-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VgCH0RK2NcD1sKf2kBUIoyK01XiNpHXoj3O+JyVMKk1Gw5YJtkzr0dI4W9l4/OK7 ljHb36/eQsGJ45AHEkDI4w== 0001047469-98-012980.txt : 19980401 0001047469-98-012980.hdr.sgml : 19980401 ACCESSION NUMBER: 0001047469-98-012980 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AFFYMETRIX INC CENTRAL INDEX KEY: 0000913077 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH [8731] IRS NUMBER: 770319159 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-28218 FILM NUMBER: 98582515 BUSINESS ADDRESS: STREET 1: 3380 CENTRAL EXPRESSWAY CITY: SANTA CLARA STATE: CA ZIP: 95051 BUSINESS PHONE: 4085226000 MAIL ADDRESS: STREET 1: 3380 CENTRAL EXPRESSWAY CITY: SANTA CLARA STATE: CA ZIP: 95051 10-K405 1 FORM 10-K405 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-28218 ------------------------ AFFYMETRIX, INC. (Exact name of registrant as specified in its charter) CALIFORNIA 77-0319159 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 3380 CENTRAL EXPRESSWAY, SANTA CLARA, CALIFORNIA 95051 (Address of principal executive offices) (Zip Code)
(408) 731-5000 (Registrant's telephone number including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, no par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. /X/ Yes / / No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /X/ The aggregate market value of voting stock held by non-affiliates of the registrant (based on the closing price for the Common Stock on the Nasdaq National Market on March 16, 1998) was approximately $473.5 million. As of March 16, 1998, 22,857,488 shares of Common Stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE The Company's Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 31, 1997 are incorporated by reference into Parts II and IV of this Form 10-K Report and are filed as Exhibit 13 to this Form 10-K Report. Certain sections of the Proxy Statement to be filed in connection with the 1998 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K Report where indicated. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- AFFYMETRIX, INC. FORM 10-K DECEMBER 31, 1997 TABLE OF CONTENTS
ITEM PAGE NO. - ---- -------- PART I 1. Business.......................................... 3 2. Properties........................................ 30 3. Legal Proceedings................................. 30 4. Submissions of Matters to a Vote of Security Holders......................................... 30 PART II 5. Market for Registrant's Common Equity and Related Shareholder Matters............................. 31 6. Selected Financial Data........................... 31 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............. 32 8. Financial Statements and Supplementary Data....... 32 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............. 33 PART III 10. Directors and Executive Officers of the Registrant...................................... 33 11. Executive Compensation............................ 33 12. Security Ownership of Certain Beneficial Owners and Management.................................. 33 13. Certain Relationships and Related Transactions.... 33 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................. 34 Signatures........................................ 36
2 PART I ITEM 1. BUSINESS ALL STATEMENTS IN THIS ANNUAL REPORT ON FORM 10-K THAT ARE NOT HISTORICAL ARE FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES. SUCH STATEMENTS ARE BASED ON MANAGEMENT'S CURRENT EXPECTATIONS AND ARE SUBJECT TO A NUMBER OF FACTORS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE DESCRIBED IN THE FORWARD-LOOKING STATEMENTS. THE COMPANY CAUTIONS INVESTORS THAT THERE CAN BE NO ASSURANCE THAT ACTUAL RESULTS OR BUSINESS CONDITIONS WILL NOT DIFFER MATERIALLY FROM THOSE PROJECTED OR SUGGESTED IN SUCH FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS, INCLUDING, BUT NOT LIMITED TO, THE RISK FACTORS DISCUSSED IN THIS ANNUAL REPORT ON FORM 10-K. AFFYMETRIX EXPRESSLY DISCLAIMS ANY OBLIGATION OR UNDERTAKING TO RELEASE PUBLICLY ANY UPDATES OR REVISIONS TO ANY FORWARD-LOOKING STATEMENTS CONTAINED HEREIN TO REFLECT ANY CHANGE IN AFFYMETRIX' EXPECTATIONS WITH REGARD THERETO OR ANY CHANGE IN EVENTS, CONDITIONS, OR CIRCUMSTANCES ON WHICH ANY SUCH STATEMENTS ARE BASED. Affymetrix is recognized as a worldwide leader in the field of DNA chip technology. The Company has developed and intends to establish its GeneChip-Registered Trademark- system as the platform of choice for acquiring, analyzing and managing complex genetic information in order to improve the diagnosis, monitoring and treatment of disease. The Company's GeneChip system consists of disposable DNA probe arrays containing gene sequences on a chip, a scanner and other instruments to process the probe arrays, and software to analyze and manage genetic information from the probe arrays. The Company commenced commercial sales of the GeneChip system for research use in April 1996 and currently sells its products to pharmaceutical and biotechnology companies, academic research centers and clinical reference laboratories. BACKGROUND GENES AND DISEASE The entire genetic content of an organism is known as its genome. DNA is the molecule that makes up genes and encodes genetic instructions. These instructions are embodied in the sequence of the four nucleotide bases (A, C, G and T) that are the chemical building blocks of DNA. The DNA molecule is a combination of two strands held together by chemical bonds between nucleotide bases on one strand and the bases on the other strand. Only certain pairs of nucleotide bases can form these bonds: C always pairs with G, and A always pairs with T. Such paired DNA strands are said to be complementary. When two DNA strands are complementary, they can bind together to form a double helix in a process called hybridization. The Company's GeneChip technology relies on this principle of hybridization to analyze complex genetic information. Cells carry out their normal biological functions through the genetic instructions encoded in their DNA. This genetic process, known as gene expression, involves several steps. In the first step, nucleotides in a gene are copied into a related nucleic acid molecule called messenger RNA. Messenger RNA instructs the cell to produce proteins. Proteins are molecules that regulate or perform most of the physiological functions of the body. Because the order of nucleotides in each gene is different, each gene directs the production of a different protein. An organism's characteristics are thus ultimately determined by proteins encoded by its DNA. Increased awareness of the role of genes in regulating the functions of living organisms has generated a worldwide effort to identify and sequence genes of many organisms, including the estimated three billion nucleotide pairs and 100,000 genes within the human genome. This effort is being led by the Human Genome Project and related academic, government and industry research projects. Once the genes and their nucleotide sequences are identified, it is anticipated that many years of additional research will be required to understand the specific function and role in disease of each of these genes. This research, commonly referred to as genomics, is expected to lead to a new health care paradigm where disease is 3 understood at the molecular level, allowing patients to be diagnosed according to their genetic profile and then treated with drugs designed to work on specific molecular targets. GENETIC VARIABILITY The diversity of living organisms results from variability in their genomes. Variability stems from differences in the sequences of genes and from differences in levels of gene expression. In order to understand how genetic variation causes disease, scientists must compare both sequence variation and expression patterns of genes from healthy and diseased individuals. Currently, these efforts are laborious, time consuming and expensive, requiring the repeated sequencing of the same genes from a large number of persons. The Company believes that its GeneChip technology will simplify, accelerate and reduce the cost of analyzing genetic variability (both sequence and expression) and lead to new opportunities in disease management. SEQUENCE VARIABILITY Changes in the sequences of normal genes may be introduced by environmental or other factors, such as errors in replication of genes. These changes are known as polymorphisms, and the affected genes can be passed from generation to generation. In some cases, polymorphisms have no effect on the biology of the organism. However, in other cases, polymorphisms can result in the altered function or expression of the protein encoded by the gene. Such polymorphisms are called mutations. Mutations in single genes have been associated with diseases such as cystic fibrosis and sickle cell anemia, while mutations in multiple genes have been associated with diseases such as cancer and diabetes. By screening for polymorphisms, researchers seek to correlate variability in the sequence of genes with a specific disease. By sequencing a gene of interest from a large number of healthy and diseased persons, researchers are able to correlate specific gene mutations with the disease. However, a typical polymorphism association project on one disease might require sequencing 100 genes of 3,000 nucleotide bases each in up to 500 patients, or a total of 150 million bases. Currently, the polymorphism screening process uses gel-based sequencing which is labor intensive and costly. The Company believes that its GeneChip technology will have advantages over conventional gel based techniques and has initiated a large scale polymorphism discovery and database project to identify these correlations. EXPRESSION VARIABILITY Differences in the genes expressed in a given cell, as well as the timing and levels of their expression, are another basis for genetic variability. Although most cells contain an organism's full set of genes, each cell expresses only a small fraction of this set in different quantities and at different times. The expression of the wrong or defective genes, or the overexpression or underexpression of normal genes have been associated with human diseases, as well as treatment failures in specific patient populations. By identifying genes that are differentially expressed in particular diseases or patient populations, new targets can be identified for which new therapies can then be developed. Expression monitoring may also help demonstrate the likely effectiveness of new as well as existing therapeutic agents and lead to the development of new therapeutics and diagnostic tools. The effectiveness of monitoring gene expression is a function of the quality of the cell population being studied, the number of genes that can be monitored simultaneously, the sensitivity of the method (ability to measure small changes or low levels of gene expression) and the ability of the method used to provide quantitative information. Relative levels of gene expression are currently monitored primarily through a costly and time-consuming process of sequencing many copies of each gene. By contrast, the company believes its GeneChip technology will have significant advantages over other expression profiling techniques. 4 OPPORTUNITIES ARISING FROM GENETIC VARIABILITY The analysis of genetic variability in organisms is revealing polymorphisms and differences in gene expression levels that correlate with diseases, prognoses for those diseases, and likely therapeutic outcomes. Understanding this variability provides new opportunities for therapeutic intervention that can be more narrowly focused and therefore safer and more efficacious than drugs that affect more biological pathways. The Company believes that by providing a powerful tool to identify appropriate pathways for therapeutic intervention, evaluate lead compounds and assess the efficacy and toxicology of these compounds on biological systems, the GeneChip system can facilitate the drug discovery process and improve the effectiveness and efficiency of health care. In addition to revealing opportunities for the discovery and development of new therapeutics, understanding of sequence and expression variability in organisms may have the potential to effect a major paradigm shift in disease management and the diagnostics industry. These highly competitive industries are currently characterized by low margins and large barriers to entry, with substantial pressure to reduce prices exerted by health care providers. Further, information available from many current diagnostic tests often provides insufficient information as to the etiology, prognosis, and potential treatment options for a particular clinical presentation. Access to complex genetic information, such as changes in gene sequences or expression levels that have previously been correlated with particular outcomes, has the potential to provide guidance on appropriate therapeutic regimens. The value of this information in reducing total health care costs and improving the quality of life is very high. For example, by determining that an HIV-infected patient on a triple drug combination therapy is resistant to one or two of these drugs, the health care provider may change the therapeutic regimen to replace or eliminate drugs to which the patient is resistant and thereby improve the patient's health while reducing costs. The use of complex genetic information to manage disease is in its infancy. Current techniques for gathering complex genetic information are time-consuming, require skilled labor, and can analyze only limited lengths of contiguous DNA sequences in a given run. This has prevented any large scale systematic study of how sequence variability and expression variability correlate with particular disease outcomes. The Company believes that new technology, such as the Company's GeneChip system, will be required to utilize complex genetic information in health care. BUSINESS STRATEGY Affymetrix' strategy is to capitalize on its leadership position in the DNA probe array field by applying its GeneChip technology primarily to expression analysis, polymorphism discovery and disease management. The Company intends to commercialize its GeneChip probe array technology for sale to pharmaceutical and biotechnology companies, academic research centers and clinical reference laboratories by demonstrating its advantages over conventional tools used for DNA sequence and expression monitoring analysis. The Company offers both custom and standard configurations of its GeneChip probe arrays to customers under a variety of access plans tailored to meet customer needs, such as the high-volume EasyAccess-TM- program subscribed to by F. Hoffmann La Roche Ltd. ("Roche") and Genetics Institute, Inc. ("Genetics Institute"). In addition, the Company intends to continue to enter into collaborations to expand the utilization and applications of its GeneChip technology. APPLICATIONS Currently, there are three principal applications of the Company's technology: gene expression monitoring, polymorphism discovery and disease management. 5 GENE EXPRESSION MONITORING Gene expression monitoring is a valuable tool for identifying correlations between genes, their biological function and disease. To facilitate the monitoring of gene expression, the Company designs and manufactures probe arrays with single stranded DNA molecules that are complementary to sequences within a gene of interest. By synthesizing specific probes for multiple genes on a single probe array, the Company enables researchers to quickly, quantitatively and simultaneously monitor the expression of a large number of genes of interest. By monitoring the expression of such genes under different conditions and at different times, researchers can use the probe arrays to understand the dynamic relationship between gene expression and disease. The Company believes that such information will be an important tool in the understanding of gene function and the development of new drugs and disease management tools. The Company is currently selling expression monitoring GeneChip arrays, each capable of analyzing approximately 1,600 human, mouse or yeast genes. Affymetrix is also developing next generation probe arrays that will monitor the expression of up to 40,000 genes per probe array. For example, a probe array is currently being developed to monitor the expression of the approximately 6,800 human genes for which full length sequences are currently in public databases. Affymetrix intends to commercialize the expression monitoring applications of its GeneChip technology for use in identifying and validating novel targets for drug discovery broadly to pharmaceutical, biotechnology, academic research organizations and clinical reference laboratories. The Company is offering different access plans to its technology centered around a pricing model that is based on the number of data points and value of the gene collections being monitored on a particular GeneChip probe array. Actual pricing of the GeneChip expression probe arrays under this model depends on a number of additional factors, including the magnitude of the customer's research effort, whether the genes being monitored are human or from other organisms, whether intellectual property is to be retained, shared or disclosed and whether the Company provides custom chip design or screening services to a customer, and the amount of any up-front fees, milestones, royalties or other payments to be received by the Company. For example, the Company's largest supply arrangements to date are with Roche and Genetics Institute, pursuant to which these companies have gained broad access to the Company's gene expression probe arrays under the EasyAccess plan designed to incent high-volume use. To date, the Company has more than a dozen commercial customers for its GeneChip expression probe arrays, including Genetics Institute, Glaxo Wellcome plc ("Glaxo"), Hoechst Marion Roussel, Inc. ("Hoechst"), Merck & Co., Inc. ("Merck"), Parke-Davis division of Warner Lambert Company ("Parke-Davis"), Pfizer, Inc. ("Pfizer"), Pioneer Hi-Bred International Inc. ("Pioneer Hi-Bred"), Novartis Pharma AG ("Novartis"), Rhone Poulenc Rorer Pharmaceuticals, Inc. ("Rhone Poulenc Rorer"), Roche and Sanofi Recherche ("Sanofi"). POLYMORPHISM DISCOVERY As genes in the human genome are identified, sequenced and mapped, the value of understanding the variability of sequences in these genes increases. Researchers must determine the normal sequence of the gene, which mutations exist and whether these mutations correlate with a disease. This currently requires the sequencing of samples from a large number of affected and unaffected individuals. Furthermore, during clinical trials, the Company believes that pharmacogenomics (the understanding of the impact that genetic variation has on therapeutic effectiveness and toxicity) will become increasingly important. Using sequence checking strategies developed by the Company, Affymetrix believes that its GeneChip probe arrays could significantly reduce the cost and time required for polymorphism screening, which is currently performed through more labor intensive sequencing techniques. Affymetrix has recently initiated a major effort aimed at discovering the most common polymorphisms in full length genes. Through a number of customized applications of its GeneChip technology, the 6 Company believes it is uniquely positioned both to identify a large number of polymorphisms and to detect their presence across broad populations to help link these genetic variations to disease. These customized applications may provide rapid analysis of (i) genetic markers, (ii) selected candidate genes potentially implicated in disease, (iii) genes associated with toxic drug reactions and (iv) genes that are existing drug targets. As these efforts are advanced and the variability of these genes is stored in databases, specific polymorphisms can be encoded on GeneChip probe arrays and used for broad-based genotyping. The Company intends to use these genotyping probe arrays to develop large, disease-specific databases correlating mutations with disease. The Company has formed collaborations and intends to form additional collaborations to accelerate the development of its polymorphism databases. The Company intends to offer access to these databases and genotyping probe arrays to its customers and collaborators. As an initial step in its polymorphism discovery efforts, the Company has entered into a consortium with Bristol-Myers Squibb Company ("Bristol-Myers") and Millennium Pharmaceuticals Inc. ("Millennium") to fund research at the Whitehead Institute of the Massachusetts Institute of Technology ("Whitehead Institute") to identify novel markers and study their role in disease, along with other research programs. Affymetrix has also entered into polymorphism discovery collaborations with academic and commercial partners. The Company intends to use certain of these markers, as well as publicly available markers and markers discovered by Affymetrix, to develop GeneChip probe arrays that can be used to map genes to their chromosomal locations more rapidly and cost-effectively than is possible with existing technologies. The first such GeneChip mapping array, the GeneChip Poly 2000, is currently under development. The Company intends to market this and other polymorphism probe arrays to customers to facilitate genetic mapping and disease association studies. DISEASE MANAGEMENT Disease management is an emerging field that seeks to improve the effectiveness of health care by collecting information on patients from the time of diagnosis to the end of therapy and subsequently measuring the outcomes of various treatment protocols. Affymetrix believes that genetic analysis will be a core component of disease management. The Company has therefore developed GeneChip assays for this purpose and believes that such assays will facilitate more efficient and effective patient management. The Company is focusing on the development and commercialization of disease management products in infectious diseases, cancer and other areas, including drug metabolism. Affymetrix has established partnerships and customer relationships with leading diagnostic companies, clinical reference laboratories and medical research centers to further its disease management strategy. To date, the Company has introduced three disease management GeneChip assays for the research and clinical reference markets: the HIV, p53 and p450 GeneChip products. These products provide sequence information from the reverse transcriptase and protease genes of HIV, the p53 tumor suppressor gene, and the cytochrome p450 metabolic gene family, respectively. The Company is working with commercial and academic researchers to correlate specific mutations in these genes with therapeutic outcomes. In the case of HIV, the Company and Glaxo, a world leader in sales of HIV antivirals, have developed a pilot database correlating patient outcomes under varied therapeutic drug regimens with specific mutations in the HIV virus. In oncology, the Company has a collaboration with OncorMed, Inc. ("OncorMed"), a genetic testing reference laboratory business. In bacteriology, the Company has formed a collaboration with bioMerieux Vitek, Inc. ("bioMerieux"), a world leader in providing bacterial identification and antibiotic resistance testing. Affymetrix believes that before its GeneChip probe arrays can become widely used tools in disease management, significant additional research including clinical trials supporting FDA registration may be required. Furthermore, additional instrumentation and automation will need to be developed to allow for the handling of the large volumes of testing anticipated in the clinical diagnostic setting. bioMerieux is obligated to develop such instrumentation as part of its collaboration with the Company. Affymetrix is also 7 seeking to partner with, or license technology to, other established diagnostic companies to develop, seek regulatory approval, and commercialize probe arrays and instrumentation for broader clinical use. TECHNOLOGY Affymetrix' GeneChip probe array technology and systems integrate semiconductor fabrication techniques, solid phase chemistry, molecular biology, software and robotics. The Company's GeneChip system consists of several integrated components: disposable DNA probe arrays containing genetic information on a chip housed in a cartridge, reagents for extracting and labeling target nucleic acid, a fluidics station for introducing the test sample to the probe arrays, a scanner to read the data from the probe arrays, and software to control the instruments and to analyze and manage the genetic information. The GeneChip system is designed to be used by pharmaceutical and biotechnology companies, academic research centers and clinical reference laboratories. DNA PROBE ARRAYS The Company produces its DNA probe arrays using a process based on semiconductor photolithographic fabrication techniques, which enables it to assemble vast amounts of genetic information on a small glass chip called a probe array. The genetic information is contained in sequences of DNA probes that are built on the glass chip. The Company believes that this technology enables the efficient use of a large number of DNA probes to analyze DNA or RNA sequences in a test sample. The Company uses photolithography to synthesize a large variety of predetermined DNA sequences simultaneously in specific locations on a glass chip. Photolithography is a technique which uses light to create exposure patterns on the glass chip and induce chemical reactions. The process begins by coating the chip with light-sensitive chemical compounds that prevent chemical coupling. The light sensitive compounds are called protecting groups. Lithographic masks, which consist of predetermined patterns that either block or transmit light, are used to selectively illuminate the glass surface of the chip. Only those areas exposed to light are deprotected and thus activated for chemical coupling through removal of the light-sensitive protecting groups. The entire surface is then flooded with a solution containing the first in a series of DNA building blocks (A, C, G or T). Coupling only occurs in those regions which have been deprotected through illumination. The new DNA building block also bears a light-sensitive protecting group so that the cycle can be repeated. This process of exposure to light and subsequent chemical coupling can be repeated on the same chip in order to generate an array of DNA sequences. The intricate illumination patterns allow the Company to build high density arrays of many diverse DNA sequences in a small area. The Company can manufacture a large number of identical DNA probe arrays on a glass wafer, which is then diced into individual probe arrays. Currently, each probe array can be manufactured with hundreds of thousands of "features." Each feature can contain millions of copies of the same single-stranded DNA sequence, or probe. The patterns of photolithographic masks and the order of DNA building blocks used in the synthesis process dictate the sequence of the probes in each feature on the chip surface. The number of synthesis cycles determines the length of the DNA probes in each feature. The Company's GeneChip technology enables it to synthesize with high density a large number of chemically diverse DNA sequences. Unlike conventional synthesis techniques, which generally use a linear process to create compounds, the Company's synthesis technology is combinatorial, in that the number of different compounds synthesized grows exponentially with the number of cycles in the synthesis. For example, in a 40 cycle process, Affymetrix has produced a prototype probe array with over one million features, each containing multiple copies of a unique DNA sequence. This process would take over ten million cycles using conventional DNA synthesis techniques. The function of each single-stranded probe on the GeneChip probe array is to bind to its complementary single strand of DNA or RNA from a biological sample. Each feature on the GeneChip probe array 8 contains identical copies of a single strand of DNA. The nucleic acid to be tested is isolated from a sample, such as blood or biopsy tissue, and fluorescently labeled by one of several standard biochemical methods. The labeled test sample is then washed over the probe array surface to bind or hybridize to the complementary probes if they are present in the probe array. When scanned by the laser in the GeneChip scanner, the hybridized test sample generates a fluorescent signal. Sequence variation or the concentration of the nucleic acid sample can be determined by detecting the relative strength of these signals since the sequence and position of each complementary DNA probe on the probe array are known. INSTRUMENTATION The fluidics station controls the hybridization of the test sample to the probe array and, in certain applications, the introduction of sample on to the probe array. A technician uses the fluidics station to control the delivery of reagents and the timing and temperature required for hybridization of the test sample to the probe array. The process concludes with a reagent wash that leaves only the hybridized test sample bound to the probe array. The fluidics station can process four probe arrays simultaneously. After completion of hybridization on the fluidics station, the technician places the cartridge in the scanner which reads the probe array. The GeneChip scanner consists of a laser, high resolution optics, robotics to position and scan the cartridge, a fluorescence detector and an interface to a personal computer. The label on the test sample emits fluorescent signals when exposed to the light from the laser. The intensity of the fluorescent signal is recorded by the scanner and stored in the computer. The current scanner, which was developed in collaboration with Hewlett Packard Company ("HP") and introduced in April 1997, can read 1.28 cm by 1.28 cm probe arrays with up to 400,000 features. SOFTWARE The GeneChip operating system software is supplied as part of the integrated system and runs on an IBM compatible platform. The fluorescence intensity data captured from the scanner are used in conjunction with computer files containing the sequence and location of all the probes on the probe array to determine the nucleotide sequence of the test sample. For the GeneChip HIV product, the analysis takes less than 90 seconds for one probe array and the results are displayed on the computer. Customized software enables the technician to rapidly identify polymorphisms in the test sample and to compare genetic sequences across test samples. Other GeneChip software applications enable custom probe array users to simultaneously evaluate the relative expression levels of thousands of genes. CUSTOMERS, COLLABORATIVE PARTNERS AND GRANTS The Company's strategy is to establish the GeneChip system as the platform of choice for analyzing complex genetic information, expand the applications of the Company's technology and acquire access to complementary technologies and resources, such as manufacturing, distribution and marketing, from its collaborative partners. Accordingly, the Company's agreements emphasize selling probe arrays, preserving the Company's rights to technological improvements and obtaining support for the development of applications of GeneChip technology. The Company's research and development efforts have been supported in part by government grants, including grants from the U.S. Department of Commerce Advanced Technology Program ("ATP") and the National Institutes of Health ("NIH"). The following table sets forth a selected list of customers and collaborators with whom the Company has existing agreements, the related products and programs and the commencement dates of the most recent agreement with each customer or collaborator. 9 SUMMARY OF AFFYMETRIX CUSTOMERS AND COLLABORATORS
CUSTOMER/COLLABORATOR PRODUCT/PROGRAM DATE - ------------------------------------------------------------ -------------- Amersham Pharmacia Biotech.... Sales agency agreement November 1997 bioMerieux.................... Bacteriology and virology diagnostics January 1998 Bristol-Myers, Millennium, Whitehead Institute......... Functional genomics and polymorphism discovery April 1997 DNAX (Schering-Plough)........ GeneChip expression technology July 1997 Genetics Institute............ GeneChip expression technology-- EasyAccess Program January 1998 Glaxo......................... HIV disease management January 1997 Hewlett-Packard............... Scanner supply February 1997 Hoechst....................... GeneChip expression technology April 1997 Merck......................... GeneChip expression technology September 1997 Millennium.................... GeneChip expression technology November 1997 OncorMed...................... Oncology testing services and GeneChip databases and services March 1998 Parke-Davis (Warner-Lambert)............ GeneChip expression technology October 1996 Pfizer........................ GeneChip expression technology July 1997 Pioneer Hi-Bred............... GeneChip expression technology April 1997 Rhone Poulenc Rorer........... GeneChip expression technology March 1998 Roche......................... GeneChip expression technology-- EasyAccess Program August 1997 Sanofi........................ GeneChip expression technology March 1998 Tularik....................... GeneChip expression technology September 1997
F. HOFFMANN-LA ROCHE LTD. In August 1997, the Company entered into a three-year agreement with Roche and its affiliates for supply of standard and custom expression arrays for use in Roche's worldwide pharmaceutical research and development activities. Pursuant to the agreement, Roche became the Company's first EasyAccess customer, which will allow Roche access to up to tens of thousands of probe arrays and the opportunity to create up to 100 million or more expression datapoints. Under the terms of the agreement, Roche will pay the Company annual subscription fees for such access to the GeneChip expression technology, per-probe-array fees and fees for any custom designs ordered by Roche. Prior to the 1997 agreement, the Company had entered into two gene expression-related agreements with Roche. In October 1996, the Company signed a demonstration agreement with Roche for the development and supply of a single custom probe array containing bacterial genes. In December 1996, the Company signed a pilot agreement with Roche Bioscience, a division of Syntex (U.S.A.) Inc., for the development and supply of a single custom probe array containing human, rat and mouse genes. The milestones of these agreements were met and the agreements have been concluded. GENETICS INSTITUTE INC. In January 1998, the Company entered into a three-year agreement with Genetics Institute for the supply of standard and custom expression arrays for use in Genetic Institute's research and development 10 activities. Pursuant to the agreement, Genetics Institute became the Company's second EasyAccess customer. Under the terms of the agreement, Genetics Institute will pay the Company annual subscription fees for such access to the GeneChip expression technology, per-probe-array fees and any custom design fees. Prior to the 1998 agreement, the Company had entered into two agreements with Genetics Institute. In December 1995, the Company entered into a supply agreement under which Affymetrix agreed to manufacture and supply custom probe arrays based on specific genes identified and selected by Genetics Institute. Many of the terms and conditions of this agreement were superceded by the January 1998 agreement. In November 1994 the Company and Genetics Institute entered into a collaboration agreement that provided for research funding to the Company for the development of DNA probe arrays to enable Genetics Institute to discover new genes and uses for genes. The Company has completed performance of the 1994 agreement and, accordingly, development funding under the collaboration agreement has been discontinued. Affymetrix has agreed to supply custom probe arrays developed under the collaboration agreement to Genetics Institute in accordance with the EasyAccess agreement. OTHER SUPPLY AGREEMENTS The Company has supply agreements in genomics with several other pharmaceutical and biotechnology companies that cover either standard or custom probe arrays for gene expression or both. Under the terms of these agreements, the Company will receive fees for each probe array, as well as, in some cases, revenue from probe array design fees, instrument and software sales and other fees. Current customers include DNAX Research Institute of Molecular & Cellular Biology, Inc. (a subsidiary of Schering-Plough Corporation) ("DNAX"), Glaxo, Hoechst, Merck, Metabolex, Inc. ("Metabolex"), Millennium, Novartis, OncorMed, Parke-Davis, Pfizer, Pioneer Hi-Bred, Rhone Poulenc Rorer, Sanofi and Tularik, Inc. AMERSHAM PHARMACIA BIOTECH In December 1997, the Company entered into a worldwide, non-exclusive sales representation agreement with Amersham Pharmacia Biotech Ltd ("Amersham Pharmacia Biotech"). Under the agreement, Amersham Pharmacia Biotech's sales representatives will solicit orders for Affymetrix' products from prospective customers in the pharmaceutical and biotechnology industries and the academic research community worldwide. The Company will pay Amersham Pharmacia Biotech transaction processing fees as well as a percentage of product sales up to a maximum annual amount as a sales agency fee. MOLECULAR DYNAMICS In December 1997, the Company entered into a non-exclusive, worldwide, royalty bearing license agreement with Molecular Dynamics, Inc. ("Molecular Dynamics"). Under the license agreement, Molecular Dynamics was granted rights to certain Affymetrix technology for commercializing low and medium density mechanically spotted DNA arrays. Affymetrix also obtained rights to certain Molecular Dynamics patents. Molecular Dynamics is obligated to pay Affymetrix royalties on sales of its products covered by the licenses. GENETIC ANALYSIS TECHNOLOGY CONSORTIUM ("GATC") In December 1997, the Company and Molecular Dynamics formed the Genetic Analysis Technology Consortium, a standards setting body charted to define a uniform set of specifications to allow for the interoperability of chips, readers, reagents, software and data generated using GATC compliant products. The GATC has been formed to allow for additional members to join the GATC and participate in setting interoperability standards, as well as to certify non-members' products as GATC compliant. In January 1998, Pangea Corp., a privately held bioinformatics company, announced its intention to produce software products that are GATC compliant. 