144 under the Securities Act (or any successor provision
thereto), or after the second anniversary of the original issuance date of
the Security (or such earlier date after which the Security may be freely
transferred without registration under the Securities Act or without being
subject to transfer restrictions pursuant to the Securities Act, as may be
provided in Rule 144(k) under the Securities Act (or any successor provision
thereto) or otherwise). Any Security as to which such restrictions on
transfer shall have expired in accordance with their terms or shall have
terminated may, upon surrender of such Security for exchange to the Security
Registrar in accordance with the provisions of this Section 3.05
(accompanied, in the event that such restrictions on transfer have terminated
by reason of a transfer in compliance with Rule 144 or any successor
provision, by an opinion of counsel having substantial experience in practice
under the Securities Act and otherwise reasonably acceptable to the Company,
addressed to the Company and in form acceptable to the Company, to the effect
that the transfer of such Security has been made in compliance with Rule 144
or such successor provision), be exchanged for a new Security, of like tenor
and aggregate principal amount, which shall not bear the restrictive legend
set forth in the first paragraph of Section 2.02. The Company shall inform
the Trustee of the effective date of any registration statement registering
the Securities under the Securities Act. The Trustee shall not be liable for
any action taken or omitted to be taken by it in good faith in accordance
with the aforementioned opinion of counsel or notice of an effective
registration statement.
(e) As used in the preceding two paragraphs (c) and (d) of this
Section 3.05, the term "transfer" encompasses any sale, pledge, transfer,
hypothecation or other disposition of any Security.
(f) No service charge shall be made for any registration of
transfer or exchange of Securities, but the Company may require payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed in
connection with any registration of transfer or exchange of Securities, other
than exchanges pursuant to Section 3.04, 9.06, 11.08, 13.02 or 14.06 not
involving any transfer.
(g) The Company shall not be required (i) to issue, register the
transfer of or exchange any Security during a period beginning at the opening of
business 15 days before the day of the mailing of a notice of redemption of
Securities selected for redemption under Section 11.04 and ending at the close
of business on the day of such mailing, or (ii) to register the transfer of or
exchange any Security so selected for redemption in whole or in part, except the
unredeemed portion of any Security being redeemed in part.
<PAGE>
39
SECTION 3.06. MUTILATED, DESTROYED, LOST AND STOLEN SECURITIES.
If any mutilated Security is surrendered to the Trustee, the Company shall
execute and the Trustee shall authenticate and deliver in exchange therefor a
new Security of like tenor and principal amount and bearing a number not
contemporaneously outstanding.
If there shall be delivered to the Company and the Trustee (i)
evidence to their satisfaction of the destruction, loss or theft of any Security
and (ii) such security or indemnity as may be required by them to save each of
them and any agent of either of them harmless, then, in the absence of written
notice to the Company or the Trustee that such Security has been acquired by a
bona fide purchaser, the Company shall execute and the Trustee shall
authenticate and deliver, in lieu of any such destroyed, lost or stolen
Security, a new Security of like tenor and principal amount and bearing a number
not contemporaneously outstanding.
In case any such mutilated, destroyed, lost or stolen Security
has become or is about to become due and payable, the Company in its discretion,
but subject to any conversion rights, may, instead of issuing a new Security,
pay such Security.
Upon the issuance, authentication and delivery by the Trustee of
any new Security under this Section 3.06, the Company may require the payment of
a sum sufficient to cover any tax or other governmental charge that may be
imposed in relation thereto and any other expenses (including the fees and
expenses of the Trustee) connected therewith.
Every new Security issued, authenticated and delivered by the
Trustee pursuant to this Section 3.06 in lieu of any destroyed, lost or stolen
Security shall constitute an original additional contractual obligation of the
Company, whether or not the destroyed, lost or stolen Security shall be at any
time enforceable by anyone, and shall be entitled to all the benefits of this
Indenture equally and proportionately with any and all other Securities duly
issued hereunder.
The provisions of this Section are exclusive and shall preclude
(to the extent lawful) all other rights and remedies with respect to the
replacement or payment of mutilated, destroyed, lost or stolen Securities.
SECTION 3.07. PAYMENT OF INTEREST; INTEREST RIGHTS PRESERVED.
Interest on any Security which is payable, and is punctually paid or duly
provided for, on any Interest Payment Date shall be paid to the Person in whose
name that Security (or one or more Predecessor Securities) is registered at the
close of business on the Regular Record Date for payment of such interest.
<PAGE>
40
If the Company shall be required by law to deduct any taxes from
any sum of interest payable hereunder to a Holder, (i) the Company shall make
such deductions and shall pay the full amount deducted to the relevant taxing
authority in accordance with applicable law and (ii) the amount of such
deduction shall be treated for purposes hereof as a payment of interest.
Any interest on any Security which is payable, but is not
punctually paid or duly provided for, on any Interest Payment Date (herein
called "Defaulted Interest") shall forthwith cease to be payable to the Holder
on the relevant Regular Record Date by virtue of having been such Holder, and
such Defaulted Interest may be paid by the Company, at its election in each
case, as provided in clause (1) or (2) below:
(1) The Company may elect to make payment of any Defaulted
Interest to the Persons in whose names the Securities (or their
respective Predecessor Securities) are registered at the close of
business on a Special Record Date for the payment of such Defaulted
Interest, which shall be fixed in the following manner. The Company
shall notify the Trustee in writing of the amount of Defaulted Interest
proposed to be paid on each Security and the date of the proposed
payment, and at the same time the Company shall deposit with the Trustee
an amount of money equal to the aggregate amount proposed to be paid in
respect of such Defaulted Interest or shall make arrangements
satisfactory to the Trustee for such deposit prior to the date of the
proposed payment, such money when deposited to be held in trust for the
benefit of the Persons entitled to such Defaulted Interest as in this
clause (1) provided. Thereupon, the Trustee shall, on behalf of, and
upon the instructions of, the Company, fix a Special Record Date for the
payment of such Defaulted Interest which shall be not more than 15 days
and not less than 10 days prior to the date of the proposed payment and
not less than 10 days after the receipt by the Trustee of the notice of
the proposed payment. The Trustee, in the name and at the expense of the
Company, shall forward a notice prepared by the Company of the proposed
payment of such Defaulted Interest and the Special Record Date therefor
to be mailed, first-class postage prepaid, to each Holder at his address
as it appears in the Security Register, not less than 10 days prior to
such Special Record Date at the expense of the Company. Notice of the
proposed payment of such Defaulted Interest and the Special Record Date
therefor having been so mailed, such Defaulted Interest shall be paid to
the Persons in whose names the Securities (or their respective
Predecessor Securities) are registered at the close of business on such
Special Record Date and shall no longer be payable pursuant to the
following clause (2).
(2) The Company may make payment of any Defaulted Interest in any
other lawful manner not inconsistent with the requirements of any
securities exchange on which the Securities may be listed, and upon
such notice as may be
<PAGE>
41
required by such exchange, if, after written notice given by the
Company to the Trustee of the proposed payment pursuant to this clause
(2), such manner of payment shall be deemed practicable by the Trustee.
Subject to the foregoing provisions of this Section, each
Security delivered under this Indenture upon registration of transfer of or in
exchange for or in lieu of any other Security shall carry the rights to interest
accrued and unpaid, and to accrue, which were carried by such other Security.
In the case of any Security which is converted after any Regular
Record Date and on or prior to the corresponding Interest Payment Date, interest
on such Security whose Stated Maturity is on such Interest Payment Date shall be
deemed to continue to accrue and shall be payable on such Interest Payment Date
notwithstanding such conversion and notwithstanding that such Security may have
been called for redemption on a Redemption Date within such period, and such
interest (whether or not punctually paid or duly provided for) shall be paid to
the Person in whose name that Security (or one or more Predecessor Securities)
is registered at the close of business on such Regular Record Date. Except as
otherwise expressly provided in the immediately preceding sentence, in the case
of any Security which is converted, interest whose Stated Maturity is after the
date of conversion of such Security shall not be payable.
SECTION 3.08. PERSONS DEEMED OWNERS. Prior to due presentment of
a Security for registration of transfer, the Company, the Trustee and any agent
of the Company or the Trustee may treat the Person in whose name such Security
is registered in the Security Register as the owner of such Security for the
purpose of receiving payment of principal of, premium, if any, and (subject to
Section 3.07) interest on such Security and for all other purposes whatsoever,
whether or not such Security be overdue, and neither the Company, the Trustee
nor any agent of the Company or the Trustee shall be affected by notice to the
contrary.
SECTION 3.09. CANCELLATION. All Securities surrendered for
payment, redemption, purchase, registration of transfer or exchange or
conversion shall, if surrendered to any Person other than the Trustee, be
delivered to the Trustee and shall be promptly cancelled by it. The Company may
at any time deliver to the Trustee for cancellation any Securities previously
authenticated and delivered hereunder which the Company may have acquired in any
manner whatsoever, and all Securities so delivered shall be promptly cancelled
by the Trustee. No Securities shall be authenticated in lieu of or in exchange
for any Securities cancelled as provided in this Section, except as expressly
permitted by this Indenture. All cancelled Securities held by the Trustee shall
be disposed of as directed by a Company Order; PROVIDED HOWEVER, the Trustee
shall not be required to destroy such cancelled Securities.
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SECTION 3.10. COMPUTATION OF INTEREST. Interest on the Securities
shall be computed on the basis of a 360-day year of twelve 30-day months.
SECTION 3.11 CUSIP NUMBERS. The Company in issuing the Securities
may use "CUSIP" numbers (if then generally in use), and, if so, the Trustee
shall use "CUSIP" numbers in notices of redemption as a convenience to
Holders; PROVIDED that any such notice may state that no representation is
made as to the correctness of such numbers either as printed on the
Securities or as contained in any notice of a redemption and that reliance
may be placed only on the other identification numbers printed on the
Securities, and any such redemption shall not be affected by any defect in or
omission of such numbers. The Company will promptly notify the Trustee of any
change in the "CUSIP" numbers.
ARTICLE IV
SATISFACTION AND DISCHARGE
SECTION 4.01. SATISFACTION AND DISCHARGE OF INDENTURE. This
Indenture shall upon Company Request cease to be of further effect (except as to
any surviving rights of conversion, registration of transfer or exchange of
Securities herein expressly provided for), and the Trustee, at the expense of
the Company, shall execute proper instruments acknowledging satisfaction and
discharge of this Indenture, when
(1) either
(A) all Securities theretofore authenticated and delivered
(other than (i) Securities which have been destroyed, lost or
stolen and which have been replaced or paid as provided in
Section 3.06 and (ii) Securities for whose payment money has
theretofore been deposited in trust or segregated and held in
trust by the Company and thereafter repaid to the Company or
discharged from such trust, as provided in Section 10.03) have
been delivered to the Trustee for cancellation;
(B) all such Securities not theretofore delivered to the
Trustee for cancellation
(i) have become due and payable, or
(ii) will become due and payable at their Stated
Maturity within one year, or
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43
(iii) are to be called for redemption within one
year under arrangements satisfactory to the Trustee for
the giving of notice of redemption by the Trustee in the
name, and at the expense, of the Company,
and the Company, in the case of (i), (ii) or (iii) above, has deposited or
caused to be deposited irrevocably with the Trustee as trust funds in trust for
the benefit of Holders of Outstanding Securities in an amount sufficient to pay
and discharge the entire indebtedness on such Securities not theretofore
delivered to the Trustee for cancellation, for principal (and premium, if any)
and interest to the date of such deposit (in the case of Securities which have
become due and payable) or to the Stated Maturity or Redemption Date, as the
case may be;
(2) the Company has paid or caused to be paid all other sums
payable hereunder by the Company;
(3) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent herein provided for relating to the satisfaction and discharge
of this Indenture have been complied with; and
(4) no Event of Default which, with notice or lapse of time, or
both, would become an Event of Default with respect to the Securities
shall have occurred and be continuing on the date of such deposit.
Notwithstanding the satisfaction and discharge of this Indenture, the
obligations of the Company to the Trustee under Section 6.07, the obligations of
the Company to any Authenticating Agent under Section 6.14 and, if money shall
have been deposited with the Trustee pursuant to subclause (B) of clause (1) of
this Section, the obligations of the Trustee under Section 4.02 and the last
paragraph of Section 10.03 shall survive.
SECTION 4.02. APPLICATION OF TRUST MONEY. Subject to the
provisions of the last paragraph of Section 10.03, all money deposited with the
Trustee pursuant to Section 4.01 shall be held in trust and applied by it, in
accordance with the provisions of the Securities and this Indenture, to the
payment, either directly or through any Paying Agent (including the Company
acting as its own Paying Agent) as the Trustee may determine, to the Persons
entitled thereto, of the principal (and premium, if any) and interest for whose
payment such money has been deposited with the Trustee. All moneys deposited
with the Trustee pursuant to Section 4.01 (and held by it or any Paying Agent)
for the payment of Securities subsequently converted shall be returned to the
Company upon Company Request.
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44
ARTICLE V
REMEDIES
SECTION 5.01. EVENTS OF DEFAULT. "Event of Default", wherever
used herein, means any one of the following events (whatever the reason for such
Event of Default and whether it shall be occasioned by the provisions of Article
XII or be voluntary or involuntary or be effected by operation of law or
pursuant to any judgment, decree or order of any court or any order, rule or
regulation of any administrative or governmental body):
(1) default in the payment of any interest (including Additional
Interest) upon any Security when it becomes due and payable, and
continuance of such default for a period of 30 days (whether or not such
payment is prohibited by the provisions of Article XII); or
(2) default in the payment of the principal of (or premium, if
any, on) any Security at its Maturity (whether or not such payment is
prohibited by the provisions of Article XII); or
(3) failure by the Company to provide the notice of a Change in
Control in accordance with Section 14.03 or default in the payment of
the Purchase Price in respect of any Security on the Purchase Date
therefor (whether or not such payment is prohibited by the provisions of
Article XII); or
(4) default in the performance, or breach, of any covenant or
warranty of the Company in this Indenture (other than a covenant or
warranty a default in whose performance or whose breach is elsewhere in
this Section specifically dealt with), and continuance of such default
or breach for a period of 60 days after there has been given, by
registered or certified mail, to the Company by the Trustee or to the
Company and the Trustee by the Holders of at least 25% in principal
amount of the Outstanding Securities a written notice specifying such
default or breach and requiring it to be remedied and stating that such
notice is a "Notice of Default" hereunder; or
(5) a default under any bonds, debentures, notes or other
evidences of indebtedness for money borrowed by the Company or a
Subsidiary or under any mortgages, indentures or instruments under which
there may be issued or by which there may be secured or evidenced any
indebtedness for money borrowed by the Company or a Subsidiary, whether
such indebtedness now exists or shall hereafter be created which
indebtedness, individually or in the aggregate, has a principal amount
outstanding in excess of U.S.$10,000,000, which default shall
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45
constitute a failure to pay any portion of the principal of such
indebtedness when due and payable after the expiration of any
applicable grace or cure period with respect thereto or shall have
resulted in such indebtedness becoming or being declared due and payable
prior to the date on which it would otherwise have become due and
payable, without such indebtedness having been discharged, or such
acceleration having been rescinded or annulled, within a period of 30
days after there shall have been given, by registered or certified mail,
to the Company by the Trustee or to the Company and the Trustee by the
Holders of at least 25% in principal amount of the Outstanding
Securities a written notice specifying such default and requiring the
Company to cause such indebtedness to be discharged or cause such
acceleration to be rescinded or annulled and stating that such notice is
a "Notice of Default" hereunder; or
(6) the entry by a court having jurisdiction in the premises of
(A) a decree or order for relief in respect of the Company or a
Subsidiary in an involuntary case or proceeding under any applicable
Federal or State bankruptcy, insolvency, reorganization or other similar
law or (B) a decree or order adjudging the Company or a Subsidiary
bankrupt or insolvent, or approving as properly filed a petition seeking
reorganization, arrangement, adjustment or composition of or in respect
of the Company or a Subsidiary under any applicable Federal or State
law, or appointing a custodian, receiver, liquidator, assignee, trustee,
sequestrator or other similar official of the Company or a Subsidiary or
of any substantial part of their respective properties, or ordering the
winding up or liquidation of the affairs of the Company or a Subsidiary,
and the continuance of any such decree or order for relief or any such
other decree or order unstayed and in effect for a period of 60
consecutive days; or
(7) the commencement by the Company or a Subsidiary of a
voluntary case or proceeding under any applicable Federal or State
bankruptcy, insolvency, reorganization or other similar law or of any
other case or proceeding to be adjudicated a bankrupt or insolvent, or
the consent by either the Company or a Subsidiary to the entry of a
decree or order for relief in respect of the Company or a Subsidiary in
an involuntary case or proceeding under any applicable Federal or State
bankruptcy, insolvency, reorganization or other similar law or to the
commencement of any bankruptcy or insolvency case or proceeding against
either the Company or a Subsidiary, or the filing by either the Company
or a Subsidiary of a petition or answer or consent seeking
reorganization or relief under any applicable Federal or State law, or
the consent by either the Company or a Subsidiary to the filing of such
petition or to the appointment of or taking possession by a custodian,
receiver, liquidator, assignee, trustee, sequestrator or other similar
official of the Company or a Subsidiary or of any substantial part of
their respective properties, or the making by either the Company or a
Subsidiary
<PAGE>
46
of an assignment for the benefit of creditors, or the admission by
either the Company or a Subsidiary in writing of an inability to pay
the debts of either the Company or a Subsidiary generally as they become
due, or the taking of corporate action by the Company or a Subsidiary in
furtherance of any such action.
SECTION 5.02. ACCELERATION OF MATURITY; RESCISSION AND ANNULMENT.
If an Event of Default (other than an Event of Default specified in Section
5.01(6) or 5.01(7)) occurs and is continuing, then in every such case the
Trustee or the Holders of not less than 25% in principal amount of the
Outstanding Securities may declare the principal of all the Securities to be due
and payable immediately, by a notice in writing to the Company (and to the
Trustee if given by Holders), and upon any such declaration such principal and
any accrued interest (including Additional Interest) thereon shall become
immediately due and payable. If an Event of Default specified in Section 5.01(6)
or 5.01(7) occurs, the principal of, and accrued interest (including Additional
Interest) on, all the Securities shall automatically, and without any
declaration or other action on the part of the Trustee or any Holder, become
immediately due and payable.
At any time after such a declaration of acceleration has been
made and before a judgment or decree for payment of the money due has been
obtained by the Trustee as hereinafter in this Article V provided, the Holders
of a majority in principal amount of the Outstanding Securities, by written
notice to the Company and the Trustee, may rescind and annul such declaration
and its consequences if
(1) the Company has paid or deposited with the Trustee a sum
sufficient to pay
(A) all overdue interest (including Additional Interest)
on all Securities,
(B) the principal of (and premium, if any, on) any
Securities which have become due otherwise than by such
declaration of acceleration and interest thereon at the rate
borne by the Securities,
(C) to the extent that payment of such interest is lawful,
interest upon overdue interest at the rate borne by the
Securities, and
(D) all sums paid or advanced by the Trustee hereunder and
the reasonable compensation, expenses, disbursements and advances
of the Trustee, its agents and counsel;
and
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(2) all Events of Default, other than the nonpayment of the
principal of Securities which have become due solely by such declaration
of acceleration, have been cured or waived as provided in Section 5.13.
No such rescission shall affect any subsequent default or impair any right
consequent thereon.
SECTION 5.03. COLLECTION OF INDEBTEDNESS AND SUITS FOR
ENFORCEMENT BY TRUSTEE. If
(1) default is made in the payment of any interest on any
Security when such interest becomes due and payable and such default
continues for a period of 30 days, or
(2) default is made in the payment of the principal of (or
premium, if any, on) any Security at the Maturity thereof,
the Trustee is authorized to recover judgment in its own name and as trustee of
an express trust against the Company for the whole amount then due and payable
on such Securities for principal (and premium, if any) and interest, and, to the
extent that payment of such interest shall be legally enforceable, interest on
any overdue principal (and premium, if any) and on any overdue interest, at the
rate borne by the Securities, and, in addition thereto, such further amount as
shall be sufficient to cover the costs and expenses of collection, including the
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and counsel.
If an Event of Default occurs and is continuing, the Trustee may
in its discretion proceed to protect and enforce its rights and the rights of
the Holders by such appropriate judicial proceedings as the Trustee shall deem
most effectual to protect and enforce any such rights, whether for the specific
enforcement of any covenant or agreement in this Indenture or in aid of the
exercise of any power granted herein, or to enforce any other proper remedy.
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48
SECTION 5.04. TRUSTEE MAY FILE PROOFS OF CLAIM. In case of any
judicial proceeding relative to the Company (or any other obligor upon the
Securities), its property or its creditors, the Trustee shall be entitled and
empowered, by intervention in such proceeding or otherwise,
(1) to file and prove a claim for the whole amount of principal
and interest owing and unpaid in respect of the Securities and to file
such other papers or documents as may be necessary or advisable in order
to have the claims of the Trustee (including any claim for the
reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel) and of the Holders allowed in such
judicial proceeding, and
(2) to collect and receive any moneys or other property payable
or deliverable on any such claim and to distribute the same;
and any custodian, receiver, assignee, trustee, liquidator, sequestrator or
other similar official in any such judicial proceeding is hereby authorized
by each Holder to make such payments to the Trustee and, in the event that
the Trustee shall consent to the making of such payments directly to the
Holders, to pay to the Trustee any amount due it for the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel, and any other amounts due the Trustee under Section 6.07.
No provision of this Indenture shall be deemed to authorize the
Trustee to authorize or consent to or accept or adopt on behalf of any Holder
any plan of reorganization, arrangement, adjustment or composition affecting the
Securities or the rights of any Holder thereof or to authorize the Trustee to
vote in respect of the claim of any Holder in any such proceeding; PROVIDED,
HOWEVER, that the Trustee may, on behalf of the Holders, vote for the election
of a trustee in bankruptcy or similar official and be a member of a creditors'
or other similar committee.
SECTION 5.05. TRUSTEE MAY ENFORCE CLAIMS WITHOUT POSSESSION OF
SECURITIES. All rights of action and claims under this Indenture or the
Securities may be prosecuted and enforced by the Trustee without the possession
of any of the Securities or the production thereof in any proceeding relating
thereto, and any such proceeding instituted by the Trustee shall be brought in
its own name as trustee of an express trust, and any recovery of judgment shall,
after provision for the payment of the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel, be for the
ratable benefit of the Holders of the Securities in respect of which such
judgment has been recovered.
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49
SECTION 5.06. APPLICATION OF MONEY COLLECTED. Any money collected
by the Trustee pursuant to this Article V shall be applied in the following
order, at the date or dates fixed by the Trustee and, in case of the
distribution of such money on account of principal (or premium, if any) or
interest, upon presentation of the Securities and the notation thereon of the
payment if only partially paid and upon surrender thereof if fully paid:
FIRST: to the payment of all amounts due the Trustee under
Section 6.07;
SECOND: subject to Article XII, to the payment of the amounts
then due and unpaid for first, interest (including Additional Interest)
on, and, second, for principal of (and premium, if any, on) the
Securities in respect of which or for the benefit of which such money
has been collected, ratably, without preference or priority of any kind,
according to the amounts due and payable on such Securities for interest
and principal (and premium, if any) respectively;
THIRD: the balance, if any, to the Person or Persons entitled
thereto, as their interest may appear or as a court of competent
jurisdiction shall direct; and
FOURTH: to the Company.
