-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EaZBeLrCSWop6CwNRYJAJ7mcim4Ryo8iae6O2SJTP0pBhD0Uyg/Gbu0bRTIwXJpP GXXbA6a7NkTI2BUjZG/fjQ== 0000912057-00-015008.txt : 20000331 0000912057-00-015008.hdr.sgml : 20000331 ACCESSION NUMBER: 0000912057-00-015008 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AFFYMETRIX INC CENTRAL INDEX KEY: 0000913077 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH [8731] IRS NUMBER: 770319159 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-28218 FILM NUMBER: 587353 BUSINESS ADDRESS: STREET 1: 3380 CENTRAL EXPRESSWAY CITY: SANTA CLARA STATE: CA ZIP: 95051 BUSINESS PHONE: 4085226000 MAIL ADDRESS: STREET 1: 3380 CENTRAL EXPRESSWAY CITY: SANTA CLARA STATE: CA ZIP: 95051 10-K405 1 FORM 10-K405 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM ______________ TO ______________ COMMISSION FILE NUMBER 0-28218 ------------------------ AFFYMETRIX, INC. (Exact name of registrant as specified in its charter) DELAWARE 77-0319159 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Number) 3380 CENTRAL EXPRESSWAY, SANTA CLARA, CALIFORNIA 95051 (Address of principal executive offices) (Zip Code)
(408) 731-5000 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 ------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /X/ The aggregate market value of voting common stock held by non-affiliates of the registrant (based on the closing price for the common stock on the Nasdaq National Market on March 20, 2000) was approximately $4,106.7 million. As of March 20, 2000, 27,313,517 shares of common stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Certain sections of the Proxy Statement to be filed in connection with the 2000 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K Report where indicated. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- AFFYMETRIX, INC. FORM 10-K DECEMBER 31, 1999 TABLE OF CONTENTS
ITEM PAGE NO. - ---- -------- PART I 1. Business.................................................... 1 2. Properties.................................................. 28 3. Legal Proceedings........................................... 29 4. Submissions of Matters to a Vote of Security Holders........ 31 PART II 5. Market for Registrant's Common Equity and Related Stockholder Matters....................................... 31 6. Selected Financial Data..................................... 32 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 33 7A. Quantitative and Qualitative Disclosure About Market Risk... 38 8. Financial Statements and Supplementary Data................. 39 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................. 65 PART III 10. Directors and Executive Officers of the Registrant.......... 65 11. Executive Compensation...................................... 65 12. Security Ownership of Certain Beneficial Owners and Management................................................ 65 13. Certain Relationships and Related Transactions.............. 65 PART IV 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K.................................................. 66 Signatures.................................................. 71
PART I ITEM 1. BUSINESS All statements in this discussion that are not historical are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act, including statements regarding the Company's "expectations", "beliefs", "hopes", "intentions", "strategies" or the like. Such statements are based on management's current expectations and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. The Company cautions investors that there can be no assurance that actual results or business conditions will not differ materially from those projected or suggested in such forward-looking statements as a result of various factors, including, but not limited to, the risk factors discussed in this Annual Report on Form 10-K. Affymetrix expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in Affymetrix' expectations with regard thereto or any change in events, conditions, or circumstances on which any such statements are based. Affymetrix is recognized as a worldwide leader in the field of DNA chip technology. The Company has developed and intends to establish its GeneChip-Registered Trademark- system as the platform of choice for acquiring, analyzing and managing complex genetic information in order to improve the diagnosis, monitoring and treatment of disease. The Company's GeneChip system consists of disposable DNA probe arrays containing gene sequences on a chip, certain reagents for use with the probe arrays, a scanner and other instruments to process the probe arrays, and software to analyze and manage genetic information from the probe arrays. The Company commenced commercial sales of the GeneChip system for research use in April 1996 and currently sells its products to pharmaceutical and biotechnology companies, academic research centers and clinical reference laboratories primarily in the United States and Europe. The business and operations of the Company were commenced in 1991 by Affymax N.V. ("Affymax") and were initially conducted within Affymax. In March 1992, the Company was incorporated as a California corporation and a wholly owned subsidiary of Affymax and in September 1998 was reincorporated as a Delaware corporation. BACKGROUND GENES AND DISEASE The entire genetic content of an organism is known as its genome. DNA is the molecule that makes up genes and encodes genetic instructions. These instructions are embodied in the sequence of the four nucleotide bases (A, C, G and T) that are the chemical building blocks of DNA. The DNA molecule is a combination of two strands held together by chemical bonds between nucleotide bases on one strand and the bases on the other strand. Only certain pairs of nucleotide bases can form these bonds: C always pairs with G, and A always pairs with T. Such paired DNA strands are said to be complementary. When two DNA strands are complementary, they can bind together to form a double helix in a process called hybridization. The Company's GeneChip technology relies on this principle of hybridization to analyze complex genetic information. Cells carry out their normal biological functions through the genetic instructions encoded in their DNA. This genetic process, known as gene expression, involves several steps. In the first step, nucleotides in a gene are copied into a related nucleic acid molecule called messenger RNA. Messenger RNA instructs the cell to produce proteins. Proteins are molecules that regulate or perform most of the physiological functions of the body. Because the order of nucleotides in each gene is different, each gene directs the production of a different protein. An organism's characteristics are thus ultimately determined by proteins encoded by its DNA. 1 Increased awareness of the role of genes in regulating the functions of living organisms has generated a worldwide effort to identify and sequence genes of many organisms, including the estimated three billion nucleotide pairs and over 100,000 genes within the human genome. This effort is being led by the Human Genome Project and related academic, government and industry research projects. Once the genes and their nucleotide sequences are identified, it is anticipated that many years of additional research will be required to understand the specific function and role in disease of each of these genes. This research, commonly referred to as genomics, is expected to lead to a new health care paradigm where disease is understood at the molecular level, allowing patients to be diagnosed according to their genetic profile and then treated with drugs designed to work on specific molecular targets. GENETIC VARIABILITY The diversity of living organisms results from variability in their genomes. Variability stems from differences in the sequences of genes and from differences in levels of gene expression. In order to understand how genetic variation causes disease, scientists must compare both sequence variation and expression patterns of genes from healthy and diseased individuals. Currently, these efforts are laborious, time consuming and expensive. The Company believes that its GeneChip technology will simplify, accelerate and reduce the cost of analyzing genetic variability (both sequence and expression) and lead to new opportunities in disease management. SEQUENCE VARIABILITY Changes in the sequences of genes may be introduced by environmental or other factors, such as errors in replication of genes. These changes are known as polymorphisms, and the affected genes can be passed from generation to generation. In some cases, polymorphisms have no or an undetectable effect on the biology of the organism. However, in other cases, polymorphisms can result in the altered function or expression of the protein encoded by the gene. Such polymorphisms are normally referred to as mutations. Mutations in single genes have been associated with diseases such as cystic fibrosis and sickle cell anemia, while mutations in multiple genes have been associated with diseases such as cancer and diabetes. By screening for polymorphisms, researchers seek to correlate variability in the sequence of genes with a specific disease. By sequencing genes of interest from a large number of healthy and diseased persons, researchers are able to correlate specific gene polymorphisms with the disease. However, a typical polymorphism association project on one disease might currently require sequencing 100 genes of 3,000 nucleotide bases each in up to 500 patients, or a total of 150 million bases. Currently, such high volume polymorphism screening is performed with gel-based sequencing, which is labor intensive and costly. The Company believes that its GeneChip technology will have advantages over conventional gel-based techniques for performing large genetic correlation studies and has initiated a high throughput polymorphism discovery and database project as well as product development initiatives to enable researchers to identify these correlations. EXPRESSION VARIABILITY Differences in the genes expressed in a given cell, as well as the timing and levels of their expression, are another basis for genetic variability. Although most cells contain an organism's full set of genes, each cell expresses only a small fraction of this set in different quantities and at different times. The expression of the wrong or defective genes, or the overexpression or underexpression of normal genes have been associated with human diseases, as well as treatment failures in specific patient populations. By identifying genes that are differentially expressed in particular diseases or patient populations, new targets can be identified and validated for which new therapies can then be developed. Expression monitoring may also help demonstrate the likely effectiveness of new as well as existing therapeutic agents and lead to the development of new therapeutics and diagnostic tools. The 2 effectiveness of monitoring gene expression is a function of the quality of the cell population being studied, the number of genes that can be monitored simultaneously, the sensitivity of the method (ability to measure small changes or low levels of gene expression) and the ability of the method used to provide quantitative information. Before the advent of DNA array techniques, relative levels of gene expression were monitored primarily through a costly and time-consuming process of sequencing many copies of each gene. The Company believes new DNA array technologies such as its GeneChip system will have significant advantages over older expression profiling techniques. Furthermore, the Company believes its GeneChip technology offers significant advantages over other DNA array technologies. OPPORTUNITIES ARISING FROM GENETIC VARIABILITY The analysis of genetic variability in organisms is revealing polymorphisms and differences in gene expression levels that correlate with diseases, prognoses for diseases, and likely therapeutic outcomes. Understanding this variability provides new opportunities for therapeutic intervention that can be more narrowly focused and therefore safer and more efficacious than drugs that affect more biological pathways. The Company believes that by providing a powerful tool to identify appropriate pathways for therapeutic intervention, evaluate lead compounds, and assess the efficacy and toxicology of these compounds on biological systems, the GeneChip system can facilitate the drug discovery process and improve the effectiveness and efficiency of health care. In addition to revealing opportunities for the discovery and development of new therapeutics, understanding of sequence and expression variability in organisms may have the potential to effect a major paradigm shift in the disease management and diagnostics industries. These highly competitive industries are currently characterized by low margins and large barriers to entry, with substantial pressure to reduce prices exerted by health care providers. Further, information available from many current diagnostic tests often provides insufficient information as to the etiology, prognosis, and potential treatment options for a particular clinical presentation. Access to complex genetic information, such as changes in gene sequences or expression levels that have previously been correlated with particular outcomes, has the potential to provide guidance on appropriate therapeutic regimens. The value of this information in reducing total health care costs and improving the quality of life is very high. For example, by determining that an HIV-infected patient on a triple drug combination therapy is resistant to one or two of these drugs, the health care provider may change the therapeutic regimen to replace or eliminate drugs to which the patient is resistant and thereby improve the patient's health while reducing costs. The use of complex genetic information to manage disease is in its infancy. Current techniques for gathering complex genetic information are time-consuming, require skilled labor, and can analyze only limited lengths of contiguous DNA sequences in a given run. This has prevented any large scale systematic study of how sequence variability and expression variability correlate with particular disease outcomes. The Company believes that new technology, such as the Company's GeneChip system, will be required to utilize complex genetic information in health care. BUSINESS STRATEGY Affymetrix' strategy is to capitalize on its leadership position in the DNA probe array field by applying its GeneChip technology to three primary areas: gene expression monitoring, polymorphism analysis and disease management. The Company is commercializing its GeneChip probe array technology for sale to pharmaceutical and biotechnology companies, academic research centers and clinical reference laboratories by demonstrating its advantages over other tools used for complex genetic analysis. 3 GENE EXPRESSION MONITORING Gene expression monitoring is a valuable tool for identifying correlations between genes, their biological function and disease. To facilitate the monitoring of gene expression, the Company designs and manufactures probe arrays with single stranded DNA molecules that are complementary to sequences within a gene of interest. By synthesizing specific probes for multiple genes on a single probe array, the Company enables researchers to quickly, quantitatively and simultaneously monitor the expression of a large number of genes of interest. By monitoring the expression of such genes under different conditions and at different times, researchers can use the probe arrays to understand the dynamic relationship between gene expression and biological activity. The Company believes that such information will be an important tool in the understanding of gene function and the development of new drugs and disease management tools. The Company is currently selling a portfolio of custom and standard expression monitoring GeneChip arrays. The Company's current offering of standard arrays include products that monitor the expression of the majority of full length and partial gene sequences contained in publicly available sequence databases that correspond to human, mouse, rat and yeast organisms. Affymetrix has also developed directed probe arrays to monitor the expression of specific collections of genes believed to be highly relevant to particular biological conditions such as cancer and toxicology. Affymetrix is commercializing the expression monitoring applications of its GeneChip technology for use in identifying and validating novel targets for drug discovery broadly to pharmaceutical, biotechnology, and academic research organizations. The Company offers a variety of sales programs to its GeneChip technology, such as the high-volume EasyAccess-TM- Silver and Gold, and AcademicAccess-TM- subscription packages. All of the Company's sales programs for its expression monitoring applications center around a pricing model that reflects performance specifications, the number of data points represented on the array, and the value of the gene collections being monitored on a particular GeneChip probe array. Actual pricing of the GeneChip expression probe arrays under this model depends on a number of additional factors, including the magnitude of the customer's research effort and volume commitment to the Company, whether intellectual property is to be retained, shared or disclosed, whether the Company provides custom chip design or screening services to a customer, whether the customer intends to offer screening services or sell databases and the amount of any up-front fees, milestones, royalties or other payments to be received by the Company. Under the Company's EasyAccess program, customers commit to make certain payments to Affymetrix in exchange for preferential access to GeneChip arrays and new product offerings, custom design services, intellectual property licenses, research, development and other customer support for a defined period of time. The Company currently has more than 400 customers. Table 1 sets forth a selected list of customers with whom the Company has existing supply agreements for GeneChip expression monitoring arrays. 4 TABLE 1. SUMMARY OF SELECTED AFFYMETRIX EXPRESSION PROFILING CUSTOMERS
CUSTOMER ACCESS PACKAGE - -------- ------------------------- Aventis Pharma Ltd.......................................... EasyAccess Gold EOS Biotechnology, Inc...................................... EasyAccess Gold F. Hoffmann-La Roche, Ltd................................... EasyAccess Gold Gene Logic, Inc............................................. EasyAccess Gold Genetics Institute/American Home Products Corporation....... EasyAccess Gold Novartis Agriculture Discovery Institute.................... EasyAccess Gold Novartis Institute for Functional Genomics.................. EasyAccess Gold The Scripps Research Institute.............................. EasyAccess Gold AstraZeneca PLC............................................. EasyAccess Silver Bayer Corporation........................................... EasyAccess Silver Boehringer Ingelheim GmbH................................... EasyAccess Silver Eli Lilly and Company....................................... EasyAccess Silver Novartis Pharmaceuticals Corporation........................ EasyAccess Silver Parke-Davis (a division of the Warner-Lambert Company)...... EasyAccess Silver Pfizer, Inc................................................. EasyAccess Silver Sankyo Co., Ltd............................................. EasyAccess Silver SmithKline Beecham.......................................... EasyAccess Silver Howard Hughes Medical Institute............................. AcademicAccess Preferred Case Western Reserve University............................. AcademicAccess Dana Farber Cancer Institute................................ AcademicAccess Harvard University.......................................... AcademicAccess National Institutes of Health............................... AcademicAccess Stanford University......................................... AcademicAccess University of California.................................... AcademicAccess University of Colorado...................................... AcademicAccess University of Pennsylvania.................................. AcademicAccess University of Wisconsin (Madison)........................... AcademicAccess Washington University....................................... AcademicAccess
POLYMORPHISM ANALYSIS As genes in the human genome are identified, sequenced and mapped, the value of understanding the variability of sequences in these genes increases. Researchers must determine the normal sequence of the gene, which mutations or polymorphisms exist, and whether these variations correlate with a disease. This currently requires the sequencing of samples from a large number of affected and unaffected individuals. Furthermore, during clinical trials, the Company believes that pharmacogenomics (the understanding of the impact that genetic variation has on therapeutic effectiveness and toxicity) will become increasingly important. Using sequence checking strategies developed by the Company, Affymetrix believes that its GeneChip probe arrays could significantly reduce the cost and time required for high-volume polymorphism analysis, which is currently performed through more labor intensive sequencing techniques. The Company has initiated product research and development efforts on several genotyping probe arrays and formed collaborations to accelerate the development of its polymorphism databases and genotyping products. The first such GeneChip mapping array, the GeneChip HuSNP array was launched during 1999. In December 1999, the Company entered into a collaboration with Orchid BioSciences, Inc. to develop reagent kits for its GenFlex-Registered Trademark- Tag array, which is designed to give researchers the flexibility to simultaneously analyze large numbers of polymorphisms of their choosing. 5 DISEASE MANAGEMENT Disease management is an emerging field that seeks to improve the effectiveness of health care by collecting information on patients from the time of diagnosis to the end of therapy and subsequently measuring the outcomes of various treatment protocols. Affymetrix believes that genetic analysis will be a core component of disease management. The Company has therefore developed GeneChip assays for this purpose and believes that such assays will facilitate more efficient and effective patient management. The Company is focusing on the development and commercialization of disease management products in infectious diseases, cancer and other areas, including drug metabolism. To further its disease management strategy, Affymetrix has established partnerships and customer relationships with leading academic researchers, clinical reference laboratories and pharmaceutical and biotechnology companies. To date, the Company has introduced three disease management GeneChip assays for the research and clinical reference markets: the HIV, p53 and CYP450 GeneChip products. These products provide sequence variation information from the reverse transcriptase and protease genes of HIV, the p53 tumor suppressor gene, and variants of two human cytochrome p450 genes, respectively. Affymetrix believes that before its GeneChip probe arrays can become widely used tools in disease management, significant additional research including clinical trials supporting FDA registration may be required. Furthermore, additional instrumentation and automation will need to be developed to allow for handling large volume testing anticipated in the clinical diagnostic setting. The Company has formed collaborations and intends to further partner with, or license technology to, established diagnostic companies to develop, seek regulatory approval, and commercialize probe arrays and instrumentation for broader clinical use of disease management probe arrays. In bacteriology, the Company has entered into exclusive collaborative development agreements and an associated supply agreement for probe arrays with bioMerieux Vitek, Inc. ("bioMerieux") to identify the species and drug resistance profiles of bacteria causing human infection. The agreements also allow for the development of DNA probe arrays for clinical diagnostic tests in the fields of HIV and food and industrial testing on a non-exclusive basis. In the virology and cancer fields, the Company has entered into a non-exclusive collaborative development agreement with Roche Molecular Systems, Inc. ("Roche Molecular Systems") to develop probe array-based diagnostic products. Under the terms of the agreement, the parties are collaborating to develop mutually agreed upon arrays directed to selected genes, as well as associated instrumentation and reagents. Affymetrix also entered into a series of agreements in July 1998 with Beckman Coulter, Inc. ("Beckman") that gives Beckman the right to develop probe array based diagnostic products that would use the Company's GeneChip technology. TECHNOLOGY Affymetrix' GeneChip probe array technology and systems integrate semiconductor fabrication techniques, solid phase chemistry, molecular biology, software and robotics. The Company's GeneChip system consists of several integrated components: disposable DNA probe arrays containing genetic information on a chip housed in a cartridge, reagents for extracting and labeling target nucleic acid, a fluidics station for introducing the test sample to the probe arrays, a hybridization oven for optimizing the binding of samples to the probe arrays, a scanner to read the fluorescent image from the probe arrays, and software to control the instruments and to analyze and manage the genetic information. The GeneChip system is designed to be used by pharmaceutical and biotechnology companies, academic research centers and clinical reference laboratories. 6 DNA PROBE ARRAYS The Company produces its DNA probe arrays using a process based on semiconductor photolithographic fabrication techniques, which enables it to assemble vast amounts of genetic information on a small glass chip called a probe array. The genetic information is contained in sequences of DNA probes that are built on the glass chip. The Company believes that this technology enables the efficient use of a large number of DNA probes to analyze DNA or RNA sequences in a test sample. The Company uses photolithography to synthesize a large variety of predetermined DNA sequences simultaneously in specific locations on a glass chip. Photolithography is a technique which uses light to create exposure patterns on the glass chip and induce chemical reactions. The process begins by coating the chip with light-sensitive chemical compounds that prevent chemical coupling. The light sensitive compounds are called protecting groups. Lithographic masks, which consist of predetermined patterns that either block or transmit light, are used to selectively illuminate the glass surface of the chip. Only those areas exposed to light are deprotected and thus activated for chemical coupling through removal of the light-sensitive protecting groups. The entire surface is then flooded with a solution containing the first in a series of DNA building blocks (A, C, G or T). Coupling only occurs in those regions which have been deprotected through illumination. The new DNA building block also bears a light-sensitive protecting group so that the cycle can be repeated. This process of exposure to light and subsequent chemical coupling can be repeated on the same chip in order to generate an array of DNA sequences. The intricate illumination patterns allow the Company to build high-density arrays of many diverse DNA sequences in a small area. The Company can manufacture a large number of identical or different DNA probe arrays on a glass wafer, which is then diced into individual probe arrays. Currently, each probe array can be manufactured with hundreds of thousands of "features." Each feature can contain millions of copies of the same single-stranded DNA sequence, or probe. The patterns of photolithographic masks and the order of DNA building blocks used in the synthesis process dictate the sequence of the probes in each feature on the chip surface. The number of synthesis cycles determines the length of the DNA probes in each feature. The Company's GeneChip technology enables it to synthesize with high density a large number of chemically diverse DNA sequences. Unlike conventional synthesis techniques, which generally use a linear process to create compounds, the Company's synthesis technology is combinatorial, in that the number of different compounds synthesized grows exponentially with the number of cycles in the synthesis. For example, in a 40 cycle process, Affymetrix has produced a prototype probe array with over one million features, each containing multiple copies of a unique DNA sequence. This process would take over ten million cycles using conventional DNA synthesis techniques. The function of each single-stranded probe on the GeneChip probe array is to bind to its complementary single strand of DNA or RNA from a biological sample. Each feature on the GeneChip probe array contains identical copies of a single strand of DNA. The nucleic acid to be tested is isolated from a sample, such as blood or biopsy tissue, and fluorescently labeled by one of several standard biochemical methods. The labeled test sample is then washed over the probe array. When scanned by the laser, the test sample generates a fluorescent signal. Sequence variation or the concentration of the nucleic acid sample can be determined by detecting the relative strength of these signals since the sequence and position of each complementary DNA probe on the probe array is known. INSTRUMENTATION The fluidics station controls the exposure of the test sample to the probe array and, in certain applications, the introduction of the sample on to the probe array. A technician uses the fluidics station 7 to control the delivery of reagents and the timing and temperature required for hybridization of the test sample to the probe array. The process concludes with a reagent wash that leaves only the hybridized test sample bound to the probe array. The fluidics station can process four probe arrays simultaneously. In certain applications, a hybridization oven is used to control the temperature required for exposure of the test sample to the probe array. After completion of hybridization on the fluidics station, the technician places the cartridge in the scanner which reads the probe array. The scanner consists of a laser, high-resolution optics, robotics to position and scan the cartridge, a fluorescence detector and an interface to a personal computer. The label on the test sample emits fluorescent signals when exposed to the light from the laser. The intensity of the fluorescent signal is recorded by the scanner and stored in the computer. The current scanner, which was developed in collaboration with Agilent Technologies, Inc. ("Agilent Technologies"), formerly Hewlett-Packard Company and introduced in April 1997, can read 1.28 cm by 1.28 cm probe arrays with up to 400,000 features in a few minutes. In February 2000, the Company completed its acquisition of Woburn, Massachusetts based Genetic MicroSystems, Inc. ("GMS"), a privately-held DNA instrumentation company specializing in DNA array technology. GMS manufactures and markets exportable instruments for both fabricating and analyzing DNA arrays for use in life science research and development applications. At the end of 1999, GMS, together with its distributor network, has placed more than 200 array makers and scanners at academic, biotechnology and pharmaceutical customer sites worldwide. The current product offering from GMS consists of the Affymetrix 417 Arrayer and Affymetrix 418 Array Scanner. The Affymetrix 417 Arrayer utilizes a proprietary moving-reservoir, Pin-and-Ring-TM- arraying mechanism designed to provide greater consistency of spotted array elements relative to other spotting systems. The Affymetrix 418 Array Scanner uses a unique Flying Objective-TM- laser optics system that rapidly captures images with superior speed and sensitivity. The proprietary features of the Affymetrix arrayer and scanner are designed to offer significant performance advantages over other "home-made" and commercially available spotting robots and scanners. Because the instrumentation is installed at the customer site, this product line, compared to service alternatives, provides researchers with the flexibility to quickly fabricate user-specific arrays while maintaining direct control over cloned materials, sample preparation and hybridization conditions. SOFTWARE The GeneChip operating system software is supplied as part of the integrated system and runs on an IBM compatible platform. The fluorescence intensity data captured from the scanner are used in conjunction with computer files containing the probe sequence and location of all the probes on the probe array to determine the expression level of a particular gene or locate nucleotide sequence variations of the test sample. The GeneChip Expression Data Mining Tool ("EDMT") and Laboratory Information Management System ("LIMS") software products allow for sophisticated analyses of gene expression results and provide a means of linking and integrating this information with other databases. COLLABORATIVE PARTNERS AND LICENSEES The Company's strategy is to establish the GeneChip system as the platform of choice for analyzing complex genetic information, expand the applications of the Company's technology, acquire access to complementary technologies and resources, and enable complementary technologies in the gene expression monitoring field by licensing third parties under its patent estate. Accordingly, the Company has entered into and intends to enter into additional collaborative and licensing agreements to further this strategy. Table 2 sets forth a selected list of collaborators with whom the Company has current agreements, the related products and programs and the commencement dates of the most recent agreement. 8 TABLE 2. SUMMARY OF AFFYMETRIX SELECTED COLLABORATORS AND LICENSEES
COMPANY TYPE DATE - ------- ------------------------------------- -------------- Agilent Technologies, Inc., a subsidiary of Hewlett-Packard Company............................ Scanner supply February 1997 Amersham Pharmacia Biotech, Ltd...... Sales agency agreement December 1997 Amersham Pharmacia Biotech, KK....... Sales distribution agreement October 1998 Beckman Coulter, Inc................. OEM supply of GeneChip arrays for July 1998 disease management products; non- light directed array commercialization license bioMerieux Vitek, Inc................ Bacteriology and virology disease January 1998 management products; industrial and food testing products Bristol-Myers Squibb Company, Millennium Pharmaceuticals, Inc., Whitehead Institute................ Functional genomics and polymorphism April 1997 discovery Enzo Diagnostics, Inc................ Labeling kits April 1998 Genetic Analysis Technology Consortium......................... Establish standards for DNA Array December 1997 based products Spotted array commercialization Molecular Dynamics, Inc.............. license December 1997 Orchid BioSciences, Inc.............. Genotyping assays December 1999 Roche Molecular Systems, Inc......... HIV and p53 disease management arrays February 1998
AGILENT TECHNOLOGIES, INC., A SUBSIDIARY OF HEWLETT-PACKARD COMPANY The Company entered into a collaborative agreement with Hewlett-Packard in November 1994, which was amended in February 1997 and December 1998. Under the terms of the amended agreement, Agilent Technologies, a subsidiary of Hewlett-Packard, manufactures and sells the array scanner to Affymetrix on an OEM basis. The agreement also provides for cooperation between Affymetrix and Agilent Technologies for worldwide distribution and instrument services. Pursuant to the agreement, Agilent Technologies is required to supply all of the Company's forecasted requirements for scanners until February 2003, and Affymetrix is required to purchase an annual minimum number of scanners from Agilent Technologies during the same period. AMERSHAM PHARMACIA BIOTECH, LTD. In December 1997, the Company entered into a non-exclusive sales representation agreement with Amersham Pharmacia Biotech, Ltd. ("Amersham Pharmacia Biotech"). Under the agreement, Amersham Pharmacia Biotech's sales representatives solicit orders for Affymetrix' products from prospective customers in the pharmaceutical and biotechnology industries and the academic research community in North America and Western Europe. The Company paid Amersham Pharmacia Biotech transaction processing fees as well as a percentage of product sales up to a maximum annual amount as a sales agency fee. In July and December 1999, the Company terminated its sales representation agreement with Amersham Pharmacia Biotech in North America and Western Europe, respectively. In October 1998, the Company entered into a non-exclusive distribution agreement with Amersham Pharmacia Biotech, KK ("Amersham Pharmacia Biotech KK") for the marketing and sale of the Company's products in Japan. Under this agreement, Amersham Pharmacia Biotech KK purchases 9 GeneChip technology directly from the Company and is responsible for marketing and selling the technology to its customers in Japan. BECKMAN COULTER, INC. In July 1998, the Company entered into a series of agreements with Beckman that gave Beckman licenses to commercialize probe arrays manufactured using certain technologies other than light directed synthesis, and an original equipment manufacturer ("OEM") supply agreement for products that use the Company's GeneChip technology. Beckman will pay Affymetrix transfer prices and royalties on sales of these products as specified in the agreements. The agreements also provided Affymetrix with a path to obtain a license to commercialize DNA arrays under certain patents, including patents covering inventions by Professor Edwin Southern of Oxford University. In June 1999, the Company purchased the array business of Beckman that included a license to the Southern DNA array patents owned by Oxford Gene Technology ("OGT") of Oxford, England. OGT is contesting the transfer of this license (See "Legal Proceedings"). BIOMERIEUX VITEK, INC. In September 1996, the Company and bioMerieux entered into a five-year collaborative development agreement and associated supply agreement for probe arrays to identify the species and drug resistance profiles of bacteria causing human infection in a clinical setting. As part of the collaboration, bioMerieux is developing instrumentation for the use of these probe arrays in a clinical diagnostic setting. The agreement provides that the Company will not market or provide probe arrays for such tests to others that are in a format that would reasonably be considered approvable by the FDA for clinical diagnostic use. Under the terms of the agreements, bioMerieux provides research and development support and will make payments to Affymetrix upon achievement of certain milestones. Four such milestones have been met to date. In addition, bioMerieux will pay specified prices for the supply of probe arrays and royalties on any resulting products. In December 1997 and January 1998, bioMerieux and the Company expanded their collaboration to include the non-exclusive development of DNA probe arrays for clinical diagnostics tests in the fields of HIV and food and industrial testing, respectively. As a result of this expansion of the collaboration, bioMerieux made certain option exercise payments to the Company. BRISTOL-MYERS SQUIBB, MILLENNIUM PHARMACEUTICALS AND WHITEHEAD INSTITUTE CONSORTIUM In April 1997, the Company, Bristol-Myers Squibb Company ("BMS") and Millennium Pharmaceuticals, Inc. ("Millennium") entered into a corporate consortium to fund a five-year research program in functional genomics at the Whitehead Institute of the Massachusetts Institute of Technology. The program, under the direction of Dr. Eric S. Lander, Director of the Whitehead Institute, seeks to advance the development of gene-based technologies for research and health care. Under the terms of the consortium agreement, Affymetrix, BMS and Millennium are supporting a program of research initiated by scientists at the Whitehead Institute to develop the next generation of genomics technologies for the scientific community. The three companies will provide funds and technology totaling approximately $8.0 million per year for five years to the Whitehead Institute. Scientists at the companies will also collaborate with scientists at the Whitehead Institute to identify novel genetic markers and develop new genomics tools. In return, Affymetrix, BMS and Millennium will receive certain licensing rights to inventions made through efforts funded by the consortium or emerging from the use of contributed technology, subject to the payment of cross royalties. Affymetrix has exclusive rights to commercialize consortium inventions related to nucleic acid probe arrays and joint rights with Millennium to commercialize diagnostic products and services and certain other products that may arise from the consortium. 10 ENZO DIAGNOSTICS, INC. In April 1998, Affymetrix and Enzo Diagnostics, Inc. ("Enzo") entered into a collaboration and exclusive supply agreement for certain labeling kits used in the preparation of samples to be analyzed on GeneChip arrays. Under the agreement, Enzo is developing and supplying certain labeling kits to Affymetrix. GENETIC ANALYSIS TECHNOLOGY CONSORTIUM In December 1997, the Company and Molecular Dynamics, Inc. formed the Genetic Analysis Technology Consortium ("GATC"), a standards setting body charted to define a uniform set of specifications to allow for the interoperability of chips, readers, reagents, software and data generated using GATC compliant products. The GATC has been formed to allow for additional members to join the GATC and participate in setting interoperability standards, as well as to certify non-members' products as GATC compliant. In January 1998 and March 1999, privately held Pangea, Inc., and Spotfire, Inc., announced their intentions to produce software products that are GATC compliant. MOLECULAR DYNAMICS, INC. In December 1997, the Company entered into a ten year, non-exclusive, worldwide, royalty bearing license agreement with Molecular Dynamics, Inc. ("Molecular Dynamics"), a wholly owned subsidiary of Amersham Pharmacia Biotech. Under the license agreement, Molecular Dynamics was granted rights to certain Affymetrix technology for commercializing low and medium density mechanically spotted DNA arrays and related instrumentation. Affymetrix also obtained rights to certain Molecular Dynamics patents. Molecular Dynamics is obligated to pay Affymetrix royalties on sales of its products covered by the licenses. ORCHID BIOSCIENCES, INC. In December 1999, Affymetrix and Orchid Biosciences, Inc. ("Orchid") entered into an agreement to develop and commercialize single nucleotide polymorphism (SNP) genotyping assays that combine Orchid's proprietary GBA-Registered Trademark- primer extension technology with Affymetrix' new GenFlex Tag array product. These new assays will allow researchers to customize high density SNP analyses solely by designing GBA primers for use on a standard GenFlex Tag array. The first GenFlex Tag array product to be commercialized by the alliance will include reagent kits designed to perform thousands of user-defined SNP analyses. The companies expect to follow this product launch with additional genotyping products that increase the information capacity of the GenFlex Tag arrays and include expanded GBA reagent offering. Orchid will develop and manufacture GBA primer extension reagent kits that are directed to defined sets of SNPs and that can be customized by the end user. Affymetrix will develop and manufacture the GenFlex Tag arrays. Affymetrix will distribute and provide marketing, sales and technical support for the standard and universal GenFlex Tag assays. Orchid will manufacture, supply and support custom kits. As part of the agreement, Affymetrix made an investment in a private placement of equity offered by Orchid. ROCHE MOLECULAR SYSTEMS, INC. In February 1998, the Company entered into a non-exclusive collaborative development agreement with Roche Molecular Systems to initially develop probe array-based diagnostic products. Under the terms of the agreement the parties will collaborate to develop mutually agreed upon arrays, as well as associated instrumentation and reagents. Affymetrix will manufacture arrays for use in the products and Roche Molecular Systems will conduct clinical trials, manage regulatory submissions and market and sell the products. Under the terms of the agreement, Roche Molecular Systems and the Company are funding their respective work efforts as mutually agreed and will share revenues and profits based on specified terms in the agreement. 11 GRANTS The Company's research and development efforts have been supported in part by government grants, including a grant from the U.S. Department of Commerce Advanced Technology Program ("ATP"). ADVANCED TECHNOLOGY PROGRAM (UNITED STATES DEPARTMENT OF COMMERCE) In October 1994, the Company and Molecular Dynamics, a wholly owned subsidiary of Amersham Pharmacia Biotech were awarded a $31.5 million, five-year matching grant under the ATP within the National Institute of Standards and Technology to develop a miniaturized DNA diagnostic device. Pursuant to the grant, up to $20.8 million was designated for the Company and its subcontractors and partners and $10.7 million for Molecular Dynamics and its subcontractors subject to the requirement of each company to match such funding. The grant provided for the development of an advanced miniaturized nucleic acid diagnostic device intended to reduce the costs and increase the speed and reliability of DNA analysis. The device would be intended for use in point-of-care settings, such as hospitals, clinics and doctors' offices and would require FDA approval. The Company has developed a prototype of the device and is pursuing further development. There can be no assurance that the device will be successfully developed or, if developed, that it will receive regulatory approval or be successfully marketed. The research agreements between the Company and its subcontractors and additional partners under the ATP grant (the University of California, Stanford University, the University of Washington and MAG) required that these parties assign the rights to any project inventions made by them to the Company, subject to specified royalty payments. The ATP agreement provided that the Company and Molecular Dynamics retain rights in their respective fields to intellectual property developed as part of the project. The ATP grant was administered by the United States Department of Commerce. As of December 31, 1999, the Company had recognized $17.4 million in revenue under the ATP grant. The grant was subject to yearly appropriations by the United States Congress for the ATP program. Funding of the ATP grant expired in January 2000. MANUFACTURING The Company's current strategy is to manufacture its disposable DNA probe arrays, arrayers and scanners, fluidics stations and software in-house and contract with third-party suppliers to manufacture certain GeneChip scanners, hybridization ovens as well as certain reagents for its GeneChip system. The Company's probe array manufacturing process involves wafer preparation, probe synthesis, dicing of synthesized wafers into chips, assembly of chips into cartridges, and quality control. Affymetrix has developed software programs that partially automate the design of photolithographic masks used in probe array manufacturing and that control the probe array manufacturing lines. Glass wafers are prepared for synthesis through the application of chemical coatings. DNA probes are synthesized on the wafers using the Company's proprietary photolithographic process. The completed wafers are then diced to yield individual probe arrays, which are assembled into disposable cartridges and packaged for shipment. The Company is currently manufacturing probe arrays for internal and collaborative purposes and for sale in the research market. Probe arrays are manufactured out of two manufacturing facilities located in Sunnyvale and West Sacramento, California. Currently, the Company has physical capacity under optimal conditions to produce more than 10,000 wafers annually. The actual number of probe arrays the Company is able to sell or use depends on the utilization of this capacity and the yield of probe arrays that pass quality control testing as well as the number of probe arrays manufactured on each wafer. The Company has experienced and continues to experience variability in the manufacturing yield of its GeneChip products. In addition, there are certain aspects of the Company's manufacturing 12 processes that are not fully understood and that may not be readily scalable to allow for production of probe arrays in larger volumes. As a consequence, in 1999, the Company experienced difficulties in meeting customer and internal demand for certain of its probe array products. These difficulties in meeting probe array demand have had an impact on the Company's gross margin and business in the past and could have a material adverse effect on the Company's future business, financial condition and results of operations. The Company will continue to invest in additional capital equipment for its Sunnyvale and West Sacramento facilities to both increase production capacity and increase the flexibility of this capacity to produce a broader range of products. If the Company is unable to consistently manufacture probe arrays on a timely basis because of these or other factors, its business, financial condition and results of operations would be materially adversely affected. The GeneChip system is a complex set of products and includes DNA probe arrays, which are produced in an innovative and complicated manufacturing process. The Company tests only selected probe arrays from each wafer and only selected probes on such probe arrays. The Company therefore relies on internal quality control procedures, including controls on the manufacturing process and sample testing, to verify the correct completion of the manufacturing process. In addition, the Company and its customers rely on the accuracy of genetic sequence information contained in databases upon which the Company's products are based. It is therefore possible that probe arrays that do not meet all of the Company's performance specifications may not be identified before they are shipped. After the probe arrays are shipped, only selected probes may be tested by the customer. Due to the complexity and limited operating history of these products, the Company has experienced technical problems and anticipates that additional technical problems will occur and be discovered as more systems are placed into operation. The inability of the Company to timely deliver acceptable products would likely adversely affect the Company's relationship with its customers, and have a material adverse effect on its business, its financial condition and results of operations. The Company relies on Agilent Technologies to manufacture and service its scanners. The Company's scanner, introduced in April 1997, is obtained from Agilent Technologies under a supply agreement that expires in 2003. The Company is dependent on Agilent Technologies for quality testing and service of this instrument. The Company relies on Enzo to manufacture and supply certain labeling kits needed to process samples on GeneChip probe arrays under a supply agreement that expires in 2001. Affymetrix is obligated to purchase its requirements of certain labeling kits from Enzo. Certain key parts of the GeneChip system, such as the scanner, certain reagent kits and lithographic masks as well as certain raw materials and pieces of manufacturing hardware used in the synthesis of probe arrays, are currently available only from a single source or a limited number of sources. No assurance can be given that scanners, reagents, lithographic masks, fabrication equipment or other components of the GeneChip system will be available in commercial quantities under acceptable terms. Even if alternative sources of supply are available, it could be time consuming and expensive for the Company to qualify new vendors. In addition, the Company is dependent on its vendors to provide components of appropriate quality and reliability and to meet applicable regulatory requirements. Consequently, in the event that supplies from these vendors are delayed or interrupted for any reason, the Company's ability to develop and supply its products could be impaired, which could have a material adverse effect on the Company's business, financial condition and results of operations. The Company must comply with the Food and Drug Administration's (FDA) regulations for sale of analyte specific reagents (ASRs) in the United States, International Standard Organization (ISO) standards for sale of products in Europe, as well as other standards prescribed by various federal, state and local regulatory agencies in the United States and other countries. Although the Company has filed an application for the registration of the manufacturing site for its arrays as ASRs, there can be no assurance that such registration can be maintained at reasonable costs. 13 As the Company's technologies evolve, new manufacturing techniques and systems will be required. For example, it is anticipated that additional automated processing systems will be needed to meet the Company's future probe array manufacturing needs. As products requiring increased density are developed, miniaturization of the features on the arrays will be necessary, requiring new or modified manufacturing equipment and processes as well as new instrumentation, including new or modified scanners. Further, the Company's manufacturing equipment requires significant capital investment. The Company's manufacturing facilities are subject to natural disasters such as earthquakes and floods. The former are of particular significance since the Sunnyvale manufacturing facility is located in an earthquake prone area. In the event that its manufacturing facilities were to be affected by accidental or natural disasters, the Company would be unable to manufacture sufficient quantities of products for sale until the facilities were replaced or restored to operation, which would have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that any of the foregoing problems with the Company's GeneChip products will be solvable or that any solutions can be achieved in a timely manner or at commercially reasonable costs. SALES, MARKETING AND TECHNICAL SUPPORT The base price of the Company's GeneChip system (scanner, software, workstation, hybridization oven and fluidics station) starts at approximately $188,000. The Company is offering different sales programs for its expression monitoring and polymorphism analysis technologies centered upon a pricing model that is based on the performance specifications, number of data points and value of genetic information generated on a particular GeneChip probe array. Actual pricing depends on several factors, including: the magnitude of the research effort, whether the genes being analyzed are human or those of other organisms, whether intellectual property is to be retained, shared or disclosed, whether the Company provides custom probe array design or screening services to a customer and the amount of any up-front fees, volume commitments, milestones or other payments to be received by the Company. The Company is currently directly marketing and selling the GeneChip system and probe arrays for genomics and disease management applications to its customers and collaborators in North America and Western Europe. To augment these efforts, the Company entered into a non-exclusive sales representation agreement with Amersham Pharmacia Biotech in December 1997. Under this agreement, Amersham Pharmacia Biotech's sales representatives solicited orders for Affymetrix products from prospective customers in the pharmaceutical and biotechnology industries and the academic research community in North America and Western Europe. The Company paid Amersham Pharmacia Biotech transaction processing fees as well as a percentage of product sales up to a maximum annual amount as a sales agency fee. In July and December 1999, the Company terminated its relationship with Amersham Phamacia Biotech in North America and Western Europe, respectively. In October 1998, the Company entered into a non-exclusive distribution agreement with Amersham Pharmacia Biotech KK for the sale and marketing of the Company's products in Japan. Under this agreement, Amersham Pharmacia Biotech KK purchases GeneChip technology directly from Affymetrix and is responsible for marketing and selling the technology to its customers in Japan. The Company's near term strategy is to commercialize the GeneChip system for research use only and to seek regulatory approval for and to commercialize GeneChip probe arrays for clinical use through partnerships with established firms in the diagnostics industry. The Company believes that the primary near-term market for genomics and disease management GeneChip applications will be pharmaceutical and biotechnology companies, academic research centers and clinical reference laboratories. Longer term, the Company believes that the primary market for its disease management GeneChip applications will be clinical diagnostic laboratories. Affymetrix has marketing, selling and technical support groups that promote and service its GeneChip products, which the Company intends to expand as necessary. In addition, the Company 14 relies on third parties such as Agilent Technologies to service the GeneChip scanner and to assist in its promotional activities. The Company has experienced and anticipates long sales cycles to market the GeneChip system to its potential customers. There can be no assurance that the Company will be able to maintain existing relationships or establish additional agency or distribution arrangements to market and sell its products or that any such agreement will be successful (See "Risk Factors"). RESEARCH AND DEVELOPMENT The Company believes that substantial investment in research and development is essential to obtaining a long-term competitive position in the expression monitoring, polymorphism analysis and disease management fields. Affymetrix focuses on four types of research and development: basic research to explore and expand the potential uses of DNA probe arrays and to discover new technologies; applied research, primarily aimed at generating polymorphism databases and products; core technology development, such as the design of fully integrated systems for complex genetic information management; and novel manufacturing methods to improve the efficiency of the Company's probe array production processes. BASIC RESEARCH Affymetrix' basic research efforts are focused on expanding the applications of the GeneChip technology and developing related new technologies. These efforts include development of new probe array products, improving the overall performance of the GeneChip assays, increasing information capacity per probe array and simplifying the process for conducting highly complex assays. APPLIED RESEARCH Affymetrix is focusing its applied research efforts on the development of assays and databases to link genetic polymorphisms to human disease. The Company believes that such databases will ultimately lead to the discovery of novel therapeutics and the identification of diagnostic markers useful in cost-effective disease management. The Company has established relationships with several academic and commercial research organizations to identify genetic markers that can be used to design probe arrays that rapidly obtain high-resolution maps or genotypes of individual human genomes and thereby identify differences among those genomes that are characteristic of particular diseases. CORE TECHNOLOGY DEVELOPMENT The Company conducts research in several core areas, including the development of miniaturized immobilized nucleic acid detection devices. The intent of these development programs is to create advanced systems for ascertaining and analyzing complex genetic information and products that can eventually be developed by diagnostic partners for use in hospitals, clinical reference laboratories and point-of-care testing. NOVEL MANUFACTURING METHODS The Company conducts research aimed at improving the photolithographic manufacturing process currently employed in the production of the Company's GeneChip probe arrays. The Company is also pursuing research aimed at further improving its manufacturing technology. In the Company's photoresist manufacturing research program, the Company has demonstrated an ability to manufacture probe arrays with 5 micron feature sizes, as compared to the 20-24 micron feature sizes used on most of the Company's current probe arrays. The Company's research and development expenses for the years ended December 31, 1999, 1998 and 1997, were $40.5 million, $35.9 million and $28.2 million, respectively. 