11 WHITEHEAD INSTITUTE CONSORTIUM In April 1997, the Company, Bristol-Myers and Millennium entered into a corporate consortium to fund a five-year research program in functional genomics at the Whitehead Institute. The program, under the direction of Dr. Eric S. Lander, Director of the Whitehead Institute of the Massachusetts Institute of Technology, seeks to advance the development of gene-based technologies for research and health care. Under the terms of the consortium agreement, Affymetrix, Bristol-Myers and Millennium will support a program of research initiated by scientists at the Whitehead Institute to develop the next generation of genomics technologies for the scientific community. The three companies will provide funds and technology totaling approximately $8.0 million per year for five years to the Whitehead Institute. Scientists at the companies will also collaborate with scientists at the Whitehead Institute to identify novel genetic markers and develop new genomics tools. In return, Affymetrix, Bristol-Myers and Millennium will receive certain licensing rights to inventions funded by the consortium or emerging from the use of contributed technology, subject to the payment of cross royalties. Affymetrix has exclusive rights to commercialize consortium inventions related to nucleic acid probe arrays and joint rights with Millennium to commercialize diagnostic products and services and certain other products that may arise from the consortium. BIOMERIEUX VITEK, INC. In September 1996, the Company and bioMerieux entered into a five-year collaborative development agreement and associated supply agreement for probe arrays to identify the species and drug resistance profiles of bacteria causing human infection. As part of the collaboration, bioMerieux is developing instrumentation for the use of these probe arrays in a clinical diagnostic setting. The agreement provides that the Company will not market or provide probe arrays for such tests to others that are in a format that would reasonably be considered approvable by the FDA for clinical diagnostic use. Under the terms of the agreements, bioMerieux provides research and development support and will make payments to Affymetrix upon achievement of certain milestones. Three such milestones have been met to date. In addition, bioMerieux will pay specified prices for the supply of probe arrays and royalties on any resulting products. In December 1997 and January 1998, bioMerieux and the Company expanded their collaboration to include the non-exclusive development of DNA probe arrays for clinical diagnostics tests in the fields of HIV and food and industrial testing, respectively. As a result of this expansion of the collaboration, bioMerieux has and will make certain option exercise payments to the Company. HEWLETT-PACKARD COMPANY The Company entered into a collaborative agreement with HP in November 1994, which was amended in February 1997. Under the terms of the agreement, HP manufactures scanners for Affymetrix. Affymetrix retains all marketing rights for its GeneChip products, including the scanners. The agreement provides for cooperation between Affymetrix and HP for worldwide distribution and instrument services. Pursuant to the agreement, HP is required to supply all the Company's forecasted requirements for scanners until February 2000 and Affymetrix is required to purchase a minimum number of scanners from HP during the same three-year period. ADVANCED TECHNOLOGY PROGRAM (UNITED STATES DEPARTMENT OF COMMERCE) In October 1994, the Company and Molecular Dynamics were awarded a $31.5 million five-year grant to develop novel point-of-care diagnostic systems under the ATP. Pursuant to the grant, $20.8 million is designated for the Company and its subcontractors and $10.7 million for Molecular Dynamics and its subcontractors subject to the requirement of each company to match such funding. The grant specifies the development of an advanced miniaturized nucleic acid diagnostic device intended to reduce the costs and increase the speed and reliability of DNA analysis. The device would be intended for use in point-of-care settings, such as hospitals, clinics and doctors' offices and would require FDA approval. The Company has 12 developed a prototype of the device and is pursuing further development. There can be no assurance that the device will be successfully developed or, if developed, that it will receive regulatory approval or be successfully marketed. The research agreements between the Company and its subcontractors under the ATP grant (the University of California, Stanford University and the University of Washington) require that the universities assign the rights to any project inventions made by them to the Company, subject to specified royalty payments. The ATP agreement provides that the Company and Molecular Dynamics retain rights in their respective fields to intellectual property developed as part of the project. The ATP grant is administered by the United States Department of Commerce. As of December 31, 1997, the Company had recognized $7.8 million in revenue under the ATP grant. The grant is subject to yearly appropriations by the United States Congress for the ATP program. There can be no assurance that funding for the ATP program will not be reduced or eliminated at any time. The reduction or elimination of the ATP grant could have a material adverse effect on the Company's business, financial condition and results of operations. NATIONAL INSTITUTES OF HEALTH In August 1995, the Company was awarded a $5.5 million, three-year grant from the NIH National Center for Human Genome Research. As of December 31, 1997, the Company had recognized revenue of $3.6 million related to the grant. Under the project, the Company is developing applications of DNA probe arrays for larger scale genetic analysis and creating a laboratory at the Company for use by outside researchers. The grant also includes a subcontract with Stanford University to continue research and development of the DNA probe array technology. There can be no assurance that the NIH will obtain the necessary funding from the United States Congress to continue to fund this grant. MANUFACTURING The Company's current strategy is to manufacture its disposable DNA probe arrays, fluidics stations and software in-house and contract with third-party suppliers to manufacture scanners for its GeneChip system. The Company is currently manufacturing limited quantities of probe arrays for internal and collaborative purposes and for initial research use only product sales. Currently, the Company has the capacity to produce at a rate of up to 200,000 probe arrays annually at its existing manufacturing facility located in Sunnyvale, California. Expansion is underway to increase this facility's capacity to a rate of up to 400,000 probe arrays annually by late 1998. The Company has also purchased land and is currently planning to build a second manufacturing site near Sacramento, California, which will further increase its manufacturing capacity and reduce operating risks. The Company expects this facility to be operative in late 1999. The Company's probe array manufacturing process involves wafer preparation, probe synthesis, dicing of synthesized wafers into chips, assembly of chips into cartridges, and quality control. Affymetrix has developed software programs that partially automate the design of photolithographic masks used in probe array manufacturing and that control the probe array manufacturing lines. Glass wafers are prepared for synthesis through the application of chemical coatings. DNA probes are synthesized on the wafers using the Company's proprietary photolithographic process. The completed wafers are then diced to yield individual probe arrays, which are assembled into disposable cartridges and packaged for shipment. The Company relies on outside vendors to manufacture and service its scanners. The Company's first generation scanner, which can read up to 64,000 features per 1.28 cm by 1.28 cm probe array was manufactured for the Company by Molecular Dynamics. The Company's second generation scanner, developed in collaboration with HP and introduced in April 1997, can read probe arrays with up to 400,000 features per 1.28 cm by 1.28 cm probe array. Certain key parts of the GeneChip system, such as the scanner 13 and certain reagents, are currently available only from a single source or a few sources. The Company currently obtains the scanners for its GeneChip probe arrays from HP. The Company is dependent on HP for quality testing and service of this instrument. No assurance can be given that scanners, reagents or other components of the GeneChip system will be available in commercial quantities at acceptable costs. If the Company is required to seek alternative sources of supply, it could be time consuming and expensive. In addition, the Company is dependent on its vendors to provide components of appropriate quality and reliability and to meet applicable regulatory requirements. Consequently, in the event that supplies from these vendors were delayed or interrupted for any reason, the Company's ability to develop and supply its products could be impaired, which could have a material adverse effect on the Company's business, financial condition and results of operations. The GeneChip system is a complex set of products and includes DNA probe arrays, which are produced in an innovative and complicated manufacturing process. Due to the complexity and limited operating history of these products, the Company has experienced technical problems and anticipates that additional technical problems will occur and be discovered as more systems are placed into operation. The Company has experienced and continues to experience variability in the manufacturing yield of its GeneChip products which has, and may continue to, adversely impact the Company's gross margins. While the Company plans for excess manufacturing capability to mitigate the effects of this variability, there can be no assurance that such variability will not impact the Company's ability to meet its commitment to deliver product in a timely manner. The inability of the Company to timely deliver products would likely adversely affect the Company's relationship with its customers, its business, its financial condition and results of operations. The Company tests only selected probe arrays from each wafer and only selected probes on such probe arrays. It is therefore possible that defective probe arrays might not be identified before they are shipped. After the probe arrays are shipped, only selected probes may be tested by the customer. The Company therefore relies on quality control procedures, including controls on the manufacturing process and sample testing, to verify the correct completion of the manufacturing process. In addition, there are certain aspects of the Company's manufacturing processes that are not fully understood and that may not be readily scalable to allow for production of probe arrays in commercial quantities. There can be no assurance that manufacturing and quality control problems will not arise as the Company attempts to scale-up its manufacturing facilities or that such scale-up can be achieved in a timely manner or at commercially reasonable cost. If the Company is unable to consistently manufacture probe arrays on a timely basis because of these or other factors, its business, financial condition and results of operations would likely be adversely affected. The Company will also need to comply with the FDA's Good Manufacturing Practices ("GMP") regulations for sale of products in the United States, ISO standards for sale of products in Europe, as well as other standards prescribed by various federal, state and local regulatory agencies in the United States and other countries. Although the Company does not currently need to comply with GMP to manufacture probe arrays and related instrumentation for sale for research purposes only, it will need to be GMP compliant to sell these products to clinical reference laboratories and for clinical use. There can be no assurance that such GMP compliance will be obtained or that such compliance can be obtained at reasonable prices. As the Company's technologies evolve, new manufacturing techniques and systems will be required. For example, it is anticipated that automated processing systems will be needed to meet the Company's future probe array manufacturing needs. Further, as products requiring increased density are developed, miniaturization of the features on the arrays will be necessary, requiring new or modified manufacturing equipment and processes. Further, the Company's manufacturing equipment requires significant capital investment. Although the Company is planning to build a second manufacturing facility, the Company presently relies on a single manufacturing facility for its probe arrays, fluidics stations and software. This manufacturing facility is subject to natural disasters such as earthquakes and floods. The former are of 14 particular significance since the manufacturing facility is located in an earthquake prone area. In the event that its manufacturing facility were to be affected by accidental or natural disasters, the Company would be unable to manufacture products for sale until the facility was replaced or restored to operation which would likely adversely affect the Company's business, its financial condition and results of operations. There can be no assurance that any of the foregoing problems with the Company's GeneChip products will be solvable or that any solutions can be achieved in a timely manner or at commercially reasonable costs. SALES AND MARKETING The base price of the Company's GeneChip system (scanner, software, workstation and fluidics station) starts at approximately $160,000. The Company's HIV probe arrays, currently being sold commercially for research use, are priced at $45 per array, with two arrays (one for each strand of DNA) presently used per test. The Company's p53 GeneChip assay is being sold for research use at $100 per array. The Company's p450 GeneChip assay is being sold for research use at $145 per array. The Company is offering different access plans for its expression and polymorphism technology centered upon a pricing model that is based on the number of data points and value of the collection of genetic information being analyzed on a particular GeneChip probe array. Actual pricing depends on several factors, including: the magnitude of the research effort, whether the genes being analyzed are human or those of other organisms, whether intellectual property is to be retained, shared or disclosed, whether the Company provides custom probe array design or screening services to a customer and the amount of any up-front fees, volume commitments, milestones or other payments to be received by the Company. The Company is currently directly marketing the GeneChip system and probe arrays for genomics and disease management applications to its customers and collaborators. To augment these efforts the Company entered into a non-exclusive sales representation agreement with Amersham Pharmacia Biotech in December 1997. Under this agreement, Amersham Pharmacia Biotech's sales representatives will solicit orders for Affymetrix' products from prospective customers in the pharmaceutical and biotechnology industries and the academic research community worldwide. The Company will pay Amersham Pharmacia Biotech transaction processing fees as well as a percentage of product sales up to a maximum annual amount as a sales agency fee. The Company's near term strategy is to commercialize the GeneChip system for research use only and to seek regulatory approval for and to commercialize GeneChip probe arrays for clinical use through partnerships with established firms in the health care industry. The Company believes that the primary near-term market for genomics and disease management GeneChip applications will be pharmaceutical and biotechnology companies, academic research centers and clinical reference laboratories. Longer term, the Company believes that the primary market for its disease management GeneChip applications will be clinical reference laboratories. Affymetrix has marketing and technical support groups to promote and service its GeneChip products, which the Company intends to expand as necessary. In addition, the Company has retained a marketing communications firm with expertise in biotechnology to assist it in its promotional activities. The Company anticipates a long sales cycle to market the GeneChip system to its potential customers. There can be no assurance that the Company will be able to establish agency or distribution arrangements to market its products or that any such agreement will be successful. See "Risk Factors--Limited Sales and Marketing Experience." RESEARCH AND DEVELOPMENT The Company believes that substantial investment in research and development is essential to obtaining a long-term competitive position in the expression monitoring, polymorphism discovery and 15 disease management fields. Affymetrix focuses on four types of research and development: applied research, primarily aimed at generating polymorphism databases; core technology development, such as the design of fully integrated systems for complex genetic information management; novel manufacturing methods to improve the efficiency of the Company's probe array production processes; and basic research to explore and expand the potential uses of DNA probe arrays and to discover new technologies. CORE TECHNOLOGY DEVELOPMENT The Company conducts research in several core areas, including the development of miniaturized immobilized nucleic acid detection devices. The intent of these development programs is to create advanced systems for complex genetic information and products that can eventually be developed by diagnostic partners for use in hospitals, clinical reference laboratories and point-of-care testing. BASIC RESEARCH Affymetrix' basic research efforts are focused on expanding the applications of the GeneChip technology and developing related new technologies. These efforts include improving the sensitivity of the GeneChip assays, increasing information capacity per probe array and simplifying the process for conducting highly complex assays. APPLIED RESEARCH Affymetrix is focusing its applied research efforts on the development of assays and databases to link genetic polymorphisms to human disease. The Company believes that such databases will ultimately lead to the discovery of novel therapeutics and the identification of diagnostic markers useful in cost-effective disease management. The Company has established a relationship with the Whitehead Institute to identify genetic markers that can be used to rapidly obtain high-resolution maps of individual human genomes and thereby identify differences among those genomes that are characteristic of particular diseases. The Company has also entered into several commercial and academic collaborations to accelerate the pace of polymorphism discovery. NOVEL MANUFACTURING METHODS The Company conducts research aimed at improving the photolithographic manufacturing process currently employed in the production of the Company's GeneChip probe arrays. The Company is also pursuing research aimed at further improving its manufacturing technology. In the Company's photoresist manufacturing research program, the Company has demonstrated an ability to manufacture probe arrays with 5 micron feature sizes, as compared to the 50 micron feature sizes used on most of the Company's current probe arrays. The Company's research and development expenses for the years ended December 31, 1997, 1996, and 1995 were $28.2 million, $18.8 million, and $12.4 million, respectively. INTELLECTUAL PROPERTY Affymetrix has been issued 28 patents in the United States and holds several pending United States patent applications. Many of these patents and applications have been filed and/or issued in one or more foreign countries. Affymetrix also relies upon copyright protection, trade secrets, know-how, continuing technological innovation and licensing opportunities to develop and maintain its competitive position. The Company's success will depend in part on its ability to obtain patent protection for its products and processes, to preserve its copyrights and trade secrets, to operate without infringing the proprietary rights of third parties and to acquire licenses related to enabling technology or products. The Company is party to various option and license agreements with third parties (including Glaxo, Molecular Dynamics, Stanford University, Scientific Generics, Ltd., Concordia University, New York Public Health Research Institute, OncorMed, and the University of California) which give it rights to use 16 certain technologies. Failure of the Company to maintain rights to such technology could have a material adverse effect on the Company's business, financial condition and results of operations. For example, inability of the Company to exercise the option for the University of California technology relating to miniaturized PCR devices under reasonable terms could have an adverse effect on the ability of the Company to sell integrated device products. The patent positions of pharmaceutical and biotechnology companies, including the Company, are generally uncertain and involve complex legal and factual questions. There can be no assurance that any of the Company's pending patent applications will result in issued patents, that the Company will develop additional proprietary technologies that are patentable, that any patents issued to the Company or its strategic partners will provide a basis for commercially viable products or will provide the Company with any competitive advantages or will not be challenged by third parties, or that the patents of others will not have an adverse effect on the ability of the Company to do business. In addition, patent law relating to the scope of claims in the technology fields in which the Company operates is still evolving. The degree of future protection for the Company's proprietary rights, therefore, is uncertain. Furthermore, there can be no assurance that others will not independently develop similar or alternative technologies, duplicate any of the Company's technologies, or, if patents are issued to the Company, design around the patented technologies developed by the Company. In addition, the Company expects to incur substantial costs in litigation to defend itself in patent suits brought by third parties and when it initiates such suits. The commercial success of the Company also depends in part on the Company neither infringing patents or proprietary rights of third parties nor breaching any licenses that may relate to the Company's technologies and products. For example, the Company, its collaborators and customers may need to acquire a license for an amplification technology to use the GeneChip system in certain applications, and there is no assurance such a license will be available on commercially reasonable terms. Furthermore, the Company is aware of third-party patents that may relate to the Company's technology, including reagents used in probe array synthesis and in probe array assays, probe array scanners, synthesis techniques, oligonucleotide amplification techniques, assays, and probe arrays. In addition, the Company has received and may in the future receive notices claiming infringement from third parties as well as invitations to take licenses under third party patents. There can be no assurance that the Company will not infringe on these patents or other patents or proprietary rights of third parties or that the Company would be able to obtain a license to such patents or proprietary rights on commercially acceptable terms, if at all. The Company is aware of patents and patent applications owned by Oxford Gene Technology, Ltd that may relate to the Company's technology. The Company has opposed two such allowed European patents and such patents have also been issued in the United States. The Company is aware that other patents are pending and may issue. Certain of the applications have broad claims to certain array related technology. The Company could be subject to infringement claims from this and other patents that could delay or preclude sales of some or all of its products, which would have a material adverse effect on the Company's business, financial condition and results of operations. If the Company were required to obtain a license to any such patents, there can be no assurance that such license could be acquired on commercially acceptable terms, if at all. On March 3, 1997, Hyseq, Inc. ("Hyseq") filed a lawsuit in United States District Court for the Northern District of California (San Jose Division) alleging that certain Affymetrix products infringe United States patents 5,202,231 and 5,525,464. In addition, in December 1997, Hyseq filed a second action claiming that certain Affymetrix products infringe a related patent, United States patent 5,695,940. The Hyseq actions and any other legal action against the Company or its collaborative partners claiming damages and seeking to enjoin commercial activities relating to the affected products and processes could, in addition to subjecting the Company to potential liability for damages, require the Company or its collaborative partners to obtain a license in order to continue to manufacture or market the affected products and processes. While the Company believes that the Hyseq complaints are without merit, there can be no assurance that the Company will prevail in the Hyseq actions or that the Company or its 17 collaborative partners will prevail in any other action, nor can there be any assurance that any license (including licenses proposed by third parties) required would be made available on commercially acceptable terms, if at all. On January 6, 1998, the Company filed a patent infringement action in the United States District Court for the District of Delaware (No. 98-6) alleging that certain of Incyte, Inc.'s ("Incyte") and Synteni, Inc.'s ("Synteni") products infringe Affymetrix' United States patent 5,445,934. The action seeks to enjoin commercial activities of Incyte and Synteni relating to the Affymetrix patent. There can be no assurance that Affymetrix will prevail in such litigation or be successful in asserting its patent rights. The Company will incur substantial costs and expend substantial personnel time in asserting the Company's patent rights against Incyte and Synteni. Failure to successfully enforce its patent rights or the loss of these patent rights or others would remove a legal obstacle to competitors in designing systems with similar competitive advantages, which could have a material adverse effect on the Company's business, financial condition and operating results. There are a significant number of United States and foreign patents and patent applications in the Company's areas of interest, and the Company believes that there will be significant litigation in the industry regarding patent and other intellectual property rights. The Hyseq and Incyte and Synteni actions and any other such litigation will consume substantial managerial and financial resources, which could have a material adverse effect on the Company's business, financial condition and results of operations. Further, because of the substantial amount of discovery required in connection with any such litigation, there is a risk that confidential information could be compromised by disclosure. Others have filed and in the future are likely to file patent applications that are similar or identical to those of the Company or those of its licensors. To determine the priority of inventions, the Company will have to participate in interference proceedings declared by the United States Patent and Trademark Office that could result in substantial cost to the Company. No assurance can be given that any such patent application will not have priority over patent applications filed by the Company. The enactment of legislation implementing the General Agreement on Trade and Tariffs has resulted in certain changes in United States patent laws that became effective on June 8, 1995. Most notably, the term of patent protection for patent applications filed on or after June 8, 1995 is no longer a period of seventeen years from the date of grant. The new term of United States patents will commence on the date of issuance and terminate twenty years after the earliest effective filing date of the application. Because the time from filing to issuance of biotechnology patent applications in the Company's area of interest is often more than three years, a twenty-year term after the effective date of filing is expected to result in a substantially shortened term of the Company's patent protection, which may adversely affect the Company's patent position. The Company also relies upon copyright and trade secret protection for its confidential and proprietary information. There can be no assurance, however, that such measures will provide adequate protection for the Company's trade secrets or other proprietary information. In addition, there can be no assurance that proprietary information will not be disclosed, that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to the Company's copyrights and trade secrets or disclose such technology, or that the Company can effectively protect its trade secrets. The Company's academic collaborators have certain rights to publish data and information in which the Company has rights. There is considerable pressure on academic institutions to publish discoveries in the genetics and genomics fields. There can be no assurance that such publication would not adversely affect the Company's ability to obtain patent protection for information in which it may have a commercial interest. 18 GOVERNMENT REGULATION The manufacturing, labeling, distribution and marketing of some or all of the Company's disease management products are subject to government regulation in the United States and in certain other countries. In the United States, the Food and Drug Administration ("FDA") regulates, as medical devices, most diagnostic tests, including in vitro reagents and other components of the tests, including those sold to laboratories certified under the Clinical Laboratory Improvement Amendments of 1988 ("CLIA"). The Company intends to market some diagnostic products as finished test kits or equipment and others as individual components; consequently, these products will be regulated as medical devices. The Food, Drug, and Cosmetic Act requires that medical devices introduced to the United States market, unless exempted by regulation, be the subject of either a premarket notification clearance (known as a "510(k)") or an approved premarket approval (known as a "PMA"). Some of the Company's products and those of its collaborators may require a PMA and others may require a 510(k). With respect to devices reviewed through the 510(k) process, a company may not market a device until an order is issued by the FDA finding the product to be substantially equivalent to a legally marketed device known as a "predicate device." A 510(k) submission may involve the presentation of a substantial volume of data, including clinical data, and may require a substantial review. The FDA may agree that the product is substantially equivalent to a predicate device and allow the product to be marketed in the United States. The FDA, however, may (i) determine that the device is not substantially equivalent and require a PMA, or (ii) require further information, such as additional test data, including data from clinical studies, before it is able to make a determination regarding substantial equivalence. By requesting additional information, the FDA can further delay market introduction of a company's products. If the FDA indicates that a PMA is required for any of the Company's products, the application will require extensive clinical studies, manufacturing information (including demonstration of compliance with quality systems requirements) and likely review by a panel of experts outside the FDA. Clinical studies to support either a 510(k) submission or a PMA application would need to be conducted in accordance with FDA requirements. Failure to comply with FDA requirements could result in the FDA's refusal to accept the data or the imposition of regulatory sanctions. FDA review of a PMA application could take significantly longer than that for a 510(k). Even where a device is exempted from 510(k) clearance or PMA approval, FDA may impose restrictions on its marketing. For example, FDA has exempted many in vitro reagents not sold as finished test kits from obtaining 510(k) clearance or PMA approval. These reagents, however, may be marketed by the Company only to clinical reference laboratories certified under CLIA as high complexity laboratories and are subject to a number of requirements, including labeling and the FDA's GMP regulations. There can be no assurance that the Company or its collaborators will be able to meet the FDA's requirements or that any necessary approval will be received. Once granted, a 510(k) clearance or PMA approval may place substantial restrictions on how the device is marketed or to whom it may be sold. Even where a device is exempted from 510(k) clearance or PMA approval, the FDA may impose restrictions on its marketing. In addition to requiring clearance or approval for new products, the FDA may require clearance or approval prior to marketing products that are modifications of existing products. There can be no assurance that any necessary GMP clearance, 510(k) clearance or PMA approval will be granted on a timely basis or at all. FDA imposed restrictions could limit the number of customers to whom particular products could be marketed or what may be communicated about particular products. Delays in receipt of or failure to receive any necessary GMP clearance, 510(k) clearance or PMA approval, or the imposition of stringent restrictions on the Company's labeling and sales of its products could have a material adverse effect on the Company. As a medical device manufacturer, the Company would also be required to register and list its products with the FDA. In addition, the Company will be required to comply with the FDA's GMP 19 regulations, which require that medical devices be manufactured and records be maintained in a prescribed manner with respect to manufacturing, testing and control activities. Further, the Company would be required to comply with FDA requirements for labeling and promotion of its medical devices. For example, the FDA prohibits cleared or approved devices from being marketed for uncleared or unapproved uses. In addition, the medical device reporting regulation would require that the Company provide information to the FDA whenever there is evidence to reasonably suggest that one of its devices may have caused or contributed to a death or serious injury, or that there has occurred a malfunction that would be likely to cause or contribute to a death or serious injury if the malfunction were to recur. Medical device manufacturers are subject to periodic inspections by the FDA and state agencies. Additionally, the FDA will conduct a preapproval inspection for all PMA devices and in some cases for 510(k) devices as well. If the FDA believes that a company is not in compliance with applicable laws or regulations, it can institute proceedings to issue a warning or other letter apprising of violative conduct, impose civil penalties, detain or seize products, issue a recall, ask a court to seize products, enjoin future violations or assess civil and criminal penalties against the company, its officers or its employees. In addition, clearances or approvals could be suspended or withdrawn in appropriate circumstances. Failure to comply with regulatory requirements or any adverse regulatory action could have a material adverse effect on the Company. Medical device laws and regulations are also in effect in many of the countries in which the Company may do business outside the United States. These range from comprehensive device approval requirements for some or all of the Company's medical device products to requests for product data or certifications. The number and scope of these requirements are increasing. There can be no assurance that the Company will obtain regulatory approvals in such countries or that it will not be required to incur significant costs in obtaining or maintaining its foreign regulatory approvals. In addition, the export by the Company of certain of its products which have not yet been cleared for domestic commercial distribution may be subject to FDA export restrictions. The failure to obtain product approvals in a timely fashion or to comply with state or foreign medical device laws and regulations may have a material adverse impact on the Company. Medical device laws and regulations are also in effect in some states in which the Company does business. In addition, federal, state and foreign laws and regulations regarding the manufacture and sale of medical devices are subject to future changes. The Company cannot predict what impact, if any, such changes might have on its business; however, such changes could have a material impact on the Company. Any of the Company's customers using its diagnostic devices for clinical use in the United States may be regulated under CLIA. CLIA is intended to ensure the quality and reliability of clinical laboratories in the United States by mandating specific standards in the areas of personnel qualifications, administration, participation in proficiency testing, patient test management, quality control, quality assurance and inspections. The regulations promulgated under CLIA establish three levels of diagnostic tests ("waived," "moderately complex" and "highly complex") and the standards applicable to a clinical laboratory depend on the level of the tests it performs. CLIA requirements may prevent some clinical laboratories from using certain of the Company's diagnostic products. In addition, the FDA has promulgated regulation of certain "analyte specific reagents" used in clinical reference laboratories. There can be no assurance that the CLIA regulations and future administrative interpretations of CLIA or future regulatory requirements of the FDA will not have a material adverse impact on the Company by imposing new regulatory requirements or by limiting the potential market for the Company's products. The Company is also subject to numerous environmental and safety laws and regulations, including those governing the use, storage and disposal of hazardous and biological materials, and construction of new facilities. There can be no assurance that the Company will be able to obtain the necessary permits to construct new facilities, including the planned facility near Sacramento, California. Any violation of, and 20 the cost of compliance with, these regulations or permit requirements could have a material adverse effect on the Company's business, financial condition and results of operations. REIMBURSEMENT The ability of the Company, its collaborators and other pharmaceutical and biotechnology companies to successfully commercialize their products may depend on their ability to obtain adequate levels of reimbursement for certain health care products and services in the United States, Europe and other countries. The availability of third-party reimbursement for such products and services may be limited or uncertain, particularly with respect to genetic tests and other disease management products. In the United States, the cost of medical care is funded, in substantial part, by government insurance programs, such as Medicare and Medicaid, and private and corporate health insurance plans. Third-party payors may deny reimbursement if they determine that a prescribed health care product or service has not received appropriate FDA or other governmental regulatory clearances, is not used in accordance with cost-effective treatment methods as determined by the payor, or is experimental, unnecessary or inappropriate. The ability of the Company, its collaborators and other pharmaceutical and biotechnology companies to commercialize certain of their products and services successfully may depend on the extent to which appropriate reimbursement levels for the costs of such products and services are obtained from government authorities, private health insurers and other organizations, such as health maintenance organizations ("HMOs"). Third-party payors are increasingly challenging the prices charged for health care products and services. The trend towards managed health care in the United States and the concurrent growth of organizations such as HMOs, which could control or significantly influence the purchase of health care products and services, as well as legislative proposals to reform health care or reduce government insurance programs, may all result in lower prices for health care products and services commercialized by customers and collaborative partners of the Company. This could reduce the amount of future royalty payments that may be due to the Company on such product sales or services. The cost containment measures that health care providers are instituting and the impact of any health care reform may also adversely affect the profits of the Company's customers and collaborative partners. As a result, pharmaceutical and biotechnology companies may choose to reduce or eliminate certain research and development programs that utilize the Company's products. A reduction of royalty payments to the Company or the reduction or cancellation of research programs that utilize the Company's products could have a material adverse effect on the Company's business, financial condition and results of operations. COMPETITION Competition in expression monitoring, polymorphism discovery and disease management is intense and expected to increase. Further, the technologies for monitoring gene expression and discovering polymorphisms associated with significant diseases and approaches for commercializing those discoveries are new and rapidly evolving. Currently, the Company's principal competition comes from existing technologies that are used to perform many of the same functions for which the Company plans to market its GeneChip systems. In the diagnostic field, these technologies are provided by established diagnostic companies such as Abbott Laboratories, Roche Boehringer Mannheim, Johnson & Johnson and SmithKline Beecham plc. These technologies include a variety of established assays, such as immunoassays, histochemistry, flow cytometry and culture, and newer DNA probe diagnostics to analyze certain limited amounts of genetic information. In the genomics and polymorphism discovery fields, existing competitive technologies include gel-based sequencing using instruments provided by companies such as the Applied Biosystems division of The Perkin-Elmer Corporation and Amersham Pharmacia Biotech. The Company's sales representative, Amersham Pharmacia Biotech, is a competitor and a supplier of reagents to the Company. There can be no assurance that Amersham Pharmacia Biotech's commercial activities will not adversely impact the 21 Company's sales and supply agreements. In order to compete against existing technologies, the Company will need to demonstrate to potential customers that the GeneChip system provides improved performance and capabilities. Future competition in these fields will likely come from existing competitors as well as other companies seeking to develop new technologies for sequencing and analyzing genetic information. In addition, pharmaceutical and biotechnology companies, such as Axys Pharmaceuticals, Inc., Clonetech, Inc., Genome Therapeutics Corporation, Genset S.A., Genome Systems, Inc., Human Genome Sciences, Inc., Millennium, and Myriad Genetics, Inc. have significant needs for genomic information and may choose to develop or acquire competing technologies to meet these needs. Other companies including CuraGen, Inc., Digital Gene Technologies, Inc., Gene Logic, Inc., Hyseq, Lynx, Molecular Dynamics, Nanogen, Inc., Protogene, Inc., Synteni (Incyte), and Visible Genetics, Inc. also are developing or have developed DNA probe based assays or other products and services, some of which may be competitive with those of the Company. The market for disease management products derived from gene discovery is currently limited and will be highly competitive. Many companies are developing and marketing DNA probe tests for genetic and other diseases. Other companies are conducting research on new technologies for diagnostic tests based on advances in genetic information. Established diagnostic companies could provide competition to Affymetrix through the development of new products. These companies have the strategic commitment to diagnostics, the financial and other resources to invest in new technologies, substantial intellectual property portfolios, substantial experience in new product development, regulatory expertise, manufacturing capabilities and the distribution channels to deliver products to customers. These companies also have an installed base of instruments in several markets, including clinical and reference laboratories, which are not compatible with the GeneChip system. In addition, these companies have formed alliances with genomics companies which provide them access to genetic information that may be incorporated into their diagnostic tests. EMPLOYEES As of December 31, 1997, Affymetrix had 242 full-time employees, 48 of whom hold Ph.D. or M.D. degrees. The employee group includes chemists, engineers, computer scientists, mathematicians and molecular biologists with experience in the diagnostic products, medical products, semiconductor, computer software and electronics industries. None of the Company's employees is represented by a collective bargaining agreement, nor has the Company experienced work stoppages. The Company believes that it maintains good relationships with its employees. Affymetrix' success will depend in large part on its ability to attract and retain skilled and experienced employees. There can be no assurance that the Company will be successful in hiring or retaining qualified personnel, and its failure to do so could have a material adverse impact on the Company's business, financial condition and results of operations. ADDITIONAL RISK FACTORS All statements in this Annual Report on Form 10-K that are not historical are forward-looking statements that are subject to certain risks and uncertainties. Such statements are based on management's current expectations and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. The Company cautions investors that there can be no assurance that actual results or business conditions will not differ materially from those projected or suggested in such forward-looking statements as a result of various factors, including, but not limited to, the following risk factors and factors discussed elsewhere in this Annual Report on Form 10-K. Affymetrix expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in Affymetrix' expectations with regard thereto or any change in events, conditions, or circumstances on which any such statements are based. 