SECTION 5.07. LIMITATION ON SUITS. No Holder of any Security
shall have any right to institute any proceeding, judicial or otherwise, with
respect to this Indenture, or for the appointment of a receiver or trustee, or
for any other remedy hereunder, unless
(1) such Holder has previously given written notice to a
Responsible Officer the Trustee of a continuing Event of Default;
(2) the Holders of not less than 25% in principal amount of the
Outstanding Securities shall have made written request to the Trustee to
institute proceedings in respect of such Event of Default in its own
name as Trustee hereunder;
(3) such Holder or Holders have offered to the Trustee written
indemnity satisfactory to it (which indemnity shall not be unreasonable)
against the costs, expenses and liabilities to be incurred in compliance
with such request;
(4) the Trustee for 60 days after its receipt of such notice,
request and offer of indemnity has failed to institute any such
proceeding; and
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(5) no direction inconsistent with such written request has been
given to the Trustee during such 60-day period by the Holders of a
majority in principal amount of the Outstanding Securities;
it being understood and intended that no one or more of such Holders shall have
any right in any manner whatever by virtue of, or by availing of, any provision
of this Indenture to affect, disturb or prejudice the fights of any other of
such Holders, or to obtain or to seek to obtain priority or preference over any
other of such Holders or to enforce any right under this Indenture, except in
the manner herein provided and for the equal and ratable benefit of all of such
Holders.
SECTION 5.08. UNCONDITIONAL RIGHT OF HOLDERS TO RECEIVE
PRINCIPAL, PREMIUM AND INTEREST AND TO CONVERT. Notwithstanding any other
provision in this Indenture, the Holder of any Security shall have the right,
which is absolute and unconditional, to receive payment of the principal of (and
premium, if any) and (subject to Section 3.07) interest on such Security on the
respective Stated Maturities expressed in such Security (or, in the case of
redemption or purchase, on the Redemption Date or Purchase Date, as the case may
be) and to convert such Security in accordance with Article XIII and to
institute suit for the enforcement of any such payment and right to convert, and
such rights shall not be impaired without the consent of such Holder.
SECTION 5.09. RESTORATION OF RIGHTS AND REMEDIES. If the Trustee
or any Holder has instituted any proceeding to enforce any right or remedy under
this Indenture and such proceeding has been discontinued or abandoned for any
reason, or has been determined adversely to the Trustee or to such Holder, then
and in every such case, subject to any determination in such proceeding, the
Company, the Trustee and the Holders shall be restored severally and
respectively to their former positions hereunder and thereafter all rights and
remedies of the Trustee and the Holders shall continue as though no such
proceeding had been instituted.
SECTION 5.10. RIGHTS AND REMEDIES CUMULATIVE. Except as otherwise
provided with respect to the replacement or payment of mutilated, destroyed,
lost or stolen Securities in the last paragraph of Section 3.06, no right or
remedy herein conferred upon or reserved to the Trustee or to the Holders is
intended to be exclusive of any other right or remedy, and every right and
remedy shall, to the extent permitted by law, be cumulative and in addition to
every other right and remedy given hereunder or now or hereafter existing at law
or in equity or otherwise. The assertion or employment of any right or remedy
hereunder, or otherwise, shall not prevent the concurrent assertion or
employment of any other appropriate right or remedy.
SECTION 5.11. DELAY OR OMISSION NOT WAIVER. No delay or omission
of the Trustee or of any Holder of any Securities to exercise any right or
remedy accruing upon any Event of Default shall impair any such right or remedy
or constitute a waiver of
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51
any such Event of Default or an acquiescence therein. Every right and remedy
given by this Article V or by law to the Trustee or to the Holders may be
exercised from time to time, and as often as may be deemed expedient, by the
Trustee or by the Holders, as the case may be.
SECTION 5.12. CONTROL BY HOLDERS. The Holders of a majority in
principal amount of the Outstanding Securities shall have the right to direct
the time, method and place of conducting any proceeding for any remedy available
to the Trustee or exercising any trust or power conferred on the Trustee;
PROVIDED that the Trustee may seek the advice of counsel and
(1) such direction shall not be in conflict with any rule of law
or with this Indenture, and
(2) the Trustee may take any other action deemed proper by the
Trustee which is not inconsistent with such direction.
SECTION 5.13. WAIVER OF PAST DEFAULTS. The Holders of not less
than a majority in principal amount of the Outstanding Securities may on behalf
of the Holders of all the Securities waive any past default hereunder and its
consequences, except a default
(1) in the payment of the principal of (or premium, if any) or
interest on any Security, or
(2) in respect of a covenant or provision hereof which under
Article IX cannot be modified or amended without the consent of the
Holder of each Outstanding Security affected.
Upon any such waiver, such default shall cease to exist, and any
Event of Default arising therefrom shall be deemed to have been cured, for every
purpose of this Indenture; but no such waiver shall extend to any subsequent or
other default or impair any right consequent thereon. A copy of such waiver
shall be delivered by the Company to the Trustee.
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52
SECTION 5.14. UNDERTAKING FOR COSTS. In any suit for the
enforcement of any right or remedy under this Indenture, or in any suit against
the Trustee for any action taken, suffered or omitted by it as Trustee, a court
may require any party litigant in such suit to file an undertaking to pay the
costs of such suit, and may assess costs against any such party litigant, having
due regard to the merits and good faith of the claims or defenses made by such
party litigant; PROVIDED, that this Section 5.14 shall not be deemed to
authorize any court to require such an undertaking or to make such an assessment
in any suit instituted by the Trustee or the Company or in any suit for the
enforcement of the right to convert any Security in accordance with Article
XIII.
SECTION 5.15. WAIVER OF USURY, STAY OR EXTENSION LAWS. The
Company covenants (to the extent that it may lawfully do so) that it will not
at any time insist upon, or plead, or in any manner whatsoever claim or take
the benefit or advantage of, any usury, stay or extension law wherever
enacted, now or at any time hereafter in force, which may affect the
covenants or the performance of this Indenture; and the Company (to the
extent that it may lawfully do so) hereby expressly waives all benefit or
advantage of any such law and covenants that it will not hinder, delay or
impede the execution of any power herein granted to the Trustee, but will
suffer and permit the execution of every such power as though no such law had
been enacted.
ARTICLE VI
THE TRUSTEE
SECTION 6.01. CERTAIN DUTIES AND RESPONSIBILITIES. (a) Except
during the continuance of an Event of Default,
(1) the Trustee undertakes to perform such duties and only such
duties as are specifically set forth in this Indenture, and no implied
covenants or obligations shall be read into this Indenture against the
Trustee; and
(2) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the correctness
of the opinions expressed therein, upon certificates or opinions
furnished to the Trustee and conforming to the requirements of this
Indenture; but in the case of any such certificates or opinions which by
any provision hereof are specifically required to be furnished to the
Trustee, the Trustee shall be under a duty to examine the same to
determine whether or not they conform to the requirements of this
Indenture (but need not confirm or investigate the accuracy of
mathematical calculations or other facts stated therein).
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53
(b) In case an Event of Default has occurred and is continuing,
the Trustee shall exercise such of the rights and powers vested in it by this
Indenture, and use the same degree of care and skill in their exercise, as a
prudent person would exercise or use under the circumstances in the conduct of
his or her own affairs.
(c) No provision of this Indenture shall be construed to relieve
the Trustee from liability for its own negligent action, its own negligent
failure to act, or its own willful misconduct, EXCEPT that
(1) this paragraph (c) shall not be construed to limit the effect
of paragraph (a) of this Section;
(2) the Trustee shall not be liable for any error of judgment
made in good faith by a Responsible Officer, unless it shall be proved
that the Trustee was negligent in ascertaining the pertinent facts;
(3) the Trustee shall not be liable with respect to any action
taken or omitted to be taken by it in good faith in accordance with the
direction of the Holders of a majority in principal amount of the
Outstanding Securities relating to the time, method and place of
conducting any proceeding for any remedy available to the Trustee, or
exercising any trust or power conferred upon the Trustee, under this
Indenture; and
(4) no provision of this Indenture shall require the Trustee to
expend or risk its own funds or otherwise incur any financial liability
in the performance of any of its duties hereunder, or in the exercise of
any of its rights or powers.
(d) Whether or not therein expressly so provided, every provision
of this Indenture relating to the conduct or affecting the liability of or
affording protection to the Trustee (as Trustee, Paying Agent, Authenticating
Agent or Security Registrar) shall be subject to the provisions of this Section.
SECTION 6.02. NOTICE OF DEFAULTS. Within 90 days after the
occurrence of any default hereunder, the Trustee shall give the Holders, in the
manner provided in Section 1.06, notice of any default hereunder actually known
to a Responsible Officer of the Trustee; PROVIDED, HOWEVER, that in the case of
any default of the character specified in Section 5.01(3), no such notice to
Holders shall be given until at least 30 days after the occurrence thereof. The
Trustee shall not be deemed to have notice of a default unless (i) the Trustee
has received written notice thereof from the Company or any Holder or (ii) a
Responsible Officer of the Trustee shall have actual knowledge thereof. For the
purpose of this Section, the term "default" means any event which is, or after
notice or lapse of time or both would become, an Event of Default.
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54
SECTION 6.03. CERTAIN RIGHTS OF TRUSTEE. Subject to the
provisions of Section 6.01:
(a) the Trustee may conclusively rely and shall be protected in
acting or refraining from acting upon any resolution, certificate,
statement, instrument, opinion, report, notice, request, direction,
consent, order, bond, debenture, note, other evidence of indebtedness or
other paper or document believed by it to be genuine and to have been
signed or presented by the proper party or parties;
(b) any request or direction of the Company mentioned herein
shall be sufficiently evidenced by a Company Request or Company Order
and any resolution of the Board of Directors shall be sufficiently
evidenced by a Board Resolution;
(c) whenever in the administration of this Indenture the Trustee
shall deem it desirable that a matter be proved or established prior to
taking, suffering or omitting any action hereunder, the Trustee (unless
other evidence be herein specifically prescribed) may require and, in
the absence of bad faith on its part, conclusively rely upon an Opinion
of Counsel and Officers' Certificate;
(d) the Trustee may consult with counsel of its selection and the
advice of such counsel or any Opinion of Counsel shall be full and
complete authorization and protection in respect of any action taken,
suffered or omitted by it hereunder in good faith and in reliance
thereon;
(e) the Trustee shall be under no obligation to exercise any of
the rights or powers vested in it by this Indenture at the request or
direction of any of the Holders pursuant to this Indenture, unless such
Holders shall have offered to the Trustee security or indemnity
satisfactory to the Trustee (which security or indemnity shall not be
unreasonable) against the costs, expenses and liabilities which might be
incurred by it in compliance with such request or direction;
(f) the Trustee shall not be bound to make any investigation into
the facts or matters stated in any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order,
bond, debenture, note, other evidence of indebtedness or other paper or
document, but the Trustee, in its discretion, may make such further
inquiry or investigation into such facts or matters as it may see fit,
and, if the Trustee shall determine to make such further inquiry or
investigation, it shall be entitled to examine the books, records and
premises of the Company, personally or by agent or attorney at the
Company's expense; and
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55
(g) the Trustee may execute any of the trusts or powers hereunder
or perform any duties hereunder either directly or by or through agents
or attorneys and the Trustee shall not be responsible for any misconduct
or negligence on the part of any agent or attorney appointed with due
care by it hereunder.
(h) no provision of this Indenture shall require the Trustee to
expend or risk its own funds or otherwise incur any financial liability
in the performance of any of its duties hereunder, or in the exercise of
any of its rights or powers.
SECTION 6.04. NOT RESPONSIBLE FOR RECITALS OR ISSUANCE OF
SECURITIES. The recitals contained herein and in the Securities, except the
Trustee's certificates of authentication, shall be taken as the statements of
the Company, and neither the Trustee nor any Authenticating Agent assumes any
responsibility for their correctness. The Trustee makes no representations as to
the validity or sufficiency of this Indenture or of the Securities. Neither the
Trustee nor any Authenticating Agent shall be accountable for the use or
application by the Company of Securities or the proceeds thereof.
SECTION 6.05. MAY HOLD SECURITIES. The Trustee, any
Authenticating Agent, any Paying Agent, any Security Registrar or any other
agent of the Company, in its individual or any other capacity, may become the
owner or pledgee of Securities and, subject to Section 6.08 and Section 6.13,
may otherwise deal with the Company with the same rights it would have if it
were not Trustee, Authenticating Agent, Paying Agent, Security Registrar or such
other agent.
SECTION 6.06. MONEY HELD IN TRUST. Money held by the Trustee in
trust hereunder need not be segregated from other funds except to the extent
required by law. The Trustee shall be under no liability for interest on any
money received by it hereunder except as otherwise agreed with the Company in
writing.
SECTION 6.07. COMPENSATION AND REIMBURSEMENT. The Company
agrees:
(1) to pay to the Trustee from time to time such compensation as
shall be agreed in writing between the Company and the Trustee for all
services rendered by it hereunder (which compensation shall not be
limited by any provision of law in regard to the compensation of a
trustee of an express trust);
(2) except as otherwise expressly provided herein, to reimburse
the Trustee upon its request for all reasonable expenses, disbursements
and advances incurred or made by the Trustee in accordance with any
provision of this Indenture (including the reasonable compensation and
the expenses and
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56
disbursements of its agents and counsel), except any such expense,
disbursement or advance as may be attributable to its negligence or
willful misconduct;
(3) to indemnify each of the Trustee and any predecessor Trustee
for, and to hold each harmless against, any loss, liability or expense
incurred without negligence or willful misconduct on its part, arising
out of or in connection with the acceptance or administration of this
trust, including the costs and expenses of defending itself against any
claim (whether asserted by the Company, a Holder of Securities or any
other Person) or liability in connection with the exercise or
performance of any of its powers or duties hereunder. The Trustee shall
notify the Company of any claim asserted against it for which it may
seek indemnity;
(4) all indemnifications and releases from liability granted
hereunder to the Trustee shall extend to its officers, directors,
employees, agents, successors and assigns;
(5) when the Trustee incurs expenses or renders services after
the occurrence of any Event of Default specified in Section 5.01, the
expenses and the compensation for the services are intended to
constitute expenses of administration under any bankruptcy, insolvency
or similar laws; and
(6) the obligations of the Company under this Section shall
survive the satisfaction and discharge of this Indenture.
SECTION 6.08. DISQUALIFICATION; CONFLICTING INTERESTS. If the
Trustee has or shall acquire a conflicting interest within the meaning of the
Trust Indenture Act, the Trustee shall either eliminate such interest or resign,
to the extent and in the manner provided by, and subject to the provisions of,
the Trust Indenture Act and this Indenture.
SECTION 6.09. CORPORATE TRUSTEE REQUIRED; ELIGIBILITY. There
shall at all times be a Trustee hereunder which shall be a corporation organized
and doing business under the laws of the United States, authorized under such
laws to exercise corporate trust powers, which shall have (or, in the case of a
corporation included in a bank holding company system, the related bank holding
company shall have) a combined capital and surplus of at least U.S.$50,000,000,
subject to supervision or examination by Federal or State authority, in good
standing and having an established place of business or agency in the Borough of
Manhattan, The City of New York. If such corporation or related bank holding
company publishes reports of condition at least annually, pursuant to law or to
the requirements of said supervising or examining authority, then for the
purposes of this Section, the combined capital and surplus of such corporation
or related bank holding company shall be deemed to be its combined capital and
surplus as set forth in its most recent report of condition so published. If at
any time the Trustee shall cease
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to be eligible in accordance with the provisions of this Section, it shall
resign immediately in the manner and with the effect hereinafter specified in
this Article VI.
SECTION 6.10. RESIGNATION AND REMOVAL; APPOINTMENT OF SUCCESSOR.
(a) No resignation or removal of the Trustee and no appointment of a successor
Trustee pursuant to this Article shall become effective until the acceptance of
appointment by the successor Trustee in accordance with the applicable
requirements of Section 6.11.
(b) The Trustee may resign at any time by giving written notice
thereof to the Company. If the instrument of acceptance by a successor Trustee
required by Section 6.11 shall not have been delivered to the Trustee within 30
days after the giving of such notice of resignation, the resigning Trustee may
petition any court of competent jurisdiction for the appointment of a successor
Trustee.
(c) The Trustee may be removed at any time by Act of the Holders
of a majority in principal amount of the Outstanding Securities, delivered to
the Trustee and to the Company. If the instrument of acceptance by a successor
Trustee required by Section 6.11 shall not have been delivered to the Trustee
within 30 days after the giving of such notice of removal, the removed Trustee
may petition any court of competent jurisdiction for the appointment of a
successor Trustee.
(d) If at any time:
(1) the Trustee shall fail to comply with Section 6.08 after
written request therefor by the Company or by any Holder who has been a
bona fide Holder of a Security for at least six months, or
(2) the Trustee shall cease to be eligible under Section 6.09 and
shall fail to resign after written request therefor by the Company or by
any such Holder, or
(3) the Trustee shall become incapable of acting or shall be
adjudged a bankrupt or insolvent or a receiver of the Trustee or of its
property shall be appointed or any public officer shall take charge or
control of the Trustee or of its property or affairs for the purpose of
rehabilitation, conservation or liquidation,
then, in any such case, (i) the Company by a Board Resolution may remove the
Trustee, or (ii) subject to Section 5.14, any Holder who has been a bona fide
Holder of a Security for at least six months may, on behalf of himself and all
others similarly situated, petition any court of competent jurisdiction for the
removal of the Trustee and the appointment of a successor Trustee.
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(e) If the Trustee shall resign, be removed or become incapable
of acting, or if a vacancy shall occur in the office of Trustee for any cause,
the Company, by a Board Resolution, shall promptly appoint a successor Trustee.
If, within one year after such resignation, removal or incapability, or the
occurrence of such vacancy, a successor Trustee shall be appointed by Act of the
Holders of a majority in principal amount of the Outstanding Securities
delivered to the Company and the retiring Trustee, the successor Trustee so
appointed shall, forthwith upon its acceptance of such appointment in accordance
with the applicable requirements of Section 6.11, become the successor Trustee
and to that extent supersede the successor Trustee appointed by the Company. If
no successor Trustee shall have been so appointed by the Company or the Holders
and accepted appointment in the manner required by Section 6.11, any Holder who
has been a bona fide Holder of a Security for at least six months may, on behalf
of himself and all others similarly situated, petition any court of competent
jurisdiction for the appointment of a successor Trustee.
(f) The Company shall give notice of each resignation and each
removal of the Trustee and each appointment of a successor Trustee to all
Holders in the manner provided in Section 1.06. Each notice shall include the
name of the successor Trustee and the address of its Corporate Trust Office.
SECTION 6.11. ACCEPTANCE OF APPOINTMENT BY SUCCESSOR. Every
successor Trustee appointed hereunder shall execute, acknowledge and deliver to
the Company and to the retiring Trustee an instrument accepting such
appointment, and thereupon the resignation or removal of the retiring Trustee
shall become effective and such successor Trustee, without any further act, deed
or conveyance, shall become vested with all the rights, powers, trusts and
duties of the retiring Trustee; but, on the request of the Company or the
successor Trustee, such retiring Trustee shall, upon payment of its charges,
execute and deliver an instrument transferring to such successor Trustee all the
rights, powers and trusts of the retiring Trustee and shall duly assign,
transfer and deliver to such successor Trustee all property and money held by
such retiring Trustee hereunder. Upon request of any such successor Trustee, the
Company shall execute any and all instruments for more fully and certainly
vesting in and confirming to such successor Trustee all such rights, powers and
trusts.
No successor Trustee shall accept its appointment unless at the
time of such acceptance such successor Trustee shall be qualified and eligible
under this Article VI.
SECTION 6.12. MERGER, CONVERSION, CONSOLIDATION OR SUCCESSION TO
BUSINESS. Any corporation into which the Trustee may be merged or converted or
with which it may be consolidated, or any corporation resulting from any merger,
conversion or consolidation to which the Trustee shall be a party, or any
corporation succeeding to
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59
all or substantially all the corporate trust business of the Trustee, shall
be the successor of the Trustee hereunder; PROVIDED such corporation shall be
otherwise qualified and eligible under this Article VI without the execution
or filing of any paper or any further act on the part of any of the parties
hereto. In case any Securities shall have been authenticated, but not
delivered, by the Trustee then in office, any successor by merger, conversion
or consolidation to such authenticating Trustee may adopt such authentication
and deliver the Securities so authenticated with the same effect as if such
successor Trustee had itself authenticated such Securities.
SECTION 6.13. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY.
If and when the Trustee shall be or become a creditor of the Company (or any
other obligor upon the Securities), the Trustee shall be subject to the
provisions of the Trust Indenture Act regarding the collection of claims against
the Company (or any such other obligor).
SECTION 6.14. APPOINTMENT OF AUTHENTICATING AGENT. The Trustee
may appoint an Authenticating Agent or Agents which shall be authorized to
act on behalf of the Trustee to authenticate Securities issued upon original
issue and upon exchange, registration of transfer, partial conversion,
partial redemption, or partial purchase or pursuant to Section 3.06, and
Securities so authenticated shall be entitled to the benefits of this
Indenture and shall be valid and obligatory for all purposes as if
authenticated by the Trustee hereunder. Wherever reference is made in this
Indenture to the authentication and delivery of Securities by the Trustee or
the Trustee's certificate of authentication, such reference shall be deemed
to include authentication and delivery on behalf of the Trustee by an
Authenticating Agent and a certificate of authentication executed on behalf
of the Trustee by an Authenticating Agent. Each Authenticating Agent shall be
acceptable to the Company and shall at all times be a corporation organized
and doing business under the laws of the United States, authorized under such
laws to act as Authenticating Agent, which shall have (or, in the case of a
corporation included in a bank holding company system, the related bank
holding company shall have) a combined capital and surplus of not less than
U.S.$50,000,000 and be subject to supervision or examination by Federal or
State authority. If such Authenticating Agent publishes reports of condition
at least annually, pursuant to law or to the requirements of said supervising
or examining authority, then, for the purposes of this Section, the combined
capital and surplus of such Authenticating Agent or related bank holding
company shall be deemed to be its combined capital and surplus as set forth
in its most recent report of condition so published. If at any time an
Authenticating Agent shall cease to be eligible in accordance with the
provisions of this Section, such Authenticating Agent shall resign
immediately in the manner and with the effect specified in this Section.
Any corporation into which an Authenticating Agent may be merged
or converted or with which it may be consolidated, or any corporation resulting
from any merger, conversion or consolidation to which such Authenticating Agent
shall be a party,
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or any corporation succeeding to all or substantially all the
corporate agency or corporate trust business of an Authenticating Agent, shall
continue to be an Authenticating Agent; PROVIDED such corporation shall be
otherwise eligible under this Section, without the execution or filing of any
paper or any further act on the part of the Trustee or the Authenticating Agent.
An Authenticating Agent may resign at any time by giving written
notice thereof to the Trustee and to the Company. The Trustee may at any time
terminate the agency of an Authenticating Agent by giving written notice thereof
to such Authenticating Agent and to the Company. Upon receiving such a notice of
resignation or upon such a termination, or in case at any time such
Authenticating Agent shall cease to be eligible in accordance with the
provisions of this Section 6.14, the Trustee may appoint a successor
Authenticating Agent which shall be acceptable to the Company and shall mail
written notice of such appointment by first-class mail, postage prepaid, to all
Holders as their names and addresses appear in the Security Register. Any
successor Authenticating Agent upon acceptance of its appointment hereunder
shall become vested with all the rights, powers and duties of its predecessor
hereunder, with like effect as if originally named as an Authenticating Agent.
