S-1/A 1 S-1/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 20, 1996 REGISTRATION NO. 333-3648 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 2 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ AFFYMETRIX, INC. (Exact Name of Registrant as Specified in Its Charter) CALIFORNIA 8731 77-0319159 (State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer of Classification Code Number) Identification Incorporation or Organization) Number)
3380 CENTRAL EXPRESSWAY, SANTA CLARA, CALIFORNIA 95051; (408) 522-6000 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) KENNETH J. NUSSBACHER, EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER 3380 CENTRAL EXPRESSWAY, SANTA CLARA, CALIFORNIA 95051; (408) 522-6000 (Name, Address Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service) ------------------------ COPIES TO: Julian N. Stern Alan K. Austin August J. Moretti Elizabeth R. Flint Stephen C. Ferruolo Elizabeth M. Kurr Heller Ehrman White & McAuliffe Wilson, Sonsini, Goodrich & Rosati 525 University Avenue 650 Page Mill Road Palo Alto, California 94301 Palo Alto, California 94304 (415) 324-7000 (415) 493-9300
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE FOLLOWING THE EFFECTIVENESS OF THIS REGISTRATION STATEMENT. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- AFFYMETRIX, INC. CROSS-REFERENCE SHEET
ITEM AND HEADING FOR S-1 REGISTRATION STATEMENT PROSPECTUS LOCATION IN PROSPECTUS ---------------------------------------------------------------- ----------------------------------------------------- 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus...................... Outside Front Cover Page; Additional Information 2. Inside Front and Outside Back Cover Pages of Prospectus.......................................... Inside Front Cover Page 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges........................... Summary; Risk Factors 4. Use of Proceeds...................................... Summary; Use of Proceeds 5. Determination of Offering Price...................... Outside Front Cover Page; Underwriting 6. Dilution............................................. Dilution 7. Selling Security Holders............................. Not Applicable 8. Plan of Distribution................................. Outside and Inside Front Cover Pages; Underwriting 9. Description of Securities to be Registered........... Summary; Capitalization; Description of Capital Stock 10. Interests of Named Experts and Counsel............... Legal Matters; Experts 11. Information with Respect to the Registrant........... Outside and Inside Front Cover Pages; Summary; Risk Factors; Use of Proceeds; Dividend Policy; Capitalization; Dilution; Selected Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Management; Certain Transactions; Principal Shareholders; Description of Capital Stock; Shares Eligible for Future Sale; Financial Statements 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities...................... Not Applicable
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED MAY 20, 1996 LOGO 5,000,000 SHARES COMMON STOCK All of the 5,000,000 shares of Common Stock offered hereby are being sold by Affymetrix, Inc. ("Affymetrix" or the "Company"). Prior to this offering, there has been no public market for the Common Stock of the Company. It is currently estimated that the initial public offering price will be between $11.00 and $13.00 per share. See "Underwriting" for information relating to the method of determining the initial public offering price. ------------------ THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 6. ---------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------------------------------------------------------------------------------- --------------------------------------------------------------------------------- UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS COMPANY (1) --------------------------------------------------------------------------------- Per Share..................... $ $ $ --------------------------------------------------------------------------------- Total (2)..................... $ $ $ --------------------------------------------------------------------------------- ---------------------------------------------------------------------------------
(1) Before deducting expenses payable by the Company estimated at $800,000. (2) The Company has granted the Underwriters a 30-day option to purchase up to an additional shares of Common Stock solely to cover over-allotments, if any. See "Underwriting." If such option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions, and Proceeds to Company will be $ , $ , and $ , respectively. ------------------ The Common Stock is offered by the Underwriters as stated herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. It is expected that delivery of such shares will be made through the offices of Robertson, Stephens & Company LLC ("Robertson, Stephens & Company"), San Francisco, California, on or about , 1996. ROBERTSON, STEPHENS & COMPANY CS FIRST BOSTON MONTGOMERY SECURITIES The date of this Prospectus is , 1996 Affymetrix GeneChip-TM- Technology Opportunities -------------------------------------------- All genomics programs are expected to be research collaborations. All diagnostic product opportunities are in research and development with the indicated collaborators, except for HIV, which Affymetrix introduced as a "Research Use Only" product in April 1996. Diagnostic use of the Company's products would be subject to FDA and other applicable regulatory approvals, which have not been applied for or received, and which may not be obtained for several years, if at all. -------------------------------------------------------------------------------- IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. DURING THIS OFFERING, CERTAIN PERSONS AFFILIATED WITH PERSONS PARTICIPATING IN THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR THEIR OWN ACCOUNTS OR FOR THE ACCOUNTS OF OTHERS IN THE COMMON STOCK PURSUANT TO EXEMPTIONS FROM RULES 10B-6, 10B-7, AND 10B-8 UNDER THE SECURITIES EXCHANGE ACT OF 1934. Affymetrix GeneChip Technology ----------------------------------------- [Depictions of genes, double helix and probe array in cartridge] Affymetrix GeneChip probe arrays provide the capacity to acquire, analyze, and manage complex genetic information. Integrated GeneChip System [PICTURE] [PICTURE] [PICTURE] GeneChip Fluidics Station GeneChip Scanner GeneChip Software Controls hybridization of the Quantitatively detects Analyzes and manages genetic test sample to the probe hybridization of test sample information from the scanner. array. to the probe array.
GeneChip Probe Array A GeneChip probe array currently contains from 16,000 to more than 100,000 different DNA probes. Each probe array is packaged in a catridge. Probe Array Image A GeneChip scanner image of an HIV probe array for sequencing the reverse transcriplase and protease genes. Each small square represents the quantitative hybridization intensity of a labeled test sample to a specific DNA probe. [PICTURE] [PICTURE] GeneChip Software GeneChip software translates the quantitative hybridization intensities into sequence information which can also be used for gene expression analysis and genetic mapping. The red "a" in the Sequences window indicates a mutation in HIV causing resistance to a class of HIV protease inhibitor drugs. NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THE PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO, OR SOLICITATION OF, ANY PERSON IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ------------------ TABLE OF CONTENTS
PAGE ---- Summary................................................................... 4 Risk Factors.............................................................. 6 Use of Proceeds........................................................... 18 Dividend Policy........................................................... 18 Capitalization............................................................ 19 Dilution.................................................................. 20 Selected Financial Data................................................... 21 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................... 22 Business.................................................................. 26 Management................................................................ 48 Certain Transactions...................................................... 54 Principal Shareholders.................................................... 56 Description of Capital Stock.............................................. 58 Shares Eligible for Future Sale........................................... 60 Underwriting.............................................................. 62 Legal Matters............................................................. 63 Experts................................................................... 63 Additional Information.................................................... 63 Glossary.................................................................. 64 Index to Financial Statements............................................. F-1
------------------ The Company's executive offices are located at 3380 Central Expressway, Santa Clara, California 95051. The Company's telephone number is (408) 522-6000. GeneChip-TM- and Affymetrix-TM- are trademarks of the Company. Tradenames and trademarks of other companies appearing in this Prospectus are the property of their respective holders. 3 SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION, INCLUDING "RISK FACTORS", AND THE FINANCIAL STATEMENTS AND NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS. A GLOSSARY OF TECHNICAL TERMS USED IN THIS PROSPECTUS APPEARS AT PAGE 64 OF THIS PROSPECTUS. THE COMPANY Affymetrix has developed and intends to establish its GeneChip 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 system consists of disposable DNA probe arrays containing gene sequences on a chip, instruments to process the probe arrays, and software to analyze and manage genetic information. The Company commenced commercial sales of the GeneChip system and an HIV probe array for research use in April 1996. The Company manufactures its DNA probe arrays using an innovative and proprietary process that combines photolithographic fabrication techniques from the semicondutor industry with solid phase DNA synthesis to assemble large amounts of genetic information on a small glass chip called a probe array. The Company can manufacture a number of identical DNA probe arrays on a glass wafer, which is then diced into individual probe arrays. Currently, each probe array manufactured by the Company contains from 16,000 to more than 100,000 different DNA probes. Genes provide the fundamental basis for understanding human health and disease. Increased knowledge of how genes encode the functions of living organisms has generated a worldwide effort to identify and sequence genes of many organisms, including the estimated 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 sequences are identified, it is anticipated that many years of additional research will be required to understand the specific function of each gene and its role in disease. Affymetrix believes that the GeneChip system can play an important role in this research and its application in drug discovery and the development of new diagnostic products. The Company intends to commercialize the GeneChip system in two principal areas: genomics, or the study of genes and their function, and diagnostics. In genomics, Affymetrix intends to sell custom DNA probe arrays to pharmaceutical and biotechnology companies through collaborative agreements. The Company would receive revenues in the form of probe array design and development fees, and subsequently through the sale of DNA probe arrays and instruments. In addition, the Company may receive milestone payments and royalties from discoveries made through the use of the DNA probe arrays. Affymetrix also intends to use the GeneChip technology to help create and commercialize databases containing information on the function of genes and their role in disease. There can be no assurance that the Company will be successful in marketing its GeneChip system for these genomics applications. In diagnostics, Affymetrix intends to develop DNA probe arrays to analyze genetic information from patient samples to improve the accuracy and speed of diagnosis. The Company is pursuing diagnostic products and research applications in infectious diseases, cancer and other areas, such as monitoring drug metabolism. The Company intends to market its diagnostic GeneChip products directly and through collaborative partnerships. Affymetrix believes its GeneChip technology can also be used as a discovery tool for new diagnostic markers to be used in conventional immunoassays. There can be no assurance that the Company will be successful in marketing its GeneChip system for these diagnostic applications. The Company's first application for the GeneChip system is to help researchers identify mutations in HIV that cause resistance to antiviral drugs, such as AZT. The Company believes that monitoring such mutations may become an important aspect of managing patients with AIDS. As of March 31, 1996, Affymetrix had placed five prototype GeneChip systems for the HIV application in academic research centers and pharmaceutical companies for research use. An important part of the Company's strategy is to work with collaborative partners to expand the applications of the Company's technology and to acquire access to complementary technologies and resources such as manufacturing and marketing. Affymetrix has two agreements with Genetics Institute, Inc. ("GI") to apply the Company's technology to understand the function of human genes. The Company will design, manufacture and supply custom probe arrays for use in GI's drug discovery programs. Affymetrix also has a collaborative agreement with Hewlett-Packard Company ("HP"), whereby HP will develop advanced instruments to read the GeneChip probe arrays. In addition, in collaboration with HP, the Company will develop and manufacture certain probe arrays to be marketed by HP. Affymetrix began operations in 1991 as a division of Affymax N.V. ("Affymax"), was incorporated in California in March 1992 and began operating independently as a wholly-owned subsidiary of Affymax in March 1993. In March 1995, Glaxo plc, now Glaxo Wellcome plc ("Glaxo"), purchased Affymax. Prior to this offering, Glaxo indirectly owns approximately 46% of the Common Stock of Affymetrix. RISK FACTORS An investment in the shares of Common Stock offered hereby involves a high degree of risk. The Company's GeneChip system and other potential products will require significant additional development and investment. 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 diagnostic applications in the future. There can be no assurance that the Company will obtain any required regulatory approval for the GeneChip system or that the GeneChip system will be successfully commercialized or obtain market acceptance. Other risk factors include the Company's early stage of development, uncertainties relating to technological approaches, history of losses and expectation of future losses, intense competition, rapid technological change, limited manufacturing capability and sales and marketing experience and the Company's dependence on proprietary technology. See "Risk Factors." 4 THE OFFERING Common Stock Offered by the Company........... 5,000,000 shares Common Stock Outstanding after the Offering... 21,239,231 shares (1) Use of Proceeds............................... For research and development (including product development and core research), capital expenditures (manufacturing scale-up, facilities and laboratory equipment), expansion of sales and marketing, working capital and other general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market Symbol........ AFFX
SUMMARY FINANCIAL DATA (in thousands, except per share data)
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, -------------------------------------------- -------------------- 1991 1992 1993 1994 1995 1995 1996 ------- ------- ------- ------- -------- --------- --------- STATEMENT OF OPERATIONS DATA: Contract and grant revenue........................ $ -- $ 43 $ 1,413 $ 1,574 $ 4,625 $ 854 $ 1,416 Operating expenses: Research and development...................... 1,576 4,106 6,566 9,483 12,420 2,274 4,177 General and administrative.................... 261 582 577 2,303 3,833 777 1,649 ------- ------- ------- ------- -------- --------- --------- Total operating expenses.................... 1,837 4,688 7,143 11,786 16,253 3,051 5,826 ------- ------- ------- ------- -------- --------- --------- Loss from operations.............................. (1,837) (4,645) (5,730) (10,212) (11,628) (2,197) (4,410) Interest income (expense), net.................... -- (15) 138 532 881 23 489 ------- ------- ------- ------- -------- --------- --------- Net loss.......................................... $(1,837) $(4,660) $(5,592) $(9,680) $(10,747) $ (2,174) $ (3,921) ------- ------- ------- ------- -------- --------- --------- ------- ------- ------- ------- -------- --------- --------- Pro forma net loss per share...................... $ (0.52) $ (0.55) $ (0.61) $ (0.12) $ (0.22) ------- ------- -------- --------- --------- ------- ------- -------- --------- --------- Pro forma weighted average shares outstanding..... 10,715 17,653 17,664 17,663 17,664
MARCH 31, 1996 ------------------------ AS ACTUAL ADJUSTED (2) -------- ----------- BALANCE SHEET DATA: Cash, cash equivalents, and short-term investments............... $ 34,837 $ 89,837 Total assets..................................................... 41,185 96,185 Long-term obligation............................................. 898 898 Deficit accumulated during development stage..................... (36,437) (36,437) Total shareholders' equity....................................... 34,652 89,652
------------- (1) Excludes 2,191,518 shares of Common Stock issuable upon exercise of outstanding options under the Company's 1993 Stock Plan. Also excludes 203,881 shares issuable upon the exercise of warrants outstanding as of March 31, 1996. See "Management -- Stock Plans" and Note 6 of Notes to Financial Statements. (2) As adjusted to reflect the sale of the 5,000,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $12.00 per share and the receipt of the estimated net proceeds therefrom. See "Use of Proceeds." UNLESS OTHERWISE INDICATED, ALL INFORMATION CONTAINED IN THIS PROSPECTUS (I) ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION; (II) REFLECTS A 2-FOR-3 REVERSE STOCK SPLIT PRIOR TO THE EFFECTIVENESS OF THIS REGISTRATION STATEMENT; AND (III) GIVES EFFECT TO THE CONVERSION OF ALL OUTSTANDING SHARES OF PREFERRED STOCK INTO COMMON STOCK UPON THE CLOSING OF THIS OFFERING. 5 RISK FACTORS In addition to the other information in this Prospectus, the following risk factors should be considered carefully in evaluating the Company and its business before purchasing shares of the Common Stock offered hereby. This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in the following risk factors and elsewhere in this Prospectus. EARLY STAGE OF DEVELOPMENT The Company is at an early stage of development. The Company has not commercialized significant quantities of products based on its technologies. As of March 31, 1996, the Company had placed only nine GeneChip systems, all of which have been solely for research use and only five of which have been purchased by customers. Substantially all of the Company's revenues have been derived from payments from collaborative research and development agreements and government research grants. 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 in the future. The Company may need to undertake costly and time-consuming efforts to obtain this approval. There can be no assurance that any 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 a direct sales force and entering into collaborative arrangements to market its 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. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." UNCERTAINTIES RELATING TO TECHNOLOGICAL APPROACHES; NEED FOR ADDITIONAL RESEARCH AND DEVELOPMENT The Company intends to develop its GeneChip system for genomics and diagnostics applications. The GeneChip system involves several new technologies, including a complex chemical synthesis process necessary to create DNA probe arrays. In addition, 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. The instrumentation and software that comprise the GeneChip system are new and have not been previously used in commercial applications. As the system is used, it is possible that previously unrecognized defects will emerge. In addition, DNA probe arrays are tested only on a random sample basis, and quality problems could develop with the untested arrays. Further, in order for the Company to address new applications for the GeneChip system, the Company may be required to reduce the size of its probe arrays, increase the number of features on these arrays, develop instruments capable of processing the information from such probe arrays, and design software capable of managing such information. 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 successful commercialization. The Company's GeneChip technology will also need to compete against well-established techniques and enhancements to such techniques for analyzing genes and for diagnostics. There can be no assurance that the GeneChip system will replace or compete successfully against existing techniques and instruments. Furthermore, there can be no assurance that the Company's GeneChip technology will be useful in providing information on the function of genes or for the analysis of larger sequences of genes. The development of diagnostic and therapeutic 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 6 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 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 result in any commercially viable products. See "Business -- Technology." UNCERTAINTY OF MARKET ACCEPTANCE The commercial success of the Company's GeneChip system will depend upon market acceptance by academic research centers, pharmaceutical and biotechnology companies and 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 on the Company's probe arrays. Market acceptance may be adversely affected by ethical concerns that may limit the use of the GeneChip system for certain diagnostic 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. Potential customers of the GeneChip system will need to acquire the Company's fluidics station and probe array scanner in order to utilize the DNA probe arrays. The cost of this instrumentation may deter certain potential customers from purchasing probe arrays. The Company may be required to discount the price of its GeneChip system in order to place the system with customers. 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 academic research centers, pharmaceutical or biotechnology companies or 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 expects that its customers will be concentrated in a small number of academic research centers, pharmaceutical and biotechnology companies and 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 successfully market 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 large reference laboratories 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. See "Business -- Business Strategy" and "-- Sales and Marketing." UNCERTAINTIES RELATED TO THE HIV PROBE ARRAY The first commercial application of the Company's GeneChip system is an HIV probe array designed to detect mutations in HIV, the virus that causes AIDS. The HIV probe array provides sequence information from the reverse transcriptase and protease genes of HIV and the system includes a fluidics station, a scanner and related software. In April 1996, the Company introduced the HIV probe array for research purposes only. The Company has placed only five HIV probe arrays at customer sites to date, all in the United States. These systems have been in operation for only a limited period of time, and their accuracy and efficacy have not been fully demonstrated. There are other uncertainties relating to the system, including that the Company has no prior experience in introducing a commercial product, that technicians may encounter difficulties with the system that would prevent 7 or limit its use, and that the Company will rely on third parties to manufacture and service its instruments. Furthermore, there can be no assurance that the accuracy of the HIV probe array in providing sequence information from HIV will be better than current technologies, such as gel-based sequencing techniques. 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 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. In addition, cost containment pressures for treating HIV patients may limit the price the Company may be able to charge potential customers for its HIV probe array. There can be no assurance that the HIV probe array will provide useful diagnostic and monitoring information, that it will operate without difficulties, that technicians will have adequate training to use the system, or that the Company will not experience manufacturing or marketing difficulties selling the HIV probe array to academic research centers, pharmaceutical and biotechnology companies and reference laboratories. Furthermore, there can be no assurance that the HIV probe array will gain regulatory approval for clinical use. The Company's product revenues in the near term are dependent upon the commercialization of the HIV probe array. There can be no assurance that these revenues will be realized in the near term, or at all. Failure of the Company to successfully commercialize the HIV probe array 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 any future products it may develop. See "Business -- Business Strategy" and "-- Sales and Marketing." 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 $10.7 million during the year ended December 31, 1995, and, at March 31, 1996, the Company had an accumulated deficit of approximately $36.4 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 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, manufacturing scale-up, expanding sales and marketing and capital expenditures. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." PROFITABILITY UNCERTAIN The Company has experienced substantial operating losses and has never been profitable. The Company expects that it may have to 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, product mix and the degree of price discounts required to market its products to academic research centers, pharmaceutical and biotechnology companies and 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 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 successfully commercialize any product or that the Company will achieve product revenues or profitability. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." FLUCTUATIONS IN OPERATING RESULTS The Company's quarterly operating results will depend upon the volume and timing of orders for GeneChip systems and probe arrays received and delivered 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 8 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. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." INTENSE COMPETITION; RAPID TECHNOLOGICAL CHANGE Competition in genomics and diagnostics is intense and expected to increase. Further, the technologies for discovering genes 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, Boehringer Mannheim GmbH, Hoffmann-LaRoche, Inc. ("Roche"), 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 amounts of genetic information. In the genomics field, competitive technologies include gel-based sequencing using instruments provided by companies such as the Applied Biosystems division of Perkin Elmer and Pharmacia Biotech AB. 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. The market for diagnostic 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 significant 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. In the genomics field, future competition 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 Genome Therapeutics Corporation, Human Genome Sciences, Inc., Incyte Pharmaceuticals, Inc. ("Incyte"), Millennium Pharmaceuticals, Inc., Myriad Genetics, Inc. and Sequana Therapeutics, Inc. have significant needs for genomic information and may choose to develop or acquire competing technologies to meet these needs. Genomics and diagnostic 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 is no assurance that the Company will be able to make the enhancements to its technology necessary to compete successfully with newly emerging technologies. See "Business -- Research and Development" and "-- Competition." 9 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 HP and GI. In November 1994, the Company entered into a collaborative agreement with HP to develop an advanced scanner for use with the GeneChip probe arrays. The HP scanner is currently under development and, in 1997 the Company expects that HP will be the sole source of its scanners. Accordingly, if the HP scanner does not become available on a timely basis or fails to meet its performance and cost specifications, it would have a material adverse effect on the Company's business. The Company has two agreements with GI, dated November 1994 and December 1995, relating to use of GeneChip technology to measure gene expression in order for GI to develop new therapeutic proteins. If GI is not successful in using the GeneChip technology or if the Company fails to maintain a satisfactory relationship with GI, the Company could lose significant revenues and its ability to obtain additional collaborations with other companies would be impaired. 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. 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 alternative technologies or components of 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 consultants and collaborators are complex. There may be provisions within such agreements which 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 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. See "Business -- Collaborative Agreements and Grants." NEED FOR ADDITIONAL FUNDING; UNCERTAINTY OF ACCESS TO CAPITAL The Company anticipates that its existing capital resources, together with the net proceeds of this offering and interest earned thereon, will enable it to maintain currently planned operations through at least 1998. However, this expectation is based on the Company's current operating plan, which could 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 additional capital will be substantial and will depend on many factors, including payments received under existing and possible future collaborative agreements; the availability of government research grant payments; the progress of the Company's collaborative and independent research and development projects; the costs 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 10 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 through 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. See "Use of Proceeds." 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 tests, 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 gene-based diagnostic tests marketed by other companies could encounter specific difficulties, resulting in societal and governmental concerns regarding genetic testing. 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 positive genetic predisposition due to the increased risk for disease resulting in possible cost increases for health insurance and the potential for lost employment time. 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 materially adversely affect market acceptance of the Company's GeneChip system. See "Business -- Government Regulation." LIMITED MANUFACTURING CAPABILITY; SOLE SOURCE SUPPLIERS The Company has limited experience manufacturing products for commercial purposes. To date, the Company has a small scale facility providing limited quantities of probe arrays for internal and collaborative purposes and initial sales of the GeneChip system to the research market. To achieve the production levels of probe arrays necessary for successful commercialization of its products, the Company will need to scale-up its manufacturing facilities and establish automated manufacturing capabilities. The Company may also need to comply with the current good manufacturing practices ("GMP") prescribed by the United States Food and Drug Administration ("FDA") 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, it may need to be GMP compliant to sell these products to clinical reference laboratories, and it will need to be compliant to sell these products for clinical use. There can be no assurance that manufacturing and quality control problems will not arise as the Company attempts to scale-up its manufacturing facilities or that such scale-up can be achieved in a timely manner or at commercially reasonable costs. The Company's probe array manufacturing process is complex and involves a number of technologies that have never before been combined in the manufacture of a single product. The Company tests only selected probe arrays from each wafer and only selected probes on each probe array. It is therefore possible that defective probe arrays might not be identified before they are shipped. 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 may be certain aspects of the Company's manufacturing that are not fully understood and cannot be readily replicated for commercial use. If the Company is unable to manufacture probe arrays on a timely basis because of these or other factors, its business, financial condition and results of operations could be adversely affected. 11 As the Company's technologies evolve, new manufacturing techniques and systems will be required. For example, it is anticipated that batch 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. The Company will rely on a single manufacturing facility for its probe arrays for the foreseeable future. This manufacturing facility is subject to natural disasters such as earthquakes and floods. The former are of particular significance since the manufacturing facility is located in an earthquake prone area. In the event that its manufacturing facility were to be affected by accidental or natural disasters, the Company would be unable to manufacture products for sale until the facility was replaced or restored to operation. Certain key parts of the GeneChip system, such as the probe array scanner, the fluidics station, and certain reagents, are currently available only from a single source or a few sources. The Company currently obtains the scanner for its GeneChip probe arrays from Molecular Dynamics, Inc. ("Molecular Dynamics"). The Company is dependent on Molecular Dynamics for quality testing and service of this instrument. The Company has entered into an agreement with HP to supply a new scanner for the GeneChip system, which the Company expects to be available for commercialization in 1997. The Company's ability to commercialize a probe array with more features is dependent upon successful development of the HP scanner. The Company has contracted with RELA, Inc. ("RELA"), a private company, to supply the fluidics station that is part of the GeneChip system. The fluidics stations of the nine GeneChip systems placed to date are prototypes manufactured by the Company and not supplied by RELA. No assurance can be given that probe array scanners, fluidics stations or reagents 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 suppliers 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 instruments and includes DNA probe arrays, which are produced in an innovative and complicated manufacturing process. During the beta testing phase of the GeneChip system's development, the Company and its vendors have encountered and addressed a number of technical problems, including software failures, improper alignment of probe array wafers, valve and tube failures in the fluidics station, sensor wiring issues and scanner control problems. Due to the complexity and lack of operating history of these products, the Company anticipates that additional technical problems may occur or be discovered as more systems are placed into operation. If these problems cannot be readily addressed, they could cause delays in shipments, warranty expenses and damages to customer relationships, which would have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Manufacturing." LIMITED SALES AND MARKETING EXPERIENCE The Company does not have a direct sales force and has only limited experience in sales and marketing. As of March 31, 1996, the Company had placed nine GeneChip systems, of which only five had been sold. The Company has not placed any of its GeneChip systems outside the United States. The Company intends to market its products to academic research centers, pharmaceutical and biotechnology companies and reference laboratories. The Company intends to market diagnostic tests through a direct sales force to its potential customers for research use only. The Company intends to market the GeneChip system for genomic applications through collaborations with pharmaceutical and biotechnology companies. The Company anticipates a long sales cycle to market the GeneChip system to its potential customers. The Company will be required to enter into collaboration or distribution arrangements to commercialize its products outside the United States. There can be no assurance that the Company will be able to establish a direct sales force or to establish 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. See "Business -- Sales and Marketing." UNCERTAINTIES RELATED TO 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 12 grants from government agencies such as the National Institutes of Health ("NIH"). Research funding by the government, however, may be significantly reduced under several budget proposals being discussed by the United States Congress. Any such reduction may materially affect the ability of the Company's 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. Proposed legislation being debated in the United States Congress would eliminate or reduce the program under which the Company's Advanced Technology Program ("ATP") grant is funded by the Department of Commerce. There can be no assurance that the Company will receive the entire $20.8 million of funding designated for it under the ATP grant, and termination of the ATP grant could have a material adverse effect on the Company's business, financial condition and results of operations. The Company's grants from the Departments of Commerce and Energy and the NIH 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. See "Business -- Collaborative Agreements and Grants." UNCERTAINTIES RELATED TO THIRD-PARTY REIMBURSEMENT The Company's ability to successfully commercialize its products may depend on the Company's ability to obtain adequate levels of third-party reimbursement for use of certain diagnostic tests in the United States, Europe and other countries. Currently, availability of third-party reimbursement is limited and uncertain for genetic tests. 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 device or diagnostic test 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 Company's ability to commercialize certain of its products successfully may depend on the extent to which appropriate reimbursement levels for the costs of such products and related treatment 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 medical 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 services and products, as well as legislative proposals to reform health care or reduce government insurance programs, may all result in lower prices for certain of the Company's products. The cost containment measures that health care providers are instituting and the results of any health care reform could have an adverse effect on the Company's ability to sell certain of its products and may have a material adverse effect on the Company's business, financial condition and results of operations. GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY APPROVAL The Company anticipates the manufacturing, labeling, distribution and marketing of some or all of the Company's diagnostic products will be subject to regulation in the United States and in certain other countries. In the United States, the FDA regulates, as medical devices, most diagnostic tests and IN VITRO reagents that are marketed as finished test kits or equipment. Some clinical laboratories, however, purchase individual reagents intended for specific analytes, and develop and prepare their own finished diagnostic tests. Although the FDA has not generally exercised regulatory authority over these individual reagents or the finished tests prepared from them by the clinical laboratories. The FDA has recently proposed a rule that, if adopted, would regulate the reagents sold to clinical laboratories as medical devices. The proposed rule would also restrict sales of these reagents to clinical laboratories certified under Clinical Laboratory Improvement Amendments of 1988 ("CLIA") as high complexity testing laboratories. The Company intends to market some diagnostic products as finished test kits or equipment and others as individual reagents; consequently, some or all of these products will be regulated as medical devices. 13 Medical devices generally require FDA approval or clearance prior to marketing in the United States. The process of obtaining FDA clearances or approvals necessary to market medical devices can be time-consuming, expensive and uncertain, and there can be no assurance that any clearance or approval sought by the Company will be granted or that FDA review will not involve delays, adversely affecting the marketing and sale of the Company's products. Further, clearance or approval may place substantial restrictions on the indications for which the product may be marketed or to whom it may be marketed. Additionally, there can be no assurance that FDA will not request additional data or request that the Company conduct further clinical studies. If approval or clearance is obtained, the Company will be subject to continuing FDA obligations. When manufacturing medical devices, the Company will be required to adhere to regulations setting forth current GMP, which require that the Company manufacture its products and maintain its records in a prescribed manner with respect to manufacturing, testing and quality control activities. In addition, among other requirements, the Company will be required to comply with FDA requirements for labeling and promotion of its medical devices. Further, if the Company wanted to make changes on a product after FDA clearance or approval, including changes in indications or intended use or other significant modifications to labeling, manufacturing or product design, additional clearances or approvals would be required from the FDA. Failure to obtain required regulatory approval or clearance or failure to obtain timely approval or clearance, or the imposition of stringent labeling or sales restrictions on the Company's products, could have a material adverse effect on the Company. In addition, failure to comply with applicable regulatory requirements could subject the Company to enforcement action, including product seizures, recalls, withdrawal of clearances or approvals, restrictions on or injunctions against marketing the Company's products, and civil and criminal penalties, any one or more of which could have a material adverse effect on the Company. Medical device laws and regulations are also in effect in many countries 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. Failure to comply with applicable state and foreign medical device laws and regulations may have a material adverse effect on the Company's business, financial condition and results of operations. The Company is also subject to numerous environmental and safety laws and regulations, including those governing the use and disposal of hazardous materials. Any violation of, and the cost of compliance with, these regulations could adversely affect the Company's operations. See "Business -- Government Regulation." DEPENDENCE ON PROPRIETARY TECHNOLOGY AND UNPREDICTABILITY OF PATENT PROTECTION As of April 15, 1996, Affymetrix had exclusive licenses from Affymax for over 20 patents and patent applications in the United States related to its business in the fields of clinical diagnostics and research supply. In addition, Affymetrix is the assignee of 52 United States patent applications and one issued patent in the United States. Many of these patents and applications have been filed and/or issued in one or more foreign countries. Affymetrix also relies upon those patents, 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 copyright and trade secrets and to operate without infringing the proprietary rights of third parties. The Company is party to various license option agreements (including agreements with Affymax, Stanford University and the University of California) which give it rights to use certain technologies. Failure of the Company to maintain rights to such technology could have a material adverse effect on the Company's business, financial condition and results of operations. For example, inability of the Company to exercise the option for the Stanford technology under commercially reasonable terms could have an adverse effect on the ability of the Company to sell certain of its products. The patent positions of pharmaceutical, biopharmaceutical 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 14 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 could incur substantial costs in litigation if it is required to defend itself in patent suits brought by third parties or if it initiates such suits. Others may have filed and in the future are likely to file patent applications that are similar or identical to those of the Company. To determine the priority of inventions, the Company may 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 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, and there is no assurance such a license will be available on commercially reasonable terms. 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. There can be no assurance that the Company will not infringe these patents, other patents or proprietary rights of third parties. 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. Any 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 partner to obtain a license in order to continue to manufacture or market the affected products and processes. There can be no assurance that the Company or its collaborative partners would prevail in any such action or that any license (including licenses proposed by third parties) required under any such patent would be made available on commercially acceptable terms, if at all. 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 may be significant litigation in the industry regarding patent and other intellectual property rights. If the Company becomes involved in such litigation, it could consume a substantial portion of the Company's managerial and financial resources, which could have a material adverse effect on the Company's business, financial condition and results of operations. 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 may 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 meaningfully 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 15 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 some genes in which it may have a commercial interest. See "Business -- Intellectual Property." ATTRACTION AND RETENTION OF KEY EMPLOYEES AND CONSULTANTS 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 objectives. 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 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. See "Business -- Scientific Advisory Board." 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 clinical liability insurance. 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. BROAD DISCRETION IN ALLOCATION AND USE OF PROCEEDS Although the Company expects to use approximately $46,000,000 of the net proceeds of this offering for research and development, including product development and core research, manufacturing scale-up, and to expand sales and marketing capabilities, the Company has not yet identified the specific amounts and uses of approximately $9,000,000 (approximately 16%) of the net proceeds. The Company's Board of Directors and management will retain broad discretion as to the allocation of the net proceeds of the offering. See "Use of Proceeds." CONTROL BY GLAXO, MANAGEMENT AND RELATED PERSONS Upon completion of this offering, Glaxo will indirectly beneficially own 35.9% of the Company's outstanding Common Stock and executive officers, directors and principal shareholders (other than Glaxo) will indirectly beneficially own 15.0% of the Company's outstanding Common Stock. 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. See "Principal Shareholders" and "Certain Transactions." 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 16 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. NO PRIOR TRADING MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE; DILUTION Prior to this offering, there has been no public market for the Company's Common Stock, and there can be no assurance that an active public market will develop or be sustained after this offering. The initial public offering price will be determined by negotiations among the Company and the Representatives of the Underwriters and may not be indicative of future market prices. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. The trading price of the Company's Common Stock could be subject to significant fluctuations in response to announcements of results of research activities, collaborative agreements, technological innovations, or new commercial products by the Company, collaborative partners or competitors, changes in government regulations, regulatory actions, changes in patent laws, developments concerning proprietary rights, quarterly variations in operating results, litigation and other events. 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 particular companies. Further, there has been particular volatility in the market prices of securities of biotechnology and other life sciences companies. Purchasers of the Common Stock will incur an immediate and substantial dilution in the net tangible book value of the Common Stock from the initial public offering price. Additional dilution is likely to occur upon exercise of options granted by the Company. See "Dilution." SHARES ELIGIBLE FOR FUTURE SALE; POSSIBLE ADVERSE EFFECT ON FUTURE MARKET PRICE Future sales of substantial amounts of the Company's Common Stock in the public market after this offering could adversely affect the market price of the Common Stock. Of the 21,239,231 shares to be outstanding after the offering, the 5,000,000 shares of Common Stock offered hereby (plus any shares issued upon exercise of the Underwriters' over-allotment option) will be freely tradeable without restriction. Beginning 90 days after the Effective Date, approximately 50,100 additional shares will be eligible for sale in the public market subject to compliance with Rule 701. In addition, beginning 90 days after the Effective Date approximately 186,140 shares subject to vested options will be available for sale subject to compliance with Rule 701. Certain shareholders of the Company, including the officers, directors, employees and the affiliates of the Company are subject to contractual "lock-up" agreements generally providing that they will not offer, sell, contract to sell or grant any option to purchase or otherwise dispose of the shares of Common Stock of the Company or any securities exercisable for or convertible into the Company's Common Stock owned by them for a period of 180 days after the effective date of the offering (the "Effective Date") without the prior written consent of Robertson Stephens & Company. As a result of these contractual restrictions, notwithstanding possible earlier eligibility for sale under the provisions of Rules 144, 144(k) and 701 under the Securities Act of 1933, as amended (the "Securities Act"), shares subject to lock-up agreements will not be saleable until such agreements expire or are waived by Robertson Stephens & Company. Beginning 180 days after the Effective Date, approximately 10,411,408 additional shares will become eligible for sale subject to the provisions of Rule 144 or Rule 701 upon the expiration of the lock-up agreements not to sell such shares. Beginning 180 days after the Effective Date, approximately 183,366 additional shares subject to vested options will be available for sale subject to compliance with Rule 701 upon the expiration of lock-up agreements not to sell such shares. Robertson, Stephens & Company may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to lock-up agreements. In addition, the Company intends to register on Form S-8 under the Securities Act within 180 days after the Effective Date shares of Common Stock issued or reserved for issuance under the Company's 1993 Stock Plan (the "Stock Plan"), and the 1996 Nonemployee Directors Stock Option Plan (the "Directors Plan") and such registrations will be effective on filing. As of March 31, 1996, there were outstanding options for the purchase of 2,191,518 shares under the Stock Plan, of which options for 158,490 shares were exercisable. No shares have been issued to date under the Directors Plan. As of April 30, 1996, the holders of approximately 15,834,537 shares are entitled to certain registration rights with respect to such shares. If a large 17 number of such shares were registered and sold in the public market, such sales could have an adverse effect on the market price for the Company's Common Stock. If the Company were required to include in a Company-initiated registration the shares held by such holders pursuant to the exercise of their registration rights, such sales may have an adverse effect on the Company's ability to raise needed capital. See "Management -- Stock Plans," "Description of Capital Stock -- Registration Rights of Certain Shareholders," "Shares Eligible for Future Sale," and "Underwriting." USE OF PROCEEDS The net proceeds to the Company from the sale of the 5,000,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $12.00 per share are estimated to be approximately $55,000,000 ($63,370,000 assuming the Underwriters' over-allotment option is exercised in full), after deducting the underwriting discounts and commissions and estimated offering expenses payable by the Company. The Company intends to use the net proceeds from this offering to develop new products and applications for the GeneChip system. Such products may be developed by the Company internally or through collaborative arrangements using the Company's existing technology and products or complementary products or technologies acquired from third parties. While such collaborations and acquisitions may represent a significant use of the proceeds of the offering, no significant acquisitions are currently planned. The Company expects to use approximately $25 million for research and development, including product development and core research; approximately $15 million for capital expenditures, including scale-up of manufacturing, facilities and laboratory equipment; and approximately $6 million for expansion of sales and marketing. The Company will use the $9 million balance (approximately 16%) of the net proceeds for working capital and other general corporate purposes. The Company's Board of Directors and management will retain broad discretion as to the allocation of the net proceeds of the offering. The amounts actually expended for each purpose and the timing of such expenditures will depend upon numerous factors, including payments received under existing and possible future collaborative agreements; the availability of government research grant payments; the progress of the Company's collaborative and independent research and development projects; the costs 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. Pending such uses, the Company intends to invest the net proceeds of this offering in short-term, investment-grade, interest-bearing securities. DIVIDEND POLICY The Company has never paid dividends since its inception and does not intend to pay any dividends in the foreseeable future. The Company currently intends to retain any future earnings to fund the development of its business. 18 CAPITALIZATION The following table sets forth the capitalization of the Company as of March 31, 1996, (i) on a pro forma basis to give effect to the automatic conversion of all outstanding shares of the Company's Preferred Stock into Common Stock upon the closing of this offering and (ii) as adjusted to reflect the receipt of the estimated net proceeds from the sale of the 5,000,000 shares of Common Stock offered hereby, at an assumed initial public offering price of $12.00 per share, after deducting the underwriting discounts and commissions and estimated offering expenses payable by the Company. This table should be read in conjunction with the financial statements of the Company and the notes thereto included elsewhere in this Prospectus.
MARCH 31, 1996 ------------------------ PRO FORMA AS ADJUSTED ----------- ----------- (in thousands) Noncurrent portion of capital lease obligation (1)....................................... $ 898 $ 898 Shareholders' equity: Preferred stock; no par value, 27,500,000 shares authorized; pro forma and as adjusted, no shares issued and outstanding...................................................... -- -- Common stock; no par value, 50,000,000 shares authorized; pro forma 16,239,231 issued and outstanding; as adjusted, 21,239,231 issued and outstanding (2)................................................. 73,528 128,528 Notes receivable from officers......................................................... (41) (41) Unrealized gain on available-for-sale securities....................................... 1 1 Deferred compensation.................................................................. (2,399) (2,399) Deficit accumulated during the development stage....................................... (36,437) (36,437) ----------- ----------- Total shareholders' equity........................................................... 34,652 89,652 ----------- ----------- Total capitalization............................................................... $ 35,550 $ 90,550 ----------- ----------- ----------- -----------
------------ (1) See Note 5 of Notes to Financial Statements for a description of the Company's obligation under capital lease. (2) Excludes (i) 203,881 shares of Common Stock issuable upon exercise of outstanding warrants at an exercise price of $8.25 per share, (ii) 2,191,518 shares issuable upon exercise of outstanding options at March 31, 1996, at a weighted average price of $0.65 per share and (iii) 965,228 shares of Common Stock reserved for future issuance under the Stock Plan. Also excludes 300,000 shares reserved for issuance under the Directors Plan, which was adopted in April 1996. See "Management -- Stock Plans" and Note 6 of Notes to Financial Statements. 19 DILUTION The pro forma net tangible book value of the Company as of March 31, 1996 was $34,652,000 or approximately $2.13 per share. Pro forma net tangible book value per share represents the amount of the Company's total tangible assets less total liabilities, divided by the number of shares of Common Stock outstanding at March 31, 1996. Pro forma net tangible book value dilution per share represents the difference between the amount per share paid by purchasers of shares of Common Stock in the offering made hereby and the pro forma net tangible book value per share immediately after completion of this offering. After giving effect to the estimated net proceeds from the sale of the 5,000,000 shares of Common Stock offered hereby at an assumed initial public offering price of $12.00 per share, after deducting the underwriting discounts and commissions and estimated offering expenses payable by the Company, the pro forma net tangible book value of the Company as of March 31, 1996 would have been $89,652,000 or approximately $4.22 per share of Common Stock. This represents an immediate increase in net tangible book value of $2.09 per share to existing shareholders and an immediate dilution in pro forma net tangible book value of $7.78 per share to purchasers of Common Stock in this offering. The following table illustrates this per share dilution: Assumed public offering price........................................ $ 12.00 Pro forma net tangible book value as of March 31, 1996............. $ 2.13 Increase attributable to new investors............................. 2.09 --------- Pro forma net tangible book value after the offering................. 4.22 --------- Dilution to new investors............................................ $ 7.78 --------- ---------
The following table summarizes, on a pro forma basis as of March 31, 1996, the number of shares of Common Stock purchased from the Company, the total cash consideration paid and the average price per share paid by the existing shareholders and by new investors before deducting the underwriting discounts and commissions and estimated offering expenses payable by the Company at the assumed initial public offering price of $12.00 per share:
SHARES PURCHASED TOTAL CONSIDERATION ----------------------- ------------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ------------ --------- -------------- --------- ------------- Existing shareholders................. 16,239,231 76.5% $ 70,860,000 54.1% $ 4.36 New investors......................... 5,000,000 23.5 60,000,000 45.9 12.00 ------------ --------- -------------- --------- Total............................... 21,239,231 100.0% $ 130,860,000 100.0% ------------ --------- -------------- --------- ------------ --------- -------------- ---------
The foregoing table assumes no exercise of outstanding stock options or warrants. As of March 31, 1996, there were outstanding warrants to purchase 203,881 shares of Common Stock at an exercise price of $8.25 per share and outstanding options to purchase an aggregate of 2,191,518 shares of Common Stock at a weighted average exercise price of $0.65 per share. To the extent that any of these options or warrants or additional options or warrants are exercised, there will be further dilution to new investors. See "Management -- Stock Plans" and Note 6 of Notes to Financial Statements. 20 SELECTED FINANCIAL DATA The statement of operations data set forth below for the years ended December 31, 1993, 1994 and 1995 and the balance sheet data as of December 31, 1994 and 1995 are derived from financial statements of the Company audited by Ernst & Young LLP, independent auditors, which are included elsewhere in this Prospectus. The statement of operations data for the years ended December 31, 1991 and 1992 and the balance sheet data as of December 31, 1991, 1992, and 1993 are derived from financial statements audited by Ernst & Young LLP, which are not included in this Prospectus. The balance sheet data at March 31, 1996 and the statement of operations data for the three months ended March 31, 1995 and 1996 and for the period from inception (January 1, 1991) to March 31, 1996 are derived from unaudited financial statements included elsewhere in this prospectus. The unaudited financial statements include all adjustments, consisting only of normal recurring adjustments, that the Company considers necessary for a fair presentation of the financial position and results of operations for these periods. Operating results for the three months ended March 31, 1996 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 1996. The Company has never declared or paid any cash dividends on shares of its capital stock. The data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Financial Statements, related Notes thereto, and other financial information included elsewhere in this Prospectus.