15 INTELLECTUAL PROPERTY Affymetrix has been issued 75 patents in the United States and holds numerous pending United States patent applications. Many of these patents and applications have been filed and/or issued in one or more foreign countries. Affymetrix also relies upon copyright protection, trade secrets, know-how, continuing technological innovation and licensing opportunities to develop and maintain its competitive position. The Company's success will depend in part on its ability to obtain patent protection for its products and processes, to preserve its copyrights and trade secrets, to operate without infringing the proprietary rights of third parties and to acquire licenses related to enabling technology or products used with the Company's GeneChip technology. The Company is party to various option, supply and license agreements with third parties (including Beckman, Enzo, Molecular Dynamics, Stanford University, Scientific Generics, Ltd., Concordia University, Cooperative Research Centre for Diagnostic Technologies, The Imperial Cancer Research Foundation, New York Public Health Research Institute, Gene Logic, the University of California and Xenometrix, Inc.) which give it rights to use certain technologies. Failure of the Company to maintain rights to such technology could have a material adverse effect on the Company's business, financial condition and results of operations. For example, inability of the Company to exercise the option for the University of California technology relating to miniaturized Polymerase Chain Reaction ("PCR") devices or other option agreements under reasonable terms could have an adverse effect on the ability of the Company to sell integrated device products. The patent positions of pharmaceutical and biotechnology companies, including the Company, are generally uncertain and involve complex legal and factual questions. There can be no assurance that any of the Company's pending patent applications will result in issued patents, that the Company will develop additional proprietary technologies that are patentable, that any patents issued to the Company or its strategic partners will provide a basis for commercially viable products or will provide the Company with any competitive advantages or will not be challenged by third parties, or that the patents of others will not have an adverse effect on the ability of the Company to do business. In addition, patent law relating to the scope of claims in the technology fields in which the Company operates is still evolving. The degree of future protection for the Company's proprietary rights, therefore, is uncertain. Furthermore, there can be no assurance that others will not independently develop similar or alternative technologies, duplicate any of the Company's technologies, or, if patents are issued to the Company, design around or invalidate the patented technologies developed by the Company. In addition, the Company expects to incur substantial costs in litigation to defend itself in patent suits brought by third parties and when it initiates such suits. In addition, administrative proceedings such as "interferences," in the United States Patent Office ("PTO") could substantially impact the scope of the Company's patent protection as well as result in the expenditure of substantial funds in legal fees. In September 1999, the PTO ruled in favor of Affymetrix in such an interferences proceeding. The commercial success of the Company also depends in part on the Company neither infringing patents or proprietary rights of third parties nor breaching any licenses that may relate to the Company's technologies and products. For example, the Company, its collaborators and customers may need to acquire a license for an amplification technology to use the GeneChip system in certain applications, and there is no assurance that such a license will be available on commercially reasonable terms. Furthermore, the Company is aware of third-party patents that may relate to the Company's technology, including reagents used in probe array synthesis and in probe array assays, probe array scanners, synthesis techniques, polynucleotide amplification techniques, assays, and probe arrays. In addition, the Company has received and may in the future receive notices claiming infringement from third parties as well as invitations to take licenses under third party patents. There can be no assurance that the Company will not infringe on these patents or other patents or proprietary rights of third parties or that the Company would be able to obtain a license to such patents or proprietary rights on commercially acceptable terms, if at all. 16 The Company is aware of patents and patent applications owned by OGT that may relate to the Company's technology. The Company has opposed two such allowed European patents and such patents have also been issued in the United States. The Company is aware that other patents are pending and may issue. Certain of the applications have broad claims to certain array related technology. In July 1998, the Company entered into a series of agreements with Beckman that were designed to provide it with a path to obtain a license to these patents and patent applications. In June 1999, OGT filed suit in the UK and US asserting that Affymetrix infringed these patents. Also in June 1999, Affymetrix purchased the array business of Beckman which included a license to the OGT patents. As a result of this purchase, Affymetrix asserted that infringement trials were not called for because of this license assignment. In February 2000, the High Court of Justice, Chancery Division, Patents Court held a trial to determine if Affymetrix had acquired a Southern license. No decision of the court has been entered. In addition, in February 2000, OGT asserted that Affymetrix and Beckman were in breach of this license. If the agreements with Beckman are interpreted adversely to the Company or if the Company is required to obtain a license to any other patents, there can be no assurance that such licenses could be acquired on commercially acceptable terms, if at all. Affymetrix is a party to significant litigation, which will consume substantial financial and managerial resources and which could adversely affect its business, financial condition and results of operations. Further, because of the substantial amount of discovery required in connection with any such litigation, there is a risk that confidential information could be compromised by disclosure. On March 3, 1997, Hyseq, Inc. ("Hyseq") filed a lawsuit in United States District Court for the Northern District of California (San Jose Division) alleging that Affymetrix' products infringe United States Patents 5,202,231, or '231, and 5,525,464 or '464. In addition, in December 1997, Hyseq filed a second action claiming that Affymetrix' products infringe a related patent, United States Patent 5,695,940, '940. On August 18, 1998, Affymetrix filed a lawsuit in United States District Court for the Northern District of California (San Francisco Division) against Hyseq alleging infringement of U.S. Patent Nos. 5,795,716, or '716, and 5,744,305, or '305. On September 1, 1998, Affymetrix added its U.S. Patent No. 5,800,992, or '992, to the complaint of infringement against Hyseq. On October 26, 1999, Hyseq filed a third action in United States District Court for the Northern District of California (San Francisco Division) claiming that Affymetrix' products infringe a related patent, United States Patent 5,972,619, or '619. The action also requests a declaration that the '716 Patent is invalid based on the '619 Patent. On November 23, 1998, Hyseq filed an answer to Affymetrix' complaint, alleging that Affymetrix' three asserted patents are invalid. On October 26, 1999, the United States District Court for the Northern District of California issued a Claims Construction Order interpreting various terms of the '231, '464, and '940 Patents. On June 4, 1999, OGT filed suit against Affymetrix in the United States District Court for the District of Delaware and in the United Kingdom alleging infringement of United States Patent 5,700,637 and European Patent 0-373-203, respectively. On June 4, 1999, an asset transfer agreement with Beckman Coulter became effective, giving Affymetrix access to Beckman Coulter's microarray business, including licenses to United States Patent 5,700,637 and European Patent 0-373-203. On June 17, 1999, Affymetrix filed a complaint in the United States District Court for the Northern District of California asking for, among other things, a declaration that Affymetrix has a valid license to use the patents and that, in light of this license, Affymetrix is not infringing on these patents. This case has been consolidated with the Delaware action. In the UK action, Affymetrix has counterclaimed for revocation of this patent and OGT has applied to amend the patent. The patent infringement issues have been stayed pending resolution of whether Affymetrix and Affymetrix UK Limited have a license under the patent as a result of the purchase of Beckman Coulter's microarray business. In February, 2000, the High Court of Justice, Chancery Division, Patent Court held a hearing on the issue of whether Affymetrix UK has valid license. A decision on this hearing is anticipated shortly. In addition, in February 2000, OGT asserted that Affymetrix and Beckman were in breach of this license. 17 The Hyseq and the OGT actions seek damages based on the sale of Affymetrix' products and processes and seek to enjoin commercial activities relating to those products and processes. In addition to subjecting Affymetrix to potential liability for damages, these actions, and any other similar legal actions against Affymetrix or its collaborative partners, could require Affymetrix or its collaborative partners to obtain a license in order to continue to manufacture, market or use the affected products and processes. While Affymetrix believes that the Hyseq and OGT complaints are without merit, Affymetrix may not prevail in these actions and Affymetrix or its collaborative partners may not prevail in any other related action. Moreover, in the event Affymetrix does not prevail in the Hyseq and OGT actions and Affymetrix, its partners or its customers are required to obtain a license to continue to manufacture, market or use the affected products and processes, Affymetrix, its partners or its customers may not be able to obtain such a license on commercially acceptable terms, if at all. Furthermore, Affymetrix has expended and is likely to continue to expend substantial financial and managerial resources in defending against the claims filed by Hyseq and OGT. On January 6, 1998, Affymetrix filed a patent infringement action in the United States District Court for the District of Delaware (No. 98-6) alleging that certain of Incyte Pharmaceuticals, Inc.'s ("Incyte") and Synteni, Inc.'s ("Synteni") products infringe United States Patent 5,445,934, or '934. On September 1, 1998, Affymetrix filed a complaint against Incyte and Synteni in Federal District Court in Delaware alleging infringement of the '305 Patent and the '992 Patent. These actions were transferred to the United States District Court for the Northern District of California on November 18, 1998, as case numbers C98-4507 and C98-4508, respectively. The actions seek to enjoin commercial activities of Incyte and Synteni relating to Affymetrix' patents and, in regard to the '992 Patent, sought a preliminary injunction. Incyte and Synteni moved for summary judgment that certain claims of the '992 Patent were invalid. On May 4, 1999, the Court denied Affymetrix' motion for preliminary injunction and denied Incyte/Synteni's motion for summary judgment. In the High Court of Justice, Chancery Division, Patents Court, OGT has applied in the United Kingdom to revoke Affymetrix' EP (UK) 0-619-321 Patent (related to certain DNA arrays). This revocation action also includes an application to revoke Affymetrix's related United Kingdom Patent GB 2248840. Revocation and infringement actions typically are resolved in the first instance in about twelve to eighteen months. The underlying patents can be declared valid, invalid, or partially valid, often with claim amendments submitted during the course of the proceedings. Affymetrix may not prevail in asserting its patent rights against Hyseq, Incyte, Synteni or others. Affymetrix has expended and is likely to continue to expend substantial financial and managerial resources in asserting its patent rights against Hyseq, Incyte, Synteni and others. Affymetrix' failure to successfully enforce its patent rights or the loss of these patent rights or others would remove a legal obstacle to competitors in designing probe array systems with similar competitive advantages to Affymetrix' GeneChip technology. The removal of such barriers could have a material adverse effect on Affymetrix' business, financial condition and results of operations. On April 17, 1998, Incyte filed a response and counterclaim to case number C98-4507, asserting that the '934 Patent is invalid and not infringed. On April 17, 1998, Incyte also filed a counterclaim alleging that a patent license agreement Affymetrix entered into in December 1997 with Molecular Dynamics interfered with an agreement between Incyte and Molecular Dynamics. In the counterclaim, Incyte alleges that the terms of Affymetrix' patent license to Molecular Dynamics prevented Molecular Dynamics from meeting its obligations to Incyte. Incyte seeks damages from Affymetrix. On September 21, 1998, Incyte and Synteni filed an answer asserting various defenses to the lawsuits in relation to the '992 Patent and the '305 Patent, and asserted several counterclaims, including: - a request for declaration of non-infringement and invalidity; - an assertion of unfair competition; 18 - a request for a declaration that Synteni and Dari Shalon (a one-time employee of Synteni) have not misappropriated any of Affymetrix' trade secrets; - a claim of tortious interference with Incyte's and Synteni's economic advantage; and - a claim of slander of title of a patent and a claim of trade libel. Affymetrix believes that the counterclaims are without merit. However, Affymetrix has expended and is likely to continue to expend significant financial and managerial resources defending against these and any other counterclaims filed by Incyte and Synteni and others. Affymetrix' failure to successfully enforce its patent rights or defend against counterclaims of Incyte, Synteni, or others could result in a material adverse effect on Affymetrix' business, financial condition and results of operations. The United States Patent and Trademark Office, or USPTO, notified Affymetrix that Stanford University presented claims that relate to substantially the same subject matter as certain claims from the '992 Patent and all of the claims of the '305 Patent. The Stanford application is alleged to be exclusively licensed to Incyte. The USPTO notified Affymetrix on April 2, 1999 that it had declared an interference proceeding relating to these patents and claims of patents. The USPTO conducted proceedings to determine the priority of these claims and determined that Incyte/Synteni did not meet the burden of proof required to establish a case that the claims should be further evaluated in a full interference proceeding. Incyte/Synteni has appealed this decision. In United States District Court for the Northern District of California (case number C99-2111). Affymetrix has expended, and expects in the future to continue to expend, substantial financial and managerial resources as a result of these proceedings. Moreover, Affymetrix may not prevail in such proceedings or in similar proceedings relating to those or other patents. Affymetrix may not prevail in the appeal of the Incyte/Synteni interference proceedings. A failure to prevail could result in Affymetrix' inability to commercialize its products and also would enable others to copy aspects of Affymetrix' products. Affymetrix' intellectual property outside of the United States is expected to be subject to significant additional administrative and litigation actions. For example, in Europe and Japan, third parties are expected to oppose significant patents owned or controlled by Affymetrix. Currently, OGT, Incyte, Multilyte Ltd. and ProtoGene Laboratories, Inc. filed oppositions against Affymetrix' EP 0-619-321 Patent in the European Patent Office. This procedure will result in the patent being either upheld in its entirety, allowed to grant in amended form in designated European countries, or revoked. There are a significant number of United States and foreign patents and patent applications in the Company's areas of interest, and the Company believes that there will be significant litigation in the industry regarding patent and other intellectual property rights. The Hyseq, Incyte, Synteni and OGT actions and any other such litigation will consume substantial managerial and financial resources, which could have a material adverse effect on the Company's business, financial condition and results of operations. Further, because of the substantial amount of discovery required in connection with any such litigation, there is a risk that confidential information could be compromised by disclosure. Others have filed and in the future are likely to file patent applications that are similar or identical to those of the Company or those of its licensors. To determine the priority of inventions, the Company will have to participate in interference proceedings declared by the United States Patent and Trademark Office that could result in substantial cost to the Company. No assurance can be given that any such patent application will not have priority over patent applications filed by the Company. The enactment of legislation implementing the General Agreement on Trade and Tariffs has resulted in certain changes in United States patent laws that became effective on June 8, 1995. Most notably, the term of patent protection for patent applications filed on or after June 8, 1995 is no longer a period of seventeen years from the date of grant. The new term of United States patents will commence on the date of issuance and terminate twenty years after the earliest effective filing date of the application. Because the time from filing to issuance of biotechnology patent applications in the Company's area of interest is often more than three years, a twenty-year term after the effective date 19 of filing is expected to result in a substantially shortened term of the Company's patent protection, which may adversely affect the Company's business, financial condition and results of operations. The Company also relies upon copyright and trade secret protection for its confidential and proprietary information. There can be no assurance, however, that such measures will provide adequate protection for the Company's copyrights, trade secrets or other proprietary information. In addition, there can be no assurance that trade secrets and other proprietary information will not be disclosed, that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to or disclose the Company's trade secrets and other proprietary information. There can be no assurance that the Company can effectively protect its copyrights, trade secrets or other proprietary information. The Company's academic collaborators have certain rights to publish data and information in which the Company has rights. There is considerable pressure on academic institutions to publish discoveries in the genetics and genomics fields. There can be no assurance that such publication would not adversely affect the Company's ability to obtain patent protection for information in which it may have a commercial interest. GOVERNMENT REGULATION The manufacturing, labeling, distribution and marketing of some or all of the Company's disease management products are subject to government regulation in the United States and in certain other countries. In the United States, the FDA regulates, as medical devices, most diagnostic tests, including analyte specific reagents and other components of the tests, including those sold to laboratories certified under the Clinical Laboratory Improvement Amendments of 1988 ("CLIA"). The Company intends to market some diagnostic products as finished test kits or equipment and others as individual components; consequently, these products are regulated as medical devices. The Food, Drug, and Cosmetic Act requires that medical devices introduced to the United States market, unless exempted by regulation, be the subject of either a premarket notification clearance (known as a "510(k)") or an approved premarket approval ("PMA"). Some of the Company's products and those of its collaborators may require a PMA and others may require a 510(k). With respect to devices reviewed through the 510(k) process, a company may not market a device until an order is issued by the FDA finding the product to be substantially equivalent to a legally marketed device known as a "predicate device." A 510(k) submission may involve the presentation of a substantial volume of data, including clinical data, and may require a substantial review. The FDA may agree that the product is substantially equivalent to a predicate device and allow the product to be marketed in the United States. The FDA, however, may (i) determine that the device is not substantially equivalent and require a PMA, or (ii) require further information, such as additional test data, including data from clinical studies, before it is able to make a determination regarding substantial equivalence. By requesting additional information, the FDA can further delay market introduction of a company's products. If the FDA indicates that a PMA is required for any of the Company's products, the application will require extensive clinical studies, manufacturing information (including demonstration of compliance with quality systems requirements) and likely review by a panel of experts outside the FDA. Clinical studies to support either a 510(k) submission or a PMA application would need to be conducted in accordance with FDA requirements. Failure to comply with FDA requirements could result in the FDA's refusal to accept the data or the imposition of regulatory sanctions. FDA review of a PMA application could take significantly longer than that for a 510(k). 20 Even where a device is exempted from 510(k) clearance or PMA approval, the FDA may impose restrictions on its marketing. For example, the FDA has exempted many in vitro reagents not sold as finished test kits from obtaining 510(k) clearance or PMA approval. These reagents, however, may be marketed by the Company only to clinical reference laboratories certified under CLIA as high complexity laboratories and are subject to a number of requirements, including labeling and the FDA's GMP regulations. There can be no assurance that the Company or its collaborators will be able to meet the FDA's requirements or that any necessary approval will be received. Once granted, a 510(k) clearance or PMA approval may place substantial restrictions on how the device is marketed or to whom it may be sold. Even where a device is exempted from 510(k) clearance or PMA approval, the FDA may impose restrictions on its marketing. In addition to requiring clearance or approval for new products, the FDA may require clearance or approval prior to marketing products that are modifications of existing products. There can be no assurance that any necessary GMP clearance, 510(k) clearance or PMA approval will be granted on a timely basis or at all. FDA imposed restrictions could limit the number of customers to whom particular products could be marketed or what may be communicated about particular products. Delays in receipt of or failure to receive any necessary GMP clearance, 510(k) clearance or PMA approval, or the imposition of stringent restrictions on the Company's labeling and sales of its products could have a material adverse effect on the Company. As a medical device manufacturer, the Company is required to register and list its products with the FDA. In addition, the Company will be required to comply with the FDA's GMP regulations, which require that medical devices be manufactured and records be maintained in a prescribed manner with respect to manufacturing, testing and control activities. Further, the Company would be required to comply with FDA requirements for labeling and promotion of its medical devices. For example, the FDA prohibits cleared or approved devices from being marketed for uncleared or unapproved uses. In addition, the medical device reporting regulation would require that the Company provide information to the FDA whenever there is evidence to reasonably suggest that one of its devices may have caused or contributed to a death or serious injury, or that there has occurred a malfunction that would be likely to cause or contribute to a death or serious injury if the malfunction were to recur. Medical device manufacturers are subject to periodic inspections by the FDA and state agencies. Additionally, the FDA will conduct a preapproval inspection for all PMA devices and in some cases for 510(k) devices as well. If the FDA believes that a company is not in compliance with applicable laws or regulations, it can institute proceedings to issue a warning or other letter apprising of violative conduct, impose civil penalties, detain or seize products, issue a recall, ask a court to seize products, enjoin future violations or assess civil and criminal penalties against the company, its officers or its employees. In addition, clearances or approvals could be suspended or withdrawn in appropriate circumstances. Failure to comply with regulatory requirements or any adverse regulatory action could have a material adverse effect on the Company's business, financial condition or results of operations. Medical device laws and regulations are also in effect in many of the countries in which the Company may do business outside the United States. These range from comprehensive device approval requirements for some or all of the Company's medical device products to requests for product data or certifications. The number and scope of these requirements are increasing. There can be no assurance that the Company will obtain regulatory approvals in such countries or that it will not be required to incur significant costs in obtaining or maintaining its foreign regulatory approvals. In addition, the export by the Company of certain of its products which have not yet been cleared for domestic commercial distribution may be subject to FDA export restrictions. The failure to obtain product approvals in a timely fashion or to comply with state or foreign medical device laws and regulations may have a material adverse effect on the Company's business, financial condition or results of operations. Medical device laws and regulations are also in effect in some states in which the Company does business. 21 In addition, federal, state and foreign laws and regulations regarding the manufacture and sale of medical devices are subject to future changes. The Company cannot predict what impact, if any, such changes might have on its business; however, such changes could have a material effect on the Company. Any of the Company's customers using its diagnostic devices for clinical use in the United States may be regulated under CLIA. CLIA is intended to ensure the quality and reliability of clinical laboratories in the United States by mandating specific standards in the areas of personnel qualifications, administration, participation in proficiency testing, patient test management, quality control, quality assurance and inspections. The regulations promulgated under CLIA establish three levels of diagnostic tests ("waived," "moderately complex" and "highly complex") and the standards applicable to a clinical laboratory depend on the level of the tests it performs. CLIA requirements may prevent some clinical laboratories from using certain of the Company's diagnostic products. In addition, the FDA has promulgated regulation of certain "analyte specific reagents" used in clinical reference laboratories. There can be no assurance that the CLIA regulations and future administrative interpretations of CLIA or future regulatory requirements of the FDA will not have a material adverse impact on the Company by imposing new regulatory requirements or by limiting the potential market for the Company's products. The Company is also subject to numerous environmental and safety laws and regulations, including those governing the use, storage and disposal of hazardous and biological materials, and construction of new facilities. There can be no assurance that the Company will be able to obtain or maintain the necessary permits to operate its facilities, including its new manufacturing facility in West Sacramento, California. Any violation of, and the cost of compliance with, these regulations or permit requirements could have a material adverse effect on the Company's business, financial condition and results of operations. REIMBURSEMENT The ability of the Company, its collaborators and other pharmaceutical and biotechnology companies to successfully commercialize their products may depend on their ability to obtain adequate levels of reimbursement for certain health care products and services in the United States, Europe and other countries. The availability of third-party reimbursement for such products and services may be limited or uncertain, particularly with respect to genetic tests and other disease management products. In the United States, the cost of medical care is funded, in substantial part, by government insurance programs, such as Medicare and Medicaid, and private and corporate health insurance plans. Third-party payors may deny reimbursement if they determine that a prescribed health care product or service has not received appropriate FDA or other governmental regulatory clearances, is not used in accordance with cost-effective treatment methods as determined by the payor, or is experimental, unnecessary or inappropriate. The ability of the Company, its collaborators and other pharmaceutical and biotechnology companies to commercialize certain of their products and services successfully may depend on the extent to which appropriate reimbursement levels for the costs of such products and services are obtained from government authorities, private health insurers and other organizations, such as health maintenance organizations ("HMOs"). Third-party payors are increasingly challenging the prices charged for health care products and services. The trend towards managed health care in the United States and the concurrent growth of organizations such as HMOs, which could control or significantly influence the purchase of health care products and services, as well as legislative proposals to reform health care or reduce government insurance programs, may all result in lower prices for health care products and services commercialized by customers and collaborative partners of the Company. This could reduce the amount of future royalty payments that may be due to the Company on such product sales or services. The cost containment measures that health care providers are instituting and the impact of any health care reform may also adversely affect the profits of the 22 Company's customers and collaborative partners. As a result, pharmaceutical and biotechnology companies may choose to reduce or eliminate certain research and development programs that utilize the Company's products. A reduction of royalty payments to the Company or the reduction or cancellation of research programs that utilize the Company's products could have a material adverse effect on the Company's business, financial condition and results of operations. COMPETITION Competition in expression monitoring, polymorphism analysis and disease management is intense and expected to increase. Further, the technologies for monitoring gene expression and discovering and analyzing polymorphisms associated with significant diseases and approaches for commercializing those discoveries are new and rapidly evolving. Currently, the Company's principal competition comes from existing technologies and other DNA array technologies that are used to perform many of the same functions for which the Company plans to market its GeneChip systems. In the expression monitoring and polymorphism analysis fields, existing competitive technologies include gel-based sequencing using instruments provided by companies such as PE Biosystems and Amersham Pharmacia Biotech. Other companies including Agilent Technologies, Axon Instruments, Clonetech, Inc., Corning, Inc., CuraGen, Inc., Digital Gene Technologies, Inc., Gene Logic, Inc., Genomic Solutions, Inc., Hyseq, Ilumina, Inc., Lynx Therapeutics, Inc., Molecular Dynamics, Motorola Inc., Nanogen, Inc., NEN LifeSciences Products, Inc., Packard Instruments Company, Protogene, Inc., Sequenome, Inc., Synteni (Incyte), Texas Instruments, Inc., Visible Genetics, Inc. and Vysis also are developing or have developed DNA probe based assays or other products and services, some of which may be competitive with those of the Company. In order to compete against existing technologies and maintain pricing and gross margins, the Company will need to be successful in asserting its patents in the DNA array field and in demonstrating to potential customers that the GeneChip system provides improved performance and capabilities. In 1999, the Company's sales representative, Amersham Pharmacia Biotech and its wholly owned subsidiary, Molecular Dynamics are competitors, suppliers of the Company's reagents and licensees of the Company. There can be no assurance that Amersham Pharmacia Biotech's and Molecular Dynamics' commercial activities will not adversely impact the Company's sales and supply agreements. Similarly, Agilent Technologies supplies the Company with its scanners and has publically announced its intention to commercialize its own DNA array technology. There can be no assurance that Agilent Technologies' commercial activity will not adversely impact the Company's sales and supply agreements. Future competition in the expression monitoring, polymorphism analysis and disease management fields will likely come from existing competitors as well as other companies seeking to develop new technologies for sequencing and analyzing genetic information. In addition, pharmaceutical and biotechnology companies have significant needs for genomic information and may choose to develop or acquire competing technologies to meet these needs. In the diagnostic field, competition will likely come from established diagnostic companies such as Abbott Laboratories, Becton Dickinson, Bayer A.G., Roche Boehringer Mannheim and Johnson & Johnson. These companies offer a variety of diagnostic technologies including immunoassays, histochemistry, flow cytometry and culture, and newer DNA probe diagnostics to analyze certain limited amounts of genetic information. The market for disease management products derived from gene discovery is currently limited and will be highly competitive. Many companies are developing and marketing DNA probe tests for genetic and other diseases. Other companies are conducting research on new technologies for diagnostic tests based on advances in genetic information. Established diagnostic companies could provide competition to Affymetrix through the development of new products. These companies have the strategic commitment to diagnostics, the financial and other resources to invest in new technologies, substantial intellectual 23 property portfolios, substantial experience in new product development, regulatory expertise, manufacturing capabilities and the distribution channels to deliver products to customers. These companies also have an installed base of instruments in several markets, including clinical and reference laboratories, which are not compatible with the GeneChip system. In addition, these companies have formed alliances with genomics companies which provide them access to genetic information that may be incorporated into their diagnostic tests. EMPLOYEES As of December 31, 1999, Affymetrix had 519 full-time employees, 52 of whom hold Ph.D. or M.D. degrees. The employee group includes chemists, engineers, computer scientists, mathematicians and molecular biologists with experience in the diagnostic products, medical products, semiconductor, computer software and electronics industries. None of the Company's employees are represented by a collective bargaining agreement, nor has the Company experienced work stoppages. The Company believes that it maintains good relationships with its employees. Affymetrix' success will depend in large part on its ability to attract and retain skilled and experienced employees. There can be no assurance that the Company will be successful in hiring or retaining qualified personnel, and its failure to do so could have a material adverse impact on the Company's business, financial condition and results of operations. RISK FACTORS All statements in this annual report that do not discuss past results are forward-looking statements. Forward-looking statements are based on management's current expectations and are therefore subject to certain risks and uncertainties. Any of the following risks could seriously harm our business, financial condition or results of operations. As a result, these risks could cause the decline of the trading price of the Company's common stock. The risks described below, however, are not the only ones that we face. You should also refer to the other information set forth in this annual report, including our financial statements and the related notes. THE MARKET PRICE OF THE COMPANY'S COMMON STOCK IS EXTREMELY VOLATILE AND THE VALUE OF ITS STOCK MAY DECREASE SUDDENLY AND SUBSTANTIALLY For a number of reasons, the market price of our common stock is extremely volatile and the value of your common stock may decrease substantially. This extreme volatility also puts us at risk for securities class action litigation, which would cause the Company to divert both financial and managerial resources, which could reduce our profits. To demonstrate the volatility of the Company's stock price, during the twelve month period ending March 27, 2000, the volume of its common stock traded on any given day has ranged from 48,700 to 5,372,400 shares, a 10,932% difference. Moreover, during the same twelve months, its common stock has traded as low as $31.75 per share and as high as $327.00 per share, a 930% difference. The market price of its common stock has changed as much $67.00 per share in a single day and its stock price has changed more than $20 in a single day thirty-seven times in the last six months. THE COMPANY'S QUARTERLY RESULTS OF OPERATION HAVE HISTORICALLY FLUCTUATED SIGNIFICANTLY PERIOD-TO-PERIOD, AND ITS STOCK MAY DECREASE IN VALUE SIGNIFICANTLY FOLLOWING AN EARNINGS RELEASE Although the Company believes that period-to-period comparisons of its results of operations are not a good indication of its future performance, its operating results will likely be below the expectations of public market analysts or investors in future quarters and the market price of its common stock may fall significantly. 24 THE COMPANY HAS A LIMITED OPERATING HISTORY, HAS NEVER BEEN PROFITABLE AND MAY NEVER DEVELOP A COMMERCIALLY SUCCESSFUL PRODUCT The Company is a relatively new company and, for the most part, its technologies are still in the early stages of development. The Company has just begun to incorporate its technologies into commercial products. The Company needs to make significant investments to ensure its products perform correctly and are cost-effective. In addition, the Company must obtain additional regulatory approvals to sell its product for purposes other than research use. Even if the Company develops its products for commercial use and obtains all necessary regulatory approval, it may not be able to develop products that: - are accepted by the research, diagnostic or other market places; - are accurate and effective; - meet applicable regulatory standards in a timely manner; - are protected from competition by others; - do not infringe the intellectual property rights of others; - can be manufactured in sufficient quantities or at a reasonable cost; or - can be marketed successfully. THE COMPANY MAY LOSE CUSTOMERS UNLESS IT IMPROVES ITS ABILITY TO MANUFACTURE ITS PRODUCTS AND ENSURE THEIR PROPER PERFORMANCE The Company produces its GeneChip products in an innovative and complicated manufacturing process. It has experienced and continues to experience significant variability in the manufacturing yield of its GeneChip products which has reduced, and it believes will continue to reduce, its gross margins and business. The Company has also experienced, and anticipates that it will continue to experience, difficulties in meeting customer, collaborator and internal demand for some of its probe array products. If the Company can't deliver products in a timely manner, it could result in the loss of customers, delay introduction of new products or cause demand for the Company's products to decline. Furthermore, if the Company can't deliver products to its customers that consistently meet their performance expectations, demand for its products will decline. Because the Company has a limited manufacturing history, it doesn't fully understand all of the factors that affect its manufacturing processes. As a result, manufacturing and quality control problems have arisen and the Company expects them to continue to arise as it attempts to increase the production rate at its manufacturing facilities. The Company may not be able to increase production rates at these facilities in a timely and cost-effective manner or at commercially reasonable costs. THE COMPANY'S SURVIVAL DEPENDS ON ITS ABILITY TO AVOID INFRINGING THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS AS WELL AS MAINTAINING, ENFORCING AND OBTAINING INTELLECTUAL PROPERTY RIGHTS OF ITS OWN Intellectual property rights are essential to the Company's business. The Company is engaged in significant litigation with its competitors regarding both its intellectual property rights and their rights which consume, and will continue to consume, substantial portions of the Company's financial and managerial resources. A loss of a significant litigation could prevent the Company from producing its current products or developing new ones and could also result in the payment of significant penalties and royalties, which could make it too costly to produce some or all of the products. If the Company can't maintain, enforce or obtain intellectual property rights, competitors can design probe array 25 systems with similar competitive advantages to its GeneChip technology without paying royalties to it. In order to continue its current business, the Company must successfully: - defend against third parties asserting that it infringes their intellectual property rights; - enforce its intellectual property rights against third parties infringing its rights; - obtain licenses to the intellectual property it needs to continue or expand its business; - obtain enforceable patent rights to its product and process innovations; and - defend the scope of its existing or pending patents in administrative proceedings, such as oppositions or interferences. Moreover, even if the Company defends and enforces its intellectual property rights, others may independently develop similar or alternative technologies, duplicate any of its technologies, or design around or invalidate its patented technologies. These developments would reduce the value of the Company's intellectual property assets. IF THE COMPANY CAN'T CONTINUOUSLY DEVELOP AND INTRODUCE NEW PRODUCTS IT WON'T BE ABLE TO COMPETE SUCCESSFULLY IN ITS HIGHLY COMPETITIVE AND RAPIDLY CHANGING MARKET The Company competes in markets that are new, intensely competitive, highly fragmented and rapidly changing and many of its current and potential competitors have significantly greater financial, technical, marketing and other resources. In addition, many current and potential competitors have greater name recognition, more extensive customer bases and access to proprietary genetic content. The Company cannot survive if it fails to respond quickly to new or emerging technologies and changes in customer requirements. Currently, the Company's principal competition comes from existing DNA probe array and other technologies that are used to perform many of the same functions for which the Company markets its GeneChip products. In order to compete against existing and newly developed technologies and maintain pricing and gross margins, the Company needs to successfully demonstrate to potential customers that its GeneChip products provide improved performance and capabilities. A large number of publicly traded and privately held companies including Agilent Technologies, Corning Inc., CuraGen, Gene Logic, Inc., General Scanning, Inc., Genome Solutions, Hitachi, Ltd., Illumina, Inc., Incyte/ Synteni, Lynx Therapeutics, Motorola, Inc. and Sequenome, Inc. also are developing or have developed DNA probe based assays or other products and services, some of which may be competitive with the Company's. THE COMPANY DEPENDS ON A LIMITED NUMBER OF SUPPLIERS AND IT WILL BE UNABLE TO MANUFACTURE ITS PRODUCTS IF SHIPMENTS FROM THESE SUPPLIERS ARE DELAYED OR INTERRUPTED Key parts of the Company's GeneChip product line, as well as various equipment and raw materials used in the synthesis of probe arrays, are currently available only from a single source or a limited number of sources. The Company relies on Agilent Technologies to manufacture, install and service its scanners and on Enzo to manufacture key substances used with probe arrays and various labeling kits needed to process samples. In addition, components of the Company's manufacturing equipment are available from one of only a few suppliers. In the event that supplies from these vendors were delayed or interrupted for any reason, the Company wouldn't be able to get manufacturing equipment, scanners or other components for its GeneChip product in a timely fashion or in insufficient quantities or under acceptable terms. Even if alternative sources of supply are available, it could be time consuming and expensive for the Company to qualify new vendors. In addition, it is dependent on its vendors to provide components of appropriate quality and reliability and to meet applicable regulatory requirements. Consequently, in 26 the event that supplies from these vendors were delayed or interrupted for any reason, the Company could be delayed in its ability to develop and deliver products to its customers. IF THE COMPANY IS UNABLE TO MAINTAIN ITS RELATIONSHIPS WITH COLLABORATIVE PARTNERS, IT MAY HAVE DIFFICULTY SELLING ITS PRODUCTS AND SERVICES The Company believes that its success in penetrating its target markets depends in part on its ability to develop and maintain collaborative relationships with key companies as well as with key academic researchers. The Company's collaborative partners, however, may not be able to perform their obligations as expected or devote sufficient resources to the development, clinical testing, supply or marketing of its potential products developed under these collaborations. Currently, the Company's significant collaborative partners include Agilent Technologies in the making of its scanners, Amersham Pharmacia Biotech KK in distributing its products in Japan, and Roche Molecular Systems and bioMerieux in the making of its diagnostic chip products. Relying on these or other collaborative relationships is risky to the Company's future success because: - its partners may develop technologies or components competitive with its GeneChip product; - its existing collaborations may preclude it from entering into additional future arrangements; - its partners may not obtain regulatory approvals necessary to continue the collaborations in a timely manner; - some of its agreements may prematurely terminate due to disagreements between it and its partners; - its partners may not devote sufficient resources to the development and sale of its products; - its partners may be unable to supply products to it on a timely basis; - its collaborations may be unsuccessful; or - it may not be able to negotiate future collaborative arrangements on acceptable terms. THE COMPANY'S CURRENT SALES, MARKETING AND TECHNICAL SUPPORT ORGANIZATION MAY LIMIT ITS ABILITY TO SELL ITS PRODUCTS The Company currently has limited sales, marketing and technical support services. To assist its sales and support activities, it entered into a nonexclusive distribution agreement covering Japan with Amersham Pharmacia Biotech KK and a service agreement for its GeneArray scanner with Agilent Technologies. Although the Company has invested significant other resources to expand its direct sales force and its technical and support staff, it may not be able to establish a sufficiently sized sales, marketing or technical support organization to sell, market or support the Company's products. Moreover, relying on third parties such as Amersham Pharmacia Biotech KK and Agilent Technologies for sales, marketing and technical support is risky because these third parties will sell competitive products or otherwise become the Company's competitors. THE LOSS OF A KEY CUSTOMER COULD SUBSTANTIALLY REDUCE OUR REVENUES AND BE PERCEIVED AS A LOSS OF MOMENTUM IN THE COMPANY'S BUSINESS The Company's customers are concentrated in a small number of pharmaceutical and biotechnology companies, academic research centers and clinical reference laboratories. The Company expects that a small number of customers, such as Aventis, F. Hoffman-La Roche, Ltd., Genetics Institute, Gene Logic, Inc. and other key customers, will continue to account for a substantial portion of revenues for the foreseeable future. If the Company loses a major customer, its revenues may be 27 substantially reduced and investors may perceive this as a loss of momentum in its business. Moreover, if consolidation in the pharmaceutical and biotechnology industries continues, the Company's current and potential customers could decrease or slow aggregate sales of its technology and shrink its target market. BECAUSE THE COMPANY'S BUSINESS IS HIGHLY DEPENDENT ON KEY EXECUTIVES AND SCIENTISTS, ITS INABILITY TO RECRUIT AND RETAIN THESE PEOPLE COULD HINDER ITS BUSINESS EXPANSION PLANS The Company is highly dependent on its executive officers and its senior scientists and engineers, including scientific advisors. The Company's product development and marketing efforts will be delayed or curtailed if it loses the services of any of these people. The Company relies on its scientific advisors and consultants to assist it in formulating its research, development and commercialization strategy. All of these individuals are engaged by employers other than the Company and have commitments to other entities that may limit their availability to the Company. Some of them also consult for companies that may be competitors of the Company's. A scientific advisor's other obligations may prevent him or her from assisting the Company in developing its technical and business strategies. To expand its research, product development and sales efforts the Company needs additional people skilled in areas such as bioinformatics, organic chemistry, information services, regulatory affairs, manufacturing, sales, marketing and technical support. Competition for these people is intense and their turnover rate is high. The Company won't be able to expand its business if it is unable to hire, train and retain a sufficient number of qualified employees. BECAUSE GLAXO WELLCOME OWNS A SUBSTANTIAL PORTION OF THE COMPANY'S OUTSTANDING CAPITAL STOCK, GLAXO MAY BE ABLE TO INFLUENCE THE OUTCOME OF STOCKHOLDER VOTES OR THE MARKET PRICE OF THE COMPANY'S STOCK Glaxo Wellcome plc, ("Glaxo") and its affiliates currently beneficially own approximately 31% of the Company's outstanding common stock. Although the Company has executed a governance agreement with Glaxo, Glaxo nevertheless may be able to influence the outcome of stockholder votes, including votes concerning the election of directors, adoption of amendments to the Company's certificate of incorporation and bylaws and approval of mergers and other significant corporate transactions. Moreover, the Company's stock price may drop if Glaxo sells a significant amount of the Company's stock or if investors interpret any sale of the Company's stock by Glaxo as a sign of weakness in the Company's business. ITEM 2. PROPERTIES Affymetrix leases two facilities in Santa Clara, California, totaling 93,000 square feet for research and development laboratories and administrative offices under leases expiring in 2003. The Company has an option to renew the leases on these facilities for an additional three years. The Company leases 20,000 square feet of space for manufacturing operations in Sunnyvale, California, under a lease that expires in 2003. The Company also leases 31,000 square feet of research and development space in Sunnyvale, California under a lease that expires in 2002. In February 1998, the Company purchased approximately ten acres of land in West Sacramento, California, upon which the Company has built a 52,000 square foot manufacturing facility. The Company expects to continue to expand its manufacturing and other operating facilities over the next few years. In October 1999, Affymetrix acquired an additional 57,000 square feet of office and light manufacturing space in Sunnyvale, California, under a lease that expires in 2004. In November 1999, another new lease began comprising 3,000 square feet of office space in Abingdon, England. This space is used by Affmetrix' European Sales Group under a lease expiring in 2002. 28 ITEM 3. LEGAL PROCEEDINGS Affymetrix is a party to significant litigation, which will consume substantial financial and managerial resources and which could adversely affect its business, financial condition and results of operations. Further, because of the substantial amount of discovery required in connection with any such litigation, there is a risk that confidential information could be compromised by disclosure. On March 3, 1997, Hyseq, Inc. ("Hyseq") filed a lawsuit in United States District Court for the Northern District of California (San Jose Division) alleging that Affymetrix' products infringe United States Patents 5,202,231, or '231, and 5,525,464 or '464. In addition, in December 1997, Hyseq filed a second action claiming that Affymetrix' products infringe a related patent, United States Patent 5,695,940, '940. On August 18, 1998, Affymetrix filed a lawsuit in United States District Court for the Northern District of California (San Francisco Division) against Hyseq alleging infringement of U.S. Patent Nos. 5,795,716, or '716, and 5,744,305, or '305. On September 1, 1998, Affymetrix added its U.S. Patent No. 5,800,992, or '992, to the complaint of infringement against Hyseq. On October 26, 1999, Hyseq filed a third action in United States District Court for the Northern District of California (San Francisco Division) claiming that Affymetrix' products infringe a related patent, United States Patent 5,972,619, or '619. The action also requests a declaration that the '716 Patent is invalid based on the '619 Patent. On November 23, 1998, Hyseq filed an answer to Affymetrix' complaint, alleging that Affymetrix' three asserted patents are invalid. On October 26, 1999, the United States District Court for the Northern District of California issued a Claims Construction Order interpreting various terms of the '231, '464, and '940 Patents. On June 4, 1999, Oxford Gene Technology, Ltd. ("OGT") filed suit against Affymetrix in the United States District Court for the District of Delaware and in the United Kingdom alleging infringement of United States Patent 5,700,637 and European Patent 0-373-203, respectively. On June 4, 1999, an asset transfer agreement with Beckman Coulter, Inc. ("Beckman") became effective, giving Affymetrix access to Beckman's microarray business, including licenses to United States Patent 5,700,637 and European Patent 0-373-203. On June 17, 1999, Affymetrix filed a complaint in the United States District Court for the Northern District of California asking for, among other things, a declaration that Affymetrix has a valid license to use the patents and that, in light of this license, Affymetrix is not infringing on these patents. This case has been consolidated with the Delaware action. In the UK action, Affymetrix has counterclaimed for revocation of this patent and OGT has applied to amend the patent. The patent infringement issues have been stayed pending resolution of whether Affymetrix and Affymetrix UK Limited have a license under the patent as a result of the purchase of Beckman's microarray business. In February, 2000, the High Court of Justice, Chancery Division, Patent Court held a hearing on the issue of whether Affymetrix UK had a valid license. A decision on this hearing is anticipated shortly. In addition, in February 2000, OGT asserted that Affymetrix and Beckman were in breach of this license. The Hyseq and the OGT actions seek damages based on the sale of Affymetrix' products and processes and seek to enjoin commercial activities relating to those products and processes. In addition to subjecting Affymetrix to potential liability for damages, these actions, and any other similar legal actions against Affymetrix or its collaborative partners, could require Affymetrix or its collaborative partners to obtain a license in order to continue to manufacture, market or use the affected products and processes. While Affymetrix believes that the Hyseq and OGT complaints are without merit, Affymetrix may not prevail in these actions and Affymetrix or its collaborative partners may not prevail in any other related action. Moreover, in the event Affymetrix does not prevail in the Hyseq and OGT actions and Affymetrix, its partners or its customers are required to obtain a license to continue to manufacture, market or use the affected products and processes, Affymetrix, its partners or its customers may not be able to obtain such a license on commercially acceptable terms, if at all. 29 Furthermore, Affymetrix has expended and is likely to continue to expend substantial financial and managerial resources in defending against the claims filed by Hyseq and OGT. On January 6, 1998, Affymetrix filed a patent infringement action in the United States District Court for the District of Delaware (No. 98-6) alleging that certain of Incyte Pharmaceuticals, Inc.'s ("Incyte") and Synteni, Inc.'s ("Synteni") products infringe United States Patent 5,445,934, or '934. On September 1, 1998, Affymetrix filed a complaint against Incyte and Synteni in Federal District Court in Delaware alleging infringement of the '305 Patent and the '992 Patent. These actions were transferred to the United States District Court for the Northern District of California on November 18, 1998, as case numbers C98-4507 and C98-4508, respectively. The actions seek to enjoin commercial activities of Incyte and Synteni relating to Affymetrix' patents and, in regard to the '992 Patent, sought a preliminary injunction. Incyte and Synteni moved for summary judgment that certain claims of the '992 Patent were invalid. On May 4, 1999, the Court denied Affymetrix' motion for preliminary injunction and denied Incyte/Synteni's motion for summary judgment. In the High Court of Justice, Chancery Division, Patents Court, OGT has applied in the United Kingdom to revoke Affymetrix' EP (UK) 0-619-321 Patent (related to certain DNA arrays). This revocation action also includes an application to revoke Affymetrix's related United Kingdom Patent GB 2248840. Revocation and infringement actions typically are resolved in the first instance in about twelve to eighteen months. The underlying patents can be declared valid, invalid, or partially valid, often with claim amendments submitted during the course of the proceedings. Affymetrix may not prevail in asserting its patent rights against Hyseq, Incyte, Synteni or others. Affymetrix has expended and is likely to continue to expend substantial financial and managerial resources in asserting its patent rights against Hyseq, Incyte, Synteni and others. Affymetrix' failure to successfully enforce its patent rights or the loss of these patent rights or others would remove a legal obstacle to competitors in designing probe array systems with similar competitive advantages to Affymetrix' GeneChip technology. The removal of such barriers could have a material adverse effect on Affymetrix' business, financial condition and results of operations. On April 17, 1998, Incyte filed a response and counterclaim to case number C98-4507, asserting that the '934 Patent is invalid and not infringed. On April 17, 1998, Incyte also filed a counterclaim alleging that a patent license agreement Affymetrix entered into in December 1997 with Molecular Dynamics interfered with an agreement between Incyte and Molecular Dynamics. In the counterclaim, Incyte alleges that the terms of Affymetrix' patent license to Molecular Dynamics prevented Molecular Dynamics from meeting its obligations to Incyte. Incyte seeks damages from Affymetrix. On September 21, 1998, Incyte and Synteni filed an answer asserting various defenses to the lawsuits in relation to the '992 Patent and the '305 Patent, and asserted several counterclaims, including: - a request for declaration of non-infringement and invalidity; - an assertion of unfair competition; - a request for a declaration that Synteni and Dari Shalon (a one-time employee of Synteni) have not misappropriated any of Affymetrix' trade secrets; - a claim of tortious interference with Incyte's and Synteni's economic advantage; and - a claim of slander of title of a patent and a claim of trade libel. Affymetrix believes that the counterclaims are without merit. However, Affymetrix has expended and is likely to continue to expend significant financial and managerial resources defending against these and any other counterclaims filed by Incyte and Synteni and others. Affymetrix' failure to successfully enforce its patent rights or defend against counterclaims of Incyte, Synteni, or others could result in a material adverse effect on Affymetrix' business, financial condition and results of operations. 30 The United States Patent and Trademark Office, or USPTO, notified Affymetrix that Stanford University presented claims that relate to substantially the same subject matter as certain claims from the '992 Patent and all of the claims of the '305 Patent. The Stanford application is alleged to be exclusively licensed to Incyte. The USPTO notified Affymetrix on April 2, 1999 that it had declared an interference proceeding relating to these patents and claims of patents. The USPTO conducted proceedings to determine the priority of these claims and determined that Incyte/Synteni did not meet the burden of proof required to establish a case that the claims should be further evaluated in a full interference proceeding. Incyte/Synteni has appealed this decision. In United States District Court for the Northern District of California (case number C99-2111). Affymetrix has expended, and expects in the future to continue to expend, substantial financial and managerial resources as a result of these proceedings. Moreover, Affymetrix may not prevail in such proceedings or in similar proceedings relating to those or other patents. Affymetrix may not prevail in the appeal of the Incyte/Synteni interference proceedings. A failure to prevail could result in Affymetrix' inability to commercialize its products and also would enable others to copy aspects of Affymetrix' products. Affymetrix' intellectual property outside of the United States is expected to be subject to significant additional administrative and litigation actions. For example, in Europe and Japan, third parties are expected to oppose significant patents owned or controlled by Affymetrix. Currently, OGT, Incyte, Multilyte Ltd. and ProtoGene Laboratories, Inc. filed oppositions against Affymetrix's EP 0-619-321 Patent in the European Patent Office. This procedure will result in the patent being either upheld in its entirety, allowed to grant in amended form in designated European countries, or revoked. Affymetrix expects in the future to expend substantial financial and managerial resources as a result of these proceedings. A failure to prevail could result in an inability to commercialize its products and also would enable others to copy aspects of its products. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fourth quarter of the year ended December 31, 1999. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is traded on the Nasdaq National Market System under the symbol of AFFX. The following table sets forth, for the periods indicated, the low and high bid prices per share for the Company's common stock as reported by the Nasdaq National Market.