No successor Authenticating Agent shall be appointed unless eligible under the
provisions of this Section 6.14.
The Company agrees to pay to each Authenticating Agent from time
to time compensation for its services under this Section 6.14.
If an appointment is made pursuant to this Section, the
Securities may have endorsed thereon, in addition to the Trustee's certificate
of authentication, an alternative certificate of authentication in the following
form:
This is one of the Securities described in the within-mentioned
Indenture.
The Bank of New York
Date:
---------------- ----------------------------------------
As Trustee
By
--------------------------------------
As Authenticating Agent
By
--------------------------------------
Authorized Signatory
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SECTION 6.15. APPOINTMENT OF CO-TRUSTEE. Subject to the
qualifications set forth in Section 6.09, the Trustee may appoint an additional
institution as a separate trustee or co-trustee. If the Trustee appoints an
additional institution as a separate trustee or co-trustee, each and every
remedy, power, fight, claim, demand, cause of action, immunity, estate, duty,
obligation, title, interest and lien expressed or intended by this Indenture to
be exercised by, vested in and conveyed by the Trustee with respect thereto
shall be exercisable by, vested in and conveyed to such separate trustee or
co-trustee, but only to the extent necessary to enable such separate trustee or
co-trustee to exercise such powers, rights and remedies, and every covenant and
obligation necessary for the exercise thereby by such separate trustee or
co-trustee shall run to and be enforceable by either of them. Should any
instrument in writing from the Company be required by the separate trustee or
co-trustee so appointed by the Trustee for more fully vesting in and confirming
to them such properties, rights, powers, trusts, duties and obligations, any and
all such instruments in writing shall, on request, be executed, acknowledged and
delivered by the Company. If any separate trustee or co-trustee, or a successor
to either, shall become incapable of acting or not qualified to act, resign or
be removed, all the estate, properties, rights, powers, trusts, duties and
obligations of such separate trustee or co-trustee, so far as permitted by law,
shall vest in and be exercised by the Trustee until the appointment of a
successor to such separate trustee or co-trustee. The appointment of any
separate trustee or co-trustee shall be subject to written approval of the
Company so long as no Event of Default has occurred and is continuing under this
Indenture.
ARTICLE VII
HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY
SECTION 7.01. COMPANY TO FURNISH TRUSTEE NAMES AND ADDRESSES OF
HOLDERS. The Company will furnish or cause to be furnished to the Trustee
(a) semi-annually, not more than 15 days after each Regular
Record Date, a list, in such form as the Trustee may reasonably require,
of the names and addresses of the Holders as of such Regular Record
Date, and
(b) at such other times as the Trustee may request in writing,
within 30 days after the receipt by the Company of any such request, a
list of similar form and content as of a date not more than 15 days
prior to the time such list is furnished;
EXCLUDING from any such list names and addresses received by the Trustee in its
capacity as Security Registrar.
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SECTION 7.02. PRESERVATION OF INFORMATION; COMMUNICATIONS TO
HOLDERS. (a) The Trustee shall preserve, in as current a form as is reasonably
practicable, the names and addresses of Holders contained in the most recent
list furnished to the Trustee as provided in Section 7.01 and the names and
addresses of Holders received by the Trustee in its capacity as Security
Registrar. The Trustee may destroy any list furnished to it as provided in
Section 7.01 upon receipt of a new list so furnished.
(b) The rights of Holders to communicate with other Holders with
respect to their rights under this Indenture or under the Securities, and the
corresponding rights and duties of the Trustee, shall be as provided by the
Trust Indenture Act.
(c) Every Holder of Securities, by receiving and holding the
same, agrees with the Company and the Trustee that neither the Company nor the
Trustee nor any agent of either of them shall be held accountable by reason of
any disclosure of information as to names and addresses of Holders made pursuant
to the Trust Indenture Act.
SECTION 7.03. REPORTS BY TRUSTEE. (a) The Trustee shall transmit
to Holders within 60 days after May 15th of each year such reports concerning
the Trustee and its actions under this Indenture as may be required pursuant to
the Trust Indenture Act at the times and in the manner provided pursuant
thereto.
(b) A copy of each such report shall, at the time of such
transmission to Holders, be filed by the Trustee with each stock exchange upon
which the Securities are listed, with the Commission, if applicable, and with
the Company. The Company will promptly notify the Trustee when the Securities
are listed on any stock exchange and of any delisting thereof.
SECTION 7.04. REPORTS BY COMPANY. (a) The Company shall file with
the Trustee and the Commission, if applicable, and transmit to Holders, such
information, documents and other reports, and such summaries thereof, as may be
required pursuant to the Trust Indenture Act at the times and in the manner
provided pursuant to such Act; PROVIDED that any such information, documents or
reports required to be filed with the Commission pursuant to Section 13 or 15(d)
of the Exchange Act shall be filed with the Trustee within 15 days after the
same is so required to be filed with the Commission. Delivery of such reports,
information and documents to the Trustee is for informational purposes only, and
the Trustee's receipt of such shall not constitute constructive notice of any
information contained therein or determinable from information contained
therein, including the Company's compliance with any of its covenants hereunder
(as to which the Trustee is entitled to rely exclusively on Officers'
Certificates). Notwithstanding
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63
anything to the contrary contained herein, the Trustee shall have no duty to
review such documents for the purpose of determining compliance with this
Indenture.
Delivery of such reports, information and documents to the
Trustee is for informational purposes only and the Trustee's receipt of such
shall not constitute constructive notice of any information contained therein
or determinable from information contained therein, including the Company's
compliance with any of its covenants hereunder (as to which the Trustee is
entitled to rely exclusively on Officers' Certificates).
(b) The Company shall provide the Trustee with at least 30 days'
prior written notice of any change in location of its principal executive
offices or other principal place of business.
ARTICLE VIII
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE
SECTION 8.01. COMPANY MAY CONSOLIDATE, ETC., ONLY ON CERTAIN
TERMS. The Company shall not consolidate with or merge into any other Person or,
directly or indirectly, convey, transfer, sell, lease or otherwise dispose of
all or substantially all of its properties and assets to any Person, and the
Company shall not permit any Person to consolidate with or merge into the
Company or convey, transfer, sell, lease or otherwise dispose of all or
substantially all of its properties and assets to the Company, unless:
(1) in case the Company shall consolidate with or merge into
another Person or convey, transfer or lease its properties and assets
substantially as an entirety to any Person, the Person formed by such
consolidation or into which the Company is merged or the Person which
acquires by conveyance or transfer, or which leases, the properties and
assets of the Company substantially as an entirety (i) shall be a
corporation, partnership or trust, (ii) shall be an entity (A) organized
and validly existing under the laws of the United States of America, any
State thereof or the District of Columbia or (B) organized and validly
existing under the laws of a jurisdiction outside of the United States
of America, with its common stock, or American Depositary Shares
representing such shares of common stock, traded on a national
securities exchange in the United States of America or through Nasdaq
and a worldwide total market capitalization of its equity securities of
at least U.S. $5 billion, and (iii) shall expressly assume, by an
indenture supplemental hereto, executed and delivered to the Trustee, in
form satisfactory to the Trustee, the due and punctual payment of the
principal of (and premium, if any) and interest (including Additional
Interest) on all the Securities and the
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64
performance or observance of every covenant of this Indenture on the
part of the Company to be performed or observed and shall have provided
for conversion rights in accordance with Article XIII;
(2) immediately after giving effect to such transaction, no Event
of Default, and no event which, after notice or lapse of time or both,
would become an Event of Default, shall have happened and be continuing;
and
(3) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such
consolidation, merger, conveyance, transfer or lease and, if a
supplemental indenture is required in connection with such transaction,
such supplemental indenture comply with this Article VIII and that all
conditions precedent herein provided for relating to such transaction
have been complied with.
SECTION 8.02. SUCCESSOR SUBSTITUTED. Upon any consolidation of
the Company with, or merger of the Company into, any other Person or any
conveyance, transfer or lease of the properties and assets of the Company
substantially as an entirety in accordance with Section 8.01, the successor
Person formed by such consolidation or into which the Company is merged or to
which such conveyance, transfer or lease is made shall succeed to, and be
substituted for, and may exercise every right and power of, the Company under
this Indenture with the same effect as if such successor Person had been named
as the Company herein, and thereafter, except in the case of a lease, the
predecessor Person shall be released from its obligations and covenants under
this Indenture and the Securities.
ARTICLE IX
SUPPLEMENTAL INDENTURES
SECTION 9.01. SUPPLEMENTAL INDENTURES WITHOUT CONSENT OF HOLDERS.
Without the consent of any Holders, the Company, when authorized by a Board
Resolution, and the Trustee, at any time and from time to time, may enter into
one or more indentures supplemental hereto, in form satisfactory to the Trustee,
for any of the following purposes:
(1) to evidence the succession of another Person to the Company
and the assumption by any such successor of the covenants of the Company
herein and in the Securities; or
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(2) to add to the covenants of the Company for the equal and
ratable benefit of the Holders, or to surrender any right or power
herein conferred upon the Company; or
(3) to secure the Company's obligations in respect of the
Securities; or
(4) to make provision with respect to the conversion rights of
Holders pursuant to the requirements of Article XIII; or
(5) to make any changes or modifications to this Indenture
necessary in connection with the registration of any Transfer Restricted
Securities under the Securities Act as contemplated by Section 10.11;
PROVIDED that such action pursuant to this clause (5) shall not
adversely affect the interests of the Holders of Securities; or
(6) to cure any ambiguity, to correct or supplement any provision
herein which may be inconsistent with any other provision herein, to
correct or supplement any provision herein which limits, qualifies or
conflicts with a provision of the Trust Indenture Act which is required
under such Act to be a part of and govern this Indenture, in any case to
the extent necessary to qualify this Indenture under the Trust Indenture
Act, or to make any other provisions with respect to matters or
questions arising under this Indenture which shall not be inconsistent
with the provisions of this Indenture; PROVIDED that such action
pursuant to this clause (6) shall not adversely affect the interests or
legal rights of the Holders in any material respect.
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66
SECTION 9.02. SUPPLEMENTAL INDENTURES WITH CONSENT OF HOLDERS.
With the consent of the Holders of not less than a majority in principal amount
of the Outstanding Securities, by the Act of said Holders delivered to the
Company and the Trustee, the Company, when authorized by a Board Resolution, and
the Trustee may enter into an indenture or indentures supplemental hereto for
the purpose of adding any provisions to or changing in any manner or eliminating
any of the provisions of this Indenture or of modifying in any manner the rights
of the Holders under this Indenture; PROVIDED, HOWEVER, that no such
supplemental indenture shall, without the consent of the Holder of each
Outstanding Security affected thereby,
(1) change the Stated Maturity of the principal of, or any
installment of interest on, any Security, or reduce the principal amount
thereof or the rate of interest thereon or any premium payable upon the
redemption thereof, or change the place of payment where, or the coin or
currency in which, any Security or any premium or interest thereon is
payable, or impair the right to institute suit for the enforcement of
any such payment on or after the Stated Maturity thereof (or, in the
case of redemption or purchase, on or after the Redemption Date or
Purchase Date, as the case may be), or adversely affect the right to
convert any Security as provided in Article XIII (except as permitted by
Section 9.01(4)), or modify the provisions of this Indenture with
respect to the subordination of the Securities in a manner adverse to
the Holders, or modify the redemption provisions in a manner adverse to
the Holders, or modify the provisions relating to the Company's
requirement to offer to purchase Notes upon a Change in Control in a
manner adverse to the Holders, or
(2) modify any of the provisions of this Section 9.02, Section
5.13 or Section 10.08, except to increase any such percentage or to
provide that certain other provisions of this Indenture cannot be
modified or waived without the consent of the Holder of each Outstanding
Security affected thereby, or
(3) modify the obligation of the Company to maintain an office or
agency in the Borough of Manhattan, The City of New York pursuant to
Section 10.02, or
(4) modify any of the provisions of Section 10.09 or Section
10.10, or
(5) reduce the percentage in principal amount of the Outstanding
Securities, the consent of whose Holders is required for any such
supplemental indenture, or the consent of whose Holders is required for
any waiver (of compliance with certain provisions of this Indenture or
certain defaults hereunder and their consequences) provided for in this
Indenture.
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It shall not be necessary for any Act of Holders under this
Section 9.02 to approve the particular form of any proposed supplemental
indenture, but it shall be sufficient if such Act shall approve the substance
thereof.
SECTION 9.03. EXECUTION OF SUPPLEMENTAL INDENTURES. In executing,
or accepting the additional trusts created by, any supplemental indenture
permitted by this Article IX or the modifications thereby of the trusts
created by this Indenture, the Trustee shall receive, and (subject to Section
6.01 and Section 6.03) shall be fully protected in relying upon, an Opinion
of Counsel stating that the execution of such supplemental indenture is
authorized or permitted by this Indenture, complies with its terms and will,
upon the execution and delivery thereof, be valid and binding upon the
Company in accordance with its terms. The Trustee may, but shall not be
obligated to, enter into any such supplemental indenture which affects the
Trustee's own rights, duties or immunities under this Indenture or otherwise.
SECTION 9.04. EFFECT OF SUPPLEMENTAL INDENTURES. Upon the
execution of any supplemental indenture under this Article, this Indenture shall
be modified in accordance therewith, and such supplemental indenture shall form
a part of this Indenture for all purposes; and every Holder of Securities
theretofore or thereafter authenticated and delivered hereunder shall be bound
thereby.
SECTION 9.05. CONFORMITY WITH TRUST INDENTURE ACT. Every
supplemental indenture executed pursuant to this Article shall conform to the
requirements of the Trust Indenture Act.
SECTION 9.06. REFERENCE IN SECURITIES TO SUPPLEMENTAL INDENTURES.
Securities authenticated and delivered after the execution of any supplemental
indenture pursuant to this Article may, and shall if required by the Trustee,
bear a notation as to any matter provided for in such supplemental indenture. If
the Company shall so determine, new Securities so modified as to conform, in the
judgment of the Company, to any such supplemental indenture may be prepared and
executed by the Company and authenticated and delivered by the Trustee in
exchange for Outstanding Securities.
ARTICLE X
COVENANTS
SECTION 10.01. PAYMENT OF PRINCIPAL, PREMIUM AND INTEREST. The
Company will duly and punctually pay the principal of (and premium, if any) and
interest on the Securities in accordance with the terms of the Securities and
this Indenture.
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SECTION 10.02. MAINTENANCE OF OFFICE OR AGENCY. The Company will
maintain in the Borough of Manhattan, The City of New York an office or agency
where Securities may be presented or surrendered for payment, where Securities
may be surrendered for registration of transfer or exchange, where Securities
may be surrendered for conversion and where notices and demands to or upon the
Company in respect of the Securities and this Indenture may be served. The
Company will give prompt written notice to the Trustee of the location, and any
change in the location, of such office or agency. If at any time the Company
shall fail to maintain any such required office or agency or shall fail to
furnish the Trustee with the address thereof, such presentations, surrenders,
notices and demands may be made or served at the Corporate Trust Office of the
Trustee or the office or agency of the Trustee in the Borough of Manhattan, The
City of New York, and the Company hereby appoints the Trustee as its agent to
receive all such presentations, surrenders, notices and demands.
The Company may also from time to time designate one or more
other offices or agencies (in or outside the Borough of Manhattan, The City
of New York) where the Securities may be presented or surrendered for any or
all such purposes and may from time to time rescind such designations;
PROVIDED, HOWEVER, that no such designation or rescission shall in any manner
relieve the Company of its obligation to maintain an office or agency in the
Borough of Manhattan, The City of New York for such purposes. The Company
will give prompt written notice to the Trustee of any such designation or
rescission and of any change in the location of any such other office or
agency.
SECTION 10.03. MONEY FOR SECURITY PAYMENTS TO BE HELD IN TRUST.
If the Company shall at any time act as its own Paying Agent, it will, prior to
11:00 a.m., New York City time, on each due date of the principal of (and
premium, if any) or interest (together with any Additional Interest in respect
thereof) on any of the Securities, segregate and hold in trust for the benefit
of the Persons entitled thereto a sum sufficient to pay the principal (and
premium, if any) or interest (together with any Additional Interest in respect
thereof) so becoming due until such sums shall be paid to such Persons or
otherwise disposed of as herein provided and will promptly notify the Trustee of
its action or failure so to act.
Whenever the Company shall have one or more Paying Agents, it
will, prior to each due date of the principal of (and premium, if any) or
interest (together with any Additional Interest in respect thereof) on any
Securities, deposit with a Paying Agent a sum sufficient to pay such amount,
such sum to be held in trust for the benefit of the Persons entitled to such
principal, premium, if any, or interest, and (unless such Paying Agent is the
Trustee) the Company will promptly notify the Trustee in writing of its action
or failure so to act.
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The Company will cause each Paying Agent other than the Trustee
to execute and deliver to the Trustee an instrument in which such Paying Agent
shall agree with the Trustee, subject to the provisions of this Section 10.03,
that such Paying Agent will:
(1) hold all sums held by it for the payment of the principal of,
premium, if any, or interest on Securities in trust for the benefit of
the Persons entitled thereto until such sums shall be paid to such
Persons or otherwise disposed of as herein provided;
(2) give the Trustee written notice of any default by the Company
(or any other obligor upon the Securities) in the making of any payment
of principal, premium, if any, or interest; and
(3) at any time during the continuance of any such default, upon
the written request of the Trustee, forthwith pay to the Trustee all
sums so held in trust by such Paying Agent.
The Company may at any time, for the purpose of obtaining the
satisfaction and discharge of this Indenture or for any other purpose, pay,
or by Company Order direct any Paying Agent to pay, to the Trustee all sums
held in trust by the Company or such Paying Agent, such sums to be held by
the Trustee upon the same trusts as those upon which such sums were held by
the Company or such Paying Agent; and, upon such payment by any Paying Agent
to the Trustee, such Paying Agent shall be released from all further
liability with respect to such money.
Any money deposited with the Trustee or any Paying Agent, or
then held by the Company, in trust for the payment of the principal of (and
premium, if any) or interest (together with any Additional Interest in
respect thereof) on any Security and remaining unclaimed for two years after
such principal (and premium, if any) or interest has become due and payable
shall be paid to the Company on Company Request, or (if then held by the
Company) shall be discharged from such trust; and the Holder of such Security
shall thereafter, as an unsecured general creditor, look only to the Company
for payment thereof, and all liability of the Trustee or such Paying Agent
with respect to such trust money, and all liability of the Company as trustee
thereof, shall thereupon cease; PROVIDED, HOWEVER, that the Trustee or such
Paying Agent, before being required to make any such repayment, may at the
expense of the Company cause to be published once, in a newspaper published
in the English language, customarily published on each Business Day and of
general circulation in the Borough of Manhattan, The City of New York, notice
that such money remains unclaimed and that, after a date specified therein,
which shall not be less than 30 days from the date of such publication, any
unclaimed balance of such money then remaining will be repaid to the Company.
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SECTION 10.04. STATEMENT BY OFFICERS AS TO DEFAULT. The Company
shall deliver to the Trustee, within 120 days after the end of each fiscal year
of the Company ending after the date hereof, an Officers' Certificate, stating
whether or not to the best knowledge of the signers thereof the Company is in
default in the performance and observance of any of the terms, provisions and
conditions of this Indenture (without regard to any period of grace or
requirement of notice provided hereunder) and, if the Company shall be in
default, specifying all such defaults and the nature and status thereof of which
they may have knowledge.
SECTION 10.05. EXISTENCE. Subject to Article VIII, the Company
shall do or cause to be done all things necessary to preserve and keep in full
force and effect its existence, rights (charter and statutory) and franchises;
PROVIDED, HOWEVER, that the Company shall not be required to preserve any such
right or franchise if the Board of Directors shall determine that the
preservation thereof is no longer desirable in the conduct of the business of
the Company and that the loss thereof is not disadvantageous in any material
respect to the Holders.
SECTION 10.06. MAINTENANCE OF PROPERTIES. The Company shall cause
all properties used or useful in the conduct of its business or the business of
any Subsidiary to be maintained and kept in good condition, repair and working
order and supplied with all necessary equipment and shall cause to be made all
necessary repairs, renewals, replacements, betterments and improvements thereof,
all as in the judgment of the Company may be necessary so that the business
carried on in connection therewith may be properly and advantageously conducted
at all times; PROVIDED, HOWEVER, that nothing in this Section 10.06 shall
prevent the Company from discontinuing the operation or maintenance of any of
such properties, or disposing of any of them, if such discontinuance or
disposition is, in the judgment of the Company, desirable in the conduct of its
business or the business of any Subsidiary and not disadvantageous in any
material respect to the Holders.
SECTION 10.07. PAYMENT OF TAXES AND OTHER CLAIMS. The Company
shall pay or discharge or cause to be paid or discharged, before the same
shall become delinquent, (1) all taxes, assessments and governmental charges
levied or imposed upon the Company or any Subsidiary or upon the income,
profits or property of the Company or any Subsidiary, and (2) all lawful
claims for labor, materials and supplies which, if unpaid, might by law
become a lien upon the property of the Company or any Subsidiary; PROVIDED,
HOWEVER, that the Company shall not be required to pay or discharge or cause
to be paid or discharged any such tax, assessment, charge or claim whose
amount, applicability or validity is being contested in good faith by
appropriate proceedings.
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SECTION 10.08. WAIVER OF CERTAIN COVENANTS. The Company may omit
in any particular instance to comply with any covenant or condition set forth in
Sections 10.05 to 10.07, inclusive, if before the time for such compliance the
Holders of at least a majority in principal amount of the Outstanding Securities
shall, by Act of such Holders, either waive such compliance in such instance or
generally waive compliance with such covenant or condition, but no such waiver
shall extend to or affect such covenant or condition except to the extent so
expressly waived, and, until such waiver shall become effective, the obligations
of the Company and the duties of the Trustee in respect of any such covenant or
condition shall remain in full force and effect.
SECTION 10.09. DELIVERY OF CERTAIN INFORMATION. At any time when
the Company is not subject to Section 13 or 15(d) of the Exchange Act, upon the
request of a Holder or the holder of shares of Common Stock issued upon
conversion thereof, the Company shall promptly furnish or cause to be furnished
Rule 144A Information (as defined below) to such Holder or such holder of shares
of Common Stock issued upon conversion of Securities, or to a prospective
purchaser of any such security designated by any such Holder or holder, as the
case may be, to the extent required to permit compliance by such Holder or
holder with Rule 144A under the Securities Act in connection with the resale of
any such security. "Rule 144A Information" shall be such information as is
specified pursuant to Rule 144A(d)(4) under the Securities Act.
SECTION 10.10. RESALE OF CERTAIN SECURITIES; REPORTING ISSUER.
During the period beginning on the last date of original issuance of the
Securities and ending on the date that is two years from such date, the Company
will not, and will use its best efforts not to permit any of its "affiliates"
(as defined under Rule 144 under the Securities Act or any successor provision
thereto) to, resell (x) any Securities which constitute "restricted securities"
under Rule 144 or (y) any securities into which the Securities have been
converted under this Indenture which constitute "restricted securities" under
Rule 144, that in either case have been reacquired by any of them. The Trustee
shall have no responsibility in respect of the Company's performance of its
agreement in the preceding sentence.