PERIOD FROM INCEPTION THREE MONTHS ENDED (JANUARY 1, 1991) THROUGH YEAR ENDED DECEMBER 31, MARCH 31, MARCH 31, ----------------------------------------------------- -------------------- --------------- 1991 1992 1993 1994 1995 1995 1996 1996 --------- --------- --------- --------- --------- --------- --------- --------------- (in thousands, except per share data) STATEMENT OF OPERATIONS DATA: Contract and grant revenue..... $ -- $ 43 $ 1,413 $ 1,574 $ 4,625 $ 854 $ 1,416 $ 9,071 Operating expenses: Research and development..... 1,576 4,106 6,566 9,483 12,420 2,274 4,177 38,328 General and administrative... 261 582 577 2,303 3,833 777 1,649 9,205 --------- --------- --------- --------- --------- --------- --------- ------- Total operating expenses... 1,837 4,688 7,143 11,786 16,253 3,051 5,826 47,533 --------- --------- --------- --------- --------- --------- --------- ------- Loss from operations........... (1,837) (4,645) (5,730) (10,212) (11,628) (2,197) (4,410) (38,462) Interest income.............. -- 3 211 575 1,301 183 517 2,607 Interest expense............. -- (18) (73) (43) (420) (160) (28) (582) --------- --------- --------- --------- --------- --------- --------- ------- Net loss....................... $ (1,837) $ (4,660) $ (5,592) $ (9,680) $ (10,747) $ (2,174) $ (3,921) $ (36,437) --------- --------- --------- --------- --------- --------- --------- ------- --------- --------- --------- --------- --------- --------- --------- ------- Pro forma net loss per share (1)........................... $ (0.52) $ (0.55) $ (0.61) $ (0.12) $ (0.22) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Pro forma weighted average shares outstanding (1)........ 10,715 17,653 17,664 17,663 17,664
DECEMBER 31, MARCH 31, ----------------------------------------------------- ----------- 1991 1992 1993 1994 1995 1996 --------- --------- --------- --------- --------- ----------- (in thousands) BALANCE SHEET DATA: Cash, cash equivalents and short-term investments.................................. $ -- $ 94 $ 20,392 $ 17,805 $ 38,883 $ 34,837 Working capital............................... 1 (320) 17,452 15,677 36,070 31,729 Total assets.................................. 1 813 22,817 19,861 44,552 41,185 Long-term obligations......................... -- 564 -- 7,135 948 898 Deficit accumulated during development stage........................................ (1,837) (6,497) (12,089) (21,769) (32,516) (36,437) Total shareholders' equity (net capital deficiency).................................. 1 (181) 19,214 9,170 38,519 34,652
--------------- (1) See Note 1 of Notes to Financial Statements for an explanation of the determination of the number of shares used in computing pro forma net loss per share. 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. OVERVIEW Affymetrix is a development stage company which is developing GeneChip systems and related applications and technologies for the acquisition, analysis and management of complex genetic information. The business and operations of Affymetrix were commenced in 1991 by 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. In September 1993, Affymetrix issued equity securities through a private financing of approximately $21 million that reduced Affymax' ownership to approximately 65%. In March 1995, Glaxo acquired Affymax, including its then majority ownership interest in Affymetrix. In August 1995, Affymetrix issued equity securities through a second private financing of approximately $39 million, further reducing Affymax' percentage ownership. Glaxo currently indirectly owns approximately 46% of Affymetrix. The Company 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 academic research centers, pharmaceutical and biotechnology companies and reference laboratories. As of March 31, 1996, the Company had placed nine of its GeneChip systems with customers for validation, initial testing and certain research applications. Only five of the systems have been purchased by customers, three of which were for the HIV application. The payments received from the sale of these systems were recorded as contract revenues pursuant to development agreements. The Company commercially introduced its first product, the GeneChip system and the HIV probe array for research use only, in April 1996. Failure of the Company to successfully develop, manufacture and market additional products over the next several years 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 net losses of approximately $10.7 million during the year ended December 31, 1995, and at March 31, 1996, the Company had an accumulated deficit of approximately $36.4 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 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, manufacturing and marketing capabilities. The Company's quarterly operating results will depend upon the volume and timing of orders for GeneChip systems and probe arrays received and delivered 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. The Company expects that it may have to 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, product mix and the degree of price discounts required to market its products to academic research centers, 22 pharmaceutical companies and 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 collaborative 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. From inception through March 31, 1996, the Company has generated $11.7 million from government grants, collaborative agreements and interest income. The Company has significant collaborative relationships with GI and HP and a significant grant from the National Institute of Standards and Technology's Advanced Technology Program. The Company began its collaboration with GI in November 1994 to develop applications of the GeneChip system to the identification of new genes and new uses of genes using expression monitoring. Under this agreement, GI funded the Company's research to determine the feasibility of this application of GeneChip technology and agreed to make milestone and royalty payments. In December 1995, GI and the Company signed a second agreement for the supply of custom probe arrays to GI in return for up-front fees, milestone payments and royalties for products developed from use of the probe arrays. As of March 31, 1996, the Company recognized contract revenues totaling $1.3 million from GI. As a result of entering into an agreement with Incyte in April 1996, Affymetrix is required to refund 30% of the development funding received from GI and future funding from GI will be proportionally reduced. The Company recorded an accrued liability for this refund and believes that the reduction of future funding from GI will not have a material effect on its operations. See "Business -- Collaborative Agreements and Grants." The Company entered into a collaboration with HP in November 1994 to develop, manufacture and supply a more advanced scanner for use with the Company's GeneChip probe arrays and for the Company, in collaboration with HP, to develop, manufacture and supply certain probe arrays to HP for sale in certain markets. As of March 31, 1996, the Company recognized contract revenues totaling $1.5 million from HP. In October 1994, the Company and Molecular Dynamics received a five-year grant from the National Institute of Standards and Technology's Advanced Technology Program in the amount of $31.5 million to develop a miniaturized DNA diagnostic system based on the Company's technology. Pursuant to the grant, $20.8 million is designated for the Company and its subcontractors and $10.7 million is designated for Molecular Dynamics and its subcontractors, subject to the requirements of each company to match such funding. As of March 31, 1996, the Company's revenues from this grant totaled $1.6 million. Collaborations will continue to be an important element of the Company's business strategy. There can be no assurance that the Company will be able to maintain existing collaborations, enter into future collaborations to develop applications of its GeneChip system or that any such collaborative arrangements will be successful. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 31, 1995 Contract and grant revenue increased by 66% for the three months ended March 31, 1996 to $1.4 million from $854,000 for the three months ended March 31, 1995. The increase was principally due to the sale of one GeneChip system pursuant to a development agreement in the first quarter of 1996, as compared to none in the first quarter of 1995, and an increase in ATP grant revenue. Research and development expenses increased to $4.2 million for the first quarter of 1996 compared to $2.3 million for the same period of 1995. The increase was attributable primarily to the hiring of additional research and development personnel, costs incurred to further product development in anticipation of Affymetrix' initial product launch, and purchase of research supplies. Affymetrix anticipates that research and development expenses will continue to increase in future periods. General and administrative expenses increased to $1.6 million for the three months ended March 31, 1996 compared to $777,000 for the comparable period in 1995. The increase in general and administrative expenses was attributable primarily to the hiring of additional management personnel and the incurring of legal and other 23 professional fees in connection with the overall scale-up of operations and business development efforts. General and administrative expenses are expected to increase significantly in future periods to support Affymetrix operations and business development efforts. Interest income was $517,000 for the three months ended March 31, 1996 compared to $183,000 for the comparable period in 1995. The increase was primarily attributable to the investment of the net proceeds from the private placement of Series B Senior Convertible Preferred Stock in August 1995 and higher interest rates. Interest expense in 1996 decreased by $132,000 as compared to 1995, primarily due to the conversion of a $6.0 million subordinated convertible promissory note held by Affymax in August 1995. YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1994 Contract and grant revenue increased to $4.6 million for 1995 from $1.6 million for 1994 as a result primarily of its ATP grant and revenue earned from collaborative agreements with GI and HP. Research and development expenses increased to $12.4 million for 1995 compared to $9.5 million for 1994. The increase in research and development expenses was attributable primarily to the hiring of additional research and development personnel, costs incurred to establish a pilot manufacturing facility, and increased purchases of research supplies. General and administrative expenses increased to $3.8 million for 1995 compared to $2.3 million for 1994. The increase in 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 was $1.3 million for 1995 compared to $575,000 for 1994. The increase resulted from the investment of net proceeds from Affymetrix' private placement of Series B Senior Convertible Preferred Stock in August 1995. Interest expense resulted from lease financing for manufacturing equipment and facilities. YEARS ENDED DECEMBER 31, 1994 AND DECEMBER 31, 1993 Contract and grant revenue increased to $1.6 million for 1994 from $1.4 million for 1993 as a result of additional funding from government grants. Research and development expenses increased to $9.5 million for 1994 compared to $6.6 million for 1993. The increase in research and development expenses was attributable primarily to the hiring of additional research and development personnel and increased purchases of research supplies. General and administrative expenses increased to $2.3 million for 1994 compared to $577,000 for 1993. The increase in general and administrative expenses was attributable primarily to the hiring of additional administrative personnel and the incurring of legal and other professional fees in connection with the expansion of Affymetrix' operations. Interest income was $575,000 for 1994 compared to $211,000 for 1993. The increase resulted from the investment of net proceeds from the private placement of Series A Senior Convertible Preferred Stock in September 1993. LIQUIDITY AND CAPITAL RESOURCES Since inception, Affymetrix has financed its operations primarily through private placements of equity securities, contributions from Affymax, government grants, collaborative agreements, issuances of convertible debt, equipment lease financings and interest income. Through March 31, 1996, Affymetrix has received net cash of $71.4 million from financing activities, consisting principally of approximately $53.6 million from issuances of common and preferred stock, $10.6 million from contribution by Affymax, $7.1 million from issuances of notes payable, and $1.3 million in lease financing. As of March 31, 1996, $1.1 million of notes have been repaid, $6.0 million of convertible notes held by Affymax have been converted into shares of Series B Senior Convertible Preferred Stock, and $10.6 million of contributions from Affymax have been converted to shares of Series 1 Subordinated Convertible Preferred Stock. Affymetrix' net cash used in operating activities was $3.1 million for the three months ended March 31, 1996, $10.2 million for 1995, $7.4 million for 1994 and $3.2 million for 1993. The cash used for operations was 24 primarily to fund research and development expenses and manufacturing start-up costs related to the introduction and support of Affymetrix' products. Affymetrix has also received collaborative research and government grant funding totaling $11.0 million, of which $9.1 million has been recognized as contract and grant revenue. The cash used by the Company in investing activities since its inception through March 31, 1996 totaled $41.0 million. Capital expenditures totaled $701,000 for the three months ended March 31, 1996. Capital expenditures totaled $2.3 million in 1995, $1.2 million in 1994 and $1.5 million in 1993. Purchases of available-for-sale securities were $2.0 million for the three months ended March 31, 1996 and $38.4 million, $3.0 million, and $14.0 million for 1995, 1994, and 1993, respectively. Proceeds from sales and maturities of available-for-sale-securities were $3.6 million for the three months ended March 31, 1996 and $14.0 million and $5.3 million for 1995 and 1994, respectively. There were no sales or maturities in 1993. As of March 31, 1996, Affymetrix had cash, cash equivalents, and short-term investments of $34.8 million. The Company anticipates that these existing capital resources, together with the net proceeds of this offering and interest earned thereon, will enable it to maintain currently planned operations through at least 1998. However, this expectation is based on the Company's current operating plan, which could change 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 continues to have sufficient funds for its operating plan. The Company's requirements for additional capital will be substantial and will depend on many factors, including payments received under existing and possible collaborative agreements; the availability of government research grant payments; the progress of the Company's collaborative and independent research and development projects; the costs of preclinical and clinical trials for the Company's products; the prosecution, defense and enforcement of patent claims and other intellectual property rights; and the development of manufacturing, sales and marketing capabilities. The Company has no credit facility or other committed sources of capital. To the extent capital resources, including payments from existing and possible future collaborative agreements and grants, together with the net proceeds of the offering 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 through entering into collaborative 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 scientific 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. At December 31, 1995, Affymetrix' net operating loss carryforwards and research tax credit carryforwards for income tax purposes were approximately $22.0 million and $1.2 million, respectively. 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. If not utilized,the carryforwards expire at various dates beginning in 2008 through 2010. As a result of the annual limitation, a portion of these carryforwards may expire before ultimately becoming available to reduce income tax liabilities. 25 BUSINESS The following Business section contains forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. OVERVIEW Affymetrix has developed and intends to establish its GeneChip 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 system consists of disposable DNA probe arrays containing gene sequences on a chip, instruments to process the probe arrays, and software to analyze and manage genetic information. The Company commenced commercial sales of the GeneChip system and a HIV probe array for research use in April 1996. BACKGROUND GENES AND DISEASE Genes provide the fundamental basis for understanding human health and disease. Genomics, the study of genes and their functions, will lead to new approaches to diagnose, monitor and treat disease. The entire genetic content of an organism is known as its genome. DNA is the molecule that makes up genes and encodes the 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 other strand. Only certain pairs of nucleotide bases can form these bonds: A always pairs with T, and C always pairs with G. Such paired DNA strands are said to be complementary. When two DNA strands are complementary, they bind together to form a double helix in a process called hybridization. In humans, the DNA molecule contains 3 billion nucleotide pairs organized into 46 chromosomes. The human genome is believed to contain over 100,000 genes. Cells carry out their normal biological functions through the genetic instructions encoded in their DNA. This 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. Each organism's characteristics are thus ultimately determined by proteins encoded in its DNA. This process is illustrated below. [DIAGRAM] 26 The diversity of living organisms results from variability in their genomes. Variability stems from differences in the sequences of genes and from differences in gene expression. 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 organism. However, in other cases, polymorphisms can result in altered function 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 mutations in multiple genes have been associated with diseases such as cancer and cardiovascular disease. Similarly, it has recently been discovered that polymorphisms in the genome of HIV, the virus that causes AIDS, enable that virus to develop resistance to antiviral drugs, resulting in disease progression and ultimately death. In order to understand how mutations in particular genes cause disease, scientists must compare genes from healthy and diseased people. These efforts are laborious and time consuming, requiring the repeated sequencing of genes from a large number of people. The genes expressed, as well as the order and level of their expression, determine differences among cell types in an organism. Although most cells contain an organism's full set of genes, only a small fraction of this set is expressed in each cell. The expression of the wrong or defective genes, or the expression of too much or too little of genes normally expressed, causes disease. Such abnormalities in gene expression have been associated with human diseases, including many types of cancer. The role of gene expression in disease requires an understanding of how genes interact to cause disease and how external stimuli, such as drugs, cause variations in gene expression. THE ROLE OF GENOMICS IN UNDERSTANDING DISEASE Increased knowledge of how DNA molecules encode the functions of living organisms has generated a worldwide effort to identify and sequence genes of many organisms, including the estimated 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 of each gene and its role in disease. This research, commonly referred to as genomics, may lead to new opportunities in drug discovery and diagnostics. The general processes by which researchers are attempting to discover genes fall into two principal categories: genetic mapping and high-throughput sequencing. Once a gene has been identified, either through mapping or high-throughput sequencing, researchers must understand the function of the gene and how variability in the gene leads to disease. Many diseases are caused by either changes in the sequence of the gene or by changes in the expression of the gene. Understanding the role of a gene in disease requires either quantitative gene expression monitoring or large scale polymorphism screening. 27 [CHART] THE CHART ABOVE ILLUSTRATES TECHNIQUES USED TO IDENTIFY GENES AND UNDERSTAND THEIR FUNCTIONS, WHICH CAN LEAD TO THE DEVELOPMENT OF NEW DIAGNOSTIC AND THERAPEUTIC OPPORTUNITIES. GENETIC MAPPING. Researchers use genetic mapping to identify the gene or genes causing an observable and well-characterized disease or genetic disorder. The gene mapping process is extensive and typically begins by assembling tissue samples and histories from families where the disease of interest is prevalent. Researchers then attempt to locate the position of the gene responsible for the disease using a technique called linkage analysis. This technique relies on the identification of genes using DNA sequences called markers, whose specific locations are known among the three billion base pairs of the human genome. By comparing the patterns of markers in generations of healthy and diseased people, researchers can link genes to markers and thereby determine that a particular marker is located near the gene responsible for the disease. By using more markers, genes can be more precisely mapped. Since many major diseases, such as diabetes and atherosclerosis, are believed to be caused by the interplay of numerous genes, it is often necessary to try to map several genes simultaneously. This mapping process requires extensive efforts and significant computational capabilities. It is expected that increasing the speed and accuracy of genetic mapping and improving the ability to analyze information from thousands of different markers may accelerate the identification of disease genes. HIGH-THROUGHPUT SEQUENCING. High-throughput sequencing involves first identifying genes and subsequently determining their function and possible role in disease. When a gene is expressed in a particular cell, its DNA is copied into messenger RNA. In this process, sequences that do not code for an expressed gene are removed. Thus, messenger RNA contains only expressed gene sequences. Using high-throughput sequencing methods, DNA copies of the messenger RNA can be sequenced and thereby reveal the sequence of a gene. Corporate, academic and government efforts have been successful in identifying a substantial number of the 100,000 genes in the human genome using such techniques. GENE EXPRESSION MONITORING. By monitoring the expression of a large number of genes, researchers seek to correlate changes in expression patterns with a particular disease. The effectiveness of monitoring gene 28 expression is a function of the number of genes that can be monitored simultaneously, the sensitivity (ability to measure low levels of gene expression) and the ability of the method used to provide qualitative information. Relative levels of gene expression are currently monitored primarily through an intensive process of sequencing many copies of genes. Scientists believe that the development of technologies that can quantitatively monitor thousands of genes simultaneously will increase the effectiveness of gene expression monitoring as a tool for understanding the roles of genes in disease. POLYMORPHISM SCREENING. Using polymorphism screening, 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 statistically correlate specific gene mutations with the disease. Currently, the polymorphism screening process is done using gel-based sequencing. A typical polymorphism screening project might require sequencing 10 genes of 5,000 nucleotide bases each in up to 1,000 patients, or a total of 50 million bases, to understand the role of these 10 genes in one disease. Using high-throughput sequencing techniques, even at a cost of cents per base, such projects are expensive and time consuming. It is expected that new technologies will be needed to effectively screen the more than 100,000 human genes for polymorphisms that correlate with many known diseases. OPPORTUNITIES IN DIAGNOSTICS AND THERAPEUTICS Current diagnostic tests can monitor the physiological effects of disease, detect infectious organisms by growing them in culture, or use specific markers, such as proteins, known to be associated with disease. Diagnostic tests rely on a patient sample of tissue, blood, or urine, and detect the physiological effect, the infectious organism or the marker, in the sample. For example, immunoassays detect and measure specific proteins already known to be associated with a disease using antibodies generated against those proteins. However, protein markers are not available or are not useful for diagnosing many diseases. Diagnostic tests that monitor physiological effects are also limited because different diseases can cause the same effect. For example, an elevated white blood cell count can be caused by appendicitis, an acute infection or leukemia. Most infectious diseases are viral, bacterial or fungal. Diagnosis of bacterial and fungal infections is generally achieved by growing a culture, which may take several days. Even after the infectious organism is identified, further analysis may be required to determine which antibiotics, if any, may be effective in treating the disease. In the case of many viruses, diagnosis depends on immunoassay tests that detect antibodies to the virus. However, these tests provide no information as to whether the virus is resistant to drug therapy or if the infection is active or latent. Recent advances in gene-based diagnostic tests using DNA probes, DNA amplification techniques and sequencing technologies have begun to address these shortcomings by directly examining the genes associated with a given disease rather than relying on physiological parameters or antibodies. For example, amplification of specific genes from an infectious organism eliminates the need to grow that organism in culture. However, current techniques for gathering genetic information for diagnosis and monitoring of disease have limitations. For example, gel-based sequencing techniques used in some approaches are time-consuming, require skilled operators, and can analyze only limited lengths of contiguous DNA sequences in a given run. Gene-based diagnosis often requires rapid turnaround and examination of noncontiguous DNA sequences. As a result, new techniques and tools are being developed to improve the diagnosis, monitoring and treatment of disease. 29 Using genetic mapping and high-throughput sequencing, scientists have been successful in discovering many genes. Technological improvements that increase the speed and decrease the cost of gene expression monitoring and polymorphism screening will improve the ability of researchers to understand the function of these genes and their role in disease. Such knowledge may assist in the development of therapeutics with greater efficacy and fewer side effects, as well as diagnostic products with greater sensitivity and accuracy. BUSINESS STRATEGY Affymetrix' objective is to establish the GeneChip 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, instruments to process the probe arrays, and software to analyze and manage genetic information from the probe arrays. The Company intends to commercialize the GeneChip system in two principal areas: genomics and diagnostics. GENOMICS - ESTABLISH GENECHIP TECHNOLOGY AS A PLATFORM FOR GENOMICS RESEARCH. The Company intends to develop the GeneChip system for use in several applications where Affymetrix believes it has substantial advantages over conventional tools used for DNA sequence analysis in the identification of genes and their role in disease. Initially, four such applications have been identified: gene discovery, gene mapping, gene expression monitoring and polymorphism screening, all of which require analyzing and processing large amounts of genetic information. - COMMERCIALIZE CUSTOM PROBE ARRAYS THROUGH CORPORATE PARTNERSHIPS. The Company intends to sell custom probe arrays to pharmaceutical and biotechnology companies through collaborative agreements. The Company will seek to receive revenues through design and development fees, milestone payments and sales of DNA probe arrays and instruments to the collaborative partner. If the collaborative partner is successful in discovering products through the use of the GeneChip technology, the Company would also seek to receive royalties from the sale of such products. - PARTICIPATE IN THE COLLECTION AND APPLICATION OF GENETIC INFORMATION. Affymetrix intends to use the DNA sequence analysis capabilities of the GeneChip technology to measure gene expression in order to create databases containing information on the function of genes and their role in disease. Affymetrix anticipates that such databases will be developed and commercialized through partnerships with pharmaceutical and biotechnology companies. DIAGNOSTICS - IMPROVE ACCURACY AND SPEED OF DIAGNOSIS. Affymetrix intends to develop DNA probe arrays to obtain genetic information from patient samples so that specific diseases can be rapidly diagnosed. Furthermore, such probe arrays will be designed to simultaneously collect additional relevant information, including drug resistance data. - ESTABLISH DIRECT SALES EFFORTS AND PARTNERSHIPS. Affymetrix intends to initially market its GeneChip products, for research use only, directly to academic research centers and reference laboratories that conduct the majority of gene-based diagnostic tests. In addition, the Company will seek to partner with, or license technology to, established diagnostic companies which could develop, seek regulatory approval, and commercialize probe arrays for broader clinical use. - DISCOVER NOVEL DIAGNOSTIC MARKERS. The Company intends to use information from the Human Genome Project and related efforts to identify genes associated with particular diseases and use the proteins encoded by these genes in new diagnostic tests. The Company will seek to partner with established diagnostic companies by providing these novel protein markers for development and commercialization as conventional immunoassays. There can be no assurance that the Company will be successful in implementing its strategy or marketing its GeneChip system for these genomics and diagnostic applications. The Company's GeneChip system and 30 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 diagnostic applications in the future. The Company may need to undertake costly and time-consuming efforts to obtain this approval. There can be no assurance that any 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. TECHNOLOGY Affymetrix' probe array technology and systems integrate semiconductor fabrication techniques, molecular biology, solid phase chemistry, software and robotics. The Company's GeneChip system consists of four integrated parts: disposable DNA probe arrays containing genetic information on a chip housed in a cartridge, 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, analyze and manage the genetic information. The GeneChip system is designed for use by pharmaceutical and biotechnology companies, academic research centers and reference laboratories. The price of the Company's GeneChip system, excluding probe arrays, is approximately $120,000. The HIV probe array, currently being sold commercially for research use, is priced at $45 per array. 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 probe array. This process uses technology initially developed at Affymax and exclusively licensed to the Company for selected applications. 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. ILLUSTRATION OF THE LIGHT DIRECTED PROBE ARRAY SYNTHESIS PROCESS [DIAGRAM] The Company uses photolithography to synthesize large numbers of DNA sequences simultaneously in specific locations on a glass chip. Photolithography is a technique which uses light to induce chemical reactions that create exposure patterns on the glass chip. The process begins by coating the chip with light-sensitive chemical compounds (defined as "protecting" groups) that prevent chemical coupling. 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 31 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 arrays of many diverse DNA sequences in a small area. The Company can manufacture a large number of identical DNA probe arrays on a large glass wafer, which is then diced into single probe arrays. Each probe array contains thousands of "features." Each feature contains 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. [DIAGRAM] The Company's GeneChip technology enables it to effectively synthesize a large number of DNA sequences, which would not be possible with existing technologies. Unlike conventional synthesis, which generally uses a linear process to create compounds, the Company's synthesis technology is combinatorial, in that the number of compounds synthesized grows exponentially with the number of cycles in the synthesis. For example, in a 40 cycle process, Affymetrix has produced a probe array with over one million features, each containing a unique DNA sequence. This process would take over ten million cycles using standard 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 the patient sample. Each feature on the GeneChip probe array contains identical copies of a single strand of DNA. The nucleic acid to be tested is isolated from a sample, such as blood or biopsy tissue, and fluorescently labeled by one of several standard biochemical methods. The test sample is then washed over the probe array surface and the labeled test sample binds, or hybridizes, 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. The presence and sequence of the nucleic acid sample can be determined by detecting these signals since the sequence and position of each complementary DNA probe on the probe array are known. The Company's currently manufactured probe arrays contain from 16,000 to more than 100,000 features. 32 INSTRUMENTATION. The fluidics station controls the introduction of the test sample to the probe array and the hybridization process. A technician places the test sample in a small container in the fluidics station, which introduces the test sample into the cartridge containing the DNA probe array. The technician uses a computer 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, typically taking less than one hour to process these arrays. 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 excited by the light from the laser. The intensity of the fluorescent signal is recorded by the scanner and stored in the computer. The current scanner can read 1.28X1.28 centimeter probe arrays with up to 64,000 features. An advanced scanner is being developed to read 1.28X1.28 centimeter probe arrays with up to 400,000 features. However, there can be no assurance that this scanner will be successfully developed or commercialized. SOFTWARE. The GeneChip product software is supplied as part of the integrated system and runs on a Windows 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 HIV GeneChip product, the analysis takes less than 90 seconds for one probe array and the resulting sequence is 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. GENOMICS APPLICATION AREAS Affymetrix is applying the GeneChip technology to create a platform for genomics and pharmaceutical research. Genomics applications include gene discovery, genetic mapping, expression monitoring and polymorphism screening. GENE DISCOVERY. The discovery of genes may be an important means to understand disease and to design new therapies. A large number of the genes identified to date have been classified into families based on common sequences within these genes. One approach to gene discovery uses these common sequences to search for and identify previously unknown members of these gene families. To facilitate this approach, the Company designs DNA probe arrays containing a large number of probes for both common and variable regions of known genes. Using this technology, samples containing DNA are screened against the probe arrays, and, for genes that are already known, both the variable and common regions are detected from the sample. For previously unknown genes, only the common regions are detected, thus identifying a new gene. The Company believes that this approach to gene discovery may accelerate the rate of new gene identification. In November 1994, Affymetrix established a collaboration with GI to apply the GeneChip technology to the discovery of new genes and uses of genes in selected gene areas. As part of this collaboration, GI and the Company have undertaken a three-year research project whereby GI provides research funding. In addition, Affymetrix supplies custom probe arrays to GI for specified fees and may receive milestone payments and royalties. GENETIC MAPPING. Genetic mapping is an important method for linking diseases to particular genes. Over the last five years, over 60 genes have been linked to known diseases by this method. However, the current technologies for mapping genes are slow and labor intensive. This problem is exacerbated when looking at complex diseases such as diabetes, asthma, and cardiovascular disease which are believed to be associated with multiple genes. Using genetic mapping, researchers attempt to find disease genes by using markers. The correlation between markers in diseased and healthy people enables researchers to link such genes to a particular disease state. Research to identify markers is currently being conducted by various academic and scientific groups to improve genetic mapping techniques. The Company has established a collaboration with the Whitehead Institute for Biomedical Research at the Massachusetts Institute of Technology ("MIT") to design probe arrays with new markers identified by Whitehead scientists. The Company intends to develop mapping 33 probe arrays based upon publicly available markers as well as custom probe arrays based upon proprietary markers. The Company intends to market these arrays to pharmaceutical and biotechnology companies for conducting genetic mapping. There can be no assurance that these arrays will be successfully developed or marketed to these or other customers. EXPRESSION MONITORING. Currently, large amounts of genetic sequence information are being generated, through the Human Genome Project and related efforts, yet relatively little is understood about the function of most genes. Affymetrix believes that monitoring gene expression is fundamental for understanding the function of genes and their role in disease. To facilitate the monitoring of gene expression, the Company designs probe arrays with DNA probes that are complementary to a sequence within a gene of interest. By providing sequence information, these probe arrays may enable researchers to identify the particular gene and quantitatively measure its level of expression compared to other genes of interest in the test sample. By synthesizing specific probes for multiple genes on a single probe array, the Company also 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 at different times, researchers can use the probe arrays to understand gene expression and how it is related to disease progression. The Company believes that such information will be an important tool in the development of new therapeutics. Under its collaboration with GI established in November 1994, the Company is receiving research funding to develop probe arrays for gene expression monitoring. The Company will also design, manufacture, and supply custom probe arrays for GI pursuant to a second agreement executed in December 1995. Multiple custom DNA probe arrays will be designed by the Company to monitor the expression patterns of approximately 15,000 genes to be specified by GI. GI retains all rights to discovered genes and their uses. Affymetrix will supply custom probe arrays for specified fees and may receive milestone payments and royalties on certain therapeutic products based on the discovered genes. In April 1996, the Company also entered into an agreement with Incyte to explore the potential use of DNA probe arrays in the area of gene expression. POLYMORPHISM SCREENING. As the identity of genes in the human genome is determined, the need to understand the significance of the variability of nucleotide sequences in these genes increases. Researchers must determine the normal sequence of the gene, which mutations exist and how these mutations correlate with a disease. This requires the sequencing of samples from a large number of affected and unaffected individuals. Using sequencing strategies developed for the HIV probe array, Affymetrix believes that GeneChip probe arrays could significantly reduce the cost and time of polymorphism screening, which is currently done through more labor intensive gel-based sequencing techniques. In May 1996, the Company entered into an agreement with Glaxo to design, test and supply probe arrays to demonstrate use of the arrays in detecting polymorphisms in specific genes. Glaxo and Affymetrix will design and test a probe array containing several genes specified by Glaxo. If successfully developed, Affymetrix will supply Glaxo's requirements of such probe arrays for research purposes. There can be no assurance that the Company's collaborative partners will perform their obligations as expected or will devote sufficient resources to the development, testing or marketing of the Company's potential products developed under the collaborations. Further, there can be no assurance that any products for genomics applications will be successfully developed, be proven to be accurate and efficacious in any markets, 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. DIAGNOSTIC PRODUCTS AND RESEARCH APPLICATIONS Affymetrix intends to use the GeneChip platform in conjunction with public and private gene databases to discover and develop diagnostic products. The Company is pursuing diagnostic products and research applications in infectious diseases, cancer and other areas, including drug metabolism. INFECTIOUS DISEASES. The Company believes its GeneChip technology may enable it to develop tests which, by sequencing large amounts of genetic information and quantitatively measuring levels of gene expression, can provide information that could improve treatments for many infectious diseases. 34 Industry sources estimate that in North America and Europe approximately 1.5 million persons are infected with HIV and that approximately 100,000 persons are diagnosed with AIDS annually. Many HIV symptomatic patients receive antiviral treatment with reverse transcriptase inhibitors, such as AZT, or protease inhibitors, both of which block proteins required for the virus to replicate. The HIV genome encodes the reverse transcriptase and protease gene proteins within approximately 1,400 bases (or approximately 15%) of the viral genome. Mutations in the viral genome result from errors in replication. Some of these mutations confer resistance to the antiviral drugs being administered to the patient. It is believed that the identity of nucleotides in the reverse transcriptase and protease genes will be essential in order to monitor a patient's drug resistance profile. Affymetrix has developed the GeneChip system with an HIV probe array as its first product for commercialization. The Company believes this GeneChip system will enable researchers to identify the mutations associated with drug resistance in HIV infected patients and allow researchers to identify new mutations. The HIV probe array contains DNA probes in approximately 20,000 features that represent sequences of the reverse transcriptase and protease genes of the virus. These features can identify mutations at any of the sites in the genes that have been associated with drug resistance. The Company expects to initially market the HIV product for research use in identifying the correlation between mutations in the virus and drug resistance. The Company believes that monitoring drug resistance related mutations during therapy may become a valuable aspect of patient management. Affymetrix has placed five GeneChip systems for the HIV application in academic research and pharmaceutical companies for evaluation and validation. The Company commenced commercial sales of the GeneChip system and HIV probe array for research use only in April 1996. The Company will rely on third parties to manufacture and service its instruments. The Company has no prior experience in introducing a commercial product. There can be no assurance that technicians will not experience difficulties with the system that would prevent or limit its use. In addition, there can be no assurance that the efficiency and accuracy of the HIV probe array in providing sequence information from HIV will be better than current technologies, such as gel-based sequencing. The Company intends to develop additional diagnostic products in the infectious disease area that could determine complex drug resistance and gene identification information. The Company is evaluating the development of additional GeneChip probe tests for bacterial, viral and fungal infections, such as tuberculosis and cytomegalovirus (CMV). The Company intends to seek collaborators to participate in the funding, development and marketing of these tests. CANCER. In the United States, approximately 1.1 million new cases of cancer are diagnosed annually and the incidence of cancer deaths is approximately 520,000 individuals each year. Colorectal, breast, prostate and lung cancer account for approximately half of all diagnoses. The p53 gene encodes a protein whose normal function is to control cell replication. However, mutations in the p53 gene can result in the loss of this function and are known to contribute to the aggressive growth of some types of cancer, including colorectal, breast and bladder cancers. Mutations have been observed to date at more than 400 distinct sites in the p53 gene sequence. Currently available diagnostic tests include IN VITRO assays that use antibodies to detect the accumulation of p53 molecules in cells but cannot directly detect mutations in the p53 gene. Gel-based sequencing methods are impractical because mutations can occur over a large area of the genome, requiring many gels to be processed to sequence the entire gene. As a result, these methods are unable to predict the rate of cancer progression. Understanding the rate of progression is often necessary to determine whether to treat the cancer with chemotherapy, radiation or surgery. The Company is currently developing a GeneChip p53 probe array that contains DNA probes to detect known mutation sites, as well as to sequence areas of the p53 gene where other mutations may occur but have currently not been identified. Initially, the Company intends to market these p53 probe arrays to academic research centers and reference laboratories to study the p53 gene. The Company also intends to seek regulatory approval to use the p53 probe array for clinical use to assist in monitoring cancer progression and improving patient therapy. The Company is currently evaluating other genes associated with cancer for potential product development. There can be no assurance that the p53 probe array or other cancer products will be developed, receive regulatory approvals or be successfully commercialized. 35 OTHER APPLICATIONS. The Company is developing its GeneChip technology to address other applications in pharmaceutical research, such as monitoring drug metabolism. Monitoring drug metabolism is an essential component in drug development. Drug metabolism determines how quickly or slowly a drug is eliminated or rendered inactive and whether any of the drug is processed into a toxic compound. Genetic differences among patients are an important factor in drug metabolism. Variations in drug metabolism are important to the development of new drugs because these variations determine how patients will react to drugs and which drugs will have relatively uniform effects across a broad population. Certain of the genes coding for metabolic enzymes have been identified and sequenced by researchers. Patients who have mutations in these genes are poor metabolizers of drugs and may suffer from excessive drug accumulation and severe toxicity from standard drug doses. Affymetrix is collaborating with HP to develop a GeneChip probe array with probes containing the gene sequence of mutations in two genes coding for metabolic enzymes. Mutations in these two genes have been associated with patients who are poor metabolizers of numerous drugs. HP will have worldwide marketing rights for the probe arrays in the nonclinical market, which are to be manufactured and supplied by the Company. The Company is entitled to royalties and revenues, if any, from the supply of these probe arrays to HP. There can be no assurance that these DNA probe arrays will be developed or commercialized or will result in revenues to the Company. NEW DIAGNOSTIC MARKERS. As genes are discovered through the Human Genome Project and related efforts, the Company believes that additional correlations will be found between genes and disease. Affymetrix believes that by using probe arrays to monitor the levels of expression of many genes in parallel, it will be able to identify proteins encoded by these genes that can serve as new markers for conventional immunoassays. The Company intends to collaborate with diagnostic companies to incorporate such protein markers into established immunoassay formats. There can be no assurance that the Company will be able to identify any new markers, negotiate such collaborative agreements on acceptable terms, if at all, or that such collaborations will be successful. There can be no assurance that any products for diagnostic applications 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. MANUFACTURING The Company's strategy is to manufacture its disposable DNA probe arrays in-house and contract with third-party suppliers to manufacture the fluidics station and scanner for its GeneChip system. The Company is currently manufacturing limited quantities of probe arrays for internal and collaborative purposes and for initial product sales for research use. 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. 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's probe array synthesis, dicing and assembly processes currently use robotics and the Company's manufacturing process is partially automated. The Company intends to further automate the manufacturing process. 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 acheived in a timely manner or at commercially reasonable costs. Affymetrix has developed software programs that automatically design photolithographic masks used in probe array manufacturing and control the probe array manufacturing lines. The Company relies on outside vendors to manufacture its fluidics stations and scanners. The Company has a supply agreement with Molecular Dynamics for its current scanner, which can read up to 64,000 features per 36 1.28X1.28 centimeter probe array. The Company's HIV probe array currently has 20,000 features on a 1.28X1.28 centimeter probe array and may be used with the Molecular Dynamics scanner. The Company expects to purchase scanners from Molecular Dynamics through the end of 1996. As part of the Company's collaboration with HP, HP is developing a higher resolution scanner. The HP scanner is designed to read probe arrays with up to 400,000 features per 1.28X1.28 centimeter probe array. The Company expects that the HP scanner will be commercially available for use with the Company's probe arrays in 1997. The fluidics stations currently in the field are prototype versions that were manufactured by the Company. The Company has entered into an agreement with RELA, a private company, for the supply of fluidics stations. Pursuant to the Company's supply agreement with RELA, the Company must provide a six-month rolling forecast of its purchase requirements for fluidics stations and is obligated to make certain minimum purchases, at prices that vary depending on the volume ordered. There can be no assurance that the HP scanner will be developed successfully. Further, no assurance can be given that probe array scanners, fluidics stations or reagents 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 suppliers 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 instruments and includes DNA probe arrays, which are produced in an innovative and complicated manufacturing process. During the beta testing phase of the GeneChip system's development, the Company and its vendors have encountered and satisfactorily addressed a number of technical problems, including software failures, improper alignment of probe array wafers, valve and tube failures in the fluidics station, sensor wiring issues and scanner control problems. Due to the complexity and lack of operating history of these products, the Company anticipates that additional technical problems may occur or be discovered as more systems are placed into operation. If these problems cannot be readily addressed, they could cause delays in shipments, warranty expenses and damages to customer relationships, which would have a material adverse effect on the Company's business, financial condition and results of operations. Although the Company does not currently need to comply with GMP to manufacture probe arrays and related instrumentation for sale for research purposes, it may need to be GMP compliant to sell these products to clinical reference laboratories and it will need to be compliant to sell these products for clinical use. 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 a commercially reasonable cost. SALES AND MARKETING The Company intends to market the GeneChip system for diagnostic applications through direct sales efforts and collaborative arrangements with corporate partners and distributors. The Company intends to market the GeneChip system for genomics applications through collaborations with corporate partners. The Company's near term strategy is to commercialize the GeneChip system for research use only. The Company's longer term strategy is to seek regulatory approval for and to commercialize GeneChip systems as diagnostic tests for clinical use. To date, the Company has placed nine systems for research use in the United States. Five of these systems are for HIV applications. The Company believes that the primary market for diagnostic applications in the United States will be academic research centers, pharmaceutical and biotechnology companies and reference laboratories. The Company intends to establish a direct sales force to market to these potential customers for research use. The Company believes that academic research centers could use the GeneChip system in their disease related research. Affymetrix believes pharmaceutical companies could use the GeneChip system to study genetic variations in patients participating in clinical trials of new drugs. Currently, there are three major reference laboratory companies in the United States, two of which are associated with large pharmaceutical companies. 37 These reference laboratories are specialized laboratories at multiple locations that conduct complex testing for the diagnosis and monitoring of disease and clinical trials and testing for pharmaceutical and biotechnology companies. The Company believes that each of these reference laboratories could be a customer for the GeneChip system and may require multiple systems at each location depending on the volume and complexity of the tests. The Company believes that the primary international customers for diagnostic applications of its GeneChip system will be academic research centers, pharmaceutical and biotechnology companies, and independent testing laboratories. The Company initially intends to market to these customers through collaborative partners. To date, the Company has not placed any of its GeneChip systems outside the United States. Affymetrix believes that the primary customers for genomics applications of its GeneChip system will be pharmaceutical and biotechnology companies that would use the GeneChip system in the discovery of new therapeutics. Affymetrix intends to market to these customers directly and to form non-exclusive contracts for the design, manufacture and supply of custom GeneChip probe arrays. Affymetrix currently has a small internal technical support group to service its GeneChip system, which the Company intends to expand as necessary. The Company believes that it will need to develop a larger technical support infrastructure to service these collaborations. Under the Company's collaboration with HP, HP has worldwide rights to market GeneChip systems in specified nonclinical markets. Affymetrix has the right to market the system in the clinical diagnostic market, subject to HP's option to certain rights in selected clinical markets. Market acceptance will depend on many factors, including convincing researchers 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 on the Company's probe arrays. Market acceptance may be adversely affected by ethical concerns that may limit the use of the GeneChip system for certain diagnostic 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 centers that are the potential customers for the GeneChip system. 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 a direct sales force or to establish 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. RESEARCH AND DEVELOPMENT The Company believes that substantial investment in research and development is essential to obtaining a competitive position in the genetic information and diagnostics markets. Affymetrix focuses on three types of research and development: applied research, including diagnostic product research and discovery; core technology development, including manufacturing process refinement, new instrumentation design, and novel chemical synthesis; and basic research to explore and expand the potential uses of DNA probe arrays and to discover new technologies. APPLIED RESEARCH. Affymetrix has several diagnostic research projects in three major diagnostic fields: infectious disease, cancer and other diseases. In the infectious disease area, the Company is evaluating probe array applications for several infectious organisms, such as tuberculosis and CMV. The Company's research in cancer is focused on monitoring mutations associated with cancer progression and the discovery of diagnostic markers for cancers such as breast and colorectal cancers. The Company has a collaboration with Dr. Francis Collins at the NIH for the development of probe arrays directed to the detection of certain mutations believed to be associated with the development of breast cancer. Other research efforts at Affymetrix are currently focused on developing probe arrays for the diagnosis of genetic diseases and certain other disorders. Affymetrix has conducted a feasibility study funded by Roche to 38 develop a probe array to detect mutations causing cystic fibrosis. Affymetrix also intends to initiate research programs based on known markers, such as HLA, for determining compatibility for tissue transplants. The Company intends to initiate research programs to discover novel markers for prevalent chronic human diseases, such as cardiovascular disease, osteoporosis and arthritis. CORE TECHNOLOGY DEVELOPMENT. The Company conducts research in several areas, including novel and improved synthesis chemistries, manufacturing processes, new manufacturing instrumentation, and enhancements in the design of fluidics stations and scanners. A significant research effort is dedicated to designing data analysis software to extract information from DNA probe arrays. BASIC RESEARCH. Affymetrix' basic research efforts are focused on expanding the applications of the GeneChip system and discovering related new technologies. These efforts are focused on improving sensitivity, increasing capacity and conducting more complex assays. The Company's research and development expenses for the years ended December 31, 1995, 1994 and 1993, were $12.4 million, $9.5 million and $6.6 million respectively. Research and development expenses for the three-month period ended March 31, 1996 and 1995 were $4.2 million and $2.3 million, respectively. Genomics and diagnostic technologies have undergone and are expected to continue to undergo rapid and significant change. Rapid technological development by the Company or others may result in products or technologies becoming obsolete. In addition, any 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 is no assurance that the Company will be able to make the enhancements to its technology necessary to compete successfully with newly emerging technologies. COLLABORATIVE AGREEMENTS AND GRANTS The Company's strategy regarding collaborative agreements is to expand the applications of the Company's technology and to acquire access to complementary technologies and resources, such as manufacturing and marketing, from its collaborative partners. Accordingly, the Company's agreements emphasize preserving the Company's rights to technological improvements and future business opportunities rather than large up-front fees or sizeable commitments of research funding from its partners. GENETICS INSTITUTE, INC. In November 1994, the Company entered into a collaboration with GI to develop and apply new technologies for understanding the functions of human genes. Under the agreement, GI provides research funding to the Company for the development of DNA probe arrays used in DNA sequence analysis to enable GI to discover new genes and uses for genes and to rapidly screen for the expression of specified genes in both normal and diseased tissues. The initial term of the research collaboration with GI is three years. In the event that the specified technical milestones are achieved prior to such time, GI and the Company may either conclude the collaboration or agree to continue the collaboration with additional milestones for the remainder of the three years. The agreement provides that if the Company enters into similar agreements for gene expression with other third parties, it may be required to refund a portion of the development funding received from GI and future funding may be proportionately reduced. As a result of the agreement entered into with Incyte in April 1996, the Company expects to refund a portion of such funding to GI in 1996. In addition, either party has the right to terminate the collaboration for lack of feasibility or if the parties cannot reach agreement on certain matters, in which event the Company could be obligated to refund up to 50% of the funding paid by GI. Until five years from the end of the research collaboration, Affymetrix has agreed to supply custom probe arrays to GI for gene discovery and gene expression research in certain designated fields in return for specified payments. In addition, upon the achievement of technical milestones, GI pays Affymetrix milestone payments. Until November 1999, the Company cannot develop probe arrays duplicating specific characteristics of those developed for GI. Thereafter, the Company can sell such probe arrays, provided that they do not contain proprietary sequences or other confidential information belonging to GI. GI will have all rights to therapeutic 39 compounds discovered through the use of DNA probes provided by the Company, and the Company will receive royalties on certain such therapeutic compounds. The Company retains all rights to enhancements to the GeneChip system technology developed in the collaboration. In December 1995, the Company and GI expanded their relationship by entering into a supply agreement in the field of genomics under which the Company will manufacture and supply additional custom probe arrays based on specific genes identified and selected by GI. Unlike the 1994 agreement with GI, this agreement does not provide research funding to the Company. Pursuant to the agreement, GI is obligated to purchase and the Company is obligated to supply certain minimum quantities of the custom probe arrays developed for GI until the later of 2001 or four years after development of specified probe arrays. The Company will receive fees for the design and delivery of the custom probe arrays, as well as certain milestone payments and royalties on most therapeutic compounds if developed by GI using these probe arrays. GI has exclusive rights to specific probe arrays supplied by the Company. As of March 31, 1996, the Company had received a total of $1.8 million from GI, a portion of which is subject to refund. HEWLETT-PACKARD COMPANY In November 1994, the Company entered into a collaborative agreement with HP to combine the Company's GeneChip technology and HP's measurement and instrument capabilities to develop and manufacture a more advanced scanner for use with GeneChip probe arrays. Pursuant to the agreement, the Company will develop and manufacture probe arrays and HP will develop and manufacture instruments to read the arrays. Each of the parties is obligated to supply the components of the system developed by it to the other party. Under certain circumstances, if either party ceases to supply its component, the other party could obtain the manufacturing rights to such component. The agreement also specifies marketing rights outside of the clinical market in certain non-clinical fields. HP has primary rights to market the GeneChip system to the bioanalytical market, and the Company has primary rights to market the GeneChip system in the biomedical research market. The Company has rights to market the system for clinical use, subject to HP's option to certain rights in selected clinical markets. The Company also has reserved rights to supply custom probe arrays for collaborations in the genomics field. As of March 31, 1996, the Company had received a total of $3.0 million from HP under this collaboration, consisting of research funding, license fees and option payments. The Company is also entitled to receive certain milestone payments and royalties on HP's sales of the GeneChip system and HP is entitled to receive royalties on any systems sold by the Company. The collaboration is for a five-year term and is renewable for consecutive three-year terms thereafter, subject to either party's right to terminate on six months notice. Pursuant to the agreement, the Company, in collaboration with HP, will manufacture and supply a limited number of custom probe array designs for HP in the nonclinical field. HP also has a one-year option, to sponsor the development of custom probe arrays in certain specified fields and to obtain exclusive rights to such probe arrays. In the event that HP exercises such option, the Company will be required to develop the probe arrays on a timely basis. If the Company fails to provide the requested probe arrays, it will be required to grant HP rights to develop and manufacture such probe arrays, subject to the payment of established royalty rates to the Company. 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 National Institute of Standards and Technology's Advanced Technology Program. 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 diagnostic tests. The device would be used in point-of-care settings, such as hospitals, clinics and doctors' offices. The research agreements between the Company and its subcontractors under the ATP grant (the University of 40 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 March 31, 1996, the Company had received $1.4 million under the ATP grant. The grant is subject to yearly appropriations by the United States Congress for the ATP program, and legislation has been introduced to eliminate the 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 received a three-year grant for approximately $6.0 million from the NIH National Center for Human Genome Research, for a project entitled "Sequencing and Mapping with DNA Probe Arrays." Under the project, the Company is developing applications of DNA probe arrays for larger scale gene sequencing 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. The Company has been awarded approximately $2.0 million for the first year of the grant, and the remaining amounts are subject to yearly appropriations by the NIH. There can be no assurance that the NIH will obtain the necessary funding from the United States Congress to continue to fund this grant. OTHER AGREEMENTS The Company has agreements with several entities to develop and test probe arrays for the detection of certain gene sequences, mutations or organisms. These include a one-year feasibility agreement with Roche Molecular Systems, Inc., entered into in November 1995, for detection of certain mutations associated with the cystic fibrosis transmembrane regulator (CFTR) gene, a six-month feasibility agreement with Incyte, entered into in April 1996 to evaluate the use of DNA probe arrays to generate gene expression data, and a development and supply agreement entered into in May 1996 with Glaxo for detection of polymorphisms in specific genes, which has a term of up to three years. 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. For example, the Company has an agreement with Dr. Francis Collins at the NIH for the development of probe arrays to detect certain mutations believed to be associated with the development of breast cancer, and an agreement with Dr. Eric Lander at the Whitehead Institute for Biomedical Research at MIT to collaborate in the investigation of single nucleotide polymorphism markers using DNA probe arrays. 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. 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. There can be no assurance that the Company will be able to maintain its current collaborations, negotiate collaborative arrangements on acceptable terms, if at all, or that any collaborations will be successful. INTELLECTUAL PROPERTY As of April 15, 1996, Affymetrix had exclusive licenses from Affymax for over 20 patents and patent applications in the United States related to its business in the fields of clinical diagnostics and research supply. In addition, Affymetrix is the assignee of 52 United States patent applications and one issued patent in the United States. 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 41 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 copyright and trade secrets and to operate without infringing the proprietary rights of third parties. In 1993 Affymetrix and Affymax entered into a technology license agreement (the "Technology License Agreement") pursuant to which Affymax granted to Affymetrix an exclusive, worldwide, royalty-free license with right to sublicense, among other things, certain patents and patent applications (and any foreign counterparts) to develop, make, use and sell certain products for the clinical diagnostic and research supply markets, including rights to sell DNA probe arrays. The patents licensed to Affymetrix include those for the light-directed synthesis technology and for several other technologies. Affymetrix has the exclusive right to sell DNA probe array technology for DNA sequencing and sequence analysis. The Company's rights to the other technologies are for the fields of diagnostics and analytical and bioanalytical tests, and do not include other fields such as drug discovery. In addition, Affymax granted to Affymetrix an exclusive license to certain trademarks, including "Affymetrix." Pursuant to the Technology License Agreement, Affymax also granted to Affymetrix certain rights to future inventions made by, or on behalf of, Affymax to use such inventions for the development and commercialization of, among other things, certain products in the clinical diagnostics and research supply markets, including rights to sell DNA probe arrays. These rights consist of either an exclusive, worldwide royalty-free license with right to sublicense or a right of first negotiation covering such inventions made during the period until July 2000. In turn, Affymetrix granted to Affymax certain parallel rights to future inventions made by, or on behalf of, Affymetrix during the same period for the development and commercialization of products in drug discovery and related fields, not including those related to DNA sequence analysis. The rights granted to Affymax consist of an exclusive, worldwide royalty-free license with right to sublicense, to develop and commercialize any new Affymetrix technology that is dominated by one or more patents licensed to Affymetrix in drug discovery and related fields, and the right of first negotiation with respect to other Affymetrix inventions in these fields, not including those related to DNA sequence analysis. In addition, Affymetrix agreed to notify Affymax in advance of its intention to sell certain products in the research supply market to ensure that such products cannot be used for drug discovery, as reagents for IN VIVO imaging or certain other related purposes. The Company is party to various license option agreements with third parties (including Stanford University and the University of California) which give it rights to use certain technologies. Failure of the Company to maintain rights to such technology could have a material adverse effect on the Company's business, financial condition and results of operations. For example, inability of the Company to exercise the option for the Stanford technology under commercially reasonable terms could have an adverse effect on the ability of the Company to sell certain of its products. The patent positions of pharmaceutical, biopharmaceutical 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 could incur substantial costs in litigation if it is required to defend itself in patent suits brought by third parties or if 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, and there is no assurance such a license will be available on commercially reasonable terms. 