LOW HIGH -------- -------- 1998 First Quarter.............................................. $24.63 $ 35.25 Second Quarter............................................. $21.13 $ 34.88 Third Quarter.............................................. $16.13 $ 30.38 Fourth Quarter............................................. $19.50 $ 28.38 1999 First Quarter.............................................. $23.62 $ 43.19 Second Quarter............................................. $32.50 $ 52.19 Third Quarter.............................................. $49.25 $127.00 Fourth Quarter............................................. $72.62 $195.12
As of March 20, 2000, there were approximately 466 holders of record of the Company's common stock. No dividends have been paid on the common stock. The Company currently intends to retain all future earnings, if any, for use in its business and does not anticipate paying any cash dividends on its common stock in the foreseeable future. 31 ITEM 6. SELECTED FINANCIAL DATA The following selected historical information has been derived from the audited financial statements of the Company. The financial information as of December 31, 1999 and 1998 and for each of the three years in the period ended December 31, 1999 are derived from audited financial statements included in this Form 10-K. The table should be read in conjunction with Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and Item 8, "Financial Statements and Supplementary Data."
YEAR ENDED DECEMBER 31, ----------------------------------------------------- 1999 1998 1997 1996 1995 --------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA: Revenue: Product................................. $ 86,076 $ 36,644 $ 4,789 $ 1,389 $ -- Research................................ 7,932 14,522 14,976 10,583 4,625 License fees and royalties.............. 2,847 859 -- -- -- --------- -------- -------- -------- -------- Total revenue......................... 96,855 52,025 19,765 11,972 4,625 --------- -------- -------- -------- -------- Cost and expenses: Cost of product revenue................. 35,333 14,858 4,559 2,178 -- Research and development................ 40,527 35,953 28,168 18,762 12,420 Selling, general and administrative..... 48,714 29,763 14,697 7,569 3,833 --------- -------- -------- -------- -------- Total costs and expenses................ 124,574 80,574 47,424 28,509 16,253 --------- -------- -------- -------- -------- Loss from operations...................... (27,719) (28,549) (27,659) (16,537) (11,628) Interest income, net...................... 4,634 5,419 5,133 4,310 881 --------- -------- -------- -------- -------- Net loss.................................. (23,085) (23,130) (22,526) (12,227) (10,747) Preferred Stock dividends................. (2,055) (2,321) -- -- -- --------- -------- -------- -------- -------- Net loss attributable to Common Stockholders............................ $ (25,140) $(25,451) $(22,526) $(12,227) $(10,747) ========= ======== ======== ======== ======== Basic and diluted net loss per common share(1)................................ $ (1.02) $ (1.11) $ (0.99) $ (0.61) $ (0.61) Shares used in computing basic and diluted net loss per common share(1)............ 24,623 22,915 22,644 20,131 17,664 BALANCE SHEET DATA: Cash, cash equivalents, and available-for-sale securities........... $ 225,043 $ 80,568 $ 71,573 $108,982 $ 38,883 Working capital........................... 228,757 80,387 71,553 107,668 36,070 Total assets.............................. 320,298 136,428 101,170 118,900 44,594 Long-term obligations(2).................. 155,000 5,261 513 741 948 Convertible Redeemable Preferred Stock.... -- 49,857 -- -- -- Accumulated deficit....................... (117,860) (92,720) (67,269) (44,743) (32,516) Total stockholders' equity................ 131,342 66,750 91,036 112,533 38,561
- ------------------------ (1) See Note 1 to the Financial Statements included in Item 8. (2) In February 2000, the Company issued $225 million principal amount of 4.75% convertible subordinated notes. 32 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS All statements in this discussion that are not historical are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act, including statements regarding the Company's "expectations", "beliefs", "hopes", "intentions", "strategies" or the like. Such statements are subject to risks and uncertainties that could cause actual results to differ materially for Affymetrix from those projected, including, but not limited to, uncertainties relating to technological approaches, product development, manufacturing and market acceptance, uncertainties related to cost and pricing of Affymetrix products, dependence on collaborative partners, uncertainties relating to sole source suppliers, uncertainties relating to FDA and other regulatory approvals, competition, risks relating to intellectual property of others and the uncertainties of patent protection and litigation. Affymetrix expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in Affymetrix' expectations with regard thereto or any change in events, conditions, or circumstances on which any such statements are based. OVERVIEW Affymetrix, Inc. has developed and intends to establish its GeneChip-Registered Trademark- system as the platform of choice for acquiring, analyzing and managing complex genetic information in order to improve the diagnosis, monitoring and treatment of disease. The Company's GeneChip system consists of disposable DNA probe arrays containing gene sequences on a chip, certain reagents for use with the probe arrays, a scanner and other instruments to process the probe arrays, and software to analyze and manage genetic information from the probe arrays. The Company commenced commercial sales of the GeneChip system for research use in April 1996 and currently sells its products to pharmaceutical and biotechnology companies, academic research centers and clinical reference laboratories primarily in the United States and Europe. The business and operations of the Company were commenced in 1991 by Affymax N.V. ("Affymax") and were initially conducted within Affymax. In March 1992, the Company was incorporated as a California corporation and wholly owned subsidiary of Affymax and in September 1998 was reincorporated as a Delaware corporation. In March 1995, Glaxo plc, now Glaxo Wellcome plc ("Glaxo"), acquired Affymax, including its ownership interest in Affymetrix. Beginning in September 1993, the Company issued equity securities, including an initial public offering in June 1996, which diluted Affymax' and then Glaxo's ownership in Affymetrix. In April 1998, the Company completed the sale of 1,634,522 shares of Series AA Convertible Redeemable Preferred Stock to Glaxo Wellcome Americas, Inc. (a wholly owned subsidiary of Glaxo) for net proceeds of approximately $49.9 million and in August 1999, Glaxo elected to convert the Series AA Convertible Redeemable Preferred Stock to 1,257,229 shares of Affymetrix common stock at a conversion price of $40 per share. As of December 31, 1999, Glaxo's ownership position is approximately 31%. The Company has incurred operating losses in each year since its inception, including a loss attributable to Common Stockholders of approximately $25.1 million during the year ended December 31, 1999 and, as of such date, had an accumulated deficit of approximately $117.9 million. The Company's losses have resulted principally from costs incurred in research and development, manufacturing and from selling, general and administrative costs associated with the Company's operations. These costs have exceeded the Company's revenues and interest income, which to date have been generated principally from product sales, royalties and license fees and technology access fees, collaborative research and development agreements, government research grants and from cash and investment balances. The Company expects to incur additional operating losses for at least the next year as a result of increases in its expenses for expansion in its manufacturing, marketing and sales capabilities, research and product development and general and administrative costs. The Company's 33 quarterly operating results will depend upon the volume and timing of orders received for GeneChip systems and probe arrays and the timing of deliveries made during the quarter, variations in payments under collaborative agreements, including milestones, design fees, royalties, license fees, and other research revenues, and the timing of new product introductions by the Company. The Company's quarterly operating results may also fluctuate significantly depending on other factors, including the introduction of new products by the Company's competitors; regulatory actions; market acceptance of the GeneChip system and other potential products; the outcome of on-going or future litigation; adoption of new technologies; manufacturing capabilities; variations in gross margins of the Company's products; competition; the cost, quality and availability of reagents and components; the mix of products sold; changes in government funding; and third-party reimbursement policies. Affymetrix may have to reduce or discount the price of its products to gain market acceptance, which could adversely affect gross margins. The Company's future gross margins, if any, will be dependent on, among other factors, the Company's ability to manufacture the GeneChip system and probe arrays cost-effectively and successfully market its products to pharmaceutical and biotechnology companies, academic research centers and clinical reference laboratories. The amount of future operating losses and time required by the Company to reach profitability are uncertain. The Company's ability to generate significant revenues and become profitable is dependent in large part on the ability of the Company to enter into additional collaborative and supply arrangements and on the ability of the Company and its collaborative partners to successfully manufacture and commercialize products incorporating the Company's technologies. In addition, delays in receipt of any necessary regulatory approvals by the Company or its collaborators, or receipt of approvals by competitors, could adversely affect the successful commercialization of the Company's technologies. In February 2000, the Company completed its acquisition of Genetic MicroSystems, Inc. ("GMS") in a merger that will be accounted for as a pooling of interests. Under the terms of the acquisition, the outstanding shares of GMS common and preferred stock were converted into an aggregate of 969,899 shares of the Company's common stock and the Company assumed all outstanding GMS options and warrants. At the date of consummation, GMS had an aggregate 100,101 options and warrants outstanding. The Company's financial statements will be restated in 2000 to include the accounts and operations of GMS. IMPACT OF YEAR 2000 Prior to January 1, 2000, the Company completed an assessment of Year 2000 compliance of its internal and embedded computer systems, certain third parties suppliers and major customers and undertook certain remediative actions. The Company has not experienced any material Year 2000 problems as a result of operating on and after January 1, 2000. However, there can be no assurance that the Company will not experience problems in the future with the operation of its internal and embedded systems and those of its third party suppliers and customers. Any such problems could result in the Company experiencing a business interruption and being subject to certain litigation, which could have a material adverse impact on the Company's business, results of operations and financial condition. RESULTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1999 AND DECEMBER 31, 1998 PRODUCT REVENUE AND COST OF PRODUCT REVENUE. Product sales increased to $86.1 million in 1999, up from $36.6 million in 1998. The increase primarily resulted from growth in placements of GeneChip systems, sales of GeneChip probe arrays and related products and subscription fees earned under EasyAccess-TM- contracts. Cost of product revenue increased to $35.3 million in 1999, up from $14.9 million in 1998. The increase in cost of product revenue is due to the higher revenue base, increased manufacturing costs from the start-up of the Company's West 34 Sacramento facility and variations in manufacturing capacity and yield. The Company has experienced, and continues to experience, variation in manufacturing capacity and yield of its GeneChip products which has impacted, and may continue to impact, the Company's ability to meet its commitments to deliver certain products to its customers in a timely manner. Difficulty in providing timely delivery of products adversely affects the Company's relationships with its customers, its business, its financial condition and results of operations. Margins have fluctuated, and will continue to fluctuate significantly, as a result of variation in manufacturing yields. In addition, margins will continue to fluctuate as the Company continues development and expansion of its manufacturing capabilities and as the Company incurs costs associated with the expansion of its West Sacramento facility throughout 2000. Margins also fluctuate as a result of changes in the mix of products sold. The Company also sells products in certain foreign countries and thus revenue and margins will fluctuate due to changes in currency exchange rates. RESEARCH REVENUE. Research revenue includes custom probe array design fees, milestones, FTE support and grant funding. Research revenue decreased to $7.9 million for 1999 from $14.5 million for 1998. The decrease is primarily due to timing of certain milestone payments and design fees and lower activity under government grants including grants from the Advanced Technology Program ("ATP") and the National Institutes of Health, National Center for Human Genome Project, which was completed in 1998. The Company expects grant revenues to decline substantially due to the completion of the ATP grant in January 2000. LICENSE FEES AND ROYALTY REVENUES. License fees and royalty revenues increased to $2.8 million in 1999, up from $0.9 million in 1998. The increase was attributed primarily to the signing of additional licensees and the expansion of existing licensing arrangements. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses, which primarily consist of new technology, product and manufacturing process development, increased to $40.5 million for 1999 compared to $36.0 million for 1998. The increase in research and development expenses was attributable primarily to the hiring of additional research and development personnel and associated purchases of research supplies. The Company expects research and development spending to increase over the next several years as product development and core research efforts continue to expand. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased to $48.7 million in 1999 compared to $29.8 million for 1998. The increase in selling, general and administrative expenses resulted primarily from the Company's expansion of commercial activities and significantly increased legal costs arising from ongoing patent litigations. Selling, general and administrative expenses are expected to continue to increase as the Company expands sales, marketing, and technical support functions, increases headcount in management and administrative functions, prosecutes and defends its intellectual property position and defends against claims made by third parties in ongoing litigation. In particular, the Company expects legal costs to increase as on-going patent litigation with Hyseq, Inc., Incyte Pharmaceuticals, Inc./ Synteni, Inc. and Oxford Gene Technology, Ltd. approach their respective trial dates. INTEREST INCOME. Interest income was $6.9 million for 1999 compared to $5.5 million for 1998 due to higher cash investment balances from the sale of common stock and convertible subordinated notes. Interest expense increased to $2.3 million for 1999 compared to $0.1 million for 1998 primarily due to the issuance of convertible subordinated notes. YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997 PRODUCT REVENUE AND COST OF PRODUCT REVENUE. Product sales increased to $36.6 million in 1998, up from $4.8 million in 1997. The increase primarily resulted from growth in placements of GeneChip systems and sales of GeneChip probe arrays and related products. Cost of 35 product revenue increased to $14.9 million in 1998, up from $4.6 million in 1997. The increase in cost of product revenue was due to the cost of selling more GeneChip systems and probe arrays and increased manufacturing costs arising from variations in manufacturing capacity and yield. RESEARCH REVENUE. Research revenue includes custom probe array design fees, milestones, FTE support and grant funding. Research revenue for 1998 and 1997 was approximately $14.5 million and $15.0 million, respectively. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses, which primarily consist of new technology, product and manufacturing process development, increased to $36.0 million for 1998 compared to $28.2 million for 1997. The increase in research and development expenses was attributed to the hiring of additional research and development personnel and associated purchases of research supplies. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased to $29.8 million in 1998 compared to $14.7 million for 1997. The increase in selling, general and administrative expenses resulted primarily from the Company's development of its commercial capabilities and increased legal costs arising from ongoing patent litigation. INTEREST INCOME AND EXPENSES. Interest income was $5.5 million for 1998 compared to $5.2 million for 1997. Interest expense of approximately $0.1 million for both 1998 and 1997 was related to a capital equipment lease in 1998. NET LOSS PER COMMON SHARE. The net loss per common share in 1998 included the impact of $2.3 million of preferred stock dividends paid to Glaxo. LIQUIDITY AND CAPITAL RESOURCES The Company has financed its operations primarily through the sale of equity and debt securities, government grants, collaborative agreements, interest income and product sales. Proceeds raised through the sale of equity and debt securities include net proceeds of $144.6 million from the private placement of convertible subordinated notes issued in September 1999, $32.4 million from the private placement of 1,000,000 shares of common stock in March 1999, $49.9 million from the sales of Series AA Convertible Redeemable Preferred Stock to Glaxo in April 1998, net proceeds of $85.1 million from the Company's initial public offering in June 1996 and aggregate net proceeds of $53.6 million from private placements in August 1995 and September 1993. Net cash used in operating activities was $29.0 million in 1999 compared to $16.7 million in 1998 and $21.4 million in 1997. The cash used for operations was primarily to fund the Company's operating losses. The Company expects net cash used in operating activities to increase in 2000 as the Company continues to expand its operating activities. The Company's investing activities, other than purchases, sales and maturities of available-for-sale securities, consisted of capital expenditures, which totaled $15.5 million in 1999, $16.5 million in 1998 and $16.0 million in 1997. Capital expenditures during 1999 included investments in facilities and production and laboratory equipment. Net cash provided by financing activities was $188.4 million in 1999, $47.6 million in 1998 and $30,000 in 1997. These cash flows from financing activities are primarily the result of the issuance of $150.0 million of convertible subordinated notes in September 1999 and the sale of 1,000,000 shares of common stock in a private placement, net of Preferred Stock dividends of $2.1 million. The convertible subordinated notes bear interest at 5% per annum and mature in 2006. As of December 31, 1999, Affymetrix had cash, cash equivalents, and available-for-sale securities of approximately $225.0 million. In February 2000, the Company sold an additional $225 million of 36 subordinated convertible notes in a private placement. These notes bear interest at 4.75% and mature in 2007. The Company anticipates that its existing capital resources will enable it to maintain currently planned operations and planned capital expenditures through at least the foreseeable future. However, this expectation is based on the Company's current operating plan and capital expenditure plan, which is expected to change, and therefore the Company could require additional funding sooner than anticipated. In addition, the Company expects its capital requirements will remain substantial and may increase over the next several years as it expands its facilities and acquires scientific equipment to support expanded manufacturing and research and development efforts. The Company's long-term capital expenditure requirements will depend on numerous factors, including: the development of commercial scale manufacturing capabilities; its ability to maintain existing collaborative and customer arrangements and establish and maintain new collaborative and customer arrangements; the progress of its research and development programs; initiation or expansion of research programs and collaborations; the costs involved in preparing, filing, prosecuting, defending and enforcing intellectual property rights; the effectiveness of product commercialization activities and arrangements; the purchase of patent licenses; and other factors. The Company has no credit facility or other committed sources of capital. To the extent capital resources are insufficient to meet future capital requirements, the Company will have to raise additional funds to continue the development of its technologies. There can be no assurance that such funds will be available on favorable terms, or at all. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of such securities could result in dilution to the Company's stockholders. If adequate funds are not available, the Company may be required to curtail operations significantly or to obtain funds by entering into collaboration agreements on unattractive terms. The Company's inability to raise capital would have a material adverse effect on the Company's business, financial condition and results of operations. As of December 31, 1999, Affymetrix had federal and state net operating loss carryforwards for income tax purposes of approximately $116.9 million and $6.1 million, respectively, which will expire at various dates beginning in 2000 through 2019, if not utilized. In addition, the Company has federal and state research and development credit carryforwards of approximately $4.6 million and $3.1 million, respectively, which expire at various dates beginning in 2007 through 2019, if not utilized. Utilization of the net operating loss and tax credits may be subject to substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Management believes the effect of such limitations will not result in the expiration of the net operating loss and tax credit carry forward before utilization. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Financial Instruments and for Hedging Activities" ("SFAS 133") which provides a comprehensive and consistent standard for hedging activities. In June 1999, FASB issued Statement of Financial Accounting Standards No. 137 which defers the effective date of SFAS 133 to years beginning after June 15, 2000. The Company does not anticipate SFAS 133 to have an impact on its results of operations or financial condition when adopted. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements" ("SAB 101") which provides guidance related to revenue recognition based on interpretations and practices followed by the SEC. SAB 101 requires companies to report any changes in revenue recognition as a cumulative change in accounting principle at the time of implementation in accordance with APB Opinion No. 20, "Accounting Changes." Such changes, if necessary, are required to be made by June 30, 2000. The Company is currently evaluating SAB 101 to determine whether it would have any material impact on the Company's results of operations. 37 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK INTEREST RATE RISK The Company's exposure to interest rate risk relates primarily to its investment portfolio and its convertible subordinated notes. Fixed rate securities and borrowings may have their fair market value adversely impacted due to fluctuations in interest rates, while floating rate securities may produce less income than expected if interest rates fall and floating rate borrowings may lead to additional interest expense if interest rates increase. Due in part to these factors, the Company's future investment income may fall short of expectations due to changes in interest rates or the Company may suffer losses in principal if forced to sell securities which have declined in market value due to changes in interest rates. The primary objective of the Company's investment activities is to preserve principal while at the same time maximize yields without significantly increasing risk. To achieve this objective, the Company invests its excess cash in debt instruments of the U.S. Government and its agencies and high-quality corporate issuers, and, by policy, restricts its exposure to any single corporate issuer by imposing concentration limits. To minimize the exposure due to adverse shifts in interest rates, the Company maintains investments at an average maturity of generally less than two years. The table below presents the principal amounts and weighted-average interest rates by year of maturity for the Company's investment portfolio:
FAIR VALUE AT DECEMBER 31, (DOLLAR AMOUNTS IN THOUSANDS) 2000 2001 2002 2003 2004 THEREAFTER TOTAL 1999 - ----------------------------- -------- -------- -------- -------- -------- ---------- -------- ------------- ASSETS: Available-for-sale securities................ $155,590 $48,866 $18,090 $-- $-- $ -- $222,546 $221,744 Average interest rate....... 1.7% 5.8% 6.2% LIABILITIES: 5% convertible subordinated notes due 2006............ $ -- $ -- $ -- $-- $-- $150,000 $150,000 $223,350 Average interest rate....... 5%
38 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS AFFYMETRIX, INC.
PAGE NO. -------- Report of Ernst & Young LLP, Independent Auditors........... 40 Balance Sheets.............................................. 41 Statements of Operations.................................... 42 Statements of Stockholders' Equity.......................... 43 Statements of Cash Flows.................................... 44 Notes to Financial Statements............................... 45
39 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS To the Board of Directors and Stockholders Affymetrix, Inc. We have audited the accompanying consolidated balance sheets of Affymetrix, Inc. as of December 31, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Affymetrix, Inc. at December 31, 1999 and 1998, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Ernst & Young LLP Palo Alto, California, February 2, 2000 40 AFFYMETRIX, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 31, -------------------- 1999 1998 --------- -------- ASSETS: Current assets: Cash and cash equivalents................................. $ 11,280 $ 1,301 Available-for-sale securities............................. 213,763 79,267 --------- -------- 225,043 80,568 Accounts receivable, net of allowances for doubtful accounts of $975 in 1999 and $408 in 1998............... 22,203 8,919 Inventories............................................... 11,362 3,276 Prepaid expenses.......................................... 4,105 2,184 --------- -------- Total current assets.................................... 262,713 94,947 Property and equipment: Construction-in-progress.................................. 8,212 9,512 Land...................................................... 1,310 1,310 Equipment and furniture................................... 24,511 16,761 Building and leasehold improvements....................... 22,300 13,213 --------- -------- 56,333 40,796 Less accumulated depreciation and amortization............ (16,459) (9,931) --------- -------- Net property and equipment.............................. 39,874 30,865 Acquired technology rights, net of accumulated amortization of $1,035 in 1999 and $375 in 1998 (Note 3)............... 8,965 9,625 Notes receivable from employees............................. 1,074 991 Other assets................................................ 7,672 -- --------- -------- $ 320,298 $136,428 ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY: Current liabilities: Accounts payable and accrued liabilities.................. $ 28,053 $ 12,791 Deferred revenue.......................................... 5,642 1,517 Current portion of capital lease obligation............... 261 252 --------- -------- Total current liabilities............................... 33,956 14,560 Noncurrent portion of capital lease obligation.............. -- 261 Obligation to Beckman Coulter, Inc.......................... 5,000 5,000 Convertible subordinated notes.............................. 150,000 -- Commitments and contingencies Convertible Redeemable Preferred Stock, $0.01 par value; 5,000,000 shares authorized; no and 1,634,522 Series AA shares issued and outstanding at December 31, 1999 and 1998, respectively........................................ -- 49,857 Stockholders' equity: Common stock, $0.01 par value; 75,000,000 shares authorized; 26,185,064 and 23,017,409 shares issued and outstanding at December 31, 1999 and 1998, respectively............................................ 262 230 Additional paid-in-capital................................ 249,665 159,147 Deferred compensation..................................... (119) (342) Accumulated other comprehensive (loss) income............. (606) 435 Accumulated deficit....................................... (117,860) (92,720) --------- -------- Total stockholders' equity.............................. 131,342 66,750 --------- -------- $ 320,298 $136,428 ========= ========
See Accompanying Notes 41 AFFYMETRIX, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- REVENUE: Product................................................... $ 86,076 $ 36,644 $ 4,789 Research.................................................. 7,932 14,522 14,976 License fees and royalties................................ 2,847 859 -- -------- -------- -------- Total revenue........................................... 96,855 52,025 19,765 -------- -------- -------- COSTS AND EXPENSES: Cost of product revenue................................... 35,333 14,858 4,559 Research and development.................................. 40,527 35,953 28,168 Selling, general and administrative....................... 48,714 29,763 14,697 -------- -------- -------- Total costs and expenses (includes related-party expense of $448, $48 and $52, respectively)................... 124,574 80,574 47,424 -------- -------- -------- Loss from operations........................................ (27,719) (28,549) (27,659) Interest income............................................. 6,904 5,484 5,218 Interest expense............................................ (2,270) (65) (85) -------- -------- -------- Net loss.................................................... (23,085) (23,130) (22,526) Preferred Stock dividends................................... (2,055) (2,321) -- -------- -------- -------- Net loss attributable to Common Stockholders................ $(25,140) $(25,451) $(22,526) ======== ======== ======== Basic and diluted net loss per common share................. $ (1.02) $ (1.11) $ (0.99) ======== ======== ======== Shares used in computing basic and diluted net loss per common share.............................................. 24,623 22,915 22,644 ======== ======== ========
See Accompanying Notes 42 AFFYMETRIX, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ACCUMULATED ADDITIONAL OTHER TOTAL COMMON PAID-IN DEFERRED COMPREHENSIVE ACCUMULATED STOCKHOLDERS' STOCK CAPITAL COMPENSATION INCOME DEFICIT EQUITY --------- ---------- ------------ ------------- ----------- ------------- Balance, December 31, 1996........... $ 158,687 $ -- $(1,460) $ 49 $ (44,743) $112,533 Comprehensive loss: Unrealized loss on available-for-sale securities of $107, net of reclassification adjustments for losses included in net income of $183............ -- -- -- 76 -- 76 Net loss........................... -- -- -- -- (22,526) (22,526) -------- Comprehensive loss................... (22,450) -------- Issuance of common stock upon exercise of stock options.......... 237 -- -- -- -- 237 Amortization of deferred compensation....................... -- -- 716 -- -- 716 --------- -------- ------- ------- --------- -------- Balance, December 31, 1997........... 158,924 -- (744) 125 (67,269) 91,036 --------- -------- ------- ------- --------- -------- Comprehensive loss: Unrealized gain on available-for-sale securities of $627, net of reclassification adjustments for gains included in net loss of $317................. -- -- -- 310 -- 310 Net loss........................... -- -- -- -- (23,130) (23,130) -------- Comprehensive loss................... (22,820) -------- Preferred stock dividends............ -- -- -- -- (2,321) (2,321) Reincorporation in Delaware.......... (158,696) 158,696 -- -- -- -- Issuance of common stock upon exercise of stock options and warrants........................... 2 451 -- -- -- 453 Amortization of deferred compensation....................... -- -- 402 -- -- 402 --------- -------- ------- ------- --------- -------- Balance, December 31, 1998........... 230 159,147 (342) 435 (92,720) 66,750 --------- -------- ------- ------- --------- -------- Comprehensive loss: Unrealized loss on available-for-sale securities of $1,106, net of reclassification adjustments for losses included in net loss of $65............... -- -- -- (1,041) -- (1,041) Net loss........................... -- -- -- -- (23,085) (23,085) -------- Comprehensive loss................... (24,126) -------- Preferred stock dividends............ -- -- -- -- (2,055) (2,055) Issuance of common stock upon exercise of stock options and warrants........................... 9 8,279 -- -- -- 8,288 Sale of common stock in private placement.......................... 10 32,395 -- -- -- 32,405 Conversion of Series AA Redeemable Preferred Stock to common stock.... 13 49,844 -- -- -- 49,857 Amortization of deferred compensation....................... -- -- 223 -- -- 223 --------- -------- ------- ------- --------- -------- Balance, December 31, 1999........... $ 262 $249,665 $ (119) $ (606) $(117,860) $131,342 ========= ======== ======= ======= ========= ========
See Accompanying Notes 43 AFFYMETRIX, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, -------------------------------- 1999 1998 1997 --------- --------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.................................................. $ (23,085) $ (23,130)) $(22,526) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization........................... 6,528 4,765 2,310 Amortization of acquired technology rights.............. 660 375 -- Amortization of investment premiums..................... (1,650) (270) 159 Amortization of deferred compensation................... 223 577 716 Changes in operating assets and liabilities: Accounts receivable................................... (13,284) (2,703) (4,328) Inventories........................................... (8,086) (639) (736) Prepaid expenses...................................... (1,921) (536) (225) Accounts payable and other accrued liabilities........ 15,262 4,062 3,706 Deferred revenue...................................... 4,125 853 268 Other assets.......................................... (7,755) (83) (699) --------- --------- -------- Net cash used in operating activities............... (28,983) (16,729) (21,355) --------- --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures...................................... (15,537) (16,542) (16,001) Payment to Beckman Coulter, Inc. for acquired technology rights.................................................. -- (5,900) -- Proceeds from sale of available-for-sale securities....... 63,064 143,639 98,452 Proceeds from maturities of available-for-sale securities.............................................. -- -- 12,183 Purchases of available-for-sale securities................ (196,951) (155,532) (82,673) --------- --------- -------- Net cash provided by (used in) investing activities........................................ (149,424) (34,335) 11,961 --------- --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of common stock, net............................. 40,693 278 237 Issuance of Redeemable Preferred Stock, net............... -- 49,857 -- Preferred Stock dividends................................. (2,055) (2,321) -- Issuance of convertible subordinated debt................. 150,000 -- -- Principal payments on capital lease obligation............ (252) (228) (207) --------- --------- -------- Net cash provided by financing activities........... 188,386 47,586 30 --------- --------- -------- Net increase (decrease) in cash and cash equivalents....................................... 9,979 (3,478) (9,364) Cash and cash equivalents at beginning of year.............. 1,301 4,779 14,143 --------- --------- -------- Cash and cash equivalents at end of year.................... $ 11,280 $ 1,301 $ 4,779 ========= ========= ======== SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Obligation to Beckman Coulter, Inc. for acquired technology rights....................................... $ -- $ 5,000 $ -- ========= ========= ======== Conversion of Series AA Convertible Redeemable Preferred Stock................................................... $ 49,857 $ -- $ -- ========= ========= ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid............................................. $ 40 $ 65 $ 85 ========= ========= ========
See Accompanying Notes 44 AFFYMETRIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999 NOTE 1--NATURE OF OPERATION Affymetrix, Inc. has developed and intends to establish its GeneChip-Registered Trademark- system as the platform of choice for acquiring, analyzing and managing complex genetic information in order to improve the diagnosis, monitoring and treatment of disease. The Company's GeneChip system consists of disposable DNA probe arrays containing gene sequences on a chip, certain reagents for use with the probe arrays, a scanner and other instruments to process the probe arrays, and software to analyze and manage genetic information. The Company currently sells its products to pharmaceutical and biotechnology companies, academic research centers and clinical reference laboratories primarily in the United States and Europe. The business and operations of the Company were commenced in 1991 by Affymax N.V. ("Affymax") and were initially conducted within Affymax. In March 1992, the Company was incorporated as a California corporation and wholly owned subsidiary of Affymax and in September 1998 was reincorporated as a Delaware corporation. In March 1995, Glaxo plc, now Glaxo Wellcome plc ("Glaxo"), acquired Affymax, including its ownership interest in Affymetrix. Beginning in September 1993, the Company issued equity securities, including an initial public offering in June 1996, which diluted Affymax' and then Glaxo's ownership in Affymetrix. In April 1998, the Company completed the sale of 1,634,522 shares of Series AA Convertible Redeemable Preferred Stock to Glaxo Wellcome Americas, Inc. (a wholly owned subsidiary of Glaxo) for net proceeds of approximately $49.9 million and in August 1999, Glaxo elected to convert the Series AA Convertible Redeemable Preferred Stock to 1,257,229 shares of Affymetrix common stock at a conversion price of $40 per share. As of December 31, 1999, Glaxo's ownership position is approximately 31%. NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The summary of significant accounting policies is presented to assist the reader in understanding and evaluating the financial statements. These policies are in conformity with generally accepted accounting policies. Certain amounts for prior years have been reclassified to conform to the current year presentation. BASIS OF PRESENTATION The consolidated financial statements include the accounts of Affymetrix and its wholly-owned subsidiary, Affymetrix, UK Ltd. All significant intercompany accounts and transactions have been eliminated. USE OF ESTIMATES The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. REVENUE RECOGNITION Product revenues include sales of GeneChip instrumentation, software and probe arrays as well as the associated subscription fees earned under EasyAccess-TM- supply agreements. Instrumentation and probe array revenues are recognized when earned, which is generally upon shipment and transfer of 45 AFFYMETRIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) title to the customer. Software revenue is recognized upon completion of performance obligations, which is generally upon installation. Reserves are provided for anticipated returns and warranty expenses at the time the associated revenue is recognized. Revenue from subscription fees earned under EasyAccess supply agreements is recorded ratably over the term of the agreement subject to adjustments for anticipated reductions provided for in certain agreements for late delivery of probe arrays. Payments received in advance under these arrangements are recorded as deferred revenue until earned. Research revenue includes amounts earned, including milestones, from services performed pursuant to commercial collaboration and supply agreements as well as under government grants. Research revenue is recorded in the period in which the costs are incurred or in which the revenue is earned as defined in the related agreement. Direct costs associated with these contracts and grants are reported as research and development expense. License and royalty revenues include amounts earned from third parties licensed under the Company's intellectual property and are recognized when earned under the terms of the related agreements. RESEARCH AND DEVELOPMENT Research and development expenses consist of costs incurred for internal, contract and grant-sponsored research and development. These costs include direct and research-related overhead expenses. IMPAIRMENT OF LONG-LIVED ASSETS In accordance with the provisions of Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"), the Company reviews long-lived assets, including property and equipment and acquired technology rights for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. Under SFAS 121, an impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. Impairment, if any, is assessed using discounted cash flow. Through December 31, 1999, there have been no such losses. ADVERTISING COSTS The Company expenses advertising costs as incurred. Advertising costs were $0.4 million for 1999 and 1998 and not material for 1997. NET LOSS PER SHARE Basic loss per share is calculated using the weighted average number of common shares outstanding during the period. Diluted loss per share, which gives effect to the dilutive effect of stock options and warrants (calculated based on the treasury stock method), Convertible Redeemable Preferred Stock and convertible debt (calculated on an if-converted method) is the same as basic loss per share because the Company is in a net loss position. 46 AFFYMETRIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Outstanding securities which could potentially dilute basic earnings per share in the future but were excluded from the computation of diluted net loss per share as their effect would have been anti-dilutive were as follows (in thousands):
YEAR ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- Options and warrants................................... 4,007 3,311 3,155 Subordinated convertible notes......................... 1,220 -- -- Convertible Redeemable Preferred Stock................. -- 1,635 --
CASH, CASH EQUIVALENTS AND AVAILABLE-FOR-SALE SECURITIES Cash equivalents and available-for-sale securities consist of debt securities. Management determines the appropriate classification of debt securities at the time of purchase. As of December 31, 1999 and 1998, Affymetrix' investments in debt securities are classified as available-for-sale and are carried at fair value with unrealized gains and losses reported in stockholders' equity. Affymetrix reports all liquid securities with maturities at the date of purchase of three months or less that are readily convertible into cash and have insignificant interest rate risk as cash equivalents. The cost of debt securities is adjusted for amortization of premiums and discounts to maturity. This amortization is included in interest income. Realized gains and losses on available-for-sale securities are included in interest income. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest income. The fair values of securities are based on quoted market prices. COMPREHENSIVE INCOME Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130") requires unrealized gains or losses on the Company's available-for sale securities to be included in other comprehensive income. Total comprehensive income/loss has been disclosed in the consolidated statement of stockholders' equity. FOREIGN CURRENCY TRANSLATION The financial statements of Affymetrix, UK Ltd. are measured using the U.S. dollar as the functional currency. Monetary assets and liabilities of this subsidiary are translated at the rates of exchange at the balance sheet date. Income and expense items are translated at average quarterly rates of exchange. The resultant translation adjustments are included in the consolidated statements of operations. 47 AFFYMETRIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INVENTORIES Inventories are stated at the lower of cost (as determined by the first-in, first-out method) or market and consist of the following at December 31, 1999 and 1998 (in thousands):
1999 1998 -------- -------- Raw materials.............................................. $ 4,484 $1,775 Work in process............................................ 706 70 Finished goods............................................. 6,172 1,431 ------- ------ Total.................................................. $11,362 $3,276 ======= ======
PROPERTY AND EQUIPMENT Property and equipment, including equipment under capital leases, are recorded at cost and are depreciated for financial reporting purposes using the straight-line method over the estimated useful lives of the assets ranging from three to twenty-five years. Leasehold improvements are amortized over the useful lives of the assets or the lease-term, whichever is shorter. STOCK-BASED COMPENSATION As permitted by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), the Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related interpretations, in accounting for its employee and director stock option and stock incentive plan. Under APB 25, if the exercise price of the Company's stock options is not less than the market price of the underlying stock on the date of grant, no compensation expense is recognized. Options granted to non-employees are accounted for using the Black-Scholes method prescribed by SFAS 123 and, in accordance with Emerging Issues Task Force Consensus No. 96-18, the options are subject to periodic re-valuation over their vesting terms. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts payable and accrued liabilities as of December 31, 1999 and 1998, consist of the following (in thousands):
1999 1998 -------- -------- Accounts payable.......................................... $10,696 $ 7,334 Accrued compensation and related liabilities.............. 3,631 1,213 Accrued interest on convertible subordinated notes........ 2,221 -- Accrued sales and use tax................................. 1,143 -- Accrued warranty.......................................... 1,522 937 Accrued legal............................................. 6,067 2,707 Other..................................................... 2,773 600 ------- ------- Total................................................. $28,053 $12,791 ======= =======