SECTION 10.11. REGISTRATION RIGHTS. (a) The Company agrees that
the Holders (and any Person that has a beneficial interest in a Security) from
time to time of Transfer Restricted Securities are entitled to the benefits of a
Registration Rights Agreement, dated as of February 14, 2000 (the "Registration
Rights Agreement"), executed by the Company. Pursuant to the Registration Rights
Agreement, the Company has agreed for the benefit of the Holders from time to
time of Transfer Restricted Securities, at the Company's expense, (i) to file
within 90 days after the first date of original issuance of the Securities, a
shelf registration statement (the "Shelf Registration Statement") with the
Commission with respect to resales of the Transfer Restricted Securities, (ii)
to use its commercially reasonable best efforts to cause such Shelf
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Registration Statement to be declared effective by the Commission not later
than 150 days after the first date of original issuance of the Securities,
and (iii) to use its commercially reasonable best efforts to maintain such
Shelf Registration Statement continuously effective under the Securities Act
subject to and in accordance with the terms of the Registration Rights
Agreement.
Additional interest (the "Additional Interest") with respect to
the Securities shall be assessed as follows if any of the following events occur
(each such event in clauses (i) through (iii) below being herein called a
"Registration Default"):
(i) if on or prior to the 90th day after the first date of
original issuance of the Securities the Shelf Registration Statement has
not been filed with the Commission;
(ii) if on or prior to the 150th day after the first date of
original issuance of the Securities the Shelf Registration Statement has
not been declared effective by the Commission; or
(iii) if after the Shelf Registration Statement is declared
effective (A) the Shelf Registration Statement thereafter ceases to be
effective; or (B) the Shelf Registration Statement or the related
prospectus ceases to be usable subject to certain exceptions set forth
in the Registration Rights Agreement, including the right to suspend the
use of the Shelf Registration Statement under certain circumstances for
up to 90 days) in connection with resales of Transfer Restricted
Securities in accordance with and during the periods specified herein
because either (1) any event occurs as a result of which the related
prospectus forming part of such Shelf Registration Statement would
include any untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein in the light of
the circumstances under which they were made not misleading, or (2) it
shall be necessary to amend such Shelf Registration Statement or
supplement the related prospectus, to comply with the Securities Act or
the Exchange Act or the respective rules thereunder.
Additional Interest shall accrue on the Securities over and above
the interest set forth in the title of the Securities from and including the
date on which any such Registration Default shall occur, to but excluding the
date on which all such Registration Defaults have been cured, at a rate of 0.50%
per annum. Written notice of any such Registration Default shall be provided to
the Trustee by the Company.
(b) Any amounts of Additional Interest due pursuant to clause
(a)(i), (a)(ii) or (a)(iii) of this Section 10.11 shall be payable in cash on
the regular Interest Payment Dates in the manner provided for by the Indenture.
The amount of Additional
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Interest shall be determined by multiplying the applicable Additional
Interest rate by the principal amount of the Securities, multiplied by a
fraction, the numerator of which is the number of days such Additional
Interest rate was applicable during such period (determined on the basis of a
360-day year comprised of twelve 30-day months), and the denominator of which
is 360.
Whenever in this Indenture there is mentioned, in any context,
the payment of the principal of, premium, if any, or interest on, or in
respect of, any Security, such mention shall be deemed to include mention of
the payment of Additional Interest provided for in this Section to the extent
that, in such context, Additional Interest are, were or would be payable in
respect thereof pursuant to the provisions of this Section 10.11 and express
mention of the payment of Additional Interest (if applicable) in any
provisions hereof shall not be construed as excluding Additional Interest in
those provisions hereof where such express mention is not made.
ARTICLE XI
REDEMPTION OF SECURITIES
SECTION 11.01. RIGHT OF REDEMPTION. (a) The Securities may be
redeemed at the election of the Company (an "Optional Redemption"), as a whole
or from time to time in part, at any time on or after February 20, 2003, at the
Redemption Prices specified in the form of Security hereinbefore set forth,
together with accrued interest to the Redemption Date.
(b) In addition to the right to redeem the Securities as provided
in Section 11.01(a), the Company may redeem the Securities (a "Provisional
Redemption"), in whole or in part, at any time prior to February 20, 2003, upon
notice as set forth in Section 11.05, at a redemption price equal to $1,000 per
Security to be redeemed plus accrued and unpaid interest, if any (including
Additional Interest, if any), to the date of redemption (the "Provisional
Redemption Date") if (i) the closing price of the Common Stock shall have
exceeded 150% of the conversion price then in effect for at least 20 Trading
Days in any consecutive 30-Trading Day period ending on the Trading Day prior to
the date of mailing of the notice of redemption pursuant to Section 11.05 (the
"Redemption Notice Date") and (ii) the Shelf Registration Statement is effective
and available for use and is expected to remain effective and available for use
for the 30 days immediately following the Provisional Redemption Date. Upon any
such Provisional Redemption, the Company shall make an additional payment in
cash (the "Make-Whole Payment") with respect to the Securities called for
redemption to Holders on the Redemption Notice Date in an amount equal to
$142.50 per $1,000 Security, less the amount of any interest actually paid on
such Security prior to the Redemption Notice
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Date. The Company shall make the Make-Whole Payment on all Securities called
for Provisional Redemption, including any Securities converted into Common
Stock pursuant to the terms hereof after the Redemption Notice Date and prior
to the Provisional Redemption Date.
SECTION 11.02. APPLICABILITY OF ARTICLE. Redemption of Securities
at the election of the Company or otherwise, as permitted or required by any
provision of this Indenture, shall be made in accordance with such provision and
this Article XI.
SECTION 11.03. ELECTION TO REDEEM; NOTICE TO TRUSTEE. The
election of the Company to redeem any Securities pursuant to Section 11.01 shall
be evidenced by a Board Resolution. In case of any redemption at the election of
the Company, the Company shall, at least 45 days prior to the Redemption Date
fixed by the Company (unless a shorter notice shall be satisfactory to the
Trustee), notify the Trustee of such Redemption Date in writing and of the
principal amount of Securities to be redeemed.
SECTION 11.04. SELECTION BY TRUSTEE OF SECURITIES TO BE REDEEMED.
If less than all the Securities are to be redeemed, the particular Securities
to be redeemed shall be selected not less than 30 days or more than 60 days
prior to the Redemption Date by the Trustee, from the Outstanding Securities
not previously called for redemption, by lot or by such method as the Trustee
shall deem fair and appropriate in the circumstances and which may provide
for the selection for redemption of portions (equal to U.S.$1,000 or any
integral multiple thereof) of the principal amount of Securities of a
denomination larger than U.S.$1,000.
If any Security selected for partial redemption is converted in
part before termination of the conversion right with respect to the portion of
the Security so selected, the converted portion of such Security shall be deemed
(so far as may be) to be the portion selected for redemption. Securities which
have been converted during a selection of Securities to be redeemed shall be
treated by the Trustee as Outstanding for the purpose of such selection.
The Trustee shall promptly notify the Company and each Security
Registrar in writing of the Securities selected for redemption and, in the case
of any Securities selected for partial redemption, the principal amount thereof
to be redeemed.
For all purposes of this Indenture, unless the context otherwise
requires, all provisions relating to the redemption of Securities shall relate,
in the case of any Securities redeemed or to be redeemed only in part, to the
portion of the principal amount of such Securities which has been or is to be
redeemed.
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SECTION 11.05. NOTICE OF REDEMPTION. Notice of redemption shall
be given by first-class mail, postage prepaid, mailed not less than 30 nor more
than 60 days prior to the Redemption Date, to each Holder of Securities to be
redeemed, at his address appearing in the Security Register.
All notices of redemption shall describe the Securities,
including CUSIP number, and state:
(1) the Redemption Date;
(2) the Redemption Price;
(3) if less than all the Outstanding Securities are to be
redeemed, the identification (and, in the case of partial redemption of
any Securities, the principal amounts) of the particular Securities to
be redeemed;
(4) whether such redemption is a Provisional Redemption or an
Optional Redemption;
(5) that on the Redemption Date the Redemption Price shall become
due and payable upon each such Security to be redeemed and that interest
thereon shall cease to accrue on and after said date;
(6) the conversion price, the date on which the right to convert
the Securities to be redeemed will terminate and the place or places
where such Securities may be surrendered for conversion;
(7) the place or places where such Securities are to be
surrendered for payment of the Redemption Price; and
(8) if such a redemption is a Provisional Redemption, the amount
of the Make-Whole Payment.
Notice of redemption of Securities to be redeemed at the election
of the Company shall be given by the Company or, at the Company's request, by
the Trustee in the name and at the expense of the Company, and shall be
irrevocable.
SECTION 11.06. DEPOSIT OF REDEMPTION PRICE. Prior to 11:00 a.m.,
New York City time, on any Redemption Date, the Company shall deposit with the
Trustee or with a Paying Agent (or, if the Company is acting as its own Paying
Agent, segregate and hold in trust as provided in Section 10.03) an amount of
money sufficient to pay the Redemption Price of, and (except if the Redemption
Date shall be an Interest Payment Date) accrued interest on, all the Securities
which are to be redeemed on that
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date other than any Securities called for redemption on that date which have
been converted prior to the date of such deposit.
If any Security called for redemption is converted, any money
deposited with the Trustee or with any Paying Agent or so segregated and held in
trust for the redemption of such Security shall (subject to any right of the
Holder of such Security or any Predecessor Security to receive interest as
provided in the last paragraph of Section 3.07) be paid to the Company as soon
as practicable upon Company Request or, if then held by the Company, shall be
released from such trust.
SECTION 11.07. SECURITIES PAYABLE ON REDEMPTION DATE. Notice of
redemption having been given as aforesaid, the Securities so to be redeemed
shall, on the Redemption Date, become due and payable at the Redemption Price
therein specified, and, with respect to Securities called for Provisional
Redemption, the Make-Whole Payment, and from and after such date (unless the
Company shall default in the payment of the Redemption Price and accrued
interest) such Securities shall cease to bear or accrue any interest. Upon
surrender of any such Security for redemption in accordance with said notice,
such Security shall be paid by the Company at the Redemption Price, together
with accrued interest to (but not including) the Redemption Date and, with
respect to Securities called for Provisional Redemption (including Securities
converted into Common Stock pursuant to the terms hereof after the Redemption
Notice Date and prior to the Provisional Redemption Date), the Make-whole
Payment; PROVIDED, HOWEVER, that installments of interest whose Stated Maturity
is on or prior to the Redemption Date shall be payable to the Holders of such
Securities, or one or more Predecessor Securities, registered as such at the
close of business on the relevant Record Dates according to their terms and the
provisions of Section 3.07; and PROVIDED FURTHER that, with respect to a
Provisional Redemption, the holder of any Securities converted into Common Stock
pursuant to the terms of this Indenture after the Redemption Notice Date and
prior to the Provisional Redemption Date shall have the right to the Make-Whole
Payment, if any, with respect to such Securities regardless of the conversion of
such Securities.
If the Company shall fail to deposit the Redemption Price (and
MakeWhole Payment, if any) with the Trustee and any Security called for
redemption shall not be so paid upon surrender thereof for redemption, the
principal (and premium, if any) shall, until paid, bear and accrue interest from
the Redemption Date at the rate borne by the Security.
SECTION 11.08. SECURITIES REDEEMED IN PART. Any Security which is
to be redeemed only in part shall be surrendered at an office or agency of the
Company designated for that purpose pursuant to Section 10.02 (with, if the
Company or the Trustee so requires, due endorsement by, or a written instrument
of transfer in form satisfactory to the Company and the Trustee duly executed
by, the Holder thereof or his
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attorney-in-fact duly authorized in writing), and the Company shall execute,
and the Trustee shall authenticate and deliver to the Holder of such Security
without service charge, a new Security or Securities, of any authorized
denomination as requested by such Holder, in aggregate principal amount equal
to and in exchange for the unredeemed portion of the principal amount of the
Security so surrendered.
SECTION 11.09. CONVERSION ARRANGEMENT ON CALL FOR REDEMPTION. In
connection with any redemption of Securities, the Company may arrange for the
purchase and conversion of any Securities by an agreement with one or more
investment bankers or other purchasers to purchase such Securities by paying to
the Trustee in trust for the Holders, on or before the Redemption Date, an
amount not less than the applicable Redemption Price, together with interest
accrued to the Redemption Date, of such Securities and in connection with a
Provisional Redemption, the Make-Whole Payment. Notwithstanding anything to the
contrary contained in this Article XI, the obligation of the Company to pay the
Redemption Price of such Securities, together with interest accrued to, but
excluding, the Redemption Date and in connection with a Provisional Redemption,
the Make-Whole Payment, shall be deemed to be satisfied and discharged to the
extent such amount is so paid by such purchasers. If such an agreement is
entered into, a copy of which shall be filed with the Trustee prior to the
Redemption Date, any Securities not duly surrendered for conversion by the
holders thereof may, at the option of the Company, be deemed, to the fullest
extent permitted by law, acquired by such purchasers from such holders and
(notwithstanding anything to the contrary contained in Article XIII) surrendered
by such purchasers for conversion, all as of immediately prior to the close of
business on the Redemption Date (and the right to convert any such Securities
shall be deemed to have been extended through such time), subject to payment of
the above amount as aforesaid (including the Make-Whole Payment, if any, with
respect to all Securities called for Provisional Redemption). At the written
direction of the Company, the Trustee shall hold and dispose of any such amount
paid to it in the same manner as it would monies deposited with it by the
Company for the redemption of Securities. Without the Trustee's prior written
consent, no arrangement between the Company and such purchasers for the purchase
and conversion of any Securities shall increase or otherwise affect any of the
powers, duties, responsibilities or obligations of the Trustee as set forth in
this Indenture, and the Company agrees to indemnify the Trustee from, and hold
it harmless against, any loss, liability or expense arising out of or in
connection with any such arrangement for the purchase and conversion of any
Securities between the Company and such purchasers to which the Trustee has not
consented in writing, including the costs and expenses incurred by the Trustee
in the defense of any claim or liability arising out of or in connection with
the exercise or performance of any of its powers, duties, responsibilities or
obligations under this Indenture. Nothing in the preceding sentence shall be
deemed to limit the rights and protections afforded to the Trustee in Article VI
hereof, including, but not limited to, the right to indemnification pursuant to
Section 6.07.
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ARTICLE XII
SUBORDINATION OF SECURITIES
SECTION 12.01. SECURITIES SUBORDINATE TO SENIOR INDEBTEDNESS. The
Company covenants and agrees, and each Holder of a Security, by his acceptance
thereof, likewise covenants and agrees, that, to the extent and in the manner
hereinafter set forth in this Article XII, the indebtedness represented by the
Securities and the payment of the principal of (and premium, if any) and
interest on each and all of the Securities and all obligations of the Company
under this Indenture are hereby expressly made subordinate and subject in right
of payment to the prior payment in full of all Senior Indebtedness.
SECTION 12.02. PAYMENT OVER OF PROCEEDS UPON DISSOLUTION, ETC. In
the event of (a) any insolvency or bankruptcy case or proceeding, or any
receivership, liquidation, reorganization or other similar case or proceeding in
connection therewith, relative to the Company or to its creditors, as such, or
to its assets, or (b) any liquidation, dissolution or other winding-up of the
Company, whether voluntary or involuntary and whether or not involving
insolvency or bankruptcy, or (c) any assignment for the benefit of creditors or
any other marshaling of assets and liabilities of the Company, then and in any
such event the holders of Senior Indebtedness shall be entitled to receive
payment in full of all amounts due or to become due on or in respect of all
Senior Indebtedness, or provision shall be made for such payment in cash or cash
equivalents or otherwise in a manner satisfactory to the holders of Senior
Indebtedness, before the Holders of the Securities are entitled to receive any
payment on account of principal of (or premium, if any) or interest on the
Securities, and to that end the holders of Senior Indebtedness shall be entitled
to receive, for application to the payment thereof, any payment or distribution
of any kind or character, whether in cash, property or securities, which may be
payable or deliverable in respect of the Securities in any such case,
proceeding, dissolution, liquidation or other winding-up or event.
In the event that, notwithstanding the foregoing provisions of
this Section 12.02, the Trustee or the Holder of any Security shall have
received any payment or distribution of assets of the Company prohibited by the
foregoing paragraph of any kind or character, whether in cash, property or
securities, before all Senior Indebtedness is paid in full or payment thereof
provided for, and if such fact shall, at or prior to the time of such payment or
distribution, have been made actually known to a Responsible Officer of the
Trustee or, as the case may be, such Holder, then and in such event such payment
or distribution shall be paid over or delivered forthwith to the trustee in
bankruptcy, receiver, liquidating trustee, custodian, assignee, agent or other
Person making payment or distribution of assets of the Company for application
to the payment of all Senior Indebtedness remaining unpaid, to the extent
necessary to pay all Senior
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Indebtedness in full, after giving effect to any concurrent payment or
distribution to or for the holders of Senior Indebtedness.
For purposes of this Article XII only, the words "cash, property
or securities" shall not be deemed to include shares of capital stock of the
Company as reorganized or readjusted, or securities of the Company or any
other corporation provided for by a plan of reorganization or readjustment
which in either case are subordinated in right of payment to all Senior
Indebtedness which may at the time be outstanding to substantially the same
extent as, or to a greater extent than, the Securities are so subordinated as
provided in this Article XII. The consolidation of the Company with, or the
merger of the Company into, another Person or the liquidation or dissolution
of the Company following the conveyance or transfer of its properties and
assets substantially as an entirety to another Person upon the terms and
conditions set forth in Article VIII shall not be deemed a dissolution,
winding-up, liquidation, reorganization, assignment for the benefit of
creditors or marshaling of assets and liabilities of the Company for the
purposes of this Section 12.02 if the Person formed by such consolidation or
into which the Company is merged or which acquires by conveyance or transfer
such properties and assets substantially as an entirety, as the case may be,
shall, as a part of such consolidation, merger, conveyance or transfer,
comply with the conditions set forth in Article VIII.
SECTION 12.03. NO PAYMENT WHEN SENIOR INDEBTEDNESS IN DEFAULT.
(a) In the event and during the continuation of any default in the payment of
principal of (or premium, if any) or interest on any Senior Indebtedness beyond
any applicable grace period with respect thereto (unless and until such payment
default shall have been cured or waived in writing by the holders of such Senior
Indebtedness), or (b) in the event any judicial proceeding shall be pending with
respect to any such default, then no payment shall be made by the Company on
account of principal of (or premium, if any) or interest on the Securities or on
account of the purchase or other acquisition of Securities (including pursuant
to Articles XI and XIII).
In the event that, notwithstanding the foregoing, the Company
shall make any payment to the Trustee or the Holder of any Security prohibited
by the foregoing provisions of this Section 12.03, and if such fact shall, at or
prior to the time of such payment, have been made actually known to a
Responsible Officer of the Trustee or, as the case may be, such Holder, then and
in such event such payment shall be paid over and delivered forthwith to the
Company upon Company Request.
The provisions of this Section 12.03 shall not apply to any
payment with respect to which Section 12.02 would be applicable.
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SECTION 12.04. PAYMENT PERMITTED IF NO DEFAULT. Nothing contained
in this Article XII or elsewhere in this Indenture or in any of the Securities
shall prevent (a) the Company, at any time except during the pendency of any
case, proceeding, dissolution, liquidation or other winding-up, assignment for
the benefit of creditors or other marshaling of assets and liabilities of the
Company referred to in Section 12.02 or under the conditions described in
Section 12.03, from making payments at any time of principal of (and premium, if
any) or interest on the Securities, or (b) the application by the Trustee of any
money deposited with it hereunder to the payment of or on account of the
principal of (and premium, if any) or interest on the Securities or the
retention of such payment by the Holders, if, at the time of such application by
the Trustee, a Responsible Officer of the Trustee did not have actual knowledge
that such payment would have been prohibited by the provisions of this Article
XII.
SECTION 12.05. SUBROGATION TO RIGHTS OF HOLDERS OF SENIOR
INDEBTEDNESS. Subject to the payment in full of all Senior Indebtedness, and
until the Securities are paid in full, the Holders of the Securities shall be
subrogated (equally and ratably with the holders of all indebtedness of the
Company which by its express terms is subordinated to indebtedness of the
Company to substantially the same extent as the Securities are subordinated
and is entitled to like rights of subrogation) to the rights of the holders
of such Senior Indebtedness to receive payments and distributions of cash,
property and securities applicable to the Senior Indebtedness to the extent
that payments and distributions otherwise payable to Holders of Securities
have been applied to the payment of Senior Indebtedness as provided by this
Article XII. For purposes of such subrogation, no payments or distributions
to the holders of the Senior Indebtedness of any cash, property or securities
to which the Holders of the Securities or the Trustee would be entitled,
except for the provisions of this Article XII, and no payments over pursuant
to the provisions of this Article XII to the holders of Senior Indebtedness
by Holders of the Securities or the Trustee, shall, as among the Company, its
creditors other than holders of Senior Indebtedness and the Holders of the
Securities, be deemed to be a payment or distribution by the Company to or on
account of the Senior Indebtedness.
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SECTION 12.06. PROVISIONS SOLELY TO DEFINE RELATIVE RIGHTS. The
provisions of this Article XII are and are intended solely for the purpose of
defining the relative rights of the Holders of the Securities on the one hand
and the holders of Senior Indebtedness on the other hand. Nothing contained in
this Article XII or elsewhere in this Indenture or in the Securities is intended
to or shall
(a) impair, as among the Company, its creditors other than
holders of Senior Indebtedness and the Holders of the Securities, the
obligation of the Company, which is absolute and unconditional (and
which, subject to the rights under this Article XII of the holders of
Senior Indebtedness, is intended to rank equally with all other general
obligations of the Company), to pay to the Holders of the Securities the
principal of (and premium, if any) and interest on the Securities as and
when the same shall become due and payable in accordance with their
terms; or
(b) affect the relative rights against the Company of the Holders
of the Securities and creditors of the Company other than the holders of
Senior Indebtedness; or
(c) prevent the Trustee or the Holder of any Security from
exercising all remedies otherwise permitted by applicable law upon
default under this Indenture, subject to the rights, if any, under this
Article XII of the holders of Senior Indebtedness to receive cash,
property and securities otherwise payable or deliverable to the Trustee
or such Holder.
SECTION 12.07. TRUSTEE TO EFFECTUATE SUBORDINATION. Each Holder
of a Security by his acceptance thereof authorizes and directs the Trustee on
his behalf to take such action as may be necessary or appropriate to effectuate
the subordination provided in this Article XII and appoints the Trustee his
attorney-in-fact for any and all such purposes.
SECTION 12.08. NO WAIVER OF SUBORDINATION PROVISIONS. No right of
any present or future holder of any Senior Indebtedness to enforce subordination
as herein provided shall at any time in any way be prejudiced or impaired by any
act or failure to act on the part of the Company or by any act or failure to
act, in good faith, by any such holder, or by any non-compliance by the Company
with the terms, provisions and covenants of this Indenture, regardless of any
knowledge thereof any such holder may have or be otherwise charged with.