22 EARLY STAGE OF DEVELOPMENT The Company has not commercialized significant quantities of products based on its technologies. As of December 31, 1997, the Company had placed 55 GeneChip systems, all of which have been solely for research use. The Company's GeneChip system and other potential products will require significant additional development and investment, including testing to further validate performance and demonstrate cost-effectiveness. While the Company's initial product sales for research use have not required regulatory approval, the Company expects that such approval will be required for some applications in the future. The Company or its partners may need to undertake costly and time-consuming efforts to obtain this approval. There can be no assurance that any future products will be successfully developed, be proven to be accurate and efficacious in any markets, meet applicable regulatory standards in a timely manner or at all, be protected from competition by others, avoid infringing the proprietary rights of others, be manufactured in sufficient quantities or at reasonable costs, or be marketed successfully. The Company has experienced significant operating losses since inception and expects these losses to continue for at least the next several years. Whether the Company can successfully manage the transition to a commercial-scale enterprise will depend upon a number of factors including establishing its commercial manufacturing capability, developing its marketing capabilities, establishing sales and distribution capabilities, as well as entering into supply agreements with customers desiring to use the Company's products. Failure to make such a transition successfully would have a material adverse effect on the Company's business, financial condition and results of operations. TECHNOLOGICAL UNCERTAINTY; RAPID TECHNOLOGICAL CHANGE The Company is developing its GeneChip system for expression monitoring, polymorphism discovery and disease management applications. The GeneChip system involves several new technologies, including a complex chemical synthesis process necessary to create DNA probe arrays. Technicians using the GeneChip system require new technical skills and training. There can be no assurance that technicians will not experience difficulties with the system that would prevent or limit its use. Further, in order for the Company to address new applications for the GeneChip system, the Company may be required to increase the number of features on these arrays and design software capable of managing the information generated from such probe arrays. There can be no assurance that the Company will be capable of validating or achieving the improvements in the components of the GeneChip system necessary for its continued successful commercialization. The development of research and disease management products based on the Company's technologies will be subject to the risks of failure inherent in the development of products based on new technologies. These risks include possibilities that any products based on these technologies will be found to be ineffective, unreliable or unsafe, or otherwise fail to receive necessary regulatory clearances; that products will be difficult to manufacture on a large scale or will be uneconomical to manufacture and market; that proprietary rights of third parties will preclude the Company or its collaborative partners from marketing products; or that third parties will market superior or equivalent products. Furthermore, there can be no assurance that the Company's research and development activities will continue to result in any commercially viable products. Expression monitoring, polymorphism discovery and disease management technologies have undergone and are expected to continue to undergo rapid and significant change. The Company's future success will depend in large part on its ability to maintain a competitive position with respect to these technologies. Rapid technological development by the Company or others may result in products or technologies becoming obsolete. In addition, products offered by the Company would be made obsolete by less expensive or more effective tests based on other technologies or by new therapeutic or prophylactic agents that obviate the need for diagnostic and monitoring information. There can be no assurance that the 23 Company will be able to make the enhancements to its technology necessary to compete successfully with newly emerging technologies. INTENSE COMPETITION See the discussion under the heading "COMPETITION" elsewhere in this Annual Report on Form 10-K. UNCERTAINTY OF MARKET ACCEPTANCE; DEPENDENCE ON SIGNIFICANT CUSTOMERS The commercial success of the Company's GeneChip system will depend upon market acceptance by pharmaceutical and biotechnology companies, academic research centers and clinical reference laboratories. Market acceptance will depend on many factors, including convincing researchers that the GeneChip system is an attractive alternative to current technologies for the acquisition, analysis and management of genetic information; the receipt of regulatory clearances in the United States, Europe, Japan and elsewhere; the need for laboratories to license other technologies, such as amplification technologies that may be required to use the GeneChip system for certain applications; and the availability of new proprietary markers that may be important to the diagnosis, monitoring and treatment of disease for incorporation into the Company's probe arrays. Further, ethical concerns may limit the use of the GeneChip system for certain disease management applications or the analysis of genetic information. In addition, potential customers will need skilled laboratory technicians to operate the GeneChip system. Market acceptance of the GeneChip system could also be adversely affected by limited funding available for academic research centers and other research organizations that are the potential customers for the GeneChip system. The cost of the GeneChip system and access to probe arrays may deter certain potential customers of the Company's products. The Company may be required to reduce or discount the price of its GeneChip system or probe arrays. Furthermore, the failure of the Company to place sufficient quantities of the instruments for the GeneChip system would have a material adverse effect on its ability to sell the disposable probe arrays. There can be no assurance that pharmaceutical or biotechnology companies, academic research centers or clinical reference laboratories will replace existing instrumentation and techniques with the GeneChip system. Because of these and other factors, there can be no assurance that the Company's products will gain market acceptance. The Company's customers are concentrated in a small number of pharmaceutical and biotechnology companies, academic research centers and clinical reference laboratories. As a result, the Company's financial performance may depend on large orders from a limited number of customers. There are only three major reference laboratories in the United States, two of which are associated with large pharmaceutical companies. There can be no assurance that the Company will be able to market successfully the GeneChip system to reference laboratories or that the affiliation of these laboratories with pharmaceutical companies will not adversely affect their decision to purchase GeneChip systems. The Company's dependence on sales to a few customers may also strengthen the purchasing leverage of these potential customers, which could reduce the sales price of the GeneChip system. Also, the Company believes that the sales cycle for the GeneChip system will be lengthy due to the need to educate potential customers about its characteristics. The failure of the Company to gain additional customers, the loss of any customer or a significant reduction in the level of sales to any customer would have a material adverse effect on the Company's business, financial condition and results of operations. UNCERTAINTIES RELATED TO COMMERCIAL VIABILITY OF EXISTING PRODUCTS The first commercial application of the Company's GeneChip system is an HIV probe assay designed to detect mutations in HIV, the virus that causes AIDS. The HIV probe array provides sequence information from the reverse transcriptase and protease genes of HIV, and the system includes a fluidics 24 station, a scanner and related software. In April 1996, the Company introduced the HIV probe array for research purposes only. In July 1997, the Company introduced its second commercially available product, the p53 tumor suppressor gene assay for research use, which was developed in collaboration with OncorMed. In November 1997, the Company introduced its third commercially available product, the p450 assay for research use only. The Company has also entered into several supply and collaborative agreements pursuant to which it is supplying GeneChip systems and expression probe arrays for research purposes. As of December 31, 1997 the Company had placed 55 GeneChip systems at customer sites. These systems have been in operation for a limited period of time, and their accuracy and efficacy have not been fully demonstrated. There can be no assurance that the accuracy of the probe arrays in providing sequence information will be equal to or better than current technologies, such as gel-based sequencing techniques. There can be no assurance that the probe arrays will provide commercially useful information, that the arrays or the GeneChip system will operate without difficulties, that technicians will have adequate training to use the GeneChip system, or that the Company will not experience manufacturing problems or marketing difficulties selling the probe arrays to pharmaceutical and biotechnology companies, academic research centers and clinical reference laboratories. Furthermore, there can be no assurance that the HIV, p53 or p450 assays will gain regulatory approval for clinical use. As new therapies and combinations of therapies for treating HIV are employed, new mutations in the HIV genome may be discovered that would require the Company to redesign its current HIV probe array or develop new probe arrays. Advanced therapies could be discovered that target other components of the virus or which do not generate drug resistance. Similarly, new mutations identified in the p53 and p450 genes may require the Company to redesign its current p53 and p450 probe assays or develop new probe assays. Cost containment pressures for treating diseases, including HIV and cancer, may limit the price the Company may be able to charge potential customers for these assays. Failure of the Company to successfully commercialize its HIV, p53, p450 and gene expression assays could have a material adverse effect on the Company's business, financial condition and results of operations and may adversely affect the Company's ability to commercialize future products. DEPENDENCE UPON COLLABORATIVE PARTNERS An important element of the Company's business strategy involves collaborations with pharmaceutical, diagnostic and biotechnology companies that have discovered genes and may seek to use the Company's technologies to discover genetic mutations or develop diagnostic and therapeutic products. The Company has significant collaborations with Amersham Pharmacia Biotech, HP, bioMerieux, and OncorMed, and has entered into a consortium with the Whitehead Institute, Millennium and Bristol-Myers. The Company has received a material portion of its revenue since inception from its collaborative partners and intends to enter into collaborative arrangements with other companies to apply its technology, fund development, commercialize potential future products, and assist in obtaining regulatory approval. There can be no assurance that any of the Company's present or future collaborative partners will perform their obligations as expected or will devote sufficient resources to the development, clinical testing or marketing of the Company's potential products developed under the collaborations. Any parallel development by a partner of technologies or components competitive with the GeneChip system, preclusion of the Company from entering into competitive arrangements, failure to obtain timely regulatory approvals, premature termination of an agreement, or failure by a partner to devote sufficient resources to the development and commercialization of the Company's products could have a material adverse effect on the Company's business, financial condition and results of operations. The Company's agreements with its collaborators may have provisions that give rise to disputes regarding the rights and obligations of the parties. These and other possible disagreements could lead to delays in collaborative research, development or commercialization of certain products, or could require or 25 result in litigation or arbitration, which would be time-consuming and expensive, and could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that the Company will be able to negotiate future collaborative arrangements on acceptable terms, if at all, or that such collaborations will be successful. HISTORY OF LOSSES AND EXPECTATION OF FUTURE LOSSES The Company has incurred operating losses in each year since its inception, including net losses of approximately $22.5 million, $12.2 million and $10.7 million during the years ended December 31, 1997, 1996 and 1995, respectively. At December 31, 1997, the Company had an accumulated deficit of approximately $67.3 million. The Company's losses have resulted principally from costs incurred in research and development and from general and administrative costs associated with the Company's operations. These costs have exceeded the Company's interest income and revenues, which, to date, have been generated principally from cash and investment balances, collaborative research and development agreements, supply agreements and government research grants. The Company expects to incur substantial additional operating losses over the next several years as a result of increases in its expenses for research and product development, manufacturing scale-up, expanding sales and marketing and capital expenditures. The Company may have to reduce or discount the price of the GeneChip system to gain market acceptance, which could adversely affect gross margins. The Company's future gross margins, if any, will be dependent on, among other factors, the Company's ability to cost-effectively manufacture the GeneChip system, its product mix and the degree of price discounts or reductions required to market its products to pharmaceutical and biotechnology companies, academic research centers and clinical reference laboratories. The amount of future operating losses and time required by the Company to reach profitability, if ever, are highly uncertain. The Company's ability to generate significant revenues and become profitable is dependent in large part on the ability of the Company to enter into additional customer supply agreements and collaborative arrangements and on the ability of the Company and its collaborative partners to successfully commercialize products developed under the collaborations. In addition, delays in receipt of any necessary regulatory approvals by the Company or its collaborators, or receipt of approvals by competitors, could adversely affect the successful commercialization of the Company's technologies. There can be no assurance that the Company will ever achieve profitability. FLUCTUATIONS IN OPERATING RESULTS The Company's quarterly operating results depend upon the volume and timing of orders for GeneChip systems and probe arrays received and delivered during the quarter, variations in revenue recognized under supply and collaborative agreements, including license fees, product sales, milestones, royalties and other contract revenues, as well as the timing of new product introductions by the Company. The Company's quarterly operating results may also fluctuate significantly depending on other factors, including the introduction of new products by the Company's competitors; regulatory actions; market acceptance of the GeneChip system and other potential products; adoption of new technologies; manufacturing capabilities; variations in gross margins of the Company's products; competition; the cost, quality and availability of reagents and components; the mix of products sold; changes in government funding; and third-party reimbursement policies. DEPENDENCE ON PROPRIETARY TECHNOLOGY AND UNPREDICTABILITY OF PATENT PROTECTION See the discussion under the heading "INTELLECTUAL PROPERTY" elsewhere in this Annual Report on Form 10-K. 26 NEED FOR ADDITIONAL FUNDING; UNCERTAINTY OF ACCESS TO CAPITAL The Company anticipates that its existing capital resources, together with the expected proceeds of approximately $50 million from the pending sale of Series AA Preferred Stock to Glaxo, will enable it to maintain currently planned operations. However, this expectation is based on the Company's current operating plan, which is expected to change as a result of many factors, and the Company could require additional funding sooner than anticipated. In addition, the Company may choose to raise additional capital due to market conditions or strategic considerations even if it has sufficient funds for its operating plan. The Company's requirements for capital will be substantial and will depend on many factors, including payments received under existing and possible future supply and collaborative agreements; the availability of government research grant payments; the progress of the Company's collaborative and independent research and development projects; the cost of preclinical and clinical trials for the Company's products; the prosecution, defense and enforcement of patent claims and other intellectual property rights; and development of manufacturing, marketing and sales capabilities. The Company has no credit facility or other committed sources of capital. To the extent capital resources are insufficient to meet future capital requirements, the Company will have to raise additional funds to continue the development of its technologies. There can be no assurance that such funds will be available on favorable terms, or at all. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of such securities could result in dilution to the Company's shareholders. If adequate funds are not available, the Company may be required to curtail operations significantly or to obtain funds by entering into collaboration agreements on unattractive terms. The Company's inability to raise capital would have a material effect on the Company's business, financial condition and results of operations. LIMITED MANUFACTURING CAPABILITY; SOLE SOURCE SUPPLIERS See the discussion under the heading "MANUFACTURING" elsewhere in this Annual Report on Form 10-K. LIMITED SALES AND MARKETING EXPERIENCE The Company does not have a direct sales force and has only limited experience in sales and marketing. The Company intends to market its products to pharmaceutical and biotechnology companies, academic research centers and clinical reference laboratories. The Company has entered into a non-exclusive sales agency agreement with Amersham Pharmacia Biotech and may be required to enter into additional collaboration or distribution arrangements to commercialize its products both inside and outside the United States. There can be no assurance that the Company will be able to establish a direct sales force, that Amersham Pharmacia Biotech will be successful in distributing the Company's products or that the Company will be able to establish additional collaborative or distribution arrangements to market its products. Failure to do so would have a material adverse effect on the Company's business, financial condition and results of operations. UNCERTAINTIES RELATED TO CONTINUED GOVERNMENT FUNDING A significant portion of the Company's products for research use are likely to be sold to universities, government research laboratories, private foundations and other institutions where funding is dependent upon grants from government agencies such as the NIH. Research funding by the government, however, may be significantly reduced in the future. Any such reduction may materially affect the ability of the Company's existing and prospective research customers to purchase the Company's products for research use. The Company has received and expects to continue to receive significant funds under various United States government research and technology programs. While the programs are generally multi-year awards, they are subject to a yearly appropriations process in the United States Congress. There can be no assurance that the Company will receive the $15.5 million remaining funding designated for it under the ATP grant, and termination of the ATP grant could have a material adverse effect on the Company's 27 business, financial condition and results of operations. The Company's ATP and NIH grants give the government certain rights to license for its own use inventions resulting from funded work. There can be no assurance that the Company's proprietary position will not be adversely affected should the government exercise these rights. UNCERTAINTIES RELATED TO THIRD-PARTY REIMBURSEMENT See the discussion under the heading "REIMBURSEMENT" elsewhere in this Annual Report on Form 10-K. GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY APPROVAL See the discussion under the heading "GOVERNMENT REGULATION" elsewhere in this Annual Report on Form 10-K. ETHICAL, LEGAL AND SOCIAL IMPLICATIONS OF GENETIC PREDISPOSITION TESTING The Company's success will depend in part upon the Company's ability to develop genetic tests for genes discovered by the Company and others. Genetic tests, such as certain of the Company's GeneChip assays, may be difficult to perform and interpret and may lead to misinformation or misdiagnosis. Further, even when a genetic test identifies the existence of a mutation in an individual, the interpretation of the result is often limited to the identification of a statistical probability that the tested individual will develop the disease or condition for which the test is performed. In addition, once available, such tests may be subject to ethical concerns or reluctance to administer or pay for tests for conditions that are not treatable. Further, it is possible that specific gene-based diagnostic tests marketed by other companies could encounter public resistance, resulting in societal and governmental concerns regarding genetic testing in general. The prospect of broadly available genetic predisposition testing has raised issues regarding the appropriate utilization and the confidentiality of information provided by such testing. It is possible that discrimination by insurance companies could occur through the raising of premiums by insurers to prohibitive levels, outright cancellation of insurance or unwillingness to provide coverage to patients shown to have a genetic predisposition to a particular disease. In addition, employers could discriminate against employees with a genetic predisposition to develop a particular disease. Finally, governmental authorities could, for social or other purposes, limit the use of genetic testing or prohibit testing for genetic predisposition to certain conditions which could adversely affect the use of the Company's products. There can be no assurance that ethical concerns about genetic testing will not adversely affect market acceptance of the Company's GeneChip system. ATTRACTION AND RETENTION OF KEY EMPLOYEES AND SCIENTIFIC ADVISORS The Company is highly dependent on the principal members of its management and scientific staff. The loss of services of any of these persons could have a material adverse effect on the Company's product development and commercialization efforts. In addition, recruiting and retaining qualified scientific personnel to perform future research and development work will be critical to the Company's success. There can be no assurance that the Company will be able to attract and retain such personnel. Product development and commercialization will require additional personnel in areas such as diagnostic testing, regulatory affairs, manufacturing and marketing. The inability to acquire such services or to develop such expertise could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the Company relies on its scientific advisors to assist the Company in formulating its research and development strategy. All of the scientific advisors are employed by employers other than the 28 Company and have commitments to other entities that may limit their availability to the Company. Some of the Company's scientific advisors also consult for companies that may be competitors of the Company. EXPOSURE TO PRODUCT LIABILITY CLAIMS The Company's business exposes it to potential product liability claims that are inherent in the testing, manufacturing, marketing and sale of human diagnostic and therapeutic products. The Company intends to acquire additional insurance, should it be desirable, for clinical liability risks. There can be no assurance that it will be able to obtain such insurance or general product liability insurance on acceptable terms or at reasonable costs or that such insurance will be in sufficient amounts to provide the Company with adequate coverage against potential liabilities. A product liability claim or recall could have a material adverse effect on the Company's business, financial condition and results of operations. CONTROL BY GLAXO, MANAGEMENT AND RELATED PERSONS Glaxo currently beneficially owns approximately 33% of the Company's outstanding Common Stock and executive officers, directors and principal shareholders (other than Glaxo) beneficially own approximately 2% of the Company's outstanding Common Stock. In March 1998, the Company agreed to sell and Glaxo agreed to purchase $50 million of Series AA Preferred Stock, subject to certain conditions. If such sale is completed, Glaxo will own approximately 37% of the then outstanding Common Stock and Common Stock equivalents of the Company. Accordingly, Glaxo and these shareholders may be able to influence the outcome of shareholder votes, including votes concerning the election of directors, adoption of amendments to the Company's Articles of Incorporation and Bylaws and approval of mergers and other significant corporate transactions. Glaxo and the Company have executed a governance agreement that confers rights on Glaxo in certain circumstances. ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS Certain provisions of the Company's Articles of Incorporation and Bylaws and certain other contractual provisions could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, or control the Company. Such provisions could limit the price that certain investors might be willing to pay in the future for shares of the Company's Common Stock. Certain of these provisions allow the Company to issue Preferred Stock with rights senior to those of the Common Stock without any further vote or action by the shareholders, eliminate the right of shareholders to act by written consent which could make it more difficult for shareholders to affect certain corporate actions. These provisions could also have the effect of delaying or preventing a change in control of the Company. The issuance of Preferred Stock could decrease the amount of earnings and assets available for distribution to the holders of Common Stock or could adversely affect the rights and powers, including voting rights, of the holders of the Common Stock. In certain circumstances, such issuance could have the effect of decreasing the market price of the Common Stock. VOLATILITY OF STOCK PRICE The market price of the Company's Common Stock since the Company's initial public offering in June 1996 has increased dramatically and has been highly volatile. In addition to overall stock market fluctuations, factors such as announcements of results of research activities, collaborative agreements, technological innovations, or new commercial products by the Company, collaborative partners or competitors, changes in government regulation, regulatory actions, changes in patent laws, developments concerning proprietary rights, quarterly variations in operating results, litigation and other events may have a significant impact on the market price of the Company's Common Stock. The stock market has from time to time experienced significant price and volume fluctuations which have particularly affected the market prices of the stocks of technology companies, and which may be unrelated to the operating performance of 29 particular companies. Further, there has been particular volatility in the market prices of securities of biotechnology and other life sciences companies. ITEM 2. PROPERTIES Affymetrix leases two facilities in Santa Clara, California, totaling 101,000 square feet for research laboratories and administrative offices under a lease expiring in 2003. The Company has an option to renew the leases on these facilities for an additional three years. The Company leases 20,000 square feet of space for manufacturing operations in Sunnyvale, California, under a lease that expires in 2000. The Company has options to renew this lease for two successive three-year terms. The Company also leases 31,000 square feet of research and development space in Sunnyvale, California under a lease that expires in 1999. In February 1998, the Company purchased approximately ten acres of land near Sacramento, California, upon which the Company plans to build additional manufacturing facilities. The Company expects to continue to expand its manufacturing facilities as well as its research and development facilities over the next few years. ITEM 3. LEGAL PROCEEDINGS On March 3, 1997, Hyseq filed a lawsuit in United States District Court for the Northern District of California (San Jose Division) alleging that certain Affymetrix products infringe United States patents 5,202,231 and 5,525,464. In addition, in December 1997, Hyseq filed a second action claiming that certain Affymetrix products infringe a related patent, United States patent 5,695,940. The Hyseq actions and any other legal action against the Company or its collaborative partners claiming damages and seeking to enjoin commercial activities relating to the affected products and processes could, in addition to subjecting the Company to potential liability for damages, require the Company or its collaborative partners to obtain a license in order to continue to manufacture or market the affected products and processes. While the Company believes that the Hyseq complaints are without merit, there can be no assurance that the Company will prevail in the Hyseq actions or that the Company or its collaborative partners will prevail in any other action, nor can there be any assurance that any license (including licenses proposed by third parties) required would be made available on commercially acceptable terms, if at all. On January 6, 1998, the Company filed a patent infringement action in the United States District Court for the District of Delaware (No. 98-6) alleging that certain of Incyte, Inc.'s ("Incyte") and Synteni, Inc.'s ("Synteni") products infringe United States Patent 5,445,934. The action seeks to enjoin commercial activities of Incyte and Synteni relating to the Affymetrix patent. There can be no assurance that Affymetrix will prevail in such litigation or be successful in asserting its patent rights. The Company is likely to incur substantial costs and expend substantial personnel time in asserting the Company's patent rights against Incyte and Synteni. Failure to successfully enforce its patent rights or the loss of these patent rights or others would remove a legal obstacle to competitors in designing systems with similar competitive advantages, which could have a material adverse effect on the Company's business, financial condition and operating results. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fourth quarter of the year ended December 31, 1997. 30 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The Company's Common Stock is traded on the Nasdaq National Market System under the symbol of AFFX. The following table sets forth, for the periods indicated, the low and high bid prices per share for the Company's Common Stock as reported by the Nasdaq National Market.
LOW HIGH ------ ------ 1996 - -------------------------------------------------- Second Quarter (BEGINNING JUNE 6, 1996)........................ $14.50 $17.88 Third Quarter..................................... $ 9.00 $19.00 Fourth Quarter.................................... $15.88 $23.50 1997 - -------------------------------------------------- First Quarter..................................... $19.75 $36.38 Second Quarter.................................... $20.38 $35.25 Third Quarter..................................... $29.13 $49.88 Fourth Quarter.................................... $29.75 $47.63
As of December 31, 1997, there were approximately 372 holders of record of the Company's Common Stock. No dividends have been paid on the Common Stock. The Company currently intends to retain all future earnings, if any, for use in its business and does not anticipate paying any cash dividends on its common stock in the foreseeable future. If the sale of the Series AA Preferred Stock to Glaxo is completed, the Company will pay a semi-annual, cumulative dividend of 6.5% per year on the Series AA Preferred Stock. USE OF PROCEEDS On June 6, 1996, a Registration Statement on Form S-1 (No. 333-3648) was declared effective by the Securities and Exchange Commission, pursuant to which 6,153,000 shares of the Company's Common Stock, no par value, were offered and sold for the account of the Company at a price of $15.00 per share, generating gross offering proceeds of $92.3 million for the account of the Company. The managing underwriters for the offering were Robertson Stephens, CS First Boston and Montgomery Securities. From the effective date of the Registration Statement to December 31, 1997, the Company incurred $6.2 million in underwriting discounts and commissions and $1.0 million in other related expenses. Total expenses incurred in connection with the offering were $7.2 million. The net proceeds of the offering, after deducting the foregoing expenses, were $85.1 million. No direct or indirect payments were made to directors, officers, or general partners of the Company or their associates, or to persons owning 10% or more of any class of equity securities of the Company and its affiliates. From the effective date of the Registration Statement to December 31, 1997, the Company estimates that it has used a portion of the net proceeds of the offering as follows: (i) temporary investment in marketable debt securities, $71.6 million; and (ii) working capital, $13.5 million. ITEM 6. SELECTED FINANCIAL DATA The following selected historical information has been derived from the audited financial statements of the Company. The financial statements as of December 31, 1997 and 1996 and for each of the three 31 years in the period ended December 31, 1997 are derived from audited financial statements and are included elsewhere in this Form 10-K. The table should be read in conjunction with Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Item 8. "Financial Statements and Supplementary Data."