48 AFFYMETRIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Financial Instruments and for Hedging Activities" ("SFAS 133") which provides a comprehensive and consistent standard for hedging activities. In June 1999, FASB issued Statement of Financial Accounting Standards No. 137 which defers the effective date of SFAS 133 to years beginning after June 15, 2000. The Company does not anticipate SFAS 133 to have an impact on its results of operations or financial condition when adopted. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements" ("SAB 101") which provides guidance related to revenue recognition based on interpretations and practices followed by the SEC. SAB 101 requires companies to report any changes in revenue recognition as a cumulative change in accounting principle at the time of implementation in accordance with APB Opinion No. 20, "Accounting Changes." Such changes, if necessary, are required to be made by June 30, 2000. The Company is currently evaluating SAB 101 to determine whether it would have any material impact on the Company's results of operations. CONCENTRATIONS OF RISK Cash equivalents and investments are financial instruments that potentially subject Affymetrix to concentrations of risk to the extent of amounts recorded in the consolidated balance sheet. Corporate policy restricts the amount of credit exposure to any one issuer and to any one type of investment, other than securities issued by the United States Government. The Company has not experienced any significant credit losses from its accounts receivable, from grants or from collaborative research agreements, and none are currently expected. Affymetrix performs a regular review of its customer activity and associated credit risks and does not require collateral from its customers. Certain key parts of the GeneChip system, such as the scanner, certain reagent kits and lithographic masks as well as certain raw materials used in the synthesis of probe arrays, are currently available only from a single source or limited sources. No assurance can be given that scanners, reagents, lithographic masks or other components of the GeneChip system will be available in commercial quantities at acceptable costs. If the Company is required to seek alternative sources of supply, it could be time consuming and expensive. In 1998, the Company entered into an agreement with Agilent Technologies, Inc. ("Agilent Technologies") under which Agilent Technologies is required to supply all of the Company's forecasted requirements for scanners until February 2003 and the Company is required to purchase a minimum number of scanners from Agilent Technologies each year during the same period. In addition, the Company is dependent on its vendors to provide components of appropriate quality and reliability and to meet applicable regulatory requirements. Consequently, in the event that supplies from these vendors are delayed or interrupted for any reason, the Company's ability to develop and supply its products could be impaired, which could have a material adverse effect on the Company's business, financial condition and results of operations. 49 AFFYMETRIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 NOTE 3--COLLABORATIVE AGREEMENTS AND GRANTS The Company has agreements with several entities to develop and test probe arrays for the detection of certain gene sequences, mutations or organisms. Under such agreements, the Company may receive a development fee and may receive milestone payments upon achievement of certain technical goals. The Company also has research agreements with several universities and research organizations. The Company generally obtains rights to intellectual property arising from these agreements. If a project is successful, generally the Company and the third-party collaborator would negotiate the right to commercialize products resulting from such project. AMERSHAM PHARMACIA BIOTECH, LTD. ("AMERSHAM PHARMACIA BIOTECH") AND AMERSHAM PHARMACIA BIOTECH, KK ("AMERSHAM PHARMACIA BIOTECH KK") In December 1997, the Company entered into a non-exclusive sales representation agreement with Amersham Pharmacia Biotech, Ltd. ("Amersham Pharmacia Biotech"). Under the agreement, Amersham Pharmacia Biotech's sales representatives solicit orders for Affymetrix' products from prospective customers in the pharmaceutical and biotechnology industries and the academic research community in North America and Western Europe. The Company pays Amersham Pharmacia Biotech transaction processing fees as well as a percentage of product sales up to a maximum annual amount as a sales agency fee. In July and December 1999 the Company terminated its sales representation agreement with Amersham Pharmacia Biotech in North America and Western Europe, respectively. In October 1998, the Company entered into a non-exclusive distribution agreement with Amersham Pharmacia Biotech, KK ("Amersham Pharmacia Biotech KK") for the marketing and sale of the Company's products in Japan. Under this agreement, Amersham Pharmacia Biotech KK purchases GeneChip technology directly from the Company and is responsible for marketing and selling the technology to its customers in Japan. BECKMAN COULTER, INC. ("BECKMAN") In July 1998, the Company entered into a series of agreements with Beckman that gave Beckman licenses to commercialize probe arrays manufactured using certain technologies other than light directed synthesis, and an original equipment manufacturer ("OEM") supply agreement for products that use the Company's GeneChip technology. Beckman will pay Affymetrix transfer prices and royalties on sales of these products as specified in the agreements. The agreements also provided Affymetrix with a path to obtain a license to commercialize DNA arrays under certain patents, including patents covering inventions by Professor Edwin Southern of Oxford University. In June 1999, the Company purchased the array business of Beckman that included a license to the Southern DNA array patents owned by Oxford Gene Technology ("OGT") of Oxford, England. OGT is contesting the transfer of this license (See "Legal Proceedings"). Under the agreements, Affymetrix made a $5.9 million payment to Beckman and agreed to provide an additional $5.0 million in services, cash or stock to Beckman over the next seven years. The payments and obligations to Beckman were accounted for as the purchase of an intangible asset which will be amortized on a straight-line basis over its estimated useful life of 15 years. 50 AFFYMETRIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 NOTE 3--COLLABORATIVE AGREEMENTS AND GRANTS (CONTINUED) BIOMERIEUX VITEK, INC. ("BIOMERIEUX") In September 1996, bioMerieux and Affymetrix entered into a five year collaborative development agreement and associated supply agreement to develop and commercialize DNA probe arrays using the Affymetrix GeneChip technology for clinical diagnostic kits for bacterial identification and antibiotic resistance analysis. The agreement provides for certain research funding, license and milestone payments. bioMerieux is also funding certain research activities at Affymetrix for a minimum of three years. Research revenue under this contract were approximately $0.6 million, $1.2 million and $3.4 million for the years ended December 31, 1999, 1998 and 1997, respectively. The associated research costs incurred approximated revenue for each of the years presented. Additionally, a manufacturing agreement was signed under which Affymetrix will manufacture GeneChip probe arrays for sale to bioMerieux. The agreement provides for royalties to Affymetrix on bioMerieux' sales of GeneChip probe arrays. In December 1997 and January 1998, bioMerieux and the Company expanded their collaboration to include the development of DNA probe arrays using the Affymetrix GeneChip technology for clinical diagnostics tests in the fields of HIV and food and industrial testing. GENETICS INSTITUTE ("GI") In December 1995, Affymetrix and GI entered into a supply agreement in the field of genomics under which Affymetrix manufactures and supplies custom probe arrays based on specific genes identified and selected by GI. Pursuant to the agreement, GI is obligated to purchase and Affymetrix is obligated to supply certain minimum quantities of custom probe arrays developed for GI until the later of 2001 or four years after development of specified probe arrays. Affymetrix receives fees for the design and delivery of the custom probe arrays, and may receive milestone payments and royalties on any therapeutic compounds developed by GI using these probe arrays. GI has exclusive rights to specific probe arrays supplied by Affymetrix. In January 1998, the Company and GI entered into a three-year EasyAccess supply agreement under which the Company will supply GI with custom and standard probe arrays and related technical support on preferential terms in return for expected annual subscription fees, custom design fees and revenue from the sale of probe arrays. In February 1998, this EasyAccess agreement was expanded to include GI's parent, American Home Products, Inc. F. HOFFMANN-LA ROCHE LTD. ("ROCHE") In August 1997, the Company and Roche entered into a three-year EasyAccess supply agreement under which the Company will supply Roche with custom and standard probe arrays and related technical support on preferential terms in return for annual subscription fees, custom design fees and revenue from the sale of probe arrays. Prior to the 1997 agreement, the Company had entered into two agreements with Roche. In October 1996, the Company signed a demonstration agreement with Roche for the development and supply of a single custom probe array containing bacterial genes. In December 1996, the Company signed a pilot agreement with Roche Bioscience, a division of Syntex (U.S.A.) Inc., for the development and supply of a single custom probe array containing human, rat and mouse genes. The milestones of these agreements were met and the agreements have been concluded. 51 AFFYMETRIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 NOTE 3--COLLABORATIVE AGREEMENTS AND GRANTS (CONTINUED) In February 1998, the Company entered into collaboration with Roche Molecular Systems, Inc., a subsidiary of Roche, for the development of diagnostic products utilizing the Company's array technology. Under the terms of the agreement, the Company and Roche will co-develop mutually agreed upon products, Affymetrix will manufacture arrays for use in the products and Roche will market and sell the products. Under the terms of the agreement Roche and the Company are funding their respective work efforts as mutually agreed and will share revenues and profits based on specified terms in the agreement. ORCHID BIOSCIENCES, INC. ("ORCHID") In December 1999, Affymetrix and Orchid entered into an agreement to develop and commercialize single nucleotide polymorphism (SNP) genotyping assays that combine Orchid's proprietary GBA-Registered Trademark- primer extension technology with Affymetrix' new GenFlex-Registered Trademark- Tag array product offering from Arrymetrix. The first products to be commercialized by the alliance will include reagent kits for use with Affymetrix' GenFlex Tag array designed to perform thousands of user-defined SNP analyses. Orchid will develop and manufacture GBA primer extension reagent kits that are directed to defined sets of SNPs and that can be customized by the end user. Affymetrix will develop and manufacture the GenFlex Tag arrays. Affymetrix will distribute and provide marketing, sales and technical support for the standard and universal genotyping assays. Orchid will manufacture, supply and support custom kits for use on GenFlex Tag arrays developed and sold by Affymetrix. As part of the agreement, Affymetrix received a promissory note from Orchid in the principal amount of $2.5 million, which is convertible, under certain circumstances, into Orchid Series E Convertible Preferred Stock, par value $.001 per share. As of December 31, 1999, the transaction was accounted for as a short-term note receivable. In January 2000, the promissory note was converted into shares of Orchid Preferred Stock and Affymetrix purchased an additional $2.5 million of Series E Convertible Preferred Stock of Orchid. GOVERNMENT GRANT In October 1994, Affymetrix and Molecular Dynamics, Inc. ("Molecular Dynamics") were awarded a five-year matching grant for a total of $31.5 million under the Advanced Technology Program ("ATP") within the National Institute of Standards and Technology to develop a miniaturized DNA diagnostic device, of which approximately $10.7 million is available to Molecular Dynamics. Under the contract Affymetrix receives matching funding up to $20.8 million, some of which is used to fund activities at collaborating academic institutions and commercial partners. Affymetrix is to receive payments monthly based on costs incurred and has recognized revenue of $17.4 million through December 31, 1999. The ATP grant expired in January 2000 and is subject to audit by the granting authorities. 52 AFFYMETRIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 NOTE 4--AVAILABLE-FOR-SALE SECURITIES The following is a summary of available-for-sale securities as of December 31, 1999 (in thousands):
GROSS UNREALIZED GROSS UNREALIZED COST GAINS LOSSES FAIR VALUE -------- ---------------- ---------------- ---------- U.S. Government obligations and U.S. Government agency securities............. $ 28,049 $ -- $(252) $ 27,798 U.S. Corporate securities.................. 194,300 24 (378) 193,946 -------- --------- ----- -------- Total securities..................... $222,349 $ 24 $(630) $221,744 ======== ========= ===== ======== Amounts included in: Cash equivalents....................... $ 7,976 $ 4 $ -- $ 7,980 Available-for-sale securities.......... 214,373 20 (630) 213,763 -------- --------- ----- -------- $222,349 $ 24 $(630) $221,744 ======== ========= ===== ========
The following is a summary of available-for-sale securities as of December 31, 1998 (in thousands):
GROSS UNREALIZED GROSS UNREALIZED COST GAINS LOSSES FAIR VALUE -------- ---------------- ---------------- ---------- U.S. Government obligations and U.S. Government agency securities.............. $45,321 $324 $ (2) $45,643 U.S. Corporate securities................... 33,511 127 (14) 33,624 ------- ---- ---- ------- Total securities........................ $78,832 $451 $(16) $79,267 ======= ==== ==== ======= Amounts included in: Short-term investments.................. $78,832 $451 $(16) $79,267 ======= ==== ==== =======
The realized gains and losses on sales of available-for-sale securities were immaterial for the years ended December 31, 1999, 1998, and 1997. The following is a summary of the cost and estimated fair value of available-for-sale securities at December 31, 1999 and 1998, by contractual maturity (in thousands):
1999 1998 ---------------------- ---------------------- AMORTIZED AMORTIZED COST FAIR VALUE COST FAIR VALUE --------- ---------- --------- ---------- Mature in one year or less........................... $154,616 $154,444 $15,949 $16,037 Mature in one to three years......................... 67,733 67,300 62,883 63,230 -------- -------- ------- ------- Total............................................ $222,349 $221,744 $78,832 $79,267 ======== ======== ======= =======
53 AFFYMETRIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 NOTE 5--RELATED PARTY TRANSACTIONS GLAXO As mentioned in Note 1, Glaxo has a significant ownership interest in the Company. Pursuant to a Governance Agreement, Glaxo is entitled to appoint a specified number of directors to the Board of the Company depending on its ownership position. The Company has entered into research and supply agreements with Glaxo, resulting in revenue of $0.1 million in 1999, $0.5 million in 1998 and $1.7 million in 1997. In 1999, two Glaxo employees served as members of the Company's Board of Directors. EOS BIOTECHNOLOGY, INC. ("EOS") In April 1998, the Company entered into a series of agreements with Eos under which Eos became an EasyAccess supply customer of the Company. In return for granting Eos access to certain technology and licenses, the Company received 3,750,000 shares of Series C Preferred Stock and the right to name one director of Eos. In September 1999, the Company purchased an additional 76,923 shares of Series D Preferred Stock for approximately $0.1 million (at December 31, 1999, Affymetrix owns approximately 9% of EOS' outstanding equity). The shares received were recorded at zero value as Eos is a development stage entity and realization of this investment is uncertain. The shares are subject to repurchase by Eos in the event the Company does not fulfill its obligations under the EasyAccess supply agreement. For the years ended December 31, 1999 and 1998, the Company earned revenue of $0.3 million and $0.6 million, respectively, from EOS under the EasyAccess supply agreement. NOTE 6--COMMITMENTS AND CONTINGENCIES CAPITAL LEASE In December 1994, Affymetrix entered into a financing arrangement with a leasing company for existing equipment. Under the terms of the lease, Affymetrix received a single payment of $1.3 million at the inception of the lease. The leaseback contract includes a five-year term expiring January 2, 2000, with an option to purchase the equipment at the greater of the residual value or fair market value. Under certain provisions, the lease may be extended for an additional year. The amount included in property and equipment related to the lease is $1.2 million and was fully depreciated as of December 31, 1996. OPERATING LEASES Affymetrix leases laboratory, office and manufacturing facilities, and equipment under noncancelable operating leases which expire at various times through 2004. Rent expense related to operating leases was approximately $2.2 million in 1999, $1.7 million in 1998 and $1.4 million in 1997. 54 AFFYMETRIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 NOTE 6--COMMITMENTS AND CONTINGENCIES (CONTINUED) Future minimum lease obligations at December 31, 1999 under all leases are as follows (in thousands):
CAPITAL OPERATING LEASES LEASES -------- --------- 2000....................................................... $ 280 $ 3,330 2001....................................................... -- 3,316 2002....................................................... -- 3,371 2003....................................................... -- 2,271 2004....................................................... -- 1,121 ----- ------- Total minimum lease payments............................... 280 $13,409 ======= Less amount representing interest.......................... (19) ===== Present value of minimum lease payments.................... 261 Less current portion....................................... (261) ===== Noncurrent obligation under capital lease.................. $ -- =====
LITIGATION Affymetrix is a party to significant litigation, which will consume substantial financial and managerial resources and which could adversely affect its business, financial condition and results of operations. Further, because of the substantial amount of discovery required in connection with any such litigation, there is a risk that confidential information could be compromised by disclosure. On March 3, 1997, Hyseq, Inc. ("Hyseq") filed a lawsuit in United States District Court for the Northern District of California (San Jose Division) alleging that Affymetrix' products infringe United States Patents 5,202,231, or '231, and 5,525,464 or '464. In addition, in December 1997, Hyseq filed a second action claiming that Affymetrix' products infringe a related patent, United States Patent 5,695,940, '940. On August 18, 1998, Affymetrix filed a lawsuit in United States District Court for the Northern District of California (San Francisco Division) against Hyseq alleging infringement of U.S. Patent Nos. 5,795,716, or '716, and 5,744,305, or '305. On September 1, 1998, Affymetrix added its U.S. Patent No. 5,800,992, or '992, to the complaint of infringement against Hyseq. On October 26, 1999, Hyseq filed a third action in United States District Court for the Northern District of California (San Francisco Division) claiming that Affymetrix' products infringe a related patent, United States Patent 5,972,619, or '619. The action also requests a declaration that the '716 Patent is invalid based on the '619 Patent. On November 23, 1998, Hyseq filed an answer to Affymetrix' complaint, alleging that Affymetrix' three asserted patents are invalid. On October 26, 1999, the United States District Court for the Northern District of California issued a Claims Construction Order interpreting various terms of the '231, '464, and '940 Patents. On June 4, 1999, Oxford Gene Technology, Ltd. ("OGT") filed suit against Affymetrix in the United States District Court for the District of Delaware and in the United Kingdom alleging infringement of United States Patent 5,700,637 and European Patent 0-373-203, respectively. On June 4, 1999, an asset transfer agreement with Beckman became effective, giving Affymetrix access to 55 AFFYMETRIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 NOTE 6--COMMITMENTS AND CONTINGENCIES (CONTINUED) Beckman's microarray business, including licenses to United States Patent 5,700,637 and European Patent 0-373-203. On June 17, 1999, Affymetrix filed a complaint in the United States District Court for the Northern District of California asking for, among other things, a declaration that Affymetrix has a valid license to use the patents and that, in light of this license, Affymetrix is not infringing on these patents. This case has been consolidated with the Delaware action. In the UK action, Affymetrix has counterclaimed for revocation of this patent and OGT has applied to amend the patent. The patent infringement issues have been stayed pending resolution of whether Affymetrix and Affymetrix UK Limited have a license under the patent as a result of the purchase of Beckman's microarray business. In February, 2000, the High Court of Justice, Chancery Division, Patent Court held a hearing on the issue of whether Affymetrix UK had a valid license. A decision on this hearing is anticipated shortly. In addition, in February 2000, OGT asserted that Affymetrix and Beckman were in breach of this license. The Hyseq and the OGT actions seek damages based on the sale of Affymetrix' products and processes and seek to enjoin commercial activities relating to those products and processes. In addition to subjecting Affymetrix to potential liability for damages, these actions, and any other similar legal actions against Affymetrix or its collaborative partners, could require Affymetrix or its collaborative partners to obtain a license in order to continue to manufacture, market or use the affected products and processes. While Affymetrix believes that the Hyseq and OGT complaints are without merit, Affymetrix may not prevail in these actions and Affymetrix or its collaborative partners may not prevail in any other related action. Moreover, in the event Affymetrix does not prevail in the Hyseq and OGT actions and Affymetrix, its partners or its customers are required to obtain a license to continue to manufacture, market or use the affected products and processes, Affymetrix, its partners or its customers may not be able to obtain such a license on commercially acceptable terms, if at all. Furthermore, Affymetrix has expended and is likely to continue to expend substantial financial and managerial resources in defending against the claims filed by Hyseq and OGT. On January 6, 1998, Affymetrix filed a patent infringement action in the United States District Court for the District of Delaware (No. 98-6) alleging that certain of Incyte Pharmaceuticals, Inc.'s ("Incyte") and Synteni, Inc.'s ("Synteni") products infringe United States Patent 5,445,934, or '934. On September 1, 1998, Affymetrix filed a complaint against Incyte and Synteni in Federal District Court in Delaware alleging infringement of the '305 Patent and the '992 Patent. These actions were transferred to the United States District Court for the Northern District of California on November 18, 1998, as case numbers C98-4507 and C98-4508, respectively. The actions seek to enjoin commercial activities of Incyte and Synteni relating to Affymetrix' patents and, in regard to the '992 Patent, sought a preliminary injunction. Incyte and Synteni moved for summary judgment that certain claims of the '992 Patent were invalid. On May 4, 1999, the Court denied Affymetrix' motion for preliminary injunction and denied Incyte/Synteni's motion for summary judgment. In the High Court of Justice, Chancery Division, Patents Court, OGT has applied in the United Kingdom to revoke Affymetrix' EP (UK) 0-619-321 Patent (related to certain DNA arrays). This revocation action also includes an application to revoke Affymetrix's related United Kingdom Patent GB 2248840. Revocation and infringement actions typically are resolved in the first instance in about twelve to eighteen months. The underlying patents can be declared valid, invalid, or partially valid, often with claim amendments submitted during the course of the proceedings. 56 AFFYMETRIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 NOTE 6--COMMITMENTS AND CONTINGENCIES (CONTINUED) Affymetrix may not prevail in asserting its patent rights against Hyseq, Incyte, Synteni or others. Affymetrix has expended and is likely to continue to expend substantial financial and managerial resources in asserting its patent rights against Hyseq, Incyte, Synteni and others. Affymetrix' failure to successfully enforce its patent rights or the loss of these patent rights or others would remove a legal obstacle to competitors in designing probe array systems with similar competitive advantages to Affymetrix' GeneChip technology. The removal of such barriers could have a material adverse effect on Affymetrix' business, financial condition and results of operations. On April 17, 1998, Incyte filed a response and counterclaim to case number C98-4507, asserting that the '934 Patent is invalid and not infringed. On April 17, 1998, Incyte also filed a counterclaim alleging that a patent license agreement Affymetrix entered into in December 1997 with Molecular Dynamics interfered with an agreement between Incyte and Molecular Dynamics. In the counterclaim, Incyte alleges that the terms of Affymetrix' patent license to Molecular Dynamics prevented Molecular Dynamics from meeting its obligations to Incyte. Incyte seeks damages from Affymetrix. On September 21, 1998, Incyte and Synteni filed an answer asserting various defenses to the lawsuits in relation to the '992 Patent and the '305 Patent, and asserted several counterclaims, including: - a request for declaration of non-infringement and invalidity; - an assertion of unfair competition; - a request for a declaration that Synteni and Dari Shalon (a one-time employee of Synteni) have not misappropriated any of Affymetrix' trade secrets; - a claim of tortious interference with Incyte's and Synteni's economic advantage; and - a claim of slander of title of a patent and a claim of trade libel. Affymetrix believes that the counterclaims are without merit. However, Affymetrix has expended and is likely to continue to expend significant financial and managerial resources defending against these and any other counterclaims filed by Incyte and Synteni and others. Affymetrix' failure to successfully enforce its patent rights or defend against counterclaims of Incyte, Synteni, or others could result in a material adverse effect on Affymetrix' business, financial condition and results of operations. The United States Patent and Trademark Office, or USPTO, notified Affymetrix that Stanford University presented claims that relate to substantially the same subject matter as certain claims from the '992 Patent and all of the claims of the '305 Patent. The Stanford application is alleged to be exclusively licensed to Incyte. The USPTO notified Affymetrix on April 2, 1999 that it had declared an interference proceeding relating to these patents and claims of patents. The USPTO conducted proceedings to determine the priority of these claims and determined that Incyte/Synteni did not meet the burden of proof required to establish a case that the claims should be further evaluated in a full interference proceeding. Incyte/Synteni has appealed this decision. In United States District Court for the Northern District of California (case number C99-2111). Affymetrix has expended, and expects in the future to continue to expend, substantial financial and managerial resources as a result of these proceedings. Moreover, Affymetrix may not prevail in such proceedings or in similar proceedings relating to those or other patents. Affymetrix may not prevail in the appeal of the Incyte/Synteni interference proceedings. A failure to prevail could result in Affymetrix' inability to commercialize its products and also would enable others to copy aspects of Affymetrix' products. 57 AFFYMETRIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 NOTE 6--COMMITMENTS AND CONTINGENCIES (CONTINUED) Affymetrix' intellectual property outside of the United States is expected to be subject to significant additional administrative and litigation actions. For example, in Europe and Japan, third parties are expected to oppose significant patents owned or controlled by Affymetrix. Currently, OGT, Incyte, Multilyte Ltd. and ProtoGene Laboratories, Inc. filed oppositions against Affymetrix' EP 0-619-321 Patent in the European Patent Office. This procedure will result in the patent being either upheld in its entirety, allowed to grant in amended form in designated European countries, or revoked. Affymetrix expects in the future to expend substantial financial and managerial resources as a result of these proceedings. A failure to prevail could result in an inability to commercialize its products and also would enable others to copy aspects of its products. NOTE 7--CONVERTIBLE SUBORDINATED NOTES On September 22, 1999, the Company completed the sale of $150 million principal amount of 5% convertible subordinated notes due 2006 (the "5% Notes"). The 5% Notes mature on October 1, 2006 and bear interest at a rate of 5% per annum, which is payable semi-annually on April 1 and October 1. The 5% Notes are convertible, at any time prior to maturity or redemption, into shares of the Company's common stock at a conversion price of $123.00 per share, subject to adjustment. The Company can redeem some or all of the 5% Notes at any time after October 7, 2002, and the debt holder has a right to require the Company to purchase all or a portion of the 5% Notes upon a change in control. The 5% Notes are subordinated to all of the Company's existing and future senior indebtedness. The fair value of the 5% Notes at December 31, 1999 was $223.3 million, based on the market value in the PORTAL market where the 5% Notes are traded. NOTE 8--CONVERTIBLE REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY SALE OF COMMON STOCK On March 15, 1999, the Company completed the private placement of 1,000,000 shares of common stock for an aggregate purchase price of $32.5 million to the Growth Fund of America, Inc., which is managed by Capital Research and Management Company. The Company filed a registration statement with respect to these shares on July 12, 1999. CONVERTIBLE REDEEMABLE PREFERRED STOCK On August 5, 1999, Glaxo elected to convert its 1,634,522 shares of Series AA Convertible Redeemable Preferred Stock purchased in April 1998 into 1,257,229 shares of Affymetrix common stock at the original conversion price of approximately $40 per share. COMMON STOCK WARRANTS During 1999, outstanding warrants to purchase 203,881 shares of common stock at $8.25 per share and 12,542 shares at $25.00 per share were exercised in full. At December 31, 1999, the Company had no warrants outstanding. 58 AFFYMETRIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 NOTE 8--CONVERTIBLE REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (CONTINUED) STOCKHOLDER RIGHTS PLAN On October 15, 1998, the Board of Directors of the Company declared a dividend of (i) one preferred share purchase right (a "Right") for each outstanding share of common stock of the Company, and (ii) a number of Rights for each share of Series AA Preferred Stock of the Company equal to the number of shares of common stock into which such share of Series AA Preferred Stock was convertible. The dividend is payable on October 27, 1998 (the "Record Date") to the stockholders of record on that date. Each Right entitles the registered holder to purchase from the Company one one-thousandth of a share of Series B Junior Participating Preferred Stock, par value $.01 per share, of the Company (the "Series B Preferred Stock") at a price of $125.00 per one one-thousandth of a share of Series B Preferred Stock, subject to adjustment. The Rights will be exercisable if a person or group hereafter acquires beneficial ownership of 15% or more of the common stock of the Company or announces a tender offer for 15% or more of the common stock. The Board of Directors will be entitled to redeem the Rights at one cent per Right at any time before any such person hereafter acquires beneficial ownership of 15% or more of the outstanding common stock. If a person or group hereafter acquires 15% or more of the outstanding common stock of the Company, each Right will entitle its holder to purchase, at the Right's exercise price, a number of shares of common stock having a market value at that time of twice the Right's exercise price. Rights held by the 15% holder will become void and will not be exercisable to purchase shares at the bargain purchase price. If the Company is acquired in a merger or other business combination transaction after a person acquires 15% or more of the Company's common stock, each Right will entitle its holder to purchase, at the Right's then-current exercise price, a number of the acquiring company's common shares having a market value at that time of twice the Right's exercise price. Glaxo, which currently owns in excess of 15% of the aggregate voting power of the common stock will not become an "Acquiring Person" until it acquires beneficial ownership of additional shares of common stock. The Rights will expire in ten years. In February 2000, this plan was amended (See "Subsequent Events"). STOCK OPTION AND BENEFIT PLANS In 1993, the Board adopted the Affymetrix 1993 Stock Plan (the "Stock Plan") under which incentive stock options, nonqualified stock options and purchase rights may be granted to employees and outside consultants. Options granted under the Stock Plan expire no later than ten years from the date of grant. The option price shall be at least 100% of the fair value on the date of grant (110% in certain circumstances), as determined by the Board of Directors. Options may be granted with different vesting terms from time to time but not to exceed five years from the date of grant. As of December 31, 1999, a total of 5,200,000 shares of common stock have been reserved for issuance under the Stock Plan and no shares were subject to repurchase by the Company. In March 1996, the Board adopted the 1996 Nonemployee Directors Stock Option Plan (the "Directors Plan"). There are 300,000 shares of common stock reserved for issuance under the Directors Plan. Only nonemployee directors of the Company are eligible to participate in the Directors Plan and only nonstatutory stock options can be granted. 59 AFFYMETRIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 NOTE 8--CONVERTIBLE REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (CONTINUED) On September 29, 1998, the Board of Directors of the Company adopted a Stock Incentive Plan for employees by providing for awards in the form of restricted shares or nonqualified stock options. The aggregate number of options and restricted shares shall not exceed 1,000,000. Activity under the stock plans through December 31, 1999 is as follows:
OUTSTANDING OPTIONS ---------------------------- WEIGHTED NUMBER OF AVERAGE EXERCISE SHARES PRICE PER SHARE --------- ---------------- Balance at December 31, 1996....................... 2,231,943 $ 0.60 Options granted.................................. 1,000,000 29.40 Options exercised................................ (253,074) 0.93 Options canceled................................. (27,560) 8.58 --------- Balance at December 31, 1997....................... 2,951,309 11.26 --------- Options granted.................................. 892,900 26.34 Options exercised................................ (230,464) 1.21 Options canceled................................. (510,158) 28.07 --------- Balance at December 31, 1998....................... 3,103,587 13.58 --------- Options granted.................................. 1,784,750 49.09 Options exercised................................ (699,330) 9.45 Options canceled................................. (181,594) 23.01 --------- Balance at December 31, 1999....................... 4,007,413 $29.68 =========
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ---------------------------------------------- -------------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE REMAINING AVERAGE AVERAGE RANGE OF CONTRACTUAL LIFE EXERCISE PRICE EXERCISE PRICE EXERCISE PRICES NUMBER (IN YEARS) PER SHARE NUMBER PER SHARE - -------------------- --------- ----------------- -------------- --------- -------------- $0.30 - 0.67...... 996,909 5.59 $ 0.64 747,136 $ 0.63 4.80 - 25.37...... 674,471 7.85 21.94 117,593 19.91 25.66 - 35.87...... 954,783 8.16 30.06 140,091 29.97 36.01 - 48.87...... 1,155,750 9.46 47.55 -- -- 49.44 - 79.50...... 72,750 9.54 64.77 -- -- 82.00 - 187.37...... 152,750 9.80 99.12 -- -- --------- --------- 4,007,413 7.93 $29.68 1,004,820 $ 6.98 ========= =========
For options granted through June 6, 1996, Affymetrix recognized an aggregate of $3.2 million as deferred compensation for the excess of the deemed fair value for financial statement presentation purposes of the common stock issuable on exercise of such options over the exercise price. The deferred compensation expense is being recognized over the vesting period of the options. 60 AFFYMETRIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 NOTE 8--CONVERTIBLE REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (CONTINUED) In accordance with the provisions of SFAS 123, the Company is disclosing pro forma information regarding net loss and net loss per share as if the Company had accounted for its stock based compensation plans under the fair value method of SFAS 123. The fair value of options was estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions for 1999, 1998 and 1997: risk free interest rate of 6.5%, 4.7% and 5.4%, respectively; a dividend yield of zero; volatility factors of the market price of the Company's common stock price of 0.58, 0.54 and 0.55, respectively; and a weighted average expected option term of one year from vested date. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. Based on this calculation, the weighted average fair value of options granted during 1999, 1998 and 1997 was $23.62, $11.22 and $14.01, respectively. For purposes of pro forma disclosures the estimated fair value of the options in excess of the expense recognized in conjunction with the amortization of deferred compensation is amortized to expense over the options' vesting period, generally five years. The Company's pro forma information as of December 31, 1999, 1998 and 1997 is as follows (in thousands except per share amounts):
1999 1998 1997 -------- -------- -------- Pro forma net loss attributable to Common Stockholders................................. $(39,069) $(29,471) $(26,515) Pro forma basic and diluted net loss per common share........................................ $ (1.59) $ (1.29) $ (1.17)
The pro forma information above is not representative of the effects on potential pro forma effects on results for future years. RESERVED SHARES At December 31, 1999, shares reserved for future issuance are as follows: Stock option plans: Options outstanding....................................... 4,007,413 Options available for future grants....................... 623,493 Convertible subordinated notes............................ 1,219,515 --------- 5,850,421 =========
61 AFFYMETRIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 NOTE 9--INCOME TAXES Due to operating losses and the Company's inability to recognize an income tax benefit from these losses, there is no provision for income taxes for 1999, 1998 and 1997. The difference between the provision for income taxes and the amount computed by applying the Federal statuory income tax rate (35%) to income before taxes is explained as follows (in thousands):
YEAR ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- Tax at Federal statutory rate............................... $(8,080) $(8,095) $(7,884) Loss for which no tax benefit is currently recognizable..... 8,080 8,095 7,884 ------- ------- ------- Total provision............................................. $ -- $ -- $ -- ======= ======= =======
Significant components of the Company's deferred tax assets as of December 31, 1999 and 1998 are as follows (in thousands):
1999 1998 -------- -------- Deferred tax assets: Net operating loss carryforwards...................... $ 40,100 $ 26,500 Tax credit carryforwards.............................. 7,100 3,000 Capitalized research and development.................. 4,300 2,400 Deferred revenue...................................... 2,700 1,000 Other-net............................................. 5,500 3,100 -------- -------- Total deferred tax assets............................... 59,700 36,000 Valuation allowance for deferred tax assets............. (59,700) (36,000) -------- -------- Net deferred tax assets................................. $ -- $ -- ======== ========
SFAS No. 109, "Accounting for Income Taxes," provides for the recognition of deferred tax assets if realization of such assets is more likely than not. Based upon the weight of available evidence, which includes the Company's historical operating performance and the reported cumulative net losses in all prior years, the Company has provided a full valuation allowance against its net deferred tax assets. The valuation allowance increased by $23.7 million, $10.3 million and $11.0 million during 1999, 1998 and 1997, respectively. Included in the valuation allowance balance is $15.3 million related to the exercise of stock options, which are not reflected as an expense for financial reporting purposes. Accordingly, any future reduction in the valuation allowance relating to this amount will be credited directly to equity and not reflected as an income tax benefit in the statement of operations. As of December 31, 1999, the Company has federal and state net operating loss carryforwards of approximately $116.9 million and $6.1 million, respectively, which will expire at various dates beginning in 2000 through 2019, if not utilized. In addition, the Company has federal and state research and development credit carryforwards of approximately $4.6 million and $3.1 million, respectively, which expire at various dates beginning in 2007 through 2019, if not utilized. Utilization of the net operating loss and tax credits may be subject to substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar provisions. Management believes the 62 AFFYMETRIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 NOTE 9--INCOME TAXES (CONTINUED) effect of such limitations will not result in the expiration of the net operating loss and tax credit carry forwards before utilization. NOTE 10--GEOGRAPHIC SALES AND SIGNIFICANT CUSTOMERS The Company has determined that, in accordance with Statement of Financial Accounting Standards No. 133, it operates in one segment as it only reports profit and loss information on an aggregate basis to chief operating decision makers of the Company. The Company had product sales by region as follows for the years ended December 31, 1999, 1998 and 1997 (in thousands):
1999 1998 1997 -------- -------- -------- Customer location: United States............................................. $56,933 $27,049 $4,710 Europe.................................................... 20,503 7,649 79 Other..................................................... 8,640 1,946 -- ------- ------- ------ Total..................................................... $86,076 $36,644 $4,789 ======= ======= ======
Revenue from customers representing 10% or more of total revenue during 1999, 1998 and 1997 is as follows:
1999 1998 1997 -------- -------- -------- CUSTOMER: A........................................................ -- -- 23% B........................................................ 10% 16% 10% C........................................................ -- -- 17% D........................................................ -- -- 17% E........................................................ 12% 20% --
NOTE 11--401(K) PLAN The Company maintains a defined-contribution savings plan under Section 401(k) of the Internal Revenue Code. The plan covers substantially all full-time U.S. employees. Participating employees may defer a portion of their pretax earnings, up to the Internal Revenue Service annual contribution limit. Beginning in 1998, the Company matched employee contributions according to a specified formula. The Company's matching contributions totaled $0.9 million in 1999, $0.6 million in 1998 and none in 1997. Company contributions vest to employees ratably over five years. NOTE 12--SUBSEQUENT EVENTS (UNAUDITED) STOCKHOLDER RIGHTS PLAN In February 2000, the Company's Board of the Directors approved an amendment to its to stockholder rights plan initially adopted in 1998. The amendment increases the exercise price of the Preferred Share Purchase Rights to $1,250.00 and extends the expiration date of the plan to February 2010. Under the amended plan, each Preferred Share Purchase Right entitles stockholders to 63 AFFYMETRIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 NOTE 12--SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED) buy one one-thousandth of a share of Series B Junior Participating Preferred Stock of the Company at the new exercise price of $1,250.00. The Rights will be exercisable if a person or group acquires beneficial ownership of 15% or more of the common stock of the Company or announces a tender offer for 15% or more of the common stock. CONVERTIBLE SUBORDINATED NOTES In February 2000, the Company completed the sale of $225 million principal amount of 4.75% convertible subordinated notes due 2007 (the "4.75% Notes"). The 4.75% Notes mature on February 15, 2007 and bear interest at a rate of 4.75% per annum, which is payable semi-annually. The 4.75% Notes are convertible, at any time prior to maturity or redemption, into shares of the Company's common stock at a conversion price of $321.00 per share, subject to adjustment. The Company can redeem some or all of the 4.75% Notes at any time after February 20, 2003 and the debt holder has a right to require the Company to purchase all or a portion of the 4.75% Notes upon a change in control. The 4.75% Notes are subordinated to all of the Company existing and future senior indebtedness. GENETIC MICROSYSTEMS, INC. ("GMS") In February 2000, Affymetrix completed its merger with GMS, a privately-held instrumentation company specializing in DNA array technology in Woburn, Massachusetts. Under the terms of the merger, all outstanding shares of GMS common and preferred stock were converted into 969,899 shares of the Company's common stock at an exchange ratio of 0.2815 Affymetrix share for each GMS share. In addition, Affymetrix assumed all outstanding GMS options and warrants. At the date of consummation, GMS had an aggregate of 100,101 options and warrants outstanding. The merger is expected to be accounted for as a pooling of interest, and, accordingly, the Company's financial statements and financial data will be restated in 2000 to include the accounts and operations of GMS since inception. The following unaudited pro forma data summarizes the combined results of the Company and GMS as though the merger had occurred at the beginning of each period presented:
YEAR ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Revenues.................................................... $108,947 $ 52,413 $ 19,765 Net loss.................................................... (25,504) (22,780) (26,800) Basic and diluted net loss per common share................. $ (1.15) $ (1.01) $ (1.24)
64 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Incorporated by reference to the sections of the Company's proxy statement for the 2000 Annual Meeting of Stockholders entitled "Election of Directors." ITEM 11. EXECUTIVE COMPENSATION Incorporated by reference to the sections of the Company's proxy statement for the 2000 Annual Meeting of Stockholders entitled "Executive Compensation," "Compensation Committee Report," "Certain Transactions" and "Compensation of Directors." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated by reference to the section of the Company's proxy statement for the 2000 Annual Meeting of Stockholders entitled "Stock Ownership of Principal Shareholders and Management." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated by reference to the section of the Company's proxy statement for the 2000 Annual Meeting of Shareholders entitled "Certain Transactions." 65 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) Financial Statements-See Index to Financial Statements and Financial Statement Schedule at page 40 of this Form 10-K. (a)(2) Financial Statement Schedule-Schedule II-Valuation and Qualifying Accounts. All other schedules have been omitted as they are not applicable. (a)(3) Exhibits: EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------------ ------------------------------------------------------------ (1)2.1 Agreement and Plan of Merger, dated as of September 10, 1999, among Affymetrix, Inc., GMS Acquisition, Inc. and certain shareholders (2)3.1 Amended and Restated Certificate of Incorporation (3)3.2 Bylaws (4)3.3 Agreement and Plan of Merger Between Affymetrix, Inc., a California corporation, and Affymetrix, Inc., a Delaware corporation (5)3.4 Summary of Rights to Purchase Shares of Preferred Stock pursuant to the Rights Agreement dated as of October 15, 1998 (6)4.1 Rights Agreement, dated October 15, 1998, between Affymetrix, Inc. and American Stock Transfer & Trust Company, as Rights Agent (7)4.2 Indenture dated as of September 22, 1999, between Affymetrix, Inc. and The Bank of New York, as Trustee 4.3 Indenture, dated as of February 14, 2000, between Affymetrix, Inc. and The Bank of New York, as Trustee 4.4 Registration Rights Agreement, dated as of February 14, 2000, between Affymetrix, Inc. and certain purchasers listed on the signature page thereto + (8)10.1 1993 Stock Plan, as amended + (8)10.2 1996 Nonemployee Directors Stock Option Plan *(8)10.3 Collaboration Agreement by and between Hewlett-Packard Company and Affymetrix, Inc. dated November 11, 1994 *(8)10.4 Development and Supply Agreement between Affymetrix, Inc. and Genetics Institute, Inc. dated November 15, 1994 *(8)10.5 Supply Agreement with Genetics Institute, Inc. dated December 8, 1995 *(8)10.6 Technology License Agreement among Affymax N.V., Affymax Technologies, N.V., the Affymax Research Institute, and Affymetrix, Inc. dated January 1, 1993 + (8)10.7 Severance Agreement and Release between Affymetrix, Inc. and David B. Singer dated June 15, 1995 + (8)10.8 Loan and Pledge Agreement between David B. Singer and Affymetrix, Inc. effective December 7, 1993 *(8)10.9 ATP Participation Agreement between Affymetrix, Inc. and Molecular Dynamics, Inc. dated January 12, 1995 pursuant to the National Institute of Standards and Technology's Advanced Technology Program. (8)10.10 Amendment 1 to the ATP Participation Agreement between Affymetrix, Inc. and Molecular Dynamics, Inc. effective January 13, 1996 *(8)10.11 Governance Agreement between Affymetrix, Inc. and Glaxo Wellcome plc dated July 6, 1995
66 (8)10.12 Services Agreement between Affymax Research Institute and Affymetrix, Inc. effective October 1, 1993 (8)10.13 Loan Agreement between Affymax Technologies N.V. and Affymetrix, Inc. dated December 1, 1994 (8)10.14 Lease between Solar Oakmead Joint Venture and Affymetrix, Inc. dated October 20, 1995 (8)10.15 Sublease between Salutar, Inc. and Affymetrix, Inc. dated October 20, 1995 (8)10.16 Sublease between Affymax Research Institute and Affymetrix, Inc. dated February 1, 1994 *(8)10.17 Manufacturing and Supply Agreement between Affymetrix, Inc. and RELA, Inc. dated November 27, 1995 +*(8)10.18 Loan and Pledge Agreement between Stephen P.A. Fodor and Affymetrix, Inc. effective December 7, 1993 +*(8)10.19 Agreement between Stephen P.A. Fodor and Affymetrix, Inc. dated November 1, 1994 +*(8)10.20 Form of Director and Officer Indemnification Agreement *(8)10.21 Demonstration Agreement between Affymetrix, Inc. and Glaxo Wellcome, Inc. dated May 1, 1996 (8)10.22 Lease between Harry Locklin and Affymetrix, Inc. dated December 5,1994 (9)10.23 Lease between Sobrato Interest and Affymetrix, Inc. dated May 31, 1996 (3380 Central Expressway, Santa Clara, CA) (9)10.24 Lease between Sobrato Interest and Affymetrix, Inc. dated May 31, 1996 (3450 Central Expressway, Santa Clara, CA) *(10)10.25 Collaboration Agreement between bioMerieux Vitek, Inc. and Affymetrix, Inc. effective as of September 1, 1996 *(10)10.26 Manufacturing Agreement between bioMerieux Vitek, Inc. and Affymetrix, Inc. effective as of September 1, 1996 *(10)10.27 Collaboration Agreement between Incyte Pharmaceuticals, Inc. and Affymetrix, Inc. made as of November 11, 1996 *(11)10.28 Supply Agreement among F. Hoffmann-La Roche Ltd., Hoffmann La-Roche Inc., Syntex (U.S.A.) Inc. and Affymetrix, Inc. effective as of August 15, 1997 *(12)10.29 Sales Representation Agreement between Affymetrix, Inc. and Amersham Pharmacia Biotech, Ltd. Dated November 28, 1997 *(12)10.30 License Agreement between Affymetrix, Inc. and Molecular Dynamics, Inc. dated November 28, 1997 (13)10.31 Series AA Preferred Stock Purchase Agreement dated March 9, 1998 by and between Affymetrix, Inc. and Glaxo Wellcome Americas, Inc. with exhibits. *(14)10.32 Agreement between Affymetrix, Inc. and Roche Molecular Systems, Inc. effective as of April 23, 1998 *(14)10.33 Agreement between Affymetrix, Inc. and Enzo Diagnostics, Inc. effective as of April 24, 1998. *(15)10.34 Consortium Agreement between Beckman Coulter, Inc. and the Company dated July 31, 1998. *(15)10.35 Letter Agreement between Beckman Coulter, Inc. and the Company dated July 29, 1998 +10.36 1998 Stock Incentive Plan (Incorporated by reference) +10.37 Form of Officer and Director Indemnification Agreement (Incorporated by reference) +10.38 Promissory Note between Karen H. Haynes and the Company dated February 26, 1999 (Incorporated by reference) +10.39 Promissory Note between Stephen P. A. Fodor and the Company dated April 27, 1997 (Incorporated by reference) +10.40 Promissory Note between Sue Siegel and the Company dated July 9, 1998 (Incorporated by reference) +10.41 Promissory Note between Rich Rava and the Company dated April 3, 1997 (Incorporated by reference)
67 (16)10.42 Lease Agreement by and between the Company and Aetna Life Insurance Company dated as of July 30, 1999 (17)10.43 Promissory Note between Sue Siegel and the Company dated July 9, 1999 (18)10.44 Amendment to Lease by and between Affymetrix, Inc. and Harry Locklin dated as of May 12, 1999 (19)10.46 First Addendum to Lease by and between Solar Oakmead Joint Venture and Affymetrix, Inc. (20)10.47 Amendment No. 1 to the 1996 Nonemployee Directors Stock Option Plan of Affymetrix, Inc. 21 List of Subsidiaries 23 Consent of Ernst & Young LLP, Independent Auditors 27 Financial Data Schedule
- ------------------------ (1) Incorporated by reference to the Registrant's registration statement on Form S-4 as filed on October 14, 1999 (File No. 333-88987). (2) Incorporated by reference to the same number exhibit filed with the Registrant's registration statement on Form S-3 as filed on July 12, 1999 (File No. 333-82685). (3) Incorporated by reference to the same number exhibit filed with Registrant's Form 8-K as filed on September 29, 1998 (File No. 000-28218). (4) Incorporated by reference to Exhibit 2.1 filed with Registrant's Form 8-K as filed on September 29, 1998 (File No. 000-28218). (5) Incorporated by reference to Exhibit 3.3 filed with Registrant's Form 8-K as filed on October 16, 1998 (File No. 000-28218). (6) Incorporated by reference to Exhibit 1 of the Registrant's Form 8-A as filed on October 16, 1998 (file No. 000-28218). (7) Incorporated by reference to the Registrant's registration statement on Form S-4 as filed on October 14, 1999 (File No. 333-88987). (8) Incorporated by reference to the same number exhibit filed with Registrant's Registration Statement on Form S-1 (File No. 333-3648), as amended. (9) Incorporated by reference to the same number exhibit filed with the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 (File No. 000-28218). (10) Incorporated by reference to the same number exhibit filed with the Company's Report on Form 10-K for the year ended December 31, 1996 (File No. 000-28218). (11) Incorporated by reference to the Exhibit 10.1 filed with the Registrant's Registration Statement on Form S-3 (File No. 333-38167). (12) Incorporated by reference to the same number exhibit filed with the Registrant's Report on Form 10-K for the year ended December 31, 1997 as filed on March 31, 1998 (File No. 000-28218). (13) Incorporated by reference to the Exhibit 10 filed with the Company's Current Report on Form 8-K dated March 24, 1998 (File No. 000-28218). (14) Incorporated by reference to the same number exhibit filed with Registrant's Form 10-Q as filed on August 14, 1998 (File No. 000-28218). (15) Incorporated by reference to the same number exhibit filed with Registrant's Form 10-Q as filed on November 17, 1998 (File No. 000-28218). 68 (16) Incorporated by reference to the same number exhibit filed with Registrant's Form 10-Q as filed on August 16, 1999 (File No. 000-28218). (17) Incorporated by reference to the Exhibit 10.10 filed with Registrant's Registration Statement on Form S-3 (File No. 333-82685). (18) Incorporated by reference to the Exhibit 10.11 filed with Registrant's Registration Statement on Form S-3 (File No. 333-82685). (19) Incorporated by reference to the Exhibit 10.12 filed with Registrant's Registration Statement on Form S-3 (File No. 333-82685). (20) Incorporated by reference to the Exhibit 10.13 filed with Registrant's Registration Statement on Form S-3 (File No. 333-82685). * Confidential treatment granted + Management contract, compensatory plan or arrangement (b) Reports on Form 8-K. None. 69 AFFYMETRIX, INC. SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
BALANCE AT CHARGED TO CHARGED TO BALANCE BEGINNING OF COSTS AND OTHER AT END OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD ------------ ---------- ---------- ---------- --------- Year ended December 31, 1999: Allowance for doubtful accounts........ $408 $567 $ -- $ -- $975 ==== ==== ========= ========= ==== Year ended December 31, 1998: Allowance for doubtful accounts........ $300 $108 $ -- $ -- $408 ==== ==== ========= ========= ==== Year ended December 31, 1997: Allowance for doubtful accounts........ $ -- $300 $ -- $ -- $300 ==== ==== ========= ========= ====
70 SIGNATURES Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange Act of 1934, the registrant has caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. AFFYMETRIX, INC. (Registrant) March 30, 2000 By /s/ STEPHEN P.A. FODOR, PH.D. --------------------------------------- Stephen P.A. Fodor, Ph.D. CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER March 30, 2000 By /s/ EDWARD M. HURWITZ --------------------------------------- Edward M. Hurwitz VICE PRESIDENT AND CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Stephen P.A. Fodor, Ph.D. and Edward M. Hurwitz, or either of them, each with the power of substitution, his attorney-in-fact, to sign any amendments to this Form 10-K (including post-effective amendments), and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- By /s/ STEPHEN P.A. FODOR, PH.D. Chairman of the Board and March 30, 2000 -------------------------------------- Chief Executive Officer Stephen P.A. Fodor, PH.D. (Principal Executive Officer) By /s/ EDWARD M. HURWITZ Vice President and Chief March 30, 2000 -------------------------------------- Financial Officer Edward M. Hurwitz (Principal Financial and Accounting Officer) By /s/ JOHN D. DIEKMAN, PH.D. Vice Chairman, Director March 30, 2000 -------------------------------------- John D. Diekman, PH.D.