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Without in any way limiting the generality of the foregoing
paragraph, the holders of Senior Indebtedness may, at any time and from time to
time, without the consent of or notice to the Trustee or the Holders of the
Securities, without incurring responsibility to the Holders of the Securities
and without impairing or releasing the subordination provided in this Article
XII or the obligations hereunder of the Holders of the Securities to the holders
of Senior Indebtedness, do any one or more of the following:
(i) change the manner, place or terms of payment or extend the
time of payment of, or renew or alter, Senior Indebtedness, or otherwise
amend or supplement in any manner Senior Indebtedness or any instrument
evidencing the same or any agreement under which Senior Indebtedness is
outstanding;
(ii) sell, exchange, release or otherwise deal with any property
pledged, mortgaged or otherwise securing Senior Indebtedness;
(iii) release any Person liable in any manner for the collection
of Senior Indebtedness;
(iv) exercise or refrain from exercising any rights against the
Company and any other Person;
(v) apply any and all sums received from time to time to the
Senior Indebtedness.
SECTION 12.09. NOTICE TO TRUSTEE. The Company shall give prompt
written notice to the Trustee of any fact known to the Company which would
prohibit the making of any payment to or by the Trustee in respect of the
Securities. Notwithstanding the provisions of this Article XII or any other
provision of this Indenture, the Trustee shall not be charged with knowledge of
the existence of any facts which would prohibit the making of any payment to or
by the Trustee in respect of the Securities, unless and until the Trustee shall
have received written notice thereof from the Company or a holder of Senior
Indebtedness or from any trustee therefor; and, prior to the receipt of any such
written notice, the Trustee, subject to the provisions of Section 6.01, shall be
entitled in all respects to assume that no such facts exist; PROVIDED, HOWEVER,
that if the Trustee shall not have received the notice provided for in this
Section 12.09 at least two Business Days prior to the date upon which by the
terms hereof any money may become payable for any purpose (including, without
limitation, the payment of the principal of (and premium, if any) or interest on
any Security), then, anything herein contained to the contrary notwithstanding,
the Trustee shall have full power and authority to receive such money and to
apply the same to the purpose for which such money was received and shall not be
affected by any notice to the contrary which may be received by it within two
Business Days prior to such date.
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Subject to the provisions of Section 6.01, the Trustee shall
be entitled to rely on the delivery to it of a written notice by a Person
representing himself to be a holder of Senior Indebtedness (or a trustee
therefor) to establish that such notice has been given by a holder of Senior
Indebtedness (or a trustee therefor). In the event that the Trustee
determines in good faith that further evidence is required with respect to
the right of any Person as a holder of Senior Indebtedness to participate in
any payment or distribution pursuant to this Article XII, the Trustee may
request such Person to furnish evidence to the reasonable satisfaction of the
Trustee as to the amount of Senior Indebtedness held by such Person, the
extent to which such Person is entitled to participate in such payment or
distribution and any other facts pertinent to the rights of such Person under
this Article XII, and if such evidence is not furnished, the Trustee may
defer any payment to such Person pending judicial determination as to the
right of such Person to receive such payment.
SECTION 12.10. RELIANCE ON JUDICIAL ORDER OR CERTIFICATE OF
LIQUIDATING AGENT. Upon any payment or distribution of assets of the Company
referred to in this Article XII, the Trustee, subject to the provisions of
Section 6.01, and the Holders of the Securities shall be entitled to rely upon
any order or decree entered by any court of competent jurisdiction in which such
insolvency, bankruptcy, receivership, liquidation, reorganization, dissolution,
winding up or similar case or proceeding is pending, or a certificate of the
trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee for
the benefit of creditors, agent or other Person making such payment or
distribution, delivered to the Trustee or to the Holders of Securities, for the
purpose of ascertaining the Persons entitled to participate in such payment or
distribution, the holders of the Senior Indebtedness and other indebtedness of
the Company, the amount thereof or payable thereon, the amount or amounts paid
or distributed thereon and all other facts pertinent thereto or to this Article
XII.
SECTION 12.11. TRUSTEE NOT FIDUCIARY FOR HOLDERS OF SENIOR
INDEBTEDNESS. The Trustee shall not be deemed to owe any fiduciary duty to the
holders of Senior Indebtedness and shall not be liable to any such holders if it
shall in good faith mistakenly pay over or distribute to Holders of Securities
or to the Company or to any other Person cash, property or securities to which
any holders of Senior Indebtedness shall be entitled by virtue of this Article
XII or otherwise.
SECTION 12.12. RIGHTS OF TRUSTEE AS HOLDER OF SENIOR
INDEBTEDNESS; PRESERVATION OF TRUSTEE'S RIGHTS. The Trustee in its individual
capacity shall be entitled to all the rights set forth in this Article XII with
respect to any Senior Indebtedness which may at any time be held by it, to the
same extent as any other holder of Senior Indebtedness, and nothing in this
Indenture shall deprive the Trustee of any of its rights as such holder.
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Nothing in this Article XII shall apply to claims of, or payments
to, the Trustee under or pursuant to Section 6.07.
SECTION 12.13. ARTICLE APPLICABLE TO PAYING AGENTS. In case at
any time any Paying Agent other than the Trustee shall have been appointed by
the Company and be then acting hereunder, the term "Trustee" as used in this
Article XII shall in such case (unless the context otherwise requires) be
construed as extending to and including such Paying Agent within its meaning as
fully for all intents and purposes as if such Paying Agent were named in this
Article XII in addition to or in place of the Trustee; PROVIDED, HOWEVER, that
Section 12.12 shall not apply to the Company or any Affiliate of the Company if
it or such Affiliate acts as Paying Agent.
SECTION 12.14. CERTAIN CONVERSIONS DEEMED PAYMENT. For the
purposes of this Article XII only, (1) the issuance and delivery of junior
securities upon conversion of Securities in accordance with Article XIII
shall not be deemed to constitute a payment or distribution on account of the
principal of or premium or interest on Securities or on account of the
purchase or other acquisition of Securities, and (2) the payment, issuance or
delivery of cash, property or securities (other than junior securities) upon
conversion of a Security shall be deemed to constitute payment on account of
the principal of such Security. For the purposes of this Section 12.14, the
term "junior securities" means (a) shares of any stock of any class of the
Company and (b) securities of the Company which are subordinated in right of
payment to the prior payment in full of all Senior Indebtedness which may be
outstanding at the time of issuance or delivery of such securities to
substantially the same extent as, or to a greater extent than, the Securities
are so subordinated as provided in this Article XII. Nothing contained in
this Article XII or elsewhere in this Indenture or in the Securities is
intended to or shall impair, as among the Company, its creditors other than
holders of Senior Indebtedness and the Holders of the Securities, the right,
which is absolute and unconditional, of the Holder of any Security to convert
such Security in accordance with Article XIII.
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ARTICLE XIII
CONVERSION OF SECURITIES
SECTION 13.01. CONVERSION PRIVILEGE AND CONVERSION PRICE. Subject
to and upon compliance with the provisions of this Article XIII, at the option
of the Holder thereof, any Security or any portion of the principal amount
thereof which is U.S.$1,000 or an integral multiple of U.S.$1,000 may be
converted at the principal amount thereof, or of such portion thereof, into
fully paid and nonassessable shares of Common Stock of the Company at any time
following the latest date of original issuance of Securities at the conversion
price, determined as hereinafter provided, in effect at the time of conversion.
Such conversion right shall expire at the close of business on the Business Day
immediately preceding February 15, 2007, subject, in the case of conversion of
any Global Security, to any Applicable Procedures. In case a Security or portion
thereof is called for redemption at the election of the Company or the Holder
thereof exercised his right to require the Company to purchase the Security,
such conversion right in respect of the Security or portion so called shall
expire at the close of business, New York or time, on the Business Day
immediately preceding the corresponding Redemption Date or Purchase Date, as the
case may be, unless the Company defaults in making the payment due upon
redemption or purchase, as the case may be (in each case subject as aforesaid to
any Applicable Procedures with respect to any Global Security).
The price at which shares of Common Stock shall be delivered upon
conversion (herein called the "conversion price") shall be initially U.S.$321.00
per share of Common Stock. The conversion price shall be adjusted in certain
instances as provided in Section 13.04.
In case the Company shall, by dividend or otherwise, declare
or make a distribution on its Common Stock referred to in paragraph (4) or
(5) of Section 13.04, the Holder of each Security, upon the conversion
thereof pursuant to this Article XIII subsequent to the close of business on
the date fixed for the determination of shareholders entitled to receive such
distribution and prior to the effectiveness of the conversion price
adjustment in respect of such distribution pursuant to paragraph (4) or (5)
of Section 13.04, shall also be entitled to receive for each share of Common
Stock into which such Security is converted, the portion of the evidences of
indebtedness, shares of capital stock, securities, cash and other property so
distributed applicable to one share of Common Stock; PROVIDED, HOWEVER, that,
at the election of the Company (whose election shall be evidenced by a Board
Resolution) with respect to all Holders so converting, the Company may, in
lieu of distributing to such Holder any portion of such distribution not
consisting of cash or securities of the Company, pay such Holder an amount in
cash equal to the fair market value thereof (as determined in good faith by
the Board of Directors, whose determination shall be conclusive and described
in a Board Resolution). If any
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conversion of a Security described in the immediately preceding sentence
occurs prior to the payment date for a distribution to holders of Common
Stock which the Holder of the Security so converted is entitled to receive in
accordance with the immediately preceding sentence, the Company may elect
(such election to be evidenced by a Board Resolution) to distribute to such
Holder a due bill for the evidences of indebtedness, shares of capital stock,
securities, cash or assets to which such Holder is so entitled; PROVIDED that
such due bill (i) meets any applicable requirements of the principal national
securities exchange or other market on which the Common Stock is then traded
and (ii) requires payment or delivery of such evidences of indebtedness,
shares of capital stock, securities, cash or assets no later than the date of
payment or delivery thereof to holders of Common Stock receiving such
distribution.
SECTION 13.02. EXERCISE OF CONVERSION PRIVILEGE. In order to
exercise the conversion privilege, the Holder of any Security to be converted
shall surrender such Security, duly endorsed or assigned to the Company or in
blank, at any office or agency maintained by the Company pursuant to Section
10.02, accompanied by (a) written notice (as set forth in Section 2.05 herein)
to the Company at such office or agency that the Holder elects to convert such
Security or, if less than the entire principal amount thereof is to be
converted, the portion thereof to be converted and (b) if shares or any portion
of such Security not to be converted are to be issued in the name of a Person
other than the Holder thereof, and the restrictions on transfer of such
Security, set forth in the first paragraph of Section 2.02 remain in effect, a
certification of the Holder as to compliance with such restrictions (as set
forth in Section 2.07).
If the restrictions on transfer of a Security set forth in the
first paragraph of Section 2.02 remain in effect, all shares of Common Stock
delivered upon conversion thereof shall bear a restrictive legend substantially
in the form of such paragraph.
Except as described in the last paragraph of Section 3.07, no
Holder of Securities will be entitled upon conversion thereof to any payment or
adjustment on account of accrued and unpaid interest thereon or on account of
dividends on the shares of Common Stock issued in connection therewith.
Securities surrendered for conversion during the period from the close of
business on any Regular Record Date to the opening of business on the
corresponding Interest Payment Date (except Securities called for redemption on
a Redemption Date within such period between and including such Regular Record
Date and such Interest Payment Date) must be accompanied by payment to the
Company in New York Clearing House Funds or other funds acceptable to the
Company of an amount equal to the interest payable on such Interest Payment Date
on the principal amount converted.
Securities shall be deemed to have been converted immediately
prior to the close of business on the day of surrender of such Securities for
conversion in
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accordance with the foregoing provisions, and at such time the rights of the
Holders of such Securities as Holders shall cease, and the Person or Persons
entitled to receive the Common Stock issuable upon conversion shall be
treated for all purposes as the record holder or holders of such Common Stock
at such time. As promptly as practicable on or after the conversion date, the
Company shall issue and shall deliver at such office or agency a certificate
or certificates for the number of full shares of Common Stock issuable upon
conversion, together with payment in lieu of any fraction of a share as
provided in Section 13.03.
In the case of any Security which is converted in part only, upon
such conversion the Company shall execute and the Trustee shall authenticate and
deliver to the Holder thereof, at the expense of the Company, a new Security or
Securities of authorized denominations in aggregate principal amount equal to
the unconverted portion of the principal amount of such Security. Any
requirements for notice, surrender or delivery of Securities pursuant to this
Article XIII shall, with respect to any Global Security, be subject to any
Applicable Procedures.
SECTION 13.03. FRACTIONS OF SHARES. No fractional shares of
Common Stock shall be issued upon conversion of Securities. If more than one
Security shall be surrendered for conversion at one time by the same Holder, the
number of full shares which shall be issuable upon conversion thereof shall be
computed on the basis of the aggregate principal amount of the Securities (or
specified portions thereof) so surrendered. Instead of any fractional share of
Common Stock which would otherwise be issuable upon conversion of any Security
or Securities (or specified portions thereof), the Company shall pay a cash
adjustment in respect of such fraction in an amount equal to the same fraction
of the Closing Price per share of the Common Stock at the close of business on
the day of conversion (or, if such day is not a Trading Day, on the Trading Day
immediately preceding such day) or, alternatively, the Company shall round up to
the next higher whole share.
SECTION 13.04. ADJUSTMENT OF CONVERSION PRICE. (1) In case the
Company shall pay or make a dividend or other distribution on its Common Stock
exclusively in Common Stock, the conversion price in effect at the opening of
business on the day next following the date fixed for the determination of
shareholders entitled to receive such dividend or other distribution shall be
reduced by multiplying such conversion price by a fraction of which the
numerator shall be the number of shares of Common Stock outstanding at the close
of business on the date fixed for such determination and the denominator shall
be the sum of such number of shares and the total number of shares constituting
such dividend or other distribution, such reduction to become effective
immediately after the opening of business on the day next following the date
fixed for such determination. For the purposes of this paragraph (1), the number
of shares of Common Stock at any time outstanding shall not include shares held
in the
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treasury of the Company but shall include shares issuable in respect of
scrip certificates issued in lieu of fractions of shares of Common Stock. The
Company shall not pay any dividend or make any distribution on shares of Common
Stock held in the treasury of the Company.
(2) In case the Company shall pay or make a dividend or other
distribution on its Common Stock consisting exclusively of, or shall
otherwise issue to all holders of its Common Stock, rights, warrants or
options entitling the holders thereof to subscribe for or purchase shares of
Common Stock at a price per share less than the current market price per
share (determined as provided in paragraph (7) of this Section 13.04) of the
Common Stock on the date fixed for the determination of shareholders entitled
to receive such rights, warrants or options, the conversion price in effect
at the opening of business on the day following the date fixed for such
determination shall be reduced by multiplying such conversion price by a
fraction of which the numerator shall be the number of shares of Common Stock
outstanding at the close of business on the date fixed for such determination
plus the number of shares of Common Stock which the aggregate of the offering
price of the total number of shares of Common Stock so offered for
subscription or purchase would purchase at such current market price and the
denominator shall be the number of shares of Common Stock outstanding at the
close of business on the date fixed for such determination plus the number of
shares of Common Stock so offered for subscription or purchase, such
reduction to become effective immediately after the opening of business on
the day following the date fixed for such determination. For the purposes of
this paragraph (2), the number of shares of Common Stock at any time
outstanding shall not include shares held in the treasury of the Company but
shall include shares issuable in respect of scrip certificates issued in lieu
of fractions of shares of Common Stock. The Company shall not issue any
rights, warrants or options in respect of shares of Common Stock held in the
treasury of the Company.
(3) In case outstanding shares of Common Stock shall be
subdivided into a greater number of shares of Common Stock, the conversion price
in effect at the opening of business on the day following the day upon which
such subdivision becomes effective shall be proportionately reduced, and,
conversely, in case outstanding shares of Common Stock shall each be combined
into a smaller number of shares of Common Stock, the conversion price in effect
at the opening of business on the day following the day upon which such
combination becomes effective shall be proportionately increased, such reduction
or increase, as the case may be, to become effective immediately after the
opening of business on the day following the day upon which such subdivision or
combination becomes effective.
(4) Subject to the last sentence of this paragraph (4), in case
the Company shall, by dividend or otherwise, distribute to all holders of its
Common Stock evidences
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of its indebtedness, shares of any class of capital stock, securities, cash
or property (excluding any rights, warrants or options referred to in
paragraph (2) of this Section 13.04, any dividend or distribution paid
exclusively in cash and any dividend or distribution referred to in paragraph
(1) of this Section 13.04), the conversion price shall be reduced so that the
same shall equal the price determined by multiplying the conversion price in
effect immediately prior to the effectiveness of the conversion price
reduction contemplated by this paragraph (4) by a fraction of which the
numerator shall be the current market price per share (determined as provided
in paragraph (7) of this Section 13.04) of the Common Stock on the date of
such effectiveness less the fair market value (as determined in good faith by
the Board of Directors, whose determination shall be conclusive and described
in a Board Resolution and shall, in the case of securities being distributed
for which prior thereto there is an actual or when issued trading market, be
no less than the value determined by reference to the average of the closing
prices in such market over the period specified in the succeeding sentence),
on the date of such effectiveness, of the portion of the evidences of
indebtedness, shares of capital stock, securities, cash and property so
distributed applicable to one share of Common Stock and the denominator shall
be such current market price per share of the Common Stock, such reduction to
become effective immediately prior to the opening of business on the day next
following the later of (a) the date fixed for the payment of such
distribution and (b) the date 20 days after the notice relating to such
distribution is given pursuant to Section 13.06(a) (such later date of (a)
and (b) being referred to as the "Reference Date"). If the Board of Directors
determines the fair market value of any distribution for purposes of this
paragraph (4) by reference to the actual or when issued trading market for
any securities comprising such distribution, it must in doing so consider the
prices in such market over the same period used in computing the current
market price per share pursuant to paragraph (7) of this Section. For
purposes of this paragraph (4), any dividend or distribution that includes
shares of Common Stock or rights, warrants or options to subscribe for or
purchase shares of Common Stock shall be deemed instead to be (a) a dividend
or distribution of the evidences of indebtedness, cash, property, shares of
capital stock or securities other than such shares of Common Stock or such
rights, warrants or options (making any conversion price reduction required
by this paragraph (4)) immediately followed by (b) a dividend or distribution
of such shares of Common Stock or such rights (making any further conversion
price reduction required by paragraph (1) or (2) of this Section 13.04,
except (i) the Reference Date of such dividend or distribution as defined in
this paragraph (4) shall be substituted as "the date fixed for the
determination of shareholders entitled to receive such dividend or other
distributions", "the date fixed for the determination of shareholders
entitled to receive such rights, warrants or options" and "the date fixed for
such determination" within the meaning of paragraphs (1) and (2) of this
Section 13.04 and (ii) any shares of Common Stock included in such dividend
or distribution shall not be deemed "outstanding at the close of business on
the date fixed for such determination" within the meaning of paragraph (1) of
this Section 13.04).
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(5) In case the Company shall, by dividend or otherwise, make a
distribution to all holders of its Common Stock exclusively in cash in an
aggregate amount that, together with (i) the aggregate amount of any other
distributions to all holders of its Common Stock made exclusively in cash within
the 12 months preceding the date of payment of such distribution and in respect
of which no conversion price adjustment pursuant to this paragraph (5) has been
made and (ii) the aggregate of any cash plus the fair market value (as
determined in good faith by the Board of Directors, whose determination shall be
conclusive and described in a Board Resolution), as of the expiration of the
tender or exchange offer referred to below, of consideration payable in respect
of any tender or exchange offer by the Company or a Subsidiary for all or any
portion of the Common Stock concluded within the 12 months preceding the date of
payment of such distribution and in respect of which no conversion price
adjustment pursuant to paragraph (6) of this Section 13.04 has been made,
exceeds 12.5% of the product of the current market price per share (determined
as provided in paragraph (7) of this Section 13.04) of the Common Stock on the
date fixed for shareholders entitled to receive such distribution times the
number of shares of Common Stock outstanding on such date, the conversion price
shall be reduced so that the same shall equal the price determined by
multiplying the conversion price in effect immediately prior to the
effectiveness of the conversion price reduction contemplated by this paragraph
(5) by a fraction of which the numerator shall be the current market price per
share (determined as provided in paragraph (7) of this Section 13.04) of the
Common Stock on the date of such effectiveness less the amount of cash so
distributed applicable to one share of Common Stock and the denominator shall be
such current market price per share of the Common Stock, such reduction to
become effective immediately prior to the opening of business on the later of
(a) the day following the date fixed for the payment of such distribution and
(b) the date 20 days after the notice relating to such distribution is given
pursuant to Section 13.06(a).
(6) In case a successful tender or exchange offer made by the
Company or any Subsidiary for all or any portion of the Common Stock shall
involve an aggregate consideration having a fair market value (as determined
in good faith by the Board of Directors, whose determination shall be
conclusive and described in a Board Resolution) at the last time (the
"Expiration Time") tenders or exchanges may be made pursuant to such tender
or exchange offer (as it may be amended) that, together with (i) the
aggregate of the cash plus the fair market value (as determined in good faith
by the Board of Directors, whose determination shall be conclusive and
described in a Board Resolution), as of the expiration of the other tender or
exchange offer referred to below, of consideration payable in respect of any
other tender or exchange offer by the Company or a Subsidiary for all or any
portion of the Common Stock concluded within the preceding 12 months and in
respect of which no conversion price adjustment pursuant to this paragraph
(6) has been made and (ii) the aggregate amount of any distributions to all
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holders of the Common Stock made exclusively in cash within the preceding 12
months and in respect of which no conversion price adjustment pursuant to
paragraph (5) of this Section 13.04 has been made, exceeds 12.5% of the
product of the current market price per share (determined as provided in
paragraph (7) of this Section 13.04) of the Common Stock on the Expiration
Time times the number of shares of Common Stock outstanding (including any
tendered shares) on the Expiration Time, the conversion price shall be
reduced (but not increased) so that the same shall equal the price determined
by multiplying the conversion price in effect immediately prior to the
Expiration Time by a fraction of which the numerator shall be (i) the product
of the current market price per share (determined as provided in paragraph
(7) of this Section 13.04) of the Common Stock at the Expiration Time times
the number of shares of Common Stock outstanding (including any tendered or
exchanged shares) at the Expiration Time minus (ii) the fair market value
(determined as aforesaid) of the aggregate consideration payable to
shareholders based on the acceptance (up to any maximum specified in the
terms of the tender or exchange offer) of all shares validly tendered or
exchanged and not withdrawn as of the Expiration Time (the shares deemed so
accepted, up to any such maximum, being referred to as the "Purchased
Shares") and the denominator shall be the product of (i) such current market
price per share at the Expiration Time times (ii) such number of outstanding
shares at the Expiration Time less the number of Purchased Shares, such
reduction to become effective immediately prior to the opening of business on
the day following the Expiration Time.