YEAR ENDED DECEMBER 31, ------------------------------------------------ 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA: Revenue: Product............................... $ 4,789 $ 1,389 $ -- $ -- $ -- Contract and grant.................... 14,976 10,583 4,625 1,574 1,413 -------- -------- -------- -------- -------- Total revenue....................... 19,765 11,972 4,625 1,574 1,413 -------- -------- -------- -------- -------- Cost and expenses: Cost of product revenue............... 4,559 2,178 -- -- -- Research and development.............. 28,168 18,762 12,420 9,483 6,566 Selling, general and administrative... 14,697 7,569 3,833 2,303 577 -------- -------- -------- -------- -------- Total cost and expenses............. 47,424 28,509 16,253 11,786 7,143 -------- -------- -------- -------- -------- Loss from operations.................... (27,659) (16,537) (11,628) (10,212) (5,730) Interest income, net.................... 5,133 4,310 881 532 138 -------- -------- -------- -------- -------- Net loss................................ $(22,526) $(12,227) $(10,747) $ (9,680) $ (5,592) -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Basic and diluted net loss per share (1)................................... $ (0.99) $ (0.62) $ (0.84) $ (0.94) $ (1.69) Shares used in computing basic and diluted net loss per share (1)........ 22,644 19,793 12,722 10,250 3,312 BALANCE SHEET DATA: Cash, cash equivalents, and short-term investments........................... $ 71,573 $108,982 $ 38,883 $ 17,805 $ 20,392 Working capital......................... 71,553 107,668 36,070 15,677 17,452 Total assets............................ 101,170 118,900 44,594 19,945 22,897 Long-term obligations................... 513 741 948 7,135 -- Accumulated deficit..................... (67,269) (44,743) (32,516) (21,769) (12,089) Total shareholders' equity.............. 91,036 112,533 38,561 9,254 19,294
- ------------------------ (1) In 1998, the Company adopted the provisions of Staff Accounting Bulletin No. 98 ("SAB 98") and Statement of Financial Accounting Standards No. 128 "Earnings Per Share" and restated all prior periods. SAB 98 eliminated the impact of certain dilutive securities on the number of shares used to determine basic and diluted net loss per share during the period prior to the Company's initial public offering. See Note 1 to the Financial Statements included in Exhibit 13. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information under the caption "Management's Discussion and Analysis of Financial Conditions and Results of Operations" included in Exhibit 13 to this Form 10-K Report is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Financial Statements and notes thereto included in Exhibit 13 to this Form 10-K Report are incorporated herein by reference. 32 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Incorporated by reference to the sections of the Company's proxy statement for the 1998 Annual Meeting of Shareholders entitled "Election of Directors." ITEM 11. EXECUTIVE COMPENSATION Incorporated by reference to the sections of the Company's proxy statement for the 1998 Annual Meeting of Shareholders entitled "Executive Compensation," "Compensation Committee Report," "Certain Transactions" and "Compensation of Directors." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated by reference to the section of the Company's proxy statement for the 1998 Annual Meeting of Shareholders entitled "Stock Ownership of Principal Shareholders and Management." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated by reference to the section of the Company's proxy statement for the 1998 Annual Meeting of Shareholders entitled "Certain Transactions." 33 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) The Financial Statements and notes thereto included in Exhibit 13 to this Form 10-K Report are incorporated herein by reference. (a)(2) The schedules have been omitted because they are not applicable or are not required or the information required to be set forth therein is included in the Financial Statements or notes thereto. (a)(3) Exhibits:
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - -------------------------------------------------------------------------------- (1)3.1 Amended and Restated Articles of Incorporation (1)3.2 Form of Amended and Restated Articles, to be effective upon closing of the Registrant's initial public Offering (1)3.3 Bylaws (1)3.4 Form of Certificate of Amendment of Amended and Restated Articles of Incorporation (5)4.1 Certificate of Determination as filed with the Secretary of State of the State of California on March 11, 1998 +(1)10.1 1993 Stock Plan, as amended +(1)10.2 1996 Nonemployee Directors Stock Option Plan *(1)10.3 Collaboration Agreement by and between Hewlett-Packard Company and Affymetrix, Inc. dated November 11, 1994 *(1)10.4 Development and Supply Agreement between Affymetrix, Inc. and Genetics Institute, Inc. dated November 15, 1994 *(1)10.5 Supply Agreement with Genetics Institute, Inc. dated December 8, 1995 *(1)10.6 Technology License Agreement among Affymax N.V., Affymax Technologies, N.V., the Affymax Research Institute, and Affymetrix, Inc. dated January 1, 1993 +(1)10.7 Severance Agreement and Release between Affymetrix, Inc. and David B. Singer dated June 15, 1995 +(1)10.8 Loan and Pledge Agreement between David B. Singer and Affymetrix, Inc. effective December 7, 1993 *(1)10.9 ATP Participation Agreement between Affymetrix, Inc. and Molecular Dynamics, Inc. dated January 12, 1995 pursuant to the National Institute of Standards and Technology's Advanced Technology Program. (1)10.10 Amendment 1 to the ATP Participation Agreement between Affymetrix, Inc. and Molecular Dynamics, Inc. effective January 13, 1996 *(1)10.11 Governance Agreement between Affymetrix, Inc. and Glaxo Wellcome plc dated July 6, 1995 (1)10.12 Services Agreement between Affymax Research Institute and Affymetrix, Inc. effective October 1, 1993 (1)10.13 Loan Agreement between Affymax Technologies N.V. and Affymetrix, Inc. dated December 1, 1994 (1)10.14 Lease between Solar Oakmead Joint Venture and Affymetrix, Inc. dated October 20, 1995 (1)10.15 Sublease between Salutar, Inc. and Affymetrix, Inc. dated October 20, 1995 (1)10.16 Sublease between Affymax Research Institute and Affymetrix, Inc. dated February 1, 1994 *(1)10.17 Manufacturing and Supply Agreement between Affymetrix, Inc. and RELA, Inc. dated November 27, 1995
34
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - -------------------------------------------------------------------------------- +(1)10.18 Loan and Pledge Agreement between Stephen P.A. Fodor and Affymetrix, Inc. effective December 7, 1993 +(1)10.19 Agreement between Stephen P.A. Fodor and Affymetrix, Inc. dated November 1, 1994 +(1)10.20 Form of Director and Officer Indemnification Agreement *(1)10.21 Demonstration Agreement between Affymetrix, Inc. and Glaxo Wellcome, Inc. dated May 1, 1996 (1)10.22 Lease between Harry Locklin and Affymetrix, Inc. dated December 5, 1994 (2)10.23 Lease between Sobrato Interest and Affymetrix, Inc. dated May 31, 1996 (338040 Central Expressway, Santa Clara, CA) (2)10.24 Lease between Sobrato Interest and Affymetrix, Inc. dated May 31, 1996 (34500 Central Expressway, Santa Clara, CA) *(3)10.25 Collaboration Agreement between bioMerieux Vitek, Inc. and Affymetrix, Inc. effective as of September 1, 1996 *(3)10.26 Manufacturing Agreement between bioMerieux Vitek, Inc. and Affymetrix, Inc. effective as of September 1, 1996 (3)10.27 Collaboration Agreement between Incyte Pharmaceuticals, Inc. and Affymetrix, Inc. made as of November 11, 1996 *(4)10.28 Supply Agreement among F. Hoffmann--La Roche Ltd., Hoffmann La-Roche Inc., Syntex (U.S.A.) Inc. and Affymetrix, Inc. effective as of August 15, 1997 **10.29 Sales Representation Agreement between Affymetrix, Inc. and Amersham Pharmacia Biotech, Ltd. dated November 28, 1997 **10.30 License Agreement between Affymetrix, Inc. and Molecular Dynamics, Inc. dated November 28, 1997 (6)10.31 Series AA Preferred Stock Purchase Agreement dated March 9, 1998 by and between Affymetrix, Inc. and Glaxo Wellcome Americas, Inc. with exhibits. 13 Financial Statements 23 Consent of Ernst & Young LLP, independent auditors (included on page 39) 24 Power of Attorney (included on page 36) 27.1 Financial Data Schedule 27.2 Restated Financial Data Schedules
- ------------------------ (1) Incorporated by reference to the same number exhibit filed with Registrant's Registration Statement on Form S-1 (File No. 333-3648), as amended (2) Incorporated by reference to the same number exhibit filed with the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 (File No. 000-28218) (3) Incorporated by reference to the same number exhibit filed with the Company's Report on Form 10-K for the year ended December 31, 1996 (File No. 000-28218) (4) Incorporated by reference to the Exhibit 10.1 filed with the Registrant's Registration Statement on Form S-3 (File No. 333-38167) (5) Incorporated by reference to the Exhibit 4 filed with the Company's Current Report on Form 8-K dated March 9, 1998 (File No. 000-28218) (6) Incorporated by reference to the Exhibit 10 filed with the Company's Current Report on Form 8-K dated March 9, 1998 (File No. 000-28218). * Confidential treatment granted ** Confidential treatment requested + Management contract, compensatory plan or arrangement (b) Reports on Form 8-K. The Company filed a Report on Form 8-K dated October 24, 1997 reporting the Company's financial results for the three and nine months ended September 1997. 35 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.
AFFYMETRIX, INC. (Registrant) March 31, 1998 By /s/ STEPHEN P.A. FODOR, PH.D. ------------------------------------------ Stephen P.A. Fodor, Ph.D. PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR March 31, 1998 By /s/ EDWARD M. HURWITZ ------------------------------------------ Edward M. Hurwitz VICE PRESIDENT AND CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
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.
SIGNATURE TITLE DATE ---------------------------------------- -------------------------- ------------------- President, Chief Executive By /s/ STEPHEN P.A. FODOR, PH.D. Officer and Director ---------------------------------------- (Principal Executive March 31, 1998 Stephen P.A. Fodor, Ph.D. Officer) Vice President and Chief By /s/ EDWARD M. HURWITZ Financial Officer ---------------------------------------- (Principal Financial and March 31, 1998 Edward M. Hurwitz Accounting Officer) By /s/ JOHN D. DIEKMAN, PH.D. ---------------------------------------- Chairman of the Board March 31, 1998 John D. Diekman, Ph.D.
36
SIGNATURE TITLE DATE ---------------------------------------- -------------------------- ------------------- By /s/ PAUL BERG, PH.D. ---------------------------------------- Director March 31, 1998 Paul Berg, Ph.D. By ---------------------------------------- Director March , 1998 Douglas M. Hurt By /s/ VERNON R. LOUCKS, JR. ---------------------------------------- Director March 31, 1998 Vernon R. Loucks, Jr. By /s/ BARRY C. ROSS, PH.D. ---------------------------------------- Director March 31, 1998 Barry C. Ross, Ph.D. By /s/ DAVID B. SINGER ---------------------------------------- Director March 31, 1998 David B. Singer By /s/ LUBERT STRYER, M.D. ---------------------------------------- Director March 31, 1998 Lubert Stryer, M.D. By /s/ JOHN A. YOUNG ---------------------------------------- Director March 31, 1998 John A. Young
37 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS To the Board of Directors and Shareholders Affymetrix, Inc. We have audited the accompanying balance sheets of Affymetrix, Inc. as of December 31, 1997 and 1996, and the related statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Affymetrix, Inc. at December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Ernst & Young LLP Palo Alto, California, January 23, 1998 38 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement of Affymetrix, Inc. (Form S-8 File Numbers 333-11299 and 333-35287) of our report dated January 23, 1998, with respect to the financial statements of Affymetrix, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 1997. Ernst & Young LLP Palo Alto, California March 27, 1998 39 AFFYMETRIX, INC. INDEX TO FINANCIAL STATEMENTS
Financial Statements and Notes.......... Incorporated by reference from Exhibit 13 pages 5-17. Report of Ernst & Young LLP, Independent Auditors.............................. Page 38 of this Form 10-K Report.
40 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - -------------------------------------------------------------------------------- (1)3.1 Amended and Restated Articles of Incorporation (1)3.2 Form of Amended and Restated Articles, to be effective upon closing of the Registrant's initial public Offering (1)3.3 Bylaws (1)3.4 Form of Certificate of Amendment of Amended and Restated Articles of Incorporation (5)4.1 Certificate of Determination as filed with the Secretary of State of the State of California on March 11, 1998 +(1)10.1 1993 Stock Plan, as amended +(1)10.2 1996 Nonemployee Directors Stock Option Plan *(1)10.3 Collaboration Agreement by and between Hewlett-Packard Company and Affymetrix, Inc. dated November 11, 1994 *(1)10.4 Development and Supply Agreement between Affymetrix, Inc. and Genetics Institute, Inc. dated November 15, 1994 *(1)10.5 Supply Agreement with Genetics Institute, Inc. dated December 8, 1995 *(1)10.6 Technology License Agreement among Affymax N.V., Affymax Technologies, N.V., the Affymax Research Institute, and Affymetrix, Inc. dated January 1, 1993 +(1)10.7 Severance Agreement and Release between Affymetrix, Inc. and David B. Singer dated June 15, 1995 +(1)10.8 Loan and Pledge Agreement between David B. Singer and Affymetrix, Inc. effective December 7, 1993 *(1)10.9 ATP Participation Agreement between Affymetrix, Inc. and Molecular Dynamics, Inc. dated January 12, 1995 pursuant to the National Institute of Standards and Technology's Advanced Technology Program. (1)10.10 Amendment 1 to the ATP Participation Agreement between Affymetrix, Inc. and Molecular Dynamics, Inc. effective January 13, 1996 *(1)10.11 Governance Agreement between Affymetrix, Inc. and Glaxo Wellcome plc dated July 6, 1995 (1)10.12 Services Agreement between Affymax Research Institute and Affymetrix, Inc. effective October 1, 1993 (1)10.13 Loan Agreement between Affymax Technologies N.V. and Affymetrix, Inc. dated December 1, 1994 (1)10.14 Lease between Solar Oakmead Joint Venture and Affymetrix, Inc. dated October 20, 1995 (1)10.15 Sublease between Salutar, Inc. and Affymetrix, Inc. dated October 20, 1995 (1)10.16 Sublease between Affymax Research Institute and Affymetrix, Inc. dated February 1, 1994 *(1)10.17 Manufacturing and Supply Agreement between Affymetrix, Inc. and RELA, Inc. dated November 27, 1995 +(1)10.18 Loan and Pledge Agreement between Stephen P.A. Fodor and Affymetrix, Inc. effective December 7, 1993 +(1)10.19 Agreement between Stephen P.A. Fodor and Affymetrix, Inc. dated November 1, 1994 +(1)10.20 Form of Director and Officer Indemnification Agreement *(1)10.21 Demonstration Agreement between Affymetrix, Inc. and Glaxo Wellcome, Inc. dated May 1, 1996
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - -------------------------------------------------------------------------------- (1)10.22 Lease between Harry Locklin and Affymetrix, Inc. dated December 5, 1994 (2)10.23 Lease between Sobrato Interest and Affymetrix, Inc. dated May 31, 1996 (338040 Central Expressway, Santa Clara, CA) (2)10.24 Lease between Sobrato Interest and Affymetrix, Inc. dated May 31, 1996 (34500 Central Expressway, Santa Clara, CA) *(3)10.25 Collaboration Agreement between bioMerieux Vitek, Inc. and Affymetrix, Inc. effective as of September 1, 1996 *(3)10.26 Manufacturing Agreement between bioMerieux Vitek, Inc. and Affymetrix, Inc. effective as of September 1, 1996 (3)10.27 Collaboration Agreement between Incyte Pharmaceuticals, Inc. and Affymetrix, Inc. made as of November 11, 1996 *(4)10.28 Supply Agreement among F. Hoffmann-La Roche Ltd., Hoffmann La-Roche Inc., Syntex (U.S.A.) Inc. and Affymetrix, Inc. effective as of August 15, 1997 **10.29 Sales Representation Agreement between Affymetrix, Inc. and Amersham Pharmacia Biotech, Ltd. dated November 28, 1997 **10.30 License Agreement between Affymetrix, Inc. and Molecular Dynamics, Inc. dated November 28, 1997. (6)10.31 Series AA Preferred Stock Purchase Agreement dated March 9, 1998 by and between Affymetrix, Inc. and Glaxo Wellcome Americas, Inc. with exhibits. 13 Financial Statements 23 Consent of Ernst & Young LLP, independent auditors (included on page 39) 24 Power of Attorney (included on page 36) 27.1 Financial Data Schedule 27.2 Restated Financial Data Schedules
- ------------------------ (1) Incorporated by reference to the same number exhibit filed with Registrant's Registration Statement on Form S-1 (File No. 333-3648), as amended (2) Incorporated by reference to the same number exhibit filed with the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 (File No. 000-28218) (3) Incorporated by reference to the same number exhibit filed with the Company's Report on Form 10-K for the year ended December 31, 1996 (File No. 000-28218) (4) Incorporated by reference to the Exhibit 10.1 filed with the Registrant's Registration Statement on Form S-3 (File No. 333-38167) (5) Incorporated by reference to the Exhibit 4 filed with the Company's Current Report on Form 8-K dated March 9, 1998 (File No. 000-28218) (6) Incorporated by reference to the Exhibit 10 filed with the Company's Current Report on Form 8-K dated March 9, 1998 (File No. 000-28218). * Confidential treatment granted ** Confidential treatment requested + Management contract, compensatory plan or arrangement EX-10.29 2 EXHIBIT 10.29 Exhibit 10.29 SALES REPRESENTATION AGREEMENT Affymetrix, Inc. Amersham Pharmacia Biotech, Ltd [THE SYMBOL "**" IS USED THROUGHOUT THIS EXHIBIT TO INDICATE THAT A PORTION OF THE EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION.] CONTENTS 1. Appointment; Products; Start of Obligations.. . . . . . . . . . . . . .3 2. Representative Covenants and Representations. . . . . . . . . . . . . .4 3. Commissions, Collections and Payment; Supply Terms. . . . . . . . . . .7 4. Product Support.. . . . . . . . . . . . . . . . . . . . . . . . . . . .9 5. Limited Warranty. . . . . . . . . . . . . . . . . . . . . . . . . . . .9 6. Indemnity.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 7. Limited Liability.. . . . . . . . . . . . . . . . . . . . . . . . . . 11 8. Term and Termination. . . . . . . . . . . . . . . . . . . . . . . . . 11 9. General.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 This Sales Representation Agreement (the "Agreement") is entered as of November 28, 1997 by and between Affymetrix, Inc. ("Company"), a Delaware corporation, with its principal place of business at 3380 Central Expressway, Santa Clara, California and Amersham Pharmacia Biotech, Ltd ("Representative"), with its principal place of business at Bjorkgatan 30, S-751, 84 Uppsala, Sweden. 1. APPOINTMENT; PRODUCTS; START OF OBLIGATIONS. a. Subject to all the terms and conditions of this Agreement, Company hereby appoints Representative for the term of this Agreement as a worldwide, nonexclusive agent of Company for soliciting, taking and filling orders for the sale by Company (collectively, "solicits" or "solicitation") of Company's products set forth in Attachment A (as modified from time to time), together with the documentation therefor ("Products"), but for research, non-diagnostic use only (the "Field of Use"), and only pursuant to the terms of the applicable customer sales agreement for each Product as provided hereunder. The parties anticipate that other generally, commercially available chip products for use in expression, re-sequencing and mapping fields, and other non-chip products may be added to Attachment A from time to time, by mutual agreement of the parties. Company reserves the right to change, modify or discontinue any Product at any time; provided, however, that Representative shall have the right to sell off any remaining inventory of discontinued Products or, alternatively, return such inventory to Company for a credit equal to any amount paid therefor. Nothing in this Agreement shall be construed as limiting in any manner Company's marketing or distribution activities or its appointment of dealers, distributors, licensees or agents; or, with respect to any products other than the Products, Representative's marketing or distribution activities. All Products shall be distributed to customers only accompanied by Company's then-current sales agreement or such other alternative sales agreement as is approved by the Committee (as defined below) for such purpose. Prior to approval of an alternative sales agreement by the Committee, nothing contained herein will preclude Representative from using its commercial terms in dealing with customers, provided that such terms are (i) fully consistent with (and as protective of the Company, its intellectual property and its rights and obligations as) the Company's then current sales agreement and (ii) fully consistent with this Agreement and with the Company's role as principal (and Representative's role as a sales representative) with respect of the sale of Products. b. Representative may solicit the Products by themselves, or bundled with, or in conjunction with, other products; provided, however, that Products bundled with or in conjunction with other products that compete with any Product shall only be bundled with Company's prior written approval. All solicitation of Products shall be directly to customers, and not through other agents or representatives, and in any event only for the Field of Use. All Products shall bear the names, logos, notices and other designations ("Designations") required by Company. When Representative solicits Products bundled with or in conjunction with other products, Representative may brand such other products with its own Designations, but will ensure that Company's Designations are displayed in at least as prominent location and shall be of equal size. Representative shall not alter, remove, obscure, or deface any of Company's Designations. From time to time, at Company's reasonable request, Representative shall supply samples of products that are bundled with or offered in conjunction with Products to Company for inspection, and Representative will comply with all reasonable requests of Company for changes thereto to conform with Company standards. Except to the extent expressly and 3 unambiguously set forth herein, Company retains all rights and licenses with respect to the Products, and Representative has no right to use any Products except to solicit orders as provided herein. c. Products may be solicited by Representative, or by the affiliates of Representative set forth on Attachment D ("Affiliates"), which will be completed by Representative within thirty (30) days after execution of this Agreement. Representative may propose additional affiliates in which Representative owns, directly or indirectly, more than fifty percent (50%) of the outstanding shares of securities (representing the right to vote for the election of directors or other managing authority); such proposals shall be added to the list of Affiliates upon Company's approval, which will not be withheld unreasonably. Representative shall bind all Affiliates in writing to all the restrictions on Representative contained in this Agreement, and Representative shall ensure that the Affiliates only solicit Products subject to such restrictions. d. Until February 1, 1998 ("Solicitation Date"), Representative acknowledges that Company shall not be obliged to accept or fill any orders for Products, and Company acknowledges that Representative shall not be obliged to actively solicit orders for Products; all other obligations and requirements of this Agreement shall be in full force during this time. e. Sales will not be made in any country until such country has been approved by Company as a supported region which approval will not be unreasonably withheld. 2. REPRESENTATIVE COVENANTS AND REPRESENTATIONS. Except as expressly and unambiguously provided herein, Representative represents, warrants, and covenants: a. to use all diligent efforts, on behalf of Company to solicit Products to third parties in a manner intended to maximize Company sales of Products. Without limiting the foregoing, Representative shall provide meaningful incentives to its sales representatives to encourage them to continuously and diligently solicit sales of Products, where such incentives shall be reasonable and non-discriminatory to incentives that Representative provides for soliciting competitive products. From time to time, the Committee (as defined below) may propose, and Representative shall consider, possible incentives. Representative shall be entitled to allocate its efforts between Products and other products in a reasonable commercial manner; provided, however, that if Representative solicits any products that compete, directly or indirectly, with Products, then Representative shall not discriminate in any manner against Products, or favor such competing products to the detriment of sales of Products. The Company will not actively compete in order to undercut Representative with materially more favorable terms as a whole (to the customer) for specific sales from those end users of Products where Representative has made the principal sales efforts in proportion to Company's efforts to make those specific sales, whereby a net result is avoidance of commissions that would otherwise be due on account of sales of those Products. In the event that Representative reasonably believes that Company has systematically made such sales, Representative will bring the issue to the Committee and the Committee will identify mechanisms to avoid such competing sales. In the event that the Committee cannot resolve such issues, any disputes will be resolved according to the procedures in Section 2.g. It is understood that this Section shall not limit Company's ability to, INTER ALIA, enter into academic 4 collaborations for use of the Probe Arrays, enter into joint ventures or other arrangements providing substantial intellectual property rights to Company, or enter into agreements that stimulate interest and sales of the Probe Arrays. b. to at all times maintain an adequate inventory of all commercially generally available Products at its Chicago, Illinois facility, and/or such other facility in the United States or Europe as Representative may reasonably designate from time to time ("Facility") (where the inventory levels shall be determined and modified by the Committee, and where inventory levels may overlap for a reasonable transition period when the location of the Facility changes), solicit Products (whether or not bundled with other products) only at the prices indicated on the Price List set forth on Attachment B (as modified by Company from time to time at its sole discretion), ship Products from inventory or as supplied by Company to fill orders, include a copy of the applicable customer sales agreement with each Product shipped, invoice and collect from customers payments for the Products and remit such collections to Company. c. that it will not ship any Product from inventory with a remaining shelf-life that is less than the time-period described in the warranty set forth in the Company sales agreement accompanying such Product, with a reasonable shelf life to be established for each Product by Company, and a difference between warranted shelf life and remaining shelf life established for each Product by the Committee. d. as Company's agent hereunder, to act reasonably and in good faith with respect to Company, and comply with good business practices and all laws and regulations and standards of industry and professional conduct relevant to this Agreement or the subject matter hereof. e. to fulfill the marketing and promotional activities (alone or in conjunction with Company) set forth on Attachment C, pursuant to a detailed sales and marketing plan to be developed by the Committee ("Marketing Activities") at their expense, where the Marketing Activities will be reviewed and modified from time to time by the Committee, and any such modifications suggested by a party will not be objected to unreasonably by the other party. Representative shall submit all promotional materials that reference Products or Company by name to Company at least 30 days prior to the date of introduction, for prior approval before use. In those cases where literature is to be provided to Representative, Company will provide necessary original materials, and Representative will perform needed production activities. f. to provide Company within five (5) days of the beginning of each calendar quarter with a good faith forecast of Representative's quantity requirements for each Product for the next four (4) quarters. g. to appoint an employee with appropriate skills and authority to a committee comprised of representatives of both parties that shall manage certain interactions between the parties hereto ("Committee"). Such employee (or a proxy that is reasonably acceptable to Company) shall attend all Committee meetings, including, but not limited to, regularly scheduled meetings that will be held at least once each calendar quarter at Company's offices or another mutually agreed upon location. Such employee shall participate fully in fulfilling Committee functions, including, but not limited to, establishing bundling specifications, determining Support Terms (as described below), managing Products introduction through Representative 5 (including, but not limited to, any special Product order lead time requirements, shipping and delivery procedures and any adjustments to the forecast and order mechanism set forth in the preceding paragraph), joint Marketing Activities, reporting formats, and other functions to maximize sales of Products, and shall, on behalf of Representative, keep the parties informed of the requirements of the end users and the marketplace. All decisions taken by the Committee shall be unanimous. In the event that the Committee is unable to reach a decision by unanimous action with respect to any matter for which it is clearly responsible and such inability continues for a period of forty-five (45) days after the date on which the matter is first submitted to the Committee, Company and Representative shall, on such date, each refer the matter to its chief operating or executive officers for resolution. Each party shall set forth in writing and provide to the other a proposed solution to the impasse at the time that the matter is referred to its chief operating officer or executive officers. The chief operating officer or executive officers of the parties shall within fifteen (15) days thereafter meet and confer in good faith for the purpose of achieving a compromise solution. In the absence of agreement upon a detailed sales and marketing plan by 30 days before a due date set by the Committee for which the plan must be available for implementation in the following year, either Party may submit the outstanding issues to expedited binding arbitration such that such issues may be resolved before the due date earlier set by the Committee. All other disputes shall be resolved by arbitration according to Section 9. h. to immediately notify Company of any adverse or unexpected results or any actual or potential government action relevant to a Product and, if and to the extent requested by Company in writing, to suspend sales of that Product. i. to keep for two (2) years after termination of this Agreement records of all Product sales and customers sufficient to adequately administer a recall of any Product and to cooperate fully in any decision by Company to recall, retrieve and/or replace any Product. j. to regularly inform Company as to any desired improvements or modifications to the Products suggested by Representative or any end user customers, and to advise Company periodically with respect to competitors and the introduction and/or success of products that are competitive with the Products as long as such disclosures do not violate any confidentiality obligations that Representative has to any third party; in addition, Representative will allow Company to make a presentation to Representative's sales representatives at least once each calendar year. k. to keep Company informed as to any problems encountered with the Products and any resolutions arrived at for those problems, and to communicate promptly to Company any and all modifications, design changes or improvements of the Products suggested by any customer, employee or agent, as long as such disclosures do not violate any confidentiality obligations that Representative has to any third party, Representative to use reasonable efforts to obtain the right to disclose such information. Representative further agrees that, and hereby grants to, Company a non-exclusive, worldwide, royalty-free right and license to any and all such suggested modifications, design changes, or improvements of the Products ("Improvements"), to use, incorporate and otherwise exploit such Improvements in connection with the Products; provided that such license shall not grant Company any rights to any of Representative's intellectual property to reagents, array development products, or any other intellectual property that is not 6 developed or acquired in connection with an Improvement. Representative will also endeavor to notify Company of any infringement of any patents or other proprietary rights relating to the Products. 1. to comply with the U.S. Foreign Corrupt Practices Act and all applicable export laws, restrictions, and regulations of the United States or foreign agency or authority, and not export, or allow the export or re-export of any Product in violation of any such laws, restrictions or regulations, and to obtain, and bear all expenses relating to, any necessary licenses and/or exemptions with respect to the export from the U.S. of any Product to any location. 3. COMMISSIONS, COLLECTIONS AND PAYMENT; SUPPLY TERMS. a. Representative shall comply with the following provisions in connection with paying Company, invoicing customers and collecting payments from customers on behalf of Company hereunder: i. For each shipment of Product by Company to Representative, Representative shall pay to Company, in US dollars, within sixty (60) days of the later of receipt of the shipment or receipt of Company's invoice the amount due for such shipment, less the applicable Order Fees and commissions shown on Attachment F, except that any "drop shipped" Products shall be subject to [**]. If the Order Fee. Representative will consolidate orders when reasonable. Company will have the right to contest the processing fee in those circumstances where such orders are not reasonably consolidated. ii. As part of its duties hereunder, Representative shall be responsible for promptly invoicing customers for all Products shipped at the prices set forth on the Price List, and for collecting the amounts shown in such invoices. Representative shall use best efforts to collect from customers payments of all invoices and Representative shall be entitled to retain the amount collected from the applicable customer as reimbursement to Representative for any payments made by Representative to Company pursuant to paragraph (i) above. iii. Notwithstanding the provisions of paragraph (i) above, Company shall retain the risk of collectibility of accounts receivable relating to all Products sold under this Agreement. With respect to any invoice for which Representative has not received a collection from the customer within 180 days after the date of such invoice (an "Uncollected Invoice"), (A) Representative shall turn over to Company for collection the Uncollected Invoice and (B) Company shall credit to Representative's future commissions (I) the amount of the Uncollected Invoice that was previously paid by Representative to Company pursuant to paragraph (i) above plus (II) the Order Fee that Representative was entitled to for such Uncollected Invoice plus (III) 120 days' interest on the amount specified in (I) at an annual rate of 12% or, if lower, the maximum rate allowed by law. Thirty days after the expiration or termination of this Agreement, any outstanding invoices shall become Uncollected Invoices subject to the foregoing, except that Company shall pay Representative the amounts that would otherwise have been credited on such post-termination Uncollected Invoices. Representative will use reasonable efforts to avoid shipment to those customers with poor collection histories provided that Representative is aware of such poor collection history. 