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 42 scanners, synthesis techniques, oligonucleotide amplification techniques, assays, and probe arrays. There can be no assurance that the Company will not infringe on these patents, other patents or proprietary rights of third parties. In addition, the Company has received and may in the future receive a notice claiming infringement from third parties as well as invitations to take licenses under third party patents. Any 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 partner to obtain a license in order to continue to manufacture or market the affected products and processes. There can be no assurance that the Company or its collaborative partners would prevail in any such action or that any license (including licenses proposed by third parties) required under any such patent would be made available on commercially acceptable terms, if at all. 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 may be significant litigation in the industry regarding patent and other intellectual property rights. If the Company becomes involved in such litigation, it could consume a substantial portion of the Company's managerial and financial resources, which could have a material adverse effect on the Company's business, financial condition and results of operations. Others may have filed and in the future are likely to file patent applications that are similar or identical to those of the Company. To determine the priority of inventions, the Company may 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 may 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 meaningly 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 some genes in which it may have a commercial interest. COMPETITION Competition in genomics and diagnostics is intense and expected to increase. Further, the technologies for discovering genes 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, Boehringer Mannheim GmbH, Roche, 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 field, competitive technologies include gel-based sequencing using instruments provided by companies such as the 43 Applied Biosystems division of Perkin Elmer and Pharmacia Biotech AB. 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. The market for diagnostic 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 significant 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. In the genomics field, future competition 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 Genome Therapeutics Corporation, Human Genome Sciences, Inc., Incyte, Millenium Pharmaceuticals, Inc., Myriad Genetics, Inc. and Sequana Therapeutics, Inc. have significant needs for genomic information and may choose to develop or acquire competing technologies to meet these needs. GOVERNMENT REGULATION The Company anticipates that the manufacturing, labeling, distribution and marketing of some or all of the Company's diagnostic products will be subject to government regulation in the United States and in certain other countries. In the United States, the FDA regulates, as medical devices, most diagnostic tests and IN VITRO reagents that are marketed as finished test kits or equipment. Some clinical laboratories, however, purchase individual reagents intended for specific analytes, and, using those reagents, to develop and prepare their own finished diagnostic tests. Although the FDA has not generally exercised regulatory authority over these individual reagents or the finished tests prepared from them by the clinical laboratories. The FDA has recently proposed a rule that, if adopted, would regulate reagents sold to clinical laboratories as medical devices. The proposed rule would also restrict sales of these reagents to clinical laboratories certified under CLIA as high complexity laboratories. The Company intends to market some diagnostic products as finished test kits or equipment and others as individual reagents; consequently, some or all of 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 ("PMA"). Some of the Company's products 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 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). 44 There can be no assurance that the Company 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 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 510(k) clearance or PMA, 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 would be required to comply with the FDA's GMP regulations, which require that medical devices be manufactured and records be maintained in a prescribed manner with respect to manufacturing, testing and control activities. Further, the Company would be required to comply with FDA requirements for labeling and promotion of its medical devices. For example, the FDA prohibits cleared or approved devices from being marketed for uncleared or unapproved uses. In addition, the medical device reporting regulation would require that the Company provide information to the FDA whenever there is evidence to reasonably suggest that one of its devices may have caused or contributed to a death or serious injury, or that there has occurred a malfunction that would be likely to cause or contribute to a death or serious injury if the malfunction were to recur. Medical device manufacturers are subject to periodic inspections by the FDA and state agencies. Additionally, 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 letter apprising of violative conduct, detain or seize products, issue a recall, enjoin future violations and assess civil and criminal penalties against the company, its officers or its employees. In addition, clearances or approvals could be 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. Medical device laws and regulations are also in effect in some states in which the Company does business. 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. In addition, federal, state and foreign laws and regulations regarding the manufacture and sale of medical devices are subject to future changes. For example, the FDA is currently considering significant changes to its GMP and to other regulations. 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 the 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 45 diagnostic products. Therefore, there can be no assurance that the CLIA regulations and future administrative interpretations of CLIA will not have a material adverse impact on the Company 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 and disposal of hazardous materials. Any violation of, and the cost of compliance with, these regulations could have a material adverse effect on the Company's business, financial condition and results of operations. REIMBURSEMENT The Company's ability to successfully commercialize its products may depend on the Company's ability to obtain adequate levels of third-party reimbursement for use of certain diagnostic tests, in the United States, European and other countries. Currently, the availability of third-party reimbursement is limited and uncertain for genetic tests. 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 device or diagnostic test 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 Company's ability to commercialize certain of its products successfully may depend on the extent to which appropriate reimbursement levels for the costs of such products and related treatment are obtained from government authorities, private health insurers and other organizations, such as HMOs. Third-party payors are increasingly challenging the prices charged for medical 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 services and products, as well as legislative proposals to reform health care or reduce government insurance programs, may all result in lower prices for certain of the Company's products. The cost containment measures that health care providers are instituting and the impact of any health care reform could have an adverse effect on the Company's ability to sell certain of its products and may have a material adverse effect on the Company's business, financial condition and results of operations. EMPLOYEES As of March 31, 1996, Affymetrix had 117 full-time employees, 29 of whom hold Ph.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 or 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 its relations with its employees are good. FACILITIES Affymetrix subleases 47,000 square feet in Santa Clara, California from Affymax for research laboratories and administrative offices under a lease expiring in 1996. The Company has an option to renew the lease on this facility for an additional seven 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. The Company expects to add to its existing facilities over the next few years. See "Certain Transactions." LEGAL PROCEEDINGS The Company is not a party to any legal proceedings. SCIENTIFIC ADVISORY BOARD The Company's scientific advisors have made significant contributions to the development of Affymetrix technologies. Each scientific advisor spends between one day per week and one day per quarter working on Company projects. Scientific advisors are compensated on a retainer or per diem basis and have options to acquire Common Stock of the Company subject to vesting during continued service. 46 PAUL BERG, PH.D., is Cahill Professor in Cancer Research, Professor of Biochemistry and Director of the Beckman Center for Molecular and Genetic Medicine at Stanford University School of Medicine. He received the Nobel Prize in Chemistry in 1980, the National Medal of Science in 1983 and is a member of the National Academy of Sciences, the Royal Society, London, and the French Academy of Sciences. Dr. Berg also serves as a member of the Company's Board of Directors. RONALD W. DAVIS, PH.D., is Professor of Biochemistry and Genetics at Stanford University Medical School. He was elected to the National Academy of Sciences in 1983 and has received numerous awards for his contributions to the field of genetics. He has published more than 155 papers. Dr. Davis' research focuses on developing new technologies and instrumentation to study genomic organization and whole genome analysis, including whole genome DNA sequencing, gene expression, gene deletion, functional analysis, protein interaction, and point mutational analysis. ERIC LANDER, D. PHIL., is a director of Whitehead Institute/MIT Center for Genome Research and Professor of Biology at the Massachusetts Institute of Technology. Dr. Lander was a MacArthur Prize Fellow from 1987 to 1992 and serves as Chair of the Genome Research Review Committee of the National Center for Human Genome Research. Dr. Lander's research focuses on genetic mapping and genome structure in the mouse and human, genetic analysis of polygenic traits and population genetics of human diseases. JOSHUA LEDERBERG, PH.D., is Sackler Foundation Scholar and Research Geneticist at Rockefeller University, where he was President from 1978 to 1990. Dr. Lederberg received the Nobel Prize in Medicine in 1958 for his research in the genetic structure and function of microorganisms and in 1989 was awarded the National Medal of Science. Dr. Lederberg has been involved in artificial intelligence programs and has served on the Advisory Health Research Council of the World Health Organization for many years. RICHARD A. MATHIES, PH.D., is Professor of Chemistry at the University of California, Berkeley. Dr. Mathies is an expert on the development of new methods for the detection and analysis of biomolecules, such as capillary array electrophoresis and photolithographic chemical analysis systems. Dr. Mathies is assisting Affymetrix with high sensitivity fluorescence detection methodologies, photophysics and the development of microchemical nucleic acid preparation and analysis systems. Dr. Mathies received an NIH Merit Award in 1991 and the American Society for Photobiology Research Award in 1989. He has received fellowships from the Helen Hay Whitney and Alfred P. Sloan Foundations. R. FABIAN PEASE, PH.D., is Professor of Electrical Engineering at Stanford University. Dr. Pease's current research focuses on micro- and nano-lithography, novel ultra-small electron devices, and advanced packaging concepts. From 1971 to 1978, he was supervisor of the electron beam exposure group at Bell Laboratories, where he and his colleagues developed the electron beam mask-making process that was the semiconductor industry standard for over a decade. Dr. Pease is assisting Affymetrix with the application of very large scale integrated circuit technology to the development of the Company's light-directed synthesis technology. CALVIN F. QUATE, PH.D., is Professor of Applied Physics and Electrical Engineering at Stanford University. Dr. Quate served as senior Research Fellow of the Xerox Palo Alto Research Center from 1984 to 1994. He is a director of Tencor Instruments and Park Scientific Instruments. Dr. Quate's awards include the IEEE Morris N. Liebmann Award (1981), Rank Prize for Opto-Electronics (1982), IEEE Achievement Award, Ultraoxics, Ferroelectrics and Frequency Control Society (1986), IEEE Medal of Honor (1988), President's National Medal of Science (1992) and Foreign Member Royal Society (1995). LUBERT STRYER, M.D., Chairman of the Scientific Advisory Board, is Winzer Professor in the School of Medicine and Professor of Neurobiology at Stanford University. He served as President and Scientific Director of Affymax Research Institute and Managing Director of Affymax in 1989 and 1990. He is a co-inventor of the Company's light-directed synthesis technology. Dr. Stryer has pioneered the development of novel fluorescence detection techniques and holds ten patents involving fluorescence and light-activated chemical synthesis. Dr. Stryer is the author of BIOCHEMISTRY, a major text used widely in colleges and universities around the world. Dr. Stryer received the American Chemical Society Award in Biological Chemistry (the Eli Lilly Award) and is a member of the National Academy of Sciences and received an honorary Doctor of Science from the University of Chicago. 47 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The executive officers and directors of the Company, and their ages as of March 31, 1996, are as follows:
NAME AGE POSITION ------------------------------------------ --- --------------------------------------------------------------- John D. Diekman........................... 53 Chairman and Chief Executive Officer Stephen P.A. Fodor........................ 42 President, Chief Operating Officer and Director Paul M. Kaplan............................ 50 Vice President of Product Development Vernon A. Norviel......................... 37 Vice President and General Counsel Kenneth J. Nussbacher..................... 43 Executive Vice President and Chief Financial Officer Richard P. Rava........................... 38 Vice President of Research and Engineering Paul Berg (1)............................. 69 Director Douglas M. Hurt (2)....................... 39 Director Vernon R. Loucks, Jr...................... 61 Director Barry C. Ross............................. 47 Director David B. Singer (2)....................... 33 Director John A. Young (1)(2)...................... 64 Director Alejandro C. Zaffaroni (1)................ 73 Director
------------ (1) Member of the Compensation Committee (2) Member of the Audit Committee JOHN D. DIEKMAN, PH.D., has served as a Director of the Company and Chairman since the Company's inception and was appointed Chief Executive Officer in July 1995. Dr. Diekman served as President and Chief Operating Officer of Affymax from July 1991 to March 1995 and as Chairman of the Affymax Board of Directors from July 1994 to July 1995. Prior to 1991, Dr. Diekman served as President of Monoclonal Antibodies Inc. (now Quidel Corp.), a diagnostic products company; Salutar, Inc., an IN VITRO diagnostic company; and Zoecon Corporation, an agrochemical company. Dr. Diekman also currently serves as a director of Quidel Corp. STEPHEN P.A. FODOR, PH.D., is the President and Chief Operating Officer of the Company and has been a Director of the Company since February 1993. From September 1994 to July 1995, he served as President and Chief Technical Officer and, from February 1993 until September 1994, as Chief Technical Officer of the Company. Dr. Fodor previously was Vice President and Director of Physical Sciences at the Affymax Research Institute. For the invention of the photolithographic synthesis technology used by the Company to manufacture its probe arrays, Dr. Fodor and his colleagues were awarded the 1992 AAAS Newcomb-Cleveland Prize for the best research article published in SCIENCE and the 1993 "Distinguished Inventor Award" from the Intellectual Property Owners' Association. PAUL M. KAPLAN, PH.D., has been Vice President of Product Development since joining the Company in April 1994. From 1988 to 1994, Dr. Kaplan served as Vice President, Research and Development of the Diagnostic Division at Centocor, Inc., where he was responsible for the identification, development and commercialization of a variety of proprietary immunoassay products. VERNON A. NORVIEL, J.D., was appointed Vice President and General Counsel of the Company in February 1996. From 1989 to 1996, as a partner with Townsend and Townsend and Crew LLP ("Townsend"), Mr. Norviel led the intellectual property and patent prosecution efforts of the Company. Mr. Norviel continues as a partner with Townsend on a part time basis. KENNETH J. NUSSBACHER, J.D., joined the Company in September 1995 as Executive Vice President and Chief Financial Officer. From 1989 to 1995, Mr. Nussbacher held various management positions at Affymax, most 48 recently as Executive Vice President for Business and Legal Affairs and Managing Director of Affymax Technologies N.V. Prior to 1989, Mr. Nussbacher practiced intellectual property law in the high technology field as General Counsel of Daisy Systems, as Vice President, Intellectual Property for Atari, Inc., and with Kirkland & Ellis, in Chicago. RICHARD P. RAVA, PH.D., has served as Vice President of Research and Engineering since September 1994. Dr. Rava joined the Company in February 1993 as Director of Biomedical Engineering. From 1992 to 1993, Dr. Rava was a Senior Scientist at Affymax Research Institute. From 1990 to 1992, he was a Principal Research Scientist in the George R. Harrison Spectroscopy Laboratory at MIT and the research coordinator for the NIH Laser Biomedical Research Center at MIT. PAUL BERG, PH.D., has been a Director of the Company since August 1993. Dr. Berg is Cahill Professor in Cancer Research, Professor of Biochemistry and Director of the Beckman Center for Molecular and Genetic Medicine at Stanford University School of Medicine. He received the Nobel Prize in Chemistry in 1980, the National Medal of Science in 1983 and is a member of the National Academy of Sciences, the Royal Society, London, and the French Academy of Sciences. Dr. Berg also serves as a member of the Company's Scientific Advisory Board. DOUGLAS M. HURT, a Director of the Company since June 1995, is Senior Vice President and Chief Financial Officer of Glaxo. Mr. Hurt has held various financial management positions at Glaxo since 1983 and was designated by Glaxo to serve on the Board of Directors. VERNON R. LOUCKS, JR., has been a Director of the Company since August 1993. Mr. Loucks has served as Chief Executive Officer of Baxter International Inc. ("Baxter") since 1980 and Chairman of Baxter since 1987. Mr. Loucks also serves as a director of The Dun and Bradstreet Corp., Emerson Electric Co., Quaker Oats Co. and Anheuser-Busch Companies, Inc. BARRY C. ROSS, PH.D., a Director of the Company since March 1995, has served as Director of Group Research Strategy and Alliances at Glaxo Wellcome Research and Development Ltd. since 1995. Dr. Ross joined Glaxo in 1984 and served as Director, Medicinal Chemistry from 1989-93 and was designated by Glaxo to serve on the Board of Directors. DAVID B. SINGER, a Director of the Company since February 1993, served as Vice Chairman from July 1995 to April 1996. From February 1993 to June 1995, Mr. Singer was President and Chief Executive Officer of the Company. He served as Vice President of Finance and Treasurer of Affymax from 1991 to 1993 and as Director of Corporate Development at Affymax from 1990 to 1991. JOHN A. YOUNG, a Director of the Company since August 1993, is the retired President and Chief Executive Officer of Hewlett-Packard Co. Mr. Young also serves as a director of Wells Fargo & Company, Chevron Corp., SmithKline Beecham Corp., Novell, Inc., Ciphergen Bio Systems, Inc., General Magic, Inc., Shaman Pharmaceuticals, Inc. and is a member of the Business Council. ALEJANDRO C. ZAFFARONI, PH.D., a founder of the Company, has served as a Director since February 1993. Dr. Zaffaroni is also the founder of Affymax, ALZA Corporation ("ALZA"), DNAX Research Institute of Molecular & Cellular Biology, Inc. and a co-founder of Syntex. Dr. Zaffaroni served as Chairman of Affymax from its inception to July 1994 and as Chief Executive Officer and Managing Director of Affymax from its inception until its acquisition by Glaxo Wellcome in March 1995. He served as Chairman and Chief Executive Officer of ALZA from 1968 to 1987 and has been Co-Chairman of ALZA since 1987. BOARD OF DIRECTORS COMMITTEES AND OTHER INFORMATION All directors are elected at the annual meeting of shareholders and hold office until the election and qualification of their successors at the next annual meeting of shareholders. Officers of the Company serve at the discretion of the Board of Directors. There are no family relationships among the Company's directors and executive officers. The Board of Directors currently has an Audit Committee and a Compensation Committee. The Audit Committee oversees the actions taken by the Company's independent auditors and reviews the Company's 49 internal financial and accounting controls and policies. The Compensation Committee is responsible for determining salaries, incentives and other forms of compensation for officers and other employees of the Company and administers various incentive compensation and benefit plans. DIRECTOR COMPENSATION During the fiscal year ending December 31, 1995, John D. Diekman, Stephen P.A. Fodor and David B. Singer received the cash compensation described under "Management -- Executive Compensation." During the same fiscal year each of the remaining directors received a cash payment of $2,500 for each meeting attended plus reasonable expenses. In December 1995, each nonemployee director received an option to purchase 33,333 shares of Common Stock at $0.675 per share under the Company's Stock Plan. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Compensation Committee is responsible for determining salaries, incentives and other forms of compensation for officers and other employees of the Company and administers various incentive compensation and benefit plans. The Compensation Committee consists of Paul Berg, John A. Young and Alejandro C. Zaffaroni. Stephen P.A. Fodor, President and Chief Operating Officer of the Company, participates in all discussions and decisions regarding salaries and incentive compensation for all employees and consultants of the Company, except that Dr. Fodor is excluded from discussions regarding his own salary and incentive compensation. EXECUTIVE COMPENSATION The following table sets forth certain compensation paid by the Company in the year ended December 31, 1995 to the Company's Chief Executive Officer, former Chief Executive Officer, and to the Company's other executive officers who earned in excess of $100,000 (collectively, the "Named Executive Officers"): SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS ------------- ANNUAL COMPENSATION SECURITIES ----------------------- UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS COMPENSATION ----------------------------------------------------------- ------------ --------- ------------- ------------- John D. Diekman Chief Executive Officer and Chairman...................... $ 97,304(1) $ -- 166,666 $ -- David B. Singer Former President and Chief Executive Officer.............. 183,010 -- 33,333 6,189 Stephen P.A. Fodor President and Chief Operating Officer..................... 188,819 -- 166,666 -- Paul M. Kaplan Vice President of Product Development..................... 146,218 -- 26,666 33,638(2) Richard P. Rava Vice President of Research and Engineering................ 136,962 -- 60,000 --
------------ (1) Represents Dr. Diekman's compensation commencing July 1, 1995, when he joined the Company. Prior to March 1996 when he became a full-time employee, Dr. Diekman devoted 80% of his time to the Company and 20% to Affymax. (2) Includes reimbursement for certain relocation expenses of $21,556 and housing allowances of $12,082. 50 STOCK OPTION GRANTS The following table contains information concerning the stock option grants made to each of the Named Executive Officers for the year ended December 31, 1995: OPTION GRANTS IN YEAR ENDED DECEMBER 31, 1995
INDIVIDUAL GRANTS --------------------------------------------------------- POTENTIAL REALIZABLE VALUE NUMBER OF AT ASSUMED ANNUAL RATES OF SECURITIES % OF TOTAL STOCK PRICE APPRECIATION UNDERLYING OPTIONS GRANTED EXERCISE FOR OPTION TERMS (1) OPTIONS TO EMPLOYEES IN PRICE PER EXPIRATION -------------------------- NAME GRANTED (2) FISCAL YEAR SHARE DATE 5% 10% ---------------------------- ------------- --------------- ------------- ---------- ------------ ------------ John D. Diekman............. 100,000 9.7% $ 0.675 07/01/05 $ 1,887,300 $ 3,045,300 66,666 6.5 0.675 12/20/05 1,258,200 2,030,200 David B. Singer............. 33,333 3.2 0.675 12/20/05 629,100 1,015,100 Stephen P.A. Fodor.......... 166,666 16.2 0.675 12/20/05 3,145,500 5,075,500 Paul M. Kaplan.............. 26,666 2.6 0.675 12/20/05 503,300 812,100 Richard P. Rava............. 60,000 5.8 0.675 12/20/05 1,132,400 1,827,200
------------ (1) Assumes a value of $12.00 for each share of Common Stock (the initial public offering price for this offering) on the date of grant. Potential gains are net of the exercise price but before taxes associated with the exercise. The 5% and 10% assumed annual rates of compounded stock appreciation are mandated by the rules of the Securities and Exchange Commission and do not represent the Company's estimate or projection of the future Common Stock price. Actual gains, if any, on stock option exercises are dependent on the future financial performance of the Company, overall market conditions and the option holders' continued employment through the vesting period. (2) Grants generally vest at a rate of 20% each year following the date of grant, as long as the optionee remains an employee with, consultant to, or director of, the Company. The maximum term of each option granted is ten years from the date of grant. The exercise price is equal to the fair market value of the stock on the grant date as determined by the Board of Directors. The following table sets forth for each of the Named Executive Officers certain information with respect to the exercise of options to purchase Common Stock during the year ended December 31, 1995 and the number of shares subject to both exercisable and unexercisable stock options as of December 31, 1995. AGGREGATE OPTION EXERCISES IN FISCAL YEAR-END AND FISCAL YEAR-END VALUES
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN- OPTIONS AT THE-MONEY OPTIONS AT SHARES DECEMBER 31, 1995 DECEMBER 31, 1995 (1) ACQUIRED ON VALUE -------------------------- -------------------------- NAME EXERCISE REALIZED (2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ------------------------- ----------- ----------- ----------- ------------- ----------- ------------- John D. Diekman.......... -- -- -- 166,666 -- $ 1,887,500 David B. Singer.......... -- -- 50,000 33,333 $ 566,200 377,500 Stephen P.A. Fodor....... -- -- 20,000 246,666 226,500 2,793,500 Paul M. Kaplan........... -- -- 8,000 58,666 92,600 672,000 Richard P. Rava.......... 10,000 $ 3,750 1,333 88,666 15,000 1,013,000
------------ (1) Based on an assumed initial offering price of $12.00 per share minus the exercise price. (2) Based on the fair market value at the date of exercise, as determined by the Board of Directors, minus the exercise price. 51 STOCK PLANS 1993 STOCK PLAN The Company's Stock Plan was adopted by the Board of Directors in February 1993, approved by the shareholders in July 1993 and has been subsequently amended. As of March 31, 1996, a total of 3,700,000 shares of Common Stock have been reserved for issuance under the Stock Plan. As of March 31, 1996, options to purchase a total of 543,254 shares of Common Stock had been exercised (of which 148,889 are subject to repurchase by the Company), options to purchase a total of 2,191,518 shares at a weighted average exercise price of $0.65 per share were outstanding, and 965,228 shares remain available for future option or purchase rights grants. The purpose of the Stock Plan is to attract, retain and motivate officers, key employees, consultants and directors of the Company by giving them the opportunity to acquire Stock ownership in the Company. The Stock Plan provides for the granting to employees of the Company (including officers and employee directors) of "incentive stock options" within the meaning of Section 422 of the Code, for the grant of nonstatutory stock options to employees and consultants of the Company, and for the grant of purchase rights providing for the direct sale of stock to eligible participants, subject to the Company's repurchase rights. To the extent an optionee would have the right in any calendar year to exercise for the first time incentive stock options for shares having an aggregate fair market value (under all plans of the Company and determined for each share as of the grant date) in excess of $100,000, any such excess options shall be automatically converted to a nonstatutory stock option. The Stock Plan is administered by the Board of Directors or a committee of the Board of Directors (the "Administrator"). The Administrator determines the type and terms of options and purchase rights granted under the Stock Plan, including the number of shares covered, exercise or purchase price, term and condition for exercise of the option or purchase right. The exercise price of all stock options granted under the Stock Plan must be at least 100% (85% for purchase rights) of the fair market value of the Common Stock of the Company on the grant date. The term of an incentive stock option may not exceed ten years from the date of grant. With respect to any participant who owns stock possessing more than 10% of the voting power of all classes of stock of the Company, the exercise price of any stock option granted shall be at least 110% (100% for purchase rights) of the fair market value of the Common Stock on the grant date and the term of such option may not exceed five years. Payment of the exercise price may be in cash, check, or, at the discretion of the administrator, by promissory notes or shares of stock held by the optionee or purchaser, or a combination thereof. No option may be transferred by the optionee other than by will or the laws of descent and distribution or pursuant to a qualified domestic relations order ("QDRO"). During the lifetime of an optionee, only the optionee (or the optionee's spouse pursuant to a QDRO) may exercise an option. An option shall be exercisable on or after each vesting date in accordance with the terms set forth in the option agreement; provided, however, that the right to exercise an option must vest at the rate of at least 20% per year over five years from the grant date. In the event of certain changes in control of the Company or a sale of substantially all its assets, the Administrator may cancel each outstanding option upon payment in cash to the optionee of the amount by which any cash and any other property which the optionee would have received for the shares of stock covered by the vested portion of the option exceeds the exercise price of the option. The Board may amend, suspend or terminate the Stock Plan as long as such action does not adversely affect any outstanding option or purchase right and provided that shareholder approval shall be required for any amendment to (i) increase the number of shares subject to the Stock Plan, (ii) materially change eligibility for the grant of options or purchase rights, or (iii) materially increase the benefits accruing to participants. If not terminated earlier, the Stock Plan will terminate in 2003. 1996 NONEMPLOYEE DIRECTORS STOCK OPTION PLAN The Company's Directors Plan was adopted by the Board of Directors in March 1996 and approved by the shareholders in April 1996. 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 52 only nonstatutory stock options can be granted. The Directors Plan provides that option grants to nonemployee directors of the Company are made on a mandatory basis and not on a discretionary basis. The Directors Plan may be administered by the Board of Directors or the Board may delegate its authority to a committee composed of not less than two outside directors (the "Administrator") and may delegate routine matters to management. If a person who is neither an officer nor an employee of the Company and who has not previously been a member of the Board is elected or appointed director, the Company is required to grant that person an initial 10-year option to purchase 33,333 shares of the Company's Common Stock at an exercise price equal to the fair market value of Common Stock on the date of grant. Each such option will become exercisable at the rate of one-fifth of the number of shares covered by the option on each anniversary of the grant date so long as the director is serving on the Board with full vesting over five years. In addition, on the date of each annual meeting of the shareholders of the Company held after January 1, 2001 for existing nonemployee directors who continue on the Board and after 54 months after the initial option grant to new nonemployee directors who continue on the Board, the Company will grant to each nonemployee director a ten-year option to purchase 6,667 shares of the Company's Common Stock, at an exercise price equal to the fair market value of Common Stock on the date of grant. These options will vest one year after grant. The consideration payable in connection with any option (including any related taxes) may be paid in cash, by promissory note of the nonemployee director or by delivery of shares of Common Stock of the Company. Options generally terminate three months after a nonemployee director ceases to be, for any reason, a director of the Company, with the following exceptions: if a nonemployee director ceases to be a director due to death, disability or retirement, the option may be exercised for 18 months after the termination. The Board may amend, alter, or discontinue the Directors Plan or any option at any time, except that the consent of a participant is required if the participant's existing rights under an outstanding option would be impaired. In addition, to the extent required under applicable tax and securities laws and regulations, the shareholders of the Company must approve any amendment, alteration, or discontinuance of the Directors Plan that would increase the total number of shares reserved under the Directors Plan and in certain other circumstances as the Board may deem advisable to comply with such laws and regulations. In addition, the provisions of the plan governing who is granted options, the number of shares covered by each option, the exercise price, and the period of exercisability and the timing of option grants may not be amended more than once every six months, other than for changes to comply with the Internal Revenue Code of 1986 or the Employee Retirement Income Security Act of 1974. In the event of a merger, consolidation, sale of all or substantially all of the Company's assets, or any like occurrence, the options will vest at twice the rates set forth above. LIMITATION OF DIRECTORS' LIABILITY AND INDEMNIFICATION The Company's Articles of Incorporation limit the liability of directors for monetary damages to the maximum extent permitted by California law. Such limitation of liability has no effect on the availability of equitable remedies, such as injunctive relief or rescission. The Company is also empowered under its Articles of Incorporation to enter into indemnification agreements with its directors and officers and to purchase insurance on behalf of any person whom it is required to indemnify. The Company's Bylaws provide that the Company will indemnify its directors and officers as a contractural obligation and may indemnify its employees and agents against certain liabilities to the fullest extent permitted by California law. The Company has entered into indemnification agreements with each of its current directors and officers or persons controlling the Company pursuant to the foregoing provisions. 53 CERTAIN TRANSACTIONS In September 1993, the Company sold an aggregate of 6,000,000 shares of Series A Preferred Stock (the "Series A") at $3.50 per share in a private placement transaction. In August 1995, in another private placement transaction, the Company sold an aggregate of 8,666,666 shares of Series B Preferred Stock (the "Series B") at $4.50 per share. The purchasers of the Series A and Series B (collectively, the "Preferred Stock") included, among others, the following executive officers and directors of the Company and investors known to own beneficially more than 5% of the Company's outstanding Common Stock (assuming conversion of all outstanding shares of Preferred Stock into Common Stock) (see "Principal Shareholders"):
NUMBER OF SHARES ---------------------- DIRECTORS AND EXECUTIVE OFFICERS SERIES A SERIES B ------------------------------------------------------------------------------- ---------- ---------- John D. Diekman................................................................ 20,000 40,000 Paul A. Berg................................................................... 10,000 15,000 John A. Young.................................................................. 20,000 40,000 Vernon R. Loucks, Jr........................................................... -- 40,000 Alejandro C. Zaffaroni......................................................... -- 450,000 5% SHAREHOLDERS ------------------------------------------------------------------------------- Glaxo Wellcome plc (indirectly through Affymax N.V.)........................... 1,250,000 1,333,333 College Retirement Equities Fund............................................... 1,428,570 800,000 R.A. Investment Group.......................................................... 570,000 856,000
In July 1995, the Company and Glaxo entered into an agreement (the "Governance Agreement") pursuant to which Glaxo has the right to designate a number of directors based on the percentage of voting stock then held directly or indirectly by Glaxo and is obligated to vote its shares for the slate of directors recommended to the shareholders. Glaxo currently has the right to designate four of the nine directors of the Company. See "Management -- Executive Officers and Directors." Pursuant to the Governance Agreement, Glaxo also agreed that any merger, consolidation or business combination whereby the Company would become a direct or indirect wholly-owned subsidiary of Glaxo and any material transaction between the Company and Glaxo must be approved by a majority of the independent directors of the Company. In addition, pursuant to the Governance Agreement, the Company granted Glaxo certain registration rights with respect to its shares. See "Description of Stock -- Registration Rights of Certain Shareholders." In December 1994, Affymax provided a bridge loan to the Company in the principal amount of $6.0 million. The loan was evidenced by a subordinated convertible promissory note, the terms of which were amended by the Governance Agreement (the "Convertible Note") and was converted into 1,333,333 shares of Series B Senior Convertible Preferred Stock in August 1995. Interest on the Convertible Note through the date of conversion, amounting to $319,856, was satisfied by the Company issuing Affymax three five-year warrants to purchase an aggregate of 202,441 shares of Series 2 Subordinated Convertible Preferred Stock at $5.50 per share. In connection with the lease agreement between the Company and a third party, in December 1994, Affymax agreed to relieve the Company of certain financial covenants and to guarantee its obligation to the third party in exchange for warrants to purchase Series 2 Subordinated Convertible Preferred Stock. In December 1994, Affymax received a five-year warrant to purchase 103,382 shares of Series 2 Subordinated Convertible Preferred Stock at $5.50 per share pursuant to this agreement. Effective January 1, 1993, the Company entered into the Technology License Agreement with Affymax whereby the Company was granted an exclusive worldwide royalty free license from Affymax, with the right to sublicense, to certain technology and to certain future inventions to be used in the development, production and sale of products and services in the clinical diagnostic and research supply markets. See "Intellectual Property." In August 1993, the Company agreed to issue Affymax 8,500,000 shares of Series 1 Subordinated Convertible Preferred Stock as consideration for the Technology License Agreement and funding the Company's operations through September 1993. 54 The Company and Affymax Research Institute, a subsidiary of Affymax ("ARI"), entered into a Services Agreement dated October 1, 1993, pursuant to which ARI agreed to perform certain administrative and management services for the Company. For the fiscal year ended December 31, 1995, the Company made payments to ARI in the aggregate amount of $834,000. John D. Diekman is a director of ARI. In February 1994, the Company entered into a sublease with Affymax providing for the Company to sublease facilities in Santa Clara from Affymax until October 1, 1995. The sublease provides for its term to be extended until August 31, 2003 in the event that, at the Company's request, Affymax exercises its option to extend the underlying lease until that date. In April 1995, the option was exercised to extend the lease to October 1, 1996. The Company believes that the agreements with Affymax are on terms no less favorable to the Company than would be obtained from unaffiliated third parties. In May 1996, the Company entered into an agreement with Glaxo to develop and supply probe arrays to detect polymorphisms in specific genes. See "Business -- Genomics Application Areas" and "-- Collaborative Agreements and Grants." In December 1993, in connection with grants to each of Stephen P.A. Fodor and David B. Singer of rights to purchase 133,333 shares of Common Stock at $0.30 per share, subject to repurchase at the Company's option, the Company entered into Loan and Pledge Agreements with each of Dr. Fodor and Mr. Singer. Pursuant to those agreements, the Company lent Dr. Fodor and Mr. Singer each $40,000, which loans are evidenced by secured promissory notes due in July 1998 or when their employment is terminated. These notes bear interest at the rate of 5.07% per annum. Interest payments on the notes are due and payable each year until the loan is repaid. In November 1994, the Company agreed to guarantee a loan in the amount of $117,000 of Stephen P. A. Fodor. In June 1995, the Company entered into an agreement with David B. Singer in connection with his assumption of the position of Vice Chairman of the Board. Pursuant to Mr. Singer's transition from President, Chief Executive Officer and Chief Financial Officer to Vice Chairman, Mr. Singer continues to be paid $14,583 per month and may receive health care coverage until December 15, 1996. In addition, pursuant to the agreement, the Company relinquished its right to repurchase any of the 133,333 shares of Common Stock acquired by Mr. Singer in December 1993, amended the option to purchase 100,000 shares granted to Mr. Singer in December 1994 to fully vest 50,000 shares as of September 1995, and waived its right to demand repayment of Mr. Singer's $40,000 promissory note until July 1998. Pursuant to the agreement, Mr. Singer agreed to continue to serve as a Director of the Company if nominated and elected by the shareholders, to serve as Vice Chairman of the Board, and to provide consulting services to the Company relating to the financing of the Company, grants and government relations. The Company and Symyx, Inc. ("Symyx") have entered into a sublease agreement for a portion of the property leased to the Company in Sunnyvale at market rates. Kenneth J. Nussbacher is a director, and Alejandro C. Zaffaroni is a director and greater than 10% stockholder, of Symyx. The Company has entered into indemnification agreements with each of its directors and executive officers. Such agreements require the Company to indemnify such persons to the fullest extent permitted by California law. See "Management -- Limitation of Liability and Indemnification Matters." 55 PRINCIPAL SHAREHOLDERS The following table sets forth certain information with respect to the beneficial ownership of the Common Stock as of April 30, 1996, and as adjusted to reflect the sale of the shares of Common Stock offered hereby by (i) each person who is known by the Company to be the beneficial owner of more than 5% of the Common Stock, (ii) each of the Company's directors, (iii) each of the Named Executive Officers and (iv) all current directors and executive officers as a group.
PERCENTAGE OF SHARES BENEFICIALLY OWNED (1)(2) SHARES --------------------- BENEFICIALLY PRIOR TO AFTER BENEFICIAL OWNER OWNED (1) OFFERING OFFERING -------------------------------------------------------------------------------- ----------- ---------- --------- Glaxo Wellcome plc (3).......................................................... 7,705,067 46.8% 35.9% Greenford Road Greenford, Middlesex, UBG OHE, UK College Retirement Equities Fund................................................ 1,507,991 9.3% 7.1% 730 Third Avenue New York, NY 10017 R.A. Investment Group........................................................... 959,554 5.9% 4.5% 200 West Madison, Suite 3800 Chicago, IL 60606 Paul A. Berg, Ph.D (4).......................................................... 38,488 * * John D. Diekman, Ph.D (5)....................................................... 76,177 * * Stephen P.A. Fodor, Ph.D (6).................................................... 153,333 * * Douglas M. Hurt (7)............................................................. 7,705,067 46.8 % 35.9% Paul M. Kaplan (8).............................................................. 13,334 * * Vernon R. Loucks, Jr............................................................ 59,999 * * Richard P. Rava, Ph.D (9)....................................................... 11,333 * * Barry C. Ross, Ph.D (7)......................................................... 7,705,067 46.8 % 35.9% David B. Singer................................................................. 160,666 * * John A. Young................................................................... 41,643 * * Alejandro C. Zaffaroni, Ph.D (10)............................................... 140,000 * * All directors and executive officers as a group (13 persons) (11)............... 8,426,706 50.9 % 39.1%
------------ * Represents beneficial ownership of less than one percent of the Common Stock. (1) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. In computing the number of Shares beneficially owned by a person and the percentage of ownership of that person, shares of Common Stock subject to options held by that person that are currently exercisable or exercisable within 60 days of April 30, 1996 are deemed outstanding. Such shares, however, are not deemed outstanding for the purpose of computing the percentage ownership of each other person. The persons named in this table have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them, subject to community property laws where applicable and except as indicated in the other footnotes to this table. (2) Percentage of beneficial ownership is based on 16,248,148 shares of Common Stock outstanding as of April 30, 1996 and 21,248,148 shares of Common Stock outstanding after completion of this offering. (3) Held through its subsidiary, Affymax N.V. Includes 203,881 shares issuable upon exercise of outstanding warrants at $8.25 per share. 56 (4) Includes 3,333 shares issuable upon exercise of options exercisable within 60 days of April 30, 1996. (5) Includes 40,000 shares issuable upon exercise of options within 60 days of April 30, 1996. (6) Includes 20,000 shares issuable upon exercise of options within 60 days of April 30, 1996. (7) Represents 7,705,067 shares beneficially owned by Glaxo, of which Mr. Hurt and Dr. Ross disclaim beneficial ownership. (8) Represents 13,334 shares issuable upon exercise of options exercisable within 60 days of April 30, 1996. (9) Includes 1,333 shares issuable upon exercise of options within 60 days of April 30, 1996. (10) Includes 6,667 shares issuable upon exercise of options within 60 days of April 30, 1996 and excludes any shares Dr. Zaffaroni may purchase in the offering. See "Underwriting." (11) Includes 98,000 shares issuable upon exercise of options within 60 days of April 30, 1996. Also includes 7,705,067 shares owned by Glaxo, of which Mr. Hurt and Dr. Ross disclaim beneficial ownership. Excludes any shares Dr. Zaffaroni may purchase in the offering. See "Underwriting." 57 DESCRIPTION OF CAPITAL STOCK Upon the closing of this offering, the authorized capital stock of the Company will consist of 50,000,000 shares of Common Stock, no par value, and 27,500,000 shares of Preferred Stock, no par value (the "Undesignated Preferred Stock"). COMMON STOCK At March 31, 1996, assuming the conversion of all outstanding Preferred Stock and the issuance of 203,881 shares of Common Stock pursuant to the exercise or conversion of outstanding warrants, 16,443,112 shares of Common Stock were outstanding and held of record by shareholders. Options to purchase an aggregate of 2,191,518 shares of Common Stock were also outstanding. See "Management -- Stock Plans." The holders of Common Stock are entitled to one vote per share on all matters to be voted upon by the shareholders. Subject to preferences that may be applicable to any outstanding Preferred Stock, the holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the Board of Directors out of funds legally available therefor. See "Dividend Policy." In the event of a liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior rights of Preferred Stock, if any, then outstanding. The Common Stock has no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions available to the Common Stock. All outstanding shares of Common Stock are fully paid and non-assessable. PREFERRED STOCK Effective upon the closing of this offering, the Company will be authorized to issue 27,500,000 shares of Undesignated Preferred Stock. The Board of Directors will have the authority to issue the Undesignated Preferred Stock in one or more series and to determine the powers, preferences and rights and the qualifications, limitation or restrictions granted to or imposed upon any wholly unissued shares of Undesignated Preferred Stock and fix the number of shares constituting any series and the designation of such series, without any further vote or action by the shareholders. The issuance of Undesignated Preferred Stock may have the effect of delaying, deferring or preventing a change in control of the Company without further action by the shareholders and may adversely affect the voting and other rights of the holders of Common Stock. At present, the Company has no plans to issue any shares of Undesignated Preferred Stock. REGISTRATION RIGHTS OF CERTAIN SHAREHOLDERS Certain holders of Common Stock or their transferees are entitled to certain rights with respect to the registration of such shares under the Securities Act. Registration rights are held with respect to 9,871,185 shares of Common Stock issuable upon the conversion of Preferred Stock under the terms of agreements between the Company and the holders of Series A and B Senior Preferred Stock (collectively the "Registrable Securities"). Subject to certain limitations in the agreements, the holders of Registrable Securities have "piggyback" rights to request that their shares be registered for public resale with respect to up to four registrations of the Company's securities. However, if such piggyback rights are exercised in connection with an underwritten offering of the Company's Common Stock, the underwriter of such offering has the right to reduce to 20% of the total the number of such shares to be included in such public offering or, in the case of the initial public offering, to exclude such shares entirely. In addition, at a time when the Company is eligible to register securities on Form S-3, holders of Registrable Securities not already registered may demand that the Company file a Form S-3, provided that the aggregate offering price of the Registrable Securities would be at least $2,000,000. The Company will pay certain expenses in connection with the exercise of the foregoing rights. These registration rights expire five years after an initial public offering of the Company's securities. Pursuant to the Governance Agreement, the Company also has granted to Glaxo, as long as Glaxo and its subsidiaries hold more than 10% of the outstanding Common Stock of the Company, the right to demand, at any time after six months following the Company's initial public offering, that the Company file an underwritten registration statement covering the registration of at least 40% of the Common Stock held by Glaxo and its subsidiaries. Glaxo's registration rights cover 7,705,067 shares of Common Stock issuable on conversion of Preferred Stock (including Series 1 Subordinated Convertible Preferred and Series 2 Subordinated Convertible 58 Preferred Stock, issuable upon exercise of warrants). If such demand is made after the time the Company is, or normally would have been, eligible to register securities on Form S-3, the Company will pay certain expenses incurred by Glaxo in exercising these demand rights. Glaxo has this demand right with respect to up to four registrations of the Company's securities on Form S-1 and an unlimited number of registrations on Form S-3. In addition, pursuant to the Governance Agreement, Glaxo has piggyback rights similar to those held by holders of the Registrable Securities. WARRANTS Pursuant to the terms of an agreement between Affymetrix and Affymax dated December 29, 1994, whereby Affymax agreed to guarantee Affymetrix' lease obligations to a third party, Affymetrix has issued to Affymax a warrant to purchase 103,382 shares of Series 2 Subordinated Convertible Preferred Stock. The warrants have an exercise price of $5.50 and expire in December 1999. Pursuant to the terms of a note agreement, Affymetrix has issued to Affymax warrants to purchase 202,441 shares of Series 2 Subordinated Convertible Preferred Stock for certain interest payments otherwise due on the note through August 1995, at which time the note was converted into Preferred Stock. These warrants have an exercise price of $5.50 and expire from March to July 2000. After the offering, as a result of automatic conversion of the Preferred Stock upon the closing of this offering and the 2-for-3 reverse stock split, these warrants will be exercisable for a total of 203,881 shares of Common Stock at an exercise price of $8.25 per share. See "Certain Transactions." TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for the Company's Common Stock is American Stock Transfer & Trust Company. 59 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this offering, the Company will have outstanding 21,239,231 shares of Common Stock. Of these shares, the 5,000,000 shares sold in this offering (plus any shares issued upon exercise of the Underwriters' over-allotment option) will be freely tradeable without restriction under the Securities Act, unless purchased or held by "affiliates" of the Company as that term is defined in Rule 144 under the Securities Act and the regulations promulgated thereunder. The remaining 16,239,231 shares of Common Stock outstanding (or any securities exercisable for or convertible into the Company's Common Stock) held by officers, directors, employees, consultants and certain shareholders, are "restricted securities" within the meaning of Rule 144 under the Securities Act ("Restricted Shares"). Restricted Shares may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144, 144(k) or 701 promulgated under the Securities Act, which are summarized below. Sales of the Restricted Shares in the public market, or the availability of such shares for sale, could adversely affect the market price of the Common Stock. None of the Restricted Shares will be available for sale upon the Effective Date. Approximately 50,100 of these shares of Common Stock will be eligible for sale in the public market 90 days after the Effective Date subject to the provisions of Rule 701. In addition, an additional 186,140 shares subject to vested options will be available for sale 90 days after the Effective Date subject to compliance with Rule 701. The officers, directors, certain employees and shareholders of the Company have entered into contractual "lock-up" agreements generally providing that they will not offer, sell, contract to sell or grant any option to purchase or otherwise dispose of the shares of Common Stock of the Company or any securities exercisable for or convertible into the Company's Common Stock owned by them for a period of 180 days after the Effective Date without the prior written consent of Robertson, Stephens & Company. Pursuant to the Stock Plan, all shares of Common Stock issued upon exercise of options are also subject to a lock-up arrangement for a period of 180 days after the date of this prospectus. Robertson, Stephens & Company may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to lock-up agreements. As a result of these contractual restrictions, notwithstanding possible earlier eligibility for sale under the provisions of Rules 144, 144(k) and 701, shares subject to lock-up agreements will not be saleable until such agreements expire or are waived by Robertson, Stephens & Company. Beginning 180 days after the Effective Date, approximately 10,411,408 additional Restricted Shares will become eligible for sale subject to the provisions of Rule 144 or Rule 701 upon the expiration of the lock-up agreements not to sell such shares. In addition, beginning 180 days after the Effective Date, an additional 183,366 shares subject to vested options will be available for sale subject to compliance with Rule 701 upon the expiration of lock-up agreements not to sell such shares. Robertson, Stephens & Company may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to lock-up agreements. In general, under Rule 144, as currently in effect, beginning 90 days after the Effective Date, a person (or persons whose shares are aggregated) who has beneficially owned Restricted Shares for at least two years would be entitled to sell within any three-month period a number of shares that does not exceed the greater of: (i) one percent of the number of shares of Common Stock then outstanding (which will equal approximately 212,392 shares immediately after this offering); or (ii) the average weekly trading volume of the Common Stock during the four calendar weeks preceding the filing of a Form 144 with respect to such sale. Sales under Rule 144 are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about the Company. Under Rule 144(k), a person who is not deemed to have been an affiliate of the Company at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least three years, is entitled to sell such shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Beginning 90 days after the Effective Date, certain shares issued upon exercise of options granted by the Company prior to the date of this Prospectus will also be available for sale in the public market pursuant to Rule 701 under the Securities Act. Any employee, officer or director of or consultant to the Company who purchased his or her shares pursuant to a written compensatory plan or contract may be entitled to rely on the resale provisions of Rule 701. Rule 701 permits affiliates to sell their Rule 701 shares under Rule 144 without 60 complying with the holding period requirements of Rule 144. Rule 701 further provides that non-affiliates may sell such shares in reliance on Rule 144 without having to comply with the public information, volume limitation or notice provisions of Rule 144. In both cases, a holder of Rule 701 shares is required to wait until 90 days after the date of this Prospectus before selling such shares. The Company intends to file registration statements under the Securities Act 180 days after the Effective Date to register shares of Common Stock reserved for issuance under the Stock Plan and the Directors Plan, thus permitting the resale of such shares by non-affiliates in the public market without restriction under the Securities Act. Such registration statements will become immediately upon filing. As of April 30, 1996, the holders of approximately 15,834,537 shares are entitled to certain registration rights with respect to such shares. If a large number of such shares were registered and sold in the public market, such sales could have an adverse effect on the market price for the Company's Common Stock. If the Company were required to include in a Company-initiated registration the shares held by such holders pursuant to the exercise of their registration rights, such sales may have an adverse effect on the Company's ability to raise needed capital. See "Description of Capital Stock -- Registration Rights of Certain Shareholders." Prior to this offering, there has been no public market for the Common Stock of the Company and no predictions can be made as to the effect, if any, that market sales of shares of Common Stock prevailing from time to time may have on the market price of the Common Stock. Nevertheless, sales of significant numbers of shares of the Common Stock in the public market may adversely affect the market price of the Common Stock offered hereby and could impair the Company's future ability to raise capital through an offering of its equity securities. 61 UNDERWRITING The Underwriters named below acting through their representatives, Robertson, Stephens & Company LLC, CS First Boston Corporation and Montgomery Securities (the "Representatives"), have severally agreed, subject to the terms and conditions of the Underwriting Agreement to purchase from the Company the number of shares of Common Stock set forth opposite their respective names below. The Underwriters are committed to purchase and pay for all of such shares if any are purchased:
NUMBER OF UNDERWRITER SHARES -------------------------------------------------------------------------------------------- ---------- Robertson, Stephens & Company LLC........................................................... CS First Boston Corporation................................................................. Montgomery Securities....................................................................... ---------- Total................................................................................... 5,000,000 ---------- ----------
The Company has been advised by the Representatives that the Underwriters propose to offer the shares of Common Stock to the public at the initial public offering price set forth on the cover page of this Prospectus and to certain dealers at such price, less a concession of not more than $ per share, of which $ may be reallowed to other dealers. After the initial public offering, the public offering price, concession and reallowances to dealers may be reduced by the Representatives. The Underwriters may offer up to $3 million worth of the Common Stock to Alejandro C. Zaffaroni, a founder and director of the Company, at the initial public offering price set forth on the cover page of this Prospectus. The Underwriters would not receive an underwriting discount or commission on the sale of any of these shares of Common Stock to Dr. Zaffaroni. The Company has granted to the Underwriters an option, exercisable during the 30-day period after the date of this Prospectus, to purchase up to an additional 750,000 shares of Common Stock at the same price per share as the Company receives for the 5,000,000 shares that the Underwriters have agreed to purchase. To the extent that the Underwriters exercise such option, each of the Underwriters will have a firm commitment to purchase approximately the same percentage of such additional shares that the number of shares of Common Stock to be purchased by it shown in the above table represents as a percentage of the 5,000,000 shares offered hereby. If purchased, such additional shares will be sold by the Underwriters on the same terms as those on which the 5,000,000 shares are being sold. The Company will be obligated, pursuant to the option, to sell shares to the Underwriters to the extent the option is exercised. The Underwriters may exercise such option only to cover over-allotments made in connection with the sale of shares of Common Stock offered hereby. The Underwriting Agreement contains covenants of indemnity between the Underwriters and the Company against certain civil liabilities, including liabilities under the Securities Act of 1933, as amended, and liability arising from breaches of representations and warranties contained in the Underwriting Agreement. Each officer, director and certain shareholders together holding approximately 12,643,742 shares of Common Stock have agreed with the Representatives that, until 180 days from the Effective Date, subject to certain limited exceptions, they will not, directly or indirectly, sell, offer contract to sell, pledge, grant any option to purchase or otherwise dispose of any shares of Common Stock or any securities convertible into, or exchangeable for, or any rights to purchase or acquire, shares of Common Stock, owned directly by such holders or with respect to which they have the power of disposition, without the prior written consent of Robertson, Stephens & Company LLC. Approximately 10,411,408 of such shares will be eligible for immediate public sale following expiration of the lock-up period pursuant to Rule 144. Robertson, Stephens & Company LLC may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to lock-up agreements. In addition, the Company has agreed that, until 180 days from the Effective Date, the Company will not, without the prior written consent of Robertson, Stephens & Company LLC, subject to certain limited exceptions, sell or otherwise dispose of, any shares of Common Stock, any options or warrants to purchase any 62 shares of Common Stock or any securities convertible into, exercisable for or exchangeable for shares of Common Stock other than the Company's sale of shares in this offering, the issuance of Common Stock upon the exercise of the outstanding warrants or options, or the Company's grant of options and issuance of stock under existing employee stock option or stock purchase plans. See "Shares Eligible for Future Sale." The Underwriters do not intend to confirm sales to accounts over which they exercise discretionary authority. Prior to this offering, there has been no public market for the Common Stock of the Company. Consequently, the initial public offering price for the Common Stock was determined through negotiations between the Company and the Representatives. The material factors considered in such negotiations were prevailing market conditions, certain financial information of the Company in recent periods, market valuations of other companies that the Company and the Representatives believed to be comparable to the Company, estimates of the business potential of the Company, the present state of the Company's development and the Company's management. A managing director of CS First Boston Corporation, one of the Representatives, is the beneficial owner of 7,407 shares of Common Stock. LEGAL MATTERS The validity of the Common Stock offered hereby will be passed upon for the Company by Heller Ehrman White & McAuliffe, Palo Alto, California. Julian N. Stern, the beneficial owner of 26,980 shares of Common Stock, is the sole shareholder and employee of a professional corporation that is a partner of Heller Ehrman White & McAuliffe. Certain legal matters relating to the offering will be passed upon for the Underwriters by Wilson, Sonsini, Goodrich & Rosati, Palo Alto, California. EXPERTS The financial statements of Affymetrix at December 31, 1994 and 1995, and for the years ended December 31, 1993, 1994 and 1995, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. The statements in this Prospectus as set forth under the captions "Risk Factors -- Dependence on Proprietary Technology and Unpredictability of Patent Protection" and "Business -- Intellectual Property" have been passed upon by Townsend and Townsend and Crew LLP, Palo Alto, California, patent counsel to the Company, as experts on such matters, and are included herein in reliance upon that review and approval. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement, of which this Prospectus constitutes a part, under the Securities Act with respect to the shares of Common Stock offered hereby. This Prospectus omits certain information contained in the Registration Statement, and reference is made to the Registration Statement and the exhibits and schedules thereto for further information with respect to the Company and the Common Stock offered hereby. Statements contained in this Prospectus as to the provisions of any referenced contracts or other documents summarize the material elements of such contracts or documents. Such statements, however, are not necessarily complete, and in each instance reference is made to the copy of such document filed as an exhibit to the Registration Statement. Each such statement is qualified in its entirety by such reference. The Registration Statement, including exhibits and schedules filed therewith, may be inspected without charge at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the Commission located at 7 World Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials may be obtained from the Public Reference Section of the Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and its public reference facilities in New York, New York and Chicago, Illinois, at prescribed rates. 63 GLOSSARY Amplification..................... An increase in the number of copies of specific DNA or RNA fragments. Base.............................. The nucleotides that comprise DNA. Chromosomes....................... The self-replicating genetic structures in cells containing the cellular DNA that bears in its nucleotide sequence the linear array of genes. Complementary sequence............ Nucleic acid base sequences that can form a double-stranded structure by matching base pairs; the complementary sequence to GTAC is CATG. DNA (deoxyribonucleic acid)....... The molecule that encodes genetic information. DNA is a double-stranded molecule held together by weak bonds between base pairs. The four nucleotides in DNA contain the bases adenine (A), guanine (G), cytosine (C) and thymine (T). In nature, base pairs form only between A and T and between G and C; thus, the base sequence of each single strand can be deduced from that of its complementary sequence. DNA sequence...................... The relative order of base pairs, whether in a fragment of DNA, a gene, a chromosome, or an entire genome. DNA synthesis..................... The process of building strands of nucleotide bases through controlled chemical reactions. Feature........................... A discrete section of a probe array containing millions of copies of the same DNA probe. Each probe array contains from 16,000 to more than 100,000 individual features. Fluorescent label................. A compound that may be attached to another molecule and that is capable of emitting light. The emitted light may be detected to determine the presence or location of the molecule. Gel-based sequencing.............. Determination of the order of nucleotides (base sequences) in a DNA molecule using a matrix of a polymeric molecule to form a gel, which separates pieces of DNA in an electric field based upon their sizes. Gene.............................. The fundamental physical and functional unit of heredity. A gene is an ordered sequence of nucleotides located in a particular position on a particular chromosome that encodes a specific functional product. Gene expression................... The process by which a gene's coded information creates the structures present and operating in the cell. Expressed genes include those that are transcribed into mRNA and then translated into protein and those that are transcribed into RNA but not translated into protein. Gene expression monitoring........ The process of correlating the level and timing of gene expression with abnormal cellular behavior and disease. Genetic code...................... The sequence of nucleotides, coded in triplets along the mRNA, that determines the sequence of amino acids in protein synthesis. The DNA sequence of a gene can be used to predict the mRNA sequence, and the genetic code can in turn be used to predict the amino acid sequence.