71
SIGNATURE TITLE DATE --------- ----- ---- By /s/ PAUL BERG, PH.D. Director March 30, 2000 -------------------------------------- Paul Berg, Ph.D. By /s/ ADRIAN HENNAH Director March 30, 2000 -------------------------------------- Adrian Hennah By /s/ VERNON R. LOUCKS, JR. Director March 30, 2000 -------------------------------------- Vernon R. Loucks, Jr. By /s/ BARRY C. ROSS, PH.D. Director March 30, 2000 -------------------------------------- Barry C. Ross, Ph.D. By /s/ DAVID B. SINGER Director March 30, 2000 -------------------------------------- David B. Singer By /s/ LUBERT STRYER, M.D. Director March 30, 2000 -------------------------------------- Lubert Stryer, M.D. By /s/ JOHN A. YOUNG Director March 30, 2000 -------------------------------------- John A. Young
72 INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------------ ------------------------------------------------------------ (1)2.1 Agreement and Plan of Merger, dated as of September 10, 1999, among Affymetrix, Inc., GMS Acquisition, Inc. and certain shareholders (2)3.1 Amended and Restated Certificate of Incorporation (3)3.2 Bylaws (4)3.3 Agreement and Plan of Merger Between Affymetrix, Inc., a California corporation, and Affymetrix, Inc., a Delaware corporation (5)3.4 Summary of Rights to Purchase Shares of Preferred Stock pursuant to the Rights Agreement dated as of October 15, 1998 (6)4.1 Rights Agreement, dated October 15, 1998, between Affymetrix, Inc. and American Stock Transfer & Trust Company, as Rights Agent (7)4.2 Indenture dated as of September 22, 1999, between Affymetrix, Inc. and The Bank of New York, as Trustee 4.3 Indenture, dated as of February 14, 2000, between Affymetrix, Inc. and The Bank of New York, as Trustee 4.4 Registration Rights Agreement, dated as of February 14, 2000, between Affymetrix, Inc. and certain purchasers listed on the signature page thereto + (8)10.1 1993 Stock Plan, as amended + (8)10.2 1996 Nonemployee Directors Stock Option Plan *(8)10.3 Collaboration Agreement by and between Hewlett-Packard Company and Affymetrix, Inc. dated November 11, 1994 *(8)10.4 Development and Supply Agreement between Affymetrix, Inc. and Genetics Institute, Inc. dated November 15, 1994 *(8)10.5 Supply Agreement with Genetics Institute, Inc. dated December 8, 1995 *(8)10.6 Technology License Agreement among Affymax N.V., Affymax Technologies, N.V., the Affymax Research Institute, and Affymetrix, Inc. dated January 1, 1993 + (8)10.7 Severance Agreement and Release between Affymetrix, Inc. and David B. Singer dated June 15, 1995 + (8)10.8 Loan and Pledge Agreement between David B. Singer and Affymetrix, Inc. effective December 7, 1993 *(8)10.9 ATP Participation Agreement between Affymetrix, Inc. and Molecular Dynamics, Inc. dated January 12, 1995 pursuant to the National Institute of Standards and Technology's Advanced Technology Program. (8)10.10 Amendment 1 to the ATP Participation Agreement between Affymetrix, Inc. and Molecular Dynamics, Inc. effective January 13, 1996 *(8)10.11 Governance Agreement between Affymetrix, Inc. and Glaxo Wellcome plc dated July 6, 1995 (8)10.12 Services Agreement between Affymax Research Institute and Affymetrix, Inc. effective October 1, 1993 (8)10.13 Loan Agreement between Affymax Technologies N.V. and Affymetrix, Inc. dated December 1, 1994 (8)10.14 Lease between Solar Oakmead Joint Venture and Affymetrix, Inc. dated October 20, 1995 (8)10.15 Sublease between Salutar, Inc. and Affymetrix, Inc. dated October 20, 1995 (8)10.16 Sublease between Affymax Research Institute and Affymetrix, Inc. dated February 1, 1994 *(8)10.17 Manufacturing and Supply Agreement between Affymetrix, Inc. and RELA, Inc. dated November 27, 1995 +*(8)10.18 Loan and Pledge Agreement between Stephen P.A. Fodor and Affymetrix, Inc. effective December 7, 1993 +*(8)10.19 Agreement between Stephen P.A. Fodor and Affymetrix, Inc. dated November 1, 1994 +*(8)10.20 Form of Director and Officer Indemnification Agreement
*(8)10.21 Demonstration Agreement between Affymetrix, Inc. and Glaxo Wellcome, Inc. dated May 1, 1996 (8)10.22 Lease between Harry Locklin and Affymetrix, Inc. dated December 5, 1994 (9)10.23 Lease between Sobrato Interest and Affymetrix, Inc. dated May 31, 1996 (3380 Central Expressway, Santa Clara, CA) (9)10.24 Lease between Sobrato Interest and Affymetrix, Inc. dated May 31, 1996 (3450 Central Expressway, Santa Clara, CA) *(10)10.25 Collaboration Agreement between bioMerieux Vitek, Inc. and Affymetrix, Inc. effective as of September 1, 1996 *(10)10.26 Manufacturing Agreement between bioMerieux Vitek, Inc. and Affymetrix, Inc. effective as of September 1, 1996 *(10)10.27 Collaboration Agreement between Incyte Pharmaceuticals, Inc. and Affymetrix, Inc. made as of November 11, 1996 *(11)10.28 Supply Agreement among F. Hoffmann-La Roche Ltd., Hoffmann La-Roche Inc., Syntex (U.S.A.) Inc. and Affymetrix, Inc. effective as of August 15, 1997 *(12)10.29 Sales Representation Agreement between Affymetrix, Inc. and Amersham Pharmacia Biotech, Ltd. Dated November 28, 1997 *(12)10.30 License Agreement between Affymetrix, Inc. and Molecular Dynamics, Inc. dated November 28, 1997 (13)10.31 Series AA Preferred Stock Purchase Agreement dated March 9, 1998 by and between Affymetrix, Inc. and Glaxo Wellcome Americas, Inc. with exhibits. *(14)10.32 Agreement between Affymetrix, Inc. and Roche Molecular Systems, Inc. effective as of April 23, 1998 *(14)10.33 Agreement between Affymetrix, Inc. and Enzo Diagnostics, Inc. effective as of April 24, 1998. *(15)10.34 Consortium Agreement between Beckman Coulter, Inc. and the Company dated July 31, 1998. *(15)10.35 Letter Agreement between Beckman Coulter, Inc. and the Company dated July 29, 1998 +10.36 1998 Stock Incentive Plan (Incorporated by reference) +10.37 Form of Officer and Director Indemnification Agreement (Incorporated by reference) +10.38 Promissory Note between Karen H. Haynes and the Company dated February 26, 1999 (Incorporated by reference) +10.39 Promissory Note between Stephen P. A. Fodor and the Company dated April 27, 1997 (Incorporated by reference) +10.40 Promissory Note between Sue Siegel and the Company dated July 9, 1998 (Incorporated by reference) +10.41 Promissory Note between Rich Rava and the Company dated April 3, 1997 (Incorporated by reference) (16)10.42 Lease Agreement by and between the Company and Aetna Life Insurance Company dated as of July 30, 1999 (17)10.43 Promissory Note between Sue Siegel and the Company dated July 9, 1999 (18)10.44 Amendment to Lease by and between Affymetrix, Inc. and Harry Locklin dated as of May 12, 1999 (19)10.46 First Addendum to Lease by and between Solar Oakmead Joint Venture and Affymetrix, Inc. (20)10.47 Amendment No. 1 to the 1996 Nonemployee Directors Stock Option Plan of Affymetrix, Inc. 21 List of Subsidiaries 23 Consent of Ernst & Young LLP, Independent Auditors 27 Financial Data Schedule
- ------------------------ (1) Incorporated by reference to the Registrant's registration statement on Form S-4 as filed on October 14, 1999 (File No. 333-88987). (2) Incorporated by reference to the same number exhibit filed with the Registrant's registration statement on Form S-3 as filed on July 12, 1999 (File No. 333-82685). (3) Incorporated by reference to the same number exhibit filed with Registrant's Form 8-K as filed on September 29, 1998 (File No. 000-28218). (4) Incorporated by reference to Exhibit 2.1 filed with Registrant's Form 8-K as filed on September 29, 1998 (File No. 000-28218). (5) Incorporated by reference to Exhibit 3.3 filed with Registrant's Form 8-K as filed on October 16, 1998 (File No. 000-28218). (6) Incorporated by reference to Exhibit 1 of the Registrant's Form 8-A as filed on October 16, 1998 (file No. 000-28218). (7) Incorporated by reference to the Registrant's registration statement on Form S-4 as filed on October 14, 1999 (File No. 333-88987). (8) Incorporated by reference to the same number exhibit filed with Registrant's Registration Statement on Form S-1 (File No. 333-3648), as amended. (9) Incorporated by reference to the same number exhibit filed with the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 (File No. 000-28218). (10) Incorporated by reference to the same number exhibit filed with the Company's Report on Form 10-K for the year ended December 31, 1996 (File No. 000-28218). (11) Incorporated by reference to the Exhibit 10.1 filed with the Registrant's Registration Statement on Form S-3 (File No. 333-38167). (12) Incorporated by reference to the same number exhibit filed with the Registrant's Report on Form 10-K for the year ended December 31, 1997 as filed on March 31, 1998 (File No. 000-28218). (13) Incorporated by reference to the Exhibit 10 filed with the Company's Current Report on Form 8-K dated March 24, 1998 (File No. 000-28218). (14) Incorporated by reference to the same number exhibit filed with Registrant's Form 10-Q as filed on August 14, 1998 (File No. 000-28218). (15) Incorporated by reference to the same number exhibit filed with Registrant's Form 10-Q as filed on November 17, 1998 (File No. 000-28218). (16) Incorporated by reference to the same number exhibit filed with Registrant's Form 10-Q as filed on August 16, 1999 (File No. 000-28218). (17) Incorporated by reference to the Exhibit 10.10 filed with Registrant's Registration Statement on Form S-3 (File No. 333-82685). (18) Incorporated by reference to the Exhibit 10.11 filed with Registrant's Registration Statement on Form S-3 (File No. 333-82685). (19) Incorporated by reference to the Exhibit 10.12 filed with Registrant's Registration Statement on Form S-3 (File No. 333-82685). (20) Incorporated by reference to the Exhibit 10.13 filed with Registrant's Registration Statement on Form S-3 (File No. 333-82685). * Confidential treatment granted + Management contract, compensatory plan or arrangement EX-4.3 2 EXHIBIT 4.3 ================================================================================ INDENTURE AFFYMETRIX, INC. to THE BANK OF NEW YORK Trustee 4.75% Convertible Subordinated Notes Due 2007 Dated as of February 14, 2000 ================================================================================ TABLE OF CONTENTS Page ------ ARTICLE I DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION SECTION 1.01. Definitions..........................................................1 SECTION 1.02. Compliance Certificates and Opinions.................................9 SECTION 1.03. Form of Documents Delivered to Trustee...............................9 SECTION 1.04. Acts of Holders; Record Dates.......................................10 SECTION 1.05. Notices, etc. to Trustee and Company................................12 SECTION 1.06. Notice to Holders; Waiver...........................................12 SECTION 1.07. Conflict with Trust Indenture Act...................................12 SECTION 1.08. Effect of Headings and Table of Contents............................12 SECTION 1.09. Successors and Assigns..............................................12 SECTION 1.10. Severability Clause.................................................13 SECTION 1.11. Benefits of Indenture...............................................13 SECTION 1.12. Governing Law.......................................................13 SECTION 1.13. Legal Holidays......................................................13 ARTICLE II SECURITY FORMS SECTION 2.01. Forms Generally.....................................................13 SECTION 2.02. Form of Face of Security............................................14 SECTION 2.03. Form of Reverse of Security.........................................18 SECTION 2.04. Form of Trustee's Certificate of Authentication.....................23 SECTION 2.05. Form of Conversion Notice...........................................23 SECTION 2.06. Form of Purchase Notice.............................................24 SECTION 2.07. Form of Certification...............................................25 ARTICLE III THE SECURITIES SECTION 3.01. Title and Terms.....................................................26 SECTION 3.02. Denominations.......................................................26 SECTION 3.03. Execution, Authentication, Delivery and Dating......................26 SECTION 3.04. Global and Non-Global Securities....................................27 SECTION 3.05. Registration; Registration of Transfer and Exchange.................28 SECTION 3.06. Mutilated, Destroyed, Lost and Stolen Securities....................32 SECTION 3.07. Payment of Interest; Interest Rights Preserved......................33 SECTION 3.08. Persons Deemed Owners...............................................34 SECTION 3.09. Cancellation........................................................34 SECTION 3.10. Computation of Interest.............................................34 SECTION 3.11 CUSIP Numbers.......................................................34 ARTICLE IV SATISFACTION AND DISCHARGE SECTION 4.01. Satisfaction and Discharge of Indenture.............................35 SECTION 4.02. Application of Trust Money..........................................36 ARTICLE V REMEDIES SECTION 5.01. Events of Default...................................................36 SECTION 5.02. Acceleration of Maturity; Rescission and Annulment..................38 SECTION 5.03. Collection of Indebtedness and Suits for Enforcement by Trustee........................................................39 SECTION 5.04. Trustee May File Proofs of Claim....................................39 SECTION 5.05. Trustee May Enforce Claims Without Possession of Securities.........40 SECTION 5.06. Application of Money Collected......................................40 SECTION 5.07. Limitation on Suits.................................................40 SECTION 5.08. Unconditional Right of Holders To Receive Principal, Premium and Interest and To Convert............................41 SECTION 5.09. Restoration of Rights and Remedies..................................41 SECTION 5.10. Rights and Remedies Cumulative......................................41 SECTION 5.11. Delay or Omission Not Waiver........................................42 SECTION 5.12. Control by Holders..................................................42 SECTION 5.13. Waiver of Past Defaults.............................................42 SECTION 5.14. Undertaking for Costs...............................................42 SECTION 5.15. Waiver of Usury, Stay or Extension Laws.............................42 ARTICLE VI THE TRUSTEE SECTION 6.01. Certain Duties and Responsibilities.................................43 SECTION 6.02. Notice of Defaults..................................................44 SECTION 6.03. Certain Rights of Trustee...........................................44 SECTION 6.04. Not Responsible for Recitals or Issuance of Securities..............45 SECTION 6.05. May Hold Securities.................................................45 SECTION 6.06. Money Held in Trust.................................................45 SECTION 6.07. Compensation and Reimbursement......................................45 SECTION 6.08. Disqualification; Conflicting Interests.............................46 SECTION 6.09. Corporate Trustee Required; Eligibility.............................46 SECTION 6.10. Resignation and Removal; Appointment of Successor...................46 SECTION 6.11. Acceptance of Appointment by Successor..............................48 SECTION 6.12. Merger, Conversion, Consolidation or Succession to Business.........48 SECTION 6.13. Preferential Collection of Claims Against Company...................48 SECTION 6.14. Appointment of Authenticating Agent.................................48 SECTION 6.15. Appointment of Co-Trustee...........................................50 ARTICLE VII HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY SECTION 7.01. Company To Furnish Trustee Names and Addresses of Holders...........50 SECTION 7.02. Preservation of Information; Communications to Holders..............51 SECTION 7.03. Reports by Trustee..................................................51 SECTION 7.04. Reports by Company..................................................51 ARTICLE VIII CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE SECTION 8.01. Company May Consolidate, etc., Only on Certain Terms................52 SECTION 8.02. Successor Substituted...............................................53 ARTICLE IX SUPPLEMENTAL INDENTURES SECTION 9.01. Supplemental Indentures Without Consent of Holders..................53 SECTION 9.02. Supplemental Indentures with Consent of Holders.....................54 SECTION 9.03. Execution of Supplemental Indentures................................55 SECTION 9.04. Effect of Supplemental Indentures...................................55 SECTION 9.05. Conformity with Trust Indenture Act.................................55 SECTION 9.06. Reference in Securities to Supplemental Indentures..................55 ARTICLE X COVENANTS SECTION 10.01. Payment of Principal, Premium and Interest..........................55 SECTION 10.02. Maintenance of Office or Agency.....................................55 SECTION 10.03. Money for Security Payments To Be Held in Trust.....................56 SECTION 10.04. Statement by Officers as to Default.................................57 SECTION 10.05. Existence...........................................................57 SECTION 10.06. Maintenance of Properties...........................................57 SECTION 10.07. Payment of Taxes and Other Claims...................................58 SECTION 10.08. Waiver of Certain Covenants.........................................58 SECTION 10.09. Delivery of Certain Information.....................................58 SECTION 10.10. Resale of Certain Securities; Reporting Issuer......................58 SECTION 10.11. Registration Rights.................................................58 ARTICLE XI REDEMPTION OF SECURITIES SECTION 11.01. Right of Redemption.................................................60 SECTION 11.02. Applicability of Article............................................60 SECTION 11.03. Election to Redeem; Notice to Trustee...............................60 SECTION 11.04. Selection by Trustee of Securities to Be Redeemed...................61 SECTION 11.05. Notice of Redemption................................................61 SECTION 11.06. Deposit of Redemption Price.........................................62 SECTION 11.07. Securities Payable on Redemption Date...............................62 SECTION 11.08. Securities Redeemed in Part.........................................63 SECTION 11.09. Conversion Arrangement on Call for Redemption.......................63 ARTICLE XII SUBORDINATION OF SECURITIES SECTION 12.01. Securities Subordinate to Senior Indebtedness.......................64 SECTION 12.02. Payment over of Proceeds upon Dissolution, Etc......................64 SECTION 12.03. No Payment When Senior Indebtedness in Default......................65 SECTION 12.04. Payment Permitted If No Default.....................................65 SECTION 12.05. Subrogation to Rights of Holders of Senior Indebtedness.............65 SECTION 12.06. Provisions Solely To Define Relative Rights.........................66 SECTION 12.07. Trustee to Effectuate Subordination.................................66 SECTION 12.08. No Waiver of Subordination Provisions...............................66 SECTION 12.09. Notice to Trustee...................................................67 SECTION 12.10. Reliance on Judicial Order or Certificate of Liquidating Agent......68 SECTION 12.11. Trustee Not Fiduciary for Holders of Senior Indebtedness............68 SECTION 12.12. Rights of Trustee as Holder of Senior Indebtedness; Preservation of Trustee's Rights...............................68 SECTION 12.13. Article Applicable to Paying Agents.................................68 SECTION 12.14. Certain Conversions Deemed Payment..................................68 ARTICLE XIII CONVERSION OF SECURITIES SECTION 13.01. Conversion Privilege and Conversion Price...........................69
SECTION 13.02. Exercise of Conversion Privilege....................................70 SECTION 13.03. Fractions of Shares.................................................71 SECTION 13.04. Adjustment of Conversion Price......................................71 SECTION 13.05. Notice of Adjustments of Conversion Price...........................76 SECTION 13.06. Notice of Certain Corporate Action..................................76 SECTION 13.07. Company to Reserve Common Stock.....................................77 SECTION 13.08. Taxes on Conversions................................................77 SECTION 13.09. Covenant as to Common Stock.........................................78 SECTION 13.10. Cancellation of Converted Securities................................78 SECTION 13.11. Provisions in Case of Reclassification, Consolidation, Merger or Sale of Assets..............................................78 SECTION 13.12. Trustee Adjustment Disclaimer.......................................78 ARTICLE XIV RIGHT TO REQUIRE PURCHASE SECTION 14.01. Right to Require Purchase...........................................79 SECTION 14.02. Conditions and Procedures Relating to the Company's Election to Pay the Purchase Price in Common Stock......................79 SECTION 14.03. Notice, Method of Exercising Purchase Right.........................81 SECTION 14.04. Deposit of Purchase Price...........................................81 SECTION 14.05. Securities Not Purchased on Purchase Date...........................82 SECTION 14.06. Securities Purchased in Part........................................82 SECTION 14.07. Certain Definitions.................................................82 ARTICLE XV DEFEASANCE AND COVENANT DEFEASANCE SECTION 15.01. Company's Option to Effect Defeasance or Covenant Defeasance.....................................................83 SECTION 15.02. Defeasance and Discharge............................................83 SECTION 15.03. Covenant Defeasance.................................................84 SECTION 15.04. Conditions to Defeasance or Covenant Defeasance.....................84 SECTION 15.05. Deposited Money and U.S. Government Obligations to Be Held in Trust; Other Miscellaneous Provisions..................86 SECTION 15.06. Reinstatement.......................................................86 ARTICLE XVI IMMUNITY SECTION 16.01. Personal Immunity of Incorporators, Shareholders, Directors and Officers...................................................87
1 INDENTURE dated as of February 14, 2000, between AFFYMETRIX, INC., a corporation duly organized and existing under the laws of the State of Delaware (herein called the "Company"), having its principal office at 3380 Central Expressway, Santa Clara, California 95051, and THE BANK OF NEW YORK, as Trustee (herein called the "Trustee"). The Company has duly authorized the execution and delivery of this Indenture to provide for the issuance of its 4.75% Convertible Subordinated Notes due 2007 (herein called the "Securities"), to be issued as in this Indenture provided. All things necessary to make the Securities, when executed by the Company and authenticated and delivered hereunder and duly issued by the Company, the valid obligations of the Company, and to make this Indenture a valid agreement of the Company, in accordance with their and its terms, have been done. W I T N E S S E T H : For and in consideration of the premises and the purchase of the Securities by the Holders thereof, it is mutually agreed, for the equal and proportionate benefit of all Holders of the Securities or of any series thereof, as follows: ARTICLE I DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION SECTION 1.01. DEFINITIONS. For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires: 1. The terms defined in this Article have the meanings assigned to them in this Article and include the plural as well as the singular. 2. All other terms used herein which are defined in the Trust Indenture Act, either directly or by reference therein, have the meanings assigned to them therein. 3. All accounting terms not otherwise defined herein have the meanings assigned to them in accordance with generally accepted accounting principles, and, except as otherwise herein expressly provided, the term "generally accepted accounting 2 principles" with respect to any computation required or permitted hereunder shall mean such accounting principles as are generally accepted at the date of such computation. 4. Unless the context otherwise requires, any reference to an "Article" or a "Section" refers to an Article or Section, as the case may be, of this Indenture. 5. The words "herein", "hereof" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision. 6. Unless the context otherwise requires, each reference to "premium" includes the Make-Whole Payment, if any. Certain terms used in Article XIV have the meanings specified therein. "Act", when used with respect to any Holder, has the meaning specified in Section 1.04. "Additional Interest" has the meaning specified in Section 10.11. "Affiliate" of any specified Person means any other Person who directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, such specified Person. For the purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Agent Member" means any member of, or participant in, the Depositary. "Applicable Procedures" means, with respect to any transfer or transaction involving a Global Security or beneficial interest therein, the rules and procedures of the Depositary for such Security, in each case to the extent applicable to such transaction and as in effect from time to time. "Authenticating Agent" means any Person authorized by the Trustee pursuant to Section 6.14 to act on behalf of the Trustee to authenticate Securities. "Beneficial Owner" has the meaning specified in Section 14.07. "Board of Directors" means either the board of directors of the Company or any duly authorized committee of that board. "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of 3 Directors and to be in full force and effect on the date of such certification, and delivered to the Trustee. "Business Day" means a day on which banking institutions are open for business and carrying out transactions in Dollars at the relevant place of payment. "Change in Control" has the meaning specified in Section 14.07. "Closing Price" on any Trading Day with respect to the per share price of Common Stock means the last reported sales price regular way or, in case no such reported sale takes place on such Trading Day, the average of the reported closing bid and asked prices regular way, in either case on the New York Stock Exchange or, if the Common Stock is not listed or admitted to trading on the New York Stock Exchange, on the principal national securities exchange on which the Common Stock is listed or admitted to trading, or, if not listed or admitted to trading on any national securities exchange, on Nasdaq or, if the Common Stock is not listed or admitted to trading on any national securities exchange or Nasdaq, the average of the closing bid and asked prices in the over-the-counter market as furnished by any New York Stock Exchange member firm that is selected from time to time by the Company for that purpose and is reasonably acceptable to the Trustee. "Commencement Date" has the meaning specified in Section 13.04. "Commission" means the Securities and Exchange Commission, as from time to time constituted, created under the Exchange Act, or, if at any time after the execution of this instrument such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties at such time. "Common Stock" includes any stock of any class of the Company which has no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding-up of the Company and which is not subject to redemption by the Company. However, subject to the provisions of Section 13.11, shares issuable on conversion of Securities shall include only shares of the class designated as Common Stock of the Company at the date of this instrument or shares of any class or classes resulting from any reclassification or reclassifications thereof and which have no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding-up of the Company and which are not subject to redemption by the Company; PROVIDED that if at any time there shall be more than one such resulting class, the shares of each such class then so issuable shall be substantially in the proportion which the total number of shares 4 of such class resulting from all such reclassifications bears to the total number of shares of all such classes resulting from all such reclassifications. "Company" means the Person named as the "Company" in the first paragraph of this instrument until a successor Person shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Company" shall mean such successor Person. "Company Order" has the meaning specified in the definition of Company Request in this Section 1.01. "Company Request" or "Company Order" means a written request or order signed in the name of the Company by its Chairman of the Board, its Vice Chairman of the Board, its President or a Vice President, and by its Treasurer, an Assistant Treasurer, its Secretary or an Assistant Secretary, and delivered to the Trustee. "Corporate Trust Office" means the principal office of the Trustee in the city at which at any particular time its corporate trust business shall be administered. As of the date hereof, the Corporate Trust Office of the Trustee is located at 101 Barclay Street, Floor 21 West, New York, New York 10286. "Corporation" means a corporation, association, company, joint-stock company or business trust. "Current Event" has the meaning specified in Section 13.04. "Defaulted Interest" has the meaning specified in Section 3.07. "Depositary" means, with respect to the Securities issued in whole or in part in the form of one or more Global Securities, a clearing agency registered under the Exchange Act that is designated to act as Depositary for such Securities as contemplated by Section 2.01 (or any successor securities clearing agency so registered). "Distribution Date" has the meaning specified in Section 13.04. "Dollar" or "U.S.$" means a Dollar or other equivalent unit in such coin or currency of the United States as at the time shall be legal tender for the payment of public and private debts. "DTC" means The Depository Trust Company, a New York corporation. "Event of Default" has the meaning specified in Section 5.01. 5 "ex date" has the meaning specified in Section 13.04. "Exchange Act" means the Securities Exchange Act of 1934 as it may be amended from time to time, and any successor act thereto, and the rules and regulations of the Commission promulgated thereunder. "Expiration Date" has the meaning specified in Section 1.04. "Expiration Time" has the meaning specified in Section 13.04. "Global Security" means a Security that is registered in the Security Register in the name of a Depositary or a nominee thereof. "Group" has the meaning specified in Section 14.07. "Holder" means a Person in whose name a Security is registered in the Security Register. "Indenture" means this instrument as originally executed or as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof, including, for all purposes of this instrument and any such supplemental indenture, the provisions of the Trust Indenture Act that are deemed to be a part of and govern this instrument and any such supplemental indenture, respectively. "Initial Purchasers" means Credit Suisse First Boston Corporation, FleetBoston Robertson Stephens Inc., ING Barings LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated. "Interest Payment Date" means the Stated Maturity of an installment of interest on the Securities. "Issue Date" means the date of first issuance of the Securities under this Indenture. "junior securities" has the meaning specified in Section 12.14. "Make-Whole Payment" has the meaning specified in Section 11.01. "Maturity", when used with respect to any Security, means the date on which the principal of such Security or an installment of principal becomes due and 6 payable as therein or herein provided, whether at the Stated Maturity or by declaration of acceleration, call for redemption, exercise of the purchase right or otherwise. "Nasdaq" means Nasdaq Stock Market, Inc. "Notice of Default" means a written notice of the kind specified in Section 5.01(4) or 5.01(5). "Officers' Certificate" means a certificate signed by any of the Chairman of the Board, a Vice Chairman of the Board, the Chief Executive Officer, the President or a Vice President, and by any of the Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary, of the Company, and delivered to the Trustee. One of the officers signing an Officers' Certificate given pursuant to Section 10.04 shall be the principal executive, financial or accounting officer of the Company. "Opinion of Counsel" means a written opinion of counsel, who may be internal counsel for the Company. "Other Event" has the meaning specified in Section 13.04. "Outstanding", when used with respect to Securities, means, as of the date of determination, all Securities theretofore authenticated and delivered under this Indenture, except: (i) Securities theretofore cancelled by the Trustee or delivered to the Trustee for cancellation; (ii) Securities for whose payment or redemption money in the necessary amount has been theretofore deposited with the Trustee or any Paying Agent (other than the Company) in trust or set aside and separated in trust by the Company (if the Company shall act as its own Paying Agent) for the Holders of such Securities; PROVIDED that, if such Securities are to be redeemed, notice of such redemption shall have been duly given pursuant to this Indenture or provision therefor satisfactory to the Trustee shall have been made; (iii) Securities which have been paid pursuant to Section 3.07 or in exchange for or in lieu of which other Securities have been authenticated and delivered pursuant to this Indenture, other than any such Securities in respect of which there shall have been presented to the Trustee proof satisfactory to it that such Securities are held by a bona fide purchaser in whose hands such Securities are valid obligations of the Company; and 7 (iv) Securities which have been defeased pursuant to Section 15.02; PROVIDED, HOWEVER, that in determining whether the Holders of the requisite principal amount of the Outstanding Securities have given, made or taken any request, demand, authorization, direction, notice, consent, waiver or other action hereunder as of any date, Securities owned by the Company or any other obligor upon the Securities or any Affiliate of the Company or of such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent, waiver or other action, only Securities which a Responsible Officer of the Trustee knows to be so owned shall be so disregarded. Securities so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right so to act with respect to such Securities and that the pledgee is not the Company or any other obligor upon the Securities or any Affiliate of the Company or of such other obligor. "Paying Agent" means any Person authorized by the Company to pay the principal of (and premium, if any) or interest on any Securities on behalf of the Company. "Person" means any individual, corporation, limited liability company, partnership, joint venture, trust, unincorporated organization or government or any agency or political subdivision thereof. "Predecessor Security" of any particular Security means every previous Security evidencing all or a portion of the same debt as that evidenced by such particular Security; and, for the purposes of this definition, any Security authenticated and delivered under Section 3.06 in exchange for or in lieu of a mutilated, destroyed, lost or stolen Security shall be deemed to evidence the same debt as the mutilated, destroyed, lost or stolen Security. "Provisional Redemption" has the meaning specified in Section 11.01. "Provisional Redemption Date" has the meaning specified in Section 11.01. "Purchase Date" has the meaning specified in Section 14.01. "Purchase Price" has the meaning specified in Section 14.01. "Purchased Shares" has the meaning specified in Section 13.04. 8 "Qualified Institutional Buyer" means a "qualified institutional buyer" as defined in Rule 144A. "Redemption Date", when used with respect to any Security to be redeemed, means the date fixed for such redemption by or pursuant to this Indenture. "Redemption Price", when used with respect to any Security to be redeemed, means the price at which it is to be redeemed as set forth in the Securities. "Reference Date" has the meaning specified in Section 13.04. "Registration Default" has the meaning specified in Section 10.11. "Registration Rights Agreement" has the meaning specified in Section 10.11. "Regular Record Date" for the interest payable on any Interest Payment Date means the February 1 or August 1 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. "Responsible Officer", when used with respect to the Trustee, means any officer in the corporate trust department of the Trustee, including any vice president, assistant vice president, assistant secretary, assistant treasurer, trust officer or any other officer of the Trustee who customarily performs functions similar to those performed by the Persons who at the time shall be such officers, respectively, or to whom any corporate trust matter is referred because of such person's knowledge of and familiarity with the particular subject and who shall have direct responsibility for the administration of this Indenture. "Restricted Global Security" has the meaning specified in Section 2.01. "Restricted Security" means a Security required to bear the restricted securities legend set forth in Section 2.02. "Rule 144A" means Rule 144A under the Securities Act (or any successor provision), as it may be amended from time to time. "Rule 144A Information" has the meaning specified in Section 10.09. "Securities" has the meaning stated in the first recital of this Indenture and more particularly means any Securities authenticated and delivered under this Indenture and "Security" means one of such Securities. 9 "Securities Act" means the Securities Act of 1933 as it may be amended from time to time, and any successor act thereto, and the rules and regulations of the Commission promulgated thereunder. "Security Register" has the meaning specified in Section 3.05. "Security Registrar" has the meaning specified in Section 3.05. "Senior Indebtedness" means the principal of and premium, if any, and interest on all indebtedness of the Company for money borrowed, other than the Securities, whether outstanding on the date of execution of the Indenture or thereafter created, incurred, guaranteed or assumed, except such indebtedness that by the terms of the instrument or instruments by which such indebtedness was created or incurred expressly provides that it (i) is junior in right of payment to the Securities or (ii) ranks PARI PASSU in right of payment to the Securities; provided, that the 5% Subordinated Convertible Notes due 2006 issued pursuant to the Indenture dated as of September 22, 1999, between the Company and the Trustee shall not constitute Senior Indebtedness. The term "indebtedness for money borrowed" when used with respect to the Company is defined to mean (i) any obligation of, or any obligation guaranteed by, the Company for the repayment of borrowed money, whether or not evidenced by bonds, debentures, notes or other written instruments, (ii) all obligations of the Company with respect to interest rate hedging agreements to hedge interest rates, (iii) any deferred payment obligation of, or any such obligation guaranteed by, the Company for the payment of the purchase price of property or assets evidenced by a note or similar instrument, and (iv) any obligation of, or any such obligation guaranteed by, the Company for the payment of rent or other amounts under a lease of property or assets which obligation is required to be classified and accounted for as a capitalized lease on the balance sheet of the Company under generally accepted accounting principles. "Shelf Registration Statement" has the meaning specified in Section 10.11. "Special Record Date" for the payment of any Defaulted Interest means a date fixed by the Trustee pursuant to Section 3.07. "Stated Maturity", when used with respect to any Security or any installment of principal thereof or interest thereon, means the date specified in such Security as the fixed date on which the principal of such Security or such installment of principal or interest is due and payable. "Subsidiary" means a corporation more than 50% of the outstanding voting stock of which is owned, directly or indirectly, by the Company or by one or more other Subsidiaries, or by the Company and one or more other Subsidiaries. For the 10 purposes of this definition, "voting stock" means stock which ordinarily has voting power for the election of directors, whether at all times or only so long as no senior class of stock has such voting power by reason of any contingency. "Surrendered Securities" has the meaning specified in Section 2.07. "Trading Day" means each Monday, Tuesday, Wednesday, Thursday and Friday, other than any day on which securities are not traded on the applicable securities exchange or in the applicable securities market. "Transfer Restricted Securities" has the meaning specified in the Registration Rights Agreement. "Trust Indenture Act" means the Trust Indenture Act of 1939 as in force at the date as of which this instrument was executed and the rules and regulations thereunder; PROVIDED, HOWEVER, that in the event the Trust Indenture Act of 1939 or such rules and regulations are amended after such date, "Trust Indenture Act" means, to the extent required by any such amendment, the Trust Indenture Act of 1939 and such rules and regulations as so amended. "Trustee" means the Person named as the "Trustee" in the first paragraph of this instrument until a successor Trustee shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Trustee" shall mean such successor Trustee. "United States" means the United States of America (including the States thereof and the District of Columbia), its territories, its possessions and other areas subject to its jurisdiction. "U.S. Government Obligation" has the meaning specified in Section 15.04. "Vice President", when used with respect to the Company or the Trustee, means any vice president, whether or not designated by a number or a word or words added before or after the title "vice president". SECTION 1.02. COMPLIANCE CERTIFICATES AND OPINIONS. Upon any application or request by the Company to the Trustee to take any action under any provision of this Indenture, the Company shall furnish to the Trustee an Officers' Certificate, if to be given by an officer of the Company, or an Opinion of Counsel, if to be given by counsel, stating that all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with. 11 Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture shall include: (a) a statement that each individual signing such certificate or opinion has read such covenant or condition and the definitions herein relating thereto; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (c) a statement that, in the opinion of each such individual, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether, in the opinion of each such individual, such condition or covenant has been complied with. SECTION 1.03. FORM OF DOCUMENTS DELIVERED TO TRUSTEE. In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents. Any certificate or opinion of an officer of the Company may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the matters upon which his certificate or opinion is based are erroneous. Any such certificate or Opinion of Counsel may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Company stating that the information with respect to such factual matters is in the possession of the Company, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to such matters are erroneous. Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument. SECTION 1.04. ACTS OF HOLDERS; RECORD DATES. Any request, demand, authorization, direction, notice, consent, waiver or other action provided or permitted by 12 this Indenture to be given or taken by Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by an agent duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Trustee and, where it is hereby expressly required, to the Company. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Holders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and (subject to Section 6.01) conclusive in favor of the Trustee and the Company, if made in the manner provided in this Section 1.04. The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by a certificate of a notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him the execution thereof. Where such execution is by a signer acting in a capacity other than his individual capacity, such certificate or affidavit shall also constitute sufficient proof of his authority. The fact and date of the execution of any such instrument or writing, or the authority of the Person executing the same, may also be proved in any other manner which the Trustee deems sufficient. The ownership of Securities shall be proved by the Security Register. Any request, demand, authorization, direction, notice, consent, waiver or other Act of the Holder of any Security shall bind every future Holder of the same Security and the Holder of every Security issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the Trustee or the Company in reliance thereon, whether or not notation of such action is made upon such Security. The Company may set any day as a record date for the purpose of determining the Holders of Outstanding Securities entitled to give or take any request, demand, authorization, direction, notice, consent, waiver or other action provided or permitted by this Indenture to be given or taken by Holders of Securities; PROVIDED that the Company may not set a record date for, and the provisions of this paragraph shall not apply with respect to, the giving or making of any notice, declaration, request or direction referred to in the next paragraph. If any record date is set pursuant to this paragraph, the Holders of Outstanding Securities on such record date, and no other Holders, shall be entitled to take the relevant action, whether or not such Holders remain Holders after such record date; PROVIDED that no such action shall be effective hereunder unless taken on or prior to the applicable Expiration Date by Holders of the requisite principal amount of 13 Outstanding Securities on such record date; and PROVIDED FURTHER, that for the purpose of determining whether Holders of the requisite principal amount of such Securities have taken such action, no Security shall be deemed to have been Outstanding on such record date unless it is also Outstanding on the date such action is to become effective. Nothing in this paragraph shall prevent the Company from setting a new record date for any action for which a record date has previously been set pursuant to this paragraph (whereupon the record date previously set shall automatically and with no action by any Person be cancelled and of no effect), nor shall anything in this paragraph be construed to render ineffective any action taken by Holders of the requisite principal amount of Outstanding Securities on the date such action is taken. Promptly after any record date is set pursuant to this paragraph, the Company, at its own expense, shall cause notice of such record date, the proposed action by Holders and the applicable Expiration Date to be given to the Trustee in writing and to each Holder of Securities in the manner set forth in Section 1.06. The Trustee may set any day as a record date for the purpose of determining the Holders of Outstanding Securities entitled to join in the giving or making of (i) any Notice of Default, (ii) any declaration of acceleration referred to in Section 5.02, (iii) any request to institute proceedings referred to in Section 5.07(2), or (iv) any direction referred to in Section 5.12. If any record date is set pursuant to this paragraph, the Holders of Outstanding Securities on such record date, and no other Holders, shall be entitled to join in such notice, declaration, request or direction, whether or not such Holders remain Holders after such record date; PROVIDED that no such action shall be effective hereunder unless taken on or prior to the applicable Expiration Date by Holders of the requisite principal amount of Outstanding Securities on such record date; and PROVIDED, FURTHER, that for the purpose of determining whether Holders of the requisite principal amount of such Securities have taken such action, no Security shall be deemed to have been Outstanding on such record date unless it is also Outstanding on the date such action is to become effective. Nothing in this paragraph shall be construed to prevent the Trustee from setting a new record date for any action (whereupon the record date previously set shall automatically and without any action by any Person be cancelled and of no effect), nor shall anything in this paragraph be construed to render ineffective any action taken by Holders of the requisite principal amount of Outstanding Securities on the date such action is taken. Promptly after any record date is set pursuant to this paragraph, the Trustee, at the Company's expense, shall cause notice of such record date, the proposed action by Holders and the applicable Expiration Date to be given to the Company in writing and to each Holder of Securities in the manner set forth in Section 1.06. With respect to any record date set pursuant to this Section, the party hereto that sets such record date may designate any day as the "Expiration Date" and from time to time may change the Expiration Date to any earlier or later day; PROVIDED that no 14 such change shall be effective unless notice of the proposed new Expiration Date is given to the other party hereto in writing, and to each Holder of Securities in the manner set forth in Section 1.06, on or before the existing Expiration Date. Notwithstanding the foregoing, no Expiration Date shall be later than the 180th day after the applicable record date and, if an Expiration Date is not designated with respect to any record date set pursuant to this Section, the party hereto that set such record date shall be deemed to have designated the 180th day after such record date as the Expiration Date with respect thereto. Without limiting the foregoing, a Holder entitled hereunder to take any action hereunder with regard to any particular Security may do so with regard to all or any part of the principal amount of such Security or by one or more duly appointed agents, each of which may do so pursuant to such appointment with regard to all or any part of such principal amount. SECTION 1.05. NOTICES, ETC. TO TRUSTEE AND COMPANY. Any request, demand, authorization, direction, notice, consent, waiver or Act of Holders or other document provided or permitted by this Indenture to be made upon, given or furnished to, or filed with, (1) the Trustee by any Holder or by the Company shall be sufficiently given if made, given, furnished or filed in writing to or with the Trustee at its Corporate Trust Office, Attention: Corporate Trust Administration, or at any other address previously furnished in writing to the Company by the Trustee, or (2) the Company by the Trustee or by any Holder shall be sufficiently given (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to the Company, addressed to it at the address of its principal office specified in the first paragraph of this instrument or at any other address previously furnished in writing to the Trustee by the Company. SECTION 1.06. NOTICE TO HOLDERS; WAIVER. Where this Indenture provides for notice to Holders of any event, such notice shall be sufficiently given (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to each Holder affected by such event, at his address as it appears in the Security Register, not later than the latest date (if any), and not earlier than the earliest date (if any), prescribed for the giving of such notice. In any case where notice to Holders is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular Holder shall affect the sufficiency of such notice with respect to other Holders. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by 15 Holders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. In case by reason of the suspension of regular mail service or by reason of any other cause it shall be impracticable to give such notice by mail, then such notification as shall be made with the approval of the Trustee shall constitute a sufficient notification for every purpose hereunder. SECTION 1.07. CONFLICT WITH TRUST INDENTURE ACT. If any provision hereof limits, qualifies or conflicts with a provision of the Trust Indenture Act which is required under such Act to be a part of and govern this Indenture, the latter provision shall control. If any provision of this Indenture modifies or excludes any provision of the Trust Indenture Act which may be so modified or excluded, the latter provision shall be deemed to apply to this Indenture as so modified or to be excluded, as the case may be. To the extent a Security conflicts with a provision in the Indenture, the Indenture governs. SECTION 1.08. EFFECT OF HEADINGS AND TABLE OF CONTENTS. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. SECTION 1.09. SUCCESSORS AND ASSIGNS. All covenants and agreements in this Indenture by the Company shall bind its successors and assigns, whether so expressed or not. SECTION 1.10. SEVERABILITY CLAUSE. In case any provision in this Indenture or in the Securities shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 1.11. BENEFITS OF INDENTURE. Nothing in this Indenture or in the Securities, express or implied, shall give to any Person, other than the parties hereto and their successors hereunder, the holders of Senior Indebtedness and the Holders of Securities, any benefit or any legal or equitable right, remedy or claim under this Indenture. SECTION 1.12. GOVERNING LAW. THIS INDENTURE AND THE SECURITIES SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES. SECTION 1.13. LEGAL HOLIDAYS. In any case where any Interest Payment Date, Redemption Date, Purchase Date or Stated Maturity of any Security or the last date 16 on which a Holder has the right to convert his Securities shall not be a Business Day then (notwithstanding any other provision of this Indenture or of the Securities) payment of interest or principal (and premium, if any) or conversion of the Securities need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect as if made on the Interest Payment Date, Redemption Date, Purchase Date or at the Stated Maturity, or on such last day for conversion; PROVIDED that no interest shall accrue for the period from and after such Interest Payment Date, Redemption Date, Purchase Date or Stated Maturity, as the case may be. ARTICLE II SECURITY FORMS SECTION 2.01. FORMS GENERALLY. The Securities, the conversion notice and the Trustee's certificates of authentication shall be in substantially the forms set forth in this Article, with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture, and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may be required to comply with the rules of any securities exchange or Depositary therefor or as may, consistently herewith, be determined by the officers executing such Securities, as evidenced by their execution of the Securities. The definitive Securities shall be printed, lithographed or engraved on steel engraved borders or may be produced in any other manner, all as determined by the officers executing such Securities, as evidenced by their execution of such Securities. In certain cases described elsewhere herein, the legends set forth in the first four paragraphs of Section 2.02 may be omitted from Securities issued hereunder. Upon their original issuance, Securities offered and sold as provided in the Purchase Agreement, shall be issued in the form of a single Global Security in definitive, fully registered form without interest coupons, substantially in the form of Security set forth in Sections 2.02 and 2.03, with such applicable legends as are provided for in Section 2.02, except as otherwise permitted herein. Such Global Security shall be registered in the name of DTC, as Depositary, or its nominee or successor, duly executed by the Company and authenticated by the Trustee as hereinafter provided, and deposited with the Trustee, as custodian for DTC, for credit by DTC to the respective accounts of beneficial owners of the Securities represented thereby (or such other accounts as they may direct). Such Global Security, together with its Successor Securities which are Global Securities, are collectively herein called the "Restricted Global Security". 17 Except as provided in this Section 2.01 or Section 3.05, owners of beneficial interests in Global Securities will not be entitled to receive physical delivery of certificated Securities. Upon transfer of definitive Securities to a Qualified Institutional Buyer, such definitive Securities will, unless the Restricted Global Security has previously been exchanged, be exchanged for an interest in the Restricted Global Security pursuant to the provisions of Section 3.05. Neither the Company nor the Trustee shall have any responsibility for any defect in the CUSIP number that appears on any Security, check, advice of payment or redemption or purchase notice, and any such document may contain a statement to the effect that CUSIP numbers have been assigned by an independent service for convenience of reference and that neither the Company nor the Trustee shall be liable for any inaccuracy in such numbers. SECTION 2.02. FORM OF FACE OF SECURITY. [INCLUDE IF SECURITY IS A RESTRICTED SECURITY OR A DEFINITIVE SECURITY OTHER THAN A RESTRICTED GLOBAL SECURITY: THIS SECURITY (OR ITS PREDECESSOR) WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE UNITED STATES SECURITIES ACT OF 1933 (THE "SECURITIES ACT"), AND THIS SECURITY AND THE COMMON STOCK ISSUABLE UPON THE CONVERSION THEREOF MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR IN A TRANSACTION EXEMPT FROM, OR NOT SUBJECT TO, THE SECURITIES ACT. EACH PURCHASER OF THIS SECURITY IS HEREBY NOTIFIED THAT THE SELLER OF THIS SECURITY, AND THE COMMON STOCK ISSUABLE UPON THE CONVERSION THEREOF, MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THIS SECURITY AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) THIS SECURITY AND THE COMMON STOCK ISSUABLE UPON THE CONVERSION THEREOF MAY BE OFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, ONLY (I) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (II) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF AVAILABLE) OR (III) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE 18 SECURITIES ACT, IN EACH OF CASES (I) THROUGH (III) IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES, AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER OF THIS SECURITY AND ANY SHARES OF COMMON STOCK ISSUABLE UPON THE CONVERSION THEREOF OF THE RESALE RESTRICTIONS REFERRED TO IN (A) ABOVE.] [INCLUDE IF SECURITY IS A RESTRICTED GLOBAL SECURITY: THE SECURITIES EVIDENCED BY THIS GLOBAL SECURITY (OR ITS PREDECESSOR) WERE ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE UNITED STATES SECURITIES ACT OF 1933 (THE "SECURITIES ACT"), AND SUCH SECURITIES AND THE COMMON STOCK ISSUABLE UPON THE CONVERSION THEREOF MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR IN A TRANSACTION EXEMPT FROM, OR NOT SUBJECT TO, THE SECURITIES ACT. EACH PURCHASER OF ANY BENEFICIAL INTEREST IN THE SECURITIES IS HEREBY NOTIFIED THAT THE SELLER OF SUCH BENEFICIAL INTEREST MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. EACH BENEFICIAL OWNER OF AN INTEREST IN ANY OF THE SECURITIES EVIDENCED BY THIS GLOBAL SECURITY (INCLUDING ANY PARTICIPANT IN THE DEPOSITARY HOLDING THE GLOBAL SECURITY THAT IS SHOWN AS HOLDING SUCH AN INTEREST ON THE RECORDS OF SUCH DEPOSITARY AND EACH BENEFICIAL OWNER THAT HOLDS THROUGH SUCH PARTICIPANT) AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) ANY BENEFICIAL INTEREST IN THE SECURITIES AND THE COMMON STOCK ISSUABLE UPON THE CONVERSION THEREOF MAY BE OFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, ONLY (I) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (II) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF AVAILABLE) OR (III) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH OF CASES (I) THROUGH (III) IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES, AND (B) THE BENEFICIAL OWNER WILL, AND EACH SUBSEQUENT BENEFICIAL OWNER OF THIS SECURITY OR ANY SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION THEREOF IS 19 REQUIRED TO, NOTIFY ANY PURCHASER OF ANY BENEFICIAL INTEREST IN THE SECURITIES AND ANY SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION THEREOF FROM IT OF THE RESALE RESTRICTIONS REFERRED TO IN (A) ABOVE.] [INCLUDE IF SECURITY IS A GLOBAL SECURITY: THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITARY OR A NOMINEE THEREOF. THIS SECURITY MAY NOT BE EXCHANGED IN WHOLE OR IN PART FOR A SECURITY REGISTERED, AND NO TRANSFER OF THIS SECURITY IN WHOLE OR IN PART MAY BE REGISTERED, IN THE NAME OF ANY PERSON OTHER THAN SUCH DEPOSITARY OR A NOMINEE THEREOF, EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE. UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), NEW YORK, NEW YORK, TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC, AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC, ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL BECAUSE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.] 20 Affymetrix, Inc. 4.75% Convertible Subordinated Notes due 2007 CUSIP No. [ ] No. ____ U. S. $______________ Affymetrix, Inc., a corporation duly organized and existing under the laws of the State of Delaware (herein called the "Company", which term includes any successor Person under the Indenture hereinafter referred to), for value received, hereby promises to pay to ________, or registered assigns, the principal sum of United States Dollars (U.S.$________ ) on February 15, 2007 and to pay interest thereon from February 14, 2000, or from the most recent Interest Payment Date to which interest has been paid or duly provided for, semi-annually in arrears on February 15 and August 15 in each year, commencing August 15, 2000, at the rate of 4.75% per annum, until the principal hereof is paid or made available for payment. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in such Indenture, be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, which shall be the February 1 or August 1 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. Any such interest not so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such Regular Record Date and may either be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to Holders of Securities not less than 10 days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities may be listed, and upon such notice as may be required by such exchange, all as more fully provided in said Indenture. Payment of the principal of, premium, if any, and interest (including payment of any Additional Interest) on this Security will be made at the Corporate Trust Office, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts by a U.S. Dollar check drawn on an account maintained with a bank in the Borough of Manhattan, The City of New York; 21 PROVIDED, HOWEVER, that upon written application by the Holder to the Security Registrar setting forth wire instructions not later than 5 days prior to the relevant payment date (in the case of payment of principal) or not later than the relevant Record Date (in the case of payment of interest), such Holder may receive payment by wire transfer of Dollars to a U.S. Dollar account maintained by the payee with a bank in the United States or in Europe and designated by the payee to the Security Registrar. [Include if a Global Security--All payments by the Company in respect of the Global Security shall be by wire transfer.] Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. Unless the certificate of authentication hereon has been executed by the Trustee referred to on the reverse hereof by manual signature, this Security shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose. IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed. AFFYMETRIX, INC. By:_____________________________________ Name: Title: SECTION 2.03. FORM OF REVERSE OF SECURITY. This Security is one of a duly authorized issue of Securities of the Company designated as its 4.75% Convertible Subordinated Notes due 2007 (herein called the "Securities"), limited in aggregate principal amount to U.S.$175,000,000 (subject to increase as provided in this Indenture defined up to an additional U.S.$50,000,000 aggregate principal amount), issued and to be issued under an Indenture, dated as of February 14, 2000 (herein called the "Indenture"), between the Company and The Bank of New York, as Trustee for the Holders of Securities issued under said Indenture (herein called the "Trustee", which term includes any successor trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Trustee, the 22 holders of Senior Indebtedness and the Holders of the Securities and of the terms upon which the Securities are, and are to be, authenticated and delivered. Subject to and upon compliance with the provisions of the Indenture, the Holder of this Security is entitled, at his option, at any time on or before the close of business on the Business Day immediately preceding February 15, 2007, or in case this Security or a portion hereof is called for redemption, then in respect of this Security or such portion hereof until and including, but (unless the Company defaults in making the payment due upon redemption or is otherwise due) not after, the close of business on the Business Day immediately preceding the Redemption Date or Purchase Date, as the case may be, to convert this Security (or any portion of the principal amount hereof which is U.S.$1,000 or an integral multiple thereof), at the principal amount hereof, or of such portion, into fully paid and non-assessable shares of Common Stock of the Company at a conversion price equal to U.S.$321.00 aggregate principal amount of Securities for each share of Common Stock (or at the current adjusted conversion price if an adjustment has been made as provided in Article XIII of the Indenture) by surrender of this Security, duly endorsed or assigned to the Company or in blank, to the Company at its office or agency in the Borough of Manhattan, The City of New York, accompanied by the conversion notice hereon executed by the Holder hereof evidencing such Holder's election to convert this Security, or if less than the entire principal amount hereof is to be converted, the portion hereof to be converted, and, in case such surrender shall be made during the period from the close of business on any Regular Record Date to the opening of business on the corresponding Interest Payment Date (unless this Security or the portion hereof being converted has been called for redemption on a Redemption Date within such period between and including such Regular Record Date and such Interest Payment Date), also accompanied by payment in cash of an amount equal to the interest payable on such Interest Payment Date on the principal amount of this Security then being converted. Subject to the aforesaid requirement for payment of interest and, in the case of a conversion after the close of business on any Regular Record Date and on or before the corresponding Interest Payment Date, to the right of the Holder of this Security (or any Predecessor Security) of record at such Regular Record Date to receive an installment of interest (even if the Security has been called for redemption on a Redemption Date within such period), no payment or adjustment is to be made on conversion for interest accrued hereon or for dividends on the Common Stock issued on conversion. No fractions of shares or scrip representing fractions of shares will be issued on conversion, but instead of any fractional interest the Company shall pay a cash adjustment or round up to the next higher whole share as provided in Article XIII of the Indenture. The conversion price is subject to adjustment as provided in Article XIII of the Indenture. In addition, the Indenture provides that in case of certain reclassifications, consolidations, mergers, sales or transfers of assets or other transactions pursuant to which the Common Stock is converted into the right to receive other securities, cash or other property, the Indenture shall be amended automatically, without the consent of any 23 Holders of Securities, so that this Security, if then outstanding, will be convertible thereafter, during the period this Security shall be convertible as specified above, only into the kind and amount of securities, cash and other property receivable upon the transaction by a holder of the number of shares of Common Stock into which this Security might have been converted immediately prior to such transaction. The Company will furnish to any Holder, upon request and without charge, copies of the Certificate of Incorporation and By-laws of the Company then in effect. Any such request may be addressed to the Company. The Securities may be provisionally redeemed by the Company, in whole or in part, at any time prior to February 20, 2003, at a Redemption Price equal to $1,000 per security to be redeemed plus accrued and unpaid interest, if any (including Additional Interest, if any) to the Redemption Date if (i) the closing price of the common Stock shall have exceeded 150% of the conversion price then in effect for at least 20 Trading Days in any consecutive 30-Trading Day period ending on the Trading Day prior to the date of mailing of the notice of Provisional Redemption, which date shall be no more than 60 nor less than 20 days prior to the Redemption Date and (ii) the Shelf Registration Statement is effective and available for use and is expected to remain effective and available for use for the 30 days immediately following the Redemption Date. Upon any such Provisional Redemption, the Company shall make an additional Make-Whole Payment in cash with respect to the Securities called for redemption to Holders on the date of mailing of the notice of Provisional Redemption in an amount equal to $142.50 per $1,000 Security, less the amount of any interest actually paid on such Security prior to such date. The Company shall make the Make-Whole Payment on all Securities called for Provisional Redemption, including any Securities converted after the date of mailing of the notice of Provisional Redemption and prior to the Redemption Date. The Securities are subject to redemption at the option of the Company upon not less than 30 days' or more than 60 days' notice by mail, as a whole or from time to time in part, at any time on or after February 20, 2003 through February 14, 2004 at 102.38% of the principal amount, and thereafter, at the following Redemption Prices (expressed as percentages of the principal amount), if redeemed during the 12-month period beginning on February 15 of the years indicated,