(7) For the purpose of any computation under this paragraph
and paragraphs (2), (4) and (5) of this Section 13.04, the current market
price per share of Common Stock on any date in question shall be deemed to be
the average of the daily Closing Prices for the 5 consecutive Trading Days
selected by the Company commencing not more than 20 Trading Days before, and
ending not later than, the date in question; PROVIDED, HOWEVER, that (i) if
the "ex" date (as hereinafter defined) for any event (other than the issuance
or distribution requiring such computation) that requires an adjustment to
the conversion price pursuant to paragraph (1), (2), (3), (4), (5) or (6)
above ("Other Event") occurs on or after the 20th Trading Day prior to the
date in question and prior to the "ex" date for the issuance or distribution
requiring such computation (the "Current Event"), the Closing Price for each
Trading Day prior to the "ex" date for such Other Event shall be adjusted by
multiplying such Closing Price by the same fraction by which the conversion
price is so required to be adjusted as a result of such Other Event, (ii) if
the "ex" date for any Other Event occurs after the "ex" date for the Current
Event and on or prior to the date in question, the Closing Price for each
Trading Day on and after the "ex" date for such Other Event shall be adjusted
by multiplying such Closing Price by the reciprocal of the fraction by which
the conversion price is so required to be adjusted as a result of such Other
Event, (iii) if the "ex" date for any Other Event occurs on the "ex" date for
the Current Event, one of those events shall be deemed for purposes of
clauses (i) and (ii) of this proviso to have an "ex" date occurring prior to
the "ex" date for the other
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event, and (iv) if the "ex" date for the Current Event is on or prior to the
date in question, after taking into account any adjustment required pursuant
to clause (ii) of this proviso, the Closing Price for each Trading Day on or
after such "ex" date shall be adjusted by adding thereto the amount of any
cash and the fair market value on the date in question (as determined in good
faith by the Board of Directors in a manner consistent with any determination
of such value for purposes of paragraph (4) or (5) of this Section 13.04,
whose determination shall be conclusive and described in a Board Resolution)
of the portion of the rights, warrants, options, evidences of indebtedness,
shares of capital stock, securities, cash or property being distributed
applicable to one share of Common Stock. For the purpose of any computation
under paragraph (6) of this Section 13.04, the current market price per share
of Common Stock on any date in question shall be deemed to be the average of
the daily Closing Prices for the 5 consecutive Trading Days selected by the
Company commencing on or after the latest (the "Commencement Date") of (i)
the date 20 Trading Days before the date in question, (ii) the date of
commencement of the tender or exchange offer requiring such computation and
(iii) the date of the last amendment, if any, of such tender or exchange
offer involving a change in the maximum number of shares for which tenders
are sought or a change in the consideration offered, and ending not later
than the date of the Expiration Time of such tender or exchange offer (or, if
such Expiration Time occurs before the close of trading on a Trading Day, not
later than the Trading Day immediately preceding the date of such Expiration
Time); PROVIDED, HOWEVER, that if the "ex" date for any Other Event (other
than the tender or exchange offer requiring such computation) occurs on or
after the Commencement Date and on or prior to the date of the Expiration
Time for the tender or exchange offer requiring such computation, the Closing
Price for each Trading Day prior to the "ex" date for such Other Event shall
be adjusted by multiplying such Closing Price by the same fraction by which
the conversion price is so required to be adjusted as a result of such other
event. For purposes of this paragraph, the term "ex" date, (i) when used with
respect to any issuance or distribution, means the first date on which the
Common Stock trades regular way on the relevant exchange or in the relevant
market from which the Closing Price was obtained without the right to receive
such issuance or distribution, (ii) when used with respect to any subdivision
or combination of shares of Common Stock, means the first date on which the
Common Stock trades regular way on such exchange or in such market after the
time at which such subdivision or combination becomes effective, and (iii)
when used with respect to any tender or exchange offer means the first date
on which the Common Stock trades regular way on such exchange or in such
market after the Expiration Time of such tender or exchange offer.
(8) The Company may make such reductions in the conversion price,
in addition to those required by paragraphs (1), (2), (3), (4), (5) and (6) of
this Section, as it considers to be advisable in order that any event treated
for Federal income tax purposes as a dividend of stock or stock rights shall not
be taxable to the recipients, or to diminish the amount of such tax payable.
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(9) To the extent permitted by applicable law, the Company may
from time to time decrease the conversion price by any amount for any period
of time so long as (i) such period of time is at least 20 days, (ii) such
decrease is irrevocable during such period and (iii) the Board of Directors
has determined that such a decrease is in the best interests of the Company,
which determination shall be conclusive. No such decrease may be taken into
account when determining whether the Closing Price of the Common Stock
exceeds the conversion price for purposes of clause (i) of the third
paragraph of Section 14.07. Whenever the conversion price is decreased
pursuant to the first sentence of this paragraph (9), the Company shall give
notice of the decrease to the Holders of Securities in the manner provided in
Section 1.06 at least 15 days prior to the date the decreased conversion
price takes effect, and such notice shall state the decreased conversion
price and the period during which it will be in effect.
(10) No adjustment in the conversion price shall be required
unless such adjustment would require an increase or decrease of at least 1% in
the conversion price; PROVIDED, HOWEVER, that any adjustments which by reason of
this paragraph (10) are not required to be made shall be carried forward and
taken into account in any subsequent adjustment.
(11) In the event that the Company distributes rights or warrants
(other than those referred to in paragraph (2) above) pro rata to holders of
Common Stock, so long as any such rights or warrants have not expired or been
redeemed by the Company, the Company shall make proper provision so that the
Holder of any Security surrendered for conversion will be entitled to receive
upon such conversion, in addition to the Conversion Shares, a number of rights
and warrants to be determined as follows: (i) if such conversion occurs on or
prior to the date for the distribution to the holders of rights or warrants of
separate certificates evidencing such rights or warrants (the "Distribution
Date"), the same number of rights or warrants to which a holder of a number of
shares of Common Stock equal to the number of Conversion Shares is entitled at
the time of such conversion in accordance with the terms and provisions of and
applicable to the rights or warrants, and (ii) if such conversion occurs after
such Distribution Date, the same number of rights or warrants to which a holder
of the number of shares of Common Stock into which the principal amount of such
Security so converted was convertible immediately prior to such Distribution
Date would have been entitled on such Distribution Date in accordance with the
terms and provisions of and applicable to the rights or warrants.
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SECTION 13.05. NOTICE OF ADJUSTMENTS OF CONVERSION PRICE.
Whenever the conversion price is adjusted as herein provided:
(a) the Company shall compute the adjusted conversion price in
accordance with Section 13.04 and shall prepare a certificate signed by
the Treasurer of the Company setting forth the adjusted conversion price
and showing in reasonable detail the facts upon which such adjustment is
based, and such certificate shall forthwith be filed (with a copy to the
Trustee) at each office or agency maintained for the purpose of
conversion of Securities pursuant to Section 10.02; and
(b) a notice stating that the conversion price has been adjusted
and setting forth the adjusted conversion price shall forthwith be
required, and as soon as practicable after it is required, such notice
shall be mailed by the Company to all Holders at their last addresses as
they shall appear in the Security Register.
SECTION 13.06. NOTICE OF CERTAIN CORPORATE ACTION. In case:
(a) the Company shall declare a dividend (or any other
distribution) on its Common Stock that would require a conversion price
adjustment pursuant to paragraph (5) of Section 13.04; or
(b) the Company shall authorize the granting to all holders of
its Common Stock of rights, warrants or options to subscribe for or
purchase any shares of capital stock of any class or of any other rights
(excluding rights distributed pursuant to any shareholder rights plan);
or
(c) of any reclassification of the Common Stock of the Company
(other than a subdivision or combination of its outstanding shares of
Common Stock), or of any consolidation or merger to which the Company is
a party and for which approval of any shareholders of the Company is
required, or of the sale or transfer of all or substantially all of the
assets of the Company; or
(d) of the voluntary or involuntary dissolution, liquidation or
winding, up of the Company; or
(e) the Company or any Subsidiary of the Company shall commence a
tender or exchange offer for all or a portion of the Company's
outstanding shares of Common Stock (or shall amend any such tender or
exchange offer);
then the Company shall cause to be filed at each office or agency maintained for
the purpose of conversion of Securities pursuant to Section 10.02, and shall
cause to be mailed to all Holders at their last addresses as they shall appear
in the Security Register,
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95
at least 20 days (or 10 days in any case specified in clause (a) or (b) above)
prior to the applicable record, effective or expiration date hereinafter
specified, a notice stating (x) the date on which a record is to be taken for
the purpose of such dividend, distribution or granting of rights, warrants or
options, or, if a record is not to be taken, the date as of which the holders of
Common Stock of record to be entitled to such dividend, distribution, rights,
warrants or options are to be determined, or (y) the date on which such
reclassification, consolidation, merger, sale, transfer, dissolution,
liquidation or winding up is expected to become effective, and the date as of
which it is expected that holders of Common Stock of record shall be entitled to
exchange their shares of Common Stock for securities, cash or other property
deliverable upon such reclassification, consolidation, merger, sale, transfer,
dissolution, liquidation or winding up, or (z) the date on which such tender
offer commenced, the date on which such tender offer is scheduled to expire
unless extended, the consideration offered and the other material terms thereof
(or the material terms of any amendment thereto).
SECTION 13.07. COMPANY TO RESERVE COMMON STOCK. The Company shall
at all times reserve and keep available, free from preemptive rights, out of its
authorized but unissued Common Stock, solely for the purpose of effecting the
conversion of Securities, the whole number of shares of Common Stock then
issuable upon the conversion in full of all outstanding Securities.
SECTION 13.08. TAXES ON CONVERSIONS. The Company will pay any and
all taxes that may be payable in respect of the issue or delivery of shares of
Common Stock on conversion of Securities pursuant hereto. The Company shall not,
however, be required to pay any tax which may be payable in respect of any
transfer involved in the issue and delivery of shares of Common Stock in a name
other than that of the Holder of the Security or Securities to be converted, and
no such issue or delivery shall be made unless and until the Person requesting
such issue has paid to the Company the amount of any such tax, or has
established to the satisfaction of the Company that such tax has been paid.
SECTION 13.09. COVENANT AS TO COMMON STOCK. The Company covenants
that all shares of Common Stock which may be issued upon conversion of
Securities will upon issue be newly issued (and not treasury shares) and be duly
authorized, validly issued, fully paid and nonassessable and, except as provided
in Section 13.08, the Company will pay all taxes, liens and charges with respect
to the issue thereof.
SECTION 13.10. CANCELLATION OF CONVERTED SECURITIES. All
Securities delivered for conversion shall be delivered to the Trustee to be
cancelled by or at the direction of the Trustee, which shall dispose of the same
as provided in Section 3.09.
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SECTION 13.11. PROVISIONS IN CASE OF RECLASSIFICATION,
CONSOLIDATION, MERGER OR SALE OF ASSETS. In the event that the Company shall be
a party to any transaction (including without limitation any (i)
recapitalization or reclassification of the Common Stock (other than a change in
par value, or from par value to no par value, or from no par value to par value,
or as a result of a subdivision or combination of the Common Stock), (ii)
consolidation of the Company with, or merger of the Company into, any other
person. any merger of another person into the Company (other than a merger which
does not result in a reclassification, conversion, exchange or cancellation of
outstanding shares of Common Stock of the Company), (iii) sale or transfer of
all or substantially all of the assets of the Company, or (iv) other
transaction) pursuant to which the Common Stock is converted into the right to
receive other securities, cash or other property, then lawful provision shall be
made as part of the terms of such transaction whereby the Holder of each
Security then outstanding shall have the right thereafter to convert such
Security only into (subject to funds being legally available for such purpose
under applicable law at the time of such conversion) the kind and amount of
securities, cash and other property receivable upon such transaction by a holder
of the number of shares of Common Stock into which such Security might have been
converted immediately prior to such transaction. The Company or the person
formed by such consolidation or resulting from such merger or which acquired
such assets or which acquired the Company's shares, as the case may be, shall
execute and deliver to the Trustee a supplemental indenture establishing such
rights. Such supplemental indenture shall provide for adjustments which, for
events subsequent to the effective date of such supplemental indenture, shall be
as nearly equivalent as may be practicable to the adjustments provided for in
this Article. The above provisions of this Section 13.11 shall similarly apply
to successive transactions of the foregoing type.
SECTION 13.12. TRUSTEE ADJUSTMENT DISCLAIMER. The Trustee has no
duty to determine when an adjustment under this Article XIII should be made, how
it should be made or what it should be. The Trustee has no duty to determine
whether a supplemental indenture need be entered into or whether any provisions
of any supplemental indenture are correct. The Trustee shall not be accountable
for and makes no representation as to the validity or value of any securities or
assets issued upon conversion of Securities. The Trustee shall not be
responsible for the Company's failure to comply with this Article XIII.
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ARTICLE XIV
RIGHT TO REQUIRE PURCHASE
SECTION 14.01. RIGHT TO REQUIRE PURCHASE. In the event that there
shall occur a Change in Control, then each Holder shall have the right, at such
Holder's option, to require the Company, subject to the provisions of Section
12.03, to purchase all or any designated part of such Holder's Securities on the
date (the "Purchase Date") fixed by the Company that is not less than 30 days
nor more than 45 days after the date the Company gives notice of the Change in
Control as contemplated in Section 14.03(a) at a price (the "Purchase Price")
equal to 100% of the principal amount thereof, together with accrued and unpaid
interest through the Purchase Date. Such right to require the purchase of
Securities shall not continue after a discharge of the Company from its
obligations with respect to the Securities in accordance with Article IV. At the
option of the Company, the Purchase Price may be paid in cash or, subject to the
fulfillment by the Company of the conditions set forth Section 14.02 hereof, by
delivery of shares of Common Stock in accordance with Section 14.02. Whenever in
this Indenture (including Sections 2.02, 3.01, 5.01(1) and 5.08) there is a
reference, in any context, to the principal of any Security as of any time, such
reference shall be deemed to include reference to the Purchase Price payable in
respect of such Security to the extent that such Purchase Price is, was or would
be so payable at such time, and express mention of the Purchase Price in any
provision of this Indenture shall not be construed as excluding the Purchase
Price in those provisions of this Indenture when such express mention is not
made. Any requirements for notice, surrender or delivery of Securities pursuant
to this Article XIV shall, with respect to any Global Security, be subject to
any Applicable Procedures.
SECTION 14.02. CONDITIONS AND PROCEDURES RELATING TO THE
COMPANY'S ELECTION TO PAY THE PURCHASE PRICE IN COMMON STOCK. (a) The Company
may elect to pay the Purchase Price by delivery of shares of Common Stock
pursuant to Section 14.01 so long as the following conditions precedent are
satisfied:
(i) The shares of Common Stock deliverable in payment of the
Purchase Price shall have a fair market value as of the Purchase Date of not
less than the Purchase Price. For purposes of Section 14.01 and this Section
14.02, the fair market value of shares of Common Stock shall be determined by
the Company and shall be equal to 95% of the average of the Closing Prices of
the Common Stock for the five consecutive Trading Days immediately preceding and
including the third Trading Day prior to the Purchase Date;
(ii) The shares of Common Stock to be issued upon purchase of
Notes pursuant to this Article XIV (A) shall not require registration under any
federal securities law before such shares may be freely transferable without
being subject to any transfer
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98
restrictions under the Securities Act upon purchase pursuant to this Article XIV
or, if such registration is required, such registration shall be completed and
shall become effective prior to the Purchase Date, and (B) shall not require
registration with or approval of any governmental authority under any state law
or any other federal law before such shares may be validly issued or delivered
upon purchase pursuant to this Article XIV or if such registration is required
or such approval must be obtained, such registration shall be completed or such
approval shall be obtained prior to the Purchase Date;
(iii) The shares of Common Stock to be issued upon purchase of
Notes pursuant to this Article XIV are, or shall have been, approved for listing
on Nasdaq or the New York Stock Exchange or listed on another national
securities exchange, in any case, prior to the Purchase Date; and
(iv) All shares of Common Stock which may be issued upon purchase
of Notes pursuant to this Article XIV will be issued out of the Company's
authorized but unissued Common Stock and, will upon issue, be duly and validly
issued and fully paid and non-assessable and free of any preemptive or similar
rights.
If all of the conditions set forth in this Section 14.02(a) are
not satisfied in accordance with the terms hereof, the Purchase Price shall be
paid by the Company only in cash.
(b) Any issuance of shares of Common Stock in respect of the
Purchase Price shall be deemed to have been effected immediately prior to the
close of business on the Purchase Date and the Person or Persons in whose name
or names any certificate or certificates for shares of Common Stock shall be
issuable upon such purchase shall be deemed to have become on the Purchase Date
the holder or holders of record of the shares represented thereby; PROVIDED,
HOWEVER, that any surrender for purchase on a date when the stock transfer books
of the Company shall be closed shall constitute the Person or Persons in whose
name or names the certificate or certificates for such shares are to be issued
as the record holder or holders thereof for all purposes at the opening of
business on the next succeeding day on which such stock transfer books are open.
No payment or adjustment shall be made for dividends or distributions on any
Common Stock issued upon purchase of any Note pursuant to this Article XIV
declared prior to the Purchase Date.
(c) No fractions of shares shall be issued upon purchase of Notes
pursuant to this Article XIV. If more than one Note shall be purchased from the
same Holder and the Purchase Price shall be payable in shares of Common Stock,
the number of full shares which shall be issuable upon such purchase shall be
computed on the basis of the aggregate principal amount of the Notes so
purchased. Instead of any fractional share of
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Common Stock which would otherwise be issuable on the purchase of any Note or
Notes pursuant to this Article XIV, the Company will deliver to the applicable
Holder its check for the current market value of such fractional share. The
current market value of a fraction of a share is determined by multiplying the
Closing Price of a full share on the Trading Day immediately preceding the
Purchase Date by the fraction, and rounding the result to the nearest cent.
(d) Any issuance and delivery of certificates for shares of
Common Stock on purchase of Notes pursuant to this Article XIV shall be made
without charge to the Holder of Notes being purchased for such certificates or
for any tax or duty in respect of the issuance or delivery of such certificates
or the Notes represented thereby; PROVIDED, HOWEVER, that the Company shall not
be required to pay any tax or duty which may be payable in respect of (i) income
of the Holder or (ii) any transfer involved in the issuance or delivery of
certificates for shares of Common Stock in a name other than that of the Holder
of the Notes being purchased, and no such issuance or delivery shall be made
unless and until the Person requesting such issuance or delivery has paid to the
Company the amount of any such tax or duty or has established, to the
satisfaction of the Company, that such tax or duty has been paid.
SECTION 14.03. NOTICE, METHOD OF EXERCISING PURCHASE RIGHT. (a)
On or before the 15th day after the Company knows or reasonably should know a
Change in Control has occurred, the Company, or at the written request of the
Company, the Trustee (in the name and at the expense of the Company), shall give
notice of the occurrence of the Change in Control and of the purchase right set
forth herein arising as a result thereof by first-class mail, postage prepaid,
or by telefacsimile with written acknowledgment of transmittal to each Holder of
the Securities at such Holder's address appearing in the Security Register. The
Company shall also deliver a copy of such notice of a purchase right to the
Trustee.
Each notice of a purchase right shall state:
(1) the Purchase Date,
(2) the date by which the purchase right must be exercised,
(3) the Purchase Price,
(4) whether the Purchase Price will be paid in the form of cash
or Common Stock as provided in this Indenture and that such
determination is irrevocable, and
(5) the instructions a Holder must follow to exercise its
purchase right.
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No failure of the Company to give the foregoing notice shall
limit any Holder's right to exercise a purchase right. The Trustee shall have no
affirmative obligation to determine if there shall have occurred a Change in
Control.
(b) To exercise a purchase right, a Holder shall deliver to the
Company (or an agent designated by the Company for such purpose in the notice
referred to in (a) above) and to the Trustee on or before the 30th day after the
date of transmittal of the notice referred to in (a) above (i) written notice of
the Holder's exercise of such right, which notice shall set forth the name of
the Holder, the principal amount of the Security or Securities (or portion of a
Security) to be purchased, and a statement that an election to exercise the
purchase right is being made thereby, and (ii) the Security or Securities with
respect to which the purchase right is being exercised, duly endorsed for
transfer to the Company. Such written notice shall be irrevocable. If the
Purchase Date falls between any Regular Record Date and the corresponding
succeeding Interest Payment Date, Securities to be purchased must be accompanied
by payment from the Holder of an amount equal to the interest thereon which the
registered Holder thereof is to receive on such Interest Payment Date.
(c) In the event a purchase right shall be exercised in
accordance with the terms hereof, the Company shall on the Purchase Date pay or
cause to be paid in cash or shares of Common Stock, as provided herein, to the
Holder thereof the Purchase Price of the Security or Securities as to which the
purchase right had been exercised.
SECTION 14.04. DEPOSIT OF PURCHASE PRICE. On or prior to the
Purchase Date, the Company shall deposit with the Trustee or with a Paying
Agent (or, if the Company is acting as its own Paying Agent, segregate and
hold in trust as provided in Section 10.03) cash or shares of Common Stock,
as provided herein, sufficient to pay the Purchase Price of the Securities
which are to be repaid on the Purchase Date.
SECTION 14.05. SECURITIES NOT PURCHASED ON PURCHASE DATE. If any
Security surrendered for purchase shall not be so paid on the Purchase Date, the
principal of such Security shall, until paid, bear interest from the Purchase
Date at a rate borne by such Security.
SECTION 14.06. SECURITIES PURCHASED IN PART. Any Security which
is to be purchased only in part shall be surrendered at any office or agency of
the Company designated for that purpose pursuant to Section 10.02 (with, if the
Company or the Trustee so requires, due endorsement by, or written instrument of
transfer in form satisfactory to the Company and the Trustee duly executed by,
the Holder thereof or his attorney duly authorized in writing), and the Company
shall execute, and the Trustee shall authenticate and deliver to the Holder of
such Security without service charge, a new Security or Securities of any
authorized denomination as requested by such Holder,
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in aggregate principal amount equal to and in exchange for the unpurchased
portion of the principal of the Security so surrendered.
SECTION 14.07. CERTAIN DEFINITIONS. For purposes of this Article:
The term "Beneficial Owner" shall be determined in accordance with Rules 13d-3
and 13d-5 promulgated by the Commission under the Exchange Act, or any successor
provision thereto, except that a Person shall be deemed to have "beneficial
ownership" of all shares that such Person has the right to acquire, whether such
right is exercisable immediately or only after the passage of time.
A "Change in Control" shall be deemed to have occurred at such
time as (a) any Person, or any Persons acting together in a manner which
would constitute a "group" (a "Group") for purposes of Section 13(d) of the
Exchange Act, or any successor provision thereto, together with any
Affiliates thereof, (i) become the Beneficial Owners, directly or indirectly,
of capital stock of the Company, entitling such Person or Persons and its or
their Affiliates to exercise more than 50% of the total voting power of all
classes of the Company's capital stock entitled to vote generally in the
election of directors or (ii) shall succeed in having sufficient of its or
their nominees (who are not supported by a majority of the then current Board
of Directors of the Company) elected to the Board of Directors of the Company
such that such nominees, when added to any existing directors remaining on
the Board of Directors of the Company after such election who are Affiliates
of or acting in concert with any such Persons, shall constitute a majority of
the Board of Directors of the Company, (b) the Company shall be a party to
any transaction pursuant to which the Common Stock is converted into the
right to receive other securities (other than common stock), cash and/or
property (or the Company, by dividend, tender or exchange offer or otherwise,
distributes other securities, cash and/or property to holders of Common
Stock) and the value of all such securities, cash and/or property distributed
in such transaction and any other transaction effected within the 12 months
preceding consummation of such transaction (as determined in good faith by
the Board of Directors, whose determination shall be conclusive and described
in a Board Resolution) is more than 50% of the average of the daily Closing
Prices for the five consecutive Trading Days ending on the Trading Day
immediately preceding the date of such transaction (or, if earlier, the
Trading Day immediately preceding the ex date (as defined in paragraph (7) of
Section 13.04) for such transaction) or (c) the Company shall consolidate
with or merge into any other Person or sell, convey, transfer or lease its
properties and assets substantially as an entirety to any Person other than a
Subsidiary, or any other Person shall consolidate with or merge into the
Company (other than, in the case of this clause (c), pursuant to any
consolidation or merger where Persons who are shareholders of the Company
immediately prior thereto become the Beneficial Owners of shares of capital
stock of the surviving company entitling such Persons to exercise more than
50% of the total voting power of all classes of such surviving company's
capital stock entitled to vote generally in the election of directors).