7 iv. Within fifteen (15) days following the end of each calendar quarter, Representative shall provide Company with a detailed statement setting forth (A) all sales and solicitations of Products, identity of the customer, and amounts invoiced and collected thereon, (B) the quantity of Products that Representative retains in inventory, (C) the amounts of warranty returns processed by Representative (if any) during such quarter relating to sales of Products pursuant to this Agreement, (D) the percentage of sales of Products pursuant to this Agreement that such warranty returns represented during such quarter and (E) if the percentage referred to in clause (C) above is greater than [**], reasonable support or documentation as to the cause of all such warranty returns. Products which are returned to Representative shall be returned to Company at Company's expense. v. Representative shall use reasonable efforts to match invoices to applicable customer payments, but if more than one invoice is outstanding with respect to such customer's account, and Representative is unable to match any payment to a particular invoice, Representative shall apply the "first-in, first-out" principle in determining the invoice to which such payments applies. One or more invoices issued on the same date shall be aggregated and treated as a single invoice for purposes of this paragraph. vi. For any sales, ad valorem or similar taxes or duties, customs fees or duties and other governmental assessments that arise in connection with sales of Products by Representative, Representative shall: (A) collect such amount on behalf of Company from the customer and remit it to the appropriate taxing authority or jurisdiction in Company's name; (B) show such taxes, duties or other governmental assessments separately on customer invoices and on reports to Company; (C) provide a separate report to Company no later than the fifteenth (15th) calendar day of each month for the previous month indicating the customer, amount invoiced, taxes, duties and other governmental assessments invoiced and collected, and the taxing authority or jurisdiction. Company shall hold Representative harmless for any liability that arises in connection with such taxes, duties and other governmental assessments unless such liability arises due to a failure of Representative to comply with a provision of this Agreement, including, but not limited to, the foregoing provisions. To the extent that Representative receives any refund on any such payments made to taxing authorities, it will remit such refund to Company. vii. As between Representative and Company, Representative shall be responsible for all shipping, transportation, insurance and other charges related to shipping Products from its Facility to customers, as well as all taxes (except sales taxes and taxes on Company's income), duties and other governmental assessments related to the foregoing. b. During the term of this Agreement, subject to the other terms and conditions of this Agreement, Company shall use its reasonable commercial efforts to fill promptly (by full or partial shipment) Representative's written orders for Products, which are accepted by Company at its main office, insofar as practical and consistent with then-current Company's lead-time schedule, shipping schedule, access to supplies on acceptable terms and allocation of available products and capacity among Company customers. In deciding which orders to accept, and the schedule for filling them, Company shall not discriminate between Representative and other similarly situated agents for the Products. Each order for a Product must comply with the minimum quantity requirement for such Product as set forth on the Price List. Company will 8 provide reasonable lead time estimates and minimum quantity requirements to the Committee for each Product. Company will deliver all Products F.O.B. Representative's Facility, or as the parties mutually agree, F.O.B. Company's manufacturing facility with arrangements to ship to the customer at customer's expense. All Products will be packaged according to Company's standard packaging. Orders may not be changed or canceled without Company's written approval. c. Company will not accept returns except pursuant to Company's warranty policy set forth in the applicable Product sales agreement and subject to the terms, conditions and restrictions on such warranty returns in such agreement. Representative will coordinate all returns through a designated Company contact. Company will not accept returns from Representative valued at over [**] (based on the original sale price of the Products) unless the designated Company contact has given prior approval to such returns, which approval shall not be withheld unreasonably. In the event that the returns for any country, for any period, exceed [**] of the volume of Product sold in that country for that period, the Committee shall investigate the reasons for excessive returns, and shall attempt to correct and minimize such returns for future periods. d. Company or its authorized representatives shall be entitled to review and audit Representative's books, records and facilities, as they relate to activities under this Agreement, from time to time during normal business hours upon reasonable notice to Representative and at Company's expense to confirm sales activity and compliance with the terms of this Agreement. 4. PRODUCT SUPPORT. Company will install the relevant portions of the Product(s), at its expense, at customer's location. Representative will provide high quality first line support for Products to all customers through properly trained service personnel. At a minimum, first line support shall include training, problem diagnosis and, where feasible, problem correction. Company will provide Representative (and only designated service personnel of Representative) with second line support for the Products. Within sixty (60) days of the Solicitation Date, the Committee will determine and define the levels, priorities, response times, and other terms of such first line and second line support, including an appropriate mechanism for referring support issues that have been ("Support Terms"), which shall be attached hereto as Attachment E. Company shall be responsible for any cost associated with any Product recall or government action related to the Products, provided that Representative shall not directly or indirectly incur any cost in connection with a recall without Company's prior written consent, which will not be unreasonably withheld. Company will train designated Representative personnel in a "train the trainer" format regarding the use, applications, and other aspects of the Products. 5. LIMITED WARRANTY. Company's sole warranty for the Products shall be the standard customer warranty (which shall be limited to warranting the shelf-life of such Product for a limited period of time) included in the sale agreement that Representative shall provide to each customer as part of the sale of such Products. Representative shall have no authority to offer, and Company shall have no obligation to honor or liability for, any other warranty. THE PARTIES ACKNOWLEDGE 9 THAT THIS IS AN AGREEMENT FOR SERVICES, NOT FOR THE SALE OF GOODS, AND THAT, EXCEPT FOR THE WARRANTY OFFERED ABOVE, COMPANY DOES NOT OFFER ANY OTHER WARRANTY OF THE PRODUCTS, EXPRESS OR IMPLIED, AND IN PARTICULAR COMPANY DOES NOT WARRANT THE MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OF THE PRODUCTS OR THE PERFORMANCE OR NONINFRINGEMENT THEREOF, DOES NOT MAKE ANY WARRANTY, EXPRESS OR IMPLIED, WITH RESPECT TO PRODUCTS, SPECIFICATIONS, SUPPORT, SERVICE OR ANYTHING ELSE. COMPANY HAS NOT AUTHORIZED ANYONE TO MAKE ANY REPRESENTATION OR WARRANTY OTHER THAN AS PROVIDED ABOVE. 6. INDEMNITY. a. INFRINGEMENT INDEMNITY. Company is responsible and shall hold Representative and its officers, directors, agents and employees harmless from liability resulting from claims, liabilities, damages, debts, settlements, costs, attorneys' fees, expenses, and liabilities of any type whatsoever that may arise on account of infringement by the Products of any US patent issued as of the date of this Agreement, provided Company is promptly notified of any and all threats, claims and proceedings related thereto and given reasonable assistance and the opportunity to assume sole control over the defense and all negotiations for a settlement or compromise; Company will not be responsible for any settlement it does not approve in writing. The foregoing obligation of Company does not apply with respect to Products or portions or components (i) not supplied by Company, (ii) made in whole or in part in accordance to Representative specifications or requests, (iii) which are modified by Representative after shipment by Company, if the alleged infringement relates to such modification, (iv) combined, processed or used with other products, processes or materials where the alleged infringement relates to such combination, process or use, (v) where Representative continues allegedly infringing activity after being notified thereof or after being informed of modifications that would have avoided the alleged infringement, or (vi) where the infringement is incident to use of the Product but does not result primarily from the Product. The foregoing indemnity shall be Representative's sole and exclusive remedy for claims of infringement relating to the Products. b. PRODUCT LIABILITY INDEMNITY. Company is responsible and shall hold Representative and its officers, directors, agents and employees harmless from any claims, liabilities, damages, debts, settlements, costs, attorneys' fees, expenses, and liabilities of any type whatsoever that may arise on account of damage to property, economic loss or injury to any person arising from use of the Products; provided Company is promptly notified of any and all threats, claims and proceedings related thereto and given reasonable assistance and the opportunity to assume sole control over the defense and all negotiations for a settlement or compromise; Company will not be responsible for any settlement it does not approve in writing. The foregoing obligation shall not apply if the injury under which indemnity is being claimed is due to Representative, or its officers, directors, agents or employees provision of unauthorized representations, unauthorized warranties, or incorrect instructions in connection with such Product, or failure to provide correct instructions for use of such Product. 10 c. EXCEPTION. Notwithstanding the foregoing, the indemnity set forth in this Section 6 shall not apply to liability arising from Representative's negligence or willful misconduct. 7. LIMITED LIABILITY. NOTWITHSTANDING ANYTHING ELSE IN THIS AGREEMENT OR OTHERWISE, EXCEPT AS SET FORTH IN SECTIONS 6, 9.c, 9.i, NEITHER PARTY WILL BE LIABLE WITH RESPECT TO ANY SUBJECT MATTER OF THIS AGREEMENT UNDER ANY CONTRACT, NEGLIGENCE, STRICT LIABILITY, OR OTHER LEGAL OR EQUITABLE THEORY FOR (I) ANY AMOUNTS IN EXCESS IN THE AGGREGATE OF THE AMOUNTS PAID HEREUNDER DURING THE TWELVE-MONTH PERIOD PRIOR TO THE DATE THE CAUSE OF ACTION AROSE OR (II) ANY INCIDENTAL OR CONSEQUENTIAL DAMAGES, OR LOST PROFITS OR (III) COST OF PROCUREMENT OF SUBSTITUTE GOODS, TECHNOLOGY, OR SERVICES. NEITHER PARTY SHALL HAVE ANY LIABILITY FOR ANY FAILURE OR DELAY DUE TO MATTERS BEYOND ITS REASONABLE CONTROL. THIS SECTION DOES NOT LIMIT LIABILITY FOR BODILY INJURY OF A PERSON. 8. TERM AND TERMINATION. a. Unless terminated earlier or extended as provided herein, this Agreement shall have a term of three (3) years extending from the Solicitation Date, and shall automatically renew for additional two (2) year terms unless either party notifies the other of its desire to terminate the Agreement within six (6) months of the end of the then-current term, unless the Agreement terminates sooner as set forth below. Commencing on the second anniversary of the date of this Agreement, the parties agree to begin good faith negotiations (with no further obligation) with respect to extending the term of this Agreement. Either party may discontinue such negotiations at any time upon written notice to the other party; provided, however, that such termination of such negotiations shall not otherwise affect the termination of this Agreement. b. This Agreement may be terminated by a party for cause immediately by written notice upon the occurrence of any of the following events: i. if the other ceases to do business, or otherwise terminates its business operations; or ii. if the other shall fail to promptly secure or renew any license, registration, permit, authorization or approval for the conduct of its business in the manner contemplated by this Agreement or if any such license, registration, permit, authorization or approval is revoked or suspended and not reinstated within sixty (60) days; or iii. if the other materially breaches any material provision of this Agreement and fails to substantially cure such breach within 30 days (10 days in the case of a failure to pay) of written notice describing the breach, provided, however, that in the case of a material breach by an Affiliate, Company may elect, in its sole discretion, to terminate this Agreement only with respect to such Affiliate; or 11 iv. if the other seeks protection under any bankruptcy, insolvency, receivership, trust deed, creditors arrangement, composition or comparable proceeding, or if any such proceeding is instituted against the other (and not dismissed within 90 days). c. Each party understands that the rights of termination hereunder are absolute and that it has no rights to a continued relationship with the other after termination except as expressly stated herein. Neither party shall incur any liability whatsoever for any damage, loss or expenses of any kind suffered or incurred by the other (or for any compensation to the other) arising from or incident to any termination of this Agreement by such party that complies with the terms of the Agreement whether or not such party is aware of any such damage, loss or expenses. Upon termination: (i) Company and Representative shall mutually agree on whether to continue or terminate any order then pending; (ii) Representative shall have the right to sell off any remaining inventory of Products or, alternatively, return such inventory to Company for a credit equal to the amount paid therefor, but such right to return only applies to Products with a remaining shelf-life that is less than the time-period described in the warranty set forth in the Company sales agreement accompanying such Products; and (iii) Representative shall provide Company with copies of all account and business information, including, without limitation, (A) customer lists, (B) account records, (C) account balances, (D) current inventory levels and (E) other records or information relating to the business conducted under this Agreement that Company may request. Termination is not the sole remedy under this Agreement and, whether or not termination is effected, all other remedies will remain available. Sections 2(d), 2(h), 2(i), 2(l), Sections 3(a), 3(d), and Sections 5 through 9, and any accrued rights to payment, shall survive termination of this Agreement. 9. GENERAL. a. AMENDMENT AND WAIVER--Except as otherwise expressly provided herein, any provision of this Agreement may be amended and the observance of any provision of this Agreement may be waived (either generally or any particular instance and either retroactively or prospectively) only with the written consent of the parties signed by a duly authorized officer. However, it is the intention of the parties that this Agreement be controlling over additional or different terms of any order, confirmation, invoice or similar document, even if accepted in writing by both parties, and that waivers and amendments shall be effective only if made by non-preprinted agreements clearly understood by both parties to be an amendment or waiver. b. ASSIGNMENT--This Agreement and the rights hereunder are not transferable or assignable without the prior written consent of the parties hereto (and any attempt to do so shall be void), except for rights to payment and except to a person or entity who acquires all or substantially all of the assets or business of a party, whether by sale, merger or otherwise. c. RELATIONSHIP OF PARTIES--The parties hereto intend that no partnership, joint venture or similar relationship be created pursuant to this Agreement. Representative is solely responsible for all of its employees and its labor costs and expenses arising in connection with this Agreement and is responsible for and will indemnify Company from any and all claims, liabilities, damages, debts, settlements, costs, attorneys' fees, expenses, and liabilities of any type whatsoever that may arise on account of Representative's activities, including without limitation, providing unauthorized representations or warranties (or failing to disclose all limitations on 12 warranties and liabilities set forth herein on behalf of Company) to its customers or breaching any term, representation or warranty of this Agreement, provided that Company promptly notifies Representative of any and all threats, claims and proceedings related thereto and gives Representative reasonable assistance and the opportunity to assume sole control of the defense and all negotiations for a settlement or a compromise. Representative will not be responsible for any settlement that it does not approve in writing. Notwithstanding the foregoing, the indemnity set forth in this Section 9.c shall not apply to liability incurred as a result of Company's negligence or willful misconduct. d. GOVERNING LAW AND LEGAL ACTIONS--This Agreement shall be governed by and construed under the laws of the State of California and the United States without regard to conflicts of laws provisions thereof and without regard to the United Nations Convention on Contracts for the International Sale of Goods. Unless waived by Company in writing for the particular instance (which Company may do at its option), the sole jurisdiction and venue for actions related to the subject matter hereof shall be the California state and U.S. federal courts having within their jurisdiction the location of Company's principal place of business. In any action or proceeding to enforce rights under this Agreement, the prevailing party shall be entitled to recover costs and attorneys' fees. e. ARBITRATION--In the event of any controversy or claim relating to, arising out of or in any way connected to any provision of this Agreement ("Dispute"), the Parties shall seek to settle their differences amicably between themselves and as otherwise set forth herein. Any unresolved Dispute shall be finally resolved by final and binding arbitration. Whenever a Party shall decide to institute arbitration proceedings, it shall give written notice to that effect to the other Parties. The Party giving such notice shall refrain from instituting the arbitration proceedings for a period of ten (10) days following such notice to allow the Parties to attempt to resolve the Dispute between themselves. If the Parties are still unable to resolve the dispute, the Party giving notice may institute the arbitration proceeding under the rules of the International Chamber of Commerce ("ICC Rules"). Arbitration shall be held in Palo Alto, California. The arbitration shall be conducted before a single arbitrator mutually chosen by the Parties, but if the parties have not agreed upon a single arbitrator within fifteen (15) days after notice of the institution of the arbitration proceeding, then the arbitration will be conducted by a panel of three arbitrators, each chosen by one Party. All arbitrator(s) eligible to conduct the arbitration must undertake in writing as a condition of service to render their opinion(s) promptly after the final arbitration hearing. No arbitrator (nor the panel of arbitrators) shall have the power to award punitive damages or any award of multiple damages under this Agreement and such awards are expressly prohibited. Decisions of the arbitrator(s) shall be final and binding on the Parties. f. HEADINGS--Headings and captions are for convenience only and are not to be used in the interpretation of this Agreement. g. NOTICES--Notices under this Agreement shall be sufficient only if personally delivered, delivered by telecopy, delivered by a major commercial rapid delivery courier service or mailed by certified or registered mail, return receipt requested to a party at its addresses and telecopy number first set forth herein or as amended by notice pursuant to this subsection. If not received sooner, notice by mail shall be deemed received ten (10) days after deposit in the U.S. 13 mails. Notice by telecopy shall be deemed received at the time sent unless such time is not during a business day, in which case telecopy shall be deemed received on the next business day. h. ENTIRE AGREEMENT--This Agreement supersedes all proposals, oral or written, all negotiations, conversations, or discussions between or among parties relating to the subject matter of this Agreement and all past dealing or industry custom. i. FORCE MAJEURE--A party shall not be liable for nonperformance or delay in performance (other than of obligations regarding payment of money or confidentiality) caused by any event reasonably beyond the control of such party including, but not limited to wars, hostilities, revolutions, riots, civil commotion, national emergency, strikes, lockouts, unavailability of supplies, epidemics, fire, flood, earthquake, force of nature, explosion, embargo, or any other Act of God, or any law, proclamation, regulation, ordinance, or other act or order of any court, government or governmental agency. j. CONFIDENTIALITY--Except as required by law, neither party will disclose the terms of this Agreement or any attachment to any third party. Any business, technical, financial or other information provided by a party to this Agreement (the "Disclosing Party") to the other (the "Receiving Party") and designated as confidential or proprietary ("Confidential Information") shall be held in confidence and not disclosed or, except as expressly permitted under this Agreement, used by the Receiving Party. For the avoidance of doubt, all technical information related to the Products is hereby deemed to be Confidential Information of Company. The obligations of this subsection will not apply to information that is generally and freely publicly available through no fault of the Receiving Party, or that the Receiving Party otherwise rightfully obtains from third parties without restriction, or that the Receiving Party develops independently through employees without access to or use of Confidential Information. The Receiving Party acknowledges that failure to fulfill the provisions of this subsection may cause the Disclosing Party immediate irreparable harm and, therefore, the Disclosing Party shall, in addition to other remedies and without necessity of posting bond, be entitled to seek immediate equitable and injunctive relief to prevent to resolve such a failure. k. SEVERABILITY--If any provision of this Agreement is held by a court of competent jurisdiction to be illegal, invalid or unenforceable, that provision shall be limited or eliminated to the minimum extent necessary so that this Agreement shall otherwise remain in full force and effect and enforceable. Affymetrix, Inc. Amersham Pharmacia Biotech, Ltd Signed: /s/ Stephen P.A. Fodor Signed: /s/ Ron Long --------------------------- --------------------------- Printed: Stephen P.A. Fodor Printed: Ron Long -------------------------- -------------------------- Title: President & CEO Title: CEO ---------------------------- ---------------------------- 14 Attachment A PRODUCTS GENECHIP-Registered Trademark- PRODUCTS - FALL 1997 INSTRUMENTS Hewlett-Packard GeneArray scanner GeneChip fluidics station GeneChip workstation (Dell pentium computer system) SOFTWARE GeneChip 3.0 operating system GeneChip expression analysis window ASSAYS AND REAGENTS [** ** ** **] * Estimated launch: [**] ** Custom products (reorders) added to the product list upon completion of mutually agreed order, processing, quality control, quality assurance, marketing, documentation, software and procedures. EasyAccess customers to be included upon approval of the relevant customer and Affymetrix. 15 Attachment B PRICE LIST GENECHIP ANALYSIS SYSTEMS (US PRICING - NOVEMBER 1997) Part # Product Price (US$) GENECHIP SEQUENCE ANALYSIS SYSTEMS GENECHIP EXPRESSION ANALYSIS SYSTEMS 900136 GeneChip Expression Analysis System [**] Hewlett-Packard GeneArray Scanner GeneChip Fluidics Station GeneChip Workstation GeneChip Expression Analysis Software - Single user license GENECHIP EXPRESSION ANALYSIS WINDOW GENECHIP SOFTWARE 2.1 800114 GeneChip Expression Analysis Workstation [**] GeneChip Workstation GeneChip Expression Analysis Software - Single user license GENECHIP EXPRESSION ANALYSIS WINDOW GENECHIP SOFTWARE 2.1 GENECHIP INSTRUMENTATION 800101 GeneChip Fluidics Station [**] GENECHIP SOFTWARE 610003 GeneChip Expression Analysis Software - Single user license [**] GENECHIP EXPRESSION ANALYSIS WINDOW GENECHIP SOFTWARE 2.1 16 GENECHIP SERVICE AND SUPPORT 000107 Training/Technical Support [**] 000108 Yearly service contract on instrumentation [**] including specific minor software upgrades GENECHIP ASSAYS ESTIMATED U.S. PRICING FOR ITEMS NOT CONTAINED ON THE NOVEMBER 1997 AFFYMETRIX PRICE LIST (US $) (REQUIRING THE USE OF SIGNED CONTRACTS WITH THE END USER) [** ** ** ** ** **] 17 Attachment C MARKETING ACTIVITIES A) SALES AND MARKETING PROMOTIONAL ELEMENTS. 1. [**] 2. [**] 3. [**] 4. [**] 5. [**] 6. [**] 7. [**] 8. [**] 9. [**] 10. [**] 11. [**] 12. [**] (i) [**] (ii) [**] (iii) [**] 18 B) MARKETING AND SUPPORT STAFF. 1. [**] 2. [**] 3. [**] 4. [**] 5. [**] 6. [**] 7. [**] 8. [**] 9. [**] 10. [**] 11. [**] C) WORLD-WIDE SALESFORCE ACTIVITY. [**] 19 Attachment D AFFILIATES To be provided within 30 days of execution by Representative and reasonably approved by Company. 20 Attachment E SUPPORT TERMS To be determined in good faith by the Committee by February 1, 1998. 21 Attachment F COMMISSIONS For Products shipped pursuant to a single Product order, Representative shall be entitled to an Order Fee of [**], plus applicable value-added tax assessed on the services provided by Representative (and not on the Product itself), provided that Representative shall provide Company with documentation of such tax payments, and the forms needed, and other reasonable assistance requested, by Company for claiming refund, reimbursement, or offset of such taxes. Orders solicited by Representative from a single end-user customer shall be consolidated where feasible, so as to minimize the number of separate orders for each customer. In each year during the term of this Agreement, Representative shall be entitled to Commissions on Net Sales of Products as set forth below. "Net Sales" shall mean [**] Commissions after Year 3 will be negotiated by the parties prior to commencement of any renewal period. *MAXIMUM COMMISSIONS COMMISSION AMOUNT Year 1 [**] Net Sales [**] Year 2 [**] Net Sales [**] Year 3 [**] Net Sales [**] * Maximum Commission Amount does not include the Order Fee. 22 EX-10.30 3 EXHIBIT 10.30 Exhibit 10.30 LICENSE AGREEMENT Affymetrix, Inc. and Molecular Dynamics, Inc. [THE SYMBOL "**" IS USED THROUGHOUT THIS EXHIBIT TO INDICATE THAT A PORTION OF THE EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION.] 1 CONTENTS DEFINITIONS 3 RECITALS 6 TECHNICAL INFORMATION 6 GRANTS 8 RECORDS, ACCOUNTS AND PAYMENTS 16 DURATION OF AGREEMENT 17 MISCELLANEOUS 18 EXHIBIT 1 21 EXHIBIT 2 23 EXHIBIT 3 24 EXHIBIT 4 25 EXHIBIT 5 28 EXHIBIT 6 29 2 THIS AGREEMENT is effective as of November 28, 1997 ("Effective Date") between Affymetrix, Inc., a California corporation, hereinafter referred to as "Affymetrix" and Molecular Dynamics, Inc., a Delaware corporation, hereinafter referred to as "MD". 1 DEFINITIONS Whenever used in this Agreement, the following terms shall have the meanings set forth below: 1.1 "Affiliates" as applied to Affymetrix shall mean Affymetrix, Inc., a California U.S.A. corporation, and all present and future companies (other than Affymetrix) whose outstanding stock carrying the right to vote for or appoint directors thereof is fifty percent (50%) or more owned or controlled, directly or indirectly, by Affymetrix. "Affiliates" as applied to MD shall mean Molecular Dynamics, Inc., a Delaware corporation, and all present and future companies (other than MD) whose outstanding stock carrying the right to vote for or appoint directors thereof is eighty percent (80%) or more owned or controlled, directly or indirectly, by MD, but only for so long as such ownership or control exists. In the case of non-corporate entities, "Affiliates" shall refer to those entities where the power to control and direct management of the entity is eighty percent (80%) or more owned or controlled, directly or indirectly, by the referenced entity. 1.2 "Array Maker" shall mean a device designed to fabricate Nucleic Acid Arrays by Mechanical Fabrication Methods and specifically configured to fabricate only Nucleic Acid Arrays only by Mechanical Fabrication Methods, and otherwise subject to the restrictions herein. 1.3 "Category 1 Patent" shall refer to a United States Patent issuing on U.S. Ser. No. [**] reciting, inter alia, [**], or a United States patent claiming substantively the subject matter of such application. 1.4 "Category 2 Patent" shall refer to a) a United States Patent issuing on U.S. Ser. No. [**] reciting, inter alia, [**], or a United States patent claiming substantively the subject matter of such application; or b) a United States Patent issuing on U.S. Ser. No. [**] reciting, inter alia, [**]; or c) a United States Patent issuing on U.S. Ser. No. [**] reciting, inter alia, [**], or a United States patent claiming substantively the subject matter of such application; or d) a United States Patent issuing on U.S. Ser. No. [**] reciting, inter alia, [**], or a United States patent claiming substantively the subject matter of such application. 1.5 "Expression Analysis" means the measurement of the presence, absence, or level of an expressed messenger RNA in cells. 3 1.6 "GATC Compliant" shall refer to Nucleic Acid Arrays, software, or Systems meeting the standards set forth in the GATC Agreement executed on a substantially even date herewith, provided that Nucleic Acid Arrays or Systems need not meet such standards when delivered before [**]. In the event that one or both Parties cease to be a party to such GATC Agreement, the Parties will negotiate in good faith to provide substitute specifications for interoperability of their respective Systems, Nucleic Acid Arrays, and associated software. In the event that the GATC Agreement is not executed by the Parties on a substantially even date, the Parties will agree upon specifications for interoperability substantially based on the draft of the GATC Agreement in place on the Effective Date, such agreement to be reached in good faith by the Parties by [**]. 1.7 "Gene" shall refer to a nucleic acid sequence encoding a distinct messenger RNA and protein as well as polymorphic variants of such sequence, provided that such polymorphic variants must have at least 99.9% homology with the underlying gene. 1.8 "Initial Period" shall mean, with respect to a particular Array Maker, the time period beginning upon the contractual commitment of MD to transfer such Array Maker to a third party (provided that such time must begin before [**]), and a) ending [**] from the date of such commitment, when such commitment is made between [**] and [**], or b) ending [**] for those Array Makers for which contractual commitments of MD are made before [**]. For those Array Makers for which MD contractually commits on or after [**], there shall be no Initial Period. 1.9 "Mechanical Fabrication Methods" shall mean any method for the fabrication of Nucleic Acid Arrays on a solid support by placement of fully synthesized nucleic acids (clonal polynucleotides or other presynthesized polynucleotides) having more than [**] bases each, solely through mechanically isolated deposition of such fully synthesized nucleic acids at specific locations on the array. Without limiting the above, it is understood that the synthesis of an array in which regions of an array are activated or prepared for placement of materials by means of controlled direction of electromagnetic energy at a portion of a support is not a Mechanical Fabrication Method. 1.10 "Metered Period" shall mean any period other than the Initial Period. 1.11 "Nucleic Acid Array" shall mean an array of diverse nucleic acids, each having at least [**], at defined locations on a solid support and fabricated by Mechanical Fabrication Methods, provided that in no part of such solid support may such diverse nucleic acids be arranged at a density of more than [**] locations per square centimeter, and all of the nucleic acids in any one Nucleic Acid Array may represent no more than [**] Genes. 1.12 "Party(ies)" shall refer to Affymetrix and/or MD. 1.13 "Patent Rights" shall mean claims, or the equivalent of claims of "Affymetrix' Patent Rights" or "MD's Patent Rights," as appropriate, directed to and/or primarily useful in 4 connection with Nucleic Acid Arrays. "Affymetrix' Patent Rights" shall be those arising from, and only those arising from, the patents and applications listed in Exhibit 1, as well as the inventions disclosed and claimed therein, and all continuations, continuations-in-part, divisions, reexaminations, and reissues thereof, and any corresponding foreign patent applications that may be filed in the future claiming priority thereto and any patents, patents of addition, or other equivalent foreign patent rights issuing, granted or registered thereon that are based on one or more of the patents or applications in Exhibit 1, including the patent rights of third parties for which Affymetrix obtains the right to grant sublicenses pursuant to sublicensing rights in connection with and obtained as part of a license grant of the Affymetrix Patent Rights to such third party pursuant to terms equivalent to Section 4. "MD's Patent Rights" shall be those arising from, and only those arising from, the patents and applications listed in Exhibit 2, as well as and the inventions disclosed and claimed therein, and all continuations, continuations-in-part, divisions, and reissues thereof, and any corresponding foreign patent applications that may be filed in the future claiming priority thereto and any patents, patents of addition, or other equivalent foreign patent rights issuing, granted or registered thereon. The term "Patent Rights" as defined above includes only said claims under which the herein-designated company has the right at any time during the life of this Agreement to make the herein-contained grants, in each instance to the extent, and subject to the terms and conditions, including the obligation to account to or make payments to others, under which the herein-designated company shall have such right. 1.14 "Research Market Array Maker" shall mean an Array Maker designed, manufactured, or sold to (and only to) not-for-profit research institutions, specifically including university and government research institutions, (without right of subsequent transfer) for lower-throughput and lower density research purposes than Array Makers otherwise licensed hereunder. Research Market Array Makers shall not be available for sale or transfer to third parties before [**]. Research Market Array Makers shall be subject to the terms and conditions herein relating to Array Makers except that a) such Research Market Array Makers shall be adapted to make Nucleic Acid Arrays not be configured to fabricate Nucleic Acid Arrays having more than [**] genes per array and not more than [**] array elements per square centimeter, and b) shall be subject to the lower royalty provisions of Section 5.9 herein. 