Redemption Year Price - ---- ---------- 2004......................... 101.58% 2005......................... 100.79% 2006 and thereafter.......... 100%
24 together in the case of any such redemption with accrued and unpaid interest to (but not including) the Redemption Date, but interest installments whose Stated Maturity is on or prior to such Redemption Date will be payable to the Holders of such Securities, or one or more Predecessor Securities, of record at the close of business on the relevant Record Dates referred to on the face hereof, all as provided in the Indenture. In certain circumstances involving a Change in Control, each Holder shall have the right to require the Company to redeem all or part of its Securities at a purchase price equal to 100% of the principal amount thereof, together with accrued and unpaid interest through the Purchase Date. The Purchase Price is payable in cash or, at the Company's option but subject to the satisfaction of certain conditions set forth in the Indenture, in shares of Common Stock valued at 95% of the average Closing Prices of the Common Stock for the five Trading Days preceding and including the third Trading Day prior to the Purchase Date. The Securities do not have the benefit of any sinking fund. In the event of redemption, conversion or purchase of this Security in part only, a new Security or Securities for the unredeemed, unconverted or unpurchased portion hereof will be issued in the name of the Holder hereof upon the cancellation hereof. Subject to certain limitations in the Indenture, at any time when the Company is not subject to Section 13 or 15(d) of the United States Securities Exchange Act of 1934, as amended, upon the request of a Holder or the holder of shares of Common Stock issued upon conversion thereof, the Company will promptly furnish or cause to be furnished Rule 144A Information (as defined below) to such Holder or such holder of shares of Common Stock issued upon conversion, or to a prospective purchaser of any such security designated by any such Holder or holder of shares of Common Stock, as the case may be, to the extent required to permit compliance by such Holder or holder of shares of Common Stock with Rule 144A under the United States Securities Act of 1933 (the "Securities Act"), in connection with the resale of any such security. "Rule 144A Information" shall be such information as is specified pursuant to Rule 144A(d)(4) under the Securities Act (or any successor provision thereto). If this Security is a Transfer Restricted Security, then the Holder of this Security [IF THIS SECURITY IS A GLOBAL SECURITY, THEN INSERT- (including any Person that has a beneficial interest in this Security)] and the Common Stock issuable upon conversion thereof is entitled to the benefits of a Registration Rights Agreement, dated as of February 14, 2000 (the "Registration Rights Agreement") executed by the Company. If a Registration Default occurs (as defined in the Registration Rights Agreement and in the Indenture), Additional Interest will accrue on this Security from 25 and including the day following such Registration Default to but excluding the day on which such Registration Default has been cured. Additional Interest will be paid semi-annually in arrears, with the first semi-annual payment due on the first Interest Payment Date in respect of the Securities following the date on which such Additional Interest begins to accrue, and will accrue at a rate per annum equal to an additional one-half of one percent (0.50%) of the principal amount of the Securities. Whenever in this Security there is a reference, in any context, to the payment of the principal of, premium, if any, or interest on, or in respect of, any Security, such mention shall be deemed to include mention of the payment of Additional Interest payable as described in the preceding paragraph to the extent that, in such context, Additional Interest is, was or would be payable in respect of such Security and express mention of the payment of Additional Interest (if applicable) in any provisions of this Security shall not be construed as excluding Additional Interest in those provisions of this Security where such express mention is not made. The indebtedness evidenced by this Security is, to the extent provided in the Indenture, subordinate and subject in right of payment to the prior payment in full of all Senior Indebtedness, and this Security is issued subject to the provisions of the Indenture with respect thereto. Each Holder of this Security, by accepting the same, (a) agrees to and shall be bound by such provisions, (b) authorizes and directs the Trustee on his behalf to take such action as may be necessary or appropriate to effectuate the subordination so provided and (c) appoints the Trustee his attorney-in-fact for any and all such purposes. If an Event of Default shall occur and be continuing, the principal of all the Securities may be declared due and payable in the manner and with the effect provided in Article V of the Indenture. The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of the Securities under the Indenture at any time by the Company and the Trustee with the written consent of the Holders of a majority in aggregate principal amount of the Securities at the time Outstanding. The Indenture also contains provisions permitting the Holders of a majority in aggregate principal amount of the Securities at the time Outstanding, on behalf of the Holders of all the Securities, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Security shall be written, with a copy delivered to the Trustee, and shall be conclusive and binding upon such Holder and upon all future Holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange herefor 26 or in lieu hereof, whether or not notation of such consent or waiver is made upon this Security. No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of, premium, if any, and interest on (including Additional Interest) this Security at the times, place and rate, and in the coin or currency, herein prescribed or to convert this Security as provided in the Indenture. As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Security is registrable in the Security Register, upon surrender of this Security for registration of transfer at the Corporate Trust Office duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed by, the Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Securities, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. The Securities are issuable only in registered form without coupons in denominations of U.S.$1,000 and any integral multiple thereof. As provided in the Indenture and subject to certain limitations therein set forth, Securities are exchangeable for a like aggregate principal amount of Securities of a different authorized denomination, as requested by the Holder surrendering the same. No service charge shall be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. Prior to due presentment of this Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Security is registered as the owner hereof for all purposes, whether or not payment of or on this Security is overdue, and neither the Company, the Trustee nor any such agent shall be affected by notice to the contrary. Interest on this Security shall be computed on the basis of a 360-day year of twelve 30-day months. All terms used in this Security which are defined in the Indenture shall have the meanings assigned to them in the Indenture. THE INDENTURE AND THIS SECURITY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF 27 THE STATE OF NEW YORK WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES. SECTION 2.04. FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION. This is one of the Securities referred to in the within-mentioned Indenture. Dated: The Bank of New York, not in its individual capacity but solely as Trustee By________________________________ AUTHORIZED SIGNATORY SECTION 2.05. FORM OF CONVERSION NOTICE. CONVERSION NOTICE To: Affymetrix, Inc. The undersigned Holder of this Security hereby irrevocably exercises the option to convert this Security, or the portion hereof (which is U.S.$1,000 or an integral multiple thereof) below designated, at any time following the date of original issuance thereof, into shares of Common Stock in accordance with the terms of the Indenture referred to in this Security, and directs that the shares issuable and deliverable upon conversion, together with any check in payment for a fractional share and any Security representing any unconverted principal amount hereof, be issued and delivered to the registered owner hereof unless a different name has been provided below. If shares or any portion of this Security not converted are to be issued in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith a certificate in proper form certifying that the applicable restrictions on transfer have been complied with. Any amount required to be paid by the undersigned on account of interest accompanies this Security. 28 The Applicant hereby agrees that, promptly after request of the Company, he or it will furnish such proof in support of this certification as the Company or the Security Registrar for the Common Stock may, from time to time, request. Dated: ________________________________________ Signature* __________________________________ Signature Guaranty
- -------------------------------------------------------------------------------- If shares or Securities are to be Principal amount to be registered in the name of converted (if less than all): $____,000 Person other than the Holder, please print such Person's name and address:* - -------------------------------------------------------------------------------- Name Social Security or Taxpayer Identification Number - -------------------------------------------------------------------------------- ------------------------------------ Street Address - -------------------------------------------------------------------------------- ------------------------------------ City, state and Zip Code - --------------------------------------------------------------------------------
* Signature(s) must be guaranteed by an eligible guarantor institution (banks, stock brokers, savings and loan associations and credit unions with membership in an approved signature guarantee medallion program) pursuant to Securities and Exchange Commission Rule 17Ad-15 if shares of Common Stock are to be delivered, or unconverted Securities are to be issued, other than to and in the name of the registered owner. SECTION 2.06. FORM OF PURCHASE NOTICE. ELECTION OF HOLDER TO REQUIRE PURCHASE 1. Pursuant to Section 14.01 of the Indenture, the undersigned hereby elects to have this Security purchased by the Company. 29 2. The undersigned hereby directs the Trustee or the Company to pay it or ________________ an amount in cash, or, at the Company's election, Common Stock valued as set forth in the Indenture, equal to 100% of the principal amount to be purchased (as set forth below), plus interest accrued to the Purchase Date, as provided in the Indenture. Dated:__________________________________ ________________________________________ Signature ________________________________________ Signature Guaranteed Principal amount to be purchased (must be an integral multiple of U.S. $1,000): Remaining principal amount following such purchase: -------------- NOTICE: The signature to the foregoing Election must correspond to the Name as written upon the face of this Security in every particular, without alteration or any change whatsoever. 30 SECTION 2.07. FORM OF CERTIFICATION. Whenever any certification is required to be given to evidence compliance with certain restrictions relating to transfers of Restricted Securities contemplated by Section 3.05(b)(iv), Section 3.05(c) or Section 13.02, such certification shall be provided substantially in the form of the following certificate, with only such changes as shall be approved by the Company and the Initial Purchasers, TRANSFER CERTIFICATE The undersigned Holder hereby certifies with respect to U.S.$____ principal amount of the above-captioned securities presented or surrendered on the date hereof (the "Surrendered Securities") for registration of transfer, or for exchange or conversion where the securities issuable upon such exchange or conversion are to be registered in a name other than that of the undersigned Holder (each such transaction being a "transfer"), that such transfer complies with the restrictive legend set forth on the face of the Surrendered Securities for the reason checked below: The transfer of the Surrendered Securities complies with Rule 144 under the U.S. Securities Act of 1933 (the "Securities Act"); or The transfer of the Surrendered Securities complies with Rule 144A under the Securities Act; or The transfer of the Surrendered Securities is pursuant to an effective registration statement under the Securities Act, the prospectus delivery requirements under the Securities Act have been satisfied with respect to such transfer, the undersigned Holder is named as a "Selling Securityholder" in the prospectus relating to such registration statement, or in amendments or supplements thereto, and the aggregate principal amount of Surrendered Securities transferred are all or a portion of the securities listed in such prospectus opposite the undersigned's name. Dated:_________________* * To be dated the date of surrender. ________________________________________ Signature (If the registered owner is a corporation, partnership or fiduciary, the title of the 31 Person signing on behalf of such registered owner must be stated.) ARTICLE III THE SECURITIES SECTION 3.01. TITLE AND TERMS. The aggregate principal amount of Securities which may be authenticated and delivered under this Indenture is limited to (a) U.S.$175,000,000 plus (b) such aggregate principal amount (which may not exceed U.S.$50,000,000 principal amount) of Securities as may be purchased by the Initial Purchasers pursuant to the Initial Purchasers' option pursuant to the Purchase Agreement dated February 8, 2000, between the Company and the Initial Purchasers, except for Securities authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Securities pursuant to Sections 3.04, 3.05, 3.06, 9.06, 11.08, 13.02 or 14.06 and except for Securities which, pursuant to Section 3.03, are deemed never to have been authenticated and delivered hereunder. The Stated Maturity of the Securities shall be February 15, 2007, and they shall bear interest at the rate of 4.75% per annum, payable semi-annually on February 15 and August 15 of each year commencing on August 15, 2000, until the principal thereof is paid or made available for payment. Payment of the principal of, premium, if any, and interest (including payment of any Additional Interest) on this Security will be made at the Corporate Trust Office, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts by a U.S. Dollar check drawn on an account maintained with a bank in the Borough of Manhattan, The City of New York; PROVIDED, HOWEVER, that upon written application by the Holder to the Security Registrar setting forth wire instructions not later than 15 days prior to the relevant payment date (in the case of payment of principal) or not later than the relevant Record Date (in the case of payment of interest), such Holder may receive payment by wire transfer of Dollars to a U.S. Dollar account maintained by the payee with a bank in the United States or in Europe and designated by the payee to the Security Registrar. The Securities shall be redeemable by the Company as provided in Article XI. The Securities shall be subordinated in right of payment to the prior payment in full of Senior Indebtedness as provided in Article XII. The Securities shall be convertible as provided in Article XIII. 32 The Securities shall be subject to purchase by the Company at the option of the Holder as provided in Article XIV. SECTION 3.02. DENOMINATIONS. The Securities shall be issuable only in registered form without coupons and only in denominations of U.S.$1,000 and any integral multiple thereof. SECTION 3.03. EXECUTION, AUTHENTICATION, DELIVERY AND DATING. The Securities shall be executed on behalf of the Company by any of its Chairman of the Board, its Vice Chairman of the Board, its President or one of its Vice Presidents. The signature of any of these officers on the Securities may be manual or facsimile. Securities bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Company shall bind the Company, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Securities or did not hold such offices at the date of such Securities. At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Securities of any series executed by the Company to the Trustee for authentication, together with a Company Order for the authentication and delivery of such Securities; and the Trustee in accordance with such Company Order shall authenticate and deliver such Securities as in this Indenture provided and not otherwise. Each Security shall be dated the date of its authentication. No Security shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose unless there appears on such Security a certificate of authentication substantially in the form provided for herein executed by the Trustee by manual signature, and such certificate upon any Security shall be conclusive evidence, and the only evidence, that such Security has been duly authenticated and delivered hereunder. The Trustee shall have the right to decline to authenticate and deliver any Securities under this Section if the Trustee, being advised by counsel, determines that such action may not lawfully be taken or if the Trustee in good faith shall determine that such action would expose the Trustee to personal liability to existing Holders. SECTION 3.04. GLOBAL AND NON-GLOBAL SECURITIES. (a) GLOBAL SECURITIES. (i) Each Global Security authenticated under this Indenture shall be registered in the name of the Depositary designated by the Company for such Global 33 Security or a nominee thereof and delivered to such Depositary or a nominee thereof or custodian therefor, and each such Global Security shall constitute a single Security for all purposes of this Indenture. (ii) Notwithstanding any other provision in this Indenture, no Global Security may be exchanged in whole or in part for Securities registered, and no transfer of a Global Security in whole or in part may be registered, in the name of any Person other than the Depositary for such Global Security or a nominee thereof unless (A) such Depositary (1) has notified the Company and the Trustee that it is unwilling or unable to continue as Depositary for such Global Security or (2) has ceased to be a clearing agency registered as such under the Exchange Act or announces an intention permanently to cease business or in fact does so, in each case unless a successor Depositary is appointed by the Company, (B) there shall have occurred and be continuing an Event of Default with respect to such Global Security, or (C) the Company in its discretion at any time determines not to have all the Securities represented by a Global Security. Any Global Security exchanged pursuant to clause (i) above shall be so exchanged in whole and not in part and any Global Security exchanged pursuant to clause (ii) or (iii) above may be exchanged in whole or from time to time in part as directed by the Depositary. Any Security issued in exchange for a Global Security or any portion thereof shall be a Global Security; PROVIDED that any such Security so issued that is registered in the name of a Person other than the Depositary or a nominee thereof shall not be a Global Security. (iii) If any Global Security is to be exchanged for other Securities or cancelled in whole, it shall be surrendered by or on behalf of the Depositary or its nominee to the Trustee, as Security Registrar, for exchange or cancellation as provided in this Article III. If any Global Security is to be exchanged for other Securities or cancelled in part, or if another Security is to be exchanged in whole or in part for a beneficial interest in any Global Security, in each case, as provided in Section 3.05, then either (i) such Global Security shall be so surrendered for exchange or cancellation as provided in this Article III or (ii) the principal amount thereof shall be reduced or increased by an amount equal to the portion thereof to be so exchanged or cancelled, or equal to the principal amount of such other Security to be so exchanged for a beneficial interest therein, as the case may be, by means of an appropriate adjustment made on the records of the Trustee, as Security Registrar, whereupon the Trustee, in accordance with the Applicable Procedures, shall instruct the Depositary or its authorized representative to make a corresponding adjustment to its records. Upon any such surrender or adjustment of a Global Security, the Trustee shall, subject to Section 3.05(c) and as otherwise provided in this Article III, authenticate and deliver any Securities issuable in exchange for such Global Security (or any portion thereof) to or upon the order of, and registered in such names as may be directed by, the Depositary or its authorized representative. Upon the request of the Trustee in connection with the occurrence of any of the events specified in the preceding paragraph, the Company shall promptly make available to the Trustee a reasonable supply of Securities that are not in the form of Global Securities. The Trustee 34 shall be entitled to rely upon any order, direction or request of the Depositary or its authorized representative which is given or made pursuant to this Article III if such order, direction or request is given or made in accordance with the Applicable Procedures. (iv) Every Security authenticated and delivered upon registration of transfer of, or in exchange for or in lieu of, a Global Security or any portion thereof, whether pursuant to this Article III or otherwise, shall be authenticated and delivered in the form of, and shall be, a Global Security, unless such Security is registered in the name of a Person other than the Depositary for such Global Security or a nominee thereof, in which case such Security shall be authenticated and delivered in definitive, fully registered form, without interest coupons. (v) The Depositary or its nominee, as registered owner of a Global Security, shall be the Holder of such Global Security for all purposes under the Indenture and the Securities, and owners of beneficial interests in a Global Security shall hold such interests pursuant to the Applicable Procedures. Accordingly, any such owner's beneficial interest in a Global Security will be shown only on, and the transfer of such interest shall be effected only through, records maintained by the Depositary or its nominee or its Agent Members and such owners of beneficial interests in a Global Security will not be considered the owners or holders thereof. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Trustee or any agent of the Company or the Trustee from giving effect to any written certification, proxy or other authorization furnished by the Depositary or such nominee, as the case may be, or impair, as between the Depositary, its Agent Members and any other person on whose behalf an Agent Member may act, the operation of customary practices of such Persons governing the exercise of the rights of a holder of any Security. SECTION 3.05. REGISTRATION; REGISTRATION OF TRANSFER AND EXCHANGE. (a) The Company shall cause to be kept at the Corporate Trust Office of the Trustee a register (the register maintained in such office and in any other office or agency designated pursuant to Section 10.02 being herein sometimes collectively referred to as the "Security Register") in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration of Securities and of transfers and exchanges thereof. The Trustee is hereby appointed "Security Registrar" for the purpose of registering Securities and transfers and exchanges thereof as herein provided. Upon surrender for registration of transfer or exchange of any Security at an office or agency of the Company designated pursuant to Section 10.02 for such purpose, accompanied by a written instrument of transfer or exchange in the form provided by the Company, the Company shall execute, and the Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Securities of any authorized denominations and of a like aggregate principal amount. 35 (b) Notwithstanding any other provisions of this Indenture or the Securities, transfers and exchanges of Securities and beneficial interests in a Global Security of the kinds specified in this Section 3.05(b) shall be made only in accordance with this Section 3.05(b). (i) TRANSFER OF GLOBAL SECURITY. Other than as set forth in Section 3.04(a), a Global Security may not be transferred, in whole or in part, to any Person other than the Depositary or a nominee thereof, and no such transfer to any such other Person may be registered; PROVIDED that this Section 3.05(b)(i) shall not prohibit any transfer of a Security that is issued in exchange for a Global Security but is not itself a Global Security. No transfer of a Security to any Person shall be effective under this Indenture or the Securities unless and until such Security has been registered in the name of such Person. Nothing in this Section 3.05(b)(i) shall prohibit or render ineffective any transfer of a beneficial interest in a Global Security effected in accordance with the other provisions of this Section 3.05(b). (ii) TRANSFER OF BENEFICIAL INTERESTS IN THE GLOBAL SECURITY. Transfer of beneficial interests in the Global Security shall be effected through the Depositary, in accordance with this Indenture (including applicable restrictions on transfer set forth herein, if any) and the procedures of the Depositary therefor, if applicable. (iii) OTHER EXCHANGES. In the event that a Global Security or any portion thereof is exchanged for Securities other than Global Securities, such other Securities may in turn be exchanged (on transfer or otherwise) for Securities that are not Global Securities or for beneficial interests in a Global Security (if any is then outstanding) only in accordance with such procedures, which shall be substantially consistent with the provisions of this Section 3.05(b) (including the certification requirements set forth on the reverse of the Security intended to insure that transfers of beneficial interests in a Global Security comply with Rule 144A or Rule 144 under the Securities Act, as the case may be) and any Applicable Procedures, as may be from time to time adopted by the Company and the Trustee. (iv) TRANSFER AND EXCHANGE OF DEFINITIVE SECURITIES. When definitive Securities are presented to the Security Registrar with a request: (A) to register the transfer of such definitive Securities; or 36 (B) to exchange such definitive Securities for an equal principal amount of definitive Securities of other authorized denominations, the Security Registrar shall register the transfer or make the exchange as requested if its reasonable requirements for such transaction are met; PROVIDED, HOWEVER, that the definitive Securities surrendered for transfer or exchange: (x) shall be duly endorsed or accompanied by a written instrument of transfer in form reasonably satisfactory to the Company and the Security Registrar, duly executed by the Holder thereof or his attorney duly authorized in writing; and (y) are being transferred or exchanged pursuant to an effective registration statement under the Securities Act, pursuant to Section 3.05(b)(v), or pursuant to clause (1), (2) or (3) below, and are accompanied by the following additional information and documents, as applicable: (1) if such definitive Securities are being delivered to the Security Registrar by a Holder for registration in the name of such Holder, without transfer, a certification from such Holder to that effect (in the form set forth in Section 2.07); or (2) if such definitive Securities are being transferred to the Company, a certification to that effect (in the form set forth in Section 2.07); or (3) if such definitive Securities are being transferred pursuant to an exemption from registration in accordance with Rule 144, (i) a certification to that effect (in the form set forth in Section 2.07) and (ii) if the Company or Security Registrar so requests, an opinion of counsel or other evidence reasonably satisfactory to them as to the compliance with the restrictions set forth in the legend set forth in Section 2.02. 37 (v) RESTRICTIONS ON TRANSFER OF A DEFINITIVE SECURITY FOR A BENEFICIAL INTEREST IN A GLOBAL SECURITY. A definitive Security may not be exchanged for a beneficial interest in a Global Security except upon satisfaction of the requirements set forth below. Upon receipt by the Trustee of a definitive Security, duly endorsed or accompanied by appropriate instruments of transfer, in form satisfactory to the Trustee, together with: (A) certification in the form set forth on the reverse of the Security that such definitive Security is being transferred to a Qualified Institutional Buyer in accordance with Rule 144A; and (B) written instructions directing the Trustee to make, or to direct the Securities Registrar to make, an adjustment on its books and records with respect to such Global Security to reflect an increase in the aggregate principal amount of the Securities represented by the Global Security, such instructions to contain information regarding the Depositary account to be credited with such increase, then the Trustee shall cancel such definitive Security and cause, or direct the Securities Registrar to cause, in accordance with the standing instructions and procedures existing between the Depositary and the Securities Registrar, the aggregate principal amount of Securities represented by the Global Security to be increased by the aggregate principal amount of the definitive Security to be exchanged and shall credit or cause to be credited to the account of the Person specified in such instructions a beneficial interest in the Global Security equal to the principal amount of the definitive Security so cancelled. If no Global Securities are then outstanding, the Company shall issue and the Trustee shall authenticate, upon written order of the Company in the form of an Officers' Certificate, a new Global Security in the appropriate principal amount. (c) Subject to the succeeding paragraph, every Security shall be subject to the restrictions on transfer provided in the legends required by Section 2.02 to be applied to such Security. Whenever any Security is presented or surrendered for registration of transfer or for exchange for a Security registered in a name other than that of the Holder, such Security must be accompanied by a certificate in substantially the form set forth in Section 2.07, dated the date of such surrender and signed by the Holder of such Security, as to compliance with such restrictions on transfer. The Security Registrar shall not be required to accept for such registration of transfer or exchange any Security not so accompanied by a properly completed certificate. (d) The restrictions imposed by the legend set forth in the first or fourth paragraph, as the case may be, of Section 2.02 upon the transferability of any Security 38 shall cease and terminate when such Security has been sold pursuant to an effective registration statement under the Securities Act, transferred in compliance with Rule 144 under the Securities Act (or any successor provision thereto), or after the second anniversary of the original issuance date of the Security (or such earlier date after which the Security may be freely transferred without registration under the Securities Act or without being subject to transfer restrictions pursuant to the Securities Act, as may be provided in Rule 144(k) under the Securities Act (or any successor provision thereto) or otherwise). Any Security as to which such restrictions on transfer shall have expired in accordance with their terms or shall have terminated may, upon surrender of such Security for exchange to the Security Registrar in accordance with the provisions of this Section 3.05 (accompanied, in the event that such restrictions on transfer have terminated by reason of a transfer in compliance with Rule 144 or any successor provision, by an opinion of counsel having substantial experience in practice under the Securities Act and otherwise reasonably acceptable to the Company, addressed to the Company and in form acceptable to the Company, to the effect that the transfer of such Security has been made in compliance with Rule 144 or such successor provision), be exchanged for a new Security, of like tenor and aggregate principal amount, which shall not bear the restrictive legend set forth in the first paragraph of Section 2.02. The Company shall inform the Trustee of the effective date of any registration statement registering the Securities under the Securities Act. The Trustee shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with the aforementioned opinion of counsel or notice of an effective registration statement. (e) As used in the preceding two paragraphs (c) and (d) of this Section 3.05, the term "transfer" encompasses any sale, pledge, transfer, hypothecation or other disposition of any Security. (f) No service charge shall be made for any registration of transfer or exchange of Securities, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Securities, other than exchanges pursuant to Section 3.04, 9.06, 11.08, 13.02 or 14.06 not involving any transfer. (g) The Company shall not be required (i) to issue, register the transfer of or exchange any Security during a period beginning at the opening of business 15 days before the day of the mailing of a notice of redemption of Securities selected for redemption under Section 11.04 and ending at the close of business on the day of such mailing, or (ii) to register the transfer of or exchange any Security so selected for redemption in whole or in part, except the unredeemed portion of any Security being redeemed in part. 39 SECTION 3.06. MUTILATED, DESTROYED, LOST AND STOLEN SECURITIES. If any mutilated Security is surrendered to the Trustee, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a new Security of like tenor and principal amount and bearing a number not contemporaneously outstanding. If there shall be delivered to the Company and the Trustee (i) evidence to their satisfaction of the destruction, loss or theft of any Security and (ii) such security or indemnity as may be required by them to save each of them and any agent of either of them harmless, then, in the absence of written notice to the Company or the Trustee that such Security has been acquired by a bona fide purchaser, the Company shall execute and the Trustee shall authenticate and deliver, in lieu of any such destroyed, lost or stolen Security, a new Security of like tenor and principal amount and bearing a number not contemporaneously outstanding. In case any such mutilated, destroyed, lost or stolen Security has become or is about to become due and payable, the Company in its discretion, but subject to any conversion rights, may, instead of issuing a new Security, pay such Security. Upon the issuance, authentication and delivery by the Trustee of any new Security under this Section 3.06, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith. Every new Security issued, authenticated and delivered by the Trustee pursuant to this Section 3.06 in lieu of any destroyed, lost or stolen Security shall constitute an original additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Security shall be at any time enforceable by anyone, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Securities duly issued hereunder. The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities. SECTION 3.07. PAYMENT OF INTEREST; INTEREST RIGHTS PRESERVED. Interest on any Security which is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall be paid to the Person in whose name that Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for payment of such interest. 40 If the Company shall be required by law to deduct any taxes from any sum of interest payable hereunder to a Holder, (i) the Company shall make such deductions and shall pay the full amount deducted to the relevant taxing authority in accordance with applicable law and (ii) the amount of such deduction shall be treated for purposes hereof as a payment of interest. Any interest on any Security which is payable, but is not punctually paid or duly provided for, on any Interest Payment Date (herein called "Defaulted Interest") shall forthwith cease to be payable to the Holder on the relevant Regular Record Date by virtue of having been such Holder, and such Defaulted Interest may be paid by the Company, at its election in each case, as provided in clause (1) or (2) below: (1) The Company may elect to make payment of any Defaulted Interest to the Persons in whose names the Securities (or their respective Predecessor Securities) are registered at the close of business on a Special Record Date for the payment of such Defaulted Interest, which shall be fixed in the following manner. The Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each Security and the date of the proposed payment, and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this clause (1) provided. Thereupon, the Trustee shall, on behalf of, and upon the instructions of, the Company, fix a Special Record Date for the payment of such Defaulted Interest which shall be not more than 15 days and not less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee, in the name and at the expense of the Company, shall forward a notice prepared by the Company of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be mailed, first-class postage prepaid, to each Holder at his address as it appears in the Security Register, not less than 10 days prior to such Special Record Date at the expense of the Company. Notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor having been so mailed, such Defaulted Interest shall be paid to the Persons in whose names the Securities (or their respective Predecessor Securities) are registered at the close of business on such Special Record Date and shall no longer be payable pursuant to the following clause (2). (2) The Company may make payment of any Defaulted Interest in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities may be listed, and upon such notice as may be 41 required by such exchange, if, after written notice given by the Company to the Trustee of the proposed payment pursuant to this clause (2), such manner of payment shall be deemed practicable by the Trustee. Subject to the foregoing provisions of this Section, each Security delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Security shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Security. In the case of any Security which is converted after any Regular Record Date and on or prior to the corresponding Interest Payment Date, interest on such Security whose Stated Maturity is on such Interest Payment Date shall be deemed to continue to accrue and shall be payable on such Interest Payment Date notwithstanding such conversion and notwithstanding that such Security may have been called for redemption on a Redemption Date within such period, and such interest (whether or not punctually paid or duly provided for) shall be paid to the Person in whose name that Security (or one or more Predecessor Securities) is registered at the close of business on such Regular Record Date. Except as otherwise expressly provided in the immediately preceding sentence, in the case of any Security which is converted, interest whose Stated Maturity is after the date of conversion of such Security shall not be payable. SECTION 3.08. PERSONS DEEMED OWNERS. Prior to due presentment of a Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name such Security is registered in the Security Register as the owner of such Security for the purpose of receiving payment of principal of, premium, if any, and (subject to Section 3.07) interest on such Security and for all other purposes whatsoever, whether or not such Security be overdue, and neither the Company, the Trustee nor any agent of the Company or the Trustee shall be affected by notice to the contrary. SECTION 3.09. CANCELLATION. All Securities surrendered for payment, redemption, purchase, registration of transfer or exchange or conversion shall, if surrendered to any Person other than the Trustee, be delivered to the Trustee and shall be promptly cancelled by it. The Company may at any time deliver to the Trustee for cancellation any Securities previously authenticated and delivered hereunder which the Company may have acquired in any manner whatsoever, and all Securities so delivered shall be promptly cancelled by the Trustee. No Securities shall be authenticated in lieu of or in exchange for any Securities cancelled as provided in this Section, except as expressly permitted by this Indenture. All cancelled Securities held by the Trustee shall be disposed of as directed by a Company Order; PROVIDED HOWEVER, the Trustee shall not be required to destroy such cancelled Securities. 42 SECTION 3.10. COMPUTATION OF INTEREST. Interest on the Securities shall be computed on the basis of a 360-day year of twelve 30-day months. SECTION 3.11 CUSIP NUMBERS. The Company in issuing the Securities may use "CUSIP" numbers (if then generally in use), and, if so, the Trustee shall use "CUSIP" numbers in notices of redemption as a convenience to Holders; PROVIDED that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Securities or as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers printed on the Securities, and any such redemption shall not be affected by any defect in or omission of such numbers. The Company will promptly notify the Trustee of any change in the "CUSIP" numbers. ARTICLE IV SATISFACTION AND DISCHARGE SECTION 4.01. SATISFACTION AND DISCHARGE OF INDENTURE. This Indenture shall upon Company Request cease to be of further effect (except as to any surviving rights of conversion, registration of transfer or exchange of Securities herein expressly provided for), and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture, when (1) either (A) all Securities theretofore authenticated and delivered (other than (i) Securities which have been destroyed, lost or stolen and which have been replaced or paid as provided in Section 3.06 and (ii) Securities for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust, as provided in Section 10.03) have been delivered to the Trustee for cancellation; (B) all such Securities not theretofore delivered to the Trustee for cancellation (i) have become due and payable, or (ii) will become due and payable at their Stated Maturity within one year, or 43 (iii) are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Company, and the Company, in the case of (i), (ii) or (iii) above, has deposited or caused to be deposited irrevocably with the Trustee as trust funds in trust for the benefit of Holders of Outstanding Securities in an amount sufficient to pay and discharge the entire indebtedness on such Securities not theretofore delivered to the Trustee for cancellation, for principal (and premium, if any) and interest to the date of such deposit (in the case of Securities which have become due and payable) or to the Stated Maturity or Redemption Date, as the case may be; (2) the Company has paid or caused to be paid all other sums payable hereunder by the Company; (3) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with; and (4) no Event of Default which, with notice or lapse of time, or both, would become an Event of Default with respect to the Securities shall have occurred and be continuing on the date of such deposit. Notwithstanding the satisfaction and discharge of this Indenture, the obligations of the Company to the Trustee under Section 6.07, the obligations of the Company to any Authenticating Agent under Section 6.14 and, if money shall have been deposited with the Trustee pursuant to subclause (B) of clause (1) of this Section, the obligations of the Trustee under Section 4.02 and the last paragraph of Section 10.03 shall survive. SECTION 4.02. APPLICATION OF TRUST MONEY. Subject to the provisions of the last paragraph of Section 10.03, all money deposited with the Trustee pursuant to Section 4.01 shall be held in trust and applied by it, in accordance with the provisions of the Securities and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Persons entitled thereto, of the principal (and premium, if any) and interest for whose payment such money has been deposited with the Trustee. All moneys deposited with the Trustee pursuant to Section 4.01 (and held by it or any Paying Agent) for the payment of Securities subsequently converted shall be returned to the Company upon Company Request. 44 ARTICLE V REMEDIES SECTION 5.01. EVENTS OF DEFAULT. "Event of Default", wherever used herein, means any one of the following events (whatever the reason for such Event of Default and whether it shall be occasioned by the provisions of Article XII or be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (1) default in the payment of any interest (including Additional Interest) upon any Security when it becomes due and payable, and continuance of such default for a period of 30 days (whether or not such payment is prohibited by the provisions of Article XII); or (2) default in the payment of the principal of (or premium, if any, on) any Security at its Maturity (whether or not such payment is prohibited by the provisions of Article XII); or (3) failure by the Company to provide the notice of a Change in Control in accordance with Section 14.03 or default in the payment of the Purchase Price in respect of any Security on the Purchase Date therefor (whether or not such payment is prohibited by the provisions of Article XII); or (4) default in the performance, or breach, of any covenant or warranty of the Company in this Indenture (other than a covenant or warranty a default in whose performance or whose breach is elsewhere in this Section specifically dealt with), and continuance of such default or breach for a period of 60 days after there has been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in principal amount of the Outstanding Securities a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; or (5) a default under any bonds, debentures, notes or other evidences of indebtedness for money borrowed by the Company or a Subsidiary or under any mortgages, indentures or instruments under which there may be issued or by which there may be secured or evidenced any indebtedness for money borrowed by the Company or a Subsidiary, whether such indebtedness now exists or shall hereafter be created which indebtedness, individually or in the aggregate, has a principal amount outstanding in excess of U.S.$10,000,000, which default shall 45 constitute a failure to pay any portion of the principal of such indebtedness when due and payable after the expiration of any applicable grace or cure period with respect thereto or shall have resulted in such indebtedness becoming or being declared due and payable prior to the date on which it would otherwise have become due and payable, without such indebtedness having been discharged, or such acceleration having been rescinded or annulled, within a period of 30 days after there shall have been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in principal amount of the Outstanding Securities a written notice specifying such default and requiring the Company to cause such indebtedness to be discharged or cause such acceleration to be rescinded or annulled and stating that such notice is a "Notice of Default" hereunder; or (6) the entry by a court having jurisdiction in the premises of (A) a decree or order for relief in respect of the Company or a Subsidiary in an involuntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or (B) a decree or order adjudging the Company or a Subsidiary bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Company or a Subsidiary under any applicable Federal or State law, or appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or a Subsidiary or of any substantial part of their respective properties, or ordering the winding up or liquidation of the affairs of the Company or a Subsidiary, and the continuance of any such decree or order for relief or any such other decree or order unstayed and in effect for a period of 60 consecutive days; or (7) the commencement by the Company or a Subsidiary of a voluntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or of any other case or proceeding to be adjudicated a bankrupt or insolvent, or the consent by either the Company or a Subsidiary to the entry of a decree or order for relief in respect of the Company or a Subsidiary in an involuntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or to the commencement of any bankruptcy or insolvency case or proceeding against either the Company or a Subsidiary, or the filing by either the Company or a Subsidiary of a petition or answer or consent seeking reorganization or relief under any applicable Federal or State law, or the consent by either the Company or a Subsidiary to the filing of such petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or a Subsidiary or of any substantial part of their respective properties, or the making by either the Company or a Subsidiary 46 of an assignment for the benefit of creditors, or the admission by either the Company or a Subsidiary in writing of an inability to pay the debts of either the Company or a Subsidiary generally as they become due, or the taking of corporate action by the Company or a Subsidiary in furtherance of any such action. SECTION 5.02. ACCELERATION OF MATURITY; RESCISSION AND ANNULMENT. If an Event of Default (other than an Event of Default specified in Section 5.01(6) or 5.01(7)) occurs and is continuing, then in every such case the Trustee or the Holders of not less than 25% in principal amount of the Outstanding Securities may declare the principal of all the Securities to be due and payable immediately, by a notice in writing to the Company (and to the Trustee if given by Holders), and upon any such declaration such principal and any accrued interest (including Additional Interest) thereon shall become immediately due and payable. If an Event of Default specified in Section 5.01(6) or 5.01(7) occurs, the principal of, and accrued interest (including Additional Interest) on, all the Securities shall automatically, and without any declaration or other action on the part of the Trustee or any Holder, become immediately due and payable. At any time after such a declaration of acceleration has been made and before a judgment or decree for payment of the money due has been obtained by the Trustee as hereinafter in this Article V provided, the Holders of a majority in principal amount of the Outstanding Securities, by written notice to the Company and the Trustee, may rescind and annul such declaration and its consequences if (1) the Company has paid or deposited with the Trustee a sum sufficient to pay (A) all overdue interest (including Additional Interest) on all Securities, (B) the principal of (and premium, if any, on) any Securities which have become due otherwise than by such declaration of acceleration and interest thereon at the rate borne by the Securities, (C) to the extent that payment of such interest is lawful, interest upon overdue interest at the rate borne by the Securities, and (D) all sums paid or advanced by the Trustee hereunder and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel; and 47 (2) all Events of Default, other than the nonpayment of the principal of Securities which have become due solely by such declaration of acceleration, have been cured or waived as provided in Section 5.13. No such rescission shall affect any subsequent default or impair any right consequent thereon. SECTION 5.03. COLLECTION OF INDEBTEDNESS AND SUITS FOR ENFORCEMENT BY TRUSTEE. If (1) default is made in the payment of any interest on any Security when such interest becomes due and payable and such default continues for a period of 30 days, or (2) default is made in the payment of the principal of (or premium, if any, on) any Security at the Maturity thereof, the Trustee is authorized to recover judgment in its own name and as trustee of an express trust against the Company for the whole amount then due and payable on such Securities for principal (and premium, if any) and interest, and, to the extent that payment of such interest shall be legally enforceable, interest on any overdue principal (and premium, if any) and on any overdue interest, at the rate borne by the Securities, and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. If an Event of Default occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy. 48 SECTION 5.04. TRUSTEE MAY FILE PROOFS OF CLAIM. In case of any judicial proceeding relative to the Company (or any other obligor upon the Securities), its property or its creditors, the Trustee shall be entitled and empowered, by intervention in such proceeding or otherwise, (1) to file and prove a claim for the whole amount of principal and interest owing and unpaid in respect of the Securities and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and of the Holders allowed in such judicial proceeding, and (2) to collect and receive any moneys or other property payable or deliverable on any such claim and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 6.07. No provision of this Indenture shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding; PROVIDED, HOWEVER, that the Trustee may, on behalf of the Holders, vote for the election of a trustee in bankruptcy or similar official and be a member of a creditors' or other similar committee. SECTION 5.05. TRUSTEE MAY ENFORCE CLAIMS WITHOUT POSSESSION OF SECURITIES. All rights of action and claims under this Indenture or the Securities may be prosecuted and enforced by the Trustee without the possession of any of the Securities or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the Holders of the Securities in respect of which such judgment has been recovered. 