64 Genetic mapping................... Determining the relative positions of genes on a DNA molecule and the distance between them. Genetic marker.................... An identifiable physical location on a chromosome, whose inheritance can be monitored. Genome............................ All the genetic material in the chromosomes of a particular organism. Genome size is generally given as its total number of base pairs. Genomics.......................... The study of genes and their function. High-throughput sequencing........ The process of identifying and sequencing small stretches of genes expressed in a certain cell type using gel-based sequencing techniques. HIV............................... Human Immunodeficiency Virus, the virus responsible for HIV disease and its end-stage, AIDS (Acquired Immunodeficiency Syndrome). Human Genome Project.............. Collective name for several projects begun in 1986 by United States Department of Energy to map and sequence the human genome and develop new techniques and instruments for detecting and analyzing DNA. Hybridization..................... The process of joining two complementary strands of DNA or one each of DNA and RNA to form a double-stranded molecule. Immunoassay....................... A diagnostic test that uses a protein produced by the immune system, called an antibody, to detect specific proteins that may be used to aid in the identification or treatment of disease. In vitro.......................... Studies or phenomena that take place outside the body (for instance, in test tubes). Linkage analysis.................. Locating of genes on chromosomes by determining the inheritance patterns of genetic markers that are close to one another. mRNA (messenger RNA).............. RNA that serves as a template for protein synthesis. See "Genetic code." Mutation.......................... A transmissible change in the genetic material of an organism, usually in a single gene. Nucleic acid...................... A large molecule composed of nucleotide subunits. Nucleotide........................ A subunit of DNA or RNA consisting of a nitrogenous base (adenine, guanine, thymine, or cytosine in DNA; adenine, guanine, uracil, or cytosine in RNA), a phosphate molecule and a sugar molecule (deoxyribose in DNA, ribose in RNA). Thousands of nucleotides are linked to form a DNA or RNA molecule. Nucleotide pair................... Two nitrogenous bases (adenine and thymine or guanine and cytosine) held together by weak bonds. Two strands of DNA are held together in the shape of a double helix by the bonds between base pairs. Polymorphism...................... Difference in DNA sequence among individuals. Polymorphism Screening............ The process of correlating genetic variations with disease or traits. Photolithography.................. A technique that uses light to induce chemical reactions that create exposure patterns on a surface.
65 Probe............................. Short sequence of DNA used to identify longer stretches of complementary DNA or RNA sequence. Probe array....................... Small, disposable chip consisting of densely packed DNA sequences (probes), where the identity and position of each probe is known on the chip surface. Protein........................... A large molecule composed of one or more chains of amino acids in a specific order; the order is determined by the base sequence of nucleotides in the gene or genes coding for the protein. Proteins are required for the structure, function and regulation of the body's cells, tissues, and organs, and each protein has unique functions. Examples of proteins are hormones, enzymes, and antibodies. RNA (Ribonucleic acid)............ A chemical found in the nucleus and cytoplasm of cells; it plays an important role in protein synthesis and other chemical activities of the cell. The structure of RNA is similar to that of DNA. There are several classes of RNA molecules, including messenger RNA, transfer RNA, ribosomal RNA, and other small RNAs, each serving a different purpose. Solid-phase DNA synthesis......... DNA synthesis in which the chains of bases are anchored to a solid substrate, such as glass, as opposed to being synthesized in solution. Virus............................. A noncellular biological entity that can reproduce only within a host cell. Viruses consist of nucleic acid covered by protein. Some animal viruses are also surrounded by membrane. Once inside the infected cell, the virus uses the synthetic capability of the host to produce progeny virus. Wafer............................. Pieces of glass on which multiple probe arrays are simultaneously manufactured. The wafers are subsequently diced to yield individual probe arrays.
66 AFFYMETRIX, INC. (A DEVELOPMENT STAGE COMPANY) INDEX TO FINANCIAL STATEMENTS
PAGE ----- Report of Ernst & Young LLP, Independent Auditors.......................................................... F-2 Financial Statements: Balance Sheets........................................................................................... F-3 Statements of Operations................................................................................. F-4 Statement of Shareholders' Equity........................................................................ F-5 Statements of Cash Flows................................................................................. F-7 Notes to Financial Statements............................................................................ F-8
F-1 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Shareholders Affymetrix, Inc. We have audited the accompanying balance sheets of Affymetrix, Inc. (a development stage company) at December 31, 1994 and 1995, and the related statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1995 and for the period from inception (January 1, 1991) to December 31, 1995. 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. (a development stage company) at December 31, 1994 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995 and for the period from inception (January 1, 1991) to December 31, 1995, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Palo Alto, California February 9, 1996, except for the first paragraph of Note 9 as to which the date is , 1996 -------------------------------------------------------------------------------- The foregoing report is in the form that will be signed upon the completion of the reverse stock split described in Note 9 of the financial statements. /s/ ERNST & YOUNG LLP Palo Alto, California May 20, 1996 F-2 AFFYMETRIX, INC. (A DEVELOPMENT STAGE COMPANY) BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS) ASSETS
DECEMBER 31, -------------------- 1994 1995 --------- --------- MARCH 31, PRO FORMA ----------- SHAREHOLDERS' 1996 EQUITY AT ----------- MARCH 31, ------------- (UNAUDITED) 1996 ------------- (UNAUDITED) Current assets: Cash and cash equivalents.................................... $ 6,659 $ 2,481 $ 308 Short-term investments....................................... 11,146 36,402 34,529 Contract and grant receivables............................... 90 1,342 636 Inventories.................................................. -- 670 1,469 Other current assets......................................... 88 260 422 --------- --------- ----------- Total current assets....................................... 17,983 41,155 37,364 Property and equipment, at cost: Equipment and furniture...................................... 2,554 4,254 4,955 Leasehold improvements....................................... 356 586 587 --------- --------- ----------- 2,910 4,840 5,542 Less accumulated depreciation and amortization............... (1,047) (1,583) (1,863) --------- --------- ----------- Net property and equipment................................. 1,863 3,257 3,679 Other assets................................................... 15 140 142 --------- --------- ----------- $ 19,861 $ 44,552 $ 41,185 --------- --------- ----------- --------- --------- ----------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and other accrued liabilities............... $ 1,046 $ 2,469 $ 3,278 Payable to Affymax........................................... 254 89 12 Deferred revenue............................................. 837 2,340 2,153 Current portion of capital lease obligation.................. 169 187 192 --------- --------- ----------- Total current liabilities.................................. 2,306 5,085 5,635 Convertible note payable to Affymax............................ 6,000 -- -- Noncurrent portion of capital lease obligation................. 1,135 948 898 Advance from collaborative partner............................. 1,250 -- -- Commitments.................................................... -- Shareholders' equity: Convertible preferred stock, no par value; 27,500,000 shares authorized; 14,500,000 issued and outstanding at December 31, 1994, 23,166,666 at December 31, 1995 and March 31, 1996 (none pro forma); aggregate liquidation preference of $70,625 at December 31, 1995 and March 31, 1996............. 31,283 70,439 70,439 $ -- Common stock, no par value; 50,000,000 shares authorized; 408,198 shares issued and outstanding at December 31, 1994, 536,267 at December 31, 1995 and 609,240 at March 31, 1996 (16,239,231 pro forma)...................................... 122 2,717 3,089 73,528 Notes receivable from officers............................... (84) (42) (41) (41) Unrealized gain(loss) on available-for-sale securities....... (382) 281 1 1 Deferred compensation........................................ -- (2,360) (2,399) (2,399) Deficit accumulated during development stage................. (21,769) (32,516) (36,437) (36,437) --------- --------- ----------- ------------- Total shareholders' equity................................. 9,170 38,519 34,652 $ 34,652 --------- --------- ----------- ------------- ------------- $ 19,861 $ 44,552 $ 41,185 --------- --------- ----------- --------- --------- -----------
See accompanying notes. F-3 AFFYMETRIX, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
YEAR ENDED DECEMBER 31, ------------------------------- 1993 1994 1995 --------- --------- --------- THREE MONTHS PERIOD FROM ENDED MARCH 31, INCEPTION ------------------------ (JANUARY 1, 1995 1996 1991) ----------- ----------- THROUGH MARCH 31, 1996 (UNAUDITED) (UNAUDITED) --------------- (UNAUDITED) Contract and grant revenue.......... $ 1,413 $ 1,574 $ 4,625 $ 854 $ 1,416 $ 9,071 Operating expenses: Research and development.......... 6,566 9,483 12,420 2,274 4,177 38,328 General and administrative........ 577 2,303 3,833 777 1,649 9,205 --------- --------- --------- ----------- ----------- ------- Total operating expenses (includes related-party expense of $1,147, $1,647, $1,432, $428, $364 and $4,590, respectively).................. 7,143 11,786 16,253 3,051 5,826 47,533 --------- --------- --------- ----------- ----------- ------- Loss from operations................ (5,730) (10,212) (11,628) (2,197) (4,410) (38,462) Interest income................... 211 575 1,301 183 517 2,607 Interest expense (includes related-party expense of $320 in 1995 and $128 in the three months ended March 31, 1995)............ (73) (43) (420) (160) (28) (582) --------- --------- --------- ----------- ----------- ------- Net loss............................ $ (5,592) $ (9,680) $ (10,747) $ (2,174) $ (3,921) $ (36,437) --------- --------- --------- ----------- ----------- ------- --------- --------- --------- ----------- ----------- ------- Pro forma net loss per share........ $ (0.61) $ (0.12) $ (0.22) --------- ----------- ----------- --------- ----------- ----------- Shares used in computing pro forma net loss per share................. 17,664 17,663 17,664 --------- ----------- ----------- --------- ----------- -----------
See accompanying notes. F-4 AFFYMETRIX, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENT OF SHAREHOLDERS' EQUITY FOR THE PERIOD FROM INCEPTION (JANUARY 1, 1991) TO MARCH 31, 1996 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
CONTRI- CONVERTIBLE NOTES BUTIONS PREFERRED COMMON RECEIVABLE FROM UNREALIZED DEFERRED STOCK STOCK FROM OFFICERS AFFYMAX GAIN (LOSS) COMPENSATION ----------- ----------- ------------- --------- ------------- --------------- Issuance of 666 shares of common stock for cash in March 1992 at $0.15 per share................................ $ -- $ -- $ -- $ -- $ -- $ -- Contributions from Affymax (1991 and 1992)................................ -- -- -- 6,316 -- -- Net loss (1991 and 1992).............. -- -- -- -- -- -- ----------- ----------- --- --------- ----- ------ Balance at December 31, 1992.......... -- -- -- 6,316 -- -- Contributions from Affymax through September 1993....................... -- -- -- 4,309 -- -- Issuance of 6,000,000 shares of Series A Senior convertible preferred stock for cash in September 1993, at $3.50 per share, net of issuance costs of $342................................. 20,658 -- -- -- -- -- Conversion of all contributions from Affymax into 8,500,000 shares of Series 1 Subordinated convertible preferred stock in September 1993 at $1.25 per share...................... 10,625 -- -- (10,625) -- -- Issuance of 66,666 shares of common stock for cash upon exercise of stock options in December 1993 at $0.30 per share................................ -- 20 -- -- -- -- Issuance of 266,666 shares of common stock for notes receivable upon exercise of options in December 1993 at $0.30 per share................... -- 80 (80) -- -- -- Net loss.............................. -- -- -- -- -- -- ----------- ----------- --- --------- ----- ------ Balance at December 31, 1993.......... 31,283 100 (80) -- -- -- Issuance of 74,200 shares of common stock for cash upon exercise of stock options at $0.30 per share........... -- 22 -- -- -- -- Interest accrued on notes receivable from officers........................ -- -- (4) -- -- -- Unrealized loss on available-for-sale securities........................... -- -- -- -- (382) -- Net loss.............................. -- -- -- -- -- -- ----------- ----------- --- --------- ----- ------ Balance at December 31, 1994.......... 31,283 122 (84) -- (382) -- Issuance of 7,333,333 shares of Series B Senior convertible preferred stock for cash in August 1995, at $4.50 per share, net of issuance costs of $164................................. 32,836 -- -- -- -- -- Conversion of $6,000 note payable into 1,333,333 shares of Series B Senior convertible preferred stock in August 1995, at $4.50 per share............. 6,000 -- -- -- -- -- Issuance of 62,749 shares of common stock for cash upon exercise of stock options at $0.30 to $0.675 per share................................ -- 23 -- -- -- -- Issuance of 65,320 shares of common stock for financing commissions in August 1995 at $0.675 per share...... -- 44 -- -- -- -- DEFICIT TOTAL ACCUMULATED SHAREHOLDERS' DURING EQUITY (NET DEVELOPMENT CAPITAL STAGE DEFICIENCY) ------------- ------------- Issuance of 666 shares of common stock for cash in March 1992 at $0.15 per share................................ $ -- $ -- Contributions from Affymax (1991 and 1992)................................ -- 6,316 Net loss (1991 and 1992).............. (6,497) (6,497) ------------- ------------- Balance at December 31, 1992.......... (6,497) (181) Contributions from Affymax through September 1993....................... -- 4,309 Issuance of 6,000,000 shares of Series A Senior convertible preferred stock for cash in September 1993, at $3.50 per share, net of issuance costs of $342................................. -- 20,658 Conversion of all contributions from Affymax into 8,500,000 shares of Series 1 Subordinated convertible preferred stock in September 1993 at $1.25 per share...................... -- -- Issuance of 66,666 shares of common stock for cash upon exercise of stock options in December 1993 at $0.30 per share................................ -- 20 Issuance of 266,666 shares of common stock for notes receivable upon exercise of options in December 1993 at $0.30 per share................... -- -- Net loss.............................. (5,592) (5,592) ------------- ------------- Balance at December 31, 1993.......... (12,089) 19,214 Issuance of 74,200 shares of common stock for cash upon exercise of stock options at $0.30 per share........... -- 22 Interest accrued on notes receivable from officers........................ -- (4) Unrealized loss on available-for-sale securities........................... -- (382) Net loss.............................. (9,680) (9,680) ------------- ------------- Balance at December 31, 1994.......... (21,769) 9,170 Issuance of 7,333,333 shares of Series B Senior convertible preferred stock for cash in August 1995, at $4.50 per share, net of issuance costs of $164................................. -- 32,836 Conversion of $6,000 note payable into 1,333,333 shares of Series B Senior convertible preferred stock in August 1995, at $4.50 per share............. -- 6,000 Issuance of 62,749 shares of common stock for cash upon exercise of stock options at $0.30 to $0.675 per share................................ -- 23 Issuance of 65,320 shares of common stock for financing commissions in August 1995 at $0.675 per share...... -- 44
F-5 AFFYMETRIX, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENT OF SHAREHOLDERS' EQUITY (CONTINUED) FOR THE PERIOD FROM INCEPTION (JANUARY 1, 1991) TO MARCH 31, 1996 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
CONTRI- CONVERTIBLE NOTES BUTIONS PREFERRED COMMON RECEIVABLE FROM UNREALIZED DEFERRED STOCK STOCK FROM OFFICERS AFFYMAX GAIN (LOSS) COMPENSATION ----------- ----------- ------------- --------- ------------- --------------- Issuance of warrants in June, July, and October 1995 for 202,441 of Series 2 Subordinated convertible preferred stock at $1.58 per share in exchange for interest................ 320 -- -- -- -- -- Interest received on notes receivable from officers........................ -- -- 2 -- -- -- Reclassification of notes receivable from officers to other assets........ -- -- 40 -- -- -- Compensation from accelerated options.............................. -- 40 -- -- -- -- Deferred compensation related to grant of stock options..................... -- 2,488 -- -- -- (2,488) Amortization of deferred compensation......................... -- -- -- -- -- 128 Unrealized gain on available-for-sale securities........................... -- -- -- -- 663 -- Net loss.............................. -- -- -- -- -- -- ----------- ----------- --- --------- ----- ------ Balance at December 31, 1995.......... 70,439 2,717 (42) -- 281 (2,360) Issuance of 72,973 shares of common stock for cash upon exercise of stock options at $0.30 to $0.675 per share (Unaudited).......................... -- 46 -- -- -- -- Interest received on notes receivable from officers (Unaudited)............ -- -- 1 -- -- -- Deferred compensation related to grant of stock options (Unaudited)......... -- 326 -- -- -- (326) Amortization of deferred compensation (Unaudited).......................... -- -- -- -- -- 287 Unrealized loss on available-for-sale securities (Unaudited)............... -- -- -- -- (280) -- Net loss (Unaudited).................. -- -- -- -- -- -- ----------- ----------- --- --------- ----- ------ Balance at March 31, 1996 (Unaudited).......................... $ 70,439 $ 3,089 $ (41) $ -- $ 1 $ (2,399) ----------- ----------- --- --------- ----- ------ ----------- ----------- --- --------- ----- ------ DEFICIT TOTAL ACCUMULATED SHAREHOLDERS' DURING EQUITY (NET DEVELOPMENT CAPITAL STAGE DEFICIENCY) ------------- ------------- Issuance of warrants in June, July, and October 1995 for 202,441 of Series 2 Subordinated convertible preferred stock at $1.58 per share in exchange for interest................ -- 320 Interest received on notes receivable from officers........................ -- 2 Reclassification of notes receivable from officers to other assets........ -- 40 Compensation from accelerated options.............................. -- 40 Deferred compensation related to grant of stock options..................... -- -- Amortization of deferred compensation......................... -- 128 Unrealized gain on available-for-sale securities........................... -- 663 Net loss.............................. (10,747) (10,747) ------------- ------------- Balance at December 31, 1995.......... (32,516) 38,519 Issuance of 72,973 shares of common stock for cash upon exercise of stock options at $0.30 to $0.675 per share (Unaudited).......................... -- 46 Interest received on notes receivable from officers (Unaudited)............ -- 1 Deferred compensation related to grant of stock options (Unaudited)......... -- -- Amortization of deferred compensation (Unaudited).......................... -- 287 Unrealized loss on available-for-sale securities (Unaudited)............... -- (280) Net loss (Unaudited).................. (3,921) (3,921) ------------- ------------- Balance at March 31, 1996 (Unaudited).......................... $ (36,437) $ 34,652 ------------- ------------- ------------- -------------
See accompanyng notes. F-6 AFFYMETRIX, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH ------------------------------- 31, 1993 1994 1995 ------------------------ --------- --------- --------- 1995 1996 ----------- ----------- (UNAUDITED) (UNAUDITED) Cash flows from operating activities: Net loss..................................................... $ (5,592) $ (9,680) $ (10,747) $ (2,174) $ (3,921) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization.............................. 465 689 701 150 279 Amortization of investment premiums and discounts, net..... -- 148 (191) 165 (24) Loss on disposal of equipment.............................. -- 417 188 -- -- Compensation due to accelerated vesting.................... -- -- 40 -- -- Amortization of deferred compensation...................... -- -- 128 -- 287 Interest payable exchanged for warrants.................... -- -- 320 -- -- Changes in operating assets and liabilities: Contract and grant receivables........................... -- (90) (1,252) (675) 706 Inventories.............................................. -- -- (670) -- (799) Other current assets..................................... (649) 575 (172) (19) (162) Other assets............................................. 14 (15) (80) -- (2) Accounts payable and other accrued liabilities........... 570 295 1,423 (196) 809 Payable to Affymax....................................... 1,574 (1,320) (165) (1) (77) Deferred revenue......................................... 460 377 253 (150) (187) Advance from collaborative partner....................... -- 1,250 -- -- -- --------- --------- --------- ----------- ----------- Net cash used in operating activities.................. (3,158) (7,354) (10,224) (2,900) (3,091) --------- --------- --------- ----------- ----------- Cash flows from investing activities: Capital expenditures....................................... (1,537) (1,207) (2,283) (580) (701) Proceeds from the sale of available-for-sale securities.... -- 5,308 8,538 -- 1,466 Proceeds from maturities of available-for-sale securities................................................ -- -- 5,485 -- 2,156 Purchases of available-for-sale securities................. (13,997) (2,990) (38,428) (2,007) (2,004) --------- --------- --------- ----------- ----------- Net cash provided by/(used in) investing activities.... (15,534) 1,111 (26,688) (2,587) 917 --------- --------- --------- ----------- ----------- Cash flows from financing activities: Contributions from Affymax................................... 4,309 -- -- -- -- Issuances of common stock.................................... 20 22 23 -- 46 Issuances of preferred stock, net............................ 20,658 -- 32,880 -- -- Proceeds from capital lease obligation....................... -- 1,307 -- -- -- Principal payments on capital lease obligation............... -- (3) (169) (41) (45) Issuance of convertible note payable to Affymax.............. -- 6,000 -- -- -- Issuance of notes payable.................................... 333 -- -- -- -- Principal payments on notes payable.......................... (327) (819) -- -- -- --------- --------- --------- ----------- ----------- Net cash provided by (used in) financing activities.... 24,993 6,507 32,734 (41) 1 --------- --------- --------- ----------- ----------- Net increase (decrease) in cash and cash equivalents........... 6,301 264 (4,178) (5,528) (2,173) Cash and cash equivalents at beginning of period............... 94 6,395 6,659 6,659 2,481 --------- --------- --------- ----------- ----------- Cash and cash equivalents at end of period..................... $ 6,395 $ 6,659 $ 2,481 $ 1,131 $ 308 --------- --------- --------- ----------- ----------- --------- --------- --------- ----------- ----------- Supplemental disclosure of noncash financing activities: Issuance of common stock for note receivable from officers... $ 80 $ -- $ -- $ -- $ -- --------- --------- --------- ----------- ----------- --------- --------- --------- ----------- ----------- Conversion of note payable and contributions from Affymax to preferred stock.................................. $ 10,625 $ -- $ 6,000 $ -- $ -- --------- --------- --------- ----------- ----------- --------- --------- --------- ----------- ----------- Assets under capital lease obligation........................ -- $ 1,297 $ -- $ -- $ -- --------- --------- --------- ----------- ----------- --------- --------- --------- ----------- ----------- Issuance of common stock for financing commissions........... $ -- $ -- $ 44 $ -- $ -- --------- --------- --------- ----------- ----------- --------- --------- --------- ----------- ----------- Issuance of warrants in exchange for interest payable........ $ -- $ -- $ 320 $ -- $ -- --------- --------- --------- ----------- ----------- --------- --------- --------- ----------- ----------- Supplemental disclosure of cash flow information: Interest paid................................................ $ 73 $ 20 $ 122 $ 32 $ 28 --------- --------- --------- ----------- ----------- --------- --------- --------- ----------- ----------- PERIOD FROM (JANUARY 1, 1991) THROUGH MARCH 31, 1996 Cash flows from operating activities: Net loss..................................................... $ (36,437) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization.............................. 2,210 Amortization of investment premiums and discounts, net..... (67) Loss on disposal of equipment.............................. 605 Compensation due to accelerated vesting.................... 40 Amortization of deferred compensation...................... 415 Interest payable exchanged for warrants.................... 320 Changes in operating assets and liabilities: Contract and grant receivables........................... (636) Inventories.............................................. (1,469) Other current assets..................................... (422) Other assets............................................. (98) Accounts payable and other accrued liabilities........... 3,278 Payable to Affymax....................................... 12 Deferred revenue......................................... 903 Advance from collaborative partner....................... 1,250 -------------- Net cash used in operating activities.................. (30,096) -------------- Cash flows from investing activities: Capital expenditures....................................... (6,494) Proceeds from the sale of available-for-sale securities.... 15,312 Proceeds from maturities of available-for-sale securities................................................ 7,641 Purchases of available-for-sale securities................. (57,419) -------------- Net cash provided by/(used in) investing activities.... (40,960) -------------- Cash flows from financing activities: Contributions from Affymax................................... 10,625 Issuances of common stock.................................... 111 Issuances of preferred stock, net............................ 53,538 Proceeds from capital lease obligation....................... 1,307 Principal payments on capital lease obligation............... (217) Issuance of convertible note payable to Affymax.............. 6,000 Issuance of notes payable.................................... 1,146 Principal payments on notes payable.......................... (1,146) -------------- Net cash provided by (used in) financing activities.... 71,364 -------------- Net increase (decrease) in cash and cash equivalents........... 308 Cash and cash equivalents at beginning of period............... -- -------------- Cash and cash equivalents at end of period..................... $ 308 -------------- -------------- Supplemental disclosure of noncash financing activities: Issuance of common stock for note receivable from officers... $ 80 -------------- -------------- Conversion of note payable and contributions from Affymax to preferred stock.................................. $ 16,625 -------------- -------------- Assets under capital lease obligation........................ $ 1,297 -------------- -------------- Issuance of common stock for financing commissions........... $ 44 -------------- -------------- Issuance of warrants in exchange for interest payable........ $ 320 -------------- -------------- Supplemental disclosure of cash flow information: Interest paid................................................ $ 262 -------------- --------------
See accompanying notes. F-7 AFFYMETRIX, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 AND FOR THE PERIOD FROM INCEPTION TO MARCH 31, 1996 IS UNAUDITED) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION, OWNERSHIP, AND BUSINESS Affymetrix, Inc. ("Affymetrix") is a development stage company focused on developing GeneChip-TM- 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. Affymax owns approximately 46% of Affymetrix at December 31, 1995. In March 1995, Glaxo plc, now Glaxo Wellcome plc ("Glaxo"), purchased Affymax, including its then 65% interest in Affymetrix. The accompanying financial statements include the operations of Affymetrix from inception (January 1, 1991). The advances from Affymax through September 1993 were recorded as capital contributions and converted to convertible preferred shares in September 1993. Since September 1993, the financial statements reflect the operations of Affymetrix on a stand-alone basis. Affymetrix' success will depend in part on its ability to obtain and maintain patent protection in the United States and other countries for its technologies and products. The commercial success of Affymetrix also depends in part on neither infringing patents or proprietary rights of third parties nor breaching any licenses that may relate to Affymetrix' technologies and products. 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. INTERIM FINANCIAL INFORMATION The financial information at March 31, 1996 and for the three-month periods ended March 31, 1995 and 1996 is unaudited but includes all adjustments (consisting only of normal recurring adjustments) which Affymetrix considers necessary for a fair presentation of the financial position at such date and the operating results and cash flows for those periods. Results for the March 31, 1996 period are not necessarily indicative of the results for the entire year. REVENUE RECOGNITION Contract and grant revenue is recorded as earned as defined within the specific agreements. Payments received in advance under these arrangements are recorded as deferred revenue until earned. Direct costs associated with these contracts and grants are reported as research and development expense. Revenue for the beta shipments are recorded as contract revenue pursuant to the development agreements. Revenue from customers representing 10% or more of total contract and grant revenue during fiscal 1993, 1994, and 1995 is as follows:
1993 1994 1995 ---------- ---------- ---------- Customer: A -- -- 25% B -- -- 23% C -- -- 22% D 49% 54% 17% E 38% 29% --
F-8 AFFYMETRIX, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 AND FOR THE PERIOD FROM INCEPTION TO MARCH 31, 1996 IS UNAUDITED) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. NET LOSS PER SHARE Except as noted below, historical net loss per share is computed using the weighted average number of common shares outstanding. Common equivalent shares are excluded from the computation as their effect is antidilutive, except that, pursuant to the Securities and Exchange Commission ("SEC") Staff Accounting Bulletins, common and common equivalent shares (stock options, convertible notes payable, convertible preferred stock, and warrants) issued during the 12 months prior to the initial filing of the proposed offering at prices below the assumed public offering price have been included in the calculation as if they were outstanding for all periods presented (using the treasury stock method for stock options and warrants and the if-converted method for convertible preferred stock). Historical net loss per share information is as follows:
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ---------------------------------------- -------------------------- 1993 1994 1995 1995 1996 ------------ ------------ ------------ ------------ ------------ Net loss per share...... $ (0.75) $ (1.24) $ (1.38) $ (0.28) $ (0.50) ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Shares used in computing net loss per share..... 7,422,000 7,801,000 7,812,000 7,811,000 7,812,000 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Pro forma net loss per share has been computed as described above and also gives effect to the conversion of convertible preferred shares not included above that will automatically convert upon completion of Affymetrix' initial public offering (using the if-converted method) from the original date of issuance. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS Effective January 1, 1994, Affymetrix adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The effect of adopting Statement 115 at January 1, 1994 was immaterial. 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, 1995, Affymetrix' 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. F-9 AFFYMETRIX, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 AND FOR THE PERIOD FROM INCEPTION TO MARCH 31, 1996 IS UNAUDITED) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INVENTORIES Inventories are stated at the lower of cost, as determined by the first-in, first-out method, or market and consist entirely of finished goods at December 31, 1995, and $256,000 of raw material and $1,213,000 of finished goods at March 31, 1996. DEPRECIATION AND AMORTIZATION The costs of property and equipment 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. Expenditures for maintenance and repairs are expensed as incurred. ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES Accounts payable and other accrued liabilities include the following (in thousands):
DECEMBER 31, MARCH 31, -------------------- ----------- 1994 1995 1996 --------- --------- ----------- Accounts payable......................................... $ 587 $ 1,088 $ 963 Accrued compensation..................................... 262 576 617 Collaborative research refund............................ -- 360 448 Accrued research......................................... 132 115 533 Legal.................................................... -- 222 351 Other.................................................... 65 108 366 --------- --------- ----------- $ 1,046 $ 2,469 $ 3,278 --------- --------- ----------- --------- --------- -----------
STOCK BASED COMPENSATION In October 1995, the Financial Accounting Standards Board issued "Accounting for Stock-Based Compensation" ("Statement No. 123") which is effective for fiscal 1996. Under Statement No. 123, stock-based compensation expense is measured using either the intrinsic-value method as prescribed in APB Opinion No. 25 or the fair value method described in Statement No. 123. Affymetrix intends to adopt the disclosure only alternative under Statement No. 123 and, accordingly, Affymetrix will be required to disclose the pro forma net income or loss and per share amounts in the notes to the financial statements using the fair value based method. Affymetrix has not yet determined the impact of these pro forma adjustments. CONCENTRATIONS OF CREDIT RISK Cash equivalents and investments are financial instruments which potentially subject Affymetrix to concentrations of risk. 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. NOTE 2. COLLABORATIVE AGREEMENTS AND GRANTS Affymetrix expects to collaborate with various partners to successfully commercialize its technology. Total costs incurred under contract and grant arrangements are approximately $1,412,000 in 1993, $1,499,000 in 1994, $5,237,000 in 1995, $602,000 for the three months ended March 31, 1995, $1,759,000 for the three months ended March 31, 1996 and $9,952,000 for the period from inception through March 31, 1996. F-10 AFFYMETRIX, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 AND FOR THE PERIOD FROM INCEPTION TO MARCH 31, 1996 IS UNAUDITED) NOTE 2. COLLABORATIVE AGREEMENTS AND GRANTS (CONTINUED) Affymetrix began its collaboration with Genetics Institute ("GI") in November 1994 to develop applications of the GeneChip system to the identification of new genes and new uses of genes using expression monitoring. Under this agreement, GI funded Affymetrix' research to determine the feasibility of this application of GeneChip technology and agreed to make milestone and royalty payments. Under certain circumstances, Affymetrix may pay royalty payments to GI. If Affymetrix enters into similar agreements for gene expression with third parties, Affymetrix may be required to refund a portion of the development funding received from GI and future funding may be proportionately reduced (see Note 9). In December 1995, Affymetrix and GI expanded their relationship by entering into a supply agreement in the field of genomics under which Affymetrix will manufacture and supply additional custom probe arrays based on specific genes identified and selected by GI. Unlike the 1994 agreement with GI, this agreement does not provide research funding to Affymetrix. Pursuant to the agreement, GI is obligated to purchase and Affymetrix is obligated to supply certain minimum quantities of custom probe arrays developed for GI until the later of 2001 or four years after development of specified probe arrays. Affymetrix will receive fees for the design and delivery of the custom probe arrays, and may receive milestone payments and royalties on therapeutic compounds if developed by GI using these probe arrays. GI has exclusive rights to specific probe arrays supplied by Affymetrix. In October 1995, Affymetrix entered into a collaborative research and development agreement with Roche Molecular Systems, Inc. ("Roche"). Under this agreement, Roche agreed to fund certain research efforts for approximately one year aimed at developing GeneChip based products designed to detect certain genetic mutations. Roche is required to make additional payments if certain milestones are reached. Under certain circumstances, Affymetrix may pay royalties to Roche. In August 1995, Affymetrix received a three-year grant from the National Institutes of Health ("NIH") National Center for Human Genome Research for approximately $6,000,000. Affymetrix has been awarded approximately $2,000,000 for the first year of the grant, and the remaining amounts are subject to yearly appropriations by the NIH. Affymetrix entered into a collaboration with Hewlett-Packard Company ("HP") in November 1994 for HP to manufacture and supply a more advanced scanner for the use with Affymetrix' GeneChip probe arrays and for Affymetrix to develop, manufacture and supply certain probe arrays to HP for sale in certain markets. In exchange for certain rights, Affymetrix received and will receive certain payments, including milestones, as defined research and development objectives are achieved. In addition, HP will fund certain research work at Affymetrix. The collaborative agreement is for an initial five-year term and shall be extended thereafter for consecutive three-year terms, unless either party terminates the agreement upon six months notice. In November 1994, Affymetrix received a license payment from HP that is classified as deferred revenue and as an advance from collaborative partner in 1995 and 1994, respectively. The agreement contains terms, expiring in November 1996, that allow the payment to be applied towards the purchase of an equity position in Affymetrix upon agreement of both parties. Affymetrix is required to pay royalties to HP on HP and Company sponsored probe arrays sold by the Company pursuant to the agreement. In October 1994, Affymetrix and Molecular Dynamics, Inc. were awarded a five-year matching grant for a total of $31,500,000 under the Advanced Technology Program within the National Institute of Standards and Technology to develop a miniaturized DNA diagnostic device, of which approximately $10,700,000 will be available to Molecular Dynamics. The contract provides that Affymetrix will receive funding for approximately F-11 AFFYMETRIX, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 AND FOR THE PERIOD FROM INCEPTION TO MARCH 31, 1996 IS UNAUDITED) NOTE 2. COLLABORATIVE AGREEMENTS AND GRANTS (CONTINUED) 50% of its costs up to $20,800,000, 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. Affymetrix recognized revenues of approximately $1,412,000 in 1993, $1,499,000 in 1994, $1,034,000 in 1995, and $212,000 and $51,000 for the three months ended March 31, 1995 and 1996, respectively, pursuant to other contracts and grants. NOTE 3. AVAILABLE-FOR-SALE SECURITIES The following is a summary of available-for-sale securities as of December 31, 1994 (in thousands):
GROSS GROSS UNREALIZED UNREALIZED ESTIMATED COST GAINS LOSSES FAIR VALUE --------- ------------- ------------- ----------- U.S. Government obligations.................... $ 16,503 $ -- $ 382 $ 16,121 --------- --- --- ----------- --------- --- --- ----------- Amounts included in: cash equivalents........................... $ 4,975 $ -- $ -- $ 4,975 short-term investments..................... 11,528 -- 382 11,146 --------- --- --- ----------- Total securities........................... $ 16,503 $ -- $ 382 $ 16,121 --------- --- --- ----------- --------- --- --- -----------
The following is a summary of available-for-sale securities as of December 31, 1995 (in thousands):
GROSS GROSS UNREALIZED UNREALIZED ESTIMATED COST GAINS LOSSES FAIR VALUE --------- ------------- ------------- ----------- U.S. Government obligations.................... $ 38,115 $ 309 $ 27 $ 38,397 --------- --- --- ----------- --------- --- --- ----------- Amounts included in: cash equivalents........................... $ 1,995 $ -- $ -- $ 1,995 short-term investments..................... 36,120 309 27 36,402 --------- --- --- ----------- Total securities........................... $ 38,115 $ 309 $ 27 $ 38,397 --------- --- --- ----------- --------- --- --- -----------
The gross realized gains and gross realized losses on sales of available-for-sale securities were immaterial for the years ended December 31, 1994 and 1995. The following is a summary of the amortized cost and estimated fair value of available-for-sale securities at December 31, 1995, by contractual maturity (in thousands):
ESTIMATED FAIR AMORTIZED COST VALUE -------------- ------------------ Mature in one year or less................................ $ 14,184 $ 14,184 Mature after one year through three years................. 23,931 24,213 ------- ------- Total................................................... $ 38,115 $ 38,397 ------- ------- ------- -------
NOTE 4. RELATED PARTY TRANSACTIONS In December 1994, Affymetrix issued a $6,000,000 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 F-12 AFFYMETRIX, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 AND FOR THE PERIOD FROM INCEPTION TO MARCH 31, 1996 IS UNAUDITED) NOTE 4. RELATED PARTY TRANSACTIONS (CONTINUED) 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 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. Effective January 1, 1993, Affymetrix entered into a Technology License Agreement with Affymax whereby Affymetrix was granted an exclusive worldwide royalty-free license from Affymax, with the right to sublicense, to certain technology and to certain future inventions for use in the diagnostic and research supply markets including uses of DNA probe arrays. In exchange for the Technology License Agreement and prior Affymax contributions, Affymetrix issued Affymax 8,500,000 shares of Series 1 Subordinated convertible preferred stock using a share price of $1.25, and agreed to share certain costs of developing certain technology. Two directors of Affymetrix are employees of a subsidiary of Glaxo. Pursuant to a service agreement, Affymax provided certain general administrative and legal services to Affymetrix from October 1, 1993 until December 31, 1994. As of January 1, 1995, the agreement was amended to limit those services. Amounts expensed by Affymetrix under this agreement are approximately $787,000 in 1993, $806,000 in 1994, $291,000 in 1995, $150,000 for the three months ended March 31, 1995, $37,000 for the three months ended March 31, 1996 and $1,921,000 for the period from inception through March 31, 1996. General administrative and legal services were allocated to Affymetrix based on time spent by Affymax employees exclusively on Affymetrix activities, at a rate based on the salaries of the employees involved plus an overhead rate. Such allocation was reasonable in the opinion of Affymetrix management. Since January 1, 1993, Affymetrix has been occupying a research facility in Santa Clara, California subleased from Affymax (See Note 7). Amounts expensed under this agreement are approximately $275,000 in 1993, $472,000 in 1994, $529,000 in 1995, $134,000 for the three months ended March 31, 1995, $134,000 for the three months ended March 31, 1996 and $1,410,000 for the period from inception through March 31, 1996. Affymetrix received legal services from Townsend and Townsend and Crew LLP ("Townsend") related to the intellectual property rights of Affymetrix. A partner of Townsend was also an employee on a part time basis of Affymetrix. Legal expenses related to services performed by Townsend are approximately $85,000 in 1993, $369,000 in 1994, $612,000 in 1995, $144,000 for the three months ended March 31, 1995, $193,000 for the three months ended March 31, 1996 and $1,259,000 for the period from inception through March 31, 1996. In June 1993, the Board approved the issuance of secured loans to certain officers for a total of $80,000 at an interest rate of 5.07% per year and payable in full at the earlier of July 1, 1998 or upon termination of employment. The loans were originally recorded as "notes receivable from officers" in shareholders' equity. In June 1995, one loan for $40,000 was reclassified to "other assets". In November 1994, the Board agreed to authorize $115,000 as collateral to a bank for an officer's loan. In August 1995, the Board approved the issuance of a five-year secured loan to an employee for a total of $50,000 at an interest rate of 8% per year and payable in full at the earlier of October 2, 2000 or upon termination of employment. F-13 AFFYMETRIX, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 AND FOR THE PERIOD FROM INCEPTION TO MARCH 31, 1996 IS UNAUDITED) NOTE 5. NOTES PAYABLE AND CREDIT ARRANGEMENTS NOTES PAYABLE In December 1994, Affymetrix issued a $6,000,000 subordinated convertible promissory note to Affymax maturing on December 1, 1997, which was subsequently converted into 1,333,333 shares of Series B Senior convertible preferred stock in August 1995 at a conversion rate of $4.50 per share (See Note 4). CREDIT ARRANGEMENTS 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 $1,307,000 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 $1,761,000 with accumulated depreciation of $464,000 and $818,000 at December 31, 1994 and December 31, 1995, respectively. Amortization of this property and equipment is included in depreciation expense. Future minimum lease payments under the capital lease obligation at December 31, 1995 are as follows (in thousands): 1996........................................................ $ 292 1997........................................................ 292 1998........................................................ 292 1999........................................................ 291 2000........................................................ 280 --------- Total minimum lease payments................................ 1,447 Less amount representing interest........................... (312) --------- Present value of minimum lease payments..................... 1,135 Less current portion........................................ (187) --------- Noncurrent obligation under capital lease................... $ 948 --------- ---------
NOTE 6. SHAREHOLDERS' EQUITY PREFERRED SHARES Affymetrix is authorized to issue 27,500,000 shares of preferred stock, designated as follows: 6,000,000 for Series A Senior convertible preferred stock; 8,666,666 for Series B Senior convertible preferred stock; 8,500,000 for Series 1 Subordinated convertible preferred stock; 1,000,000 for Series 2 Subordinated preferred stock and 3,333,334 shares undesignated. The following table describes information with respect to the various series of convertible preferred stock outstanding as of December 31, 1994:
TOTAL SHARES ISSUED ISSUANCE PRICE LIQUIDATION AND OUTSTANDING PER SHARE PREFERENCE --------------- --------------- ------------- Series A...................................... 6,000,000 $ 3.50 $ 21,000,000 Series 1...................................... 8,500,000 1.25 10,625,000 --------------- ------------- 14,500,000 $ 31,625,000 --------------- ------------- --------------- -------------
F-14 AFFYMETRIX, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 AND FOR THE PERIOD FROM INCEPTION TO MARCH 31, 1996 IS UNAUDITED) NOTE 6. SHAREHOLDERS' EQUITY (CONTINUED) The following table describes information with respect to the various series of convertible preferred stock outstanding as of December 31, 1995 and March 31, 1996:
TOTAL SHARES ISSUED ISSUANCE PRICE LIQUIDATION AND OUTSTANDING PER SHARE PREFERENCE --------------- --------------- ------------- Series A...................................... 6,000,000 $ 3.50 $ 21,000,000 Series B...................................... 8,666,666 4.50 39,000,000 Series 1...................................... 8,500,000 1.25 10,625,000 --------------- ------------- 23,166,666 $ 70,625,000 --------------- ------------- --------------- -------------
The Series A and Series B Senior and Series 1 and Series 2 Subordinated convertible shares represent convertible noncumulative preferred shares. Dividends for Series A and B are payable at $.28 and $.36 per share, respectively, in preference to payment of any dividends on the Series 1 Subordinated preferred shares, Series 2 Subordinated preferred shares and common stock, when and if declared by the Board. Dividends for Series 1 and 2 are payable at $.10 and $.44 per share, respectively. In the event of liquidation, dissolution, or winding up of Affymetrix, the Series A and Series B Senior preferred shares will have a liquidation preference over the Series 1 Subordinated preferred shares, Series 2 Subordinated preferred shares and common stock. Each share of preferred stock is entitled to the number of votes equal to the number of shares of common stock into which such share of preferred stock could be converted. Each share of preferred stock is convertible, at the holder's option, into 0.6667 share of common stock subject to anti-dilution adjustment upon the issuance of additional shares of common stock as defined in Affymetrix' Articles of Incorporation (See Note 9). The Series A Senior preferred shares, Series B Senior preferred shares, Series 1 Subordinated preferred shares and Series 2 Subordinated preferred shares will be automatically converted (i) upon the closing of a firm commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of common stock to the public at an aggregate offering price of at least $7,500,000; (ii) immediately upon receipt by Affymetrix of a written request for conversion of at least 60% of the then outstanding shares of that series; or (iii) upon the conversion of at least 60% of the shares of that series ever outstanding. STOCK WARRANTS At December 31, 1995, the following warrants to purchase Affymetrix' preferred stock were outstanding:
EXERCISE NUMBER OF EXPIRATION PRICE SHARES ISSUE DATE DATE ----------- ----------- ------------- ------------- Series 2 Subordinated convertible preferred.............. $ 5.50 103,382 1994 1999 Series 2 Subordinated convertible preferred.............. $ 5.50 202,441 1995 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. F-15 AFFYMETRIX, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 AND FOR THE PERIOD FROM INCEPTION TO MARCH 31, 1996 IS UNAUDITED) NOTE 6. SHAREHOLDERS' EQUITY (CONTINUED) Activity under the Stock Plan through March 31, 1996 is as follows:
OUTSTANDING OPTIONS -------------------------------------- NUMBER OF PRICE PER AGGREGATE SHARES SHARE PRICE ---------- ------------ ------------ Options granted............................................... 714,081 $ 0.30 $ 214,224 Options exercised............................................. (333,332) 0.30 (100,000) ---------- ------------ ------------ Balance at December 31, 1993................................ 380,749 0.30 114,224 Options granted............................................... 634,238 0.30-0.675 331,547 Options exercised............................................. (74,200) 0.30 (22,260) Options canceled.............................................. (38,799) 0.30 (11,640) ---------- ------------ ------------ Balance at December 31, 1994................................ 901,988 0.30-0.675 411,871 Options granted............................................... 1,423,917 0.675 961,144 Options exercised............................................. (62,749) 0.30-0.675 (22,524) Options canceled.............................................. (104,032) 0.30-0.675 (56,597) ---------- ------------ ------------ Balance at December 31, 1995................................ 2,159,124 0.30-0.675 1,293,894 Options granted............................................... 107,500 0.675-4.80 173,281 Options exercised............................................. (72,973) 0.30-0.675 (45,627) Options cancelled............................................. (2,133) 0.30-0.675 (690) ---------- ------------ ------------ Balance at March 31, 1996................................... 2,191,518 $ 0.30-4.80 $ 1,420,858 ---------- ------------ ------------ ---------- ------------ ------------
At December 31, 1995 and March 31, 1996, options for the purchase of 219,446 and 158,490 shares were exercisable, respectively, and 148,889 shares were subject to repurchase. For options granted through December 31, 1995, Affymetrix recognized an aggregate of $2,488,000 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. Deferred compensation related to options granted during the three months ended March 31, 1996 was $326,000. The deferred compensation expense is being recognized over the vesting period of the options. Affymetrix employees have participated in the Affymax stock option and benefit plan. The Affymax stock option plan, employees stock purchase plan, and investment savings plan have had no impact on the financial statements of Affymetrix. NOTE 7. OPERATING LEASE COMMITMENTS Since January 1, 1993, Affymetrix has been occupying a research facility in Santa Clara, California leased by Affymax. In February 1994, Affymetrix entered into a noncancelable operating sublease agreement with Affymax for a 21 month period. Affymetrix obtained an extension through October 1996. The underlying lease contains an option to renew the lease for an additional term of 82 months. In December 1994, Affymetrix entered into a noncancelable five-year lease for the rental of a manufacturing facility in Sunnyvale, California. Affymetrix has options to renew the lease for two additional three-year terms. F-16 AFFYMETRIX, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 AND FOR THE PERIOD FROM INCEPTION TO MARCH 31, 1996 IS UNAUDITED) NOTE 7. OPERATING LEASE COMMITMENTS (CONTINUED) In October 1995, Affymetrix entered into a four-year lease, and a noncancelable 17 month sublease, for the rental of a research and development facility in Sunnyvale, California. Future minimum rental payments under noncancelable operating leases at December 31, 1995 are as follows (in thousands): 1996........................................................ $ 1,102 1997........................................................ 1,042 1998........................................................ 1,039 1999........................................................ 1,099 2000........................................................ 688 Thereafter.................................................. 1,664 --------- Total minimum rental payments............................... $ 6,634 --------- ---------
Rent expense related to operating leases was approximately $275,000 in 1993, $472,000 in 1994, $664,000 in 1995 and $2,005,000 for the period from inception through December 31, 1995. Affymetrix entered into certain noncancelable obligations for the purchase of GeneChip equipment and supplies. The maximum commitment under the contracts at December 31, 1995 is $1,735,000, which will be paid as units are received in 1996. NOTE 8. INCOME TAXES As of December 31, 1995, Affymetrix has net operating loss carryforwards of approximately $22,000,000, which will expire at various dates beginning on 2008 through 2010, 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 are as follows (in thousands):
1993 1994 1995 --------- --------- --------- Net operating loss carryforwards.............................. $ 1,733 $ 4,284 $ 8,063 Research credits.............................................. 346 708 1,167 Deferred revenue.............................................. 156 710 1,041 Other-net..................................................... 7 209 532 --------- --------- --------- Total deferred tax assets..................................... 2,242 5,911 10,803 Valuation allowance for deferred tax assets................... (2,242) (5,911) (10,803) --------- --------- --------- Net deferred tax assets....................................... $ -- $ -- $ -- --------- --------- --------- --------- --------- ---------
The valuation allowance increased by $2,163,000, $3,669,000, and $4,892,000 during 1993, 1994, and 1995, respectively. NOTE 9. OTHER EVENTS SUBSEQUENT TO DECEMBER 31, 1995 On March 7, 1996, the Board of Directors approved a two-for-three reverse stock split of its common stock through an amendment to its Articles of Incorporation. All common share and per share amounts have been F-17 AFFYMETRIX, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 AND FOR THE PERIOD FROM INCEPTION TO MARCH 31, 1996 IS UNAUDITED) NOTE 9. OTHER EVENTS SUBSEQUENT TO DECEMBER 31, 1995 (CONTINUED) retroactively adjusted to reflect this event. The conversion rates for the various issues of preferred stock have also been retroactively adjusted to reflect the reverse stock split as well as the anti-dilution adjustment. As of the effective date of the offering it is estimated that each share of Series A, Series B and Series 1 preferred stock will convert into approximately 0.6823, 0.6667, and 0.6775 shares of common stock, respectively. In addition, on March 7, 1996, the Board authorized the filing of a registration statement with the Securities and Exchange Commission permitting Affymetix to sell shares of its common stock to the public. If the offering is consummated under the terms presently anticipated, all of the currently outstanding preferred stock will automatically convert into 15,629,991 shares of common stock and the warrants will be exercisable for 203,881 shares of common stock at $8.25 per share. Unaudited pro forma shareholders' equity, as adjusted for the conversion of the preferred stock, is set forth in the accompanying balance sheets. In April 1996, Affymetrix entered into an agreement with Incyte Pharmaceuticals, Inc. to explore potential uses of DNA probe arrays in the area of gene expression. As a result of this agreement, Affymetrix is required to refund 30% of the development funding received from GI, and future funding from GI will be proportionally reduced. The Company has recorded an accrued liability for this refund. (See Note 2). In May 1996, Affymetrix entered into an agreement with Glaxo to design, test and supply probe arrays to demonstrate use of the arrays in detecting polymorphisms in specific genes. Glaxo and Affymetrix will design and test a probe array containing genes specified by Glaxo. If successfully developed, Affymetrix will supply Glaxo's requirements of such probe arrays for research purposes. F-18 Affymetrix GeneChip Probe Array Manufacturing ----------------------------------- Combinationatorial [PICTURE] Synthesis Affymetrix is able to synthesize tens of thousands of different DNA probes in parallel. A robotic arm is shown transporting a wafer on a synthesizer. [PICTURE] Photolithography Affymetrix manufactures wafers of GeneChip probe arrays using a high resolution photolithographic fabrication process adapted from the semiconductor industry. A wafer is shown being exposed to ultraviolet light through a lithographic mask. Wafer-Scale Production [PICTURE] Affymetrix achieves manufacturing efficiencies by simultaneously synthesizing many probe arrays on a single wafer. A wafer, diced into individual probe arrays, is shown being packaged into cartridges.