1.15 "System" shall mean one or more readers, hybridization devices, computer work stations, and/or single copies of software associated therewith specifically configured (but not necessarily exclusively configured) for use with Nucleic Acid Arrays and to be used for extraction and processing of data from such Nucleic Acid Arrays (and not including, for example, Array Makers). 1.16 "Technical Information" shall mean: (a) the software identified in Exhibit 3 in object code form; (b) associated documentation related to such software directed to and/or primarily useful in connection with Nucleic Acid Arrays; and (c) reasonable enhancements thereto heretofore or hereafter acquired by the designated party prior to 5 [**] after the Effective Date of the Agreement, as well as the copyright and trade secret rights therein. Notwithstanding the above, "Technical Information" includes only such software, associated documentation, and enhancements as the herein-designated party has the right at any time during the life of this Agreement to disclose, and in each instance only to the extent that and subject to the terms and conditions, including the obligation to account to or make payments to others, under which the herein-designated party shall have the right to disclose such information to others. 2 RECITALS 2.1 MD has requested that Affymetrix grant MD a license under Affymetrix's Patent Rights and Technical Information to make, use, import, lease, distribute, and sell Nucleic Acid Arrays, as well as associated Systems and Array Makers. Affymetrix is willing to grant such a license to MD on the provisions herein set forth. 3 TECHNICAL INFORMATION 3.1 Affymetrix has developed Affymetrix' Technical Information which includes a software suite for data extraction and image processing. Affymetrix shall, promptly following execution of this Agreement and in accordance herewith, permit MD to utilize Affymetrix' Technical Information for the purpose of the commercial development of Nucleic Acid Arrays and associated Systems. Affymetrix shall thereafter, from time to time and upon MD's request, make available to MD any additional Technical Information developed by or on behalf of Affymetrix. Affymetrix will deliver object code versions of the software associated with the Technical Information to MD. MD will license software only in object code form. 3.2 Affymetrix and MD agree: (a) to use reasonable efforts to protect the confidential nature of the other Party's Technical Information; (b) not to disclose the same to others, except to the extent reasonably necessary to carry out operations licensed hereunder; and (c) to use the same only pursuant to the terms of this Agreement. However, the foregoing commitments shall not extend to any portion of Technical Information (i) which was in the possession of the receiving Party prior to receipt of same without an obligation of confidentiality; (ii) which is now, or hereafter becomes through no act or failure to act on the part of the receiving Party, generally known to the nucleic acid array industry on a non-confidential basis; or (iii) which is hereafter disclosed to the disclosing Party by others if said others have imposed no restriction on disclosure by the disclosing Party; or (iv) is independently developed by the Party; or (v) is required to be disclosed pursuant to court or agency order. 3.3 From time to time during the life of this Agreement, at Affymetrix' request, MD shall make MD's Technical Information available to Affymetrix. 6 3.4 Affymetrix and MD will advise the other with reasonable promptness and detail of Technical Information developed after the Effective Date. 7 4 GRANTS 4.1 Subject to the terms and conditions of this Agreement, Affymetrix grants to MD a nontransferable, nonexclusive, worldwide, royalty bearing license under Affymetrix' Patent Rights and Technical Information to make, (but not have made), use for internal array development programs and pharmaceutical or diagnostic research (such use rights not including the right to license or distribute expression databases, or perform therapeutic or pharmaceutical development on a service or similar basis), import, lease, distribute, offer for sale, and sell (in the case of products other than software) a) GATC Compliant Nucleic Acid Arrays, and b) GATC Compliant Systems for use with and only for use with GATC Compliant Nucleic Acid Arrays licensed hereunder, all to the extent that such Nucleic Acid Arrays or Systems are covered by Affymetrix' Patent Rights and/or Affymetrix's Technical Information. Such license shall not include the right to sublicense, except that MD shall have the right to sublicense single copies of Affymetrix' Technical Information (without the right to further sublicense) for use with GATC Compliant Systems leased, sold, or transferred by MD pursuant to this Agreement. It is understood that the rights conveyed herein do not include the right for MD to use, have used, or license or otherwise permit any third party to use the Nucleic Acid Arrays (including those made by Array Makers) for database development for external distribution, service based target or drug discovery, or product development of other nucleic acid analysis technologies. It is further understood that while the sale of Systems or licensing of Technical Information to third parties is permitted even though such Systems are or may be useful to read, prepare, or process data from nucleic acid arrays having a density greater than the density of Nucleic Acid Arrays licensed herein or in applications other than the Nucleic Acid Arrays licensed herein (such as those made by Affymetrix), no express or implied license to make, have made, use, import, lease, distribute, offer for sale, sell or transfer such higher density nucleic acid arrays or nucleic acid arrays for other applications is granted or is to be inferred or implied hereunder except as to those nucleic acid arrays made by Affymetrix or licensed by Affymetrix. Notwithstanding anything to the contrary in this Section 4.1, Nucleic Acid Arrays are licensed hereunder only to the extent that such Nucleic Acid Arrays are a) used, leased, distributed, or sold only for research use only; and b) designed and marketed only for use and used in Expression Analysis studies; and c) are for single use only, and d) are sold, leased, or otherwise transferred with contractual and label restrictions on use consistent with this agreement, which provisions may be reasonably reviewed by Affymetrix. It is understood that MD may have subassemblies made under this license that would not, but for this license, infringe the intellectual property rights granted herein. The Parties will agree to appropriate royalty and support terms for additional copies of the Technical Information to be used in the Systems. 4.2 Subject to the terms and conditions of this Agreement, Affymetrix grants to MD a nontransferable, nonexclusive, worldwide, royalty-free license under Affymetrix' Patent Rights to make (but not have made), and use Array Makers for internal array 8 development and manufacturing development programs. It is understood that MD may have subassemblies made under this license that would not, but for this license, infringe the intellectual property rights granted herein. 4.3 During the term and subject to the terms and conditions of this Agreement and during the Initial Period or the Metered Period as applicable (if any), Affymetrix grants to MD a nontransferable, nonexclusive, worldwide, royalty bearing license under Affymetrix' Patent Rights and Technical Information to make, (but not have made), use for internal array development programs and pharmaceutical or diagnostic research (such use rights not including the right to license or distribute expression databases, or perform therapeutic or pharmaceutical development on a service or similar basis), import, lease, distribute, offer for sale, and sell (in the case of licensed products other than software) Array Makers for the manufacture of GATC Compliant Nucleic Acid Arrays to the extent that such Array Makers or the use of such Arrays Makers or Nucleic Acid Arrays made therewith (or use thereof) are covered by Affymetrix' Patent Rights and/or Affymetrix' Technical Information. Such license shall not include the right to sublicense. Such license shall be considered to include a license for the Array Makers sold prior to the date of this Agreement only to the entities in Exhibit 5. It is understood that the rights conveyed herein do not include the right for MD or those acquiring Array Makers pursuant to this Agreement to use, have used, or license or otherwise permit any third party to use the Nucleic Acid Arrays made with such Array Makers for database development for external distribution, for service based target or drug discovery, or manufacture Nucleic Acid Arrays for resale or other transfer to third parties. Nucleic Acid Arrays made with the Array Makers licensed hereunder will be licensed only to the extent that such Nucleic Acid Arrays are a) used, leased, distributed, or sold for research use only; and b) designed, marketed and used only in Expression Analysis studies; and c) are for single use only, and d) are sold or otherwise transferred with contractual and label restrictions on use consistent with this agreement, which provisions may be reasonably reviewed by Affymetrix. In no event may MD transfer more than [**] Array Makers pursuant to the license hereunder to a single third party or its Affiliates, except as to [**], to which MD will not transfer more than [**] Array Makers pursuant to the license hereunder when such Array Makers are to be licensed in an Initial Period. During the Metered Period, MD may provide additional Array Makers to its customers. It is understood that a particular customer of MD may wish to order more than the above recited [**] or [**] Array Makers, and when MD is contractually obligated to provide such Array Makers they may be provided by MD, provided that any such Array Makers in excess of the above limits will be considered as being in the Metered Period upon their delivery to the customer of MD. In the event that MD is committed to deliver more than the above numbers of Array Makers before the Effective Date to the customers in Exhibit 5, MD and Affymetrix will negotiate for appropriate metering rates for such Array Makers pursuant to Section 5, upon which such Array Makers will be licensed hereunder. It is understood that MD may have subassemblies made under this license that would not, but for this license, infringe the intellectual property rights granted herein. 9 4.4 Research Market Array Makers will be subject to the provisions of this Agreement related to Arrays Makers. In addition, Research Market Array Makers may be used and are licensed only to the extent they are used in the generation of scientific information for general publication, and without pursuit of intellectual property rights thereon. Any further uses, including the patenting of information or discoveries created with the Research Market Array Maker, the creation of arrays for sale to third parties, the performance of services or tests on a paid basis for third parties, and the creation of database or informatics products for sale to third parties will not be licensed hereunder except to the extent that any such purchaser agrees to abide by the terms of Affymetrix' then current Academic User Center (or then equivalent) agreement providing for Affymetrix rights to either a) have access to such intellectual property, or b) share in royalties generated by such intellectual property. Each Research Market Array Maker sold, leased, or otherwise transferred by MD will be sold with written consent to and conditioned upon such terms. 4.5 It is understood that MD may wish to perform a service business using Nucleic Acid Arrays during the Term of this Agreement. Affymetrix will negotiate in good faith to license such service business at rates otherwise consistent with its then current pricing models. 4.6 MD may grant sublicenses (without the right to further sublicense) to the Technical Information in association with the bona fide sale, lease, or transfer of Systems or Nucleic Acid Arrays, provided that any such license of the Technical Information: a) will allow any sublicensee access only to object code versions of any software included within such grant; and b) any such grant includes provisions the same as or substantially identical to those in Exhibit 4. MD will maintain all trademark and copyright notices of Affymetrix in such Technical Information sublicensed to a third party. 4.7 Affymetrix shall provide support for the Technical Information commensurate with standard industry practices (under standard terms and conditions) to MD, its Affiliates, and their customers who have received Technical Information in connection with the bona fide sale, lease, or transfer of Systems or Nucleic Acid Arrays by MD or its Affiliates pursuant to the licenses granted hereunder. In addition, upon MD's request, Affymetrix shall escrow a source code version of the Technical information with an escrow agent mutually agreeable to the parties, which escrowed source code shall be accessible to MD in the event that Affymetrix shall default on or be unable to perform its support obligations, or as a result of insolvency, bankruptcy, or if Affymetrix otherwise ceases in the relevant business. 4.8 MD and Affymetrix will reasonably meet and confer to determine if it is reasonably feasible to retrofit Systems that are not GATC Compliant, but which are licensed hereunder, to permit such Systems to utilize probe arrays of low and/or high density made by Affymetrix. 10 4.9 In the event that a third party brings a lawsuit or is otherwise involved in administrative or other similar disputes with a Party regarding intellectual property rights, the Party that is subject to such action may provide written notification of such action, along with notification that it wishes to discontinue sales, if any, of products that would otherwise have been licensed hereunder to such third party, and terminating the licenses herein with respect to such third party. The Party receiving such notice will, subject to prior contractual commitments, use reasonable efforts to discontinue sales of products licensed hereunder to such third party or, if no such sales have occurred, to prevent such sales in the future. MD acknowledges that Affymetrix has provided notice of two such third parties, and MD understands that any products transferred to such third parties are not licensed hereunder. 4.10 Subject to the terms and conditions of this Agreement, MD grants to Affymetrix, which grant is extendible by Affymetrix to its Affiliates without accounting therefor to MD, a worldwide, nonexclusive license under MD's Patent Rights to make, have made, use, import, lease, distribute, offer for sale, and sell high density arrays of nucleic acids and systems for use therewith to the extent used to analyze such high density arrays of nucleic acids. 4.11 It is recognized that up to [**] may be sold by MD to [**] pursuant to an existing contract between MD and [**] and in accordance with the rights and obligations of this Agreement. The Parties recognize, however, that [**] may not agree to be bound by all of the the terms of this license relating to database distribution in Section 4.3. To the extent that [**] does not comply with the database distribution restrictions in Section 4.3 and to the extent that such [**] are otherwise sold by MD in accordance with this Agreement, Affymetrix, on behalf of itself, and its Affiliates, heirs, executors, assigns, agents and representatives hereby fully and forever releases MD and its heirs, executors, assigns, agents, and representatives from any claim or cause of action, under any theory of liability, known or unknown, fixed or contingent, that any of them may have arising from or relating to Affymetrix Patent Rights and/or Technical Information from the beginning of time up to the Effective Date on account of [**] lack of non-compliance, performance, or lack of agreement to comply with such database distribution restrictions with respect to such three instruments. Such release shall in no manner be construed to extend to [**] whether by implication, license, or otherwise and, further, shall not extend to future acts of MD beyond the supply of such [**] to [**]. 4.12 MD, on behalf of itself, and its Affiliates, heirs, executors, assigns, agents and representatives hereby fully and forever releases Affymetrix and its heirs, executors, assigns, agents and representatives from any claim or cause of action, under any theory of liability, known or unknown, fixed or contingent, that any of them may have arising from or relating to MD Patent Rights from the beginning of time up to the Effective Date on account of the manufacture, use, or sale of high density nucleic acid arrays and systems to analyze such high density nucleic acid arrays. 11 4.13 Subject to the terms and conditions of this Agreement, MD grants to Affymetrix the royalty-free right to grant nonexclusive licenses under MD's Patent Rights to others licensed by Affymetrix under Affymetrix' Patent Rights for use with Nucleic Acid Arrays and Systems; provided, however, that Affymetrix may grant such licenses under MD's Patent Rights only to others whose Patent Rights are included within the Affymetrix Patent Rights. 4.14 Nothing in this Agreement shall be construed to obligate either party to sue alleged infringers under such party's Patent Rights and Technical Information. Any determination to take any action against such alleged infringers shall be in such party's sole discretion. 4.15 MD shall include with all Nucleic Acid Arrays (including Nucleic Acid Arrays made with Array Makers) and Systems leased, distributed, sold, or otherwise transferred hereunder reasonable package markings, product markings, contractual restrictions, and/or user manual instructions indicating that such products are licensed: (a) for research purposes only; (b) only for Expression Analysis studies or studies otherwise licensed by Affymetrix (it being understood that the Parties may chooses upon mutual written consent to modify this limitation); and (c) for single use only, and (d) with restrictions on the distribution of databases or services based on the use of arrays herein, and (e) only consistent with the licenses herein. MD shall diligently police and enforce such restrictions. 4.16 MD shall attach a label on each Nucleic Acid Array, System and/or associated documentation sold, leased, or otherwise transferred hereunder reasonably reflecting patent numbers of a) issued US device patents covering such product, and b) other appropriate intellectual property rights notices, and will reasonably modify such label periodically at the direction of Affymetrix. Affymetrix shall attach a label on each Nucleic Acid Array, System and/or associated documentation reasonably reflecting patent numbers of a) issued US device patents covering such product, and b) other appropriate intellectual property rights notices, and will reasonably modify such label periodically at the direction of MD. 4.17 The licenses granted herein are granted on the understanding that MD will use commercially reasonable efforts to develop, manufacture, and market Nucleic Acid Arrays and Systems, and MD agrees to use such commercially reasonable efforts to develop, manufacture, and market Nucleic Acid Arrays, and Systems. If during the term of this Agreement Affymetrix reasonably believes that MD has discontinued commercially reasonable efforts to develop, manufacture, and market Nucleic Acid Arrays and/or Systems, Affymetrix may provide written notice to MD of such reasonable belief, along with notification that it intends to terminate the licenses herein In the event that MD disagrees with such assertions by Affymetrix, MD may provide reasonable evidence of its continued reasonable commercial efforts under suitable terms of 12 confidentiality. In the absence of such reasonable evidence, Affymetrix may, thereafter, on 6 months written notice, terminate this Agreement. 4.18 MD may extend the licenses granted herein to its Affiliates provided such Affiliates agree in writing to be bound by the terms and conditions of this Agreement, and further provided that MD agrees to be liable and indemnify Affymetrix for the activities of such Affiliates. 5 FEES 5.1 At the time and in the manner hereinafter provided, MD shall pay to Affymetrix for each Nucleic Acid Array a) leased, sold, or otherwise transferred pursuant to the license granted under Section 4 hereof, or b) used for internal pharmaceutical research and development purposes (but not used solely for development of Arrays Makers, Systems or Nucleic Acid Arrays), a royalty pursuant to Table 1. The royalty shall be payable based on [**] prices in Table 1 are the number of dollars to be paid to Affymetrix [**].
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5.2 The royalties and operating fees, and the licenses herein, cover arrays made with up to [**]. In the event that MD reasonably believes at a future date that [**] are reasonably required to competitively market Nucleic Acid Arrays or Array Makers, MD and 13 Affymetrix will reasonably confer and agree upon appropriate royalty levels for such Nucleic Acid Arrays and/or Array Makers using the royalty and operating fee structures set forth herein as guiding factors, provided that in no event will the licenses granted herein cover Nucleic Acid Arrays representing more than [**] unless agreed to in writing by Affymetrix. In addition, if MD is required to license probe array based intellectual property from third parties that make the above royalty rates unsupportable, MD and Affymetrix will negotiate in good faith with each other to modify the above royalty structure and/or the third party royalty rates that should be paid. 5.3 In the event that a) MD reasonably believes that it cannot support the above royalty rates and operating fees under a reasonable business model for the sale, lease, or transfer of Nucleic Acid Arrays sold pursuant to this Agreement after commercial efforts to implement such business model as a result of such royalty rates, and b) Affymetrix is not taking reasonable efforts to mitigate infringement of its intellectual property rights, MD will provide written notification to Affymetrix, along with reasonable documentation of the basis of such assertion. MD and Affymetrix will reasonably confer and identify alternative license fees and or structures to support a reasonable business model for the sale of Nucleic Acid Arrays licensed pursuant to this Agreement. 5.4 If in any calendar year following the [**] anniversary of this Agreement the royalties and operating fees generated by MD's licensed operations hereunder are less than [**], then Affymetrix shall have the right, exercisable within the period of ninety (90) days following the end of the said year, to terminate this Agreement on sixty (60) days' written notice to MD; provided, however, that MD shall have the right but not the obligation, before the expiration of the said sixty (60) days following the date of said notice of termination, to pay any differences between the royalties and operating fees so accruing and the foregoing amount and maintain this Agreement and the license granted to MD in full force and effect, subject to Affymetrix' rights to terminate this Agreement pursuant to any of Sections 7.3 through 7.5 hereunder. 5.5 In partial consideration of the rights and waivers herein MD shall pay to Affymetrix [**] upon MD's execution of this Agreement. Such payment shall be subject to refund as follows: a) if a Category 1 patent has not issued by [**] shall be refunded, and b) if a Category 2 patent has not issued by [**] shall be refunded. 5.6 During the Initial Period, and as to Array Makers (excluding Research Array Makers) transferred to third parties under contracts in which MD has committed to transfer such Array Makers pursuant to agreements effective before [**] MD will pay to Affymetrix an operating license fee for the usage of the Array Makers during the period beginning when the Category 1 and/or 2 Patents, as applicable, are issued: a) [**] per calendar year for each calendar year in which a Category 1 Patent is issued, pro-rated for the number of months in such calendar year in which such Category 1 Patent is issued, and provided that this payment shall not be payable with respect to Array Makers specifically configured to make Nucleic Acid Arrays at a density of less than [**], and b) [**] per 14 calendar year for each calendar year in which a Category 2 Patent is issued, pro-rated for the number of months in such calendar year in which such Category 2 Patent is issued. The foregoing operating license fees are a proxy for usage fees for the Array Makers. The fees recited in this Section may be made in equal quarterly installments during the applicable calendar year in which such payments are due. 5.7 MD will reasonably gather data regarding the Array Makers (excluding Research Array Makers) sold pursuant to this Agreement to determine the approximate use rate and type of use (density of arrays, etc.) by users of such Array Makers. Before [**] the Parties will meet and confer regarding an appropriate and reasonable metering system (such as, for example, monitoring of reagent usage, software usage monitoring, etc.) that may be used to apply reasonable royalties and operating fees to the use of such Array Makers reflective of the rates recited herein for Array Makers and Nucleic Acid Arrays. During the Metering Period, the royalties and operating fees payable on any such Array Makers will be based upon such agreed metering mechanism. 5.8 Until such time as Affymetrix provides MD written notification of the issuance of a Category 1 Patent, MD may discount the royalties and operating fees payable on Nucleic Acid Arrays pursuant to Sections 5.1 and 5.6 herein by [**]. Until such time as Affymetrix provides MD written notification of the issuance of a Category 2 Patent, MD may discount the royalties and operating fees payable on Nucleic Acid Arrays pursuant to Sections 5.1 and 5.6 herein by [**]. It is understood during such time as neither a Category 1 Patent or a Category 2 Patent is issued, MD may discount the royalties and operating fees payable on Nucleic Acid Arrays pursuant to Sections 5.1 and 5.6 herein by [**]. 5.9 Molecular Dynamics shall pay to Affymetrix a one-time royalty on each Research Market Array Maker and reagents sold therefor equal to [**] of the net sales revenue (F.O.B. Sunnyvale) of such Research Market Array Makers and reagents sold therefor. 5.10 MD may discount the royalties/operating fees payable pursuant to Section 5.1 herein on the sale of Nucleic Acid Arrays by [**] in those cases where the Genes represented on the Nucleic Acid Arrays are from an organism listed in Exhibit 6. 5.11 If, under similar conditions and on substantially the same terms as this Agreement, other than royalty terms, Affymetrix shall hereafter enter into another agreement making available to any person, firm or company (other than any national government or branches or agencies of any national government, or any Affiliate(s) of Affymetrix) a license or immunity from suit for any country or countries, otherwise of the same scope as the licenses and immunities granted MD under this Agreement, wherein the terms taken as a whole are more favorable than those granted in this Agreement, then MD shall, at MD's election to be exercised within ninety (90) days from the date of Affymetrix' notification, be entitled to the benefit of such more favorable terms in such country or countries as of and subsequent to the effective date of the grant by Affymetrix of such 15 more favorable terms, so long as such more favorable terms shall be available to such other licensee, provided that in any such event MD shall at the same time accept any and all other terms, conditions and limitations imposed on such other licensee, whether or not they are directly related to such more favorable terms. Affymetrix shall reasonably notify MD of any agreement which provides Affymetrix of the benefits of this paragraph. 6 RECORDS, ACCOUNTS AND PAYMENTS 6.1 The royalties and operating fees payable by MD to Affymetrix as provided in Article 5 shall be paid on or before the last day of February, May, August and November in each calendar year for MD's operations hereunder during the respective immediately preceding calendar quarter. MD will at the same time deliver to Affymetrix a certified statement of one of MD's officers, on forms which may be provided or prescribed therefor by Affymetrix, accounting for royalties and operating fees payable hereunder, or showing that no royalty is payable. 6.2 In keeping with established bookkeeping and accounting practices, MD shall maintain, for a period of two (2) years following the end of the calendar year in which any royalties and operating fees are payable, appropriate books and records fully adequate to show the full amount of royalty payable under this Agreement, including, but not limited to, books and records showing each sale, lease, or other transfer of Nucleic Acid Arrays or Systems, the net invoice price for said sale, lease, other transfer, and sublicense, the name and address of the purchaser, lessee, transferee and/or sublicensee, as appropriate. Affymetrix shall have the right, at any time during regular business hours and upon 10 days notice, to make such examination as Affymetrix deems necessary to verify said records and books of account. In the event that such examination reveals a discrepancy between the royalties and operating fees payable hereunder and the royalties and operating fees actually paid, all such additional royalties and operating fees, together with interest from the date when such additional royalties and operating fees would have been due, shall be paid to Affymetrix within thirty (30) days of written notice from Affymetrix of such discrepancy. Such notice shall be deemed to be notice of default under Section 7.5 hereunder. Any such audit shall be at Affymetrix sole expense and performed by a nationally recognized accounting firm under reasonable obligations of confidentiality. In the event that a deficiency of more than [**] is discovered, the audit shall be at MD expense. 6.3 All payments provided for in this Agreement refer to lawful money of the United States of America. All payments shall be made by MD to Affymetrix at the office of Affymetrix designated in Section 8 and shall be made in the full amounts as herein specified; provided, however, that deduction may be made from such payments by MD for amounts lawfully required to be withheld and paid by MD in respect of any income tax levied or assessed upon such payments by, and in accordance with the laws of, any foreign government but only in respect to sales and leases by MD in the foreign country imposing such income tax. Affymetrix shall have the right at any time or from time-to- 16 time to contest by appropriate proceedings the validity or amount of any such income tax withheld. If so requested by Affymetrix, MD will make such payments under protest, and, on behalf and at the expense of Affymetrix, take such other action and render all reasonable assistance that may be required by Affymetrix in the prosecution of any such proceedings. MD will obtain and forward to Affymetrix tax credit receipts or vouchers for all income taxes thus withheld and paid by MD. As used herein, "income tax" shall mean a tax on income imposed by a country other than the United States of America or by any possession or territory of the United States of America, for which a foreign tax credit is allowed by the Government of the United States of America. All late payments shall bear interest at the rate of 1.5% per month, unless the maximum amount allowed by law is lower, in which case all late payments shall bear interest at the maximum permitted rate. 6.4 If one or more of the payments required to be made herein is not made by its due date, and if such payment or payments, plus interest, is not made prior to forty five (45) days after notice from Affymetrix of such delinquency, then Affymetrix may, at its sole option, terminate this Agreement on the fifteenth day after written notice is given to MD that it intends to terminate this Agreement. 6.5 All payments herein shall be made in United States of America dollars in the form of a check drawn on a United States bank. 7 DURATION OF AGREEMENT 7.1 Unless earlier terminated as provided below, this Agreement shall remain in full force and effect until January 1, 2008. 7.2 At any time after one (1) year following the Effective Date of this Agreement, MD may terminate this Agreement upon sixty (60) days' prior written notice to Affymetrix. 7.3 In the event that MD intends to file any petition, answer, or other proceeding in bankruptcy, MD will use reasonable efforts to give Affymetrix reasonable advance written notice prior to filing such petition and provide Affymetrix reasonable adequate opportunity to review and oversee any reorganization or disposal of MD's relevant assets (to the extent applicable to the intellectual property rights herein granted) to ensure strict compliance with this Agreement. Failure to comply with this Section shall be considered a material breach which may not be remedied. 7.4 In the event that MD files, or intends to file any petition, answer, or other proceeding in bankruptcy, Affymetrix will have the right, but not the obligation, to terminate this Agreement by providing written notice. 7.5 If either party should fail to perform any obligations under this Agreement, the other party may give written notice to the defaulting party calling attention to the default. In the 17 event of a material breach or default, unless said breach or default is corrected within thirty (30) days after such notice, said other party shall thereafter have the right to terminate this Agreement upon thirty (30) days' prior written notice to said defaulting party. Said right to terminate for default shall be in addition to, and without prejudice to the exercise of, any other remedies available in law or equity. 7.6 No termination of this Agreement shall in any way affect MD's obligations pursuant to Articles 5 and 6 to pay royalties and operating fees, deliver statements, and maintain books and records under this Agreement accrued prior to such termination, or MD's or Affymetrix's obligations pursuant to Section 3.2. Furthermore, no termination of this Agreement shall in any way affect Affymetrix's rights under Sections 4 above. 8 MISCELLANEOUS 8.1 MD and Affymetrix will appropriately mark all licensed products hereunder with applicable intellectual property rights notices as may be reasonably be provided from time to time by the other Party. In addition, all product manuals and instruments to be sold as or in conjunction with Nucleic Acid Arrays, Systems, or Array Makers shall include the following notice, such notice to be reasonably modified upon notice from Affymetrix provided that any such modification is consistent with the terms and conditions of this Agreement: LIMITED LICENSE: NUCLEIC ACID ARRAYS, ARRAY MAKERS, SYSTEMS (INSTRUMENTS, SOFTWARE, AND REAGENTS) ARE LICENSED FOR RESEARCH USE ONLY. NO IMPLIED RIGHT TO MAKE, USE, HAVE MADE, OFFER TO SELL, LEASE, DISTRIBUTE, SELL, OR IMPORT NUCLEIC ACID PROBE ARRAYS OR ANY OTHER PRODUCT IN WHICH AFFYMETRIX OR MOLECULAR DYNAMICS HAS PATENT RIGHTS IS CONVEYED BY THE SALE OF PROBE ARRAYS, INSTRUMENTS, SOFTWARE, OR REAGENTS HEREUNDER. THIS LIMITED LICENSE PERMITS ONLY THE USE OF THE PARTICULAR PRODUCT(S) THAT THE USER HAS PURCHASED FROM AFFYMETRIX OR LICENSED AND SOLD BY MOLECULAR DYNAMICS, OR PERMITTED LICENSEES, AND MAY NOT BE USED IN DATABASE GENERATION FOR EXTERNAL LICENSE OR SALE, OR FOR SERVICE BASED PHARMACEUTICAL RESEARCH. 