49 SECTION 5.06. APPLICATION OF MONEY COLLECTED. Any money collected by the Trustee pursuant to this Article V shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such money on account of principal (or premium, if any) or interest, upon presentation of the Securities and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid: FIRST: to the payment of all amounts due the Trustee under Section 6.07; SECOND: subject to Article XII, to the payment of the amounts then due and unpaid for first, interest (including Additional Interest) on, and, second, for principal of (and premium, if any, on) the Securities in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Securities for interest and principal (and premium, if any) respectively; THIRD: the balance, if any, to the Person or Persons entitled thereto, as their interest may appear or as a court of competent jurisdiction shall direct; and FOURTH: to the Company. SECTION 5.07. LIMITATION ON SUITS. No Holder of any Security shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless (1) such Holder has previously given written notice to a Responsible Officer the Trustee of a continuing Event of Default; (2) the Holders of not less than 25% in principal amount of the Outstanding Securities shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder; (3) such Holder or Holders have offered to the Trustee written indemnity satisfactory to it (which indemnity shall not be unreasonable) against the costs, expenses and liabilities to be incurred in compliance with such request; (4) the Trustee for 60 days after its receipt of such notice, request and offer of indemnity has failed to institute any such proceeding; and 50 (5) no direction inconsistent with such written request has been given to the Trustee during such 60-day period by the Holders of a majority in principal amount of the Outstanding Securities; it being understood and intended that no one or more of such Holders shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture to affect, disturb or prejudice the fights of any other of such Holders, or to obtain or to seek to obtain priority or preference over any other of such Holders or to enforce any right under this Indenture, except in the manner herein provided and for the equal and ratable benefit of all of such Holders. SECTION 5.08. UNCONDITIONAL RIGHT OF HOLDERS TO RECEIVE PRINCIPAL, PREMIUM AND INTEREST AND TO CONVERT. Notwithstanding any other provision in this Indenture, the Holder of any Security shall have the right, which is absolute and unconditional, to receive payment of the principal of (and premium, if any) and (subject to Section 3.07) interest on such Security on the respective Stated Maturities expressed in such Security (or, in the case of redemption or purchase, on the Redemption Date or Purchase Date, as the case may be) and to convert such Security in accordance with Article XIII and to institute suit for the enforcement of any such payment and right to convert, and such rights shall not be impaired without the consent of such Holder. SECTION 5.09. RESTORATION OF RIGHTS AND REMEDIES. If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case, subject to any determination in such proceeding, the Company, the Trustee and the Holders shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted. SECTION 5.10. RIGHTS AND REMEDIES CUMULATIVE. Except as otherwise provided with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities in the last paragraph of Section 3.06, no right or remedy herein conferred upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. SECTION 5.11. DELAY OR OMISSION NOT WAIVER. No delay or omission of the Trustee or of any Holder of any Securities to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of 51 any such Event of Default or an acquiescence therein. Every right and remedy given by this Article V or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders, as the case may be. SECTION 5.12. CONTROL BY HOLDERS. The Holders of a majority in principal amount of the Outstanding Securities shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee; PROVIDED that the Trustee may seek the advice of counsel and (1) such direction shall not be in conflict with any rule of law or with this Indenture, and (2) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction. SECTION 5.13. WAIVER OF PAST DEFAULTS. The Holders of not less than a majority in principal amount of the Outstanding Securities may on behalf of the Holders of all the Securities waive any past default hereunder and its consequences, except a default (1) in the payment of the principal of (or premium, if any) or interest on any Security, or (2) in respect of a covenant or provision hereof which under Article IX cannot be modified or amended without the consent of the Holder of each Outstanding Security affected. Upon any such waiver, such default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other default or impair any right consequent thereon. A copy of such waiver shall be delivered by the Company to the Trustee. 52 SECTION 5.14. UNDERTAKING FOR COSTS. In any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken, suffered or omitted by it as Trustee, a court may require any party litigant in such suit to file an undertaking to pay the costs of such suit, and may assess costs against any such party litigant, having due regard to the merits and good faith of the claims or defenses made by such party litigant; PROVIDED, that this Section 5.14 shall not be deemed to authorize any court to require such an undertaking or to make such an assessment in any suit instituted by the Trustee or the Company or in any suit for the enforcement of the right to convert any Security in accordance with Article XIII. SECTION 5.15. WAIVER OF USURY, STAY OR EXTENSION LAWS. The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any usury, stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. ARTICLE VI THE TRUSTEE SECTION 6.01. CERTAIN DUTIES AND RESPONSIBILITIES. (a) Except during the continuance of an Event of Default, (1) the Trustee undertakes to perform such duties and only such duties as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (2) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; but in the case of any such certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture (but need not confirm or investigate the accuracy of mathematical calculations or other facts stated therein). 53 (b) In case an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of his or her own affairs. (c) No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, EXCEPT that (1) this paragraph (c) shall not be construed to limit the effect of paragraph (a) of this Section; (2) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; (3) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of a majority in principal amount of the Outstanding Securities relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture; and (4) no provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers. (d) Whether or not therein expressly so provided, every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee (as Trustee, Paying Agent, Authenticating Agent or Security Registrar) shall be subject to the provisions of this Section. SECTION 6.02. NOTICE OF DEFAULTS. Within 90 days after the occurrence of any default hereunder, the Trustee shall give the Holders, in the manner provided in Section 1.06, notice of any default hereunder actually known to a Responsible Officer of the Trustee; PROVIDED, HOWEVER, that in the case of any default of the character specified in Section 5.01(3), no such notice to Holders shall be given until at least 30 days after the occurrence thereof. The Trustee shall not be deemed to have notice of a default unless (i) the Trustee has received written notice thereof from the Company or any Holder or (ii) a Responsible Officer of the Trustee shall have actual knowledge thereof. For the purpose of this Section, the term "default" means any event which is, or after notice or lapse of time or both would become, an Event of Default. 54 SECTION 6.03. CERTAIN RIGHTS OF TRUSTEE. Subject to the provisions of Section 6.01: (a) the Trustee may conclusively rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (b) any request or direction of the Company mentioned herein shall be sufficiently evidenced by a Company Request or Company Order and any resolution of the Board of Directors shall be sufficiently evidenced by a Board Resolution; (c) whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may require and, in the absence of bad faith on its part, conclusively rely upon an Opinion of Counsel and Officers' Certificate; (d) the Trustee may consult with counsel of its selection and the advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon; (e) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders pursuant to this Indenture, unless such Holders shall have offered to the Trustee security or indemnity satisfactory to the Trustee (which security or indemnity shall not be unreasonable) against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction; (f) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company, personally or by agent or attorney at the Company's expense; and 55 (g) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder. (h) no provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers. SECTION 6.04. NOT RESPONSIBLE FOR RECITALS OR ISSUANCE OF SECURITIES. The recitals contained herein and in the Securities, except the Trustee's certificates of authentication, shall be taken as the statements of the Company, and neither the Trustee nor any Authenticating Agent assumes any responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Securities. Neither the Trustee nor any Authenticating Agent shall be accountable for the use or application by the Company of Securities or the proceeds thereof. SECTION 6.05. MAY HOLD SECURITIES. The Trustee, any Authenticating Agent, any Paying Agent, any Security Registrar or any other agent of the Company, in its individual or any other capacity, may become the owner or pledgee of Securities and, subject to Section 6.08 and Section 6.13, may otherwise deal with the Company with the same rights it would have if it were not Trustee, Authenticating Agent, Paying Agent, Security Registrar or such other agent. SECTION 6.06. MONEY HELD IN TRUST. Money held by the Trustee in trust hereunder need not be segregated from other funds except to the extent required by law. The Trustee shall be under no liability for interest on any money received by it hereunder except as otherwise agreed with the Company in writing. SECTION 6.07. COMPENSATION AND REIMBURSEMENT. The Company agrees: (1) to pay to the Trustee from time to time such compensation as shall be agreed in writing between the Company and the Trustee for all services rendered by it hereunder (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); (2) except as otherwise expressly provided herein, to reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any provision of this Indenture (including the reasonable compensation and the expenses and 56 disbursements of its agents and counsel), except any such expense, disbursement or advance as may be attributable to its negligence or willful misconduct; (3) to indemnify each of the Trustee and any predecessor Trustee for, and to hold each harmless against, any loss, liability or expense incurred without negligence or willful misconduct on its part, arising out of or in connection with the acceptance or administration of this trust, including the costs and expenses of defending itself against any claim (whether asserted by the Company, a Holder of Securities or any other Person) or liability in connection with the exercise or performance of any of its powers or duties hereunder. The Trustee shall notify the Company of any claim asserted against it for which it may seek indemnity; (4) all indemnifications and releases from liability granted hereunder to the Trustee shall extend to its officers, directors, employees, agents, successors and assigns; (5) when the Trustee incurs expenses or renders services after the occurrence of any Event of Default specified in Section 5.01, the expenses and the compensation for the services are intended to constitute expenses of administration under any bankruptcy, insolvency or similar laws; and (6) the obligations of the Company under this Section shall survive the satisfaction and discharge of this Indenture. SECTION 6.08. DISQUALIFICATION; CONFLICTING INTERESTS. If the Trustee has or shall acquire a conflicting interest within the meaning of the Trust Indenture Act, the Trustee shall either eliminate such interest or resign, to the extent and in the manner provided by, and subject to the provisions of, the Trust Indenture Act and this Indenture. SECTION 6.09. CORPORATE TRUSTEE REQUIRED; ELIGIBILITY. There shall at all times be a Trustee hereunder which shall be a corporation organized and doing business under the laws of the United States, authorized under such laws to exercise corporate trust powers, which shall have (or, in the case of a corporation included in a bank holding company system, the related bank holding company shall have) a combined capital and surplus of at least U.S.$50,000,000, subject to supervision or examination by Federal or State authority, in good standing and having an established place of business or agency in the Borough of Manhattan, The City of New York. If such corporation or related bank holding company publishes reports of condition at least annually, pursuant to law or to the requirements of said supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such corporation or related bank holding company shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Trustee shall cease 57 to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect hereinafter specified in this Article VI. SECTION 6.10. RESIGNATION AND REMOVAL; APPOINTMENT OF SUCCESSOR. (a) No resignation or removal of the Trustee and no appointment of a successor Trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Trustee in accordance with the applicable requirements of Section 6.11. (b) The Trustee may resign at any time by giving written notice thereof to the Company. If the instrument of acceptance by a successor Trustee required by Section 6.11 shall not have been delivered to the Trustee within 30 days after the giving of such notice of resignation, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor Trustee. (c) The Trustee may be removed at any time by Act of the Holders of a majority in principal amount of the Outstanding Securities, delivered to the Trustee and to the Company. If the instrument of acceptance by a successor Trustee required by Section 6.11 shall not have been delivered to the Trustee within 30 days after the giving of such notice of removal, the removed Trustee may petition any court of competent jurisdiction for the appointment of a successor Trustee. (d) If at any time: (1) the Trustee shall fail to comply with Section 6.08 after written request therefor by the Company or by any Holder who has been a bona fide Holder of a Security for at least six months, or (2) the Trustee shall cease to be eligible under Section 6.09 and shall fail to resign after written request therefor by the Company or by any such Holder, or (3) the Trustee shall become incapable of acting or shall be adjudged a bankrupt or insolvent or a receiver of the Trustee or of its property shall be appointed or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then, in any such case, (i) the Company by a Board Resolution may remove the Trustee, or (ii) subject to Section 5.14, any Holder who has been a bona fide Holder of a Security for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. 58 (e) If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Trustee for any cause, the Company, by a Board Resolution, shall promptly appoint a successor Trustee. If, within one year after such resignation, removal or incapability, or the occurrence of such vacancy, a successor Trustee shall be appointed by Act of the Holders of a majority in principal amount of the Outstanding Securities delivered to the Company and the retiring Trustee, the successor Trustee so appointed shall, forthwith upon its acceptance of such appointment in accordance with the applicable requirements of Section 6.11, become the successor Trustee and to that extent supersede the successor Trustee appointed by the Company. If no successor Trustee shall have been so appointed by the Company or the Holders and accepted appointment in the manner required by Section 6.11, any Holder who has been a bona fide Holder of a Security for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor Trustee. (f) The Company shall give notice of each resignation and each removal of the Trustee and each appointment of a successor Trustee to all Holders in the manner provided in Section 1.06. Each notice shall include the name of the successor Trustee and the address of its Corporate Trust Office. SECTION 6.11. ACCEPTANCE OF APPOINTMENT BY SUCCESSOR. Every successor Trustee appointed hereunder shall execute, acknowledge and deliver to the Company and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee; but, on the request of the Company or the successor Trustee, such retiring Trustee shall, upon payment of its charges, execute and deliver an instrument transferring to such successor Trustee all the rights, powers and trusts of the retiring Trustee and shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder. Upon request of any such successor Trustee, the Company shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Trustee all such rights, powers and trusts. No successor Trustee shall accept its appointment unless at the time of such acceptance such successor Trustee shall be qualified and eligible under this Article VI. SECTION 6.12. MERGER, CONVERSION, CONSOLIDATION OR SUCCESSION TO BUSINESS. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to 59 all or substantially all the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder; PROVIDED such corporation shall be otherwise qualified and eligible under this Article VI without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case any Securities shall have been authenticated, but not delivered, by the Trustee then in office, any successor by merger, conversion or consolidation to such authenticating Trustee may adopt such authentication and deliver the Securities so authenticated with the same effect as if such successor Trustee had itself authenticated such Securities. SECTION 6.13. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY. If and when the Trustee shall be or become a creditor of the Company (or any other obligor upon the Securities), the Trustee shall be subject to the provisions of the Trust Indenture Act regarding the collection of claims against the Company (or any such other obligor). SECTION 6.14. APPOINTMENT OF AUTHENTICATING AGENT. The Trustee may appoint an Authenticating Agent or Agents which shall be authorized to act on behalf of the Trustee to authenticate Securities issued upon original issue and upon exchange, registration of transfer, partial conversion, partial redemption, or partial purchase or pursuant to Section 3.06, and Securities so authenticated shall be entitled to the benefits of this Indenture and shall be valid and obligatory for all purposes as if authenticated by the Trustee hereunder. Wherever reference is made in this Indenture to the authentication and delivery of Securities by the Trustee or the Trustee's certificate of authentication, such reference shall be deemed to include authentication and delivery on behalf of the Trustee by an Authenticating Agent and a certificate of authentication executed on behalf of the Trustee by an Authenticating Agent. Each Authenticating Agent shall be acceptable to the Company and shall at all times be a corporation organized and doing business under the laws of the United States, authorized under such laws to act as Authenticating Agent, which shall have (or, in the case of a corporation included in a bank holding company system, the related bank holding company shall have) a combined capital and surplus of not less than U.S.$50,000,000 and be subject to supervision or examination by Federal or State authority. If such Authenticating Agent publishes reports of condition at least annually, pursuant to law or to the requirements of said supervising or examining authority, then, for the purposes of this Section, the combined capital and surplus of such Authenticating Agent or related bank holding company shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time an Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, such Authenticating Agent shall resign immediately in the manner and with the effect specified in this Section. Any corporation into which an Authenticating Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which such Authenticating Agent shall be a party, 60 or any corporation succeeding to all or substantially all the corporate agency or corporate trust business of an Authenticating Agent, shall continue to be an Authenticating Agent; PROVIDED such corporation shall be otherwise eligible under this Section, without the execution or filing of any paper or any further act on the part of the Trustee or the Authenticating Agent. An Authenticating Agent may resign at any time by giving written notice thereof to the Trustee and to the Company. The Trustee may at any time terminate the agency of an Authenticating Agent by giving written notice thereof to such Authenticating Agent and to the Company. Upon receiving such a notice of resignation or upon such a termination, or in case at any time such Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section 6.14, the Trustee may appoint a successor Authenticating Agent which shall be acceptable to the Company and shall mail written notice of such appointment by first-class mail, postage prepaid, to all Holders as their names and addresses appear in the Security Register. Any successor Authenticating Agent upon acceptance of its appointment hereunder shall become vested with all the rights, powers and duties of its predecessor hereunder, with like effect as if originally named as an Authenticating Agent. No successor Authenticating Agent shall be appointed unless eligible under the provisions of this Section 6.14. The Company agrees to pay to each Authenticating Agent from time to time compensation for its services under this Section 6.14. If an appointment is made pursuant to this Section, the Securities may have endorsed thereon, in addition to the Trustee's certificate of authentication, an alternative certificate of authentication in the following form: This is one of the Securities described in the within-mentioned Indenture. The Bank of New York Date: ---------------- ---------------------------------------- As Trustee By -------------------------------------- As Authenticating Agent By -------------------------------------- Authorized Signatory 61 SECTION 6.15. APPOINTMENT OF CO-TRUSTEE. Subject to the qualifications set forth in Section 6.09, the Trustee may appoint an additional institution as a separate trustee or co-trustee. If the Trustee appoints an additional institution as a separate trustee or co-trustee, each and every remedy, power, fight, claim, demand, cause of action, immunity, estate, duty, obligation, title, interest and lien expressed or intended by this Indenture to be exercised by, vested in and conveyed by the Trustee with respect thereto shall be exercisable by, vested in and conveyed to such separate trustee or co-trustee, but only to the extent necessary to enable such separate trustee or co-trustee to exercise such powers, rights and remedies, and every covenant and obligation necessary for the exercise thereby by such separate trustee or co-trustee shall run to and be enforceable by either of them. Should any instrument in writing from the Company be required by the separate trustee or co-trustee so appointed by the Trustee for more fully vesting in and confirming to them such properties, rights, powers, trusts, duties and obligations, any and all such instruments in writing shall, on request, be executed, acknowledged and delivered by the Company. If any separate trustee or co-trustee, or a successor to either, shall become incapable of acting or not qualified to act, resign or be removed, all the estate, properties, rights, powers, trusts, duties and obligations of such separate trustee or co-trustee, so far as permitted by law, shall vest in and be exercised by the Trustee until the appointment of a successor to such separate trustee or co-trustee. The appointment of any separate trustee or co-trustee shall be subject to written approval of the Company so long as no Event of Default has occurred and is continuing under this Indenture. ARTICLE VII HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY SECTION 7.01. COMPANY TO FURNISH TRUSTEE NAMES AND ADDRESSES OF HOLDERS. The Company will furnish or cause to be furnished to the Trustee (a) semi-annually, not more than 15 days after each Regular Record Date, a list, in such form as the Trustee may reasonably require, of the names and addresses of the Holders as of such Regular Record Date, and (b) at such other times as the Trustee may request in writing, within 30 days after the receipt by the Company of any such request, a list of similar form and content as of a date not more than 15 days prior to the time such list is furnished; EXCLUDING from any such list names and addresses received by the Trustee in its capacity as Security Registrar. 62 SECTION 7.02. PRESERVATION OF INFORMATION; COMMUNICATIONS TO HOLDERS. (a) The Trustee shall preserve, in as current a form as is reasonably practicable, the names and addresses of Holders contained in the most recent list furnished to the Trustee as provided in Section 7.01 and the names and addresses of Holders received by the Trustee in its capacity as Security Registrar. The Trustee may destroy any list furnished to it as provided in Section 7.01 upon receipt of a new list so furnished. (b) The rights of Holders to communicate with other Holders with respect to their rights under this Indenture or under the Securities, and the corresponding rights and duties of the Trustee, shall be as provided by the Trust Indenture Act. (c) Every Holder of Securities, by receiving and holding the same, agrees with the Company and the Trustee that neither the Company nor the Trustee nor any agent of either of them shall be held accountable by reason of any disclosure of information as to names and addresses of Holders made pursuant to the Trust Indenture Act. SECTION 7.03. REPORTS BY TRUSTEE. (a) The Trustee shall transmit to Holders within 60 days after May 15th of each year such reports concerning the Trustee and its actions under this Indenture as may be required pursuant to the Trust Indenture Act at the times and in the manner provided pursuant thereto. (b) A copy of each such report shall, at the time of such transmission to Holders, be filed by the Trustee with each stock exchange upon which the Securities are listed, with the Commission, if applicable, and with the Company. The Company will promptly notify the Trustee when the Securities are listed on any stock exchange and of any delisting thereof. SECTION 7.04. REPORTS BY COMPANY. (a) The Company shall file with the Trustee and the Commission, if applicable, and transmit to Holders, such information, documents and other reports, and such summaries thereof, as may be required pursuant to the Trust Indenture Act at the times and in the manner provided pursuant to such Act; PROVIDED that any such information, documents or reports required to be filed with the Commission pursuant to Section 13 or 15(d) of the Exchange Act shall be filed with the Trustee within 15 days after the same is so required to be filed with the Commission. Delivery of such reports, information and documents to the Trustee is for informational purposes only, and the Trustee's receipt of such shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Company's compliance with any of its covenants hereunder (as to which the Trustee is entitled to rely exclusively on Officers' Certificates). Notwithstanding 63 anything to the contrary contained herein, the Trustee shall have no duty to review such documents for the purpose of determining compliance with this Indenture. Delivery of such reports, information and documents to the Trustee is for informational purposes only and the Trustee's receipt of such shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Company's compliance with any of its covenants hereunder (as to which the Trustee is entitled to rely exclusively on Officers' Certificates). (b) The Company shall provide the Trustee with at least 30 days' prior written notice of any change in location of its principal executive offices or other principal place of business. ARTICLE VIII CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE SECTION 8.01. COMPANY MAY CONSOLIDATE, ETC., ONLY ON CERTAIN TERMS. The Company shall not consolidate with or merge into any other Person or, directly or indirectly, convey, transfer, sell, lease or otherwise dispose of all or substantially all of its properties and assets to any Person, and the Company shall not permit any Person to consolidate with or merge into the Company or convey, transfer, sell, lease or otherwise dispose of all or substantially all of its properties and assets to the Company, unless: (1) in case the Company shall consolidate with or merge into another Person or convey, transfer or lease its properties and assets substantially as an entirety to any Person, the Person formed by such consolidation or into which the Company is merged or the Person which acquires by conveyance or transfer, or which leases, the properties and assets of the Company substantially as an entirety (i) shall be a corporation, partnership or trust, (ii) shall be an entity (A) organized and validly existing under the laws of the United States of America, any State thereof or the District of Columbia or (B) organized and validly existing under the laws of a jurisdiction outside of the United States of America, with its common stock, or American Depositary Shares representing such shares of common stock, traded on a national securities exchange in the United States of America or through Nasdaq and a worldwide total market capitalization of its equity securities of at least U.S. $5 billion, and (iii) shall expressly assume, by an indenture supplemental hereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, the due and punctual payment of the principal of (and premium, if any) and interest (including Additional Interest) on all the Securities and the 64 performance or observance of every covenant of this Indenture on the part of the Company to be performed or observed and shall have provided for conversion rights in accordance with Article XIII; (2) immediately after giving effect to such transaction, no Event of Default, and no event which, after notice or lapse of time or both, would become an Event of Default, shall have happened and be continuing; and (3) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger, conveyance, transfer or lease and, if a supplemental indenture is required in connection with such transaction, such supplemental indenture comply with this Article VIII and that all conditions precedent herein provided for relating to such transaction have been complied with. SECTION 8.02. SUCCESSOR SUBSTITUTED. Upon any consolidation of the Company with, or merger of the Company into, any other Person or any conveyance, transfer or lease of the properties and assets of the Company substantially as an entirety in accordance with Section 8.01, the successor Person formed by such consolidation or into which the Company is merged or to which such conveyance, transfer or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture with the same effect as if such successor Person had been named as the Company herein, and thereafter, except in the case of a lease, the predecessor Person shall be released from its obligations and covenants under this Indenture and the Securities. ARTICLE IX SUPPLEMENTAL INDENTURES SECTION 9.01. SUPPLEMENTAL INDENTURES WITHOUT CONSENT OF HOLDERS. Without the consent of any Holders, the Company, when authorized by a Board Resolution, and the Trustee, at any time and from time to time, may enter into one or more indentures supplemental hereto, in form satisfactory to the Trustee, for any of the following purposes: (1) to evidence the succession of another Person to the Company and the assumption by any such successor of the covenants of the Company herein and in the Securities; or 65 (2) to add to the covenants of the Company for the equal and ratable benefit of the Holders, or to surrender any right or power herein conferred upon the Company; or (3) to secure the Company's obligations in respect of the Securities; or (4) to make provision with respect to the conversion rights of Holders pursuant to the requirements of Article XIII; or (5) to make any changes or modifications to this Indenture necessary in connection with the registration of any Transfer Restricted Securities under the Securities Act as contemplated by Section 10.11; PROVIDED that such action pursuant to this clause (5) shall not adversely affect the interests of the Holders of Securities; or (6) to cure any ambiguity, to correct or supplement any provision herein which may be inconsistent with any other provision herein, to correct or supplement any provision herein which limits, qualifies or conflicts with a provision of the Trust Indenture Act which is required under such Act to be a part of and govern this Indenture, in any case to the extent necessary to qualify this Indenture under the Trust Indenture Act, or to make any other provisions with respect to matters or questions arising under this Indenture which shall not be inconsistent with the provisions of this Indenture; PROVIDED that such action pursuant to this clause (6) shall not adversely affect the interests or legal rights of the Holders in any material respect. 66 SECTION 9.02. SUPPLEMENTAL INDENTURES WITH CONSENT OF HOLDERS. With the consent of the Holders of not less than a majority in principal amount of the Outstanding Securities, by the Act of said Holders delivered to the Company and the Trustee, the Company, when authorized by a Board Resolution, and the Trustee may enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of modifying in any manner the rights of the Holders under this Indenture; PROVIDED, HOWEVER, that no such supplemental indenture shall, without the consent of the Holder of each Outstanding Security affected thereby, (1) change the Stated Maturity of the principal of, or any installment of interest on, any Security, or reduce the principal amount thereof or the rate of interest thereon or any premium payable upon the redemption thereof, or change the place of payment where, or the coin or currency in which, any Security or any premium or interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment on or after the Stated Maturity thereof (or, in the case of redemption or purchase, on or after the Redemption Date or Purchase Date, as the case may be), or adversely affect the right to convert any Security as provided in Article XIII (except as permitted by Section 9.01(4)), or modify the provisions of this Indenture with respect to the subordination of the Securities in a manner adverse to the Holders, or modify the redemption provisions in a manner adverse to the Holders, or modify the provisions relating to the Company's requirement to offer to purchase Notes upon a Change in Control in a manner adverse to the Holders, or (2) modify any of the provisions of this Section 9.02, Section 5.13 or Section 10.08, except to increase any such percentage or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each Outstanding Security affected thereby, or (3) modify the obligation of the Company to maintain an office or agency in the Borough of Manhattan, The City of New York pursuant to Section 10.02, or (4) modify any of the provisions of Section 10.09 or Section 10.10, or (5) reduce the percentage in principal amount of the Outstanding Securities, the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver (of compliance with certain provisions of this Indenture or certain defaults hereunder and their consequences) provided for in this Indenture. 67 It shall not be necessary for any Act of Holders under this Section 9.02 to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such Act shall approve the substance thereof. SECTION 9.03. EXECUTION OF SUPPLEMENTAL INDENTURES. In executing, or accepting the additional trusts created by, any supplemental indenture permitted by this Article IX or the modifications thereby of the trusts created by this Indenture, the Trustee shall receive, and (subject to Section 6.01 and Section 6.03) shall be fully protected in relying upon, an Opinion of Counsel stating that the execution of such supplemental indenture is authorized or permitted by this Indenture, complies with its terms and will, upon the execution and delivery thereof, be valid and binding upon the Company in accordance with its terms. The Trustee may, but shall not be obligated to, enter into any such supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. SECTION 9.04. EFFECT OF SUPPLEMENTAL INDENTURES. Upon the execution of any supplemental indenture under this Article, this Indenture shall be modified in accordance therewith, and such supplemental indenture shall form a part of this Indenture for all purposes; and every Holder of Securities theretofore or thereafter authenticated and delivered hereunder shall be bound thereby. SECTION 9.05. CONFORMITY WITH TRUST INDENTURE ACT. Every supplemental indenture executed pursuant to this Article shall conform to the requirements of the Trust Indenture Act. SECTION 9.06. REFERENCE IN SECURITIES TO SUPPLEMENTAL INDENTURES. Securities authenticated and delivered after the execution of any supplemental indenture pursuant to this Article may, and shall if required by the Trustee, bear a notation as to any matter provided for in such supplemental indenture. If the Company shall so determine, new Securities so modified as to conform, in the judgment of the Company, to any such supplemental indenture may be prepared and executed by the Company and authenticated and delivered by the Trustee in exchange for Outstanding Securities. ARTICLE X COVENANTS SECTION 10.01. PAYMENT OF PRINCIPAL, PREMIUM AND INTEREST. The Company will duly and punctually pay the principal of (and premium, if any) and interest on the Securities in accordance with the terms of the Securities and this Indenture. 68 SECTION 10.02. MAINTENANCE OF OFFICE OR AGENCY. The Company will maintain in the Borough of Manhattan, The City of New York an office or agency where Securities may be presented or surrendered for payment, where Securities may be surrendered for registration of transfer or exchange, where Securities may be surrendered for conversion and where notices and demands to or upon the Company in respect of the Securities and this Indenture may be served. The Company will give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee or the office or agency of the Trustee in the Borough of Manhattan, The City of New York, and the Company hereby appoints the Trustee as its agent to receive all such presentations, surrenders, notices and demands. The Company may also from time to time designate one or more other offices or agencies (in or outside the Borough of Manhattan, The City of New York) where the Securities may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; PROVIDED, HOWEVER, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in the Borough of Manhattan, The City of New York for such purposes. The Company will give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency. SECTION 10.03. MONEY FOR SECURITY PAYMENTS TO BE HELD IN TRUST. If the Company shall at any time act as its own Paying Agent, it will, prior to 11:00 a.m., New York City time, on each due date of the principal of (and premium, if any) or interest (together with any Additional Interest in respect thereof) on any of the Securities, segregate and hold in trust for the benefit of the Persons entitled thereto a sum sufficient to pay the principal (and premium, if any) or interest (together with any Additional Interest in respect thereof) so becoming due until such sums shall be paid to such Persons or otherwise disposed of as herein provided and will promptly notify the Trustee of its action or failure so to act. Whenever the Company shall have one or more Paying Agents, it will, prior to each due date of the principal of (and premium, if any) or interest (together with any Additional Interest in respect thereof) on any Securities, deposit with a Paying Agent a sum sufficient to pay such amount, such sum to be held in trust for the benefit of the Persons entitled to such principal, premium, if any, or interest, and (unless such Paying Agent is the Trustee) the Company will promptly notify the Trustee in writing of its action or failure so to act. 69 The Company will cause each Paying Agent other than the Trustee to execute and deliver to the Trustee an instrument in which such Paying Agent shall agree with the Trustee, subject to the provisions of this Section 10.03, that such Paying Agent will: (1) hold all sums held by it for the payment of the principal of, premium, if any, or interest on Securities in trust for the benefit of the Persons entitled thereto until such sums shall be paid to such Persons or otherwise disposed of as herein provided; (2) give the Trustee written notice of any default by the Company (or any other obligor upon the Securities) in the making of any payment of principal, premium, if any, or interest; and (3) at any time during the continuance of any such default, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such Paying Agent. The Company may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or by Company Order direct any Paying Agent to pay, to the Trustee all sums held in trust by the Company or such Paying Agent, such sums to be held by the Trustee upon the same trusts as those upon which such sums were held by the Company or such Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying Agent shall be released from all further liability with respect to such money. Any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of (and premium, if any) or interest (together with any Additional Interest in respect thereof) on any Security and remaining unclaimed for two years after such principal (and premium, if any) or interest has become due and payable shall be paid to the Company on Company Request, or (if then held by the Company) shall be discharged from such trust; and the Holder of such Security shall thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease; PROVIDED, HOWEVER, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once, in a newspaper published in the English language, customarily published on each Business Day and of general circulation in the Borough of Manhattan, The City of New York, notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication, any unclaimed balance of such money then remaining will be repaid to the Company. 70 SECTION 10.04. STATEMENT BY OFFICERS AS TO DEFAULT. The Company shall deliver to the Trustee, within 120 days after the end of each fiscal year of the Company ending after the date hereof, an Officers' Certificate, stating whether or not to the best knowledge of the signers thereof the Company is in default in the performance and observance of any of the terms, provisions and conditions of this Indenture (without regard to any period of grace or requirement of notice provided hereunder) and, if the Company shall be in default, specifying all such defaults and the nature and status thereof of which they may have knowledge. SECTION 10.05. EXISTENCE. Subject to Article VIII, the Company shall do or cause to be done all things necessary to preserve and keep in full force and effect its existence, rights (charter and statutory) and franchises; PROVIDED, HOWEVER, that the Company shall not be required to preserve any such right or franchise if the Board of Directors shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and that the loss thereof is not disadvantageous in any material respect to the Holders. SECTION 10.06. MAINTENANCE OF PROPERTIES. The Company shall cause all properties used or useful in the conduct of its business or the business of any Subsidiary to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment and shall cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in the judgment of the Company may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times; PROVIDED, HOWEVER, that nothing in this Section 10.06 shall prevent the Company from discontinuing the operation or maintenance of any of such properties, or disposing of any of them, if such discontinuance or disposition is, in the judgment of the Company, desirable in the conduct of its business or the business of any Subsidiary and not disadvantageous in any material respect to the Holders. SECTION 10.07. PAYMENT OF TAXES AND OTHER CLAIMS. The Company shall pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (1) all taxes, assessments and governmental charges levied or imposed upon the Company or any Subsidiary or upon the income, profits or property of the Company or any Subsidiary, and (2) all lawful claims for labor, materials and supplies which, if unpaid, might by law become a lien upon the property of the Company or any Subsidiary; PROVIDED, HOWEVER, that the Company shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings. 71 SECTION 10.08. WAIVER OF CERTAIN COVENANTS. The Company may omit in any particular instance to comply with any covenant or condition set forth in Sections 10.05 to 10.07, inclusive, if before the time for such compliance the Holders of at least a majority in principal amount of the Outstanding Securities shall, by Act of such Holders, either waive such compliance in such instance or generally waive compliance with such covenant or condition, but no such waiver shall extend to or affect such covenant or condition except to the extent so expressly waived, and, until such waiver shall become effective, the obligations of the Company and the duties of the Trustee in respect of any such covenant or condition shall remain in full force and effect. SECTION 10.09. DELIVERY OF CERTAIN INFORMATION. At any time when the Company is not subject to Section 13 or 15(d) of the Exchange Act, upon the request of a Holder or the holder of shares of Common Stock issued upon conversion thereof, the Company shall promptly furnish or cause to be furnished Rule 144A Information (as defined below) to such Holder or such holder of shares of Common Stock issued upon conversion of Securities, or to a prospective purchaser of any such security designated by any such Holder or holder, as the case may be, to the extent required to permit compliance by such Holder or holder with Rule 144A under the Securities Act in connection with the resale of any such security. "Rule 144A Information" shall be such information as is specified pursuant to Rule 144A(d)(4) under the Securities Act. SECTION 10.10. RESALE OF CERTAIN SECURITIES; REPORTING ISSUER. During the period beginning on the last date of original issuance of the Securities and ending on the date that is two years from such date, the Company will not, and will use its best efforts not to permit any of its "affiliates" (as defined under Rule 144 under the Securities Act or any successor provision thereto) to, resell (x) any Securities which constitute "restricted securities" under Rule 144 or (y) any securities into which the Securities have been converted under this Indenture which constitute "restricted securities" under Rule 144, that in either case have been reacquired by any of them. The Trustee shall have no responsibility in respect of the Company's performance of its agreement in the preceding sentence. SECTION 10.11. REGISTRATION RIGHTS. (a) The Company agrees that the Holders (and any Person that has a beneficial interest in a Security) from time to time of Transfer Restricted Securities are entitled to the benefits of a Registration Rights Agreement, dated as of February 14, 2000 (the "Registration Rights Agreement"), executed by the Company. Pursuant to the Registration Rights Agreement, the Company has agreed for the benefit of the Holders from time to time of Transfer Restricted Securities, at the Company's expense, (i) to file within 90 days after the first date of original issuance of the Securities, a shelf registration statement (the "Shelf Registration Statement") with the Commission with respect to resales of the Transfer Restricted Securities, (ii) to use its commercially reasonable best efforts to cause such Shelf 72 Registration Statement to be declared effective by the Commission not later than 150 days after the first date of original issuance of the Securities, and (iii) to use its commercially reasonable best efforts to maintain such Shelf Registration Statement continuously effective under the Securities Act subject to and in accordance with the terms of the Registration Rights Agreement. Additional interest (the "Additional Interest") with respect to the Securities shall be assessed as follows if any of the following events occur (each such event in clauses (i) through (iii) below being herein called a "Registration Default"): (i) if on or prior to the 90th day after the first date of original issuance of the Securities the Shelf Registration Statement has not been filed with the Commission; (ii) if on or prior to the 150th day after the first date of original issuance of the Securities the Shelf Registration Statement has not been declared effective by the Commission; or (iii) if after the Shelf Registration Statement is declared effective (A) the Shelf Registration Statement thereafter ceases to be effective; or (B) the Shelf Registration Statement or the related prospectus ceases to be usable subject to certain exceptions set forth in the Registration Rights Agreement, including the right to suspend the use of the Shelf Registration Statement under certain circumstances for up to 90 days) in connection with resales of Transfer Restricted Securities in accordance with and during the periods specified herein because either (1) any event occurs as a result of which the related prospectus forming part of such Shelf Registration Statement would include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein in the light of the circumstances under which they were made not misleading, or (2) it shall be necessary to amend such Shelf Registration Statement or supplement the related prospectus, to comply with the Securities Act or the Exchange Act or the respective rules thereunder. Additional Interest shall accrue on the Securities over and above the interest set forth in the title of the Securities from and including the date on which any such Registration Default shall occur, to but excluding the date on which all such Registration Defaults have been cured, at a rate of 0.50% per annum. Written notice of any such Registration Default shall be provided to the Trustee by the Company. (b) Any amounts of Additional Interest due pursuant to clause (a)(i), (a)(ii) or (a)(iii) of this Section 10.11 shall be payable in cash on the regular Interest Payment Dates in the manner provided for by the Indenture. The amount of Additional 73 Interest shall be determined by multiplying the applicable Additional Interest rate by the principal amount of the Securities, multiplied by a fraction, the numerator of which is the number of days such Additional Interest rate was applicable during such period (determined on the basis of a 360-day year comprised of twelve 30-day months), and the denominator of which is 360. Whenever in this Indenture there is mentioned, in any context, the payment of the principal of, premium, if any, or interest on, or in respect of, any Security, such mention shall be deemed to include mention of the payment of Additional Interest provided for in this Section to the extent that, in such context, Additional Interest are, were or would be payable in respect thereof pursuant to the provisions of this Section 10.11 and express mention of the payment of Additional Interest (if applicable) in any provisions hereof shall not be construed as excluding Additional Interest in those provisions hereof where such express mention is not made. ARTICLE XI REDEMPTION OF SECURITIES SECTION 11.01. RIGHT OF REDEMPTION. (a) The Securities may be redeemed at the election of the Company (an "Optional Redemption"), as a whole or from time to time in part, at any time on or after February 20, 2003, at the Redemption Prices specified in the form of Security hereinbefore set forth, together with accrued interest to the Redemption Date. (b) In addition to the right to redeem the Securities as provided in Section 11.01(a), the Company may redeem the Securities (a "Provisional Redemption"), in whole or in part, at any time prior to February 20, 2003, upon notice as set forth in Section 11.05, at a redemption price equal to $1,000 per Security to be redeemed plus accrued and unpaid interest, if any (including Additional Interest, if any), to the date of redemption (the "Provisional Redemption Date") if (i) the closing price of the Common Stock shall have exceeded 150% of the conversion price then in effect for at least 20 Trading Days in any consecutive 30-Trading Day period ending on the Trading Day prior to the date of mailing of the notice of redemption pursuant to Section 11.05 (the "Redemption Notice Date") and (ii) the Shelf Registration Statement is effective and available for use and is expected to remain effective and available for use for the 30 days immediately following the Provisional Redemption Date. Upon any such Provisional Redemption, the Company shall make an additional payment in cash (the "Make-Whole Payment") with respect to the Securities called for redemption to Holders on the Redemption Notice Date in an amount equal to $142.50 per $1,000 Security, less the amount of any interest actually paid on such Security prior to the Redemption Notice 74 Date. The Company shall make the Make-Whole Payment on all Securities called for Provisional Redemption, including any Securities converted into Common Stock pursuant to the terms hereof after the Redemption Notice Date and prior to the Provisional Redemption Date. SECTION 11.02. APPLICABILITY OF ARTICLE. Redemption of Securities at the election of the Company or otherwise, as permitted or required by any provision of this Indenture, shall be made in accordance with such provision and this Article XI. SECTION 11.03. ELECTION TO REDEEM; NOTICE TO TRUSTEE. The election of the Company to redeem any Securities pursuant to Section 11.01 shall be evidenced by a Board Resolution. In case of any redemption at the election of the Company, the Company shall, at least 45 days prior to the Redemption Date fixed by the Company (unless a shorter notice shall be satisfactory to the Trustee), notify the Trustee of such Redemption Date in writing and of the principal amount of Securities to be redeemed. SECTION 11.04. SELECTION BY TRUSTEE OF SECURITIES TO BE REDEEMED. If less than all the Securities are to be redeemed, the particular Securities to be redeemed shall be selected not less than 30 days or more than 60 days prior to the Redemption Date by the Trustee, from the Outstanding Securities not previously called for redemption, by lot or by such method as the Trustee shall deem fair and appropriate in the circumstances and which may provide for the selection for redemption of portions (equal to U.S.$1,000 or any integral multiple thereof) of the principal amount of Securities of a denomination larger than U.S.$1,000. If any Security selected for partial redemption is converted in part before termination of the conversion right with respect to the portion of the Security so selected, the converted portion of such Security shall be deemed (so far as may be) to be the portion selected for redemption. Securities which have been converted during a selection of Securities to be redeemed shall be treated by the Trustee as Outstanding for the purpose of such selection. The Trustee shall promptly notify the Company and each Security Registrar in writing of the Securities selected for redemption and, in the case of any Securities selected for partial redemption, the principal amount thereof to be redeemed. For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to the redemption of Securities shall relate, in the case of any Securities redeemed or to be redeemed only in part, to the portion of the principal amount of such Securities which has been or is to be redeemed. 75 SECTION 11.05. NOTICE OF REDEMPTION. Notice of redemption shall be given by first-class mail, postage prepaid, mailed not less than 30 nor more than 60 days prior to the Redemption Date, to each Holder of Securities to be redeemed, at his address appearing in the Security Register. All notices of redemption shall describe the Securities, including CUSIP number, and state: (1) the Redemption Date; (2) the Redemption Price; (3) if less than all the Outstanding Securities are to be redeemed, the identification (and, in the case of partial redemption of any Securities, the principal amounts) of the particular Securities to be redeemed; (4) whether such redemption is a Provisional Redemption or an Optional Redemption; (5) that on the Redemption Date the Redemption Price shall become due and payable upon each such Security to be redeemed and that interest thereon shall cease to accrue on and after said date; (6) the conversion price, the date on which the right to convert the Securities to be redeemed will terminate and the place or places where such Securities may be surrendered for conversion; (7) the place or places where such Securities are to be surrendered for payment of the Redemption Price; and (8) if such a redemption is a Provisional Redemption, the amount of the Make-Whole Payment. Notice of redemption of Securities to be redeemed at the election of the Company shall be given by the Company or, at the Company's request, by the Trustee in the name and at the expense of the Company, and shall be irrevocable. SECTION 11.06. DEPOSIT OF REDEMPTION PRICE. Prior to 11:00 a.m., New York City time, on any Redemption Date, the Company shall deposit with the Trustee or with a Paying Agent (or, if the Company is acting as its own Paying Agent, segregate and hold in trust as provided in Section 10.03) an amount of money sufficient to pay the Redemption Price of, and (except if the Redemption Date shall be an Interest Payment Date) accrued interest on, all the Securities which are to be redeemed on that 76 date other than any Securities called for redemption on that date which have been converted prior to the date of such deposit. If any Security called for redemption is converted, any money deposited with the Trustee or with any Paying Agent or so segregated and held in trust for the redemption of such Security shall (subject to any right of the Holder of such Security or any Predecessor Security to receive interest as provided in the last paragraph of Section 3.07) be paid to the Company as soon as practicable upon Company Request or, if then held by the Company, shall be released from such trust. SECTION 11.07. SECURITIES PAYABLE ON REDEMPTION DATE. Notice of redemption having been given as aforesaid, the Securities so to be redeemed shall, on the Redemption Date, become due and payable at the Redemption Price therein specified, and, with respect to Securities called for Provisional Redemption, the Make-Whole Payment, and from and after such date (unless the Company shall default in the payment of the Redemption Price and accrued interest) such Securities shall cease to bear or accrue any interest. Upon surrender of any such Security for redemption in accordance with said notice, such Security shall be paid by the Company at the Redemption Price, together with accrued interest to (but not including) the Redemption Date and, with respect to Securities called for Provisional Redemption (including Securities converted into Common Stock pursuant to the terms hereof after the Redemption Notice Date and prior to the Provisional Redemption Date), the Make-whole Payment; PROVIDED, HOWEVER, that installments of interest whose Stated Maturity is on or prior to the Redemption Date shall be payable to the Holders of such Securities, or one or more Predecessor Securities, registered as such at the close of business on the relevant Record Dates according to their terms and the provisions of Section 3.07; and PROVIDED FURTHER that, with respect to a Provisional Redemption, the holder of any Securities converted into Common Stock pursuant to the terms of this Indenture after the Redemption Notice Date and prior to the Provisional Redemption Date shall have the right to the Make-Whole Payment, if any, with respect to such Securities regardless of the conversion of such Securities. If the Company shall fail to deposit the Redemption Price (and MakeWhole Payment, if any) with the Trustee and any Security called for redemption shall not be so paid upon surrender thereof for redemption, the principal (and premium, if any) shall, until paid, bear and accrue interest from the Redemption Date at the rate borne by the Security. SECTION 11.08. SECURITIES REDEEMED IN PART. Any Security which is to be redeemed only in part shall be surrendered at an office or agency of the Company designated for that purpose pursuant to Section 10.02 (with, if the Company or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the Holder thereof or his 77 attorney-in-fact duly authorized in writing), and the Company shall execute, and the Trustee shall authenticate and deliver to the Holder of such Security without service charge, a new Security or Securities, of any authorized denomination as requested by such Holder, in aggregate principal amount equal to and in exchange for the unredeemed portion of the principal amount of the Security so surrendered. SECTION 11.09. CONVERSION ARRANGEMENT ON CALL FOR REDEMPTION. In connection with any redemption of Securities, the Company may arrange for the purchase and conversion of any Securities by an agreement with one or more investment bankers or other purchasers to purchase such Securities by paying to the Trustee in trust for the Holders, on or before the Redemption Date, an amount not less than the applicable Redemption Price, together with interest accrued to the Redemption Date, of such Securities and in connection with a Provisional Redemption, the Make-Whole Payment. Notwithstanding anything to the contrary contained in this Article XI, the obligation of the Company to pay the Redemption Price of such Securities, together with interest accrued to, but excluding, the Redemption Date and in connection with a Provisional Redemption, the Make-Whole Payment, shall be deemed to be satisfied and discharged to the extent such amount is so paid by such purchasers. If such an agreement is entered into, a copy of which shall be filed with the Trustee prior to the Redemption Date, any Securities not duly surrendered for conversion by the holders thereof may, at the option of the Company, be deemed, to the fullest extent permitted by law, acquired by such purchasers from such holders and (notwithstanding anything to the contrary contained in Article XIII) surrendered by such purchasers for conversion, all as of immediately prior to the close of business on the Redemption Date (and the right to convert any such Securities shall be deemed to have been extended through such time), subject to payment of the above amount as aforesaid (including the Make-Whole Payment, if any, with respect to all Securities called for Provisional Redemption). At the written direction of the Company, the Trustee shall hold and dispose of any such amount paid to it in the same manner as it would monies deposited with it by the Company for the redemption of Securities. Without the Trustee's prior written consent, no arrangement between the Company and such purchasers for the purchase and conversion of any Securities shall increase or otherwise affect any of the powers, duties, responsibilities or obligations of the Trustee as set forth in this Indenture, and the Company agrees to indemnify the Trustee from, and hold it harmless against, any loss, liability or expense arising out of or in connection with any such arrangement for the purchase and conversion of any Securities between the Company and such purchasers to which the Trustee has not consented in writing, including the costs and expenses incurred by the Trustee in the defense of any claim or liability arising out of or in connection with the exercise or performance of any of its powers, duties, responsibilities or obligations under this Indenture. Nothing in the preceding sentence shall be deemed to limit the rights and protections afforded to the Trustee in Article VI hereof, including, but not limited to, the right to indemnification pursuant to Section 6.07. 