[LOGO] PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by the registrant in connection with the sale of the Common Stock being registered. All amounts are estimated except the SEC Registration Fee, the NASD Filing Fee and the Nasdaq National Market Application Fee. SEC Registration Fee.............................................. $ 25,776 NASD Filing Fee................................................... 7,975 Nasdaq National Market Application Fee............................ 1,000 Blue Sky Qualification Fees and Expenses.......................... 10,000 Accounting Fees and Expenses...................................... 150,000 Legal Fees and Expenses (including Blue Sky)...................... 300,000 Transfer Agent and Registrar Fees................................. 5,000 Printing and Engraving............................................ 150,000 Miscellaneous..................................................... 150,249 --------- Total......................................................... $ 800,000 --------- ---------
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Pursuant to Section 204(a) and 317 of the California Corporations Code, as amended, the registrant has included in its articles of incorporation and by-laws provisions regarding the indemnification of officers and directors of the registrant. Article Four of registrant's Restated Articles of Incorporation, as amended, provides as follows: "The liability of the directors of this corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. This corporation is also authorized, to the fullest extent permissible under California law, to indemnify its agents (as defined in Section 317 of the California Corporations Code), whether by by-law, agreement or otherwise, in excess of the indemnification expressly permitted by Section 317 and to advance defense expenses to its agents in connection with such matters as they are incurred, subject to the limits on such excess indemnification set forth in Section 204 of the California Corporations Code. If, after the effective date of this Article, California law is amended in a manner which permits a corporation to limit the monetary or other liability of its directors or to authorize indemnification of, or advancement of such defense expense to, its directors or other persons, in any such case to a greater extent than is permitted on such effective date, the references in this Article to "California law" shall to that extent be deemed to refer to California law as so amended." Section 29 of the registrant's By-Laws, as amended, provides as follows: "29. INDEMNIFICATION OF DIRECTORS AND OFFICERS. (A) INDEMNIFICATION. To the fullest extent permissible under California law, the corporation shall indemnify its directors and officers against all expenses, judgment, fines settlement and other amounts actually and reasonably incurred by them in connection with any proceeding, including an action by or in the right of the corporation, by reason of the fact that such person is or was a director or officer of the corporation, or is or was serving at the request of the corporation as a director, officer, trustee, employee or agent of another corporation, or of a partnership, joint venture, trust or other enterprise (including service with respect to employee benefit plans). To the fullest extent permissible under California law, expenses incurred by a director or officer seeking indemnification under this By-law in defending any proceeding shall be advanced by the corporation as they are incurred upon receipt by the corporation of an undertaking by or on behalf of the director or officer to repay such amount if it shall ultimately be determined that the director or officer is not entitled to be indemnified by the corporation for those expenses. If, after the effective date of this By-law, California law is amended in a manner which permits the corporation to authorize indemnification of or advancement of expenses to its II-1 directors or officers, in any such case to a greater extent than is permitted on such effective date, the references in this By-law to "California law" shall to that extent be deemed to refer to California law as so amended. The rights granted by this By-law are contractual in nature and, as such, may not be altered with respect to any present or former director or officer without the written consent of that person. (b) PROCEDURE. Upon written request to the Board of Directors by a person seeking indemnification under this By-law, the Board shall promptly determine in accordance with Section 317(e) of the California Corporations Code whether the applicable standard of conduct has been met and, if so, the Board shall authorize indemnification. If the Board cannot authorize indemnification because the number of directors who are parties to the proceeding with respect to which indemnification is sought prevents the formation of a quorum of directors who are not parties to the proceeding, then, upon written request by the person seeking indemnification, independent legal counsel (by means of a written opinion obtained at the corporation's expense) or the corporation's shareholders shall determine whether the applicable standard of conduct has been met and, if so, shall authorize indemnification. (c) DEFINITIONS. The term "proceeding" means any threatened, pending or completed action or proceeding, whether civil, criminal, administrative or investigative. The term "expenses" includes, without limitation, attorney's fees and any expenses of establishing a right to indemnification." ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES During the past three years, the registrant has issued the securities set forth below which were not registered under the Securities Act of 1933, as amended (the "Act"). The share amounts (and purchase and option exercise prices) set forth below have been adjusted to give effect to the two-for-three reverse stock split of the Common Stock effected in May 1996 but do not give effect to the conversion of Preferred Stock into Common Stock upon the closing of this offering. (1) COMMON STOCK. In August 1993, the registrant issued to Affymax N.V. ("Affymax"), an accredited investor, 667 shares of Common Stock at $0.15 per share. The issuance was a private placement without general advertising or solicitation to an "accredited investor" within the meaning of Rule 501(a) under the Act and was exempt from registration under Section 4(2) of the Act. From December 1993 to April 30, 1996, the registrant issued 552,169 shares of Common Stock at prices ranging between $0.30 per share and $0.675 per share to directors, employees and consultants in connection with the exercise by such directors, employees and consultants of stock options held by them. All issuances made pursuant to the exercise of options were made under the registrant's 1993 Stock Plan, as amended. In August 1995, the registrant issued 65,320 shares of Common Stock for financing commissions. All of the foregoing issuances and exercises of options were exempt from registration pursuant to Section 3(b) of the Act and Rule 701 promulgated thereunder. (2) SERIES A SENIOR CONVERTIBLE PREFERRED STOCK. In September 1993, the registrant sold an aggregate of 6,000,000 shares of Series A Convertible Senior Preferred Stock for $3.50 per share to approximately 48 accredited investors. The sales were private placements without general advertising or solicitation to "accredited investors" within the meaning of Rule 501(a) under the Act and were exempt from registration under Section 4(2) of the Act. (3) SERIES B SENIOR CONVERTIBLE PREFERRED STOCK. In August 1995, the registrant sold 8,666,666 shares of Series B Senior Convertible Preferred Stock at a price of $4.50 per share to approximately 100 accredited investors. The sales were private placements without general advertising or solicitation to "accredited investors" within the meaning of Rule 501(a) under the Act and were exempt from registration under Section 4(2) of the Act. (4) SERIES 1 SUBORDINATED CONVERTIBLE PREFERRED STOCK. In September 1993 the registrant issued to Affymax 8,500,000 shares of Series 1 Subordinated Preferred Stock at a price of $1.25 per share. The sale was a private placement without general advertising or solicitation to an "accredited investor" within the meaning of Rule 501(a) under the Act and was exempt from registration under Section 4(2) of the Act. (5) WARRANTS TO PURCHASE SERIES 2 SUBORDINATED CONVERTIBLE PREFERRED STOCK. In December 1994, the registrant issued a five-year warrant to purchase an aggregate of 103,382 shares of Series 2 Subordinated II-2 Convertible Preferred Stock exercisable at $5.50 per share to Affymax in consideration for relieving the Company of certain financial covenants and to guarantee its obligation to a third party. In 1995, the registrant issued five-year warrants to purchase an aggregate of 202,441 shares of Series 2 Subordinated Convertible Preferred Stock exercisable at $5.50 per share to Affymax in consideration for certain interest payments otherwise due on a note agreement. Affymax is an "accredited investor" within the meaning of Rule 501(a) under the Act. The sales were private placements without general advertising or solicitation and was exempt from registration under Section 4(2) of the Act. (6) OPTION ISSUANCES TO DIRECTORS, OFFICERS, EMPLOYEES AND CONSULTANTS. From July 1993 to April 30, 1996, the registrant has issued options to purchase a total of 2,885,400 shares of Common Stock at an exercise price ranging between $0.30 and $4.80 per share to directors, officers, employees and consultants. As of the date of this registration statement, 552,169 options have been exercised. All of such issuances were made under the registrant's 1993 Stock Plan, as amended. No consideration was paid to the registrant by any recipient of any of the foregoing options for the grant of any such options. All of the foregoing issuances and exercises were exempt from registration pursuant to Section 3(b) of the Act and Rule 701 promulgated thereunder. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits 1.1 Form of Underwriting Agreement **3.1 Amended and Restated Articles of Incorporation **3.2 Form of Amended and Restated Articles, to be effective upon closing **3.3 Bylaws **3.4 Form of Certificate of Amendment of Amended and Restated Articles of Incorporation **4.1 Specimen Common Stock Certificate **5.1 Opinion of Heller Ehrman White & McAuliffe **10.1 1993 Stock Plan, as amended **10.2 1996 Nonemployee Directors Stock Option Plan **+10.3 Collaboration Agreement by and between Hewlett-Packard Company and Affymetrix, Inc. dated November 11, 1994 **+10.4 Development and Supply Agreement between Affymetrix, Inc. and Genetics Institute, Inc. dated November 15, 1994 **+10.5 Supply Agreement with Genetics Institute, Inc. dated December 8, 1995 **+10.6 Technology License Agreement among Affymax N.V., Affymax Technologies, N.V., the Affymax Research Institute, and Affymetrix, Inc. dated January 1, 1993 **10.7 Severance Agreement and Release between Affymetrix, Inc. and David B. Singer dated June 15, 1995 **10.8 Loan and Pledge Agreement between David B. Singer and Affymetrix, Inc. effective December 7, 1993. **+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. **10.10 Amendment 1 to the ATP Participation Agreement between Affymetrix, Inc. and Molecular Dynamics, Inc. effective January 13, 1996. **+10.11 Governance Agreement between Affymetrix, Inc. and Glaxo Wellcome plc dated July 6, 1995. **10.12 Services Agreement between Affymax Research Institute and Affymetrix, Inc. effective October 1, 1993.
II-3 **10.13 Loan Agreement between Affymax Technologies N.V. and Affymetrix, Inc. dated December 1, 1994. **10.14 Lease between Solar Oakmead Joint Venture and Affymetrix, Inc. dated October 20, 1995. **10.15 Sublease between Salutar, Inc. and Affymetrix, Inc. dated October 20, 1995. **10.16 Sublease between Affymax Research Institute and Affymetrix, Inc. dated February 1, 1994. **+10.17 Manufacturing and Supply Agreement between Affymetrix, Inc. and RELA, Inc. dated November 27, 1995. **10.18 Loan and Pledge Agreement between Stephen P.A. Fodor and Affymetrix, Inc. effective December 7, 1993. **10.19 Agreement between Stephen P.A. Fodor and Affymetrix, Inc. dated November 1, 1994. **10.20 Form of Director and Officer Indemnification Agreement **+10.21 Demonstration Agreement between Affymetrix, Inc. and Glaxo Wellcome, Inc. dated May 1, 1996 10.22 Lease between Harry Locklin and Affymetrix, Inc. dated December 5, 1994. 11.1 Statement of computation of net loss per share 23.1 Consent of Ernst & Young LLP, independent auditors **23.2 Consent of Heller Ehrman White & McAuliffe 23.3 Consent of Townsend and Townsend and Crew LLP **24.1 Power of Attorney (included on page II-5) **24.2 Power of Attorney of Alejandro C. Zaffaroni 24.3 Power of Attorney of Barry C. Ross
------------ ** Previously filed. + Confidential treatment requested. ITEM 17. UNDERTAKINGS A. The undersigned registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreements, certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser. B. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers, and controlling persons of the registrant pursuant to the provisions described in Item 14 above, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. C. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act of 1933 shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial BONA FIDE offering thereof. II-4 SIGNATURE Pursuant to the requirements of the Securities Act of 1933, Affymetrix, Inc. has duly caused this Amendment No. 2 to Registration Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in Santa Clara, California on May 20, 1996. AFFYMETRIX, INC. By * ------------------------------------ JOHN D. DIEKMAN, Ph.D. CHIEF EXECUTIVE OFFICER AND CHAIRMAN Pursuant to the requirements of the Securities Act of 1933, this Registration Statement on Form S-1 has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE ----------------------------------------------------- ------------------------------------------ --------------- * Director, and Chief Executive ------------------------------------------ Officer (Principal Executive Officer) May 20, 1996 John D. Diekman, Ph.D. * ------------------------------------------ Director and President May 20, 1996 Stephen P.A. Fodor, Ph.D. * ------------------------------------------ Director May 20, 1996 Paul Berg, Ph.D. * ------------------------------------------ Director May 20, 1996 Douglas M. Hurt * ------------------------------------------ Director May 20, 1996 Vernon R. Loucks, Jr. * ------------------------------------------ Director May 20, 1996 Barry C. Ross, Ph.D. * ------------------------------------------ Director May 20, 1996 David B. Singer * ------------------------------------------ Director May 20, 1996 John A. Young * ------------------------------------------ Director May 20, 1996 Alejandro C. Zaffaroni Ph.D. /S/ KENNETH J. NUSSBACHER Chief Financial Officer ------------------------------------------ (Principal Financial and May 20, 1996 Kenneth J. Nussbacher Accounting Officer) *By: /S/ KENNETH J. NUSSBACHER ------------------------------------- May 20, 1996 Kenneth J. Nussbacher (ATTORNEY-IN-FACT)
II-5 INDEX TO EXHIBITS
EXHIBIT PAGE ---------- --------- 1.1 Form of Underwriting Agreement........................................................ **3.1 Amended and Restated Articles of Incorporation........................................ **3.2 Amended and Restated Articles, to be effective upon closing........................... **3.3 Bylaws................................................................................ **3.4 Form of Certificate of Amendment of Amended and Restated Articles of Incorporation.... **4.1 Specimen Common Stock Certificate..................................................... **5.1 Opinion of Heller Ehrman White & McAuliffe............................................ **10.1 1993 Stock Plan, as amended........................................................... **10.2 1996 Nonemployee Directors Stock Option Plan.......................................... **+10.3 Collaboration Agreement by and between Hewlett-Packard Company and Affymetrix, Inc. dated November 11, 1994............................................................... **+10.4 Development and Supply Agreement between Affymetrix, Inc. and Genetics Institute, Inc. dated November 15, 1994............................................................... **+10.5 Supply Agreement with Genetics Institute, Inc. dated December 8, 1995................. **+10.6 Technology License Agreement among Affymax N.V., Affymax Technologies, N.V., the Affymax Research Institute, and Affymetrix, Inc. dated January 1, 1993................ **10.7 Severance Agreement and Release between Affymetrix, Inc. and David B. Singer dated June 15, 1995......................................................................... **10.8 Loan and Pledge Agreement between David B. Singer and Affymetrix, Inc. effective December 7, 1993...................................................................... **+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.............................................. **10.10 Amendment 1 to the ATP Participation Agreement between Affymetrix, Inc. and Molecular Dynamics, Inc. effective January 13, 1996............................................. **+10.11 Governance Agreement between Affymetrix, Inc. and Glaxo Wellcome plc dated July 6, 1995.................................................................................. **10.12 Services Agreement between Affymax Research Institute and Affymetrix, Inc. effective October 1, 1993....................................................................... **10.13 Loan Agreement between Affymax Technologies N.V. and Affymetrix, Inc. dated December 1, 1994............................................................................... **10.14 Lease between Solar Oakmead Joint Venture and Affymetrix, Inc. dated October 20, 1995.................................................................................. **10.15 Sublease between Salutar, Inc. and Affymetrix, Inc. dated October 20, 1995............ **10.16 Sublease between Affymax Research Institute and Affymetrix, Inc. dated February 1, 1994.................................................................................. **+10.17 Manufacturing and Supply Agreement between Affymetrix, Inc. and RELA, Inc. dated November 27, 1995.....................................................................
**10.18 Loan and Pledge Agreement between Stephen P.A. Fodor and Affymetrix, Inc. effective December 7, 1993...................................................................... **10.19 Agreement between Stephen P.A. Fodor and Affymetrix, Inc. dated November 1, 1994...... **10.20 Form of Director and Officer Indemnification Agreement................................ **+10.21 Demonstration Agreement between Affymetrix, Inc. and Glaxo Wellcome, Inc. dated May 1, 1996.................................................................................. 10.22 Lease between Harry Locklin and Affymetrix, Inc. dated December 5, 1994............... 11.1 Statement of computation of loss per share............................................ 23.1 Consent of Ernst & Young LLP, independent auditors.................................... **23.2 Consent of Heller Ehrman White & McAuliffe............................................ 23.3 Consent of Townsend and Townsend and Crew LLP......................................... **24.1 Power of Attorney (included on page II-5)............................................. **24.2 Power of Attorney of Alejandro C. Zaffaroni........................................... 24.3 Power of Attorney of Barry C. Ross....................................................
------------ ** Previously filed. + Confidential treatment requested. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ EXHIBITS TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ AFFYMETRIX, INC. VOLUME I -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ EXHIBITS TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ AFFYMETRIX, INC. VOLUME II --------------------------------------------------------- --------------------------------------------------------- EX-1.1 2 EXHIBIT 1.1 5,000,000 SHARES(1) AFFYMETRIX, INC. COMMON STOCK UNDERWRITING AGREEMENT ____________, 1996 ROBERTSON, STEPHENS & COMPANY LLC CS FIRST BOSTON CORPORATION MONTGOMERY SECURITIES As Representatives of the several Underwriters c/o Robertson, Stephens & Company LLC 555 California Street Suite 2600 San Francisco, California 94104 Ladies/Gentlemen: Affymetrix, Inc., a California corporation (the "Company"), addresses you as the Representatives of each of the persons, firms and corporations listed in Schedule A hereto (herein collectively called the "Underwriters") and hereby confirms its agreement with the several Underwriters as follows: 1. DESCRIPTION OF SHARES. The Company proposes to issue and sell 5,000,000 shares of its authorized and unissued Common Stock, no par value, (the "Firm Shares") to the several Underwriters. The Company also proposes to grant to the Underwriters an option to purchase up to 750,000 additional shares of the Company's Common Stock, no par value, (the "Option Shares"), as provided in Section 7 hereof. As used in this Agreement, the term "Shares" shall include the Firm Shares and the Option Shares. All shares of Common Stock, no par value of the Company to be outstanding after giving effect to the sales contemplated hereby, including the Shares, are hereinafter referred to as "Common Stock." 2. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE COMPANY. The Company represents and warrants to and agrees with each Underwriter that: (a) A registration statement on Form S-1 (File No. 333-3648) with respect to the Shares, including a prospectus subject to completion, has been prepared by the Company in conformity with the requirements of the Securities Act of 1933, as amended (the "Act"), and the applicable rules and regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") under the Act and has been filed with the Commission; such amendments to such registration statement, such amended prospectuses subject to completion and such abbreviated registration statements pursuant to Rule 462(b) of the Rules and Regulations as may have been required prior to the date hereof have been similarly prepared and filed with the Commission; and the Company ------------------------ (1) Plus an option to purchase up to 750,000 additional shares from the Company to cover over-allotments. will file such additional amendments to such registration statement, such amended prospectuses subject to completion and such abbreviated registration statements as may hereafter be required. Copies of such registration statement and amendments, of each related prospectus subject to completion (the "Preliminary Prospectuses") and of any abbreviated registration statement pursuant to Rule 462(b) of the Rules and Regulations have been delivered to you. If the registration statement relating to the Shares has been declared effective under the Act by the Commission, the Company will prepare and promptly file with the Commission the information omitted from the registration statement pursuant to Rule 430A(a) or, if Robertson, Stephens & Company LLC, on behalf of the several Underwriters, shall agree to the utilization of Rule 434 of the Rules and Regulations, the information required to be included in any term sheet filed pursuant to Rule 434(b) or (c), as applicable, of the Rules and Regulations pursuant to subparagraph (1), (4) or (7) of Rule 424(b) of the Rules and Regulations or as part of a post-effective amendment to the registration statement (including a final form of prospectus). If the registration statement relating to the Shares has not been declared effective under the Act by the Commission, the Company will prepare and promptly file an amendment to the registration statement, including a final form of prospectus, or, if Robertson, Stephens & Company LLC, on behalf of the several Underwriters, shall agree to the utilization of Rule 434 of the Rules and Regulations, the information required to be included in any term sheet filed pursuant to Rule 434(b) or (c), as applicable, of the Rules and Regulations. The term "Registration Statement" as used in this Agreement shall mean such registration statement, including financial statements, schedules and exhibits, in the form in which it became or becomes, as the case may be, effective (including, if the Company omitted information from the registration statement pursuant to Rule 430A(a) or files a term sheet pursuant to Rule 434 of the Rules and Regulations, the information deemed to be a part of the registration statement at the time it became effective pursuant to Rule 430A(b) or Rule 434(d) of the Rules and Regulations) and, in the event of any amendment thereto or the filing of any abbreviated registration statement pursuant to Rule 462(b) of the Rules and Regulations relating thereto after the effective date of such registration statement, shall also mean (from and after the effectiveness of such amendment or the filing of such abbreviated registration statement) such registration statement as so amended, together with any such abbreviated registration statement. The term "Prospectus" as used in this Agreement shall mean the prospectus relating to the Shares as included in such Registration Statement at the time it becomes effective (including, if the Company omitted information from the Registration Statement pursuant to Rule 430A(a) of the Rules and Regulations, the information deemed to be a part of the Registration Statement at the time it became effective pursuant to Rule 430A(b) of the Rules and Regulations); PROVIDED, HOWEVER, that if in reliance on Rule 434 of the Rules and Regulations and with the consent of Robertson, Stephens & Company LLC, on behalf of the several Underwriters, the Company shall have provided to the Underwriters a term sheet pursuant to Rule 434(b) or (c), as applicable, prior to the time that a confirmation is sent or given for purposes of Section 2(10)(a) of the Act, the term "Prospectus" shall mean the "prospectus subject to completion" (as defined in Rule 434(g) of the Rules and Regulations) last provided to the Underwriters by the Company and circulated by the Underwriters to all prospective purchasers of the Shares (including the information deemed to be a part of the Registration Statement at the time it became effective pursuant to Rule 434(d) of the Rules and Regulations). Notwithstanding the foregoing, if any revised prospectus shall be provided to the Underwriters by the Company for use in connection with the offering of the Shares that differs from the prospectus referred to in the immediately preceding sentence (whether or not such revised prospectus is required to be filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations), the term "Prospectus" shall refer to such revised prospectus from and after the time it is first provided to the Underwriters for such use. If in reliance on Rule 434 of the Rules and Regulations and with the consent of Robertson, Stephens & Company LLC, on behalf of the several Underwriters, the Company shall have -2- provided to the Underwriters a term sheet pursuant to Rule 434(b) or (c), as applicable, prior to the time that a confirmation is sent or given for purposes of Section 2(10)(a) of the Act, the Prospectus and the term sheet, together, will not be materially different from the prospectus in the Registration Statement. (b) The Commission has not issued any order preventing or suspending the use of any Preliminary Prospectus or instituted proceedings for that purpose, and each such Preliminary Prospectus has conformed in all material respects to the requirements of the Act and the Rules and Regulations and, as of its date, has not included any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and at the time the Registration Statement became or becomes, as the case may be, effective and at all times subsequent thereto up to and on the Closing Date (hereinafter defined) and on any later date on which Option Shares are to be purchased, (i) the Registration Statement and the Prospectus, and any amendments or supplements thereto, contained and will contain all material information required to be included therein by the Act and the Rules and Regulations and will in all material respects conform to the requirements of the Act and the Rules and Regulations, (ii) the Registration Statement, and any amendments or supplements thereto, did not and will not include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and (iii) the Prospectus, and any amendments or supplements thereto, did not and will not include any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; PROVIDED, HOWEVER, that none of the representations and warranties contained in this subparagraph (b) shall apply to information contained in or omitted from the Registration Statement or Prospectus, or any amendment or supplement thereto, in reliance upon, and in conformity with, written information relating to any Underwriter furnished to the Company by such Underwriter specifically for use in the preparation thereof which is specified in the last paragraph of Section 3 hereof. (c) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation with full power and authority (corporate and other) to own, lease and operate its properties and conduct its business as described in the Prospectus; the Company is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction in which the ownership or leasing of its properties or the conduct of its business requires such qualification, except where the failure to be so qualified or be in good standing would not have a material adverse effect on the condition (financial or otherwise), earnings, operations or business as described in the Prospectus of the Company; no proceeding has been instituted in any such jurisdiction, revoking, limiting or curtailing, or seeking to revoke, limit or curtail, such power and authority or qualification; the Company is in possession of and operating in compliance with all authorizations, licenses, certificates, consents, orders and permits from state, federal and other regulatory authorities which are material to the conduct of its business, all of which are valid and in full force and effect; the Company is not in violation of its charter or bylaws or in default in the performance or observance of any obligation, agreement, covenant or condition contained in any material bond, debenture, note or other evidence of indebtedness, or in any material lease, contract, indenture, mortgage, deed of trust, loan agreement, joint venture or other agreement or instrument to which the Company is a party or by which it or its properties may be bound; and the Company is not in violation of any material law, order, rule, regulation, writ, injunction, judgment or decree of any court, government or governmental agency or body, domestic or foreign, having jurisdiction over the Company -3- or over its properties of which it has knowledge. The Company does not own or control, directly or indirectly, any corporation, association or other entity. (d) The Company has full legal right, power and authority to enter into this Agreement and perform the transactions contemplated hereby. This Agreement has been duly authorized, executed and delivered by the Company and is a valid and binding agreement on the part of the Company, enforceable in accordance with its terms, except as rights to indemnification hereunder may be limited by applicable law and except as the enforcement hereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles; the performance of this Agreement and the consummation of the transactions herein contemplated will not result in a breach or violation of any of the terms and provisions of, or constitute a default under, (i) any material bond, debenture, note or other evidence of indebtedness, or under any material lease, contract, indenture, mortgage, deed of trust, loan agreement, joint venture or other agreement or instrument to which the Company is a party or by which it or its properties may be bound, (ii) the charter or bylaws of the Company, or (iii) any material law, order, rule, regulation, writ, injunction, judgment or decree of any court, government or governmental agency or body, domestic or foreign, having jurisdiction over the Company or over its properties. No consent, approval, authorization or order of or qualification with any court, government or governmental agency or body, domestic or foreign, having jurisdiction over the Company or over its properties is required for the execution and delivery of this Agreement and the consummation by the Company of the transactions herein contemplated, except such as may be required under the Act and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which will have been obtained prior to the Closing Date (as hereinafter defined) and except such as may be required under state or other securities or Blue Sky laws. (e) There is not any pending or, to the Company's knowledge, threatened action, suit, claim or proceeding against the Company or any of its officers or any of its properties, assets or rights before any court, government or governmental agency or body, domestic or foreign, having jurisdiction over the Company or over its officers or properties or otherwise which (i) might result in any material adverse change in the condition (financial or otherwise), earnings, operations or business as described in the Prospectus of the Company or might materially and adversely affect its properties, assets or rights, (ii) might prevent consummation of the transactions contemplated hereby or (iii) is required to be disclosed in the Registration Statement or Prospectus and is not so disclosed; and there are no agreements, contracts, leases or documents of the Company of a character required to be described or referred to in the Registration Statement or Prospectus or to be filed as an exhibit to the Registration Statement by the Act or the Rules and Regulations which have not been accurately described in all material respects in the Registration Statement or Prospectus or filed as exhibits to the Registration Statement. (f) All outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable, have been issued in compliance with all federal and state securities laws, were not issued in violation of or subject to any preemptive rights or other rights to subscribe for or purchase securities, and the authorized and outstanding capital stock of the Company is as set forth in the Prospectus under the caption "Capitalization" and conforms in all material respects to the statements relating thereto contained in the Registration Statement and the Prospectus (and such statements correctly state the substance of the instruments defining the capitalization of the Company); the Firm Shares and the Option Shares have been duly authorized for issuance and sale to the Underwriters pursuant to this Agreement and, when issued and delivered by the Company against payment therefor in accordance with the terms of this Agreement, will be duly and validly issued and -4- fully paid and nonassessable, and will be sold free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest; and no preemptive right, co-sale right, registration right, right of first refusal or other similar right of shareholders exists with respect to any of the Firm Shares or Option Shares or the issuance and sale thereof other than those that have been expressly waived prior to the date hereof and those that will automatically expire upon and will not apply to the consummation of the transactions contemplated on the Closing Date. No further approval or authorization of any shareholder, the Board of Directors of the Company or others is required for the issuance and sale or transfer of the Shares except as may be required under the Act (which will have been obtained prior to the Closing Date), state or other securities or Blue Sky laws. Except as disclosed in the Prospectus and the financial statements of the Company, and the related notes thereto, included in the Prospectus, the Company has no outstanding options to purchase, or any preemptive rights or other rights to subscribe for or to purchase, any securities or obligations convertible into, or any contracts or commitments to issue or sell, shares of its capital stock or any such options, rights, convertible securities or obligations. The description of the Company's warrants, stock option, stock bonus and other stock plans or arrangements, and the options or other rights granted and exercised thereunder, set forth in the Prospectus accurately and fairly presents the information required to be shown with respect to such warrants, plans, arrangements, options and rights. (g) Ernst & Young LLP, which has examined the financial statements of the Company, together with the related schedules and notes, as of December 31, 1995 and 1994 and for each of the years in the three (3) years ended December 31, 1995 filed with the Commission as a part of the Registration Statement, which are included in the Prospectus, are independent accountants within the meaning of the Act and the Rules and Regulations; the audited financial statements of the Company, together with the related schedules and notes, and the unaudited financial information, forming part of the Registration Statement and Prospectus, fairly present the financial position and the results of operations of the Company at the respective dates and for the respective periods to which they apply; and all audited financial statements of the Company, together with the related schedules and notes, and the unaudited financial information, filed with the Commission as part of the Registration Statement, have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved except as may be otherwise stated therein. The selected and summary financial and statistical data included in the Registration Statement present fairly the information shown therein and have been compiled on a basis consistent with the audited financial statements presented therein. No other financial statements or schedules are required to be included in the Registration Statement. (h) Subsequent to the respective dates as of which information is given in the Registration Statement and Prospectus, there has not been (i) any material adverse change in the condition (financial or otherwise), earnings, operations or business as described in the Prospectus of the Company, (ii) any transaction that is material to the Company, except transactions entered into in the ordinary course of business, (iii) any obligation, direct or contingent, that is material to the Company, incurred by the Company, except obligations incurred in the ordinary course of business, (iv) any change in the capital stock or outstanding indebtedness of the Company that is material to the Company, (v) any dividend or distribution of any kind declared, paid or made on the capital stock of the Company, or (vi) any loss or damage (whether or not insured) to the property of the Company which has been sustained or will have been sustained which has a material adverse effect on the condition (financial or otherwise), earnings, operations, business as described in the Prospectus of the Company. -5- (i) Except as set forth in the Registration Statement and Prospectus, (i) the Company has good and marketable title to all properties and assets described in the Registration Statement and Prospectus as owned by it, free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest, other than such as would not have a material adverse effect on the condition (financial or otherwise), earnings, operations or business as described in the Prospectus of the Company, (ii) the agreements to which the Company is a party described in the Registration Statement and Prospectus are valid agreements, enforceable by the Company, except as the enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles and, to the Company's knowledge, the other contracting party or parties thereto are not in material breach or material default under any of such agreements, and (iii) the Company has valid and enforceable leases and subleases for all properties described in the Registration Statement and Prospectus as leased by it, except as the enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles. Except as set forth in the Registration Statement and Prospectus, the Company owns or leases all such properties as are necessary to its operations as now conducted or as proposed to be conducted. (j) The Company has timely filed all necessary federal, state and foreign income and franchise tax returns and has paid all taxes shown thereon as due, and there is no tax deficiency that has been or, to the Company's knowledge, might be asserted against the Company that might have a material adverse effect on the condition (financial or otherwise), earnings, operations, business as described in the Prospectus of the Company; and all tax liabilities are adequately provided for on the books of the Company. (k) The Company maintains insurance with insurers of recognized financial responsibility of the types and in the amounts generally deemed adequate for its business and consistent with insurance coverage maintained by similar companies in similar businesses, including, but not limited to, insurance covering real and personal property owned or leased by the Company against theft, damage, destruction, acts of vandalism, product liability and all other risks customarily insured against and with respect to the Company's directors' and officers' insurance policy, the Company has obtained coverage for up to $8 million, all of which insurance is in full force and effect; the Company has not been refused any insurance coverage sought or applied for; and the Company has no reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not materially and adversely affect the condition (financial or otherwise), earnings, operations, business as described in the Prospectus of the Company. (l) To the Company's knowledge, no labor disturbance by the employees of the Company exists or is imminent; and the Company is not aware of any existing or imminent labor disturbance by the employees of any of its principal suppliers, customers, manufacturers, partners or collaborators that might be expected to result in a material adverse change in the condition (financial or otherwise), earnings, operations or business as described in the Prospectus of the Company. No collective bargaining agreement exists with any of the Company's employees and, to the Company's knowledge, no such agreement is imminent. (m) Except as previously disclosed to you in writing, the Company owns or possesses adequate rights to use all patents, patent rights, inventions, trade secrets, know-how, trademarks, service marks, trade names and copyrights which are necessary to conduct its business as described in the -6- Registration Statement and Prospectus; the expiration of any patents, patent rights, trade secrets, trademarks, service marks, trade names or copyrights would not have a material adverse effect on the condition (financial or otherwise), earnings, operations or business as described in the Prospectus of the Company; except as previously disclosed to you in writing, the Company has not received any notice of, and has no knowledge of, any infringement of or conflict with asserted rights of the Company by others with respect to any patent, patent rights, inventions, trade secrets, know-how, trademarks, service marks, trade names or copyrights; and the Company has not received any notice of, and has no knowledge of, any infringement of or conflict with asserted rights of others with respect to any patent, patent rights, inventions, trade secrets, know-how, trademarks, service marks, trade names or copyrights which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, might have a material adverse effect on the condition (financial or otherwise), earnings, operations or business as described in the Prospectus of the Company. (n) The Common Stock has been approved for quotation on The Nasdaq National Market, subject to official notice of issuance. (o) The Company has been advised concerning the Investment Company Act of 1940, as amended (the "1940 Act"), and the rules and regulations thereunder, and has in the past conducted, and intends in the future to conduct, its affairs in such a manner as to ensure that it will not become an "investment company" or a company "controlled" by an "investment company" within the meaning of the 1940 Act and such rules and regulations. (p) The Company has not distributed and will not distribute prior to the later of (i) the Closing Date, or any date on which Option Shares are to be purchased, as the case may be, and (ii) completion of the distribution of the Shares, any offering material in connection with the offering and sale of the Shares other than any Preliminary Prospectuses, the Prospectus, the Registration Statement and other materials, if any, permitted by the Act. (q) The Company has not at any time during the last five (5) years (i) made any unlawful contribution to any candidate for foreign office or failed to disclose fully any contribution in violation of law, or (ii) made any payment to any federal or state governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments required or permitted by the laws of the United States or any jurisdiction thereof. (r) The Company has not taken and will not take, directly or indirectly, any action designed to or that might reasonably be expected to cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Shares. (s) Each officer and director of the Company and beneficial owner of one percent or more of the Company's outstanding shares of capital stock as of the date of this Agreement has agreed in writing that such person will not, for a period of 180 days from the date that the Registration Statement is declared effective by the Commission (the "Lock-up Period"), offer to sell, contract to sell, or otherwise sell, dispose of, loan, pledge or grant any rights with respect to (collectively, a "Disposition") any shares of Common Stock, any options or warrants to purchase any shares of Common Stock (except for options held by non-officer employees of the Company) or any securities convertible into or exchangeable for shares of Common Stock (collectively, "Securities") now owned or hereafter acquired directly by such person or with respect to which such person has or hereafter acquires the power of disposition, otherwise than (i) as a bona fide gift or gifts, provided the donee or -7- donees thereof agree in writing to be bound by this restriction, (ii) as a distribution to partners or shareholders of such person, provided that the distributees thereof agree in writing to be bound by the terms of this restriction, or (iii) with the prior written consent of Robertson, Stephens & Company LLC. The foregoing restriction has been expressly agreed to preclude the holder of the Securities from engaging in any hedging or other transaction which is designed to or reasonably expected to lead to or result in a Disposition of Securities during the Lock-up Period, even if such Securities would be disposed of by someone other than such holder. Such prohibited hedging or other transactions would include, without limitation, any short sale (whether or not against the box) or any purchase, sale or grant of any right (including, without limitation, any put or call option) with respect to any Securities or with respect to any security (other than a broad-based market basket or index) that includes, relates to or derives any significant part of its value from Securities. Furthermore, such person has also agreed and consented to the entry of stop transfer instructions with the Company's transfer agent against the transfer of the Securities held by such person except in compliance with this restriction. The Company has provided to counsel for the Underwriters a complete and accurate list of all security holders of the Company and the number and type of securities held by each security holder. The Company has provided to counsel for the Underwriters true, accurate and complete copies of all of the agreements pursuant to which its officers, directors and shareholders have agreed to such or similar restrictions (the "Lock-up Agreements") presently in effect or effected hereby. The Company understands and agrees that the Lock-Up Agreements are for the benefit of the Underwriters and hereby assigns its rights under such Lock-Up Agreements to Robertson , Stephens & Company LLC. The Company hereby agrees to enforce such Lock-Up Agreements, to not release any of its officers, directors or other shareholders (except for employees of the Company who are not officers of the Company) from any Lock-up Agreements currently existing or hereafter effected without the prior written consent of Robertson, Stephens & Company LLC and to enter stop transfer instructions with the Company's transfer agent against the transfer of any Securities held by such persons except in compliance with the foregoing restriction. (t) Except as set forth in the Registration Statement and Prospectus, (i) the Company is in compliance with all rules, laws and regulations relating to the use, treatment, storage and disposal of toxic substances and protection of health or the environment ("Environmental Laws") which are applicable to its business, (ii) the Company has received no notice from any governmental authority or third party of an asserted claim under Environmental Laws, which claim is required to be disclosed in the Registration Statement and the Prospectus, (iii) the Company will not be required to make future material capital expenditures to comply with Environmental Laws and (iv) no property which is owned, leased or occupied by the Company has been designated as a Superfund site pursuant to the Comprehensive Response, Compensation, and Liability Act of 1980, as amended (42 U.S.C. Section 9601, et seq.), or otherwise designated as a contaminated site under applicable state or local law. (u) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets, (iii) access to assets is permitted only in accordance with management's general or specific authorization, and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (v) There are no outstanding loans, advances (except normal advances for business expenses in the ordinary course of business) or guarantees of indebtedness by the Company to or for the -8- benefit of any of the officers or directors of the Company or any of the members of the families of any of them, except as disclosed in the Registration Statement and the Prospectus. (w) The Company has complied with all provisions of Section 517.075, Florida Statutes relating to doing business with the Government of Cuba or with any person or affiliate located in Cuba. 3. PURCHASE, SALE AND DELIVERY OF SHARES. On the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Company agrees to sell to the Underwriters, and each Underwriter agrees, severally and not jointly, to purchase from the Company at a purchase price of $_____ per share, the respective number of Firm Shares as hereinafter set forth except that any Firm Shares to be sold by the Underwriters to Dr. Alejandro C. Zaffaroni shall be purchased by the Underwriters from the Company at a purchase price per share equal to the inital public offering price set forth on the front page of the Prospectus. The obligation of each Underwriter to the Company shall be to purchase from the Company that number of Firm Shares which is set forth opposite the name of such Underwriter in Schedule A hereto (subject to adjustment as provided in Section 10). Delivery of definitive certificates for the Firm Shares to be purchased by the Underwriters pursuant to this Section 3 shall be made against payment of the purchase price therefor by the several Underwriters by wire transfer of same-day funds paid to an account designated by the Company in writing at the offices of Heller Ehrman White & McAuliffe, 525 University Avenue, Palo Alto, California 94301-1908 (or at such other place as may be agreed upon among the Representatives and the Company, at 7:00 A.M., San Francisco time (a) on the third (3rd) full business day following the first day that Shares are traded, (b) if this Agreement is executed and delivered after 1:30 P.M., San Francisco time, the fourth (4th) full business day following the day that this Agreement is executed and delivered or -C- at such other time and date not later than seven (7) full business days following the first day that Shares are traded as the Representatives and the Company may determine (or at such time and date to which payment and delivery shall have been postponed pursuant to Section 10 hereof), such time and date of payment and delivery being herein called the "Closing Date;" PROVIDED, HOWEVER, that if the Company has not made available to the Representatives copies of the Prospectus within the time provided in Section 4(d) hereof, the Representatives may, in their sole discretion, postpone the Closing Date until no later than two (2) full business days following delivery of copies of the Prospectus to the Representatives. The certificates for the Firm Shares to be so delivered will be made available to you at such office or such other location including, without limitation, in New York City, as you may reasonably request for checking at least one (1) full business day prior to the Closing Date and will be in such names and denominations as you may request, such request to be made at least two (2) full business days prior to the Closing Date. If the Representatives so elect, delivery of the Firm Shares may be made by credit through full fast transfer to the accounts at The Depository Trust Company designated by the Representatives. It is understood that you, individually, and not as the Representatives of the several Underwriters, may (but shall not be obligated to) make payment of the purchase price on behalf of any Underwriter or Underwriters whose check or checks (or wire transfers, as the case may be) shall not have been received by you prior to the Closing Date for the Firm Shares to be purchased by such Underwriter or Underwriters. Any such payment by you shall not relieve any such Underwriter or Underwriters of any of its or their obligations hereunder. -9- After the Registration Statement becomes effective, the several Underwriters intend to make an initial public offering (as such term is described in Section 11 hereof) of the Firm Shares at an initial public offering price of $_____ per share. After the initial public offering, the several Underwriters may, in their discretion, vary the public offering price. The information set forth in the last paragraph on the front cover page (insofar as such information relates to the Underwriters), in the last two paragraphs on the inside front cover concerning stabilization and over-allotment by the Underwriters, and under the second, sixth and seventh paragraphs under the caption "Underwriting" in any Preliminary Prospectus and in the Prospectus constitutes the only information furnished by the Underwriters to the Company for inclusion in any Preliminary Prospectus, the Prospectus or the Registration Statement, and you, on behalf of the respective Underwriters, represent and warrant to the Company that the statements made therein do not include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. 4. FURTHER AGREEMENTS OF THE COMPANY. The Company agrees with the several Underwriters that: (a) The Company will use its best efforts to cause the Registration Statement and any amendment thereof, if not effective at the time and date that this Agreement is executed and delivered by the parties hereto, to become effective as promptly as possible; the Company will use its best efforts to cause any abbreviated registration statement pursuant to Rule 462(b) of the Rules and Regulations as may be required subsequent to the date the Registration Statement is declared effective to become effective as promptly as possible; the Company will notify you, promptly after it shall receive notice thereof, of the time when the Registration Statement, any subsequent amendment to the Registration Statement or any abbreviated registration statement has become effective or any supplement to the Prospectus has been filed; if the Company omitted information from the Registration Statement at the time it was originally declared effective in reliance upon Rule 430A(a) of the Rules and Regulations, the Company will provide evidence satisfactory to you that the Prospectus contains such information and has been filed, within the time period prescribed, with the Commission pursuant to subparagraph (1) or (4) of Rule 424(b) of the Rules and Regulations or as part of a post-effective amendment to such Registration Statement as originally declared effective which is declared effective by the Commission; if the Company files a term sheet pursuant to Rule 434 of the Rules and Regulations, the Company will provide evidence satisfactory to you that the Prospectus and term sheet meeting the requirements of Rule 434(b) or (c), as applicable, of the Rules and Regulations, have been filed, within the time period prescribed, with the Commission pursuant to subparagraph (7) of Rule 424(b) of the Rules and Regulations; if for any reason the filing of the final form of Prospectus is required under Rule 424(b)(3) of the Rules and Regulations, it will provide evidence satisfactory to you that the Prospectus contains such information and has been filed with the Commission within the time period prescribed; it will notify you promptly of any request by the Commission for the amending or supplementing of the Registration Statement or the Prospectus or for additional information; promptly upon your request, it will prepare and file with the Commission any amendments or supplements to the Registration Statement or Prospectus which, in the opinion of counsel for the several Underwriters ("Underwriters' Counsel"), may be necessary or advisable in connection with the distribution of the Shares by the Underwriters; it will promptly prepare and file with the Commission, and promptly notify you of the filing of, any -10- amendments or supplements to the Registration Statement or Prospectus which may be necessary to correct any statements or omissions, if, at any time when a prospectus relating to the Shares is required to be delivered under the Act, any event shall have occurred as a result of which the Prospectus or any other prospectus relating to the Shares as then in effect would include any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; in case any Underwriter is required to deliver a prospectus nine (9) months or more after the effective date of the Registration Statement in connection with the sale of the Shares, it will prepare promptly upon request, but at the expense of such Underwriter, such amendment or amendments to the Registration Statement and such prospectus or prospectuses as may be necessary to permit compliance with the requirements of Section 10(a)(3) of the Act; and it will file no amendment or supplement to the Registration Statement or Prospectus which shall not previously have been submitted to you in a reasonable time prior to the proposed filing thereof or to which you shall reasonably object in writing, subject, however, to compliance with the Act and the Rules and Regulations and the provisions of this Agreement. (b) The Company will advise you, promptly after it shall receive notice or obtain knowledge, of the issuance of any stop order by the Commission suspending the effectiveness of the Registration Statement or of the initiation or threat of any proceeding for that purpose; and it will promptly use its best efforts to prevent the issuance of any stop order or to obtain its withdrawal at the earliest possible moment if such stop order should be issued. (c) The Company will use its best efforts to qualify the Shares for offering and sale under the securities laws of such jurisdictions as you may designate and to continue such qualifications in effect for so long as may be required for purposes of the distribution of the Shares, except that the Company shall not be required in connection therewith or as a condition thereof to qualify as a foreign corporation or to execute a general consent to service of process in any jurisdiction in which it is not otherwise required to be so qualified or to so execute a general consent to service of process. In each jurisdiction in which the Shares shall have been qualified as above provided, the Company will make and file such statements and reports in each year as are or may be required by the laws of such jurisdiction. (d) The Company will furnish to you, as soon as available, and, in the case of the Prospectus and any term sheet or abbreviated term sheet under Rule 434, in no event later than the first (1st) full business day following the first day that Shares are traded, copies of the Registration Statement (three of which will be signed and which will include all exhibits), each Preliminary Prospectus, the Prospectus and any amendments or supplements to such documents, including any prospectus prepared to permit compliance with Section 10(a)(3) of the Act, all in such quantities as you may from time to time reasonably request. Notwithstanding the foregoing, if Robertson, Stephens & Company LLC, on behalf of the several Underwriters, shall agree to the utilization of Rule 434 of the Rules and Regulations, the Company shall provide to you copies of a Preliminary Prospectus updated in all respects through the date specified by you in such quantities as you may from time to time reasonably request. (e) The Company will make generally available to its security holders as soon as practicable, but in any event not later than the forty-fifth (45th) day following the end of the fiscal quarter first occurring after the first anniversary of the effective date of the Registration Statement, an earnings statement (which will be in reasonable detail but need not be audited) complying with the provisions of Section 11(a) of the Act and covering a twelve (12) month period beginning after the effective date of the Registration Statement. -11- (f) During a period of five (5) years after the date hereof or until an Acquisition of the Company, the Company will furnish to its shareholders as soon as practicable after the end of each respective period, annual reports (including financial statements audited by independent certified public accountants) and unaudited quarterly reports of operations for each of the first three quarters of the fiscal year, and will furnish to you and the other several Underwriters hereunder, upon request (i) concurrently with furnishing such reports to its shareholders, statements of operations of the Company for each of the first three (3) quarters in the form furnished to the Company's shareholders, (ii) concurrently with furnishing to its shareholders, a balance sheet of the Company as of the end of such fiscal year, together with statements of operations, of shareholders' equity, and of cash flows of the Company for such fiscal year, accompanied by a copy of the certificate or report thereon of independent certified public accountants, (iii) as soon as they are available, copies of all reports (financial or other) mailed to shareholders, (iv) as soon as they are available, copies of all reports and financial statements furnished to or filed with the Commission, any securities exchange or the National Association of Securities Dealers, Inc. ("NASD"), (v) every material press release and every material news item or article in respect of the Company or its affairs which was generally released to shareholders or prepared by the Company, and (vi) any additional information of a public nature concerning the Company, or its business which you may reasonably request. During such five (5) year period, if the Company shall have active subsidiaries, the foregoing financial statements shall be on a consolidated basis to the extent that the accounts of the Company and its subsidiaries are consolidated, and shall be accompanied by similar financial statements for any significant subsidiary which is not so consolidated. An "Acquisition of the Company" shall mean the closing of an acquisition or merger of the Company (i) whereby all or substantially all of the capital stock of the Company is sold, directly or indirectly, by the Company's shareholders of record immediately prior to such closing and (ii) which results in the Company no longer being required to comply with the reporting requirements of the Exchange Act. (g) The Company will apply the net proceeds from the sale of the Shares being sold by it in the manner set forth under the caption "Use of Proceeds" in the Prospectus. (h) The Company will maintain a transfer agent and, if necessary under the jurisdiction of incorporation of the Company, a registrar (which may be the same entity as the transfer agent) for its Common Stock. (i) The Company will file Form SR in conformity with the requirements of the Act and the Rules and Regulations. (j) If the transactions contemplated hereby are not consummated by reason of any failure, refusal or inability on the part of the Company to perform any agreement on its part to be performed hereunder or to fulfill any condition of the Underwriters' obligations hereunder, or if the Company shall terminate this Agreement pursuant to Section 11(a) hereof, or if the Underwriters shall terminate this Agreement pursuant to Section 11(b)(i), the Company will reimburse the several Underwriters for all reasonable out-of-pocket expenses (including fees and disbursements of Underwriters' Counsel) incurred by the Underwriters in investigating or preparing to market or marketing the Shares. (k) If at any time during the ninety (90) day period after the Registration Statement becomes effective, any rumor, publication or event relating to or affecting the Company shall occur as a result of which in your opinion the market price of the Common Stock has been or is likely to be materially affected (regardless of whether such rumor, publication or event necessitates a supplement -12- to or amendment of the Prospectus), the Company will, after written notice from you advising the Company to the effect set forth above, forthwith prepare, consult with you concerning the substance of and disseminate a press release or other public statement, reasonably satisfactory to you, responding to or commenting on such rumor, publication or event. (l) During the Lock-up Period, the Company will not, without the prior written consent of Robertson Stephens & Company LLC, effect the Disposition of, directly or indirectly, any Securities other than the (i) sale of the Firm Shares and the Option Shares hereunder, (ii) the Company's issuance of options or Common Stock under the Company's presently authorized 1993 Stock Plan and 1996 Non-Employee Directors Stock Option Plan (the "Option Plans") or upon exercise of any warrants of the Company outstanding as of the date of this Agreement (the "Warrants") and (iii) the Company's issuance of shares to a strategic partner of the Company in conjunction with an agreement involving a technical, manufacturing and/or marketing collaboration, provided that the Company shall give you ten days prior written notice of any such collaboration during such period. The Company understands and agrees that the Lock-Up Agreements are for the benefit of the Underwriters and hereby assigns its rights under such Lock-Up Agreements to Robertson , Stephens & Company LLC. The Company hereby agrees to enforce such Lock-Up Agreements, to not release any of its officers, directors or other shareholders (except for employees of the Company who are not officers of the Company) from any Lock-up Agreements currently existing or hereafter effected without the prior written consent of Robertson, Stephens & Company LLC and to enter stop transfer instructions with the Company's transfer agent against the transfer of any Securities held by such persons except in compliance with the foregoing restriction. (m) During a period of ninety (90) days from the effective date of the Registration Statement, the Company will not file a registration statement registering shares under the Option Plans or any other employee benefit plan. 5. EXPENSES. (a) The Company agrees with each Underwriter that: (i) The Company will pay and bear all costs and expenses in connection with the preparation, printing and filing of the Registration Statement (including financial statements, schedules and exhibits), Preliminary Prospectuses and the Prospectus and any amendments or supplements thereto; the printing of this Agreement, the Agreement Among Underwriters, the Selected Dealer Agreement, the Preliminary Blue Sky Survey and any Supplemental Blue Sky Survey, the Underwriters' Questionnaire and Power of Attorney, and any instruments related to any of the foregoing; the issuance and delivery of the Shares hereunder to the several Underwriters, including transfer taxes, if any, the cost of all certificates representing the Shares and transfer agents' and registrars' fees; the fees and disbursements of counsel for the Company; all fees and other charges of the Company's independent certified public accountants; the cost of furnishing to the several Underwriters copies of the Registration Statement (including exhibits), Preliminary Prospectus and the Prospectus, and any amendments or supplements to any of the foregoing; NASD filing fees and the cost of qualifying the Shares under the laws of such jurisdictions as you may designate (including filing fees and fees and disbursements of Underwriters' Counsel in connection with such NASD filings and Blue Sky qualifications); and all other expenses directly incurred by the Company in connection with the performance of their obligations hereunder. -13- (ii) In addition to its other obligations under Section 8(a) hereof, the Company agrees that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding described in Section 8(a) hereof, it will reimburse the Underwriters on a monthly basis for all reasonable legal or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the Company's obligation to reimburse the Underwriters for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any such interim reimbursement payment is so held to have been improper, the Underwriters shall promptly return such payment to the Company together with interest, compounded daily, determined on the basis of the prime rate listed from time to time in The Wall Street Journal which represents the base rate on corporate loans posted by a substantial majority of the nation's thirty (30) largest banks (the "Prime Rate"). Any such interim reimbursement payments which are not made to the Underwriters within thirty (30) days of a request for reimbursement shall bear interest at the Prime Rate from the date of such request. (b) In addition to their other obligations under Section 8(b) hereof, the Underwriters severally and not jointly agree that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding described in Section 8(b) hereof, they will reimburse the Company on a monthly basis for all reasonable legal or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the Underwriters' obligation to reimburse the Company for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any such interim reimbursement payment is so held to have been improper, the Company shall promptly return such payment to the Underwriters together with interest, compounded daily, determined on the basis of the Prime Rate. Any such interim reimbursement payments which are not made to the Company within thirty (30) days of a request for reimbursement shall bear interest at the Prime Rate from the date of such request. (c) It is agreed that any controversy arising out of the operation of the interim reimbursement arrangements set forth in Sections 5(a)(ii) and 5(b) hereof, including the amounts of any requested reimbursement payments, the method of determining such amounts and the basis on which such amounts shall be apportioned among the reimbursing parties, shall be settled by arbitration conducted under the provisions of the Constitution and Rules of the Board of Governors of the New York Stock Exchange, Inc. or pursuant to the Code of Arbitration Procedure of the NASD. Any such arbitration must be commenced by service of a written demand for arbitration or a written notice of intention to arbitrate, therein electing the arbitration tribunal. In the event the party demanding arbitration does not make such designation of an arbitration tribunal in such demand or notice, then the party responding to said demand or notice is authorized to do so. Any such arbitration will be limited to the operation of the interim reimbursement provisions contained in Sections 5(a)(ii) and 5(b) hereof and will take place in San Francisco or Santa Clara, California and will not resolve the ultimate propriety or enforceability of the obligation to indemnify for expenses which is created by the provisions of Sections 8(a)and 8(b) hereof or the obligation to contribute to expenses which is created by the provisions of Section 8(d) hereof. 6. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the several Underwriters to purchase and pay for the Shares as provided herein shall be subject to the accuracy, as of the date hereof and the Closing Date and any later date on which Option Shares are to be purchased, as the case may be, -14- of the representations and warranties of the Company herein, to the performance by the Company of its obligations hereunder and to the following additional conditions: (a) The Registration Statement shall have become effective not later than 2:00 P.M., San Francisco time, on the date following the date of this Agreement, or such later date as shall be consented to in writing by you; and no stop order suspending the effectiveness thereof shall have been issued and no proceedings for that purpose shall have been initiated or, to the knowledge of the Company or any Underwriter, threatened by the Commission, and any request of the Commission for additional information (to be included in the Registration Statement or the Prospectus or otherwise) shall have been complied with to the satisfaction of Underwriters' Counsel. (b) All corporate proceedings and other legal matters in connection with this Agreement, the form of Registration Statement and the Prospectus, and the registration, authorization, issue, sale and delivery of the Shares, shall have been reasonably satisfactory to Underwriters' Counsel, and such counsel shall have been furnished with such papers and information as they may reasonably have requested to enable them to pass upon the matters referred to in this Section. (c) Subsequent to the execution and delivery of this Agreement and prior to the Closing Date, or any later date on which Option Shares are to be purchased, as the case may be, there shall not have been any change in the condition (financial or otherwise), earnings, operations, business as described in the Prospectus of the Company from that set forth in the Registration Statement or Prospectus, which, in your sole judgment, is material and adverse and that makes it, in your sole judgment, impracticable or inadvisable to proceed with the public offering of the Shares as contemplated by the Prospectus. (d) You shall have received on the Closing Date and on any later date on which Option Shares are to be purchased, as the case may be, the following opinion of Heller Ehrman White & McAuliffe, counsel for the Company, dated the Closing Date or such later date on which Option Shares are to be purchased addressed to the Underwriters and with reproduced copies or signed counterparts thereof for each of the Underwriters, to the effect that: (i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation; (ii) The Company has the corporate power and corporate authority to own, lease and operate its properties and to conduct its business as described in the Prospectus; (iii) The Company is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction, if any, in which the ownership or leasing of its properties or the conduct of its business requires such qualification, except where the failure to be so qualified or be in good standing would not have a material adverse effect on the condition (financial or otherwise), earnings, operations or business of the Company. To such counsel's knowledge, the Company does not own or control, directly or indirectly, any corporation, association or other entity; (iv) The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectus under the caption "Capitalization" as of the dates stated therein, the issued and outstanding shares of capital stock of the Company have been duly and validly issued and are fully paid and nonassessable, have not been issued in violation of preemptive rights set forth in the Company's -15- charter, and to such counsel's knowledge, will not have been issued in violation of or subject to any co-sale right, registration right, right of first refusal or other similar right granted by the Company; (v) The Firm Shares or the Option Shares, as the case may be, to be issued by the Company pursuant to the terms of this Agreement have been duly authorized and, upon issuance and delivery against payment therefor in accordance with the terms hereof, will be duly and validly issued and fully paid and nonassessable, have not been issued in violation of preemptive rights set forth in the Company's charter, and will not have been issued in violation of or subject to any co-sale right, registration right, right of first refusal or other similar right granted by the Company. (vi) The Company has the corporate power and corporate authority to enter into this Agreement and to issue, sell and deliver to the Underwriters the Shares to be issued and sold by it hereunder; (vii) This Agreement has been duly authorized by all necessary corporate action on the part of the Company and has been duly executed and delivered by the Company and, assuming due authorization, execution and delivery by you, is a valid and binding agreement of the Company, enforceable in accordance with its terms, except insofar as indemnification provisions may be limited by applicable law and except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting creditors' rights generally or by general equitable principles; (viii) The Registration Statement has become effective under the Act and, to such counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or threatened under the Act; (ix) The Registration Statement and the Prospectus, and each amendment or supplement thereto (other than the financial statements (including supporting schedules) and financial data derived therefrom as to which such counsel need express no opinion), as of the effective date of the Registration Statement, complied as to form in all material respects with the requirements of the Act and the applicable Rules and Regulations; (x) The information in the Prospectus under the caption "Description of Capital Stock," to the extent that it constitutes matters of law or legal conclusions, has been reviewed by such counsel and is a fair summary of such matters and conclusions; and the form of certificates evidencing the Common Stock and filed as an exhibit to the Registration Statement complies with California law; (xi) The description in the Registration Statement and the Prospectus of the charter and bylaws of the Company and of statutes (other than statutes opined upon in Section 6(e) by Townsend and Townsend and Crew and in Section 5(f) by Buc Levitt & Beardsley) is accurate and fairly presents the information required to be presented by the Act and the applicable Rules and Regulations; (xii) To such counsel's knowledge, there are no agreements, contracts, leases or documents to which the Company is a party of a character required to be described or referred to in the Registration Statement or Prospectus or to be filed as an exhibit to the Registration Statement which are not described or referred to therein or filed as required; -16- (xiii) The performance of this Agreement and the consummation of the transactions herein contemplated (other than performance of the Company's indemnification obligations hereunder, concerning which no opinion need be expressed) will not (a) result in any violation of the Company's charter or bylaws or (b) to such counsel's knowledge, result in a breach or violation of any of the terms and provisions of, or constitute a default under, any material bond, debenture, note or other evidence of indebtedness, or any material lease, contract, indenture, mortgage, deed of trust, loan agreement, joint venture or other agreement or instrument known to such counsel to which the Company is a party or by which its properties are bound, or any applicable material statute, rule or regulation known to such counsel or, to such counsel's knowledge, any material order, writ or decree of any court, government or governmental agency or body having jurisdiction over the Company, or over any of its properties or operations; (xiv) No consent, approval, authorization or order of or qualification with any court, government or governmental agency or body having jurisdiction over the Company, or over any of its properties or operations is necessary in connection with the consummation by the Company of the transactions herein contemplated, except such as have been obtained under the Act or the Exchange Act or such as may be required under state or other securities or Blue Sky laws in connection with the purchase and the distribution of the Shares by the Underwriters; (xv) To such counsel's knowledge, there are no legal or governmental proceedings pending or threatened against the Company of a character required to be disclosed in the Registration Statement or the Prospectus by the Act or the Rules and Regulations, other than those described therein; (xvi) To such counsel's knowledge, the Company is not presently (a) in violation of its charter or bylaws, or (b) in breach of any applicable material statute, rule or regulation known to such counsel or, to such counsel's knowledge, any material order, writ or decree of any court or governmental agency or body having jurisdiction over the Company, or over any of its properties or operations; and (xvii) To such counsel's knowledge, except as set forth in the Registration Statement and Prospectus, no holders of Common Stock or other securities of the Company have registration rights with respect to securities of the Company and, except as set forth in the Registration Statement and Prospectus, all holders of securities of the Company having rights known to such counsel to registration of such shares of Common Stock or other securities, because of the filing of the Registration Statement by the Company have, with respect to the offering contemplated thereby, waived such rights or such rights have expired by reason of lapse of time following notification of the Company's intent to file the Registration Statement. In addition, such counsel shall state that such counsel has participated in conferences with officials and other representatives of the Company, the Representatives, Underwriters' Counsel and the independent certified public accountants of the Company, at which such conferences the contents of the Registration Statement and Prospectus and related matters were discussed, and although they have not verified the accuracy or completeness of the statements contained in the Registration Statement or the Prospectus, nothing has come to the attention of such counsel which leads such counsel to believe that, at the time the Registration Statement became effective and at all times subsequent thereto up to and on the Closing Date and on any later date on which Option Shares are to be purchased, the Registration Statement and any amendment or supplement thereto (other than the financial statements including supporting schedules and other financial and statistical information derived therefrom, as to which such counsel need express no comment) contained any untrue statement of a material fact or omitted to state -17- a material fact required to be stated therein or necessary to make the statements therein not misleading, or at the Closing Date or any later date on which the Option Shares are to be purchased, as the case may be, the Registration Statement, the Prospectus and any amendment or supplement thereto (except as aforesaid) contained any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. Counsel rendering the foregoing opinion may rely as to questions of law not involving the laws of the United States or the State of California upon opinions of local counsel, and as to questions of fact upon representations or certificates of officers of the Company and of government officials, in which case their opinion is to state that they are so relying and that they have no knowledge of any material misstatement or inaccuracy in any such opinion, representation or certificate. Copies of any opinion, representation or certificate so relied upon shall be delivered to you, as Representatives of the Underwriters, and to Underwriters' Counsel. (e) Townsend and Townsend and Crew ("Townsend"), outside patent counsel for the Company, shall have expertised the statements set forth in the Prospectus under the caption "Risk Factors--- Dependence on Proprietary Technology and Unpredictability of Patent Protection" and "Business-Intellectual Property". In addition, you shall have received on the Closing Date and on any later date on which Option Shares are purchased, as the case may be, the following opinion of Townsend, dated the Closing Date or such later date on which Option Shares are purchased, addressed to the Underwriters and with reproduced copies or signed counterparts thereof for each of the Underwriters, stating that such counsel is familiar with the technology used by the Company, its business and the manner of its technology's use thereof, and to the effect that: (i) To such counsel's knowledge, except as set forth on Exhibit 1, the Company owns or possesses sufficient licenses or other rights to use all necessary patents, patent rights, trade secrets, trademarks, service marks, trade names and copyrights (hereinafter called "Intellectual Property Rights," ) to conduct the business now being or proposed to be conducted by the Company as described in the Prospectus; (ii) To such counsel's knowledge, except as otherwise set forth on Exhibit 1, there are no actions, suits, proceedings, claims or other legal actions or governmental proceedings relating to (a) any Intellectual Property Rights owned or licensed by the Company pending against the Company, Affymax or any licensor, or (b) a third party's Intellectual Property Rights pending against the Company or of which the Company has received notice; (iii) To such counsel's knowledge, except as set forth in Exhibit 1 to the opinion, the Company is not infringing or otherwise violating any Intellectual Property Rights of others and there are no infringements by others of any Intellectual Property Rights owned or licensed by the Company which, in the judgment of such counsel, could affect materially the use thereof by the Company; (iv) We are not aware of any facts which would preclude the Company from having clear title to or a valid license to each foreign or domestic patent and patent application listed on Exhibit 2 (the "Patent Portfolio") to such opinion, and the Company is the sole assignee or exclusive licensee thereof, except as indicated on the Patent Portfolio; -18- (v) We are not aware of any material defect of form in preparation or filing of the applications in the Patent Portfolio; (vi) The patent applications in the Patent Portfolio are being diligently pursued; and (vii) The information in the Registration Statement and Prospectus under the captions "Risk Factors--Dependence on Proprietary Technology and Unpredictability of Patent Protection and Business--Intellectual Property" and "--Collaborative Agreements" (the "Intellectual Property Information") to the extent it constitutes matters of law or legal conclusions, has been reviewed by such counsel and is a fair and accurate summary of such matters; In addition, such counsel shall state that such counsel has participated in conferences with officials and other representatives of the Company, the Representatives, Underwriters' Counsel and the independent certified public accountants of the Company, at which such conferences the contents of the Registration Statement and Prospectus and related matters were discussed, and although they have not verified the accuracy or completeness of the statements contained in the Registration Statement or the Prospectus, nothing has come to the attention of such counsel which leads such counsel to believe that, at the time the Registration Statement became effective and at all times subsequent thereto up to and on the Closing Date and on any later date on which Option Shares are to be purchased, the Intellectual Property Information in the Registration Statement and any amendment or supplement thereto (other than financial statements including supporting schedules and other financial and statistical information derived therefrom, as to which such counsel need express no comment) did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or at the Closing Date or any later date on which Option Shares are to be purchased, as the case may be, the Intellectual Property Information in the Prospectus, and any amendment or supplement thereto, (except aforesaid) did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (f) You shall have received on the Closing Date and on any later date on which Option Shares are purchased, as the case may be, the following opinion of Buc Levitt & Beardsley, regulatory counsel for the Company, dated the Closing Date or such later date on which Option Shares are purchased, addressed to the Underwriters and with reproduced copies or signed counterparts thereof for each of the Underwriters stating that such counsel is familiar with the technology used by the Company, its business and the manner of its technology's use thereof and has read the Registration Statement and the Prospectus including particularly the portions of the Registration Statement and the Prospectus referring to regulatory matters, and to the effect that: (i) The information in the Registration Statement and the Prospectus under the captions "Risk Factors--Government Regulation; No Assurance of Regulatory Approval," and "Business--Government Regulation" (the "Regulatory Information"), to the extent that it constitutes matters of law or legal conclusions, has been reviewed by such counsel and is a fair and accurate summary of such matters; (ii) In addition, such counsel shall state that such counsel has participated in conferences with officials and other representatives of the Company, at which such conferences the Regulatory Information and related matters were discussed, and although they have not verified the -19- accuracy or completeness of the statements contained in the Registration Statement or the Prospectus, nothing has come to the attention of such counsel which leads such counsel to believe that, at the time the Registration Statement became effective and at all times subsequent thereto up to and on the Closing Date and on any later date on which Option Shares are to be purchased, the Regulatory Information in the Registration Statement and any amendment or supplement thereto (other than financial statements including supporting schedules and other financial and statistical information derived therefrom, as to which such counsel need express no comment) did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or at the Closing Date or any later date on which Option Shares are to be purchased, as the case may be, the Regulatory Information in the Prospectus, and any amendment or supplement thereto, (except aforesaid) did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (g) You shall have received on the Closing Date and on any later date on which Option Shares are to be purchased, as the case may be, an opinion of Wilson Sonsini Goodrich & Rosati, in form and substance satisfactory to you, with respect to the sufficiency of all such corporate proceedings and other legal matters relating to this Agreement and the transactions contemplated hereby as you may reasonably require, and the Company shall have furnished to such counsel such documents as they may have requested for the purpose of enabling them to pass upon such matters. (h) You shall have received on the Closing Date and on any later date on which Option Shares are to be purchased, as the case may be, a letter from Ernst & Young LLP addressed to the Underwriters, dated the Closing Date or such later date on which Option Shares are to be purchased, as the case may be, confirming that they are independent certified public accountants with respect to the Company within the meaning of the Act and the applicable published Rules and Regulations and based upon the procedures described in such letter delivered to you concurrently with the execution of this Agreement (herein called the "Original Letter"), but carried out to a date not more than five (5) business days prior to the Closing Date or such later date on which Option Shares are to be purchased, as the case may be, (i) confirming, to the extent true, that the statements and conclusions set forth in the Original Letter are accurate as of the Closing Date or such later date on which Option Shares are to be purchased, as the case may be, and (ii) setting forth any revisions and additions to the statements and conclusions set forth in the Original Letter which are necessary to reflect any changes in the facts described in the Original Letter since the date of such letter, or to reflect the availability of more recent financial statements, data or information. The letter shall not disclose any change in the condition (financial or otherwise), earnings, operations or business as described in the Prospectus of the Company from that set forth in the Registration Statement or Prospectus, which, in your sole judgment, is material and adverse and that makes it, in your sole judgment, impracticable or inadvisable to proceed with the public offering of the Shares as contemplated by the Prospectus. The Original Letter from Ernst & Young LLP shall be addressed to or for the use of the Underwriters in form and substance satisfactory to the Underwriters and shall (i) represent, to the extent true, that they are independent certified public accountants with respect to the Company within the meaning of the Act and the applicable published Rules and Regulations, (ii) set forth their opinion with respect to their examination of the balance sheet of the Company as of December 31, 1995 and related statements of operations, shareholders' equity, and cash flows for the twelve (12) months ended December 31, 1995, and(iii) state that Ernst & Young, LLP has performed the procedure set out in Statement on Auditing Standards No. 71 ("SAS 71") for a review of interim financial information and providing the report of Ernst & Young LLP as described in SAS 71 in the financial statements for each of the quarters in the three month period ending March 31, 1996 -20- and 1995 (the "Quarterly Financial Statements"), (iv) state that in the course of such review, nothing came to their attention that leads them to believe that any material modifications need be made to any of the Quarterly Financial Statements in order for them to be in compliance with generally accepted accounting principles consistently applied across the periods presented and (v) address other matters agreed upon by Ernst & Young, LLP and you. In addition, you shall have received from Ernst & Young LLP, a letter addressed to the Company and made available to you for the use of the Underwriters stating that their review of the Company's system of internal accounting controls, to the extent they deemed necessary in establishing the scope of their examination of the Company's financial statements as of December 31, 1995, did not disclose any weaknesses in internal controls that they considered to be material weaknesses. (i) You shall have received on the Closing Date and on any later date on which Option Shares are to be purchased, as the case may be, a certificate of the Company, dated the Closing Date or such later date on which Option Shares are to be purchased, as the case may be, signed by the Chief Executive Officer and Chief Financial Officer of the Company, to the effect that, and you shall be satisfied that: (i) The representations and warranties of the Company in this Agreement are true and correct, as if made on and as of the Closing Date or any later date on which Option Shares are to be purchased, as the case may be, and the Company has complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied at or prior to the Closing Date or any later date on which Option Shares are to be purchased, as the case may be; (ii) No stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or threatened under the Act; (iii) When the Registration Statement became effective and at all times subsequent thereto up to the delivery of such certificate, the Registration Statement and the Prospectus, and any amendments or supplements thereto, contained all material information required to be included therein by the Act and the Rules and Regulations and in all material respects conformed to the requirements of the Act and the Rules and Regulations, the Registration Statement, and any amendment or supplement thereto, did not and does not include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, the Prospectus, and any amendment or supplement thereto, did not and does not include any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, and, since the effective date of the Registration Statement, there has occurred no event required to be set forth in an amended or supplemented Prospectus which has not been so set forth; and (iv) Subsequent to the respective dates as of which information is given in the Registration Statement and Prospectus, there has not been (a) any material adverse change in the condition (financial or otherwise), earnings, operations or business as described in the Prospectus of the Company, (b) any transaction that is material to the Company, except transactions entered into in the ordinary course of business, (c) any obligation, direct or contingent, that is material to the Company incurred by the Company, except obligations incurred in the ordinary course of business, (d) any change in the capital stock or outstanding indebtedness of the Company that is material to the Company, (e) any dividend or distribution of any kind declared, paid or made on the capital stock of the Company, or (f) -21- any loss or damage (whether or not insured) to the property of the Company which has been sustained or will have been sustained which has a material adverse effect on the condition (financial or otherwise), earnings, operations or business as described in the Prospectus of the Company. (j) The Company shall have obtained and delivered to you an agreement from each officer and director of the Company, and each beneficial owner of one percent or more of the Company's outstanding shares of capital stock as of the date of this Agreement in writing prior to the date hereof that such person will not, during the Lock-up Period, effect the Disposition of any Securities now owned or hereafter acquired directly by such person or with respect to which such person has or hereafter acquires the power of disposition, otherwise than (i) as a bona fide gift or gifts, provided the donee or donees thereof agree in writing to be bound by this restriction, (ii) as a distribution to partners or shareholders of such person, provided that the distributees thereof agree in writing to be bound by the terms of this restriction, or (iii) with the prior written consent of Robertson, Stephens & Company LLC. The foregoing restriction shall have been expressly agreed to preclude the holder of the Securities from engaging in any hedging or other transaction which is designed to or reasonably expected to lead to or result in a Disposition of Securities during the Lock-up Period, even if such Securities would be disposed of by someone other than the such holder. Such prohibited hedging or other transactions would including, without limitation, any short sale (whether or not against the box) or any purchase, sale or grant of any right (including, without limitation, any put or call option) with respect to any Securities or with respect to any security (other than a broad-based market basket or index) that includes, relates to or derives any significant part of its value from Securities. Furthermore, such person will have also agreed and consented to the entry of stop transfer instructions with the Company's transfer agent against the transfer of the Securities held by such person except in compliance with this restriction. (k) The Company shall have furnished to you such further certificates and documents as you shall reasonably request (including certificates of officers) of the Company as to the accuracy of the representations and warranties of the Company herein, as to the performance by the Company of its obligations hereunder and as to the other conditions concurrent and precedent to the obligations of the Underwriters hereunder. All such opinions, certificates, letters and documents will be in compliance with the provisions hereof only if they are reasonably satisfactory to Underwriters' Counsel. The Company will furnish you with such number of conformed copies of such opinions, certificates, letters and documents as you shall reasonably request. 7. OPTION SHARES. (a) On the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Company hereby grants to the several Underwriters, for the purpose of covering over-allotments in connection with the distribution and sale of the Firm Shares only, a nontransferable option to purchase up to an aggregate of 750,000 Option Shares at the purchase price per share of $_______. Such option may be exercised by the Representatives on behalf of the several Underwriters on one (1) occasion in whole or in part during the period of thirty (30) days after the date on which the Firm Shares are initially offered to the public, by giving written notice to the Company. The number of Option Shares to be purchased by each Underwriter upon the exercise of such option shall be the same proportion of the total number of Option Shares to be purchased by the several Underwriters pursuant to the exercise of such option as the number of Firm Shares purchased by such Underwriter (set forth in Schedule A hereto) bears to the total number -22- of Firm Shares purchased by the several Underwriters (set forth in Schedule A hereto), adjusted by the Representatives in such manner as to avoid fractional shares. Delivery of definitive certificates for the Option Shares to be purchased by the several Underwriters pursuant to the exercise of the option granted by this Section 7 shall be made against payment of the purchase price therefor by the several Underwriters by wire transfer of same-day funds paid to an account designated by the Company in writing. Such delivery and payment shall take place at the offices of Heller Ehrman White & McAuliffe, 525 University Avenue, Palo Alto, California 94301-1908, or at such other place as may be agreed upon among the Representatives and the Company (i) on the Closing Date, if written notice of the exercise of such option is received by the Company at least two (2) full business days prior to the Closing Date, or (ii) on a date which shall not be later than the third (3rd) full business day following the date the Company receives written notice of the exercise of such option, if such notice is received by the Company less than two (2) full business days prior to the Closing Date. The certificates for the Option Shares to be so delivered will be made available to you at such office or such other location including, without limitation, in New York City, as you may reasonably request for checking at least one (1) full business day prior to the date of payment and delivery and will be in such names and denominations as you may request, such request to be made at least two (2) full business days prior to such date of payment and delivery. If the Representatives so elect, delivery of the Option Shares may be made by credit through full fast transfer to the accounts at The Depository Trust Company designated by the Representatives. It is understood that you, individually, and not as the Representatives of the several Underwriters, may (but shall not be obligated to) make payment of the purchase price on behalf of any Underwriter or Underwriters whose check or checks (or wire transfers as the case may be) shall not have been received by you prior to the date of payment and delivery for the Option Shares to be purchased by such Underwriter or Underwriters. Any such payment by you shall not relieve any such Underwriter or Underwriters of any of its or their obligations hereunder. (b) Upon exercise of any option provided for in Section 7(a) hereof, the obligations of the several Underwriters to purchase such Option Shares will be subject (as of the date hereof and as of the date of payment and delivery for such Option Shares) to the accuracy of and compliance with the representations, warranties and agreements of the Company herein, to the accuracy of the statements of the Company and officers of the Company made pursuant to the provisions hereof, to the performance by the Company of its obligations hereunder, to the conditions set forth in Section 6 hereof, and to the condition that all proceedings taken at or prior to the payment date in connection with the sale and transfer of such Option Shares shall be satisfactory in form and substance to you and to Underwriters' Counsel, and you shall have been furnished with all such documents, certificates and opinions as you may request in order to evidence the accuracy and completeness of any of the representations, warranties or statements, the performance of any of the covenants or agreements of the Company or the satisfaction of any of the conditions herein contained. 8. INDEMNIFICATION AND CONTRIBUTION. (a) The Company agrees to indemnify and hold harmless each Underwriter against any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject (including, without limitation, in its capacity as an Underwriter or as a "qualified independent -23- underwriter" within the meaning of Schedule E of the Bylaws of the NASD), under the Act, the Exchange Act or otherwise, specifically including, but not limited to, losses, claims, damages or liabilities (or actions in respect thereof) arising out of or based upon (i) any breach of any representation, warranty, agreement or covenant of the Company herein contained, (ii) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement or any amendment or supplement thereto, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (iii) any untrue statement or alleged untrue statement of any material fact contained in any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, and agrees to reimburse each Underwriter for any legal or other expenses reasonably incurred by it in connection with investigating or defending any such loss, claim, damage, liability or action; PROVIDED, HOWEVER, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability or action arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement, such Preliminary Prospectus or the Prospectus, or any such amendment or supplement thereto, in reliance upon, and in conformity with, written information relating to any Underwriter furnished to the Company by such Underwriter, directly or through you, specifically for use in the preparation thereof and, PROVIDED FURTHER, that the indemnity agreement provided in this Section 8(a) with respect to any Preliminary Prospectus shall not inure to the benefit of any Underwriter from whom the person asserting any losses, claims, damages, liabilities or actions based upon any untrue statement or alleged untrue statement of material fact or omission or alleged omission to state therein a material fact purchased Shares, if a copy of the Prospectus in which such untrue statement or alleged untrue statement or omission or alleged omission was corrected had not been sent or given to such person within the time required by the Act and the Rules and Regulations, unless such failure is the result of noncompliance by the Company with Section 4(d) hereof. The indemnity agreement in this Section 8(a) shall extend upon the same terms and conditions to, and shall inure to the benefit of, each person, if any, who controls any Underwriter within the meaning of the Act or the Exchange Act. This indemnity agreement shall be in addition to any liabilities which the Company may otherwise have. (b) Each Underwriter, severally and not jointly, agrees to indemnify and hold harmless the Company against any losses, claims, damages or liabilities, joint or several, to which the Company may become subject under the Act, the Exchange Act or otherwise, specifically including, but not limited to, losses, claims, damages or liabilities (or actions in respect thereof) arising out of or based upon (i) any breach of any representation, warranty, agreement or covenant of such Underwriter herein contained, (ii) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement or any amendment or supplement thereto, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (iii) any untrue statement or alleged untrue statement of any material fact contained in any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or the omission or alleged omission to state therein a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, in the case of subparagraphs (ii) and (iii) of this Section 8(b) to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by such Underwriter, directly or through you, specifically for use in the preparation thereof, and agrees to reimburse the Company for -24- any legal or other expenses reasonably incurred by the Company in connection with investigating or defending any such loss, claim, damage, liability or action. The indemnity agreement in this Section 8(b) shall extend upon the same terms and conditions to, and shall inure to the benefit of, each officer of the Company who signed the Registration Statement and each director of the Company, and each person, if any, who controls the Company within the meaning of the Act or the Exchange Act. This indemnity agreement shall be in addition to any liabilities which each Underwriter may otherwise have. (c) Promptly after receipt by an indemnified party under this Section 8 of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against any indemnifying party under this Section 8, notify the indemnifying party in writing of the commencement thereof but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under this Section 8. In case any such action is brought against any indemnified party, and it notified the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it shall elect by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party; PROVIDED, HOWEVER, that if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, the indemnified party or parties shall have the right to select separate counsel to assume such legal defenses and to otherwise participate in the defense of such action on behalf of such indemnified party or parties. Upon receipt of notice from the indemnifying party to such indemnified party of the indemnifying party's election so to assume the defense of such action and approval by the indemnified party of counsel, the indemnifying party will not be liable to such indemnified party under this Section 8 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof unless (i) the indemnified party shall have employed separate counsel in accordance with the proviso to the next preceding sentence (it being understood, however, that the indemnifying party shall not be liable for the expenses of more than one separate counsel (together with appropriate local counsel) approved by the indemnifying party representing all the indemnified parties under Section 8(a) or 8(b) hereof who are parties to such action), (ii) the indemnifying party shall not have employed counsel satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of commencement of the action or (iii) the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party. In no event shall any indemnifying party be liable in respect of any amounts paid in settlement of any action unless the indemnifying party shall have approved the terms of such settlement; PROVIDED that such consent shall not be unreasonably withheld. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnification could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on all claims that are the subject matter of such proceeding. (d) In order to provide for just and equitable contribution in any action in which a claim for indemnification is made pursuant to this Section 8 but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case -25- notwithstanding the fact that this Section 8 provides for indemnification in such case, all the parties hereto shall contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (after contribution from others) in such proportion so that the Underwriters severally and not jointly are responsible pro rata for the portion represented by the percentage that the underwriting discount bears to the initial public offering price, and the Company is responsible for the remaining portion, PROVIDED, HOWEVER, that (i) no Underwriter shall be required to contribute any amount in excess of the amount by which the underwriting discount applicable to the Shares purchased by such Underwriter exceeds the amount of damages which such Underwriter has otherwise required to pay and (ii) no person guilty of a fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. The contribution agreement in this Section 8(d) shall extend upon the same terms and conditions to, and shall inure to the benefit of, each person, if any, who controls any Underwriter, the Company within the meaning of the Act or the Exchange Act and each officer of the Company who signed the Registration Statement and each director of the Company. (e) The parties to this Agreement hereby acknowledge that they are sophisticated business persons who were represented by counsel during the negotiations regarding the provisions hereof including, without limitation, the provisions of this Section 8, and are fully informed regarding said provisions. They further acknowledge that the provisions of this Section 8 fairly allocate the risks in light of the ability of the parties to investigate the Company and its business in order to assure that adequate disclosure is made in the Registration Statement and Prospectus as required by the Act and the Exchange Act. 9. REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS TO SURVIVE DELIVERY. All representations, warranties, covenants and agreements of the Company and the Underwriters herein or in certificates delivered pursuant hereto, and the indemnity and contribution agreements contained in Section 8 hereof shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter within the meaning of the Act or the Exchange Act, or by or on behalf of the Company or any of its officers, directors or controlling persons within the meaning of the Act or the Exchange Act, and shall survive the delivery of the Shares to the several Underwriters hereunder or termination of this Agreement. 10. SUBSTITUTION OF UNDERWRITERS. If any Underwriter or Underwriters shall fail to take up and pay for the number of Firm Shares agreed by such Underwriter or Underwriters to be purchased hereunder upon tender of such Firm Shares in accordance with the terms hereof, and if the aggregate number of Firm Shares which such defaulting Underwriter or Underwriters so agreed but failed to purchase does not exceed 10% of the Firm Shares, the remaining Underwriters shall be obligated, severally in proportion to their respective commitments hereunder, to take up and pay for the Firm Shares of such defaulting Underwriter or Underwriters. If any Underwriter or Underwriters so defaults and the aggregate number of Firm Shares which such defaulting Underwriter or Underwriters agreed but failed to take up and pay for exceeds 10% of the Firm Shares, the remaining Underwriters shall have the right, but shall not be obligated, to take up and pay for (in such proportions as may be agreed upon among them) the Firm Shares which the defaulting Underwriter or Underwriters so agreed but failed to purchase. If such remaining Underwriters do not, at the Closing Date, take up and pay for the Firm Shares which the defaulting Underwriter or Underwriters so agreed but failed to purchase, the Closing Date shall be postponed for twenty- four (24) hours to allow the several Underwriters the privilege of substituting within twenty-four (24) hours -26- (including non-business hours) another underwriter or underwriters (which may include any nondefaulting Underwriter) satisfactory to the Company. If no such underwriter or underwriters shall have been substituted as aforesaid by such postponed Closing Date, the Closing Date may, at the option of the Company, be postponed for a further twenty-four (24) hours, if necessary, to allow the Company the privilege of finding another underwriter or underwriters, satisfactory to you, to purchase the Firm Shares which the defaulting Underwriter or Underwriters so agreed but failed to purchase. If it shall be arranged for the remaining Underwriters or substituted underwriter or underwriters to take up the Firm Shares of the defaulting Underwriter or Underwriters as provided in this Section 10, (i) the Company shall have the right to postpone the time of delivery for a period of not more than seven (7) full business days, in order to effect whatever changes may thereby be made necessary in the Registration Statement or the Prospectus, or in any other documents or arrangements, and the Company agrees promptly to file any amendments to the Registration Statement, supplements to the Prospectus or other such documents which may thereby be made necessary, and (ii) the respective number of Firm Shares to be purchased by the remaining Underwriters and substituted underwriter or underwriters shall be taken as the basis of their underwriting obligation. If the remaining Underwriters shall not take up and pay for all such Firm Shares so agreed to be purchased by the defaulting Underwriter or Underwriters or substitute another underwriter or underwriters as aforesaid and the Company shall not find or shall not elect to seek another underwriter or underwriters for such Firm Shares as aforesaid, then this Agreement shall terminate. In the event of any termination of this Agreement pursuant to the preceding paragraph of this Section 10, neither the Company shall be liable to any Underwriter (except as provided in Sections 5 and 8 hereof) nor shall any Underwriter (other than an Underwriter who shall have failed, otherwise than for some reason permitted under this Agreement, to purchase the number of Firm Shares agreed by such Underwriter to be purchased hereunder, which Underwriter shall remain liable to the Company and the other Underwriters for damages, if any, resulting from such default) be liable to the Company (except to the extent provided in Sections 5 and 8 hereof). The term "Underwriter" in this Agreement shall include any person substituted for an Underwriter under this Section 10. 11. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION. (a) This Agreement shall become effective at the earlier of (i) 6:30 A.M., San Francisco time, on the first full business day following the effective date of the Registration Statement, or (ii) the time of the initial public offering of any of the Shares by the Underwriters after the Registration Statement becomes effective. The time of the initial public offering shall mean the time of the release by you, for publication, of the first newspaper advertisement relating to the Shares, or the time at which the Shares are first generally offered by the Underwriters to the public by letter, telephone, telegram or telecopy, whichever shall first occur. By giving notice as set forth in Section 12 before the time this Agreement becomes effective, you, as Representatives of the several Underwriters, or the Company, may prevent this Agreement from becoming effective without liability of any party to any other party, except as provided in Sections 4(j), 5 and 8 hereof. (b) You, as Representatives of the several Underwriters, shall have the right to terminate this Agreement by giving notice as hereinafter specified at any time on or prior to the Closing Date or on or prior to any later date on which Option Shares are to be purchased, as the case may be, (i) if the Company shall have failed, refused or been unable to perform any agreement on its part to be performed, -27- or because any other condition of the Underwriters' obligations hereunder required to be fulfilled is not fulfilled, including, without limitation, any change in the condition (financial or otherwise), earnings, operations or business as described in the Prospectus of the Company from that set forth in the Registration Statement or Prospectus, which, in your sole judgment, is material and adverse, or (ii) if additional material governmental restrictions, not in force and effect on the date hereof, shall have been imposed upon trading in securities generally or minimum or maximum prices shall have been generally established on the New York Stock Exchange or on the American Stock Exchange or in the over the counter market by the NASD, or trading in securities generally shall have been suspended on either such exchange or in the over the counter market by the NASD, or if a banking moratorium shall have been declared by federal, New York or California authorities, or (iii) if the Company shall have sustained a loss by strike, fire, flood, earthquake, accident or other calamity of such character as to interfere materially with the conduct of the business and operations of the Company regardless of whether or not such loss shall have been insured, or (iv) if there shall have been a material adverse change in the general political or economic conditions or financial markets as in your reasonable judgment makes it inadvisable or impracticable to proceed with the offering, sale and delivery of the Shares, or (v) if there shall have been an outbreak or escalation of hostilities or of any other insurrection or armed conflict or the declaration by the United States of a national emergency which, in the reasonable opinion of the Representatives, makes it impracticable or inadvisable to proceed with the public offering of the Shares as contemplated by the Prospectus. In the event of termination pursuant to subparagraph (i) above, the Company shall remain obligated to pay costs and expenses pursuant to Sections 4(j), 5 and 8 hereof. Any termination pursuant to any of subparagraphs (ii) through (v) above shall be without liability of any party to any other party except as provided in Sections 5 and 8 hereof. If you elect to prevent this Agreement from becoming effective or to terminate this Agreement as provided in this Section 11, you shall promptly notify the Company by telephone, telecopy or telegram, in each case confirmed by letter. If the Company shall elect to prevent this Agreement from becoming effective, the Company shall promptly notify you by telephone, telecopy or telegram, in each case, confirmed by letter. 12. NOTICES. All notices or communications hereunder, except as herein otherwise specifically provided, shall be in writing and if sent to you shall be mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and confirmed by letter) to you c/o Robertson, Stephens & Company LLC, 555 California Street, Suite 2600, San Francisco, California 94104, telecopier number (415) 781-0278, Attention: General Counsel with a copy to Wilson Sonsini Goodrich & Rosati, 650 Page Mill Road, Palo Alto, California 94304-1050, telecopier number (415) 493-6811, Attention: Alan K. Austin; if sent to the Company, such notice shall be mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and confirmed by letter) to Affymetrix, Inc., 3380 Central Expressway, Santa Clara, California 95051, telecopier number (408) 481- 0920, Attention: John D. Diekman, Ph.D., Chief Executive Officer with a copy to Heller Ehrman White & McAuliffe, 525 University Avenue, Palo Alto, California 94301-1908 , telecopier number (415) 324-0638, Attention: Julian N. Stern. 13. PARTIES. This Agreement shall inure to the benefit of and be binding upon the several Underwriters and the Company and its executors, administrators, successors and assigns. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person or entity, other than the parties hereto and their respective executors, administrators, successors and assigns, and the controlling persons within the meaning of the Act or the Exchange Act, officers and directors referred to in Section 8 hereof, any legal or equitable right, remedy or claim in respect of this Agreement or any provisions herein contained, this Agreement and all conditions and provisions hereof being -28- intended to be and being for the sole and exclusive benefit of the parties hereto and their respective executors, administrators, successors and assigns and said controlling persons and said officers and directors, and for the benefit of no other person or entity. No purchaser of any of the Shares from any Underwriter shall be construed a successor or assign by reason merely of such purchase. In all dealings with the Company under this Agreement, you shall act on behalf of each of the several Underwriters, and the Company shall be entitled to act and rely upon any statement, request, notice or agreement made or given by you jointly or by Robertson, Stephens & Company LLC, on behalf of you. 14. APPLICABLE LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California. 15. COUNTERPARTS. This Agreement may be signed in several counterparts, each of which will constitute an original. -29- If the foregoing correctly sets forth the understanding among the Company and the several Underwriters, please so indicate in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement among the Company and the several Underwriters. Very truly yours, AFFYMETRIX, INC. By: --------------------------- Name: ------------------------- Title: ------------------------ Accepted as of the date first above written: ROBERTSON, STEPHENS & COMPANY LLC CS FIRST BOSTON CORPORATION MONTGOMERY SECURITIES On their behalf and on behalf of each of the several Underwriters named in Schedule A hereto. By ROBERTSON, STEPHENS & COMPANY LLC By ROBERTSON, STEPHENS & COMPANY GROUP, L.L.C. By --------------------------------------- Authorized Signatory -30- SCHEDULE A Number of Firm shares To Be Underwriters Purchased ------------ --------------- ROBERTSON, STEPHENS & COMPANY LLC. . . . . . . . . . . . . . . . . CS FIRST BOSTON CORPORATION. . . . . . . . . . . . . . . . . . . . MONTGOMERY SECURITIES. . . . . . . . . . . . . . . . . . . . . . . --------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000,000 --------- --------- EX-10.22 3 EXHIBIT 10.22 AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE -- NET 1. Basic Provisions ("Basic Provisions") 1.1 Parties: This Lease ("Lease"), dated for reference purposes only, December 5, 1994, is made by and between Harry Locklin ("Lessor") and Affymetrix, a California Corporation ("Lessee"), (collectively the "Parties," or individually a "Party"). 1.2 Premises: That certain real property, including all improvements therein or to be provided by Lessor under the terms of this Lease, and commonly known by the street address of 1145 Sonora Court, Sunnyvale, located in the County of Santa Clara, State of California and generally described as (describe briefly the nature of the property) approximately 19,900 square feet of an office/R&D building together with parking areas and landscaping (if any) appurtenant thereto. 1.3 Term: Five (5) years and 0 months ("Original Term") commencing three (3) months after the date of delivery ("Commencement Date") and ending April 30, 2000 ("Expiration Date"). (See Paragraph 3 for further provisions). 1.4 Early Possession: February 1, 1995, ("Early Possession Date") however if National Semiconductor vacates building at an earlier date, access shall be granted. (See Paragraphs 3.2 and 3.3 for further provisions.) 1.5 Base Rent: $14,992.50 per month ("Base Rent"), payable on the first day of each month commencing three (3) months after access is granted. (See Paragraph 4 for further provisions.) /X/ If this box is checked, there are provisions in this Lease for the Base Rent to be adjusted. 1.6 Base Rent Paid Upon Execution: $14,992.50 as Base Rent for the first full calendar month of the term. 1.7 Security Deposit: $15,000.00 ("Security Deposit"). (See Paragraph 5 for further provisions.) 1.8 Permitted Use: Administrative offices, laboratory, research and development facility, manufacturing and clean room areas. (See Paragraph 6 for further provisions.) 1.9 Insuring Party: Lessor is the "Insuring Party" unless otherwise stated herein. (See Paragraph 8 for further provisions.) 1.10 Real Estate Brokers: The following real estate brokers (collectively, the "Brokers") and brokerage relationships exist in this transaction and are consented to by the Parties (check applicable boxes): Cornish & Carey Commercial Oncor International represents Lessor exclusively ("Lessor's Broker"), and Cornish & Carey Commercial Oncor International and Catalyst Real Estate Group represents Lessee exclusively ("Lessee's Broker"). 1.11 Guarantor. The obligations of the Lessee under this Lease are to be guaranteed by ___________________ ("Guarantor"). (See Paragraph 37 for further provisions.) 1.12 Addenda. Attached hereto is an Addendum or Addenda consisting of Paragraphs 1 through 13 and Exhibits A and B, all of which constitute a part of this Lease. 2. Premises. 2.1 Letting. Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the Premises, for the term, at the rental, and upon all of the terms, covenants and conditions set forth in this Lease. Unless otherwise provided herein, any statement of square footage set forth in this Lease, or that may have been used in calculating rental, is an approximation which Lessor and Lessee agree is reasonable and the rental based thereon is not subject to revision whether or not the actual square footage is more or less. 2.2 Deleted. 2.3 Deleted. 2.4 Acceptance of Premises. Lessee hereby acknowledges: (a) that it has been advised by the Brokers to satisfy itself with respect to the condition of the Premises (including but not limited to the electrical and fire sprinkler systems, security, environmental aspects, compliance with Applicable Law, as defined in Paragraph 6.3) and the present and future suitability of the Premises for Lessee's intended use and (c) that neither Lessor, nor any of Lessor's agents, has made any oral or written representations or warranties with respect to the said matters other than as set forth in this Lease. 2.5 Lessee Prior Owner/Occupant. The warranties made by Lessor in this Paragraph 2 shall be of no force or effect if immediately prior to the date set forth in Paragraph 1.1 Lessee was the owner or occupant of the Premises. In such event, Lessee shall, at Lessee's sole cost and expense, correct any non-compliance of the Premises with said warranties. 3. Term. 3.1 Term. The Commencement Date, Expiration Date and Original Term of this Lease are as specified in Paragraph 13. 3.2 Early Possession. If Lessee totally or partially occupies the Premises prior to the Commencement Date, the obligation to pay Base Rent shall be abated for the period of such early possession. All other terms of this Lease, however, (including but not limited to the obligations to pay Real Property Taxes and insurance premiums and to maintain the Premises) shall be in effect during such period. Any such early possession shall not affect nor advance the Expiration Date of the Original Term. 3.3 Delay in Possession. If for any reason Lessor cannot deliver possession of the Premises to Lessee as agreed herein by the Early Possession Date if one is specified in Paragraph 1.4, or, if no Early Possession Date is specified. by the Commencement Date, Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease, or the obligations of Lessee hereunder, or extend the term hereof, but in such case, Lessee shall not, except as otherwise provided herein, be obligated to pay rent or perform any other obligation of Lessee under the terms of the Lease until Lessor delivers possession of the Premises to Lessee, if possession of the Premises is not delivered to Lessee within sixty (60) days after the Commencement Date, Lessee may, at its option, by notice in writing to Lessor within ten (10) days thereafter, cancel this Lease, in which event the Parties shall be discharged from all obligations hereunder; provided, however, that if such written notice by Lessee is not received by Lessor within said ten (10) day period, Lessee's right to cancel this Lease shall terminate and be of no further force or effect. Except as may be otherwise provided, and regardless of when the term actually commences, if possession is not tendered to Lessee when required by this Lease and Lessee does not terminate this Lease as aforesaid, the period free of the obligation to pay Base Rent, if any, that Lessee would otherwise have enjoyed shall run from the date of delivery -2- of possession and continue for a period equal to what Lessee would otherwise have enjoyed under the terms hereof, but minus any days of delay caused by the acts, changes or omissions of Lessee. 