8.2 Affymetrix warrants that the Technical Information does not infringe the copyrights or trade secret rights of a third party, and will indemnify MD against any claims based on the infringement of third party copyrights or trade secret rights. THIS WARRANTY STATES THE ENTIRE LIABILITY FOR INFRINGEMENT OF THIRD PARTY INTELLECTUAL RIGHTS ARISING FROM THE SALE OF PRODUCTS UNDER THIS AGREEMENT. 18 8.3 Nothing in this Agreement shall be construed as conferring any right to use in advertising, publicity, or other promotional activities any name, trade name, trademark, or other designation of either party hereto without the express written approval of the other party. 8.4 Each of Affymetrix and MD represents and warrants that it neither owns or controls any patent or patent application which would be necessary for the other party to exercise the rights granted herein and which is not licensed hereunder. MD and Affymetrix warrant that they each have the full right to enter into this Agreement. Nothing in this Agreement shall be construed as a warranty or representation by Affymetrix or MD as to the validity or scope of any of the Patent Rights, a warranty or representation by either party that any manufacture, sale, use, or other disposition of the products licensed hereunder will be free from infringement of patents, utility models, and/or design patents other than those Patent Rights for which licenses are extended hereunder. Nothing in this Agreement shall be considered as conferring any warranty or representation as to the usefulness, marketability, or merchantability of any products sold within the scope of the licenses hereunder. Affymetrix and MD agree to hold the other harmless from any personal injury or products liability claims made as a result of the sale of products licensed hereunder. 8.5 The Parties will retain the terms of this Agreement in strict confidence, except as may be required by regulatory agencies or courts, and will then use all reasonable precautions to maintain the terms of this Agreement confidential. 8.6 This Agreement is not assignable by MD by operation of law or otherwise without the prior written consent of Affymetrix including in the event of acquisition of the assets or stock of MD without the consent of Affymetrix, which will not be unreasonably withheld, except in the case of companies directly competitive with Affymetrix. Affymetrix may assign this Agreement, without the prior written consent of MD, to any entity acquiring all or substantially all of Affymetrix' Nucleic Acid Array licensing business. No assignment of this Agreement shall be valid until all obligations under this Agreement shall have been assumed in writing by the assignee. 8.7 This Agreement is executed by the parties with the understanding that it embodies the entire agreement between the parties pertaining to the subject matter of this Agreement and there are no representations, warranties or other commitments, written or oral, pertaining to the subject matter of this Agreement which are not embodied in this Agreement. 8.8 MD and Affymetrix represents that they are familiar with the Export Administration Regulations comprising the compilation of official regulations and policies governing the export licensing of commodities and technical data promulgated by the United States Department of Commerce, Bureau of International Commerce, Office of Export Administration. Notwithstanding any other provisions of this Agreement, and each 19 assures the other that with respect to all information and licenses furnished by or under this Agreement, that it will comply with such official regulations. 8.9 It is understood and agreed between the parties that the Technical Information made available to each Party shall all be provided "as is" without any warranties, express or implied. THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE ARE EXPRESSLY EXCLUDED FROM THIS WARRANTY AND FROM THE TERMS OF THIS CONTRACT BY AGREEMENT OF THE PARTIES. In no event will Affymetrix or MD be liable for lost or prospective profits or indirect or consequential damages even if Affymetrix or MD has been advised of the possibility of such damages. 8.10 The addresses of the parties hereto for all purposes of this Agreement shall be as follows: Affymetrix: Affymetrix, Inc. 3380 Central Expressway Santa Clara, CA 95051 Attn: President MD: Molecular Dynamics, Inc. 928 East Arques Avenue Sunnyvale, CA 94086 Attn: President All correspondence relating to this Agreement shall be deemed to have been duly communicated to the addressee upon the confirmed facsimile transmission or prepaid express mailing to the party entitled thereto at its above address or at such address as it may from time-to-time designate in writing to the other party. 8.11 In the event that any provision of this Agreement is held invalid or unenforceable for any reason, such unenforeceability shall not affect the enforceability of the remaining provisions of this Agreement, and all provisions of this Agreement shall be construed so as to preserve the enforceability hereof. 8.12 The waiver by either Party of a breach or a default of any provision of this Agreement by the other Party shall not be construed as a waiver of any succeeding breach of the same or any other provision, nor shall any delay or omission on the part of either Party to exercise or avail itself of any right, power or privilege that it has or may have hereunder operate as a waiver of any right, power or privilege by such Party. 20 8.13 This Agreement is made and shall be construed in accordance with the local laws of the State of California, U.S.A. without regard to the doctrine of conflict of laws. 8.14 This Agreement may be executed in any number of counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties have respectively caused this Agreement to be executed on the dates hereinafter indicated. Affymetrix, Inc. By: /s/ Stephen P.A. Fodor ------------------------------ Title: President & CEO ------------------------------ Date: November 28, 1997 ------------------------------ Molecular Dynamics, Inc. By: /s/ Jay Flatley ------------------------------ Title: President & CEO ------------------------------ Date: November 26, 1997 ------------------------------ 21 EXHIBIT 1 AFFYMETRIX PATENT LISTING (BY AFFYMETRIX FILE NO.) [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] 22 EXHIBIT 2 MD PATENT LISTING (BY PATENT NO. OR MD FILE NO.) [**] [**] [**] 23 EXHIBIT 3 LICENSED SOFTWARE PACKAGES GeneChip-Registered Trademark- System Software (current version) GeneChip Expression Analysis Software (Cat No. 900136) 24 EXHIBIT 4 SOFTWARE LICENSE PROVISION END-USER LICENSE AGREEMENT IMPORTANT-READ CAREFULLY: This End-User License Agreement ("Agreement") is a legal agreement between you and Affymetrix, Inc. ("Licensor"), the licensor of the software products ("Software Products") accompanying the diagnostic or analytical system ("System") you have acquired from Affymetrix or a distributor of the System ("Distributor"). The Software Products include computer programs, associated storage media, associated documentation, and any other information regarding the software products listed below. If the Software Products are not accompanied with a System, you may not use, copy or read the Software Products. By installing, copying, reading, or otherwise using the Software Products, you agree to be bound by the terms of this Agreement. If you do not agree to the terms of this Agreement, Licensor is unwilling to license the Software Products to you. In such event, you may not use, copy or Distributor for instructions on return of the Software Products. This Agreement represents the entire agreement concerning the Software Products between you and Licensor, and it supersedes any prior proposal, representation, or understanding between the parties. The Software Products are protected by copyright laws and international copyright treaties, as well as other intellectual property laws and treaties. The Software Products are licensed, not sold, to you by Licensor for use only under the terms of this Agreement, and Licensor reserves any rights not expressly granted to you. 1. License Grant. This Agreement grants to you, and you accept, a nonexclusive license to use the Software Products. The computer programs of the Software Products ("Computer Programs") may only be used on the System. Further, the Computer Programs may only be used in their machine-readable, object code form. You agree that you will not assign, sublicense, transfer, pledge, lease, rent, or share your rights under this Agreement. You agree that you may not modify or prepare derivative works of the Software Products. You agree that you may not reverse engineer, decompile, disassemble, or otherwise translate the Computer Programs. The Software Products are for RESEARCH USE ONLY. You agree not to use the Software Products in any setting requiring FDA or other regulatory approval. The Computer Programs may be loaded on the System in both temporary and permanent storage, and the associated storage media may be utilized for backup purposes. In addition, you may make one copy of the Computer Programs on a backup storage media for the purpose of backup. Except as authorized under this paragraph, no copies of the Software Products or any portions thereof may be made by you or any person under your authority or control. 2. Licensor's Rights. You acknowledge and agree that the Software Products are proprietary products of Licensor protected under copyright and other intellectual property laws. You further 25 acknowledge and agree that all right, title, and interest in and to the Software Products, including associated intellectual property rights, are and shall remain with Licensor. This Agreement does not convey to you an interest in or to the Software Products, but only a limited right of use revocable in accordance with the terms of this Agreement. You agree to keep confidential and use your reasonable efforts to prevent and protect the Software Products from unauthorized disclosure or use. LIMITED LICENSE: PROBE ARRAYS, INSTRUMENTS, SOFTWARE, AND REAGENTS ARE LICENSED FOR RESEARCH USE ONLY. NO IMPLIED RIGHT TO MAKE, HAVE MADE, USE, LEASE, DISTRIBUTE, OFFER TO SELL, SELL, OR IMPORT OLIGONUCLEOTIDE PROBE ARRAYS OR ANY OTHER PRODUCT IN WHICH AFFYMETRIX HAS PATENT RIGHTS IS CONVEYED BY THE SOFTWARE. THIS LIMITED LICENSE PERMITS ONLY THE USE OF THE PARTICULAR PRODUCT(S) THAT THE USER HAS PURCHASED FROM AFFYMETRIX OR ITS LICENSEES OF PARTICULAR PATENT RIGHTS. 3. Software Products. The Affymetrix software products covered by this Agreement include, but are not limited to, the following: [to be added] 4. Term. This Agreement shall continue until terminated. You may terminate this Agreement at any time by destroying all copies of the Software Products, including the associated storage media and documentation, and erasing all copies of the Software Products in both temporary and permanent storage on the System. Licensor may terminate this Agreement upon the breach by you of any term hereof. 5. Limited Warranty. Licensor or its distributor warrants, for your benefit alone, for a period of ninety (90) days from the date of commencement of this Agreement ("Warranty Period") that the associated storage media on which the Computer Programs reside will be free from defects in material and workmanship. Licensor further warrants, for your benefit alone, that during the Warranty Period the Computer Programs shall operate substantially in accordance with the associated documentation. If during the Warranty Period, a defect in the Computer Programs appears, you may return the Software Products to Licensor for either replacement or, if so elected by Licensor, refund of license fees paid by you to Distributor for use of the Software Products. TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, AFFYMETRIX AND ITS LICENSORS EXPRESSLY DISCLAIM ALL OTHER WARRANTIES, EITHER EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE WITH REGARD TO THE SOFTWARE PRODUCTS. SOME JURISDICTIONS DO NOT ALLOW THE EXCLUSION OR LIMITATION OF IMPLIED WARRANTIES SO THE ABOVE LIMITATION MAY NOT APPLY TO YOU. 6. Limitation of Liability. To the maximum extent permitted by applicable law, Licensor's cumulative liability to you or any other party for any loss or damages resulting from any claims, demands, or actions arising out of or relating to this Agreement shall not exceed the license fees 26 paid to Distributor for the use of the Software Products. In no event shall Licensor be liable for any incidental, consequential, special, or exemplary damages, or indirect damages for personal injury or lost profits, even if Licensor has been advised of the possibility of such damages. SOME JURISDICTIONS DO NOT ALLOW THE LIMITATION OR EXCLUSION OF LIABILITY FOR INCIDENTAL OR CONSEQUENTIAL DAMAGES SO THE ABOVE LIMITATION OR EXCLUSION MAY NOT APPLY TO YOU. 7. Governing Law. This Agreement shall be governed by and interpreted under the laws of California, without regard to conflict of law provisions. 8. Severability. Should any term of this Agreement be declared void or unenforceable by any court of competent jurisdiction, such declaration shall have no effect on the remaining terms hereof. 9. U.S. Government Restricted Rights. The Software Products and documentation are provided with RESTRICTED RIGHTS as follows: a. Department of Defense Licensees. The Government's right to use, modify, reproduce, release, perform, display, or disclose the Software Products are restricted by paragraph (b)(3) of the Rights in Noncommercial Computer Software and Noncommercial Computer Software Documentation clause contained in the relevant contract between the Government and Affymetrix, Inc, 3380 Central Expressway, Santa Clara, California 95051. Any reproduction of the Software Products or portions thereof marked with this legend must also reproduce the markings. Any person, other than the Government, who has been provided access to the Software Products must promptly notify Affymetrix. b. Civilian Government Agency Licensees. Use, reproduction, or disclosure is subject to restrictions set forth in the relevant contract between the Government and Affymetrix, Inc, 3380 Central Expressway, Santa Clara, California 95051. 27 EXHIBIT 5 EXCUSED FABRICATION SYSTEMS [**] [**] [**] [**] [**] [**] [**] 28 EXHIBIT 6 DISCOUNTED ORGANISMS [**] [**] [**] [**] [**] [**] 29 EX-13 4 EXHIBIT 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS All statements in this discussion that are not historical are forward-looking statements. Such statements are subject to risks and uncertainties that could cause actual results to differ materially for Affymetrix from those projected, including, but not limited to, uncertainties relating to technological approaches, product development, manufacturing and market acceptance, uncertainties related to cost and pricing of Affymetrix products, dependence on collaborative partners, uncertainties relating to sole source suppliers, uncertainties relating to FDA and other regulatory approvals, competition, risks relating to intellectual property of others and the uncertainties of patent protection. These and other risk factors are discussed under the heading "Additional Risk Factors" and elsewhere in the Company's Form 10-K Report for the year ended December 31, 1997. Affymetrix expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in Affymetrix' expectations with regard thereto or any change in events, conditions, or circumstances on which any such statements are based. OVERVIEW Affymetrix has developed and intends to establish its GeneChip - -Registered Trademark- system as the platform of choice for acquiring, analyzing and managing complex genetic information in order to improve the diagnosis, monitoring and treatment of disease. The Company's GeneChip system consists of disposable DNA probe arrays containing gene sequences on a chip, reagents for use with the probe arrays, a scanner and other instruments to process the probe arrays, and software to analyze and manage genetic information. The business and operations of the Company were commenced in 1991 by Affymax N.V. ("Affymax") and were initially conducted within Affymax. In March 1992, the Company was incorporated as a California corporation and wholly owned subsidiary of Affymax. Beginning in September 1993, the Company issued equity securities which diluted Affymax' ownership in Affymetrix. In March 1995, Glaxo plc, now Glaxo Wellcome plc ("Glaxo"), acquired Affymax, including its ownership interest in Affymetrix. As of December 31, 1997 Glaxo owned approximately 33% of Affymetrix. On March 10, 1998, the Company announced the planned sale of 1,634,522 shares of Series AA Preferred Stock to Glaxo for expected proceeds of $50 million. The preferred stock is convertible into Affymetrix common stock at a predetermined price of approximately $40 per share, and if all of the preferred stock is converted, would result in the issuance of approximately 1,250,000 shares of Affymetrix common stock. The sale, which is subject to regulatory approval, is expected to close during the second quarter of 1998, and, if completed, will increase Glaxo's ownership interest in Affymetrix to approximately 37% assuming the conversion of preferred stock into common shares. Affymetrix has a limited operating history that, to date, has focused primarily on the development of its technology. Based on its GeneChip technology platform, Affymetrix is developing a portfolio of products for use by pharmaceutical and biotechnology companies, academic research centers and clinical reference laboratories. The Company commercially introduced its first product, the research use only GeneChip system and the HIV probe array, in April 1996. Payments received for certain systems prior to April 1996 were recorded as contract revenues pursuant to development agreements. Failure of the Company to successfully develop, manufacture and market additional products or to realize product revenues would have a material adverse effect on the Company's business, financial condition and results of operations. The Company has incurred operating losses in each year since its inception, including a net loss of approximately $22.5 million during the year ended December 31, 1997 and, as of such date, had an accumulated deficit of approximately $67.3 million. The Company's losses have resulted principally from costs incurred in research and development and from general and administrative costs associated with the Company's operations. These costs have exceeded the Company's interest income and revenues, which to date have been generated principally from cash and investment balances, collaborative research and development agreements and government research grants. The Company expects to incur substantial additional operating losses over the next several years as a result of increases in its expenses for research and product development, general and administrative costs and manufacturing, marketing and sales capabilities. -1- The Company's quarterly operating results will depend upon the volume and timing of orders for GeneChip systems and probe arrays received and the timing of deliveries made during the quarter, variations in payments under collaborative agreements, including milestones, royalties, license fees, and other contract revenues, and the timing of new product introductions by the Company. The Company's quarterly operating results may also fluctuate significantly depending on other factors, including the introduction of new products by the Company's competitors; regulatory actions; market acceptance of the GeneChip system and other potential products; adoption of new technologies; manufacturing capabilities; variations in gross margins of the Company's products; competition; the cost, quality and availability of reagents and components; the mix of products sold; changes in government funding; and third-party reimbursement policies. Affymetrix may have to reduce or discount the price of its products to gain market acceptance, which could adversely affect gross margins. The Company's future gross margins, if any, will be dependent on, among other factors, the Company's ability to cost-effectively manufacture the GeneChip system and probe arrays, product mix and the price at which it can successfully market its products to academic research centers, pharmaceutical and biotechnology companies and clinical reference laboratories. The amount of future operating losses and time required by the Company to reach profitability are uncertain. The Company's ability to generate significant revenues and become profitable is dependent in large part on the ability of the Company to enter into additional collaborative and supply arrangements and on the ability of the Company and its collaborative partners to successfully commercialize products incorporating the Company's technologies. In addition, delays in receipt of any necessary regulatory approvals by the Company or its collaborators, or receipt of approvals by competitors, could adversely affect the successful commercialization of the Company's technologies. The Company has substantially completed development of a plan to modify its information systems to recognize the year 2000. The Company expects the project to be substantially complete by mid-1999 and the cost of the project is not expected to have a material impact on the Company's financial condition or results of operations. RESULTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996 PRODUCT REVENUE. In April 1996, Affymetrix commenced commercial sales of the GeneChip system and an HIV probe array for research use and recorded sales of $1.4 million during 1996 with associated costs of product revenue of $2.2 million. Product sales increased to $4.8 million in 1997, the first full-year of sales with associated costs of product revenue of $4.6 million. Product sales revenue includes revenue from the sales of GeneChip systems as well as various probe arrays, including arrays targeting HIV, p450 and p53 genes and custom and standard gene expression monitoring probe arrays. Margins have, and will continue to, fluctuate significantly as the Company experiences variation in manufacturing yields and as the Company continues development of its manufacturing capabilities. In addition, the Company expects to increase shipments to foreign customers during 1998 and margins may fluctuate due to changes in currency exchange rates. CONTRACT AND GRANT REVENUE. Contract and grant revenue increased to $15.0 million for 1997 from $10.6 million for 1996 primarily due to increased activity under government grants and increased custom probe array design and supply fees earned and milestone payments received. RESEARCH AND DEVELOPMENT. Research and development expenses increased to $28.2 million for 1997 compared to $18.8 million for 1996. The increase in research and development expenses was attributable primarily to the hiring of additional research and development personnel, costs incurred for further product development and increased purchases of research supplies. The Company expects research and development spending to increase over the next several years as product development and research efforts continue to expand. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased to $14.7 million in 1997 compared to $7.6 million for 1996. The increase in selling, general and administrative expenses was attributable primarily to the hiring of additional management personnel, professional fees (primarily legal fees) and overall scale-up of the Company's operations and business development efforts. Selling, general and administrative expenses are expected to continue to increase as the Company expands sales and marketing, prosecutes and defends its intellectual property position and defends against claims made by third parties, and adds management and support staff. -2- INTEREST INCOME. Interest income was $5.2 million for 1997 compared to $4.4 million for 1996. The increase resulted from the full year impact of investment of net proceeds from the Company's initial public offering in June 1996. Interest expense of approximately $0.1 million for both 1997 and 1996 is related to a capital equipment lease. YEARS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1995 PRODUCT REVENUE. In April 1996, Affymetrix commenced commercial sales of the GeneChip system and an HIV probe array for research use. Product revenue of $1.4 million and costs of product revenue of $2.2 million were recognized in the last nine months of 1996. CONTRACT AND GRANT REVENUE. Contract and grant revenue increased to $10.6 million for 1996 from $4.6 million for 1995 as a result primarily of the Company's ATP grant, NIH grant and revenue earned from collaborative agreements. RESEARCH AND DEVELOPMENT. Research and development expenses increased to $18.8 million for 1996 compared to $12.4 million for 1995. The increase in research and development expenses was attributable primarily to the hiring of additional research and development personnel, costs incurred to further product development and increased purchases of research supplies. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased to $7.6 million in 1996 compared to $3.8 million for 1995. The increase in selling, general and administrative expenses was attributable primarily to the hiring of additional management personnel and the incurring of legal and other professional fees in connection with the overall scale-up of operations and business development efforts. INTEREST INCOME. Interest income was $4.4 million for 1996 compared to $1.3 million for 1995. The increase resulted from the investment of net proceeds from Affymetrix' private placement of Series B Senior Convertible Preferred Stock in August 1995 and net proceeds from its initial public offering in June 1996. Interest expense decreased to $0.1 million for 1996 from $0.4 million in 1995 as a result of the conversion of a $6.0 million subordinated convertible promissory note held by Affymax in August 1995. LIQUIDITY AND CAPITAL RESOURCES The Company has financed its operations primarily through the sale of equity securities, contributions from Affymax, government grants, collaborative agreements, interest income and product sales. Proceeds raised through the sale of equity securities include net proceeds of $85.1 million from the Company's initial public offering in June 1996 and aggregate net proceeds of $53.6 million from private placements in August 1995 and September 1993. Affymetrix' cash and cash equivalents decreased by $9.4 million during 1997. Net cash used in operating activities was $21.4 million in 1997 compared to $11.8 million in 1996 and $10.2 million for 1995. The cash used for operations was primarily to fund the Company's operating losses. Net cash provided by investing activities was $12.0 million in 1997. Net cash used in investing activities was $61.6 million for 1996 and $26.7 million in 1995. Capital expenditures totaled $16.0 million for 1997 compared to $3.5 million in 1996 and $2.3 million in 1995. The increase in 1997 relates to expansion of the Company's manufacturing, research, development and administrative facilities as well as increased purchases of information systems equipment. Purchases of available-for-sale securities were $82.7 million, $149.4 million and $38.4 million for 1997, 1996 and 1995, respectively. Proceeds from sales and maturities of available-for-sale securities were $110.6 million, $91.3 million and $14.0 million for 1997, 1996 and 1995, respectively. Net cash provided by financing activities was $30,000 in 1997 compared to $85.0 million in 1996 and $32.7 million in 1995. These cash flows from financing activities are primarily the result of the Company's initial public offering in 1996 and private placements of securities in 1995. On October 17, 1997 the Company filed a registration statement on Form S-3 with the Securities and Exchange Commission for an underwritten public offering of up to 1,725,000 shares of common stock. On November 4, 1997 the Company withdrew the offering. -3- As of December 31, 1997, Affymetrix had cash, cash equivalents, and short-term investments of approximately $71.6 million. The Company anticipates that these existing capital resources, together with the expected proceeds of approximately $50 million from the pending sale of Series AA Preferred Stock to Glaxo, will enable it to maintain currently planned operations. However, this expectation is based on the Company's current operating plan, which is expected to change as a result of many factors, and the Company could require additional funding sooner than anticipated. In addition, the Company may choose to raise additional capital due to market conditions or strategic considerations even if it has sufficient funds for its operating plan. The Company's requirements for capital will be substantial and will depend on many factors, including payments received under existing and possible future supply and collaborative agreements; payments made under license agreements; the availability of government research grant payments; the progress of the Company's collaborative and independent research and development projects; the cost of preclinical and clinical trials for the Company's products; the prosecution, defense and enforcement of patent claims and other intellectual property rights; and development of manufacturing, marketing and sales capabilities. The Company has no credit facility or other committed sources of capital. To the extent capital resources are insufficient to meet future capital requirements, the Company will have to raise additional funds to continue the development of its technologies. There can be no assurance that such funds will be available on favorable terms, or at all. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of such securities could result in dilution to the Company's shareholders. If adequate funds are not available, the Company may be required to curtail operations significantly or to obtain funds by entering into collaboration agreements on unattractive terms. The Company's inability to raise capital would have a material adverse effect on the Company's business, financial condition and results of operations. Affymetrix expects its capital requirements to increase over the next several years as it expands its facilities and acquires equipment to support manufacturing and research and development efforts. The Company's expenditure requirements will depend on numerous factors, including the progress of its research and development programs; the development of commercial scale manufacturing capabilities; its ability to maintain existing collaborative arrangements and establish and maintain new collaborative arrangements; the costs involved in preparing, filing, prosecuting, defending and enforcing intellectual property rights; the effectiveness of product commercialization activities and arrangements; and other factors. As of December 31, 1997, Affymetrix had federal net operating loss carryforwards for income tax purposes of approximately $52 million, which will expire at various dates beginning in 2008, if not utilized. Because Affymetrix has experienced ownership changes, future utilization of these carryforwards may be subject to certain limitations as defined by Internal Revenue Code and similar state regulations. As a result of the annual limitation, a portion of these carryforwards may expire before ultimately becoming available to reduce income tax liabilities. -4- AFFYMETRIX, INC. BALANCE SHEETS (In thousands, except share amounts) ASSETS
DECEMBER 31, ---------------------- 1997 1996 -------- -------- Current assets: Cash and cash equivalents.................................................... $ 4,779 $ 14,143 Short-term investments....................................................... 66,794 94,839 -------- -------- 71,573 108,982 Accounts receivable ......................................................... 6,216 1,888 Inventories.................................................................. 2,637 1,901 Other current assets......................................................... 748 523 -------- -------- Total current assets....................................................... 81,174 113,294 Property and equipment Construction-in-progress..................................................... 2,760 1,424 Equipment and furniture...................................................... 10,732 5,883 Leasehold improvements....................................................... 10,762 946 -------- -------- 24,254 8,253 Less accumulated depreciation and amortization............................... (5,166) (2,856) -------- -------- Net property and equipment................................................. 19,088 5,397 Other assets.................................................................... 908 209 -------- -------- $101,170 $118,900 -------- -------- -------- -------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities..................................... $ 8,729 $ 5,023 Deferred revenue............................................................. 664 396 Current portion of capital lease obligation.................................. 228 207 -------- -------- Total current liabilities.................................................. 9,621 5,626 Noncurrent portion of capital lease obligation.................................. 513 741 Commitments and contingencies Shareholders' equity: Common stock, no par value; 50,000,000 shares authorized; 22,786,945 and 22,535,203 shares issued and outstanding at December 31, 1997 and 1996, respectively................................................................. 158,924 158,687 Unrealized gain on available-for-sale securities............................. 125 49 Deferred compensation........................................................ (744) (1,460) Accumulated deficit.......................................................... (67,269) (44,743) -------- -------- Total shareholders' equity................................................. 91,036 112,533 -------- -------- $101,170 $118,900 -------- -------- -------- --------
See Accompanying Notes -5- AFFYMETRIX, INC. STATEMENTS OF OPERATIONS (In thousands, except per share amounts)
YEAR ENDED DECEMBER 31, -------------------------------------- 1997 1996 1995 -------- -------- -------- REVENUE: Product............................................................... $ 4,789 $ 1,389 $ - Contract and grant.................................................... 14,976 10,583 4,625 -------- -------- -------- Total revenue....................................................... 19,765 11,972 4,625 -------- -------- -------- COSTS AND EXPENSES: Cost of product revenue............................................... 4,559 2,178 - Research and development.............................................. 28,168 18,762 12,420 Selling, general and administrative................................... 14,697 7,569 3,833 -------- -------- -------- Total costs and expenses (includes related-party expense of $52, $1,422 and $1,432, respectively)............................. 47,424 28,509 16,253 -------- -------- -------- Loss from operations................................................ (27,659) (16,537) (11,628) Interest income..................................................... 5,218 4,416 1,301 Interest expense (includes related-party expense of $320 in 1995)............................................................. (85) (106) (420) -------- -------- -------- Net loss............................................................ $(22,526) $(12,227) $(10,747) -------- -------- -------- -------- -------- -------- Basic and diluted net loss per share (pro forma in 1996 and 1995)... $ (0.99) $ (0.62) $ (0.84) -------- -------- -------- -------- -------- -------- Shares used in computing basic and diluted net loss per share............................................................. 22,644 19,793 12,722 -------- -------- -------- -------- -------- --------
See Accompanying Notes -6- AFFYMETRIX, INC. STATEMENTS OF SHAREHOLDERS' EQUITY (In thousands, except share amounts)