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Notwithstanding the foregoing, a "Change in Control" will be
deemed not to have occurred (i) if the Closing Price of the Common Stock for any
five Trading Days during the ten Trading Days immediately preceding the Change
in Control is at least equal to 105% of the conversion price in effect
immediately preceding the Change in Control or (ii) if at least 90% of the
consideration (excluding cash payments for fractional shares or cash payments
for appraisal rights) received or to be received by the shareholders of the
Company in the transaction or transactions constituting the Change in Control
consists of (x) shares of common stock of an entity organized and validly
existing under the laws of the United States of America, any State thereof or
the District of Columbia the common stock of which is, or upon issuance will be,
traded on a national securities exchange in the United States of America or
through Nasdaq or (y) shares of common stock of an entity organized and validly
existing under the laws of a jurisdiction outside of the United States of
America, or American Depositary Shares representing such shares of common stock,
that are, or upon issuance will be, traded on a national securities exchange in
the United States of America or through Nasdaq, if such entity has a worldwide
total market capitalization of its equity securities of at least U.S. $5
billion.
ARTICLE XV
DEFEASANCE AND COVENANT DEFEASANCE
SECTION 15.01. COMPANY'S OPTION TO EFFECT DEFEASANCE OR COVENANT
DEFEASANCE. The Company may at its option by Board Resolution, at any time,
elect to have either Section 15.02 or Section 15.03 applied to the Outstanding
Securities upon compliance with the conditions set forth below in this Article
XV.
SECTION 15.02. DEFEASANCE AND DISCHARGE. Upon the Company's
exercise of the option provided in Section 15.01 applicable to this Section,
the Company shall be deemed to have been discharged from its obligations with
respect to the Outstanding Securities (other than those specified below), the
Holders and any holders of Senior Indebtedness, and the provisions of Article
XII hereof shall cease to be effective, on the date the conditions set forth
below are satisfied (hereinafter, "defeasance"). For this purpose, such
defeasance means that the Company shall be deemed to have paid and discharged
the entire indebtedness represented by the Outstanding Securities, the
Company shall be deemed to have satisfied all their other obligations under
such Securities and this Indenture insofar as such Securities are concerned
(and the Trustee, at the expense of the Company, shall execute proper
instruments acknowledging the same), except for the following which shall
survive until otherwise terminated or discharged hereunder: (A) the rights of
Holders of such Securities to receive, solely from the trust fund described
in Section 15.04 and as more fully set forth in such Section, payments in
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respect of the principal of, premium, if any and interest on such Securities
when such payments are due, (B) the Company's obligations with respect to
such Securities under Sections 3.04, 3.05, 3.06, 10.02, 10.03, 10.11, Article
XIII and Article XIV, (C) the rights, powers, trusts, duties and immunities
of the Trustee hereunder and (D) this Article XV. Subject to compliance with
this Article XV, the Company may exercise its option under this Section 15.02
notwithstanding the prior exercise of its option under Section 15.03.
SECTION 15.03. COVENANT DEFEASANCE. Upon the Company's exercise
of the option provided in Section 15.01 applicable to this Section, (i) the
Company shall be released from its obligations under Section 10.06 and Section
10.07, (ii) the occurrence of an event specified in Section 5.01(4) (with
respect to either of Section 10.06 or Section 10.07) or 5.01(5) shall not be
deemed to be an Event of Default and (iii) the provisions of Article XII hereof
shall cease to be effective on and after the date the conditions set forth below
are satisfied (hereinafter, "covenant defeasance"). For this purpose, such
covenant defeasance means that the Company may omit to comply with and shall
have no liability in respect of any term, condition or limitation set forth in
any such Section or Article, whether directly or indirectly by reason of any
reference elsewhere herein to any such Section or Article or by reason of any
reference in any such Section or Article to any other provision herein or in any
other document, but the remainder of this Indenture and such Securities shall be
unaffected thereby.
SECTION 15.04. CONDITIONS TO DEFEASANCE OR COVENANT DEFEASANCE.
The following shall be the conditions to application of either Section 15.02 or
Section 15.03 to the then Outstanding Securities:
<PAGE>
104
(1) The Company shall irrevocably have deposited or caused to be
deposited with the Trustee (or another trustee satisfying the
requirements of Section 6.09 who shall agree to comply with the
provisions of this Article XV applicable to it) as trust funds in trust
for the purpose of making the following payments, specifically pledged
as security for, and dedicated solely to, the benefit of the Holders of
such Securities, (A) money in an amount, or (B) U.S. Government
Obligations which through the scheduled payment of principal and
interest in respect thereof in accordance with their terms will provide,
not later than one day before the due date of any payment, money in an
amount, or (C) a combination thereof, sufficient, in the written opinion
of a nationally recognized firm of independent public accountants
expressed in a written certification thereof delivered to the Trustee,
to pay and discharge, and which shall be applied by the Trustee (or
other qualifying trustee) to pay and discharge, the principal of,
premium, if any, and each installment of interest on the Securities on
the Stated Maturity of such principal or installment of interest in
accordance with the terms of this Indenture and of such Securities. For
this purpose, "U.S. Government Obligations" means securities that are
(x) direct obligations of the United States of America for the payment
of which its full faith and credit is pledged or (y) obligations of a
Person controlled or supervised by and acting as an agency or
instrumentality of the United States of America the payment of which is
unconditionally guaranteed as a full faith and credit obligation by the
United States of America, which, in either case, are not callable or
redeemable at the option of the issuer thereof, and shall also include a
depository receipt issued by a bank (as defined in Section 3(a)(2) of
the Securities Act) as custodian with respect to any such U.S.
Government Obligation or a specific payment of principal of or interest
on any such U.S. Government Obligation held by such custodian for the
account of the holder of such depository receipt; PROVIDED that
(except as required by law) such custodian is not authorized to make any
deduction from the amount payable to the holder of such depository
receipt from any amount received by the custodian in respect of the U.S.
Government Obligation or the specific payment of principal of or
interest on the U.S. Government Obligation evidenced by such depository
receipt.
(2) In the case of an election under Section 15.02, the Company
shall have delivered to the Trustee an Opinion of Counsel stating that
(x) the Company has received from, or there has been published by, the
Internal Revenue Service a ruling, or (y) since the date of this
Indenture there has been a change in the applicable Federal income tax
law, in either case to the effect that, and based thereon such opinion
shall confirm that, the Holders of the Outstanding Securities will not
recognize gain or loss for Federal income tax purposes as a result of
such deposit, defeasance and discharge and will be subject to Federal
income tax on the
<PAGE>
105
same amount, in the same manner and at the same times
as would have been the case if such deposit, defeasance and discharge
had not occurred.
(3) In the case of an election under Section 15.03, the Company
shall have delivered to the Trustee an Opinion of Counsel to the effect
that the Holders of the Outstanding Securities will not recognize gain
or loss for Federal income tax purposes as a result of such deposit and
covenant defeasance and will be subject to Federal income tax on the
same amount, in the same manner and at the same times as would have been
the case if such deposit and covenant defeasance had not occurred.
(4) The Company shall have delivered to the Trustee an Officers'
Certificate to the effect that the Securities, if then listed on any
securities exchange, will not be delisted as a result of such deposit.
(5) Such defeasance or covenant defeasance shall not cause the
Trustee to have a conflicting interest as defined in Section 6.08 and
for purposes of the Trust Indenture Act with respect to any securities
of the Company.
(6) At the time of such deposit: (A) no default in the payment of
all or a portion of principal of (or premium, if any) or interest on or
other obligations in respect of any Senior Indebtedness shall have
occurred and be continuing, and no event of default with respect to any
Senior Indebtedness shall have occurred and be continuing and shall have
resulted in such Senior Indebtedness becoming or being declared due and
payable prior to the date on which it would otherwise have become due
and payable and (B) no other event with respect to any Senior
Indebtedness shall have occurred and be continuing permitting (after
notice or the lapse of time, or both) the holders of such Senior
Indebtedness (or a trustee on behalf of the holders thereof) to declare
such Senior Indebtedness due and payable prior to the date on which it
would otherwise have become due and payable, or, in the case of either
clause (A) or clause (B) above, each such default or event of default
shall have been cured or waived or shall have ceased to exist.
(7) No Event of Default or event which with notice or lapse of
time or both would become an Event of Default shall have occurred and be
continuing on the date of such deposit or, insofar as subsections
5.01(6) and (7) are concerned, at any time during the period ending on
the 121st day after the date of such deposit
(it being understood that this condition shall not be deemed satisfied
until the expiration of such period).
<PAGE>
106
(8) Such defeasance or covenant defeasance shall not result in a
breach or violation of, or constitute a default under, any other
agreement or instrument to which the Company is a party or by which it
is bound.
(9) The Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent provided for relating to either the defeasance under Section
15.02 or the covenant defeasance under Section 15.03 and Section 15.04
(as the case may be) have been complied with.
(10) Such defeasance or covenant defeasance shall not result in
the trust arising from such deposit constituting an investment company
as defined in the Investment Company Act of 1940, as amended, or such
trust shall be qualified under such act or exempt from regulation
thereunder.
SECTION 15.05. DEPOSITED MONEY AND U.S. GOVERNMENT OBLIGATIONS TO
BE HELD IN TRUST; OTHER MISCELLANEOUS PROVISIONS. Subject to the provisions of
the last paragraph of Section 10.03, all money and U.S. Government Obligations
(including the proceeds thereof) deposited with the Trustee (or other qualifying
trustee collectively, for purposes of this Section 15.05, the "Trustee")
pursuant to Section 15.04 in respect of the Securities shall be held in trust
and applied by the Trustee, in accordance with the provisions of such Securities
and this Indenture, to the payment, either directly or through any Paying Agent
(including the Company acting as its own Paying Agent) as the Trustee may
determine, to the Holders of such Securities, of all sums due and to become due
thereon in respect of principal, premium, if any, and interest. Money so held in
trust shall not be subject to the provisions of Article XII.
The Company shall pay and indemnify the Trustee against any tax,
fee or other charge imposed on or assessed against the U.S. Government
Obligations deposited pursuant to Section 15.04 or the principal and interest
received in respect thereof other than any such tax, fee or other charge which
by law is for the account of the Holders of the Outstanding Securities.
Anything in this Article XV to the contrary notwithstanding, the
Trustee shall deliver or pay to the Company from time to time upon Company
Request any money or U.S. Government Obligations held by it as provided in
Section 15.04 which, in the opinion of a nationally recognized firm of
independent public accountants expressed in a written certification thereof
delivered to the Trustee, are in excess of the amount thereof which would then
be required to be deposited to effect an equivalent defeasance or covenant
defeasance.
<PAGE>
107
SECTION 15.06. REINSTATEMENT. If the Trustee or the Paying
Agent is unable to apply any money in accordance with Section 15.02 or 15.03
by reason of any order or judgment of any court or governmental authority
enjoining, restraining or otherwise prohibiting such application, then the
Company's obligations under this Indenture and the Securities shall be
revived and reinstated as though no deposit had occurred pursuant to this
Article XV until such time as the Trustee or Paying Agent is permitted to
apply all such money in accordance with Section 15.02 or 15.03; PROVIDED,
HOWEVER, that if the Company makes any payment of principal of, premium, if
any, or interest on any Security following the reinstatement of its
obligations, the Company shall be subrogated to the rights of the Holders of
such Securities to receive such payment from the money held by the Trustee or
the Paying Agent.
ARTICLE XVI
IMMUNITY
SECTION 16.01. PERSONAL IMMUNITY OF INCORPORATORS,
SHAREHOLDERS, DIRECTORS AND OFFICERS. No recourse for the payment of the
principal of or interest on the Securities, and no recourse under or upon any
obligation, covenant or agreement contained in this Indenture or in any
indenture supplemental hereto, or in the Securities, or because of any
indebtedness evidenced thereby, shall be had against any incorporator, or
against any past, present or future shareholder, officer or director, as
such, of the Company or any successor corporation, either directly or through
the Company or any successor corporation, under any rule of law, statute or
constitutional provision or by the enforcement of any assessment or by any
legal or equitable proceeding or otherwise, all such liability being
expressly waived and released by the acceptance of the Securities by the
Holders thereof and as part of the consideration for the issue of the
Securities. Each and every Holder of the Securities, by receiving and holding
the same, agrees to the provisions of this Section 16.01 and waives and
releases any and all such recourse, claim and liability.
<PAGE>
This instrument may be executed in any number of counterparts,
each of which so executed shall be deemed to be an original, but all such
counterparts shall together constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Indenture
to be duly executed as of the day and year first above written.
AFFYMETRIX, INC.
by________________________________________
Name:
Title:
THE BANK OF NEW YORK,
by________________________________________
Name:
Title:
<PAGE>
EXECUTION COPY
Up to $225,000,000
Affymetrix, Inc.
4.75% Convertible Subordinated Notes due 2007
REGISTRATION RIGHTS AGREEMENT
February 14, 2000
Credit Suisse First Boston Corporation,
as Representative of the several Initial
Purchasers referred to herein,
c/o Credit Suisse First Boston Corporation
Eleven Madison Avenue
New York, New York 10010-3629
Dear Sirs:
<PAGE>
2
Affymetrix, Inc., a Delaware corporation (the "Company"),
proposes to issue and sell to Credit Suisse First Boston Corporation ("CSFBC")
and the other initial purchasers named in Schedule A to the Purchase Agreement
(as defined below) (collectively, the "Initial Purchasers"), upon the terms set
forth in a purchase agreement dated as of February 8, 2000 (the "Purchase
Agreement") between the Company and the Initial Purchasers, $175,000,000
aggregate principal amount (plus up to an additional $50,000,000 principal
amount) of 4.75% Convertible Subordinated Notes Due 2007 (the "Notes") of the
Company. The Notes will be convertible into shares of Common Stock, par value
$0.01 per share, of the Company (the "Common Stock") at the conversion price set
forth in the Offering Circular dated February 8, 2000. The Notes will be issued
pursuant to an Indenture, dated as of February 14, 2000 (the "Indenture"),
between the Company and The Bank of New York (the "Trustee"). As an inducement
to the Initial Purchasers to enter into the Purchase Agreement and in
satisfaction of a condition to the Initial Purchasers' obligations thereunder,
the Company agrees with the Initial Purchasers, (i) for the benefit of the
Initial Purchasers and (ii) for the benefit of the holders of the Notes and the
Common Stock issuable upon conversion of the Notes (collectively, the
"Securities") from time to time until such time as such Securities have been
sold pursuant to a Shelf Registration Statement (as defined below) (each of the
foregoing a "Holder" and together the "Holders"), as follows:
1. SHELF REGISTRATION. The Company shall take the following
actions:
(a) The Company shall, at its cost, prepare and, as promptly
as practicable (but in no event more than 90 days after so required or requested
pursuant to this Section 1) file with the Securities and Exchange Commission
(the "Commission") and thereafter shall use its commercially reasonable best
efforts to cause to be declared effective as soon as practicable a registration
statement on Form S-3 (the "Shelf Registration Statement") covering the offer
and sale of the Transfer Restricted Securities (as defined in Section 5 hereof)
by the Holders thereof from time to time in accordance with the methods of
distribution set forth in the Shelf Registration Statement and Rule 415 under
the Securities Act of 1933, as amended (the "Securities Act") (hereinafter, the
"Shelf Registration"); PROVIDED, HOWEVER, that no Holder (other than the Initial
Purchasers) shall be entitled to have the Securities held by it covered by such
Shelf Registration Statement unless such Holder agrees in writing to be bound by
all the provisions of this Agreement applicable to such Holder.
(b) The Company shall use its commercially reasonable best
efforts to keep the Shelf Registration Statement
<PAGE>
3
continuously effective in order to permit the prospectus included therein (the
"Prospectus") to be lawfully delivered by the Holders of the relevant
Securities, for a period of two years (or for such longer period if extended
pursuant to Section 2(h) below) from the date of its effectiveness or such
shorter period that will terminate when all the Securities covered by the Shelf
Registration Statement (i) have been sold pursuant thereto or (ii) may be sold
pursuant to Rule 144(k) under the Securities Act (or any successor rule
therefore), assuming for this purpose that the Holders thereof are not
affiliates of the Company (in any such case, such period being called the "Shelf
Registration Period"). The Company shall be deemed not to have used its
commercially reasonable best efforts to keep the Shelf Registration Statement
effective during the requisite period if it voluntarily takes any action that
would result in Holders of Securities covered thereby not being able to offer
and sell such Securities during that period, unless such action is (i) required
by applicable law or (ii) taken by the Company in good faith and for valid
business reasons upon the occurrence of any event contemplated by Section
2(b)(v) below, and the Company thereafter complies with the requirements of
Section 2(h).
(c) Notwithstanding any other provisions of this
Agreement to the contrary, the Company shall cause the Shelf Registration
Statement and the Prospectus and any amendment or supplement thereto, as of the
effective date of the Shelf Registration Statement, amendment or supplement, (i)
to comply in all material respects with the applicable requirements of the
Securities Act and the rules and regulations of the Commission and (ii) not to
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading.
2. REGISTRATION PROCEDURES. In connection with the Shelf
Registration contemplated by Section 1 hereof, the following provisions shall
apply:
(a) The Company shall (i) furnish to each of the Initial
Purchasers, prior to the filing thereof with the Commission, a copy of the Shelf
Registration Statement and each amendment thereof and each amendment or
supplement, if any, to the prospectus included therein and, in the event that an
Initial Purchaser (with respect to any portion of an unsold allotment from the
original offering) is participating in the Shelf Registration Statement, use its
commercially reasonable best efforts to reflect in each such document, when so
filed with the Commission, such comments as such Initial Purchaser reasonably
may propose and (ii) include the names of the Holders who propose to sell
Securities pursuant to the Shelf Registration Statement, as selling security
holders.
<PAGE>
4
(b) The Company shall give written notice to the Initial
Purchasers and the Holders (which notice pursuant to clauses (ii)-(v) hereof
shall be accompanied by an instruction to suspend the use of the prospectus
until the requisite changes have been made):
(i) when the Shelf Registration Statement or any amendment
thereto has been filed with the Commission and when the Shelf
Registration Statement or any post-effective amendment thereto has
become effective;
(ii) of any request by the Commission for amendments or
supplements to the Shelf Registration Statement or the
prospectus included therein or for additional information;
(iii) of the issuance by the Commission of any stop order
suspending the effectiveness of the Shelf Registration Statement or the
initiation of any proceedings for that purpose;
(iv) of the receipt by the Company or its legal counsel
of any notification with respect to the suspension of the
qualification of the Securities for sale in any jurisdiction or the
initiation or threatening of any proceeding for such purpose; and
(v) of the happening of any event or circumstance that would
require the Company to make changes in the Shelf Registration Statement
or the Prospectus in order that the Shelf Registration Statement or the
Prospectus does not contain an untrue statement of a material fact nor
omit to state a material fact required to be stated therein or
necessary to make the statements therein (in the case of the
Prospectus, in light of the circumstances under which they were made)
not misleading, which written notice need not provide any detail as to
the nature of such event.
(c) The Company shall make every reasonable effort to obtain
the withdrawal, at the earliest possible time, of any order suspending the
effectiveness of the Shelf Registration Statement.
(d) The Company shall furnish to each Holder of Securities
included within the coverage of the Shelf Registration, without charge, at least
one copy of the Shelf Registration Statement and any post-effective amendment
thereto, including financial statements and schedules, and, if the Holder so
requests in writing, all exhibits thereto (including those, if any, incorporated
by reference).
<PAGE>
5
(e) The Company shall, during the Shelf Registration Period,
deliver to each Holder of Securities included within the coverage of the Shelf
Registration Statement, without charge, as many copies of the Prospectus
(including each preliminary prospectus) included in the Shelf Registration
Statement and any amendment or supplement thereto as such person may reasonably
request. The Company consents, subject to the provisions of this Agreement, to
the use of the Prospectus or any amendment or supplement thereto by each of the
selling Holders in connection with the offering and sale of the Securities
covered by the Prospectus, or any amendment or supplement thereto, included in
the Shelf Registration Statement.
(f) Prior to any public offering of the Securities pursuant to
the Shelf Registration Statement, the Company shall register or qualify or
cooperate with the Holders of the Securities included therein and their
respective counsel in connection with the registration or qualification of such
Securities for offer and sale under the securities or "blue sky" laws of such
states of the United States as any such Holder reasonably requests in writing
and do any and all other acts or things necessary or advisable to enable the
offer and sale in such jurisdictions of the Securities covered by the Shelf
Registration Statement; PROVIDED, HOWEVER, that the Company shall not be
required to (i) qualify generally to do business in any jurisdiction
where it is not then so qualified or (ii) take any action which would subject it
to general service of process or to taxation in any jurisdiction where it is not
then so subject.
(g) The Company shall cooperate with the Holders of the
Securities to facilitate the timely preparation and delivery of certificates
representing the Securities to be sold pursuant to the Shelf Registration
Statement free of any restrictive legends and in such denominations and
registered in such names as the Holders may request a reasonable period of time
prior to sales of the Securities pursuant to the Shelf Registration Statement.
(h) Upon the occurrence of any event contemplated by
paragraphs (ii) through (v) of Section 2(b) above during the period for which
the Company is required to maintain an effective Shelf Registration Statement,
the Company shall, as required hereby, prepare and file a post-effective
amendment to the Shelf Registration Statement or an amendment or supplement to
the Prospectus and any other required document so that, as thereafter delivered
to Holders or purchasers of Securities, the Prospectus will not contain an
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading. If the Company
notifies the Initial Purchasers and the Holders in
<PAGE>
6
accordance with paragraphs (ii) through (v) of Section 2(b) above to suspend the
use of the Prospectus until the requisite changes to the Prospectus have been
made, then the Initial Purchasers and the Holders shall suspend use of such
prospectus and the period of effectiveness of the Shelf Registration Statement
provided for in Section 1(b) above shall be extended by the number of days from
and including the date of giving such notice to and including the date when the
Initial Purchasers and the Holders shall have received such amended or
supplemented prospectus pursuant to this Section 2(h). Any such amendment,
supplement or document will be prepared and filed as promptly as practicable
under the circumstances, as determined in good faith by the Company, it being
understood that the Company may have bona fide reasons to delay such preparation
and filing for a period which may not in any event exceed 60 days.
(i) Not later than the effective date of the Shelf
Registration Statement, the Company will provide CUSIP numbers for the Notes and
the Common Stock registered under the Shelf Registration Statement, and provide
the Trustee with printed certificates for such Notes, in a form eligible for
deposit with The Depository Trust Company.