4. Rent. 4.1 Base Rent. Lessee shall cause payment of Base Rent and other rent or charges, as the same may be adjusted from time to time, to be received by Lessor in lawful money of the United States, without offset or deduction, on or before the day on which it is due under the terms of this Lease. Base Rent and all other rent and charges for any period during the term hereof which is for less than one (1) full calendar month shall be prorated based upon the actual number of days of the calendar month involved. Payment of Base Rent and other charges shall be made to Lessor at its address stated herein or to such other persons or at such other addresses as Lessor may from time to time designate in writing to Lessee. 5. Security Deposit. Lessee shall deposit with Lessor upon execution hereof the Security Deposit set forth in Paragraph 1.7 as security for Lessee's faithful performance of Lessee's obligations under this Lease. If Lessee fails to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults under this Lease (as defined in Paragraph 13.1), Lessor may use, apply or retain all or any portion of said Security Deposit for the payment of any amount due Lessor or to reimburse or compensate Lessor for any liability, cost, expense, loss or damage (including attorneys' fees) which Lessor may suffer or incur by reason thereof. If Lessor uses or applies all or any portion of said Security Deposit, Lessee shall within ten (10) days after written request therefor deposit moneys with Lessor sufficient to restor said Security Deposit to the full amount required by this Lease. Any time the Base Rent increases during the term of this Lease, Lessee shall, upon written request from Lessor, deposit additional moneys with Lessor sufficient to maintain the same ratio between the Security Deposit and the Base Rent as those amounts are specified in the Basic Provisions. Lessor shall not be required to keep all or any part of the Security Deposit separate from its general accounts. Lessor shall, at the expiration or earlier termination of the term hereof and after Lessee has vacated the Premises, return to Lessee (or, at Lessor's option, to the last assignee, if any, of Lessee's interest herein), that portion of the Security Deposit not used or applied by Lessor. Unless otherwise expressly agreed in writing by Lessor, no part of the Security Deposit shall be considered to be held in trust, to bear interest or other increment for its use, or to be prepayment for any moneys to be paid by Lessee under this Lease. 6. Use. 6.1 Use. Lessee shall use and occupy the Premises only for the purposes set forth in Paragraph 1.8, or any other use which is comparable thereto, and for no other purpose. Lessee shall not use or permit the use of the Premises in a manner that creates waste or a nuisance, or that disturbs owners and/or occupants of, or causes damage to, neighboring premises or properties. Lessor hereby agrees to no unreasonably withhold or delay its consent to any written request by Lessee, Lessees assignees or subtenants, and by prospective assignees and subtenants of the Lessee, its assignees and subtenants, for a modification of said permitted purpose for which the premises may be used or occupied, so long as the same will not impair the structural integrity of the improvements on the Premises, the mechanical or electrical systems therein, is not significantly more burdensome to the Premises and the improvements thereon, and is otherwise permissible pursuant to this Paragraph 6. If Lessor elects to withhold such consent, Lessor shall within five (5) business days give a written notification of same, which notice shall include an explanation of Lessor's reasonable objections to the change in use. -3- 6.2 Hazardous Substances. (a) Reportable Uses Require Consent. Hazardous Substance shall include, but not be limited to, hydrocarbons, petroleum, gasoline, crude oil or any products, by-products or factions thereof. Lessee shall not engage in any activity in, on or about the Premises which constitutes a Reportable Use (as hereinafter defined) of Hazardous Substances without the express prior written consent of Lessor and compliance in a timely manner (at Lessee's sole cost and expense) with all Applicable Law (as defined in Paragraph 6.3). "Reportable Use" shall mean (i) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority. Reportable Use shall also include Lessee's being responsible for the presence in, on or about the Premises of a Hazardous Substance with respect to which any Applicable Law requires that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may, without Lessor's prior consent, but in compliance with all Applicable Law, use any ordinary and customary materials reasonably required to be used by Lessee in the normal course of Lessee's business permitted on the Premises, so long as such use is not a Reportable Use and does not expose the Premises or neighboring properties to any meaningful risk of contamination or damage or expose Lessor to any liability therefor. In addition, Lessor may (but without any obligation to do so) condition its consent to the use or presence of any Hazardous Substance, activity or storage tank by Lessee upon Lessee's giving Lessor such additional assurances as Lessor, in its reasonable discretion, deems necessary to protect itself, the public, the Premises and the environment against damage, contamination or injury and/or liability therefrom or therefor, including, but not limited to, the installation (and removal on or before Lease expiration or earlier termination) of reasonably necessary protective modifications to the Premises (such as concrete encasements) and/or the deposit of an additional Security Deposit under paragraph 5 hereof. (b) Duty to Inform Lessor. If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance, or a condition involving or resulting from same, has come to be located in, on, under or about the Premises, other than as previously consented to be Lessor, Lessee shall immediately give written notice of such fact to Lessor. Lessee shall also immediately give Lessor a copy of any statement, report, notice, registration, application, permit, business plan, license, claim, action or proceeding given to, or received from, any governmental authority or private party, or persons entering or occupying the Premises, concerning the Presence, spill, release, discharge of, or exposure to, any Hazardous Substance or contamination in, on, or about the Premises, including but not limited to all such documents as may be involved in any Reportable Uses involving the Premises. (c) Indemnification. Lessee shall indemnify, protect, defend and hold Lessor, its agents, employees, lenders and ground Lessor, if any, and the Premises, harmless from and against any and all loss of rents and/or damages, liabilities, judgments, costs, claims, liens, expenses, penalties, permits and attorney's and consultant's fees arising out of or involving any Hazardous Substance or storage tank brought onto the Premises by or for Lessee or under Lessee's control. Lessee's obligations under this Paragraph 6 shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Lessee, and the cost of investigation (including consultant's and attorney's fees and testing), removal, remediation, restoration and/or abatement thereof, or of any contamination therein involved, and shall survive the expiration or earlier termination of this Lease. No termination, cancellation or release agreement entered into by -4- Lessor and Lessee shall release Lessee from its obligations under this Lease with respect to Hazardous Substances or storage tanks, unless specifically so agreed by Lessor in writing at the time of such agreement. 6.3 Lessee's Compliance with Law. Except as otherwise provided in this Lease, Lessee, shall, at Lessee's sole cost and expense, fully, diligently and in a timely manner, comply with all "Applicable Law," which term is used in this Lease to include all laws, rules, regulations, ordinances, directives, covenants, easements and restrictions of record, permits, the requirements of any applicable fire insurance underwriter or rating bureau, and the recommendations of Lessor's engineers and/or consultants, relating in any manner to the Premises (including but not limited to matters pertaining to (i) industrial hygiene, (ii) environmental conditions on, in, under or about the Premises, including soil and groundwater conditions, and (iii) the use, generation, manufacture, production, installation, maintenance, removal, transportation, storage, soil or release of any Hazardous Substance or storage tank), now in effect or which may hereafter come into effect, and whether or not reflecting a change in policy from any previously existing policy, Lessee shall, within five (5) days after the receipt of Lessor's written request, provide Lessor with copies of all documents and information, including, but not limited to, permits, registrations, manifests, applications, reports and certificates, evidencing Lessee's compliance with any Applicable Law specified by Lessor, and shall immediately, upon receipt notify Lessor in writing (with copies of any documents involved) of any threatened or actual claim notice citation, warning, complaint or report pertaining to or involving failure by Lessee or the Premises to comply with any Applicable Law. 6.4 Inspection; Compliance. Lessor and Lessor's Lender(s) (as defined in Paragraph 8.3(a)) shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times, for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee with this Lease and all Applicable Laws (as defined in Paragraph 6.3), and to employ experts and/or consultants in connection therewith and/or to advise Lessor with respect to Lessee's activities, including but not limited to the installation, operation, use, monitoring, maintenance, or removal of any Hazardous Substance or storage tank on or from the Premises. The costs and expenses of any such inspections shall be paid by the party requesting same unless a Default or breach of this Lease, violation of Applicable Law, or a contamination, caused or materially contributed to by Lessee is found to exist or be imminent, or unless the inspection is requested or ordered by a governmental authority as the result of any such existing or imminent violation or contamination. In any such case, Lessee shall upon request reimburse Lessor or Lessor's Lender, as the case may be, for the costs and expenses of such inspections. 7. Maintenance; Repairs, Utility Installations; Trade Fixtures and Alternations. 7.1 Lessee's Obligations. (a) Subject to the provisions of Paragraphs 2.2 (Lessor's warranty as to condition), 2.3 (Lessor's warranty as to compliance with covenants, etc.), 7.2 (Lessors obligations to repair), 9 (damage and destruction), and 14 (condemnation). Lessee shall at Lessee's sole cost and expense and at all times keep the Premises and every part thereof in good order condition and repair structural and non-structural (whether or not such portion of the Premises requiring repairs or the means of repairing the same, are reasonably or readily accessible to Lessee, and whether or not the need for such repairs occurs as a result of Lessee's use any prior use, the elements or the age of such portion of the Premises), including without limiting the generality of the foregoing all equipment or facilities serving the Premises, such as plumbing, heating, air conditioning, -5- ventilating, electrical, lighting facilities, boiler, fired or unfired pressure vessels, fire sprinkler and/or standpipe and hose or other automatic fire extinguishing system, including fire alarm and/or smoke detection systems and equipment, fire hydrants, fixtures, walls (interior and exterior), foundations, ceilings, roofs, floors, windows, doors, plate glass, skylights, landscaping, driveways, parking lots, fences, retaining walls, signs, sidewalks and parkways located in, on, about, or adjacent to the Premises Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under or about the Premises (including through the plumbing or sanitary sewer system) and shall promptly, at Lessee's expense, take all investigatory and/or remedial action reasonably recommended, whether or not formally ordered or required, for the cleanup of any contamination of, and for the maintenance, security and/or monitoring of the Premises, the elements surrounding same, or neighboring properties, that was caused or materially contributed to by Lessee, or pertaining to or involving any Hazardous Substance and/or storage tank brought onto the Premises by or for Lessee or under its control. Lessee, in keeping the Premises in good order, condition and repair, shall exercise and perform good maintenance practices Lessee's obligations shall include restorations, replacements or renewals when necessary to keep the Premises and all improvements thereon or a part thereof in good order, condition and state of repair. (b) Lessee shall, at Lessee's sole cost and expense, procure and maintain contracts, with copies to Lessor, in customary form and substance for, and with contractors specializing and experienced in, the inspection, maintenance and service of the following equipment and improvements, if any, located on the Premises: (i) heating, air conditioning and ventilation equipment, (ii) boiler, fired or unfired pressure vessels, (iii) fire sprinkler and/or standpipe and hose or other automatic fire extinguishing systems, including fire alarm and/or smoke detection, (iv) landscaping and irrigation systems, (v) roof covering and drain maintenance and (vi) asphalt and parking lot maintenance. 7.2 Lessor's Obligations. Except for the warranties and agreements of Lessor contained in Paragraphs 2.2 (relating to condition of the Premises), 2.3 (relating to compliance with covenants, restrictions and building code), 9 (relating to destruction of the Premises) and 14 (relating to condemnation of the Premises), it is intended by the Parties hereto that Lessor have no obligation, in any manner whatsoever, to repair and maintain the Premises, the improvements located thereon, or the equipment therein, whether structural or nonstructural, all of which obligations are intended to be that of the Lessee under Paragraph 7.1 hereof. It is the intention of the Parties that the terms of this Lease govern the respective obligations of the Parties as to maintenance and repair of the Premises. Lessee and Lessor expressly waive the benefit of any statute now or hereafter in effect to the extent it is inconsistent with the terms of this Lease with respect to, or which affords Lessee the right to make repairs at the expense of Lessor or to terminate this Lease by reason of any needed repairs. 7.3 Utility Installations; Trade Fixtures; Alterations. (a) Definitions; Consent Required. The term "Utility Installations" is used in this Lease to refer to all carpeting, window coverings, air lines, power panels, electrical distribution, security, fire protection systems, communication systems, lighting fixtures, heating, ventilating, and air conditioning equipment, plumbing, and fencing in, on or about the Premises. The term "Trade Fixture" shall mean Lessee's machinery and equipment that can be removed without doing material damage to the Premises. The term "Alterations" shall mean any modification of the improvements on the Premises from that which are provided by Lessor under the terms of this Lease, other than Utility Installations or Trade Fixtures, whether by addition or deletion. "Lessee Owned Alterations and/or Utility -6- Installations" are defined as Alterations and/or Utility Installations made by Lessee that are not yet owned by Lessor as defined in Paragraph 7.4(a). Lessee shall not make any Alterations or Utility Installations in, on, under or about the Premises without Lessor's prior written consent. (b) Consent. Any Alterations or Utility Installations that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form with proposed detailed plans. All consents given by Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific consent, shall be deemed conditioned upon A: (i) Lessee's acquiring all applicable permits required by governmental authorities, (ii) the furnishing of copies of such permits together with a copy of the plans and specifications for the Alteration or Utility Installation to Lessor prior to commencement of the work thereon, and (iii) the compliance by Lessee with all conditions of said permits in a prompt and expeditious manner. Any Alterations or Utility Installations by Lessee during the term of this Lease shall be done in a good and workmanlike manner, with good and sufficient materials, and in compliance with all Applicable Law. Lessee shall promptly upon completion thereof furnish Lessor with as-built plans and specifications therefor. (c) Indemnification. Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use on the Premises, which claims are or may be secured by any mechanics' or materialmen's lien against the Premises or any interest therein. Lessee shall give Lessor not less than ten (10) days' notice prior to the commencement of any work in, on or about the Premises, and Lessor shall have the right to post notices of non-responsibility in or on the Premises as provided by law. If Lessee shall, in good faith, contest the validity of any such lien, claim or demand, then Lessee shall at its sole expense defend and protect itself, Lessor and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof against the Lessor or the Premises. If Lessor shall require, Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to one and one-half times the amount of such contested lien claim or demand, indemnifying Lessor against liability for he same, as required by law for the holding of the Premises free from the effect of such lien or claim. In addition, Lessor may require Lessee to pay Lessor's attorney's fees and costs in participating in such action if Lessor shall decide it is to its best interest to do so. 7.4 Ownership; Removal; and Restoration. (a) Ownership. Subject to Lessor's right to require their removal or become the owner thereof as hereinafter provided in this Paragraph 7.4, all Alterations and Utility Additions made to the Premises by Lessee shall be the property of and owned by Lessee, but considered a part of the Premises. Lessor may, at any time and at its option, elect in writing to Lessee to be the owner of all or any specified part of the Lessee Owned Alterations and Utility Installations. Unless otherwise instructed per subparagraph 7.4(b) hereof, all Lessee Owned Alterations and Utility Installations shall, at the expiration or earlier termination of this Lease, become the property of Lessor and remain upon and be surrendered by Lessee with the Premises. (b) Removal. Unless otherwise agreed in writing, Lessor may require that any or all Lessee Owned Alterations or Utility Installations be removed by the expiration or earlier termination of the Lease, notwithstanding their installation may have been consented to by Lessor. Lessor may require the removal at any time of all or any part of any Lessee Owned Alterations or Utility Installations made without the required consent of Lessor. -7- (c) Surrender/Restoration. Lessee shall surrender the Premises by the end of the last day of the Lease term or any earlier termination date, with all of the improvements, parts and surfaces thereof clean and free of debris and in good operating order, condition and state of repair, ordinary wear and tear excepted. "Ordinary wear and tear" shall not include any damage or deterioration that would have been prevented by good maintenance practice or by Lessee performing all of its obligations under this Lease. Except as otherwise agreed or specified in writing by Lessor, the Premises, as surrendered, shall include the Utility Installations. The obligation of Lessee shall include the repair of any damage occasioned by the installation, maintenance or removal of Lessee's Trade Fixtures, furnishings, equipment, and Alterations and/or Utility Installations, as well as the removal of any storage tank installed by or for Lessee, and the removal, replacement, or remediation of any soil, material or ground water contaminated by Lessee, all as may then be required by Applicable Law and/or good service practice. Lessee's Trade Fixtures shall remain the property of Lessee and shall be removed by Lessee subject to its obligation to repair and restore the Premises per this Lease. 8. Insurance; Indemnity. 8.1 Payment For Insurance. Regardless of whether the Lessor or Lessee is the Insuring Party, Lessee shall pay for all insurance required under this Paragraph 8. Premiums for policy periods commencing prior to or extending beyond the Lease term shall be prorated to correspond to the Lease term. Payment shall be made by Lessee to Lessor within ten (10) days following receipt of an invoice for any amount due. 8.2 Liability Insurance. (a) Carried by Lessee. Lessee shall obtain and keep in force during the term of this Lease a Commercial General Liability policy of insurance protecting Lessee and Lessor (as an additional insured) against claims for bodily injury, personal injury and property damage based upon, involving or arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $1,000,000 per occurrence with an "Additional Insured-Managers or Lessors of Premises" Endorsement and contain the "Amendment of the Pollution Exclusion" for damage caused by heat, smoke, or fumes from a hostile fire. The policy shall not contain any intra-insured exclusions as between insured persons or organizations, but shall include coverage for liability assumed under this Lease as an "insured contract" for the performance of Lessee's indemnity obligations under this Lease. The limits of said insurance required by this Lease or as carried by Lessee shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. All insurance to be carried by Lessee shall be primary to and not contributory with any similar insurance carried by Lessor, whose insurance shall be considered excess insurance only. (b) Carried By Lessor. In the event Lessor is in the Insuring Party, Lessor shall also maintain liability insurance described in Paragraph 8.2(a), above. In addition to, and not in lieu of, the insurance required to be maintained by Lessee. Lessee shall not be named as an additional insured therein 8.3 Property Insurance - Building, Improvements and Rental Value. (a) Building and Improvements. The Insuring Party shall obtain and keep in force during the term of this Lease a policy or policies in the name of Lessor, with loss payable to Lessor and to the holders of any mortgages, deeds of trust or ground leases on the Premises ("Leader(s)"), insuring loss or damage to the Premises. The amount of such insurance shall be equal to the full replacement cost of the Premises, as the same -8- shall exist from time to time, or the amount required by the Lenders, but in no event more than the commercially reasonable and available insurable value thereof if by reason of the unique nature or age of the improvements involved, such latter amount is less than full replacement cost. If Lessor is the Insuring Party, however, Lessee Owned Alterations and Utility Installations shall be insured by Lessee under Paragraph 8.4 rather than by Lessor if the coverage is available and commercially appropriate such policy or policies shall insure against all risks of direct physical loss or damage (except the perils of flood unless required by a Lender), including coverage for any additional costs resulting from debris removal and reasonable amounts of coverage for the enforcement of any ordinance or law regulating the reconstruction or replacement of any undamaged sections of the Premises required to be demolished or removed by reason of the enforcement of any building, zoning, safety or land use laws as the result of a covered cause of loss. Said policy or policies shall also contain an agreed valuation provision in lieu of any coinsurance clause, waiver of subrogation, and inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers for the city nearest to where the Premises are located. If such insurance coverage has a deductible clause, the deductible amount shall not exceed $1,000 per occurrence, and Lessee shall be liable for such deductible amount in the event of an Insured Loss, as defined in Paragraph 9.1(c). (b) Rental Value. The Insuring Party shall, in addition, obtain and keep in force during the term of this Lease a policy or policies in the name of Lessor with loss payable to Lessor and Lender(s), insuring the loss of the full rental and other charges payable by Lessee to Lessor under this Lease for one (1) year (including all real estate taxes, insurance costs, and any scheduled rental increases). Said insurance shall provide that in the event the Lease is terminated by reason of an insured loss, the period of indemnity for such coverage shall be extended beyond the date of the completion of repairs or replacement of the Premises, to provide for one full year's loss of rental revenues from the date of any such loss. Said insurance shall contain an agreed valuation provision in lieu of any coinsurance clause, and the amount of coverage shall be adjusted annually to reflect the projected rental income property taxes, insurance premium costs and other expenses, if any, otherwise payable by Lessee, for the next twelve (12) month period. Lessee shall be liable for any deductible amount in the event of such loss. (c) Adjacent Premises. If the Premises are part of a larger building, or if the Premises are part of a group of buildings owned by Lessor which are adjacent to the Premises, the Lessee shall pay for any increase in the premiums for the property insurance of such building or buildings if said increase is caused by Lessee's acts, omissions, use or occupancy of the Premises. (d) Tenant's Improvements. If the Lessor is the Insuring Party, the Lessor shall not be required to insure Lessee Owned Alterations and Utility Installations unless the item in question has become the property of Lessor under the terms of this Lease. If Lessee is the Insuring Party, the policy carried by Lessee under this Paragraph 8.3 shall insure Lessee Owned Alterations and Utility Installations. 8.4 Lessee's Property Insurance. Subject to the requirements of Paragraph 8.5, Lessee at its cost shall either by separate policy or, at Lessor's option, by endorsement to a policy already carried, maintain insurance coverage on all of Lessee's personal property, Lessee Owned Alterations and Utility Installations in, on, or about the Premises similar in coverage to that carried by the Insuring Party under Paragraph 8.3. SUCH INSURANCE SHALL BE FULL REPLACEMENT COST COVERAGE WITH A -9- DEDUCTIBLE OF NOT TO EXCEED $1,000 PER OCCURRENCE. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property or the restoration of Lessee Owned Alterations and Utility Installations. Lessee shall be the Insuring Party with respect to the insurance required by this Paragraph 8.4 and shall provide Lessor with written evidence that such Insurance is in force. 8.5 Insurance Policies. Insurance required hereunder shall be in companies duly licensed to transact business in the state where the Premises are located and maintaining during the policy term a "General Policyholders Rating" of at least B+, V, or such other rating as may be required by a Lender having a lien on the Premises, as set forth in the most current issue of "Best's Insurance Guide." Lessee shall not do or permit to be done anything which shall invalidate the insurance policies referred to in this Paragraph 8. If Lessee is the Insuring Party, Lessee shall cause to be delivered to Lessor certified copies of policies of such insurance or certificate evidencing the existence and amounts of such Insurance with the insureds and loss payable clauses as required by this Lease. No such policy shall be cancelable or subject to modification except after thirty (30) days prior written notice to Lessor. Lessee shall at least thirty (30) days prior to the expiration of such policies, furnish Lessor with evidence of renewals or "insurance binders" evidencing renewal thereof, or Lessor may order such insurance and charge the cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon demand. If the Insuring Party shall fail to procure and maintain the insurance required to be carried by the Insuring Party under this Paragraph 8, the other Party may, but shall not be required to, procure and maintain the same, but at Lessee's expense. 8.6 Waiver of Subrogation. Without affecting any other rights or remedies, Lessee and Lessor ("Waiving Party") each hereby release and relieve the other, and waive their entire right to recover damages (whether in contract or in tort) against the other, for loss of or damage to the Waiving Party's property arising out of or incident to the perils required to be insured against under Paragraph 8. The effect of such releases and waivers of the right to recover damages shall not be limited by the amount of insurance carried or required, or by any deductibles applicable thereto. 8.7 Indemnity. Except for Lessor's negligence and/or breach of express warranties, Lessee shall indemnify, protect, defend and hold harmless the Premises. Lessor and its agents, Lessor's master or ground lessor, partners and Lenders, from and against any and all claims, loss of rents and/or damages, costs, liens, judgments, penalties, permits, attorney's and consultant's fees, expenses and/or liabilities arising out of, involving, or in dealing with, the occupancy of the Premises by Lessee, the conduct of Lessee's business, any act, omission or neglect of Lessee, its agents, contractors, employees or invitees, and out of any Default or Breach by Lessee in the performance in a timely manner of any obligation on Lessee's part to be performed under this Lease. The foregoing shall include, but not be limited to, the defense or pursuit of any claim or any action or proceeding involved therein, and whether or not (in the case of claims made against Lessor) litigated and/or reduced to judgment, and whether well founded or not. In case any action or proceeding be brought against Lessor by reason of any of the foregoing matters, Lessee upon notice from Lessor shall defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be so indemnified. 8.8 Exemption of Lessor from Liability. Lessor shall not be liable for injury or damage to the person or goods, wares, merchandise or other property of Lessee. Lessee's employees, contractors, invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or -10- from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, whether the said injury or damage results from conditions arising upon the Premises or upon other portions of the building of which the Premises are a part, or from other sources or places, and regardless of whether the cause of such damage or injury or the means of repairing the same is accessible or not. Lessor shall not be liable for any damages arising from any act or neglect of any other tenant of Lessor. Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall under no circumstances be liable for injury to Lessee's business or for any loss of income or profit therefrom. 9. DAMAGE OR DESTRUCTION. 9.1 Definitions. (a) "Premises Partial Damage" shall mean damage or destruction to the improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, the repair cost of which damage or destruction is less than 50% of the then Replacement Cost of the Premises immediately prior to such damage or destruction, excluding from such calculation the value of the land and Lessee Owned Alterations and Utility Installations. (b) "Premises Total Destruction" shall mean damage or destruction to the Premises, other than Lessee Owned Alterations and Utility Installations the repair cost of which damage or destruction is 50% or more of the then Replacement Cost of the Premises immediately prior to such damage or destruction, excluding from such calculation the value of the land and Lessee Owned Alterations and Utility Installations. (c) "Insured Loss" shall mean damage or destruction to improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, which was caused by an event required to be covered by the insurance described in Paragraph 8.3(a), irrespective of any deductible amounts of coverage limits involved. (d) "Replacement Cost" shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of applicable building codes, ordinances or laws, and without deduction for depreciation. (e) "Hazardous Substance Condition" shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, or, under the Premises. 9.2 Partial Damage - Insured Loss. If a Premises Partial Damage that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility Installations) as soon as reasonably possible and this Lease shall continue in full force and effect; provided, however, that Lessee shall, at Lessor's election, make the repair of any damage or destruction the total cost to repair of which is $10,000 or less, and, in such event, Lessor shall make the insurance proceeds available to Lessee on a reasonable basis for that purpose. Notwithstanding the foregoing, if the required insurance was not in force or the insurance proceeds are not sufficient to effect such repair the Insuring Party shall promptly contribute the shortage in proceeds (except as to the deductible which is Lessee's responsibility) as and when required to complete said repairs. 9.3 Partial Damage - Uninsured Loss. If a Premises Partial Damage that is not an Insured Loss occurs, unless caused by a negligent or wilful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense and this Lease shall -11- continue in full force and effect, but subject to Lessor's rights under Paragraph 13), Lessor may at Lessor's option, either (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such damage of Lessor's desire to terminate this Lease as of the date sixty (60) days following the giving of such notice. In the event Lessor elects to give such notice of Lessor's intention to terminate this Lease, Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's commitment to pay for the repair of such damage totally at Lessee's expense and without reimbursement from Lessor. Lessee shall provide Lessor with the required funds or satisfactory assurance thereof within thirty (30) days following Lessee's said commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such repairs as soon as reasonably possible and the required funds are available. If Lessee does not give such notice and provide the funds or assurance thereof within the times specified above, this Lease shall terminate as of the date specified in Lessor's notice of termination. 9.4 Total Destruction. Notwithstanding any other provision hereof, if a Premises Total Destruction occurs (including any destruction required by any authorized public authority), this Lease shall terminate sixty (60) days following the date of such Premises Total Destruction, whether or not the damage or destruction is an Insured Loss or was caused by a negligent or willful act of Lessee. In the event, however, that the damage or destruction was caused by Lessee, Lessor shall have the right to recover Lessor's damages from Lessee except as released and waived in Paragraph 8.6. 9.5 Damage Near End of Term. If at any time during the last six (6) months of the term of this Lease there is damage for which the cost to repair exceeds one (1) month's Base Rent, whether or not an Insured Loss, Lessor may, at Lessor's option, terminate this Lease effective sixty (60) days following the date of occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within thirty (30) days after the date of occurrence of such damage. Provided, however, if Lessee at that time has an exercisable option to extend this Lease or to purchase the Premises, then Lessee may preserve this Lease by, within twenty (20) days following the occurrence of the damage, or before the expiration of the time provided in such option for its exercise, whichever is earlier ("Exercise Period"), (i) exercising such option and (ii) providing Lessor with any shortage in insurance proceeds (or adequate assurance thereof) needed to make the repairs. If Lessee duly exercises such option during said Exercise Period and provides Lessor with funds (or adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor's expense repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option and provide such funds or assurance during said Exercise Period, then Lessor may at Lessor's option terminate this Lease as of the expiration of said sixty (60) day period following the occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within ten (10) days after the expiration of the Exercise Period, notwithstanding any term or provision in the grant of option to the contrary. 9.6 Abatement of Rent; Lessee's Remedies. (a) In the event of damage described in Paragraph 9.2 (Partial Damage - Insured), whether or not Lessor or Lessee repairs or restores the Premises, the Base Rent, Real Property Taxes, insurance premiums, and other charges, if any, payable by Lessee hereunder for the period during which such damage, its repair or the restoration continues (not to exceed the period for which rental value insurance is required under Paragraph 8.3(b)), shall be abated in proportion to the degree to which Lessee's use -12- of the Premises is impaired. Except for abatement of Base Rent, Real Property Taxes, insurance premiums, and other charges, if any, as aforesaid, all other obligations of Lessee hereunder shall be performed by Lessee, and Lessee shall have no claim against Lessor for any damage suffered by reason of any such repair or restoration. (b) If Lessor shall be obligated to repair or restore the Premises under the provisions of this Paragraph 9 and shall not commence, in a substantial and meaningful way, the repair or restoration of the Premises within ninety (90) days after such obligation shall accrue, Lessee may, at any time prior to the commencement of such repair or restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice of Lessee's election to terminate this Lease on a date not less than sixty (60) days following the giving of such notice. If Lessee gives such notice to Lessor and such Lenders and such repair or restoration is not commenced within thirty (30) days after receipt of such notice, this Lease shall terminate as of the date specified in said notice. If Lessor or a Lender commences the repair or restoration of the Premises within thirty (30) days after receipt of such notice, this Lease shall continue in full force and effect. "Commence" as used in this Paragraph shall mean either the unconditional authorization of the preparation of the required plans, or the beginning of the actual work on the Premises, whichever first occurs. 9.7 Hazardous Substance Conditions. If a Hazardous Substance Condition occurs, unless Lessee is legally responsible therefor (in which case Lessee shall make the investigation and remediation thereof required by Applicable Law and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 13), Lessor may at Lessor's option either (i) investigate and remediate such Hazardous Substance Condition, if required, as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) if the estimated cost to investigate and remediate such condition exceeds twelve (12) times the then monthly Base Rent or $100,000, whichever is greater, give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such Hazardous Substance Condition of Lessor's desire to terminate this Lease as of the date sixty (60) days following the giving of such notice. In the event Lessor elects to give such notice of Lessor's intention to terminate this Lease, Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's commitment to pay for the investigation and remediation of such Hazardous Substance Condition totally at Lessee's expense and without reimbursement from Lessor except tot he extent of an amount equal to twelve (12) times the then monthly Base Rent or $100,000, whichever is greater. Lessee shall provide Lessor with the funds required of Lessee or satisfactory assurance thereof within thirty (30) days following Lessee's said commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such investigation and remediation as soon as reasonably possible and the required funds are available. If Lessee does not give such notice and provide the required funds or assurance thereof within the times specified above, this Lease shall terminate as of the date specified in Lessor's notice of termination. If a Hazardous Substance Condition occurs for which Lessee is not legally responsible, there shall be abatement of Lessee's obligations under this Lease to the same extent as provided in Paragraph 9.6(a) for a period of not to exceed twelve (12) months. 9.8 Termination - Advance Payments. Upon termination of this Lease pursuant to this Paragraph 9, an equitable adjustment shall be made concerning advance Base Rent and any other advance payments made by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's Security Deposit as has not been, or is not then required to be used by Lessor under the terms of this Lease. -13- 9.9 Waive Statutes. Lessor and Lessee agree that the terms of this Lease shall govern the effect of any damage to or destruction of the Premises with respect to the termination of this Lease and hereby waive the provisions of any present or future statute to the extent inconsistent herewith. 10. Real Property Taxes. 10.1 (a) Payment of Taxes. Lessee shall pay the Real Property Taxes, as defined in Paragraph 10.2, applicable to the Premises during the term of this Lease. Subject to Paragraph 10.1(b), all such payments shall be made at least ten (10) days prior to the delinquency date of the applicable installment. Lessee shall promptly furnish Lessor with satisfactory evidence that such taxes have been paid. If any such taxes to be paid by Lessee shall cover any period of time prior to or after the expiration or earlier termination of the term hereof, Lessee's share of such taxes shall be equitably prorated to cover only the period of time within the tax fiscal year this Lease is in effect, and Lessor shall reimburse Lessee for any over payment after such proration. If Lessee shall fail to pay any Real Property Taxes required by this Lease to be paid by Lessee, Lessor shall have the right to pay the same, and Lessee shall reimburse Lessor therefor upon demand. (b) Advance Payment. In order to insure payment when due and before delinquency of any or all Real Property Taxes, Lessor reserves the right, at Lessor's option, to estimate the current Real Property Taxes applicable to the Premises, and to require such current year's Real Property Taxes to be paid in advance to Lessor by Lessee, either: (i) in a lump sum amount equal to the installment due, at least twenty (20) days prior to the applicable delinquency date, or (ii) monthly in advance with the payment of the Base Rent. If Lessor elects to require payment monthly in advance, the monthly payment shall be that equal monthly amount which, over the number of months remaining before the month in which the applicable tax installment would become delinquent (and without interest thereon), would provide a fund large enough to fully discharge before delinquency the estimated installment of taxes to be paid. When the actual amount of the applicable tax bill is known, the amount of such equal monthly advance payment shall be adjusted as required to provide the fund needed to pay the applicable taxes before delinquency. If the amounts paid to Lessor by Lessee under the provisions of this Paragraph are insufficient to discharge the obligations of Lessee to pay such Real Property Taxes as the same become due, Lessee shall pay to Lessor, upon Lessor's demand, such additional sums as are necessary to pay such obligations. All moneys paid to Lessor under this Paragraph may be intermingled with other moneys of Lessor and shall not bear interest. In the event of a Breach by Lessee in the performance of the obligations of Lessee under this Lease, then any balance of funds paid to Lessor under the provisions of this Paragraph may, subject to proration as provided in Paragraph 10.1(a), at the option of Lessor, be treated as an additional Security Deposit under Paragraph 5. 10.2 Definition of "Real Property Taxes." As used herein, the term "Real Property Taxes" shall include any form of real estate tax or assessment general, special, ordinary or extraordinary, and any license fee, commercial rental tax, improvement bond or bonds, levy or tax (other than inheritance, personal income or estate taxes) imposed upon the Premises by any authority having the direct or indirect power to tax, including any city, state or federal government, or any school, agricultural, sanitary, fire, street, drainage or other improvement district thereof, levied against any legal or equitable interest of Lessor in the Premises or in the real property of which the Premises are a part, Lessor's right to rent or other income therefrom, and/or Lessor's business of leasing the Premises. The term "Real Property Taxes" shall also include any tax, fee, levy, assessment or charge, or any increase therein, imposed by reason of events occurring, or changes in -14- applicable law taking effect, during the term of this Lease, including but not limited to a change in the ownership of the Premises or in the improvements thereon, the execution of this Lease, or any modification, amendment or transfer thereof, and whether or not contemplated by the Parties. 10.3 Joint Assessment. If the Premises are not separately assessed, Lessee's liability shall be an equitable proportion of the Real Property Taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be determined by Lessor from the respective valuations assigned in the Lessor's work sheets or such other information as may be reasonably available Lessor's reasonable determination thereof, in good faith, shall be conclusive. 10.4 Personal Property Taxes. Lessee shall pay prior to delinquency all taxes assessed against and levied upon Lessee Owned Alternations, Utility Installations, Trade Fixtures, furnishings, equipment and all personal property of Lessee contained in the Premises or elsewhere. When possible, Lessee shall cause its Trade Fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from the real property of Lessor if any of Lessee's said personal property shall be assessed with Lessor's real property. Lessee shall pay Lessor the taxes attributable to Lessee within ten (10) days after receipt of a written statement setting forth the taxes applicable to Lessee's property or, at Lessor's option, as provided in Paragraph 10.1(b). 11. Utilities. Lessee shall pay for all water, gas, heat, light, power, telephone, trash disposal and other utilities and services supplied to the Premises, together with any taxes thereon. If any such services are not separately metered to Lessee, Lessee shall pay a reasonable proportion, to be determined by Lessor, of all charges jointly metered with other premises. 12. Assignment and Subletting. 12.1 Lessor's Consent Required. (a) Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or otherwise transfer or encumber (collectively, "assignment") or sublet all or any part of Lessee's interest in this Lease or in the Premises without Lessor's prior written consent given under the subject to the terms of Paragraph 36. (b) Deleted. (c) Deleted. (d) Deleted. (e) Lessee's remedy for any breach of this Paragraph 12.1 by Lessor shall be limited to compensatory damages and injunctive relief. 12.2 Terms and Conditions Applicable to Assignment and Subletting. (a) Regardless of Lessor's consent, any assignment or subletting shall not: (i) be effective without the express written assumption by such assignee or sublessee of the obligations of Lessee under this Lease, (ii) release Lessee of any obligations hereunder, or (iii) alter the primary liability of Lessee for the payment of Base Rent and other sums due Lessor hereunder or for the performance of any other obligations to be performed by Lessee under this Lease. (b) Lessor may accept any rent or performance of Lessee's obligations from any person other than Lessee pending approval or disapproval of an assignment. Neither a delay in the -15- approval or disapproval of such assignment nor the acceptance of any rent or performance shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for the Default or Breach by Lessee of any of the terms, covenants or conditions of this Lease. (c) The consent of Lessor to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting by Lessee or to any subsequent or successive assignment or subletting by the sublessee. However, Lessor may consent to subsequent sublettings and assignments of the sublease or any amendments or modifications thereto without notifying Lessee or anyone else liable on the Lease or sublease and without obtaining their consent, and such action shall not relieve such persons from liability under this Lease or sublease. (d) In the event of any Default or Breach of Lessee's obligations under this Lease, Lessor may proceed directly against Lessee, any Guarantors or any one else responsible for the performance of the Lessee's obligations under this Lease, including the sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefor to Lessor, or any security held by Lessor or Lessee. (e) Each request for consent to an assignment or subletting shall be in writing, accompanied by information relevant to Lessor's determination as to the financial and operational responsibility and appropriateness of the proposed assignee or sublessee, including but not limited to the intended use and/or required modification of the Premises, if any. Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested by Lessor. (f) Any assignee of, or sublessee under, this Lease shall, by reason of accepting such assignment or entering into such sublease, be deemed for the benefit of Lessor, to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Lessee during the term of said assignment or sublease, other than such obligations as are contrary to or inconsistent with provisions of an assignment or sublease to which Lessor has specifically consented in writing. (g) Deleted. (h) Deleted. 12.3 Additional Terms and Conditions Applicable to Subletting. The following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein: (a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all rentals and income arising from any sublease of all or a portion of the Premises heretofore or hereafter made by Lessee, and Lessor may collect such rent and income and apply same toward Lessee's obligations under this lease; provided, however, that until a Breach (as defined in Paragraph 13.1) shall occur in the performance of Lessee's obligations under this Lease. Lessee may, except as otherwise provided in this Lease, receive, collect and enjoy the rents accruing under such sublease. Lessor shall not, by reason for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee under such sublease. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a Breach exists in the performance of Lessee's obligations under this Lease, to pay to Lessor the rents and other charges due and to become due under the sublease. Sublessee shall rely upon any such statement and request from Lessor and shall pay such rents and other charges to Lessor without any obligation or right to -16- inquire as to whether such Breach exists and notwithstanding any notice from or claim from Lessee to the contrary. Lessee shall have no right or claim against said sublessee or, until the Breach has been cured, against Lessor, for any such rents and other charges so paid by said sublessee to Lessor. (b) In the event of a Breach by Lessee in the performance of its obligations under this Lease, Lessor, at its option and without any obligation to do so, may require any sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of the sublessor under such sublease from the time of the exercise of said option to the expiration of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to such sublessor or for any other prior Defaults or Breaches or such sublessor under such sublease. (c) Any matter or thing requiring the consent of the sublessor under a sublease shall also require the consent of Lessor herein. (d) No sublessee shall further assign or sublet all or any part of the Premises without Lessor's prior written consent. (e) Lessor shall deliver a copy of any notice of Default or Breach by Lessee to the sublessee, who shall have the right to cure the Default of Lessee within the grace period, if any, specified in such notice. The sublessee shall have a right or reimbursement and offset from and against Lessee for any such Defaults cured by the sublessee. 13. Default; Breach; Remedies. 13.1 Default; Breach. A "Default" is defined as a failure by the Lessee to observe comply with or perform any of the terms, covenants, conditions or rules applicable to Lessee under this Lease. A "Breach" is defined as the occurrence of any one or more of the following Defaults and where a grace period for cure after notice is specified herein the failure by Lessee to cure such Default prior to the expiration of the applicable grace period shall entitle Lessor to pursue the remedies set forth in Paragraphs 13.2 and/or 13.3. (a) The vacating of the Premises without the intention to reoccupy same, or the abandonment of the Premises. (b) Except as expressly otherwise provided in this Lease, the failure by Lessee to make any payment of Base Rent or any other monetary payment required to be made by Lessee hereunder, whether to Lessor or to a third party, as and when due, the failure by Lessee to provide Lessor with reasonable evidence of insurance or surety bond required under this Lease, or the failure of Lessee to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of three (3) days following written notice thereof by or on behalf of Lessor to Lessee. (c) Except as expressly otherwise provided in this Lease, the failure by Lessee to provide Lessor with reasonable written evidence (in duly executed original form, if applicable) of (i) compliance with Applicable Law per Paragraph 6.3, (ii) the inspection, maintenance and service contracts required under Paragraph 7.1(b), (iii) the recession of an unauthorized assignment or subletting per Paragraph 12.1(b), (iv) a Tenancy Statement per Paragraph 16 or 37, (v) the subordination or non-subordination of this Lease per Paragraph 30, (vi) the guaranty of the performance of Lessee's obligations under this Lease if required under Paragraphs 1.11 and 37, (vii) the execution of any document requested under Paragraph 42 (easements), or (viii) any other documentation or information which Lessor may reasonably required of Lessee under the terms of this Lease, where any such failure continues for a period of ten -17- (10) days following written notice by or on behalf of Lessor to Lessee. (d) A Default by Lessee as to the terms, covenants, conditions or provisions of this Lease, or of the rules adopted under Paragraph 40 hereof, that are to be observed, complied with or performed by Lessee, other than those described in subparagraphs (a), (b) or (c), above, where such Default continues for a period of thirty (30) days after written notice thereof by or on behalf of Lessor to Lessee; provided, however, that if the nature of Lessee's Default is such that more than thirty (30) days are reasonably required for its cure, then it shall not be deemed to be a Breach of this Lease by Lessee if Lessee commences such cure within said thirty (30) days period and thereafter diligently prosecutes such cure to completion. (e) The occurrence of any of the following events: (i) The making by Lessee of any general arrangement or assignment for the benefit of creditors, (ii) Lessee's becoming a "debtor" as defined in 11 U.S.C. Section 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within thirty (30) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within thirty (30) days; provided, however, in the event that any provision of this subparagraph (e) is contrary to any applicable law, such provision shall be of no force or effect, and not affect the validity of the remaining provisions. (f) The discovery by Lessor that any financial statement given to Lessor by Lessee or any Guarantor of Lessee's obligations hereunder was materially false. (g) If the performance of Lessee's obligations under this Lease is guaranteed: (i) the death of a guarantor, (ii) the termination of a guarantor's liability with respect to this Lease other than in accordance with the terms of such guaranty, (iii) a guarantor's becoming insolvent or the subject of a bankruptcy filing, (iv) a guarantor's refusal to honor the guaranty, or (v) a guarantor's breach of its guaranty obligation on an anticipatory breach basis, and Lessee's failure, within sixty (60) days following written notice by or on behalf of Lessor to Lessee of any such event, to provide Lessor with written alternative assurance or security, which, when coupled with the then existing resources of Lessee, equals or exceeds the combined financial resources of Lessee and the guarantors that existed at the time of execution of this Lease. 13.2 Remedies. If Lessee fails to perform any affirmative duty or obligation of Lessee under this Lease, within ten (10) days after written notice to Lessee (or in case of an emergency, without notice), Lessor may at its option (but without obligation to do so), perform such duty or obligation on Lessee's behalf, including but not limited to the obtaining of reasonably required bonds, insurance policies, or governmental licenses, permits or approvals. The costs and expenses of any such performance by Lessor shall be due and payable by Lessee to Lessor upon invoice therefor. If any check given to Lessor by Lessee shall not be honored by the bank upon which it is drawn, Lessor, at its option, may require all future payments to be made under this Lease by Lessee to be made only by cashier's check. In the event of a Breach of this Lease by Lessee, as defined in Paragraph 13.1, with or without further notice or demand, and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such Breach, Lessor may: (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease and the -18- term hereof shall terminate and Lessee shall immediately surrender possession of the Premises to Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the worth at the time of the award of the unpaid rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys' fees, and that portion of the leasing commission paid by Lessor applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to in provision (iii) of the prior sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). Efforts by Lessor to mitigate damages caused by Lessee's Default or Breach of this Lease shall not waive Lessor's right to recover damages under this Paragraph. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such proceeding the unpaid rent and damages as are recoverable therein, or Lessor may reserve therein the right to recover all or any part thereof in a separate suit for such rent and/or damages. If a notice and grace period required under subparagraphs 13.1(b), (c) or (d) was not previously given, a notice to pay rent or quit, or to perform or quit, as the case may be, given to Lessee under any statute authorizing the forfeiture of leases for unlawful detainer shall also constitute the applicable notice for grace period purposes required by subparagraphs 13.1(b), (c) or (d). In such case, the applicable grace period under subparagraphs 13.1(b), (c) or (d) and under the unlawful detainer statute shall run concurrently after the one such statutory notice, and the failure of Lessee to cure the Default within the greater of the two such grace periods shall constitute both an unlawful detainer and a Breach of this Lease entitling Lessor to the remedies provided for in this Lease and/or by said statute. (b) Continue the Lease and Lessee's right to possession in effect (in California under California Civil Code Section 1951.4) after Lessee's Breach and abandonment and recover the rent as it becomes due, provided Lessee has the right to sublet or assign, subject only to reasonable limitations. See Paragraphs 12 and 36 for the limitations on assignment and subletting which limitations Lessee and Lessor agree are reasonable. Acts of maintenance or preservation, efforts to relet the Premises, or the appointment of a receiver to protect the Lessor's interest under the Lease, shall not constitute a termination of the Lessee's right to possession. (c) Pursue any other remedy now or hereafter available to Lessor under the laws or judicial decisions of the state wherein the Premises are located. (d) The expiration or termination of this Lease and/or the termination of Lessee's right to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of Lessee's occupancy of the Premises. 13.3 Late Charges. Lessee hereby acknowledges that late payment by Lessee or Lessor of rent and other sums due hereunder will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to -19- ascertain. Such costs include, but are not limited to processing and accounting charges, and late charges which may be imposed upon Lessor by the terms of any ground lease, mortgage or trust deed covering the Premises. Accordingly, if any installment of rent or any other sum due from Lessee shall not be received by Lessor or Lessor's designee within five (5) days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a late charge equal to six percent (6%) of such overdue amount. The parties hereby agree that such later charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of late payment by Lessee. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's Default or Breach with respect to such overdue amount, not prevent Lessor from exercising any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for three (3) consecutive installments of Base Rent, then notwithstanding Paragraph 4.1 or any other provision of this Lease to the contrary. Base Rent Shall, at Lessor's option, become due and payable quarterly in advance. 13.4 Breach by Lessor. Lessor shall not be deemed in breach of this Lease unless Lessor fails within a reasonable time to perform an obligation required to be performed by Lessor. For purposes of this Paragraph 13.5, a reasonable time shall in no event be less than thirty (30) days after receipt by Lessor, and by the holders of any ground lease, mortgage or deed of trust covering the Premises whose name and address shall have been furnished Lessee in writing for such purpose, of written notice specifying wherein such obligation of Lessor has not been performed; provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days after such notice are reasonably required for its performance, then Lessor shall not be in breach of this Lease if performance is commenced within such thirty (30) day period and thereafter diligently pursued to completion. 14. Condemnation. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power (all of which are herein called "condemnation"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than ten percent (10%) of the floor area of the Premises, or more than twenty-five percent (25%) of the land area not occupied by any building, is taken by condemnation, Lessee may, at Lessee's option, to be exercised in writing within ten (10) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within ten (10) days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent shall be reduced in the same proportion as the rentable floor area of the Premises taken bears to the total rentable floor area of the building located on the Premises. No reduction of Base Rent shall occur if the only portion of the Premises taken is land on which there is no building. Any award for the taking of all or any part of the Premises under the power of eminent domain or any payment made under threat of the exercise of such power shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold or for the taking of the fee, or as severance damages; provided, however, that Lessee shall be entitled to any compensation separately awarded to Lessee for Lessee's relocation expenses and/or loss of Lessee's Trade Fixtures in the event that the Lese is not terminated by reason of such condemnation. Lessor shall to the extent of its net severance damages received over and above the legal and other expenses incurred by Lessor in the condemnation matter, repair any damage to the premises caused by such condemnation, except to the extent that Lessee has been reimbursed therefor by the condemning authority. Lessee shall be -20- responsible for the payment of any amount in excess of such net severance damages required to complete such repair. 15. Broker's Fee 15.1 The Brokers named in Paragraph 1.10 are the procuring causes of this Lease. 15.2 Upon execution of this Lease by both Parties, Lessor shall pay to said Brokers jointly, or in such separate shares as they may mutually designate in writing, a fee as set forth in a separate written agreement between Lessor and said Brokers (or in the event there is no separate written agreement between Lessor and said Brokers, the sum of $125% of Sched) for brokerage services rendered by said Brokers to Lessor in this transaction. 15.3 Lessee and Lessor each represent and warrant to the other that it has had no dealings with any person, firm, broker or finder (other than the Brokers, if any named in Paragraph 1.10) in connection with the negotiation of this Lease and/or the consummation of the transaction contemplated hereby, and that no broker or other person, firm or entity other than said named Brokers is entitled to any commission or finder's fee in connection with said transaction. Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold the other harmless from and against liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason by any dealings or actions of the indemnifying Party, including any costs, expenses, attorneys' fees reasonably incurred with respect thereto. 15.4 Lessor and Lessee hereby consent to and approve all agency relationships, including any dual agencies, indicated in Paragraph 1.10. 16. Tenancy Statement 16.1 Each Party (as "Responding Party") shall within ten (10) days after written notice from the other Party (the "Requesting Party") execute, acknowledge and deliver to the Requesting Party a statement in writing in form similar to the most current "Tenancy Statement" form published by the American Industrial Real Estate Association, plus such additional information, confirmation and/or statements as may be reasonably requested by the Requesting Party. 