CONVERTIBLE TOTAL PREFERRED COMMON UNREALIZED DEFERRED ACCUMULATED SHAREHOLDERS' STOCK STOCK GAIN/(LOSS) COMPENSATION DEFICIT EQUITY ----------- ------ ----------- ------------ ----------- ------------- Balance, December 31, 1994.................. $ 31,283 $ 122 $(382) $ - $(21,769) $ 9,254 -------- -------- ----- ------- -------- -------- Issuance of 7,333,333 shares of Series B Senior Convertible Preferred Stock, net of issuance costs................................... 32,836 - - - - 32,836 Conversion of note payable to Affymax into 1,333,333 shares of Series B Senior Convertible Preferred Stock...... 6,000 - - - - 6,000 Issuance of 62,749 shares of Common Stock upon exercise of stock options.... - 23 - - - 23 Issuance of 65,320 shares of Common Stock for financing commissions ............................ - 44 - - - 44 Issuance of warrants to Affymax for 202,441 shares of Series 2 Subordinated Convertible Preferred Stock in lieu of interest............... 320 - - - - 320 Compensation from accelerated options................................. - 40 - - - 40 Deferred compensation related to grant of stock options.................. - 2,488 - (2,488) - - Amortization of deferred compensation............................ - - - 128 - 128 Unrealized gain on available-for-sale securities........... - - 663 - - 663 Net loss................................. - - - - (10,747) (10,747) -------- -------- ----- ------- -------- -------- Balance, December 31, 1995.................. 70,439 2,717 281 (2,360) (32,516) 38,561 -------- -------- ----- ------- -------- -------- Issuance of 215,945 shares of Common Stock upon exercise of stock options.... - 127 - - - 127 Conversion of 23,166,166 shares of Preferred Stock to 15,629,991 shares of Common Stock........................ (70,119) 70,119 - - - - Conversion of warrants to purchase 202,441 shares of Series 2 Subordinated Convertible Preferred Stock to warrants to purchase 134,961 shares of Common Stock.......... (320) 320 - - - - Issuance of 6,153,000 shares of Common Stock , net of issuance costs and commissions .................. - 85,069 - - - 85,069 Deferred compensation related to grant of stock options.................. - 335 - (335) - - Amortization of deferred compensation............................ - - - 1,235 - 1,235 Unrealized loss on available-for-sale securities........... - - (232) - - (232) Net loss................................. - - - - (12,227) (12,227) -------- -------- ----- ------- -------- -------- Balance, December 31, 1996.................. - 158,687 49 (1,460) (44,743) 112,533 -------- -------- ----- ------- -------- -------- Issuance of 253,074 shares of Common Stock upon exercise of stock options.... - 237 - - - 237 Amortization of deferred compensation............................ - - - 716 - 716 Unrealized gain on available-for-sale securities........... - - 76 - - 76 Net loss................................. - - - - (22,526) (22,526) -------- -------- ----- ------- -------- -------- Balance, December 31, 1997.................. $ - $158,924 $ 125 $ (744) $(67,269) $91,036 -------- -------- ----- ------- -------- -------- -------- -------- ----- ------- -------- --------
See Accompanying Notes -7- AFFYMETRIX, INC. STATEMENTS OF CASH FLOWS (In thousands)
YEAR ENDED DECEMBER 31, -------------------------------------- 1997 1996 1995 -------- --------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss...................................................... $(22,526) $ (12,227) $(10,747) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization.............................. 2,310 1,286 701 Amortization of investment premiums........................ 159 (518) 357 Amortization of deferred compensation...................... 716 1,235 128 Changes in operating assets and liabilities: Accounts receivable...................................... (4,328) (546) (1,252) Inventories.............................................. (736) (1,231) (670) Other assets............................................. (924) (292) (252) Accounts payable and other accrued liabilities........... 4,019 856 1,098 Accrued warranty......................................... (313) 1,609 160 Deferred revenue......................................... 268 (1,944) 253 -------- --------- -------- Net cash used in operating activities.................. (21,355) (11,772) (10,224) -------- --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures.......................................... (16,001) (3,488) (2,283) Proceeds from sale of available-for-sale securities........... 98,452 48,417 8,538 Proceeds from maturities of available-for-sale securities..... 12,183 42,859 5,485 Purchases of available-for-sale securities.................... (82,673) (149,363) (38,428) -------- --------- -------- Net cash provided by (used in) investing activities.... 11,961 (61,575) (26,688) -------- --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuances of Common Stock, net................................ 237 85,196 23 Issuances of Preferred Stock, net............................. - - 32,880 Principal payments on capital lease obligation................ (207) (187) (169) -------- --------- -------- Net cash provided by financing activities.............. 30 85,009 32,734 -------- --------- -------- Net increase (decrease) in cash and cash equivalents... (9,364) 11,662 (4,178) Cash and cash equivalents at beginning of year................... 14,143 2,481 6,659 -------- --------- -------- Cash and cash equivalents at end of year......................... $ 4,779 $ 14,143 $ 2,481 -------- --------- -------- -------- --------- -------- SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES: Conversion of note payable and contributions from Affymax to Preferred Stock.......................................... $ - $ - $ 6,000 -------- --------- -------- -------- --------- --------
See Accompanying Notes -8- NOTE 1 -- NATURE OF OPERATION Affymetrix, Inc. ("Affymetrix" or the "Company") is focused on developing GeneChip -Registered Trademark- based products and related technology for the acquisition, analysis, and management of complex genetic data. The business and operations of Affymetrix commenced in 1991 by Affymax N.V. and subsidiaries ("Affymax") and were initially conducted within Affymax. In March 1992, Affymetrix was incorporated as a California corporation and became a wholly owned subsidiary of Affymax. Beginning in September 1993, Affymetrix issued equity securities which diluted Affymax' shareholding in Affymetrix. In March 1995, Glaxo plc, now Glaxo Wellcome plc ("Glaxo"), purchased Affymax, including its then 65% ownership interest in Affymetrix. Affymetrix issued additional equity securities, which further diluted Glaxo's ownership interest in Affymetrix to approximately 46% on December 31, 1995. The issuance of common stock during the Company's initial public offering in June 1996 further diluted Glaxo's ownership interest in Affymetrix to approximately 33% at December 31, 1997. On March 10, 1998, the Company announced the planned sale of 1,634,522 shares of Series AA Preferred Stock to Glaxo for expected proceeds of $50 million. The preferred stock is convertible into Affymetrix common stock at a predetermined price of approximately $40 per share, and if all of the preferred stock is converted, would result in the issuance of approximately 1,250,000 shares of Affymetrix common stock. The sale, which is subject to regulatory approval, is expected to close during the second quarter of 1998, and, if completed, will increase Glaxo's ownership interest in Affymetrix to approximately 37% assuming conversion of the Series AA Preferred Stock into common shares. NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The summary of significant accounting policies is presented to assist the reader in understanding and evaluating the financial statements. These policies are in conformity with generally accepted accounting policies. Certain amounts for prior years have been reclassified to conform to current year presentation. USE OF ESTIMATES The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. REVENUE RECOGNITION Contract and grant revenue is recorded as earned as defined within the specific agreements. Payments received in advance under these arrangements are recorded as deferred revenue until earned. Direct costs associated with these contracts and grants are reported as research and development expense. The Company recognizes product revenue from the sale of its products upon shipment to its customers. Revenue from subscription fees earned under EasyAccess agreements are recorded ratably over the term of the agreement and are recorded in "Contract Revenue". Reserves are provided for anticipated product returns and warranty expenses at the time of shipment. Revenue from customers representing 10% or more of total revenue during 1997, 1996 and 1995 is as follows:
1997 1996 1995 ---- ---- ---- CUSTOMER: A 23% 18% 25% B - 18% 23% C 10% 15% 22% D 17% 19% 17% E 17% - -
RESEARCH AND DEVELOPMENT Research and development expenses consist of costs incurred for internal, contract and grant-sponsored research and development. These costs include direct and research-related overhead expenses. -9- NET LOSS PER SHARE In 1997, the Company adopted the provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per Share' ("SFAS 128") and Staff Accounting Bulletin No. 98 ("SAB 98"), and restated all prior periods. Under the provisions of SFAS 128, basic earnings per share is calculated based on the weighted average number of common shares outstanding during the period. Diluted earnings per share gives effect to the dilutive effect of stock options and warrants (calculated based on the treasury stock method). SAB 98 eliminated the impact of certain dilutive securities during the period prior to the Company's initial public offering in 1996. Options and warrants to purchase 3,155,190, 2,435,824, and 2,363,005 shares of the Company's common stock in 1997, 1996 and 1995, respectively, had an anti-dilutive impact on net loss per share and were therefore excluded from the calculation of diluted net loss per share (See Note 7 "Shareholders' Equity"). Shares used in computing pro forma net loss per share include 6,766,000 shares in 1996, and 12,274,000 shares in 1995 on an as-converted basis for then outstanding preferred stock. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS Cash equivalents and short-term investments consist of debt securities. Management determines the appropriate classification of debt securities at the time of purchase. As of December 31, 1997, Affymetrix' investments in debt securities are classified as available-for-sale and are carried at fair value with unrealized gains and losses reported in shareholders' equity. Affymetrix reports all liquid securities with maturities at date of purchase of three months or less that are readily convertible into cash and have insignificant interest rate risk as cash equivalents. All other available-for-sale securities are recorded as short-term investments. The cost of debt securities is adjusted for amortization of premiums and discounts to maturity. This amortization is included in interest income. Realized gains and losses on available-for-sale securities are included in interest income. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest income. The fair values of securities are based on quoted market prices. INVENTORIES Inventories are stated at the lower of cost (as determined by the first-in, first-out method) or market and consist of the following at December 31, 1997 and 1996 (in thousands):
1997 1996 ------ ------ Raw materials................................................................ $ 935 $ 358 Work in process.............................................................. 160 178 Finished goods............................................................... 1,542 1,365 ------ ------ Total...................................................................... $2,637 $1,901 ------ ------
PROPERTY AND EQUIPMENT Property and equipment, including equipment under capital leases, are recorded at cost and are depreciated for financial reporting purposes using the straight-line method over the estimated useful lives of the assets ranging from two to five years. Leasehold improvements are amortized over the useful lives of the assets or the lease-term, whichever is shorter. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts payable and accrued liabilities as of December 31, 1997 and 1996, consist of the following (in thousands):
1997 1996 ------ ------ Accounts payable...................................................... $6,228 $1,875 Accrued compensation and related...................................... 638 445 Accrued warranty...................................................... 1,456 1,769 Collaborative research refund......................................... - 450 Other................................................................. 407 484 ------ ------ Total............................................................... $8,729 $5,023 ------ ------ ------ ------
-10- RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" ("SFAS 130") and SFAS No. 131 "Disclosure about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 130 establishes standards for reporting comprehensive income and is effective for fiscal year 1998. SFAS 131 establishes standards for annual and interim disclosures of operating segments, products and services, geographic areas and major customers, and is also effective in 1998, with interim disclosures required only subsequent to the initial year of application. The Company is in the process of evaluating the disclosure requirements of the new standards, the adoption of which is not expected to have a material impact on Affymetrix's results of operations or financial condition. CONCENTRATIONS OF RISK Cash equivalents and investments are financial instruments which potentially subject Affymetrix to concentrations of risk to the extent of amounts recorded in the Balance Sheet. Corporate policy restricts the amount of credit exposure to any one issuer and to any one type of investment, other than securities issued by the United States Government. The Company has not experienced any significant credit losses from its accounts receivable, from grants or from collaborative research agreements, and none are currently expected. Affymetrix performs a quarterly review of its customer activity and associated credit risks. NOTE 3 -- COLLABORATIVE AGREEMENTS AND GRANTS The Company has agreements with several entities to develop and test probe arrays for the detection of certain gene sequences, mutations or organisms. Under such agreements, the Company is typically paid a development fee and may receive milestone payments upon achievement of certain technical goals. The Company also has research agreements with several universities and research organizations. The Company generally obtains rights to intellectual property arising from these agreements. If a project is successful, the Company and the third-party collaborator would negotiate the right to commercialize products resulting from such project. The Company has received a substantial portion of its revenues since inception from its collaborative partners and intends to enter into collaborative arrangements with other companies to apply its technology, fund development, commercialize potential future products, and assist in obtaining regulatory approval. AMERSHAM PHARMACIA BIOTECH In December 1997, the Company entered into a sales representation agreement with Amersham Pharmacia Biotech ("APB") for the non-exclusive sales and marketing of certain of its GeneChip products. Under this sales representation agreement, APB will receive a percentage commission based on sales of certain GeneChip products, subject to annual maximum amounts. BIOMERIEUX VITEK, INC. In September 1996, bioMerieux Vitek, Inc. ("bioMerieux") and Affymetrix executed a collaboration agreement to develop DNA probe arrays using the Affymetrix GeneChip technology for clinical diagnostic kits for bacterial identification and antibiotic resistance analysis. The agreement provides for certain research funding, license and milestone payments. bioMerieux also is funding certain research activities at Affymetrix for a minimum of three years. Additionally, a manufacturing agreement was signed under which Affymetrix will manufacture GeneChip probe arrays for sale to bioMerieux. The agreement provides for royalties to Affymetrix on bioMerieux' sales of GeneChip probe arrays. In December 1997 and January 1998, bioMerieux and the Company expanded their collaboration to include the development of DNA probe arrays using the Affymetrix GeneChip technology for clinical diagnostics tests in the fields of HIV and food and industrial testing. As a result of this expansion of the collaboration, bioMerieux has and will make certain license payments to the Company. GENETICS INSTITUTE In December 1995, Affymetrix and Genetics Institute ("GI") entered into a supply agreement in the field of genomics under which Affymetrix manufactures and supplies custom probe arrays based on specific genes identified and selected by GI. Pursuant to the agreement, GI is obligated to purchase and Affymetrix is obligated to supply certain minimum quantities of custom probe arrays developed for GI until the later of 2001 or four years after -11- development of specified probe arrays. Affymetrix receives fees for the design and delivery of the custom probe arrays, and may receive milestone payments and royalties on any therapeutic compounds developed by GI using these probe arrays. GI has exclusive rights to specific probe arrays supplied by Affymetrix. In January 1998, the Company and GI entered into a three-year EasyAccess supply agreement under which the Company will supply GI with custom and standard probe arrays in return for expected annual subscription fees, custom design fees and revenue from the sale of probe arrays. As part of this new agreement many of the terms and conditions under the 1995 supply agreement were superceded. F. HOFFMANN-LA ROCHE LTD. In August 1997, the Company and F. Hoffmann-La Roche Ltd. ("Roche") entered into a three-year EasyAccess supply agreement under which the Company will supply Roche with custom and standard probe arrays in return for expected annual subscription fees, custom design fees and revenue from the sale of probe arrays. Prior to the 1997 agreement, the Company had entered into two agreements with Roche. In October 1996, the Company signed a demonstration agreement with Roche for the development and supply of a single custom probe array containing bacterial genes. In December 1996, the Company signed a pilot agreement with Roche Bioscience, a division of Syntex (U.S.A.) Inc., for the development and supply of a single custom probe array containing human, rat and mouse genes. The milestones of these agreements were met and the agreements have been concluded. GOVERNMENT GRANTS In August 1995, Affymetrix received a three-year grant from the National Institutes of Health ("NIH") National Center for Human Genome Research for approximately $5.5 million. The Company has recognized revenue of approximately $3.6 million through December 31, 1997, and the remaining amounts are subject to yearly appropriations by the NIH. In October 1994, Affymetrix and Molecular Dynamics, Inc. ("Molecular Dynamics") were awarded a five-year matching grant for a total of $31.5 million under the Advanced Technology Program within the National Institute of Standards and Technology to develop a miniaturized DNA diagnostic device, of which approximately $10.7 million will be available to Molecular Dynamics. The contract provides that Affymetrix will receive matching funding up to $20.8 million, some of which will be used to fund activities at collaborating academic institutions. The award is subject to yearly congressional authorization, which is uncertain. Affymetrix expects to receive payments monthly based on costs incurred and has recognized revenue of $7.8 million through December 31, 1997. NOTE 4 -- AVAILABLE-FOR-SALE SECURITIES The following is a summary of available-for-sale securities as of December 31, 1997 (in thousands):
GROSS UNREALIZED GROSS UNREALIZED ESTIMATED FAIR COST GAINS LOSSES VALUE ------- ---------------- ---------------- -------------- U.S. Government obligations.............. $40,962 $ 40 $(4) $40,998 U.S. Corporate securities................ 27,706 89 - 27,795 ------- ---- --- ------- Total securities..................... $68,668 $129 $(4) $68,793 ------- ---- --- ------- ------- ---- --- ------- Amounts included in: Cash equivalents....................... $ 1,999 $ - $ - $ 1,999 Short-term investments................. 66,669 129 (4) 66,794 ------- ---- --- ------- Total securities..................... $68,668 $129 $(4) $68,793 ------- ---- --- ------- ------- ---- --- -------
The following is a summary of available-for-sale securities as of December 31, 1996 (in thousands): -12-
GROSS UNREALIZED GROSS UNREALIZED ESTIMATED FAIR COST GAINS LOSSES VALUE -------- ---------------- ---------------- -------------- U.S. Government obligations............... $ 88,758 $134 $(86) $ 88,806 U.S. Corporate securities................. 17,017 9 (8) 17,018 -------- ---- ---- -------- Total securities...................... $105,775 $143 $(94) $105,824 -------- ---- ---- -------- -------- ---- ---- -------- Amounts included in: Cash equivalents........................ $ 10,985 $ - $ - $ 10,985 Short-term investments.................. 94,790 143 (94) 94,839 -------- ---- ---- -------- Total securities...................... $105,775 $143 $(94) $105,824 -------- ---- ---- -------- -------- ---- ---- --------
The realized gains and losses on sales of available-for-sale securities were immaterial for the years ended December 31, 1997, 1996 and 1995. The following is a summary of the cost and estimated fair value of available-for-sale securities at December 31, 1997, by contractual maturity (in thousands):
ESTIMATED FAIR COST VALUE ------- -------------- Mature in one year or less.......................................... $44,578 $44,632 Mature after one year through three years........................... 24,090 24,161 ------- ------- Total............................................................. $68,668 $68,793 ------- ------- ------- -------
NOTE 5 -- RELATED PARTY TRANSACTIONS In December 1994, Affymetrix issued a $6.0 million subordinated convertible promissory note to Affymax. In August of 1995, the note was converted into 1,333,333 shares of Series B Senior Convertible Preferred Stock issued at $4.50 per share. Affymetrix also exercised an option to satisfy interest due on the note through July 1995, amounting to $319,856, by issuing Affymax five-year warrants to purchase 202,441 shares of Series 2 Subordinated Convertible Preferred Stock at $5.50 per share. In connection with the Company's initial public offering, the Preferred Stock converted to 888,888 shares of Common Stock and the warrants converted to warrants to purchase 134,961 shares of Common Stock at $8.25 per share. Affymetrix and Affymax are parties to a technology agreement providing consignment of certain patents to Affymetrix and licenses to a limited number of patents. Two directors of Affymetrix are each employees of a subsidiary of Glaxo. See also the discussion regarding the planned sale of Series AA Preferred Stock in Note 1. In December 1994, in connection with a lease agreement between Affymetrix and a third party, Affymax, with approval of the third party lessor, agreed to release Affymetrix of certain financial covenants to the third party. In exchange for this release, Affymetrix issued a five-year warrant to Affymax to purchase 103,382 shares of Series 2 Subordinated Convertible Preferred Stock at $5.50 per share. In connection with the Company's initial public offering, the warrant was converted to a warrant to buy 68,921 shares of Common Stock at $8.25 per share. NOTE 6 -- COMMITMENTS AND CONTINGENCIES CAPITAL LEASE In December 1994, Affymetrix entered into a financing arrangement with a leasing company for existing equipment. Under the terms of the lease, Affymetrix received a single minimum aggregate lease payment of $1.3 million at the inception of the lease. The leaseback contract includes a five-year term expiring January 2, 2000, with an option to purchase the equipment at the greater of the residual value or fair market value. Under certain provisions, the lease may be extended for an additional year. The amount included in property and equipment related to the lease is $1.2 million and was fully depreciated as of December 31, 1996. -13- OPERATING LEASES Affymetrix leases laboratory, office and manufacturing facilities, and equipment under noncancelable operating leases which expire at various times through 2003. Rent expense related to operating leases was approximately $1,355,000 in 1997, $950,000 in 1996 and $664,000 in 1995. Future minimum lease obligation at December 31, 1997 under all leases are as follows (in thousands):
CAPITAL OPERATING LEASES LEASES ------- --------- 1998........................................................ $ 292 $1,723 1999........................................................ 291 1,834 2000........................................................ 280 1,292 2001........................................................ - 1,228 2002........................................................ - 1,228 Thereafter.................................................. - 819 ----- ------- Total minimum lease payments.............................. 863 $8,124 ------- ------- Less amount representing interest........................... (122) ----- Present value of minimum lease payments..................... 741 Less current portion........................................ (228) ----- Noncurrent obligation under capital lease................. $ 513 ----- -----
LITIGATION The Company routinely receives communications from third parties asserting patent or other rights covering its products and technologies. Based upon the Company's evaluation, it may take no action or it may seek to obtain a license. There can be no assurance in any given case that a license will be available on terms the Company considers reasonable, or that litigation will not ensue. In March 1997, Hyseq Inc. ("Hyseq") filed a suit against Affymetrix in the United States District Court alleging that Affymetrix infringes United States patent 5,202,231 and 5,525,464 issued to Drs. Drmanac and Crkvenjakov. In December 1997, Hyseq filed a second action claiming that certain Affymetrix products infringe a related patent, United States patent 5,695,940. In the opinion of management, the outcome of these actions will not have a material adverse effect on the Company's financial position. On January 6, 1998, the Company filed a patent infringement action in the United States District Court for the District of Delaware (No. 98-6) alleging that certain of Incyte, Inc.'s ("Incyte") and Synteni, Inc.'s ("Synteni") products infringe United States Patent 5,445,934. The action seeks to enjoin commercial activities of Incyte and Synteni relating to the Affymetrix patent. There can be no assurance that Affymetrix will prevail in such litigation or be successful in asserting its patent rights. The Company is likely to incur substantial costs and expend substantial personnel time in asserting the Company's patent rights against Incyte and Synteni. Failure to successfully enforce its patent rights or the loss of these patent rights or others would remove a legal obstacle to competitors in designing systems with similar competitive advantages, which could have a material adverse effect on the Company's business, financial condition and operating results. NOTE 7 -- SHAREHOLDERS' EQUITY PREFERRED SHARES In March 1996, the Board authorized the filing of a registration statement with the Securities and Exchange Commission permitting Affymetrix to sell shares of its Common Stock to the public. In connection with the offering all of the then outstanding Preferred Stock automatically converted into 15,629,991 shares of Common Stock at the completion of the offering in June 1996. COMMON SHARES The Company's initial public offering on June 6, 1996 generated net proceeds of approximately $83.0 million from the sale of 6,000,000 shares of Common Stock. In July 1996, the Company's underwriters purchased 153,000 shares of Common Stock pursuant to the over-allotment option, for additional net proceeds of $2.1 million. -14- STOCK WARRANTS At December 31, 1997, there were outstanding warrants to purchase 203,881 shares of Common Stock at $8.25 per share which expire at various dates beginning December 1999 through July 2000. STOCK OPTION AND BENEFIT PLANS In 1993, the Board adopted the Affymetrix 1993 Stock Plan (the "Stock Plan") under which incentive stock options, nonqualified stock options and purchase rights may be granted to employees and outside consultants. Options granted under the Stock Plan expire no later than ten years from the date of grant. The option price shall be at least 100% of the fair value on the date of grant (110% in certain circumstances), as determined by the Board of Directors. Options may be granted with different vesting terms from time to time but not to exceed five years from the date of grant. As of December 31, 1997, a total of 5,200,000 shares of Common Stock have been reserved for issuance under the Stock Plan and 53,335 shares were subject to repurchase by the Company. In March 1996, the Board adopted the 1996 Nonemployee Directors Stock Option Plan (the "Directors Plan"). There are 300,000 shares of Common Stock reserved for issuance under the Directors Plan. Only nonemployee directors of the Company are eligible to participate in the Directors Plan and only nonstatutory stock options can be granted. As of December 31, 1997, a total of 5,703,881 shares of common stock are reserved for future issuance under the Directors Plan, the Stock Plan and for outstanding warrants. Activity under the stock plans through December 31, 1997 is as follows:
OUTSTANDING OPTIONS --------------------------- WEIGHTED NUMBER OF AVERAGE PRICE SHARES PER SHARE --------- ------------- Balance at December 31, 1994.............. 901,988 $ 0.47 Options granted............................. 1,423,917 0.68 Options exercised........................... (62,749) 0.36 Options canceled............................ (104,032) 0.43 --------- Balance at December 31, 1995.............. 2,159,124 0.60 Options granted............................. 309,167 10.26 Options exercised........................... (215,945) 0.59 Options canceled............................ (20,403) 0.75 --------- Balance at December 31, 1996.............. 2,231,943 0.60 --------- --------- Options granted............................. 1,000,000 29.40 Options exercised........................... (253,074) 0.93 Options canceled............................ (27,560) 8.58 --------- Balance at December 31, 1997.............. 2,951,309 11.26 --------- ---------
For options granted through June 6, 1996, Affymetrix recognized an aggregate of $2.8 million as deferred compensation for the excess of the deemed fair value for financial statement presentation purposes of the Common Stock issuable on exercise of such options over the exercise price. The deferred compensation expense is being recognized over the vesting period of the options. Exercise prices for options outstanding as of December 31, 1997 ranged from $0.30 to $42.88 per share. The weighted-average contractual life of those options is 8.09 years as summarized below: -15-
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 - ---------------- --------- ----------------- -------------- ------- -------------- $ 0.30 - 0.675 1,749,257 7.49 $ 0.609 697,068 $ 0.620 4.80 - 29.125 958,052 8.79 24.663 41,267 12.695 29.375 - 42.875 244,000 9.67 34.951 - - - ---------------- --------- ----------------- -------------- ------- -------------- $ 0.30 - 42.875 2,951,309 8.09 $11.263 738,335 $ 1.282 - ---------------- --------- ----------------- -------------- ------- -------------- - ---------------- --------- ----------------- -------------- ------- --------------
PRO FORMA DISCLOSURE UNDER STATEMENT NO. 123 In accordance with the provisions of SFAS 123, the Company is disclosing pro forma information regarding net loss and net loss per share as if the Company had accounted for its stock based compensation plans under the fair value method of SFAS 123. The fair value of options was estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions for 1997, 1996 and 1995: risk free interest rate of 5.42%; a dividend yield of zero; volatility factors of the expected market price of the Company's Common Stock price of .55; and a weighted average expected option term of one year from vested date. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. Based on this calculation, the weighted average fair value of options granted during 1997, 1996 and 1995 was $14.01, $4.72 and $0.30, respectively. For purposes of pro forma disclosures the estimated fair value of the options in excess of the expense recognized in conjunction with the amortization of deferred compensation is amortized to expense over the options' vesting period, generally five years. The pro forma effect on net loss is not necessarily indicative of potential pro forma effects on results for future years. The Company's pro forma information as of December 31, 1997, 1996 and 1995 is as follows (in thousands excepts per share amounts):
1997 1996 1995 -------- -------- -------- Pro forma net loss $(26,515) $(12,345) $(10,747) -------- -------- -------- -------- -------- -------- Pro forma net loss per share $ (1.17) $ (0.62) $ (0.84) -------- -------- -------- -------- -------- --------
NOTE 8 -- INCOME TAXES As of December 31, 1997, Affymetrix has federal net operating loss carryforwards of approximately $52 million, which will expire at various dates beginning on 2008, if not utilized. In addition, the Company has federal and state research and development credit carryforwards of approximately $1.7 million and $1.3 million, respectively, which expire at various dates beginning in 2008, if not utilized. Utilization of the net operating losses and credits may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986. The annual limitation may result in the expiration of net operating losses and credits before utilization. Significant components of Affymetrix deferred tax assets as of December 31, 1997 and 1996 are as follows (in thousands):
1997 1996 -------- -------- Net operating loss carryforwards..................................... $ 17,853 $ 10,705 Research credits..................................................... 2,586 1,457 Other-net............................................................ 5,287 2,551 -------- -------- Total deferred tax assets............................................ 25,726 14,713 Valuation allowance for deferred tax assets.......................... (25,726) (14,713) -------- -------- Net deferred tax assets.............................................. $ - $ - -------- -------- -------- --------
-16- The valuation allowance increased by $11.0 million, $3.9 million and $4.9 million during 1997, 1996, and 1995, respectively. -17- EX-27.1 5 EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY STATEMENTS FOR THE PERIOD ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 4,479 66,794 6,216 0 2,637 81,174 19,088 (5,166) 101,170 9,621 513 0 0 158,924 (67,888) 101,170 4,789 19,765 4,559 4,559 42,865 0 (5,133) (22,526) 0 (22,526) 0 0 0 (22,526) (0.99) (0.99)
EX-27.2 6 EXHIBIT 27.2
5 1,000 6-MOS 9-MOS 12-MOS DEC-31-1996 DEC-31-1996 DEC-31-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996 JUN-30-1996 SEP-30-1996 DEC-31-1996 21,309 53,217 14,143 92,533 59,453 94,839 1,265 643 1,888 0 0 0 1,550 1,518 1,901 117,309 115,461 113,294 6,001 4,230 8,253 (2,149) 0 (2,856) 121,301 119,861 118,900 6,246 4,909 5,626 0 0 0 0 0 0 0 0 0 156,529 158,690 158,687 (42,325) (44,533) (46,154) 121,301 119,861 118,900 457 858 1,389 3,715 6,366 11,972 707 1,089 2,178 707 1,089 2,178 11,860 18,451 26,331 0 0 0 (1,154) (2,897) (4,310) (7,698) (10,277) (12,227) 0 0 0 (7,698) (10,277) (12,227) 0 0 0 0 0 0 0 0 0 (7,698) (10,277) (12,227) (0.45) (0.54) (0.62) (0.45) (0.54) (0.62)
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