(j) The Company will comply with all rules and regulations of
the Commission to the extent and so long as they are applicable to the Shelf
Registration and will make generally available to its security holders (or
otherwise provide in accordance with Section 11(a) of the Securities Act) an
earnings statement satisfying the provisions of Section 11(a) of the Securities
Act, no later than 45 days after the end of a 12-month period (or 90 days, if
such period is a fiscal year) beginning with the first month of the Company's
first fiscal quarter commencing after the effective date of the Shelf
Registration Statement, which statement shall cover such 12-month period.
(k) The Company shall cause the Indenture to be qualified
under the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"),
in a timely manner and containing such changes, if any, as shall be necessary
for such qualification. In the event that such qualification would require the
appointment of a new trustee under the Indenture, the Company shall appoint a
new trustee thereunder pursuant to the applicable provisions of the Indenture.
(l) The Company may require each Holder of Securities to be
sold pursuant to the Shelf Registration Statement to furnish to the Company such
information regarding the Holder and the distribution of the Securities as the
Company may from time to time reasonably require for inclusion in the Shelf
Registration Statement, and the Company may exclude from such registration the
Securities of any Holder that fails to furnish
<PAGE>
7
such information within a reasonable time after receiving such request.
(m) The Company shall enter into such customary agreements
(including, if requested, an underwriting agreement in customary form) and take
all other actions, if any, as any Holder shall reasonably request in order to
facilitate the disposition of the Securities pursuant to the Shelf Registration,
PROVIDED, HOWEVER, that the Company shall not be required to facilitate an
underwritten offering pursuant to the Shelf Registration Statement by any
Holders unless the offering relates to at least $50,000,000 principal amount of
the Notes or the equivalent number of shares of Common Stock into which such
Notes are convertible.
(n) The Company shall (i) make reasonably available for
inspection by the Holders, any underwriter participating in any distribution
pursuant to the Shelf Registration Statement and any attorney, accountant or
other agent retained by the Holders or any such underwriter, all relevant
financial and other records, pertinent corporate documents and properties of the
Company and (ii) cause the Company's officers, directors, employees, accountants
and auditors to supply all relevant information reasonably requested by the
Holders or any such underwriter, attorney, accountant or agent in connection
with the Shelf Registration Statement, in each case, as shall be reasonably
necessary to enable such persons to conduct a reasonable investigation within
the meaning of Section 11 of the Securities Act; PROVIDED, HOWEVER, that the
foregoing inspection and information gathering (i) shall be coordinated on
behalf of the Initial Purchasers by you and on behalf of the other parties, by
one counsel designated by and on behalf of the other parties as described in
Section 3 hereof.
(o) The Company, if requested by any Holder of Securities
covered by Shelf Registration Statement, shall cause (i) its counsel (which may
include the Company's general counsel for one or more of the opinions) to
deliver an opinion and updates thereof relating to the Securities in customary
form addressed to such Holders and the managing underwriters, if any, thereof,
and dated, in the case of the initial opinion, the effective date of the Shelf
Registration Statement (it being agreed that the matters to be covered by such
opinion shall include, without limitation, (A) the due incorporation and good
standing of the Company; (B) the qualification of the Company to transact
business as a foreign corporation; the due authorization, execution and delivery
of the relevant agreement of the type referred to in Section 2(m) hereof; (C)
the due authorization, execution, authentication and issuance, and the validity
and enforceability, of the Securities; (D) the absence of material legal or
governmental proceedings involving the
<PAGE>
8
Company; (E) the absence of governmental approvals required to be obtained in
connection with the Shelf Registration Statement, the offering and sale of the
Securities, or any agreement of the type referred to in Section 2(m) hereof; (F)
the compliance as to form of the Shelf Registration Statement and any documents
incorporated by reference therein and of the Indenture with the requirements of
the Securities Act and the Trust Indenture Act, respectively; and, (G) as of the
date of the opinion and as of the effective date of the Shelf Registration
Statement or most recent post-effective amendment thereto, as the case may be,
the absence from the Shelf Registration Statement and the prospectus included
therein, as then amended or supplemented, and from any documents incorporated by
reference therein of an untrue statement of a material fact or the omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading (in the case of any such documents, in the
light of the circumstances existing at the time that such documents were filed
with the Commission under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), it being understood that the items contained in this clause (G)
may be in the form of a statement), (ii) its officers to execute and deliver all
customary documents and certificates and updates thereof requested by any
underwriters of the Securities or counsel for the Holders and (iii) its
independent public accountants and the independent public accountants with
respect to any other entity for which financial information is provided in the
Shelf Registration Statement to provide to the selling Holders of the Securities
and any underwriter therefor a comfort letter in customary form and covering
matters of the type customarily covered in comfort letters in connection with
primary underwritten offerings, subject to receipt of appropriate documentation
as contemplated, and only if permitted, by Statement of Auditing Standards
No. 72.
(p) The Company shall use its best efforts to take all other
steps necessary to effect the registration of the Securities covered by the
Shelf Registration Statement.
3. REGISTRATION EXPENSES. The Company shall bear all fees and
expenses incurred in connection with the performance of its obligations under
Sections 1 and 2 hereof (including the reasonable fees and expenses, if any, of
counsel for the Initial Purchasers, incurred in connection with the Shelf
Registration), whether or not the Shelf Registration Statement is filed or
becomes effective, and shall bear or reimburse the Holders of the Securities
covered by the Shelf Registration for the reasonable fees and disbursements of
one firm of counsel designated by the Holders of a majority in principal amount
of the Securities covered by the Shelf Registration Statement (provided that
Holders of Common Stock issued upon the conversion of the Notes shall be deemed
to be Holders of the aggregate principal amount
<PAGE>
9
of Notes from which such Common Stock was converted) to act as counsel for the
Holders in connection therewith.
4. INDEMNIFICATION. (a) The Company agrees to indemnify and
hold harmless each Holder and each person, if any, who controls such Holder
within the meaning of the Securities Act or the Exchange Act (each Holder and
such controlling persons are referred to collectively as the "Indemnified
Parties") from and against any losses, claims, damages or liabilities, joint or
several, or any actions in respect thereof (including, but not limited to, any
losses, claims, damages, liabilities or actions relating to purchases and sales
of the Securities) to which each Indemnified Party becomes subject under the
Securities Act, the Exchange Act or otherwise, insofar as such losses, claims,
damages, liabilities or actions arise out of or are based upon any untrue
statement or alleged untrue statement of a material fact contained in the Shelf
Registration Statement or Prospectus, including any document incorporated by
reference therein, or in any amendment or supplement thereto or in any
preliminary prospectus relating to the Shelf Registration, or arise out of, or
are based upon, the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, and shall reimburse, as incurred, the Indemnified Parties for
any legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or action in
respect thereof; PROVIDED, HOWEVER, that (i) the Company shall not be liable in
any such case to the extent that such loss, claim, damage or liability arises
out of or is based upon any untrue statement or alleged untrue statement or
omission or alleged omission made in the Shelf Registration Statement or
Prospectus or in any amendment or supplement thereto or in any preliminary
prospectus relating to the Shelf Registration in reliance upon and in conformity
with written information pertaining to such Holder and furnished to the Company
by or on behalf of such Holder specifically for inclusion therein and (ii) with
respect to any untrue statement or omission or alleged untrue statement or
omission made in any preliminary prospectus relating to the Shelf Registration
Statement, the indemnity agreement contained in this subsection (a) shall not
inure to the benefit of any Holder from whom the person asserting any such
losses, claims, damages or liabilities purchased the Securities concerned, to
the extent that a prospectus relating to such Securities was required to be
delivered by such Holder under the Securities Act in connection with such
purchase and any such loss, claim, damage or liability of such Holder results
from the fact that there was not sent or given to such person, at or prior to
the written confirmation of the sale of such Securities to such person, a copy
of the final prospectus if the Company had previously furnished copies thereof
to such Holder; PROVIDED FURTHER, HOWEVER, that this indemnity agreement will be
in
<PAGE>
10
addition to any liability which the Company may otherwise have to such
Indemnified Party.
The Company shall also indemnify the underwriters, their
officers and directors and each person who controls such underwriters within the
meaning of the Securities Act or the Exchange Act to the same extent as provided
above with respect to the indemnification of the Holders if requested by such
Holders.
(b) Each Holder, severally and not jointly, will indemnify and
hold harmless the Company, its officers and directors and each person, if any,
who controls the Company within the meaning of the Securities Act or the
Exchange Act from and against any losses, claims, damages or liabilities or any
actions in respect thereof, to which the Company or any such controlling person
may become subject under the Securities Act, the Exchange Act or otherwise,
insofar as such losses, claims, damages, liabilities or actions arise out of or
are based upon any untrue statement or alleged untrue statement of a material
fact contained in a Shelf Registration Statement or prospectus or in any
amendment or supplement thereto or in any preliminary prospectus relating to a
Shelf Registration, or arise out of or are based upon the omission or alleged
omission to state therein a material fact necessary to make the statements
therein not misleading, but in each case only to the extent that the untrue
statement or omission or alleged untrue statement or omission was made in
reliance upon and in conformity with written information pertaining to such
Holder and furnished to the Company by or on behalf of such Holder specifically
for inclusion therein; and, subject to the limitation set forth immediately
preceding this clause, shall reimburse, as incurred, the Company for any legal
or other expenses reasonably incurred by the Company or any such controlling
person in connection with investigating or defending any loss, claim, damage,
liability or action in respect thereof. This indemnity agreement will be in
addition to any liability which such Holder may otherwise have to the Company or
any of its controlling persons.
(c) Promptly after receipt by an indemnified party under this
Section 4 of notice of the commencement of any action or proceeding (including a
governmental investigation), such indemnified party will, if a claim in respect
thereof is to be made against the indemnifying party under this Section 4,
notify the indemnifying party of the commencement thereof; but the omission so
to notify the indemnifying party will not, in any event, relieve the
indemnifying party from any obligations to any indemnified party other than the
indemnification obligation provided in subsections (a) or (b) above. In case any
such action is brought against any indemnified party, and it notifies the
indemnifying party of the commencement thereof, the indemnifying party will be
entitled to participate therein and,
<PAGE>
11
to the extent that it may wish, jointly with any other indemnifying party
similarly notified, to assume the defense thereof, with counsel reasonably
satisfactory to such indemnified party (who shall not, except with the consent
of the indemnified party, be counsel to the indemnifying party), and after
notice from the indemnifying party to such indemnified party of its election so
to assume the defense thereof the indemnifying party will not be liable to such
indemnified party under this Section 4 for any legal or other expenses, other
than reasonable costs of investigation, subsequently incurred by such
indemnified party in connection with the defense thereof. No indemnifying party
shall, without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened action in respect of which any
indemnified party is or could have been a party and indemnity could have been
sought hereunder by such indemnified party unless such settlement includes an
unconditional release of such indemnified party from all liability on any claims
that are the subject matter of such action.
(d) If the indemnification provided for in this Section 4 is
unavailable or insufficient to hold harmless an indemnified party under
subsections (a) or (b) above, then each indemnifying party shall contribute to
the amount paid or payable by such indemnified party as a result of the losses,
claims, damages or liabilities (or actions in respect thereof) referred to in
subsections (a) or (b) above (i) in such proportion as is appropriate to reflect
the relative benefits received by the indemnifying party or parties on the one
hand and the indemnified party on the other from the registration of the
Securities, pursuant to the Shelf Registration, or (ii) if the allocation
provided by the foregoing clause (i) is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of the indemnifying party or
parties on the one hand and the indemnified party on the other in connection
with the statements or omissions that resulted in such losses, claims, damages
or liabilities (or actions in respect thereof) as well as any other relevant
equitable considerations. The relative fault of the parties shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company on the one hand or
such Holder or such other indemnified party, as the case may be, on the other,
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The amount paid by
an indemnified party as a result of the losses, claims, damages or liabilities
referred to in the first sentence of this subsection (d) shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
<PAGE>
12
party in connection with investigating or defending any action or claim which is
the subject of this subsection (d). Notwithstanding any other provision of this
Section 4(d), the Holders shall not be required to contribute any amount in
excess of the amount by which the net proceeds received by such Holders from the
sale of the Securities pursuant to the Shelf Registration Statement exceeds the
amount of damages which such Holders have otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. For purposes
of this paragraph (d), each person, if any, who controls such indemnified party
within the meaning of the Securities Act or the Exchange Act shall have the same
rights to contribution as such indemnified party and each person, if any, who
controls the Company within the meaning of the Securities Act or the Exchange
Act shall have the same rights to contribution as the Company.
(e) The agreements contained in this Section 4 shall survive
the sale of the Securities pursuant to the Shelf Registration Statement and
shall remain in full force and effect, regardless of any termination or
cancellation of this Agreement or any investigation made by or on behalf of any
indemnified party.
5. ADDITIONAL INTEREST UNDER CERTAIN CIRCUMSTANCES. (a)
Additional interest (the "Additional Interest") with respect to the Notes shall
be assessed as follows if any of the following events occur (each such event in
clauses (i) through (iii) below being herein called a "Registration Default"):
(i) the Shelf Registration Statement has not been filed with
the Commission by the 90th day after the first date of original
issuance of the Notes;
(ii) the Shelf Registration Statement has not been declared
effective by the Commission by the 150th day after the first date of
original issuance of the Notes; or
(iii) the Shelf Registration Statement is declared effective
but (A) the Shelf Registration Statement thereafter ceases to be
effective; or (B) the Shelf Registration Statement or the Prospectus
ceases to be usable in connection with resales of Transfer Restricted
Securities (as defined below) during the periods specified herein
because either (1) any event occurs as a result of which the Prospectus
forming part of such Shelf Registration Statement would include any
untrue statement of a material fact or omit to state any material fact
necessary to make the
<PAGE>
13
statements therein in the light of the circumstances under which they
were made not misleading, or (2) it shall be necessary to amend such
Shelf Registration Statement or supplement the related prospectus, to
comply with the Securities Act or the Exchange Act or the respective
rules thereunder.
Additional Interest shall accrue on the Notes over and above
the interest set forth in the title of the Notes from and including the date on
which any such Registration Default shall occur, to but excluding the date on
which all such Registration Defaults have been cured, at a rate of 0.50% per
annum.
(b) A Registration Default referred to in Section 5(a)(iii)(B)
shall be deemed not to have occurred and be continuing in relation to the Shelf
Registration Statement or the Prospectus if (i) such Registration Default has
occurred solely as a result of (x) the filing of a post-effective amendment to
the Shelf Registration Statement to incorporate annual audited financial
information with respect to the Company where such post-effective amendment is
not yet effective and needs to be declared effective to permit Holders to use
the related prospectus or (y) other material events, with respect to the Company
that would need to be described in the Shelf Registration Statement or the
related prospectus and (ii) in the case of clause (y), the Company is proceeding
in good faith to amend or supplement the Shelf Registration Statement and
related prospectus to describe such events as required by paragraph 2(h) hereof;
PROVIDED, HOWEVER, that in any case if such Registration Default occurs for a
continuous period in excess of 90 days, Additional Interest shall be payable in
accordance with the above paragraph from the day such Registration Default
occurs until such Registration Default is cured.
(c) Any amounts of Additional Interest due pursuant to Section
5(a) will be payable in cash on the regular interest payment dates with respect
to the Notes. The amount of Additional Interest will be determined by
multiplying the applicable Additional Interest rate by the principal amount of
the Notes, further multiplied by a fraction, the numerator of which is the
number of days such Additional Interest rate was applicable during such period
(determined on the basis of a 360- day year comprised of twelve 30-day months),
and the denominator of which is 360. The indebtedness represented by the
Additional Interest shall be subordinated in right of payment to all existing
and future Senior Indebtedness (as defined in the Indenture) as and to the same
extent as the Notes.
(d) "Transfer Restricted Securities" means each Security until
(i) the date on which such Security has been effectively registered under the
Securities Act and disposed of
<PAGE>
14
in accordance with the Shelf Registration Statement or (ii) the date on which
such Security is distributed to the public pursuant to Rule 144 under the
Securities Act or is saleable pursuant to Rule 144(k) under the Securities Act.
6. RULES 144 AND 144A. The Company shall use its best efforts
to file the reports required to be filed by it under the Securities Act and
the Exchange Act in a timely manner and, if at any time the Company is not
required to file such reports, it will, upon the request of any Holder, make
publicly available other information so long as necessary to permit sales of
their securities pursuant to Rules 144 and 144A. The Company covenants that
it will take such further action as any Holder may reasonably request, all to
the extent required from time to time to enable such Holder to sell Transfer
Restricted Securities without registration under the Securities Act within
the limitations of the exemptions provided by Rules 144 and 144A (including
the requirements of Rule 144A(d)(4)). The Company will provide a copy of this
Agreement to prospective purchasers of Securities identified to the Company
by the Initial Purchaser upon request. Upon the request of any Holder, the
Company shall deliver to such Holder a written statement as to whether it has
complied with such requirements. Notwithstanding the foregoing, nothing in
this Section 6 shall be deemed to require the Company to register any of its
securities pursuant to the Exchange Act.
7. UNDERWRITTEN REGISTRATIONS. If any of the Transfer
Restricted Securities covered by the Shelf Registration are to be sold in an
underwritten offering, the investment banker or investment bankers and manager
or managers that will administer the offering ("Managing Underwriters") will be
selected by the Company.
No person may participate in any underwritten registration
hereunder unless such person (i) agrees to sell such person's Transfer
Restricted Securities on the basis reasonably provided in any underwriting
arrangements approved by the persons entitled hereunder to approve such
arrangements and (ii) completes and executes all questionnaires, powers of
attorney, indemnities, underwriting agreements and other documents reasonably
required under the terms of such underwriting arrangements.
8. MISCELLANEOUS. (a) AMENDMENTS AND WAIVERS. The provisions
of this Agreement may not be amended, modified or supplemented, and waivers or
consents to departures from the provisions hereof may not be given, except by
the Company and the written consent of the Holders of a majority in principal
amount of the Securities (provided that Holders of Common Stock issued
<PAGE>
15
upon conversion of Notes shall not be deemed Holders of Common Stock, but shall
be deemed to be Holders of the aggregate principal amount of Notes from which
such Common Stock was converted) affected by such amendment, modification,
supplement, waiver or consents.
(b) NOTICES. All notices and other communications provided for
or permitted hereunder shall be made in writing by hand delivery, first-class
mail, facsimile transmission, or air courier which guarantees overnight
delivery:
(1) if to a Holder, at the most current address given
by such Holder to the Company;
(2) if to the Initial Purchasers:
Credit Suisse First Boston Corporation
Eleven Madison Avenue
New York, NY 10010-3629
Fax No.: (212) 325-8278
Attention: Transactions Advisory Group
<PAGE>
16
with a copy to:
Cravath, Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, NY 10019
Fax No.: (212) 474-3700
Attention: Kris Heinzelman, Esq.
(3) if to the Company, at its address as follows:
Affymetrix, Inc.
3380 Central Expressway
Santa Clara, CA 95051
Fax No.: (408) 731-5000
Attention: Vernon A. Norviel
with a copy to:
Sullivan & Cromwell
1888 Century Park East
Los Angles, CA 90067-1725
Fax No.: (310) 712-8800
Attention: Stanley F. Farrar, Esq.
All such notices and communications shall be deemed to have
been duly given: at the time delivered by hand, if personally delivered; three
business days after being deposited in the mail, postage prepaid, if mailed;
when receipt is acknowledged by recipient's facsimile machine operator, if sent
by facsimile transmission; and on the day delivered, if sent by overnight air
courier guaranteeing next day delivery.
(c) NO INCONSISTENT AGREEMENTS. The Company has not, as of the
date hereof, entered into, nor shall it, on or after the date hereof, without
the prior consent of CSFBC, enter into, any agreement with respect to its
securities that is inconsistent with the rights granted to the Holders herein or
otherwise conflicts with the provisions hereof.
(d) SUCCESSORS AND ASSIGNS. This Agreement shall be
binding upon the Company and its successors and assigns.
(e) COUNTERPARTS. This Agreement may be executed in any number
of counterparts and by the parties hereto in separate counterparts, each of
which when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
<PAGE>
17
(f) HEADINGS. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
(g) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD
TO PRINCIPLES OF CONFLICTS OF LAWS.
By the execution and delivery of this Agreement, the Company
submits to the nonexclusive jurisdiction of any federal or state court in the
State of New York.
(h) SEVERABILITY. If any one or more of the provisions
contained herein, or the application thereof in any circumstance, is held
invalid, illegal or unenforceable, the validity, legality and enforceability of
any such provision in every other respect and of the remaining provisions
contained herein shall not be affected or impaired thereby.
(i) SECURITIES HELD BY THE COMPANY. Whenever the consent or
approval of Holders of a specified percentage of principal amount of Securities
is required hereunder, Securities held by the Company or its affiliates (other
than subsequent Holders of Securities if such subsequent Holders are deemed to
be affiliates solely by reason of their holdings of such Securities)
<PAGE>
shall not be counted in determining whether such consent or approval was given
by the Holders of such required percentage.
If the foregoing is in accordance with your understanding of
our agreement, please sign and return to the Company a counterpart hereof,
whereupon this instrument, along with all counterparts, will become a binding
agreement among the Initial Purchasers and the Company in accordance with its
terms.
Very truly yours,
AFFYMETRIX, INC.
By:______________________
Name:
Title:
The foregoing Registration Rights Agreement
is hereby confirmed and accepted
as of the date first above written.
CREDIT SUISSE FIRST BOSTON CORPORATION,
Acting on behalf of themselves
and as The Representative
of the several Initial Purchasers
CREDIT SUISSE FIRST BOSTON CORPORATION,
By:___________________________________
Name:
Title:
<PAGE>
EXHIBIT 21
LIST OF SUBSIDIARIES
Affymetrix UK, Ltd., incorporated in the United Kingdom and doing business
under such name.
Genetic MicroSystems, Inc., incorporated in Massachusetts 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, No. 333-35287 and No. 333-85575) pertaining to the
1993 Stock Option Plan, the 1996 Non-employee Directors Stock Option Plan and
the 1998 Stock Incentive Plan of Affymetrix, Inc., of our report dated
February 2, 2000 with respect to the consolidated financial statements and
schedule of Affymetrix, Inc. included in this Annual Report (Form 10-K) for the
year ended December 31, 1999.
/s/ Ernst & Young
Palo Alto, California
March 29, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY CONSOLIDATED FINANCIAL INFORMTION EXTRACED FROM
ITEM 1 OF THE COMPANY'S FORM 10K FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOKIDATED FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0000913077
<NAME> AFFYMETRIX, INC
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 11280
<SECURITIES> 213763
<RECEIVABLES> 22203
<ALLOWANCES> 975
<INVENTORY> 11362
<CURRENT-ASSETS> 262713
<PP&E> 56333
<DEPRECIATION> (16459)
<TOTAL-ASSETS> 320298
<CURRENT-LIABILITIES> 33956
<BONDS> 150000
0
0
<COMMON> 262
<OTHER-SE> 131080
<TOTAL-LIABILITY-AND-EQUITY> 320298
<SALES> 86076
<TOTAL-REVENUES> 96855
<CGS> 35333
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<OTHER-EXPENSES> 89241
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2270
<INCOME-PRETAX> (25140)
<INCOME-TAX> 0
<INCOME-CONTINUING> (25140)
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<NET-INCOME> (25140)
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