16.2 Lessor desires to finance, refinance, or sell the Premises, any part thereof, or the building of which the Premises are a part, Lessee and all Guarantors of Lessee's performance hereunder shall deliver to any potential lender or purchase designated by Lessor such financial statements of Lessee and such Guarantors as may be reasonably required by such lender or purchaser, including but not limited to Lessee's financial statements for the past three (3) years. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. 17. Lessor's Liability. The term "Lessor" as used herein shall mean the owner or owners at the time in question of the fee title to the Premises, or, if this is a sublease, of the Lessee's interest in the prior lease. In the event of a transfer of Lessor's title or interest in the Premises or in this Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor at the time of such transfer or assignment. Except as provided in Paragraph 15, upon such transfer or assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by the lessor. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the lessor shall be binding only upon the Lessor as hereinabove defined. -21- 18. Severability. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof. 19. Interest on Past-Due Obligations. Any monetary payment due Lessor hereunder, other than late charges, not received by lessor within thirty (30) days following the date on which it was due, shall bear interest from the thirty-first (31st) day after it was due at the rate of 12% per annum, but not exceeding the maximum rate allowed by law, in addition to the late charge provided for in Paragraph 13.4 20. Time of Essence. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Lease. 21. Rent Defined. All monetary obligations of Lessee to Lessor under the terms of this Lease are deemed to be rent. 22. No Prior or Other Agreements; Broker Disclaimer. This Lease contains all agreements between the Parties with respect to any matter mentioned herein, and no other prior or contemporaneous agreement or understanding shall be effective. Lessor and Lessee each represents and warrants to the Brokers that it has made, and is relying solely upon, its own investigation as to the nature, quality, character and financial responsibility of the other Party to this Lease and as to the nature, quality and character of the Premises. Brokers have no responsibility with respect thereto or with respect to any default or breach hereof by either Party. 23. Notices. 23.1 All notices required or permitted by this Lease shall be in writing and may be delivered in person (by hand or by messenger or courier service) or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile transmission, and shall be deemed sufficiently given if served in a manner specified in this Paragraph 23. The addresses noted adjacent to a Party's signature on this Lease shall be that Party's address for delivery or mailing of notice purposes. Either Party may by written notice to the other specify a different address for notice purposes, except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for the purpose of mailing or delivering notices to Lessee. A copy of all notices required or permitted to be given to Lessor hereunder shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate by written notice to Lessee. 23.2 Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card, or if no delivery date is shown, the postmark thereon. If sent by regular mail the notice shall be deemed given forty-eight (48) hours after the same is addressed as required herein and mailed with postage prepaid. Notices delivered by United States Express Mail or overnight courier that guarantees next day delivery shall be deemed given twenty-four (24) hours after delivery of the same to the United States Postal Service or courier. If any notice is transmitted by facsimile transmission or similar means, the same shall be deemed served or delivered upon telephone confirmation of receipt of the transmission thereof, provided a copy is also delivered via delivery or mail. If notice is received on a Sunday or legal holiday, it shall be deemed received on the next business day. 24. Waivers. No waiver by Lessor of the Default or Breach of any term, covenant or condition hereof by Lessee, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by Lessee of the same or of any other term, covenant or condition hereof. Lessor's consent to, or approval of, any act shall not be deemed to render unnecessary -22- the obtaining of Lessor's consent to, or approval of, any subsequent or similar act by Lessee, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent. Regardless of Lessor's knowledge of a Default or Breach at the time of accepting rent, the acceptance of rent by Lessor shall not be a waiver of any preceding Default or Breach by Lessee of any provision hereof, other than the failure of Lessee to pay the particular rent so accepted. any payment given Lessor by Lessee may be accepted by Lessor on account of moneys or damages due Lessor, notwithstanding any qualifying statements or conditions made by Lessee in connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit of such payment. 25. Recording. Either Lessor or Lessee shall, upon request of the other, execute, acknowledge and deliver to the other a short form memorandum of this Lease for recording purposes. The Party requesting recordation shall be responsible for payment of any fees or taxes applicable thereto. 26. No Right To Holdover. Lessee has no right to retain possession of the Premises or any part thereof beyond the expiration or earlier termination of this Lease. 27. Cumulative Remedies. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible be cumulative with all other remedies at or in equity. 28. Covenants and Conditions. All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions. 29. Binding Effect; Choice of Law. This Lease shall be binding upon the parties, their personal representatives, successors and assigns and be governed by the laws of the state in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county in which the Premises are located. 30. Subordination; Attornment; Non-Disturbance. 30.1 Subordination. This Lease and any Option granted hereby shall be subject and subordinate to any ground lease, mortgage, deed of trust, or other hypothecation or security device (collectively, "Security Device"), now or hereafter placed by Lessor upon the real property of which the Premises are a part, to any and all advances made on the security thereof, and to all renewals, modifications, consolidations, replacements and extensions thereof Lessee agrees that the lenders holding any such Security Device shall have no duty, liability or obligation to perform any of the obligations of Lessor under this Lease, but that in the event of Lessor's default with respect to any such obligation, Lessee will give any Lender whose name and address have been furnished Lessee in writing for such purpose notice of Lessor's default and allow such Lender thirty (30) days following receipt of such notice for the cure of said default before invoking any remedies Lessee may have by reason thereof. If any Lender shall elect to have this Lease and/or any Option granted hereby superior to the lien of its Security Device and shall give written notice thereof to lessee, this Lease and such Options hslal be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof. 30.2 Attornment. Subject to the non-disturbance provisions of Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who acquires ownership of the Premises by reason of a foreclosure of a Security Device, and that in the event of such foreclosure, such new owner shall not: (i) be liable for any act or omission of any prior lessor or with respect to events occurring prior to acquisition of ownership, (ii) be subject to any offsets or defenses which Lessee might have against any prior -23- lessor, or (iii) be bound by prepayment of more than one (1) month's rent. 30.3 Non-Disturbance. With respect to Security Devices entered into by Lessor after the execution of this Lease, Lessee's subordination of this Lease shall be subject to receiving assurance (a "non-disturbance agreement") from the Lender that Lessee's possession and this Lease, including any options to extend the term hereof, will not be disturbed so long as Lessee is not in Breach hereof and attorns to the record owner of the Premises. 30.4 Self-Executing. The agreements contained in this Paragraph 30 shall be effective without the execution of any further documents; provided, however, that, upon written request from Lessor or a Lender in connection with a sale, financing or refinancing of the Premises, Lessee and Lessor shall execute such further writings as may be reasonably required to separately document any such subordination or non-subordination, attornment and/or non-disturbance agreement as is provided for herein. 31. Attorney's Fees. If any Party or Broker brings an action or proceeding to enforce the terms hereof or declare rights hereunder, the Prevailing Party (as hereafter defined) or Broker in any such proceeding action, or appeal thereon, shall be entitled to reasonable attorney's fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgment. The term, "Prevailing Party" shall include, without limitation, a Party or Broker who substantially obtains or defeats the relief south, as the case may be, whether by compromise, settlement, judgment, or the abandonment by the other Party or Broker of its claim or defense. The attorney's fees award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorney's fees reasonably incurred. Lessor shall be entitled to attorney's fees, costs and expenses incurred in the preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach. 32. Lessor's Access; Showing Premises; Repairs. Lessor and Lessor's agents shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times for the purpose of showing the same to prospective purchasers, lenders, or lessees, and making such alterations, repairs, improvements or additions to the Premises or to the building of which they are a part, as Lessor may reasonably deem necessary. Lessor may at any time place on or about the premises or building any ordinary "For Sale" signs and Lessor may at any time during the last one hundred twenty (120) days of the term hereof place on or about the Premises any ordinary "For Lease" signs. All such activities of Lessor shall be without abatement of rent or liability to Lessee. 33. Auctions. Lessee shall not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction upon the Premises without first having obtained Lessor's prior written consent. Notwithstanding anything to the contrary in this Lease, Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to grant such consent. 34. Signs. Lessee shall not place any sign upon the Premises, except that Lessee may, with Lessor's prior written consent, install (but not on the roof) such signs as are reasonably required to advertise Lessee's own business. The installation of any sign on the Premises by or for Lessee shall be subject to the provisions of Paragraph 7 (Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations). Unless otherwise expressly agreed herein. Lessor reserves all rights to the use of the roof and the right to install, and all revenues from the installation, of such advertising signs on the Premises including -24- the roof, as do not unreasonably interfere with the conduct of Lessee's business. 35. Termination; Merger. Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lesser estate in the Premises; provided, however, Lessor shall, in the event of any such surrender, termination or cancellation, have the option to continue any one or all of any existing substances. Lessor's failure within ten (10) days following any such event to make a written election to the contrary by written notice of any existing subtenancies. Lessor's failure within ten (10) days following any such event to make a written election to the contrary by written notice to the holder of any such lesser interest, shall constitute Lessor's election to have such event constitute the termination of such interest. 36. Consents. (a) Except for Paragraph 33 hereof (Auctions) or as otherwise provided herein, wherever in this Lease the consent of a Party is required to an act by or for the other Party, such consent shall not be unreasonably withheld or delayed. Lessor's actual reasonable costs and expenses (including but not limited to architects', attorneys', engineers' or other consultants' fees) incurred in the consideration of, or response to, a request by Lessee for any Lessor consent pertaining to this Lease or the Premises, including but not limited to consents to an assignment, a subletting or the presence or use of a Hazardous Substance, practice or storage tank, shall be paid by Lessee to Lessor upon receipt of an invoice and supporting documentation therefor. Subject to Paragraph 12.2(e) (applicable to assignment or subletting), Lessor may, as a condition to considering any such request by Lessee, require that Lessee deposit with Lessor an amount of money (in addition to the Security Deposit held under Paragraph 5) reasonably calculated by Lessor to represent the cost Lessor will incur in considering and responding to Lessee's request. Except as otherwise provided, any unused portion of said deposit shall be refunded to Lessee without interest. Lessor's consent to any act, assignment of this Lease or subletting of the Premises by Lessee shall not constitute an acknowledgement that no Default or Breach by lessee of this Lease exists, nor shall such consent be deemed a waiver of any then existing Default or Breach, except as may be otherwise specifically stated in writing by Lessor at the time of such consent. (b) All conditions to Lessor's consent authorized by this Lease are acknowledged by Lessee as being reasonable. The failure to specify herein any particular condition to Lessor's consent shall not preclude the imposition by Lessor at the time of consent of such further or other conditions as are then reasonable with reference to the particular matter for which consent is being given. 37. Guarantor. 37.1 If there are to be any Guarantors of this Lease per Paragraph 1.11, the form of the guaranty to be executed by each such Guarantor shall be in the form most recently published by the American Industrial Real Estate Association, and each said Guarantor shall have the same obligations as Lessee under this Lease, including but not limited to the obligation to provide the Tenancy Statement and information called for by Paragraph 16. 37.2 It shall constitute a Default of the Lessee under this Lease if any such Guarantor fails or refuses, upon reasonable request by Lessor to give, (a) evidence of the due execution of the guaranty called for by this Lease, including the authority of the Guarantor (and of the party signing on Guarantor's behalf) to obligate such Guarantor on said guaranty, and including in the -25- case of a corporate Guarantor, a certified copy of a resolution of its board of directors authorizing the making of such guaranty, together with a certificate of incumbency showing the signature of the persons authorized to sign on its behalf, (b) current financial statements of Guarantor as may from time to time be requested by Lessor, (c) a Tenancy Statement or a written confirmation that the guaranty is still in effect. 38. Quiet Possession. Upon payment by Lessee of the rent for the Premises and the observance and performance of all of the covenants, conditions and provisions on Lessee's part to be observed and performed under this Lease, Lessee shall have quiet possession of the Premises for the entire term hereof subject to all of the provisions of this Lease. 39. Options. 39.1 Deleted. 39.2 Deleted. 39.3 Deleted 39.4 Effect of Default on Options. (a) Lessee shall have no right to exercise an Option, notwithstanding any provision in the grant of Option to the contrary; (i) during the period commencing with the giving of any notice of Default under Paragraph 13.1 and continuing until the noticed Default is cured, or (ii) during the period of time any monetary obligation due Lessor from Lessee is unpaid (without regard to whether notice thereof is given Lessee), or (iii) during the time Lessee is in Breach of this Lease, or (iv) in the event that Lessor has given to Lessee three (3) or more notices of Default under Paragraph 13.1, whether or not the Defaults are cured, during the twelve (12) month period immediately preceding the exercise of the Option. (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of Paragraph 39.4(a). (c) All rights of Lessee under the provisions of an Option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option, if, after such exercise and during the term of this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee for a period of thirty (30) days after such obligation becomes due (without any necessity of Lessor to give notice thereof to Lessee), or (ii) Lessor gives to Lessee three (3) or more notices of Default under Paragraph 13.1 during any twelve (12) month period, whether or not the Defaults are cured, or (iii) if Lessee commits a Breach of this Lease. 40. Multiple Buildings. If the Premises are part of a group of buildings controlled by Lessor, Lessee agrees that it will abide by, keep and observe all reasonable rules and regulations which Lessor may make from time to time for the management, safety, care, and cleanliness of the grounds, the parking and unloading of vehicles and the preservation of good order, as well as for the convenience of other occupants or tenants of such other buildings and their invitees, and that Lessee will pay its fair share of common expenses incurred in connection therewith. 41. Security Measures. Lessee hereby acknowledges that the rental payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of the Premises, Lessee, its agents and invitees and their property from the acts of third parties. -26- 42. Reservations. Lessor reserves to itself the right, from time to time, to grant, without the consent or joinder of Lessee, such easements, rights and dedications that Lessor deems necessary, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights, dedications, maps and restrictions do not unreasonably interfere with the use of the Premises by Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate any such easement rights, dedication, map or restrictions. 43. Performance Under Protest. If at any time a dispute shall arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any part thereof, said Party shall be entitled to recover such sum or so much thereof as it was not legally required to pay under the provisions of this Lease. 44. Authority. If either Party hereto is a corporation, trust, or general or limited partnership, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on its behalf. If Lessee is a corporation, trust or partnership, Lessee shall, within thirty (30) days after request by Lessor, deliver to Lessor evidence satisfactory to Lessor of such authority. 45. Conflict. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions. 46. Offer. Preparation of this Lease by Lessor or Lessor's agent and submission of same to Lessee shall not be deemed an offer to lease to Lessee. This Lease is not intended to be binding until executed by all Parties hereto. 47. Amendments. This Lease may be modified only in writing, signed by the Parties in interest at the time of the modification. The parties shall amend this Lease from time to time to reflect any adjustments that are made to the Base Rent or other rent payable under this Lease. As long as they do not materially change Lessee's obligations hereunder, Lessee agrees to make such reasonable non-monetary modifications to this Lease as may be reasonably required by an institutional, insurance company, or pension plan Lender in connection with the obtaining of normal financing or refinancing of the property of which the Premises are a part. 48. Multiple Parties. Except as otherwise expressly provided herein, if more than one person or entity is named herein as either Lessor or Lessee, the obligations of such Multiple Parties shall be the joint and several responsibility of all persons or entities named herein as such Lessor or Lessee. LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR SUBMISSION TO YOUR ATTORNEY FOR HIS APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO EVALUATE THE CONDITION OF THE PROPERTY AS TO THE POSSIBLE PRESENCE OF ASBESTOS, STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO -27- REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKER(S) OR THEIR AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. IF THE SUBJECT PROPERTY IS LOCATED IN A STATE OTHER THAN CALIFORNIA, AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED SHOULD BE CONSULTED. The parties hereto have executed this Lease at the place on the dates specified above to their respective signatures. Executed at Lafayette, CA by LESSOR: /s/ Harry Locklin By Name Printed Title Address: 956 Reliez Station Lane Lafayette, CA 94949 Tel. No. (510) 939-5666 Fax No. (510) 935-7678 by LESSEE: Affymetrix, a California Corporation By: /s/ David B. Singer Name Printed: David B. Singer Title: President & Chief Executive Officer By: /s/ Stephen P. A. Fodor Name Printed: Stephen P. A. Fodor 3380 Central Expressway Santa Clara, CA 95051 Tel No. (408) 522-6030 Fax No. (408) 481-0422 -28- National Semiconductor September 13, 1994 Mr. Harry Locklin 956 Reliez Station Lane Lafayette, CA 94949 Dear Harry, In follow up to our conversation of September 12, 1994, I am confirming National Semiconductor Corporation's (NSC) position on the physical condition of the property upon termination of the lease November 31, 1994. 1. NSC will require a minimum of one (1) additional month to effectively vacate. This will make the lease termination date December 31, 1994. 2. Recognizing the requirements of Building Departments and Government Planning Agencies don't always coincide with private industry planning criteria. I would like the flexibility of an additional month (January 1995) for a holdover if we cannot meet current schedules. I would give you forty-five (45) days notice if I needed this flexibility. 3. Referencing letter of September 9, 1994 forwarded by Affymetrix (Dan Lazare), NSC agrees to all provisions of the letter except the following points - A to E. OFFICE AREAS A. All Projection Screens - NSC may remove one or two screens in the reception area conference rooms. B. NSC reserves the right to remove their conference room furniture in the reception area rooms. C. Other - NSC would prefer this work to be the responsibility of the Owner or Affymetrix. NSC will perform the work, however, if an alternate solution is not agreed upon between Owner and Affymetrix. A. PLANS. 1. PRELIMINARY PLANS. Within thirty (30) days after execution of this lease, Lessee shall, through an architect approved by Lessor, prepare plans and specifications (the "Preliminary Plans") which shall indicate fully the specific requirements of Lessee's space and the Tenant Improvements, as hereinafter defined, required by Lessee, all adequate in scope to obtain a building permit for construction of the Tenant Improvements. "Tenant Improvements" shall mean all improvements to the reality which constitutes the Premises, including, without any limitation, interior portions of the Leased Premises such as interior partitions, the floor coverings, reflected ceiling plan, interior painting, types of materials and colors to be used within the Leased Premises, signs (if any), plumbing fixtures, electrical requirements and mechanical requirements including the heating, ventilating and air conditioning requirements of Lessee, modifications to increase sprinkler system capacities and communications systems wiring plans, among other things. The Preliminary Plans shall be subject to Lessor's prior written approval (not to be unreasonably withheld), and -29- within ten (10) business days after receipt of the Preliminary Plans, Lessor shall notify Lessee of its approval or disapproval. Lessee's architect shall, at Lessee's expense, revise the Preliminary Plans in accordance with Lessor's objections and comments and resubmit them to Lessor within ten (10) days after receipt of any disapproval by Lessor, in conformity with Lessor's comments. 2. FINAL PLANS. The Preliminary Plans, approved or as modified pursuant to paragraph 1, are hereinafter referred to as the "Final Plans." Collectively, the Preliminary Plans, Final Plans and all changes thereto are hereinafter referred to as the "Plans." B. CONSTRUCTION. Lessor, at its own cost and expense, as soon as practicable after the Final Plans have been adopted and approved and all other conditions to Lessor's Work (if any) have been fulfilled, and unless prevented or delayed by conditions over which it has no control, will arrange for the performance of Lessor's Work (if any) either by Lessor or by contract with a contractor of its choice. If there is no Lessor's Work to be performed, Lessee will accept the Premises in accordance with Paragraph D hereof and proceed with Lessee's Work accordingly. 1. LESSOR'S WORK. Lessor's Work shall be limited to that described in Schedule 1 attached hereto. 2. LESSEE'S WORK. Lessee's Work is described in Schedule 1 attached hereto and shall be performed by Lessee at Lessee's sole cost and expense, unless otherwise specifically provided in Schedule 2, if attached hereto. C. CHANGE ORDERS. Any changes, modifications or alterations ("Change Orders") requested by Lessee after approval of the Final Plans, shall be processed by the Lessee's architect at Lessee's expense, and be subject to Lessor's prior written approval. Upon revision of the Plans to accommodate any requested Change Order, Lessor shall proceed with Lessor's Work, if any, as changed, provided any additional Construction Costs resulting therefrom shall be paid in full by Lessee to Lessor prior to adoption of such change, modification or alteration. No such changes, modifications or alterations in the Plans and no changes in the construction required by the Plans shall be made without the written consent of Lessor after written request therefor by Lessee. In the event Lessee rescinds its request for a Change Order, Lessee shall remain liable for all increased Construction Costs resulting from Lessor's processing of the requested Change Order and any subsequent processing necessary to eliminate the Change Order from Plans. D. ACCEPTANCE OF LEASED PREMISES. Lessee agrees that upon substantial completion of the Lessor's Work, if any, Lessee will accept the Premises. After acceptance of the Premises by Lessee, Lessee shall save and hold Lessor harmless from liability as provided in the Lease. Upon acceptance of the Premises by Lessee, Lessee shall forthwith proceed to perform all of Lessee's Work at its sole cost and expense as Lessee may desire in order to prepare the Premises for Lessee's use thereof, provided any such work to be performed by Lessee shall be performed in accordance with the provisions set forth in the Lease regarding Alterations and only after receipt of the approvals required by this Lease. E. RULES IN RESPECT OF ALTERATIONS. All work performed by the Lessee shall be subject to compliance with the provisions of that Article of the Lease dealing with Alterations, except where expressly in conflict with the Exhibit B. F. INSURANCE. Prior to the commencement of Lessee's Work and until completion thereof, or commencement of the Lease Term, whichever is the last to occur, Lessee shall effect and maintain -30- Builder's Risk Insurance covering Lessor, Lessee and Lessee's contractors, as their interest may appear, against loss or damage by fire, vandalism and malicious mischief and such other risks as are customarily covered by a standard "All Risk" policy of insurance protecting against all risk of physical loss or damage to Lessee's Work in place and all materials stored at the site of Lessee's Work, and all materials, equipment, supplies and temporary structures of all kinds of incidental to Lessee's Work, and equipment, all while forming a part of or contained in such improvements or temporary structures, or while on the premises all to the actual replacement cost thereof at all times on a completed value basis. Lessee shall provide Lessor with certificates, or at Lessor's request, a copy of the policy, evidencing that such insurance is in full force and effect and stating the term thereof. In addition, Lessee agrees to indemnify and hold Lessor harmless against any and all claims for injury to persons or damage to property by reason of the use of the Premises for the performance of Lessee' Work, and claims, fines and penalties arising out of any failure of Lessee or its agents, contractors and employees to comply with any law, ordinance, code requirements, regulations or other requirements applicable to Lessee's Work. Lessee agrees to require all contractors and subcontractors engaged in the performance of Lessee's Work to effect and maintain and deliver to Lessee and Lessor certificates evidencing the existence of, and covering Lessor, Lessee and Lessee's contractors, prior to commencement of Lessee's Work and until completion thereof, the following insurance coverages: 1. Worker's Compensation and Occupational Disease Insurance in accordance with the laws of the State in which the work is performed, including Employer's Insurance to the limit of ONE HUNDRED THOUSAND DOLLARS ($100,000.00). 2. Commercial General Liability Insurance (excluding "Automobile Liability") with independent contractors, contractual liability and completed operations endorsements, covering personal injury, including death, with a limit of THREE MILLION DOLLARS ($3,000,000.00) for any one (1) occurrence and property damage with a limit of ONE MILLION DOLLARS ($1,000,000.00) for any one (1) occurrence or a combined single limit policy of THREE MILLION DOLLARS ($3,000,000.00) per occurrence. 3. Comprehensive Automobile Insurance, including "nonowned" automobiles, against bodily injury, including death resulting therefrom, with limits of ONE MILLION DOLLARS ($1,000,000.00) for any one occurrence and TWO HUNDRED FIFTY THOUSAND DOLLARS ($250,000) property damage or a combined single limit of ONE MILLION DOLLARS ($1,000,000.00). 4. Owner's protective liability coverage for an amount not less than THREE MILLION DOLLARS ($3,000,000.00). -31- ADDENDUM TO LEASE This is an Addendum to that certain Standard Industrial/Commercial Single-Tenant Lease (the "Form Lease") by and between Harry Locklin, as Lessor, and Affymetrix, Inc., a California corporation, as Lessee, dated December 5, 1994. Should there be any conflict between the provisions of this Addendum and the provisions of the Form Lease, the provisions of this Addendum shall control. 1. LESSEE'S INSPECTION: a. INSPECTION: Subsequent to vacation of the Premises by NSC, but within forty-five (45) days of the Early Possession Date Lessee may, at its own risk and expense, upon reasonable notice to Lessor, and subject to such conditions as Lessor may impose, conduct such reasonable soils and other investigations on the Premises as Lessee may require. Lessee shall rely upon its own inspections and its own professional advisors in its examinations of the property and all improvements thereon. Lessee shall repair all damage to the Premises resulting from Lessee's or Lessee's representatives coming upon the Premises to perform such inspections, tests or analyses. Lessee shall indemnify, defend by counsel acceptable to Lessor, and hold Lessor harmless from and against any cost, claims, damages or liabilities, including but not limited to, attorneys' fees and court costs that may arise in connection with any testing done on the Premises. Lessee's obligations under this Paragraph 1 shall survive termination of this Lease. b. NOTICE: Within forty-five (45) days of the Early Possession Date, Lessee shall notify Lessor in writing of any repair, replacements, and/or alterations reasonably necessary to cause compliance with Paragraph 2 hereof. 2. CONDITION OF PREMISES: a. Lessor will replace and/or repair all floor damage resulting from equipment removal wear and tear from the previous Lessee. The cost of such repair will not be deducted from the Allowance referenced in Schedule 2 of Exhibit B hereof. Upon occupancy of the Premises by Lessee, the roof and all building systems, including but not limited to HVAC, electrical and plumbing systems, and the NSC Equipment described in this Addendum, shall be in good condition. The Premises shall be delivered to Lessee in accordance with all local and state codes and ordinances and comply with the Americans With Disabilities Act ("ADA") requirements. In the event that the upgrades that Lessee proposes causes increased requirements for ADA, that cost shall be the sole responsibility of the Lessee. After Lessor has completed any items which Lessee has identified as requiring repair, replacement or alteration in accordance with Paragraph 1, or after forty-five (45) days from the Early Possession Date without any notice from Lessee, Lessor shall have no further obligation with respect thereto except as otherwise expressly provided in the Lease as amended by this Addendum. If at any time during the term of the Lease the HVAC units need to be replaced, the Lessee shall only be responsible for its prorata share of the unit's useful life (the term of the Lease remaining divided by the expected life of the units). b. ROOF: Lessor shall maintain the structural portions of the roof and, provided Lessee has maintained the roof membrane as herein required, be responsible for roof membrane replacement as and when required. Lessor shall effect such repairs as are noted on Lessee's notice delivered pursuant to Paragraph 1 hereof and thereafter Lessee shall maintain the roof membrane in good condition, reasonable wear and tear and damage by fire and other casualty excepted but shall not be required to replace the same unless replacement becomes required as a result of improper maintenance. Lessee shall have access to all appropriate past inspection records in Lessor's possession. 3. INSURANCE: Property insurance maintained by Lessor shall include earthquake coverage but with respect to such earthquake coverage, Lessee shall only be obligated to reimburse Lessor for 50% of that portion of the premium applicable thereto. Lessee shall have the right to review and reasonably approve the property insurance maintained by Lessor for compliance with the terms of this Lease and with respect to the amount of the deductible provided therein. 4. OPERATING EXPENSES: Except to the extent that the Form Lease or this Addendum expressly provides that Lessor shall pay such expenses, Lessee shall be responsible for all operating expenses of the Premises. 5. RENT SCHEDULE: MONTHS LEASE RATE/MONTH PER SQ. FT. ------ ---------------- ----------- 01-30 $14,992.50 $.75 NNN 31-60 $15,992.00 $.80 NNN 6. OPTION TO EXTEND THE TERM: a. NOTICE OF EXERCISE. Provided that Lessee is not in Breach of this Lease at the time of exercise, Lessee shall have two options to extend the initial term hereof for additional and consecutive periods of three (3) years each upon the same terms and conditions as stated herein, except for Minimum Monthly Rent. The number of additional periods shall be reduced by one for each option that is exercised. Each such extension is herein referred to as an "Extended Term." Failure to timely exercise the first option hereunder shall cause both options to become immediately null and void. Lessee must exercise its right, if at all, by written notification (the "Notice of Exercise") to Lessor not less than six (6) months prior to the expiration of the initial term hereof, or the then current Extended Term, if any. -2- b. OPTIONS ARE NOT PERSONAL. In the event that Lessee assigns its interest under the Lease as permitted hereunder, Lessee shall have the right to assign the Option to such assignee and in the event Lessee sublets all or part of the Premises as permitted hereunder, Lessee shall continue to have the right to exercise its Option. c. STRICT COMPLIANCE. Lessor grants the rights contained herein to Lessee in consideration of Lessee's strict compliance with the provisions hereof, including, without limitation, the manner of exercise of this option. d. FAIR MARKET RENTAL. If Lessee exercises the right to extend the term then the Minimum Monthly Rent shall be adjusted to equal the Fair Market Rental for the premises as of the date of the commencement of each such Extended Term, pursuant to the procedures hereinafter set forth. In determining the "Fair Market Rental" for the Leased Premises the following factors applicable to the Leased Premises or any comparable premises shall be considered: i. Rental rates being charged for comparable premises in the same geographical location. ii. The relative locations of the comparable premises. iii. The fact that Lessor will be providing no improvement allowance. iv. Rental adjustments, if any, or rental concessions. v. Services and utilities provided or to be provided. vi. Use limitations or restrictions. vii. Any other relevant Lease terms or conditions. viii. The fact that Lessor will not be paying a commission. The Minimum Monthly Rent payable during the pendency of any appraisal period shall continue to be the Minimum Monthly Rent payable at the end of the previous Term. e. DETERMINATION OF FAIR MARKET RENTAL. Upon exercise of the right to extend the term, and included within the Notice of Exercise, Lessee shall notify Lessor of its opinion of Fair Market Rental as above defined for the Extended Term. If Lessor disagrees with Lessee's opinion of the Fair Market Rental, it shall so notify Lessee ("Lessor's Value Notice") within thirty (30) days after receipt of Lessee's Notice of Exercise. f. APPRAISAL. If the parties cannot resolve any disagreement regarding the Fair Market Rent within ten (10) days after receipt by Lessee of Lessor's Value Notice, then, within -3- twenty (20) days after Lessee's receipt of Lessor's Value Notice, Lessor and Lessee each, and by giving notice to the other party, shall appoint a real estate appraiser with at least five (5) years' full-time appraisal experience in the geographical area of the Premises and with the leasing of properties of a similar use as the Premises (i.e. research, development and production) to appraise and set the Fair Market Rental for the Extended Term. If either Lessor or Lessee does not appoint an appraiser within twenty (20) days after the other party has given notice of the name of its appraiser, the single appraiser appointed shall be the sole appraiser and shall set the Fair Market Rental for the Extended Term. If two (2) appraisers are appointed by Lessor and Lessee they shall meet promptly and attempt to set the Fair Market Rental for the Extended Term. If the two (2) appraisers are unable to agree within thirty (30) days after the second appraiser has been appointed, they shall select a third appraiser meeting the qualifications stated hereinabove within ten (10) days after the last day the two (2) appraisers are given to set the Fair Market Rental. The third appraiser shall be a person who has not previously acted in any capacity for either Lessor or Lessee. The cost of appointing all of the appraisers shall be shared equally by the parties. Within thirty (30) days after the selection of the third appraiser, a majority of the appraisers shall set the Fair Market Rental for the Extended Term. If a majority of the appraisers is unable to set the Fair Market Rental within the stipulated period of time, the three (3) appraisals shall be added together and their total divided by three (3); the resulting quotient shall be the Fair Market Rental for the Premises during the Extended Term. However, if the low appraisal is more than ten percent (10%) lower than the middle appraisal, the low appraisal shall be disregarded; if the high appraisal is more than ten percent (10%) higher than the middle appraisal, the high appraisal shall be disregarded. If only one (1) appraisal is disregarded, the remaining two (2) appraisals shall be added together and their total divided by two (2); the resulting quotient shall be the Fair Market Rental for the Premises during the Extended Term. If both the low appraisal and the high appraisal are disregarded as stated hereinabove, the middle appraisal shall be the Fair Market Rental for the Premises during the Extended Term. After the Fair Market Rental for the Extended Term has been set, the appraisers immediately shall notify Lessor and Lessee, and Lessor and Lessee immediately shall execute an amendment to the Lease stating the Fair Market Rental. 7. EXISTING EQUIPMENT TO REMAIN IN FACILITY: Lessor has received, in the form of Exhibit A attached (see letters of September 9, 1994 and September 13, 1994), a commitment from National Semiconductor Corporation ("NSC") that, on their departure from the Premises, they will leave all mechanical and electrical equipment in place and operating. Such equipment shall include an air compressor(s), vacuum pump(s), process cooling water equipment ("NSC Equipment"), deionized water system, acid waste treatment system, all roof top equipment, 50 Herz generator & panel, all standard laboratory chemical benches and fume hoods. Lessor shall request NSC to leave one half of -4- the office cubicles and furniture in the facility. Lessor shall request that all disconnections from NSC Equipment be made in a neat, workmanlike manner with no loose or dangling wires and no hacksawed, cut or hammered pipes. In the event that NSC does not abide by its commitment to leave all mechanical and electrical equipment in place and operating, Lessee shall have the right, as its sole remedy, exercisable within thirty (30) days after the Early Possession Date, to terminate the Lease without any liability to Lessor. 8. INFORMATION AND REQUEST FROM PRIOR LESSEE: Lessor shall request that NSC provide Affymetrix with the following information: a. Operating and maintenance manuals for all equipment left in the building. b. Written preventive maintenance and repair records and identity of contractors, if any, who performed such work. c. Copies of building permits and inspections and copies of decommissioning documents. 9. SIGNAGE/GRAPHICS: Lessee will have the right to display its corporate name and logo on the face of the structure and at various locations surrounding the building as long as Lessee is in compliance with ordinances of the City of Sunnyvale. Lessee shall repair any damages made to the Premises due to the installation, maintenance and/or removal of such signs. 10. RIGHTS TO ASSIGN OR SUBLEASE: Lessee shall have the right to assign all or any portion of its interest under this Lease or sublet the entire Premises without Lessor's consent to any parent, wholly-owned, subsidiary or affiliate of Lessee, any party which results from any merger, consolidation or other business organization of Lessee, and/or any party which acquires all or substantially all the assets or stock of Lessee; provided, however, that Lessee shall give Lessor at least thirty (30) days' prior written notice thereof; that Lessee shall not be released from its obligations under the lease by reason of any such assignment; that the Transferee have a net worth at least equal to that of Affymetrix at lease execution; and that the Transferee has sufficient working capital to meet all lease obligations as they accrue. 11. NO REPRESENTATIONS: Lessee acknowledges that Lessor's Broker has not made any independent investigation of the Premises or determination with respect to the physical and environmental condition of the Premises including without limitation the existence of any underground tanks, pumps, piping, toxic or hazardous substances on the Premises. -5- Likewise, no investigation has been made to ensure compliance with the "American With Disabilities Act" (ADA). This Act may require a variety of changes to a facility, including potential removal of barriers to access by disabled persons and provision of auxiliary aids and services for hearing, vision or speech impaired persons. Lessee is advised to obtain independent legal and technical advise with respect to the physical and environmental condition and ADA compliance of the Premises. Lessee agrees that it will rely solely on its own investigations and/or that of a licensed professional specializing in such matters and not on Lessor's Broker. Lessor's Broker does not represent or warrant the accuracy or completeness of any documents or information reviewed or received by any of the parties in connection with this transaction, including reports, structural, geological or engineering studies, and plans and specifications. Except as expressly provided herein, Lessor makes no representation or warranty as to the Premises or the condition thereof, or the suitability for Lessee's use or compliance with governmental regulations. 12. CONTINGENCY: Lessee's improvement of the Premises in accordance with plans approved by Lessor is subject to the receipt of permits from the City of Sunnyvale. Promptly after approval of its plans by Lessor, Lessee shall apply for such permits and diligently pursue such application. If such permits are not received by February 28, 1995, Lessee may thereafter terminate this Lease upon notice to the Lessor given not later than March 31, 1995. 13. EXPIRATION DATE: Notwithstanding Section 1.3 of the Form Lease to the contrary, if the Commencement Date occurs after May 1, 1995, the Expiration Date shall occur five (5) years and zero (0) months after the Commencement Date. (Therefore, for example, if the Commencement Date does not occur until June 1, 1995, then the Expiration Date shall be May 31, 2000.) 14. NOTICE OF DELIVERY OF EARLY POSSESSION; COMMENCEMENT DATE MEMORANDUM: Lessor shall provide ten (10) business days prior written notice to Lessee in the event that Lessor desires to deliver possession of the Premises to Lessee prior to February 1, 1995. Further, within ten (10) days after delivery the parties shall execute a memorandum setting forth the Commencement Date and Expiration Date of the Lease. 15. REAL ESTATE BROKERS: The following information is specified to clarify Section 1.10 of the Form Lease: Lessor has dealt exclusively with Jim Binsacca at Cornish & Carey Commercial Oncor International. Lessee has dealt exclusively with R. Randolph Scott at Cornish & Carey Commercial Oncor International and Mark Pearson at Catalyst Real Estate Group. 16. DELAY IN POSSESSION: Notwithstanding Section 3.3 of the Form Lease to the contrary, and in addition to any termination -6- rights Lessee may have thereunder, if possession of the Premises is not delivered to Lessee by March 1, 1995, Lessee shall have the right, as its sole remedy, to terminate this Lease. 17. HAZARDOUS SUBSTANCE: For the purposes of the Lease "Hazardous Substance" shall mean and include any hazardous or toxic substance, material or waste which is or becomes regulated by any local governmental or regulatory authority, the state of California or the United States government. Lessor makes the following representations and warranties to Lessee as of the date of the Lease (which representations and warranties will survive the termination of the Lease) with respect to Hazardous Substances: (i) except as disclosed in the letter of Advanced Safety Applications, Inc. dated September 13, 1983 addressed to James Schlosser of Printed Circuits International, Inc. which was delivered to Lessee by Lessor, to Lessor's actual knowledge without inquiry there is no contamination from any Hazardous Substances on the Premises; (ii) to Lessor's actual knowledge without inquiry, the Premises is in compliance with all laws relating to Hazardous Substances including, but not limited to, those relating to soil and groundwater conditions; (iii) there are no claims or actions pending or threatened against Lessor or any portion of the Premises by any governmental entity or agency or any other person or entity relating to Hazardous Substances or pursuant to laws concerning Hazardous Substances; (iv) there is to Lessor's actual knowledge without inquiry no occurrence or condition on any other real property that could cause the Premises or any part thereof to be otherwise subject to any restrictions on ownership, occupancy, transferability or use which would interfere with Lessee's intended use thereof as proposed in this Lease under any laws concerning Hazardous Substances. a. Lessor shall indemnify, protect, defend and hold harmless Lessee, its directors, officers, employees, and agents, and any assignees, subtenants, or successors to Lessee's interest in the Premises and their directors, officers, employees, and agents, from and against any and all damages, liabilities, judgments, costs, claims, liens, expenses and penalties including reasonable attorneys' fees arising out of or attributable to the use, generation, production, maintenance, storage, disposal, discharge, release, or transportation of Hazardous Substances on the Premises prior to the date of delivery of the Premises; and from and against the cost of any investigation, removal, remediation, restoration or abatement thereof. Nothing herein contained shall make Lessor responsible for Lessee's business interruption or loss of profits under the provisions of this indemnity. b. If any such investigation, removal, remediation, restoration or abatement or similar action is required by any governmental authority ("Remedial Activity"), and such action requires that Lessee be closed for business or access be denied in whole or in part for greater than a twenty-four (24) hour period, then: -7- i. If the Remedial Activity materially interferes with Lessee's production, such as the loss of the use of the production floor and systems that support production activity ("Essential Activities") all payments due under the Lease, including Base Rent, shall be abated entirely during the period beyond twenty-four (24) hours and if the closure or denial of access persists in excess of sixty (60) days then Lessee shall have the right to terminate the Lease. ii. If the Remedial Activity materially interferes with Lessee's use which is not an Essential Activity all payments due under the Lease, including Base Rent, shall be abated (on a square footage basis) only to the extent that Lessee is deprived of the use of a portion of the Premises during the period beyond twenty-four (24) hours and if the closure or denial of access persists in excess of one hundred twenty (120) days then Lessee shall have the right to terminate the Lease. c. Notwithstanding any provision of the Lease to the contrary, Lessee shall have no obligation whatsoever, including no financial obligations, with respect to or otherwise attributable to the use, generation, production, maintenance, storage, disposal, discharge, release or transportation of Hazardous Substances on neighboring properties unless caused by Lessee. 18. CAPITAL IMPROVEMENTS: Notwithstanding Section 7.1 of the Form Lease to the contrary, the cost of each capital expenditure made for reasonably necessary (as opposed to elective) repairs and/or replacements to the parking lot or the HVAC systems made by Lessee shall be amortized over the period of its useful life and Lessor shall be responsible to pay upon demand by Lessee the amortized portion attributable to any period after expiration of the Term. For the purposes of calculating Lessor's obligations hereinabove the Term shall not be deemed to include any then unexercised Option terms. In the event that Lessee exercises an Option to extend the Term after any payment by Lessor hereunder has already taken place, the parties shall recalculate Lessor's obligation and the appropriate amount shall be returned to Lessor, upon the exercise of such Option to extend. 19. ALTERATIONS: Notwithstanding Section 7.3 of the Form Lease to the contrary, Lessee may make any Alterations in, on, under or about the Premises without Lessor's prior written consent provided that the cumulative cost thereof in any calendar year does not exceed $50,000 and provided further that such Alterations are not Utility Installations, do not affect the structural portions of the Premises or the exterior of the building. 20. REMOVAL OF TENANT IMPROVEMENT WORK: Notwithstanding any provision of Section 7.4 of the Form Lease to the contrary, Lessee shall not be obligated to remove from the Premises at the expiration of the Term any part of its initial improvements approved by Lessor, including the Tenant Improvement Work -8- identified in Schedules 1 and 2 to the Addendum. As to any alterations or additions during the Term of the Lease, Lessee shall be obligated to remove the same only if Lessor has specified such removal at the time that required consent of the Lessor to such alterations or additions is sought and obtained. 21. EXEMPTION OF LESSOR FROM LIABILITY: Lessor's exemption from liability in Section 8.8 of the Form Lease shall not extend to any injury or damage to the extent attributable to the negligence or wilful misconduct of Lessor or its breach of the Lease. 22. REPAIR OF PARTIAL DAMAGE TO PREMISES: a. Notwithstanding Section 9.6 of the Form Lease to the contrary, Lessor's repair of Premises Partial Damage pursuant to Section 9.2 of the Form Lease shall be completed no later than one hundred fifty (150) days after the date of occurrence of the damage subject to delays beyond the reasonable control of Lessor including strikes, acts of God, extraordinary weather conditions and the like. If within thirty (30) days after the occurrence of the damage Lessee reasonably estimates that the repair of the damage will take more than 150 days to repair, Lessee shall have the right to terminate this Lease as of the date of the damage by notice in writing to Lessor delivered within such thirty (30) day period. b. The provisions of Section 9.2 are limited to the extent that Lessee shall not be required to contribute more than 50% of the deductible amount of the property insurance policy toward the cost of repair or restoration, and Lessor shall contribute the balance. 23. LESSOR'S OBLIGATION OF REMEDIATION: Notwithstanding provision (ii) of Section 9.7 of the Form Lease to the contrary, Lessor shall bear the full cost of investigation and remediation of any Hazardous Substance condition, and Lessor shall have no right to terminate the Lease in connection therewith, if such Hazardous Substance condition is attributable to, in whole or in part, Hazardous Substances which were in existence in, on or under the Premises on or prior to the date of delivery thereof. 24. PAYMENT OF TAXES: Lessor and Lessee agree that during the Term Lessee shall make advance payments of Real Property Taxes along with payments of Base Rent as provided in Section 10.1(b) of the Form Lease. 25. CURE PERIOD FOR CERTAIN DEFAULTS: The ten (10) day cure period for certain defaults specified in the final line of Section 13.1(c) of the Form Lease shall be replaced with the number fifteen (15). 26. MORTGAGEE NON-DISTURBANCE: Within Thirty (30) days following the full execution of the Lease by both parties thereto, Lessor shall use its best efforts to obtain a non-disturbance and recognition agreement from each present mortgagee -9- of Lessor having rights in the Premises appear to those of Lessee under this Lease which agreement shall be reasonably acceptable to Lessee. Said agreement shall provide, at a minimum, that Lessee's use and enjoyment of the Premises shall not be disturbed so long as Lessee is not in Breach of the Lease. Lessee shall have the right to terminate this lease if the non-disturbance agreement has not been obtained within sixty (60) days of the execution of this lease. 27. NO GROUND LEASE: Lessor warrants that there is no ground lease in effect with respect to the Premises. 28. LESSOR ACCESS: Notwithstanding any provision of Section 32 of the Form Lease to the contrary, except in an emergency Lessor must provide reasonable advance notice to Lessee of its desire to enter the Premises. Such entry (other than in emergencies) may occur only during reasonable business hours as determined by Lessee in its sole discretion. Any entry shall be for a reasonable period of time only and shall cause as little interference to Lessee and its business as reasonably necessary. Lessor acknowledges that Lessee may impose reasonable security measures on or otherwise limit or restrict Lessor's access to certain portions of the Premises in order to protect proprietary or confidential information used by Lessee and its business provided however, Lessor may obtain access to such restricted areas for legitimate business purposes for persons who are not competitors of Lessee provided such non competitors shall sign a confidentiality agreement in form and substance reasonably satisfactory to Lessee. 29. RETURN OF DEPOSITS: Should this lease be terminated by either party as permitted herein, Lessor promptly shall return to Lessee all payments and deposits theretofore made by Lessee to Lessor. LESSOR: HARRY LOCKLIN LESSEE: AFFYMETRIX By: /S/ HARRY P. LOCKLIN By: /S/ DAVID B. SINGER -------------------- ------------------- Date: 12/11/94 Its: PRESIDENT ---------- ------------- By: /S/ STEPHEN P. A. FODOR -------------------------- Its: PRESIDENT -------------------------- Date: 12/6/94 ----------- -10- SCHEDULE 1 LESSOR'S WORK: Except as to any work which is required to place the Premises in the condition required for delivery as set forth in the Lease, Lessor shall not be responsible for any work whatsoever with respect to the Leased Premises. Lessee agrees that, subject to the provisions of the Lease and Addendum thereto, (i) it shall accept the Leased Premises in AS-IS condition as of the date Lessee takes possession of the Leased Premises with Lessor's consent; (ii) Lessor shall have no responsibility to make any Tenant Improvements which may be required to prepare the Leased Premises for Lessee's use; (iii) Lessee, at its sole cost and expense, shall complete any Tenant Improvements which may be required upon the Leased Premises prior to Lessee's initial opening for business; and (iv) all such Tenant Improvements shall be completed in accordance with all applicable City, County, and State laws, ordinances, rules and regulations relating thereto. LESSEE'S WORK: Lessee shall cause to be prepared and submitted to Lessor for its approval plans for Lessee's improvements to the Premises ("Tenant Improvements"). Lessor shall promptly approve or disapprove such plans and Lessee shall make all changes which may reasonably be requested by Lessor. When such plans have been approved by Lessor they shall be referred to herein as the Final Plans. Lessee's Work shall consist of all work described in the Final Plans and any other work which is approved by the Lessor or which may be required by Lessee or governmental authority, or which may be necessary to ready the Leased Premises for Lessee's occupancy. -1- SCHEDULE 2 Lessor shall reimburse Lessee for all Construction Costs incurred by Lessee in the construction of the Tenant Improvements, but not in any event to exceed the sum of Ninety Thousand Dollars ($90,000), hereinafter referred to as the "Improvement Allowance." The term "Construction Costs" shall mean building permit fees and the amount of the contract for labor and materials paid to third party contractors or subcontractors in the building trades for Tenant Improvements. Construction Costs shall exclude all other costs and, further, shall exclude costs that might otherwise be considered to be Construction Costs but which are for professional services, insurance or bonds, licenses, inspection, soils reports, signs, equipment, trade fixtures, interior decorations, other improvements which are not of a permanent nature or which are unique to Lessee's use and not readily usable by another tenant, nor utility hook-up fees. Upon Lessor's approval of Final Plans and following issuance of necessary building permits, Lessor shall pay to Lessee the sum of Forty-Five Thousand Dollars ($45,000) on account of the Improvement Allowance. The balance of the Improvement Allowance shall be paid within thirty (30) days thereafter. a. Following completion of the Tenant Improvements Lessee shall do the following: i. Certify to Lessor that the total cost of Lessee's Work equals or exceeds the Improvement Allowance and deliver such evidence thereof as Lessor shall reasonably request. ii. Cause the Leased Premises to be discharged and released from any and all claims or liens that may have accrued from the performance of Lessee's Work. iii. Deliver to Lessor or its designee copies of all guarantees and warranties relating to the work performed. iv. Deliver a written guaranty to Lessor from Lessee, and certificate from Lessee's architect, that all work has been substantially performed in accordance with the Final Plans, as amended by approved change orders, if any. v. Deliver to Lessor a copy of the certificate of Occupancy issued by the appropriate governmental agency, if any. vi. Furnish Lessor with one (1) set of as-built plans which incorporate all changes in the Final Plans made during the course of construction, and which accurately describe the work as in fact built. b. If at any time during the progress of the work or before the final payment is made any lien or claim of lien is filed or notification to withhold money for labor or material -2- furnished by Lessee or the contractor is served on Lessor, Lessor shall have the right to withhold from any payment otherwise due Lessee an amount sufficient to discharge any and all such liens or claims. Documentation in form satisfactory to Lessor that such liens or claims have been released must be furnished to Lessor by Lessee or Lessee's contractor before the retained money will be paid to Lessee, or if Lessee or its contractor have not settled the liens or claims within a reasonable time, not to exceed ten (10) business days, from and after the date on which such lien or claim is made, Lessor shall have the right, but not the obligation, to discharge any or all such liens or claims out of the withheld money. -3- EX-11.1 4 EXHIBIT 11.1 EXHIBIT 11.1 AFFYMETRIX, INC. STATEMENT OF COMPUTATION OF NET LOSS PER SHARE (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED ------------------------------- MARCH 31, 1993 1994 1995 1995 1996 --------- --------- --------- --------- --------- Net loss................................................... $ (5,592) $ (9,680) $ (10,747) $ (2,174) $ (3,921) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Historical primary and fully diluted number of shares: Weighted average common shares........................... 19 398 409 408 409 Shares related to SAB Topic 4D: Common shares.......................................... 201 201 201 201 201 Stock options and warrants............................. 1,424 1,424 1,424 1,424 1,424 Preferred shares....................................... 5,778 5,778 5,778 5,778 5,778 --------- --------- --------- --------- --------- Shares used in computing net loss per share................ 7,422 7,801 7,812 7,811 7,812 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Net loss per share......................................... $ (0.75) $ (1.24) $ (1.38) $ (0.28) $ (0.50) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Pro forma number of shares: Weighted average common shares........................... 19 398 409 408 409 Shares related to SAB Topic 4D: Common shares.......................................... 201 201 201 201 201 Stock options and warrants............................. 1,424 1,424 1,424 1,424 1,424 Preferred shares....................................... 5,778 5,778 5,778 5,778 5,778 Convertible preferred shares, as if converted............ 3,293 9,852 9,852 9,852 9,852 --------- --------- --------- --------- --------- Shares used in computing pro forma net loss per share...... 10,715 17,653 17,664 17,663 17,664 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Pro forma net loss per share............................... $ (0.52) $ (0.55) $ (0.61) $ (0.12) $ (0.22) --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
EX-23.1 5 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the captions "Selected Financial Data" and "Experts" and to the use of our report dated February 9, 1996 (except for the first paragraph of Note 9, as to which the date is , 1996), in Amendment No. 2 to the Registration Statement (Form S-1 No. 333-3648) and related Prospectus of Affymetrix, Inc. for the registration of 5,750,000 shares of its common stock. ERNST & YOUNG LLP Palo Alto, California , 1996 -------------------------------------------------------------------------------- The foregoing consent is in the form that will be signed upon the completion of the reverse stock split described in Note 9 to the financial statements. /s/ Ernst & Young LLP Palo Alto, California May 20, 1996 EX-23.3 6 EXHIBIT 23.3 EXHIBIT 23.3 CONSENT OF TOWNSEND AND TOWNSEND AND CREW LLP We consent to the reference to our firm under the caption "Experts" in the Registration Statement (Form S-1) and related Prospectus of Affymetrix, Inc. for the registraion of 5,750,000 shares of its common stock. TOWNSEND AND TOWNSEND AND CREW LLP By: /s/ Paul C. Haughey ------------------------------------ Paul C. Haughey Partner Palo Alto, California May 20, 1996 EX-24.3 7 EXHIBIT 24.3 EXHIBIT 24.3 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints John D. Diekman, Ph.D. and Kenneth J. Nussbacher, or either of them, each with the power of substitution, his attorney-in-fact, to sign any amendments to this Registration Statement (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 Act of 1933, this Registration Statement on Form S-1 has been signed by the following persons in the capacities and on the dates indicated. SIGNATURE CAPACITY DATE ----------------------------------------------------- ------------------------------------------ --------------- Director, and Chief Executive ------------------------------------------ Officer (Principal Executive Officer) May , 1996 John D. Diekman, Ph.D. ------------------------------------------ Director and President May , 1996 Stephen P.A. Fodor, Ph.D. ------------------------------------------ Director May , 1996 Paul Berg, Ph.D. ------------------------------------------ Director May , 1996 Douglas M. Hurt ------------------------------------------ Director May , 1996 Vernon R. Loucks, Jr. /s/ BARRY C. ROSS, PH.D. ------------------------------------------ Director May 10, 1996 Barry C. Ross, Ph.D. ------------------------------------------ Director May , 1996 David B. Singer ------------------------------------------ Director May , 1996 John A. Young ------------------------------------------ Director May , 1996 Alejandro C. Zaffaroni, Ph.D. Chief Financial Officer ------------------------------------------ (Principal Financial and May , 1996 Kenneth J. Nussbacher Accounting Officer)