78 ARTICLE XII SUBORDINATION OF SECURITIES SECTION 12.01. SECURITIES SUBORDINATE TO SENIOR INDEBTEDNESS. The Company covenants and agrees, and each Holder of a Security, by his acceptance thereof, likewise covenants and agrees, that, to the extent and in the manner hereinafter set forth in this Article XII, the indebtedness represented by the Securities and the payment of the principal of (and premium, if any) and interest on each and all of the Securities and all obligations of the Company under this Indenture are hereby expressly made subordinate and subject in right of payment to the prior payment in full of all Senior Indebtedness. SECTION 12.02. PAYMENT OVER OF PROCEEDS UPON DISSOLUTION, ETC. In the event of (a) any insolvency or bankruptcy case or proceeding, or any receivership, liquidation, reorganization or other similar case or proceeding in connection therewith, relative to the Company or to its creditors, as such, or to its assets, or (b) any liquidation, dissolution or other winding-up of the Company, whether voluntary or involuntary and whether or not involving insolvency or bankruptcy, or (c) any assignment for the benefit of creditors or any other marshaling of assets and liabilities of the Company, then and in any such event the holders of Senior Indebtedness shall be entitled to receive payment in full of all amounts due or to become due on or in respect of all Senior Indebtedness, or provision shall be made for such payment in cash or cash equivalents or otherwise in a manner satisfactory to the holders of Senior Indebtedness, before the Holders of the Securities are entitled to receive any payment on account of principal of (or premium, if any) or interest on the Securities, and to that end the holders of Senior Indebtedness shall be entitled to receive, for application to the payment thereof, any payment or distribution of any kind or character, whether in cash, property or securities, which may be payable or deliverable in respect of the Securities in any such case, proceeding, dissolution, liquidation or other winding-up or event. In the event that, notwithstanding the foregoing provisions of this Section 12.02, the Trustee or the Holder of any Security shall have received any payment or distribution of assets of the Company prohibited by the foregoing paragraph of any kind or character, whether in cash, property or securities, before all Senior Indebtedness is paid in full or payment thereof provided for, and if such fact shall, at or prior to the time of such payment or distribution, have been made actually known to a Responsible Officer of the Trustee or, as the case may be, such Holder, then and in such event such payment or distribution shall be paid over or delivered forthwith to the trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee, agent or other Person making payment or distribution of assets of the Company for application to the payment of all Senior Indebtedness remaining unpaid, to the extent necessary to pay all Senior 79 Indebtedness in full, after giving effect to any concurrent payment or distribution to or for the holders of Senior Indebtedness. For purposes of this Article XII only, the words "cash, property or securities" shall not be deemed to include shares of capital stock of the Company as reorganized or readjusted, or securities of the Company or any other corporation provided for by a plan of reorganization or readjustment which in either case are subordinated in right of payment to all Senior Indebtedness which may at the time be outstanding to substantially the same extent as, or to a greater extent than, the Securities are so subordinated as provided in this Article XII. The consolidation of the Company with, or the merger of the Company into, another Person or the liquidation or dissolution of the Company following the conveyance or transfer of its properties and assets substantially as an entirety to another Person upon the terms and conditions set forth in Article VIII shall not be deemed a dissolution, winding-up, liquidation, reorganization, assignment for the benefit of creditors or marshaling of assets and liabilities of the Company for the purposes of this Section 12.02 if the Person formed by such consolidation or into which the Company is merged or which acquires by conveyance or transfer such properties and assets substantially as an entirety, as the case may be, shall, as a part of such consolidation, merger, conveyance or transfer, comply with the conditions set forth in Article VIII. SECTION 12.03. NO PAYMENT WHEN SENIOR INDEBTEDNESS IN DEFAULT. (a) In the event and during the continuation of any default in the payment of principal of (or premium, if any) or interest on any Senior Indebtedness beyond any applicable grace period with respect thereto (unless and until such payment default shall have been cured or waived in writing by the holders of such Senior Indebtedness), or (b) in the event any judicial proceeding shall be pending with respect to any such default, then no payment shall be made by the Company on account of principal of (or premium, if any) or interest on the Securities or on account of the purchase or other acquisition of Securities (including pursuant to Articles XI and XIII). In the event that, notwithstanding the foregoing, the Company shall make any payment to the Trustee or the Holder of any Security prohibited by the foregoing provisions of this Section 12.03, and if such fact shall, at or prior to the time of such payment, have been made actually known to a Responsible Officer of the Trustee or, as the case may be, such Holder, then and in such event such payment shall be paid over and delivered forthwith to the Company upon Company Request. The provisions of this Section 12.03 shall not apply to any payment with respect to which Section 12.02 would be applicable. 80 SECTION 12.04. PAYMENT PERMITTED IF NO DEFAULT. Nothing contained in this Article XII or elsewhere in this Indenture or in any of the Securities shall prevent (a) the Company, at any time except during the pendency of any case, proceeding, dissolution, liquidation or other winding-up, assignment for the benefit of creditors or other marshaling of assets and liabilities of the Company referred to in Section 12.02 or under the conditions described in Section 12.03, from making payments at any time of principal of (and premium, if any) or interest on the Securities, or (b) the application by the Trustee of any money deposited with it hereunder to the payment of or on account of the principal of (and premium, if any) or interest on the Securities or the retention of such payment by the Holders, if, at the time of such application by the Trustee, a Responsible Officer of the Trustee did not have actual knowledge that such payment would have been prohibited by the provisions of this Article XII. SECTION 12.05. SUBROGATION TO RIGHTS OF HOLDERS OF SENIOR INDEBTEDNESS. Subject to the payment in full of all Senior Indebtedness, and until the Securities are paid in full, the Holders of the Securities shall be subrogated (equally and ratably with the holders of all indebtedness of the Company which by its express terms is subordinated to indebtedness of the Company to substantially the same extent as the Securities are subordinated and is entitled to like rights of subrogation) to the rights of the holders of such Senior Indebtedness to receive payments and distributions of cash, property and securities applicable to the Senior Indebtedness to the extent that payments and distributions otherwise payable to Holders of Securities have been applied to the payment of Senior Indebtedness as provided by this Article XII. For purposes of such subrogation, no payments or distributions to the holders of the Senior Indebtedness of any cash, property or securities to which the Holders of the Securities or the Trustee would be entitled, except for the provisions of this Article XII, and no payments over pursuant to the provisions of this Article XII to the holders of Senior Indebtedness by Holders of the Securities or the Trustee, shall, as among the Company, its creditors other than holders of Senior Indebtedness and the Holders of the Securities, be deemed to be a payment or distribution by the Company to or on account of the Senior Indebtedness. 81 SECTION 12.06. PROVISIONS SOLELY TO DEFINE RELATIVE RIGHTS. The provisions of this Article XII are and are intended solely for the purpose of defining the relative rights of the Holders of the Securities on the one hand and the holders of Senior Indebtedness on the other hand. Nothing contained in this Article XII or elsewhere in this Indenture or in the Securities is intended to or shall (a) impair, as among the Company, its creditors other than holders of Senior Indebtedness and the Holders of the Securities, the obligation of the Company, which is absolute and unconditional (and which, subject to the rights under this Article XII of the holders of Senior Indebtedness, is intended to rank equally with all other general obligations of the Company), to pay to the Holders of the Securities the principal of (and premium, if any) and interest on the Securities as and when the same shall become due and payable in accordance with their terms; or (b) affect the relative rights against the Company of the Holders of the Securities and creditors of the Company other than the holders of Senior Indebtedness; or (c) prevent the Trustee or the Holder of any Security from exercising all remedies otherwise permitted by applicable law upon default under this Indenture, subject to the rights, if any, under this Article XII of the holders of Senior Indebtedness to receive cash, property and securities otherwise payable or deliverable to the Trustee or such Holder. SECTION 12.07. TRUSTEE TO EFFECTUATE SUBORDINATION. Each Holder of a Security by his acceptance thereof authorizes and directs the Trustee on his behalf to take such action as may be necessary or appropriate to effectuate the subordination provided in this Article XII and appoints the Trustee his attorney-in-fact for any and all such purposes. SECTION 12.08. NO WAIVER OF SUBORDINATION PROVISIONS. No right of any present or future holder of any Senior Indebtedness to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company or by any act or failure to act, in good faith, by any such holder, or by any non-compliance by the Company with the terms, provisions and covenants of this Indenture, regardless of any knowledge thereof any such holder may have or be otherwise charged with. 82 Without in any way limiting the generality of the foregoing paragraph, the holders of Senior Indebtedness may, at any time and from time to time, without the consent of or notice to the Trustee or the Holders of the Securities, without incurring responsibility to the Holders of the Securities and without impairing or releasing the subordination provided in this Article XII or the obligations hereunder of the Holders of the Securities to the holders of Senior Indebtedness, do any one or more of the following: (i) change the manner, place or terms of payment or extend the time of payment of, or renew or alter, Senior Indebtedness, or otherwise amend or supplement in any manner Senior Indebtedness or any instrument evidencing the same or any agreement under which Senior Indebtedness is outstanding; (ii) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing Senior Indebtedness; (iii) release any Person liable in any manner for the collection of Senior Indebtedness; (iv) exercise or refrain from exercising any rights against the Company and any other Person; (v) apply any and all sums received from time to time to the Senior Indebtedness. SECTION 12.09. NOTICE TO TRUSTEE. The Company shall give prompt written notice to the Trustee of any fact known to the Company which would prohibit the making of any payment to or by the Trustee in respect of the Securities. Notwithstanding the provisions of this Article XII or any other provision of this Indenture, the Trustee shall not be charged with knowledge of the existence of any facts which would prohibit the making of any payment to or by the Trustee in respect of the Securities, unless and until the Trustee shall have received written notice thereof from the Company or a holder of Senior Indebtedness or from any trustee therefor; and, prior to the receipt of any such written notice, the Trustee, subject to the provisions of Section 6.01, shall be entitled in all respects to assume that no such facts exist; PROVIDED, HOWEVER, that if the Trustee shall not have received the notice provided for in this Section 12.09 at least two Business Days prior to the date upon which by the terms hereof any money may become payable for any purpose (including, without limitation, the payment of the principal of (and premium, if any) or interest on any Security), then, anything herein contained to the contrary notwithstanding, the Trustee shall have full power and authority to receive such money and to apply the same to the purpose for which such money was received and shall not be affected by any notice to the contrary which may be received by it within two Business Days prior to such date. 83 Subject to the provisions of Section 6.01, the Trustee shall be entitled to rely on the delivery to it of a written notice by a Person representing himself to be a holder of Senior Indebtedness (or a trustee therefor) to establish that such notice has been given by a holder of Senior Indebtedness (or a trustee therefor). In the event that the Trustee determines in good faith that further evidence is required with respect to the right of any Person as a holder of Senior Indebtedness to participate in any payment or distribution pursuant to this Article XII, the Trustee may request such Person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of Senior Indebtedness held by such Person, the extent to which such Person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such Person under this Article XII, and if such evidence is not furnished, the Trustee may defer any payment to such Person pending judicial determination as to the right of such Person to receive such payment. SECTION 12.10. RELIANCE ON JUDICIAL ORDER OR CERTIFICATE OF LIQUIDATING AGENT. Upon any payment or distribution of assets of the Company referred to in this Article XII, the Trustee, subject to the provisions of Section 6.01, and the Holders of the Securities shall be entitled to rely upon any order or decree entered by any court of competent jurisdiction in which such insolvency, bankruptcy, receivership, liquidation, reorganization, dissolution, winding up or similar case or proceeding is pending, or a certificate of the trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee for the benefit of creditors, agent or other Person making such payment or distribution, delivered to the Trustee or to the Holders of Securities, for the purpose of ascertaining the Persons entitled to participate in such payment or distribution, the holders of the Senior Indebtedness and other indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article XII. SECTION 12.11. TRUSTEE NOT FIDUCIARY FOR HOLDERS OF SENIOR INDEBTEDNESS. The Trustee shall not be deemed to owe any fiduciary duty to the holders of Senior Indebtedness and shall not be liable to any such holders if it shall in good faith mistakenly pay over or distribute to Holders of Securities or to the Company or to any other Person cash, property or securities to which any holders of Senior Indebtedness shall be entitled by virtue of this Article XII or otherwise. SECTION 12.12. RIGHTS OF TRUSTEE AS HOLDER OF SENIOR INDEBTEDNESS; PRESERVATION OF TRUSTEE'S RIGHTS. The Trustee in its individual capacity shall be entitled to all the rights set forth in this Article XII with respect to any Senior Indebtedness which may at any time be held by it, to the same extent as any other holder of Senior Indebtedness, and nothing in this Indenture shall deprive the Trustee of any of its rights as such holder. 84 Nothing in this Article XII shall apply to claims of, or payments to, the Trustee under or pursuant to Section 6.07. SECTION 12.13. ARTICLE APPLICABLE TO PAYING AGENTS. In case at any time any Paying Agent other than the Trustee shall have been appointed by the Company and be then acting hereunder, the term "Trustee" as used in this Article XII shall in such case (unless the context otherwise requires) be construed as extending to and including such Paying Agent within its meaning as fully for all intents and purposes as if such Paying Agent were named in this Article XII in addition to or in place of the Trustee; PROVIDED, HOWEVER, that Section 12.12 shall not apply to the Company or any Affiliate of the Company if it or such Affiliate acts as Paying Agent. SECTION 12.14. CERTAIN CONVERSIONS DEEMED PAYMENT. For the purposes of this Article XII only, (1) the issuance and delivery of junior securities upon conversion of Securities in accordance with Article XIII shall not be deemed to constitute a payment or distribution on account of the principal of or premium or interest on Securities or on account of the purchase or other acquisition of Securities, and (2) the payment, issuance or delivery of cash, property or securities (other than junior securities) upon conversion of a Security shall be deemed to constitute payment on account of the principal of such Security. For the purposes of this Section 12.14, the term "junior securities" means (a) shares of any stock of any class of the Company and (b) securities of the Company which are subordinated in right of payment to the prior payment in full of all Senior Indebtedness which may be outstanding at the time of issuance or delivery of such securities to substantially the same extent as, or to a greater extent than, the Securities are so subordinated as provided in this Article XII. Nothing contained in this Article XII or elsewhere in this Indenture or in the Securities is intended to or shall impair, as among the Company, its creditors other than holders of Senior Indebtedness and the Holders of the Securities, the right, which is absolute and unconditional, of the Holder of any Security to convert such Security in accordance with Article XIII. 85 ARTICLE XIII CONVERSION OF SECURITIES SECTION 13.01. CONVERSION PRIVILEGE AND CONVERSION PRICE. Subject to and upon compliance with the provisions of this Article XIII, at the option of the Holder thereof, any Security or any portion of the principal amount thereof which is U.S.$1,000 or an integral multiple of U.S.$1,000 may be converted at the principal amount thereof, or of such portion thereof, into fully paid and nonassessable shares of Common Stock of the Company at any time following the latest date of original issuance of Securities at the conversion price, determined as hereinafter provided, in effect at the time of conversion. Such conversion right shall expire at the close of business on the Business Day immediately preceding February 15, 2007, subject, in the case of conversion of any Global Security, to any Applicable Procedures. In case a Security or portion thereof is called for redemption at the election of the Company or the Holder thereof exercised his right to require the Company to purchase the Security, such conversion right in respect of the Security or portion so called shall expire at the close of business, New York or time, on the Business Day immediately preceding the corresponding Redemption Date or Purchase Date, as the case may be, unless the Company defaults in making the payment due upon redemption or purchase, as the case may be (in each case subject as aforesaid to any Applicable Procedures with respect to any Global Security). The price at which shares of Common Stock shall be delivered upon conversion (herein called the "conversion price") shall be initially U.S.$321.00 per share of Common Stock. The conversion price shall be adjusted in certain instances as provided in Section 13.04. In case the Company shall, by dividend or otherwise, declare or make a distribution on its Common Stock referred to in paragraph (4) or (5) of Section 13.04, the Holder of each Security, upon the conversion thereof pursuant to this Article XIII subsequent to the close of business on the date fixed for the determination of shareholders entitled to receive such distribution and prior to the effectiveness of the conversion price adjustment in respect of such distribution pursuant to paragraph (4) or (5) of Section 13.04, shall also be entitled to receive for each share of Common Stock into which such Security is converted, the portion of the evidences of indebtedness, shares of capital stock, securities, cash and other property so distributed applicable to one share of Common Stock; PROVIDED, HOWEVER, that, at the election of the Company (whose election shall be evidenced by a Board Resolution) with respect to all Holders so converting, the Company may, in lieu of distributing to such Holder any portion of such distribution not consisting of cash or securities of the Company, pay such Holder an amount in cash equal to the fair market value thereof (as determined in good faith by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution). If any 86 conversion of a Security described in the immediately preceding sentence occurs prior to the payment date for a distribution to holders of Common Stock which the Holder of the Security so converted is entitled to receive in accordance with the immediately preceding sentence, the Company may elect (such election to be evidenced by a Board Resolution) to distribute to such Holder a due bill for the evidences of indebtedness, shares of capital stock, securities, cash or assets to which such Holder is so entitled; PROVIDED that such due bill (i) meets any applicable requirements of the principal national securities exchange or other market on which the Common Stock is then traded and (ii) requires payment or delivery of such evidences of indebtedness, shares of capital stock, securities, cash or assets no later than the date of payment or delivery thereof to holders of Common Stock receiving such distribution. SECTION 13.02. EXERCISE OF CONVERSION PRIVILEGE. In order to exercise the conversion privilege, the Holder of any Security to be converted shall surrender such Security, duly endorsed or assigned to the Company or in blank, at any office or agency maintained by the Company pursuant to Section 10.02, accompanied by (a) written notice (as set forth in Section 2.05 herein) to the Company at such office or agency that the Holder elects to convert such Security or, if less than the entire principal amount thereof is to be converted, the portion thereof to be converted and (b) if shares or any portion of such Security not to be converted are to be issued in the name of a Person other than the Holder thereof, and the restrictions on transfer of such Security, set forth in the first paragraph of Section 2.02 remain in effect, a certification of the Holder as to compliance with such restrictions (as set forth in Section 2.07). If the restrictions on transfer of a Security set forth in the first paragraph of Section 2.02 remain in effect, all shares of Common Stock delivered upon conversion thereof shall bear a restrictive legend substantially in the form of such paragraph. Except as described in the last paragraph of Section 3.07, no Holder of Securities will be entitled upon conversion thereof to any payment or adjustment on account of accrued and unpaid interest thereon or on account of dividends on the shares of Common Stock issued in connection therewith. Securities surrendered for conversion during the period from the close of business on any Regular Record Date to the opening of business on the corresponding Interest Payment Date (except Securities called for redemption on a Redemption Date within such period between and including such Regular Record Date and such Interest Payment Date) must be accompanied by payment to the Company in New York Clearing House Funds or other funds acceptable to the Company of an amount equal to the interest payable on such Interest Payment Date on the principal amount converted. Securities shall be deemed to have been converted immediately prior to the close of business on the day of surrender of such Securities for conversion in 87 accordance with the foregoing provisions, and at such time the rights of the Holders of such Securities as Holders shall cease, and the Person or Persons entitled to receive the Common Stock issuable upon conversion shall be treated for all purposes as the record holder or holders of such Common Stock at such time. As promptly as practicable on or after the conversion date, the Company shall issue and shall deliver at such office or agency a certificate or certificates for the number of full shares of Common Stock issuable upon conversion, together with payment in lieu of any fraction of a share as provided in Section 13.03. In the case of any Security which is converted in part only, upon such conversion the Company shall execute and the Trustee shall authenticate and deliver to the Holder thereof, at the expense of the Company, a new Security or Securities of authorized denominations in aggregate principal amount equal to the unconverted portion of the principal amount of such Security. Any requirements for notice, surrender or delivery of Securities pursuant to this Article XIII shall, with respect to any Global Security, be subject to any Applicable Procedures. SECTION 13.03. FRACTIONS OF SHARES. No fractional shares of Common Stock shall be issued upon conversion of Securities. If more than one Security shall be surrendered for conversion at one time by the same Holder, the number of full shares which shall be issuable upon conversion thereof shall be computed on the basis of the aggregate principal amount of the Securities (or specified portions thereof) so surrendered. Instead of any fractional share of Common Stock which would otherwise be issuable upon conversion of any Security or Securities (or specified portions thereof), the Company shall pay a cash adjustment in respect of such fraction in an amount equal to the same fraction of the Closing Price per share of the Common Stock at the close of business on the day of conversion (or, if such day is not a Trading Day, on the Trading Day immediately preceding such day) or, alternatively, the Company shall round up to the next higher whole share. SECTION 13.04. ADJUSTMENT OF CONVERSION PRICE. (1) In case the Company shall pay or make a dividend or other distribution on its Common Stock exclusively in Common Stock, the conversion price in effect at the opening of business on the day next following the date fixed for the determination of shareholders entitled to receive such dividend or other distribution shall be reduced by multiplying such conversion price by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for such determination and the denominator shall be the sum of such number of shares and the total number of shares constituting such dividend or other distribution, such reduction to become effective immediately after the opening of business on the day next following the date fixed for such determination. For the purposes of this paragraph (1), the number of shares of Common Stock at any time outstanding shall not include shares held in the 88 treasury of the Company but shall include shares issuable in respect of scrip certificates issued in lieu of fractions of shares of Common Stock. The Company shall not pay any dividend or make any distribution on shares of Common Stock held in the treasury of the Company. (2) In case the Company shall pay or make a dividend or other distribution on its Common Stock consisting exclusively of, or shall otherwise issue to all holders of its Common Stock, rights, warrants or options entitling the holders thereof to subscribe for or purchase shares of Common Stock at a price per share less than the current market price per share (determined as provided in paragraph (7) of this Section 13.04) of the Common Stock on the date fixed for the determination of shareholders entitled to receive such rights, warrants or options, the conversion price in effect at the opening of business on the day following the date fixed for such determination shall be reduced by multiplying such conversion price by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for such determination plus the number of shares of Common Stock which the aggregate of the offering price of the total number of shares of Common Stock so offered for subscription or purchase would purchase at such current market price and the denominator shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for such determination plus the number of shares of Common Stock so offered for subscription or purchase, such reduction to become effective immediately after the opening of business on the day following the date fixed for such determination. For the purposes of this paragraph (2), the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Company but shall include shares issuable in respect of scrip certificates issued in lieu of fractions of shares of Common Stock. The Company shall not issue any rights, warrants or options in respect of shares of Common Stock held in the treasury of the Company. (3) In case outstanding shares of Common Stock shall be subdivided into a greater number of shares of Common Stock, the conversion price in effect at the opening of business on the day following the day upon which such subdivision becomes effective shall be proportionately reduced, and, conversely, in case outstanding shares of Common Stock shall each be combined into a smaller number of shares of Common Stock, the conversion price in effect at the opening of business on the day following the day upon which such combination becomes effective shall be proportionately increased, such reduction or increase, as the case may be, to become effective immediately after the opening of business on the day following the day upon which such subdivision or combination becomes effective. (4) Subject to the last sentence of this paragraph (4), in case the Company shall, by dividend or otherwise, distribute to all holders of its Common Stock evidences 89 of its indebtedness, shares of any class of capital stock, securities, cash or property (excluding any rights, warrants or options referred to in paragraph (2) of this Section 13.04, any dividend or distribution paid exclusively in cash and any dividend or distribution referred to in paragraph (1) of this Section 13.04), the conversion price shall be reduced so that the same shall equal the price determined by multiplying the conversion price in effect immediately prior to the effectiveness of the conversion price reduction contemplated by this paragraph (4) by a fraction of which the numerator shall be the current market price per share (determined as provided in paragraph (7) of this Section 13.04) of the Common Stock on the date of such effectiveness less the fair market value (as determined in good faith by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution and shall, in the case of securities being distributed for which prior thereto there is an actual or when issued trading market, be no less than the value determined by reference to the average of the closing prices in such market over the period specified in the succeeding sentence), on the date of such effectiveness, of the portion of the evidences of indebtedness, shares of capital stock, securities, cash and property so distributed applicable to one share of Common Stock and the denominator shall be such current market price per share of the Common Stock, such reduction to become effective immediately prior to the opening of business on the day next following the later of (a) the date fixed for the payment of such distribution and (b) the date 20 days after the notice relating to such distribution is given pursuant to Section 13.06(a) (such later date of (a) and (b) being referred to as the "Reference Date"). If the Board of Directors determines the fair market value of any distribution for purposes of this paragraph (4) by reference to the actual or when issued trading market for any securities comprising such distribution, it must in doing so consider the prices in such market over the same period used in computing the current market price per share pursuant to paragraph (7) of this Section. For purposes of this paragraph (4), any dividend or distribution that includes shares of Common Stock or rights, warrants or options to subscribe for or purchase shares of Common Stock shall be deemed instead to be (a) a dividend or distribution of the evidences of indebtedness, cash, property, shares of capital stock or securities other than such shares of Common Stock or such rights, warrants or options (making any conversion price reduction required by this paragraph (4)) immediately followed by (b) a dividend or distribution of such shares of Common Stock or such rights (making any further conversion price reduction required by paragraph (1) or (2) of this Section 13.04, except (i) the Reference Date of such dividend or distribution as defined in this paragraph (4) shall be substituted as "the date fixed for the determination of shareholders entitled to receive such dividend or other distributions", "the date fixed for the determination of shareholders entitled to receive such rights, warrants or options" and "the date fixed for such determination" within the meaning of paragraphs (1) and (2) of this Section 13.04 and (ii) any shares of Common Stock included in such dividend or distribution shall not be deemed "outstanding at the close of business on the date fixed for such determination" within the meaning of paragraph (1) of this Section 13.04). 90 (5) In case the Company shall, by dividend or otherwise, make a distribution to all holders of its Common Stock exclusively in cash in an aggregate amount that, together with (i) the aggregate amount of any other distributions to all holders of its Common Stock made exclusively in cash within the 12 months preceding the date of payment of such distribution and in respect of which no conversion price adjustment pursuant to this paragraph (5) has been made and (ii) the aggregate of any cash plus the fair market value (as determined in good faith by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution), as of the expiration of the tender or exchange offer referred to below, of consideration payable in respect of any tender or exchange offer by the Company or a Subsidiary for all or any portion of the Common Stock concluded within the 12 months preceding the date of payment of such distribution and in respect of which no conversion price adjustment pursuant to paragraph (6) of this Section 13.04 has been made, exceeds 12.5% of the product of the current market price per share (determined as provided in paragraph (7) of this Section 13.04) of the Common Stock on the date fixed for shareholders entitled to receive such distribution times the number of shares of Common Stock outstanding on such date, the conversion price shall be reduced so that the same shall equal the price determined by multiplying the conversion price in effect immediately prior to the effectiveness of the conversion price reduction contemplated by this paragraph (5) by a fraction of which the numerator shall be the current market price per share (determined as provided in paragraph (7) of this Section 13.04) of the Common Stock on the date of such effectiveness less the amount of cash so distributed applicable to one share of Common Stock and the denominator shall be such current market price per share of the Common Stock, such reduction to become effective immediately prior to the opening of business on the later of (a) the day following the date fixed for the payment of such distribution and (b) the date 20 days after the notice relating to such distribution is given pursuant to Section 13.06(a). (6) In case a successful tender or exchange offer made by the Company or any Subsidiary for all or any portion of the Common Stock shall involve an aggregate consideration having a fair market value (as determined in good faith by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution) at the last time (the "Expiration Time") tenders or exchanges may be made pursuant to such tender or exchange offer (as it may be amended) that, together with (i) the aggregate of the cash plus the fair market value (as determined in good faith by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution), as of the expiration of the other tender or exchange offer referred to below, of consideration payable in respect of any other tender or exchange offer by the Company or a Subsidiary for all or any portion of the Common Stock concluded within the preceding 12 months and in respect of which no conversion price adjustment pursuant to this paragraph (6) has been made and (ii) the aggregate amount of any distributions to all 91 holders of the Common Stock made exclusively in cash within the preceding 12 months and in respect of which no conversion price adjustment pursuant to paragraph (5) of this Section 13.04 has been made, exceeds 12.5% of the product of the current market price per share (determined as provided in paragraph (7) of this Section 13.04) of the Common Stock on the Expiration Time times the number of shares of Common Stock outstanding (including any tendered shares) on the Expiration Time, the conversion price shall be reduced (but not increased) so that the same shall equal the price determined by multiplying the conversion price in effect immediately prior to the Expiration Time by a fraction of which the numerator shall be (i) the product of the current market price per share (determined as provided in paragraph (7) of this Section 13.04) of the Common Stock at the Expiration Time times the number of shares of Common Stock outstanding (including any tendered or exchanged shares) at the Expiration Time minus (ii) the fair market value (determined as aforesaid) of the aggregate consideration payable to shareholders based on the acceptance (up to any maximum specified in the terms of the tender or exchange offer) of all shares validly tendered or exchanged and not withdrawn as of the Expiration Time (the shares deemed so accepted, up to any such maximum, being referred to as the "Purchased Shares") and the denominator shall be the product of (i) such current market price per share at the Expiration Time times (ii) such number of outstanding shares at the Expiration Time less the number of Purchased Shares, such reduction to become effective immediately prior to the opening of business on the day following the Expiration Time. (7) For the purpose of any computation under this paragraph and paragraphs (2), (4) and (5) of this Section 13.04, the current market price per share of Common Stock on any date in question shall be deemed to be the average of the daily Closing Prices for the 5 consecutive Trading Days selected by the Company commencing not more than 20 Trading Days before, and ending not later than, the date in question; PROVIDED, HOWEVER, that (i) if the "ex" date (as hereinafter defined) for any event (other than the issuance or distribution requiring such computation) that requires an adjustment to the conversion price pursuant to paragraph (1), (2), (3), (4), (5) or (6) above ("Other Event") occurs on or after the 20th Trading Day prior to the date in question and prior to the "ex" date for the issuance or distribution requiring such computation (the "Current Event"), the Closing Price for each Trading Day prior to the "ex" date for such Other Event shall be adjusted by multiplying such Closing Price by the same fraction by which the conversion price is so required to be adjusted as a result of such Other Event, (ii) if the "ex" date for any Other Event occurs after the "ex" date for the Current Event and on or prior to the date in question, the Closing Price for each Trading Day on and after the "ex" date for such Other Event shall be adjusted by multiplying such Closing Price by the reciprocal of the fraction by which the conversion price is so required to be adjusted as a result of such Other Event, (iii) if the "ex" date for any Other Event occurs on the "ex" date for the Current Event, one of those events shall be deemed for purposes of clauses (i) and (ii) of this proviso to have an "ex" date occurring prior to the "ex" date for the other 92 event, and (iv) if the "ex" date for the Current Event is on or prior to the date in question, after taking into account any adjustment required pursuant to clause (ii) of this proviso, the Closing Price for each Trading Day on or after such "ex" date shall be adjusted by adding thereto the amount of any cash and the fair market value on the date in question (as determined in good faith by the Board of Directors in a manner consistent with any determination of such value for purposes of paragraph (4) or (5) of this Section 13.04, whose determination shall be conclusive and described in a Board Resolution) of the portion of the rights, warrants, options, evidences of indebtedness, shares of capital stock, securities, cash or property being distributed applicable to one share of Common Stock. For the purpose of any computation under paragraph (6) of this Section 13.04, the current market price per share of Common Stock on any date in question shall be deemed to be the average of the daily Closing Prices for the 5 consecutive Trading Days selected by the Company commencing on or after the latest (the "Commencement Date") of (i) the date 20 Trading Days before the date in question, (ii) the date of commencement of the tender or exchange offer requiring such computation and (iii) the date of the last amendment, if any, of such tender or exchange offer involving a change in the maximum number of shares for which tenders are sought or a change in the consideration offered, and ending not later than the date of the Expiration Time of such tender or exchange offer (or, if such Expiration Time occurs before the close of trading on a Trading Day, not later than the Trading Day immediately preceding the date of such Expiration Time); PROVIDED, HOWEVER, that if the "ex" date for any Other Event (other than the tender or exchange offer requiring such computation) occurs on or after the Commencement Date and on or prior to the date of the Expiration Time for the tender or exchange offer requiring such computation, the Closing Price for each Trading Day prior to the "ex" date for such Other Event shall be adjusted by multiplying such Closing Price by the same fraction by which the conversion price is so required to be adjusted as a result of such other event. For purposes of this paragraph, the term "ex" date, (i) when used with respect to any issuance or distribution, means the first date on which the Common Stock trades regular way on the relevant exchange or in the relevant market from which the Closing Price was obtained without the right to receive such issuance or distribution, (ii) when used with respect to any subdivision or combination of shares of Common Stock, means the first date on which the Common Stock trades regular way on such exchange or in such market after the time at which such subdivision or combination becomes effective, and (iii) when used with respect to any tender or exchange offer means the first date on which the Common Stock trades regular way on such exchange or in such market after the Expiration Time of such tender or exchange offer. (8) The Company may make such reductions in the conversion price, in addition to those required by paragraphs (1), (2), (3), (4), (5) and (6) of this Section, as it considers to be advisable in order that any event treated for Federal income tax purposes as a dividend of stock or stock rights shall not be taxable to the recipients, or to diminish the amount of such tax payable. 93 (9) To the extent permitted by applicable law, the Company may from time to time decrease the conversion price by any amount for any period of time so long as (i) such period of time is at least 20 days, (ii) such decrease is irrevocable during such period and (iii) the Board of Directors has determined that such a decrease is in the best interests of the Company, which determination shall be conclusive. No such decrease may be taken into account when determining whether the Closing Price of the Common Stock exceeds the conversion price for purposes of clause (i) of the third paragraph of Section 14.07. Whenever the conversion price is decreased pursuant to the first sentence of this paragraph (9), the Company shall give notice of the decrease to the Holders of Securities in the manner provided in Section 1.06 at least 15 days prior to the date the decreased conversion price takes effect, and such notice shall state the decreased conversion price and the period during which it will be in effect. (10) No adjustment in the conversion price shall be required unless such adjustment would require an increase or decrease of at least 1% in the conversion price; PROVIDED, HOWEVER, that any adjustments which by reason of this paragraph (10) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. (11) In the event that the Company distributes rights or warrants (other than those referred to in paragraph (2) above) pro rata to holders of Common Stock, so long as any such rights or warrants have not expired or been redeemed by the Company, the Company shall make proper provision so that the Holder of any Security surrendered for conversion will be entitled to receive upon such conversion, in addition to the Conversion Shares, a number of rights and warrants to be determined as follows: (i) if such conversion occurs on or prior to the date for the distribution to the holders of rights or warrants of separate certificates evidencing such rights or warrants (the "Distribution Date"), the same number of rights or warrants to which a holder of a number of shares of Common Stock equal to the number of Conversion Shares is entitled at the time of such conversion in accordance with the terms and provisions of and applicable to the rights or warrants, and (ii) if such conversion occurs after such Distribution Date, the same number of rights or warrants to which a holder of the number of shares of Common Stock into which the principal amount of such Security so converted was convertible immediately prior to such Distribution Date would have been entitled on such Distribution Date in accordance with the terms and provisions of and applicable to the rights or warrants. 94 SECTION 13.05. NOTICE OF ADJUSTMENTS OF CONVERSION PRICE. Whenever the conversion price is adjusted as herein provided: (a) the Company shall compute the adjusted conversion price in accordance with Section 13.04 and shall prepare a certificate signed by the Treasurer of the Company setting forth the adjusted conversion price and showing in reasonable detail the facts upon which such adjustment is based, and such certificate shall forthwith be filed (with a copy to the Trustee) at each office or agency maintained for the purpose of conversion of Securities pursuant to Section 10.02; and (b) a notice stating that the conversion price has been adjusted and setting forth the adjusted conversion price shall forthwith be required, and as soon as practicable after it is required, such notice shall be mailed by the Company to all Holders at their last addresses as they shall appear in the Security Register. SECTION 13.06. NOTICE OF CERTAIN CORPORATE ACTION. In case: (a) the Company shall declare a dividend (or any other distribution) on its Common Stock that would require a conversion price adjustment pursuant to paragraph (5) of Section 13.04; or (b) the Company shall authorize the granting to all holders of its Common Stock of rights, warrants or options to subscribe for or purchase any shares of capital stock of any class or of any other rights (excluding rights distributed pursuant to any shareholder rights plan); or (c) of any reclassification of the Common Stock of the Company (other than a subdivision or combination of its outstanding shares of Common Stock), or of any consolidation or merger to which the Company is a party and for which approval of any shareholders of the Company is required, or of the sale or transfer of all or substantially all of the assets of the Company; or (d) of the voluntary or involuntary dissolution, liquidation or winding, up of the Company; or (e) the Company or any Subsidiary of the Company shall commence a tender or exchange offer for all or a portion of the Company's outstanding shares of Common Stock (or shall amend any such tender or exchange offer); then the Company shall cause to be filed at each office or agency maintained for the purpose of conversion of Securities pursuant to Section 10.02, and shall cause to be mailed to all Holders at their last addresses as they shall appear in the Security Register, 95 at least 20 days (or 10 days in any case specified in clause (a) or (b) above) prior to the applicable record, effective or expiration date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution or granting of rights, warrants or options, or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution, rights, warrants or options are to be determined, or (y) the date on which such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up, or (z) the date on which such tender offer commenced, the date on which such tender offer is scheduled to expire unless extended, the consideration offered and the other material terms thereof (or the material terms of any amendment thereto). SECTION 13.07. COMPANY TO RESERVE COMMON STOCK. The Company shall at all times reserve and keep available, free from preemptive rights, out of its authorized but unissued Common Stock, solely for the purpose of effecting the conversion of Securities, the whole number of shares of Common Stock then issuable upon the conversion in full of all outstanding Securities. SECTION 13.08. TAXES ON CONVERSIONS. The Company will pay any and all taxes that may be payable in respect of the issue or delivery of shares of Common Stock on conversion of Securities pursuant hereto. The Company shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of shares of Common Stock in a name other than that of the Holder of the Security or Securities to be converted, and no such issue or delivery shall be made unless and until the Person requesting such issue has paid to the Company the amount of any such tax, or has established to the satisfaction of the Company that such tax has been paid. SECTION 13.09. COVENANT AS TO COMMON STOCK. The Company covenants that all shares of Common Stock which may be issued upon conversion of Securities will upon issue be newly issued (and not treasury shares) and be duly authorized, validly issued, fully paid and nonassessable and, except as provided in Section 13.08, the Company will pay all taxes, liens and charges with respect to the issue thereof. SECTION 13.10. CANCELLATION OF CONVERTED SECURITIES. All Securities delivered for conversion shall be delivered to the Trustee to be cancelled by or at the direction of the Trustee, which shall dispose of the same as provided in Section 3.09. 96 SECTION 13.11. PROVISIONS IN CASE OF RECLASSIFICATION, CONSOLIDATION, MERGER OR SALE OF ASSETS. In the event that the Company shall be a party to any transaction (including without limitation any (i) recapitalization or reclassification of the Common Stock (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination of the Common Stock), (ii) consolidation of the Company with, or merger of the Company into, any other person. any merger of another person into the Company (other than a merger which does not result in a reclassification, conversion, exchange or cancellation of outstanding shares of Common Stock of the Company), (iii) sale or transfer of all or substantially all of the assets of the Company, or (iv) other transaction) pursuant to which the Common Stock is converted into the right to receive other securities, cash or other property, then lawful provision shall be made as part of the terms of such transaction whereby the Holder of each Security then outstanding shall have the right thereafter to convert such Security only into (subject to funds being legally available for such purpose under applicable law at the time of such conversion) the kind and amount of securities, cash and other property receivable upon such transaction by a holder of the number of shares of Common Stock into which such Security might have been converted immediately prior to such transaction. The Company or the person formed by such consolidation or resulting from such merger or which acquired such assets or which acquired the Company's shares, as the case may be, shall execute and deliver to the Trustee a supplemental indenture establishing such rights. Such supplemental indenture shall provide for adjustments which, for events subsequent to the effective date of such supplemental indenture, shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article. The above provisions of this Section 13.11 shall similarly apply to successive transactions of the foregoing type. SECTION 13.12. TRUSTEE ADJUSTMENT DISCLAIMER. The Trustee has no duty to determine when an adjustment under this Article XIII should be made, how it should be made or what it should be. The Trustee has no duty to determine whether a supplemental indenture need be entered into or whether any provisions of any supplemental indenture are correct. The Trustee shall not be accountable for and makes no representation as to the validity or value of any securities or assets issued upon conversion of Securities. The Trustee shall not be responsible for the Company's failure to comply with this Article XIII. 97 ARTICLE XIV RIGHT TO REQUIRE PURCHASE SECTION 14.01. RIGHT TO REQUIRE PURCHASE. In the event that there shall occur a Change in Control, then each Holder shall have the right, at such Holder's option, to require the Company, subject to the provisions of Section 12.03, to purchase all or any designated part of such Holder's Securities on the date (the "Purchase Date") fixed by the Company that is not less than 30 days nor more than 45 days after the date the Company gives notice of the Change in Control as contemplated in Section 14.03(a) at a price (the "Purchase Price") equal to 100% of the principal amount thereof, together with accrued and unpaid interest through the Purchase Date. Such right to require the purchase of Securities shall not continue after a discharge of the Company from its obligations with respect to the Securities in accordance with Article IV. At the option of the Company, the Purchase Price may be paid in cash or, subject to the fulfillment by the Company of the conditions set forth Section 14.02 hereof, by delivery of shares of Common Stock in accordance with Section 14.02. Whenever in this Indenture (including Sections 2.02, 3.01, 5.01(1) and 5.08) there is a reference, in any context, to the principal of any Security as of any time, such reference shall be deemed to include reference to the Purchase Price payable in respect of such Security to the extent that such Purchase Price is, was or would be so payable at such time, and express mention of the Purchase Price in any provision of this Indenture shall not be construed as excluding the Purchase Price in those provisions of this Indenture when such express mention is not made. Any requirements for notice, surrender or delivery of Securities pursuant to this Article XIV shall, with respect to any Global Security, be subject to any Applicable Procedures. SECTION 14.02. CONDITIONS AND PROCEDURES RELATING TO THE COMPANY'S ELECTION TO PAY THE PURCHASE PRICE IN COMMON STOCK. (a) The Company may elect to pay the Purchase Price by delivery of shares of Common Stock pursuant to Section 14.01 so long as the following conditions precedent are satisfied: (i) The shares of Common Stock deliverable in payment of the Purchase Price shall have a fair market value as of the Purchase Date of not less than the Purchase Price. For purposes of Section 14.01 and this Section 14.02, the fair market value of shares of Common Stock shall be determined by the Company and shall be equal to 95% of the average of the Closing Prices of the Common Stock for the five consecutive Trading Days immediately preceding and including the third Trading Day prior to the Purchase Date; (ii) The shares of Common Stock to be issued upon purchase of Notes pursuant to this Article XIV (A) shall not require registration under any federal securities law before such shares may be freely transferable without being subject to any transfer 98 restrictions under the Securities Act upon purchase pursuant to this Article XIV or, if such registration is required, such registration shall be completed and shall become effective prior to the Purchase Date, and (B) shall not require registration with or approval of any governmental authority under any state law or any other federal law before such shares may be validly issued or delivered upon purchase pursuant to this Article XIV or if such registration is required or such approval must be obtained, such registration shall be completed or such approval shall be obtained prior to the Purchase Date; (iii) The shares of Common Stock to be issued upon purchase of Notes pursuant to this Article XIV are, or shall have been, approved for listing on Nasdaq or the New York Stock Exchange or listed on another national securities exchange, in any case, prior to the Purchase Date; and (iv) All shares of Common Stock which may be issued upon purchase of Notes pursuant to this Article XIV will be issued out of the Company's authorized but unissued Common Stock and, will upon issue, be duly and validly issued and fully paid and non-assessable and free of any preemptive or similar rights. If all of the conditions set forth in this Section 14.02(a) are not satisfied in accordance with the terms hereof, the Purchase Price shall be paid by the Company only in cash. (b) Any issuance of shares of Common Stock in respect of the Purchase Price shall be deemed to have been effected immediately prior to the close of business on the Purchase Date and the Person or Persons in whose name or names any certificate or certificates for shares of Common Stock shall be issuable upon such purchase shall be deemed to have become on the Purchase Date the holder or holders of record of the shares represented thereby; PROVIDED, HOWEVER, that any surrender for purchase on a date when the stock transfer books of the Company shall be closed shall constitute the Person or Persons in whose name or names the certificate or certificates for such shares are to be issued as the record holder or holders thereof for all purposes at the opening of business on the next succeeding day on which such stock transfer books are open. No payment or adjustment shall be made for dividends or distributions on any Common Stock issued upon purchase of any Note pursuant to this Article XIV declared prior to the Purchase Date. (c) No fractions of shares shall be issued upon purchase of Notes pursuant to this Article XIV. If more than one Note shall be purchased from the same Holder and the Purchase Price shall be payable in shares of Common Stock, the number of full shares which shall be issuable upon such purchase shall be computed on the basis of the aggregate principal amount of the Notes so purchased. Instead of any fractional share of 99 Common Stock which would otherwise be issuable on the purchase of any Note or Notes pursuant to this Article XIV, the Company will deliver to the applicable Holder its check for the current market value of such fractional share. The current market value of a fraction of a share is determined by multiplying the Closing Price of a full share on the Trading Day immediately preceding the Purchase Date by the fraction, and rounding the result to the nearest cent. (d) Any issuance and delivery of certificates for shares of Common Stock on purchase of Notes pursuant to this Article XIV shall be made without charge to the Holder of Notes being purchased for such certificates or for any tax or duty in respect of the issuance or delivery of such certificates or the Notes represented thereby; PROVIDED, HOWEVER, that the Company shall not be required to pay any tax or duty which may be payable in respect of (i) income of the Holder or (ii) any transfer involved in the issuance or delivery of certificates for shares of Common Stock in a name other than that of the Holder of the Notes being purchased, and no such issuance or delivery shall be made unless and until the Person requesting such issuance or delivery has paid to the Company the amount of any such tax or duty or has established, to the satisfaction of the Company, that such tax or duty has been paid. SECTION 14.03. NOTICE, METHOD OF EXERCISING PURCHASE RIGHT. (a) On or before the 15th day after the Company knows or reasonably should know a Change in Control has occurred, the Company, or at the written request of the Company, the Trustee (in the name and at the expense of the Company), shall give notice of the occurrence of the Change in Control and of the purchase right set forth herein arising as a result thereof by first-class mail, postage prepaid, or by telefacsimile with written acknowledgment of transmittal to each Holder of the Securities at such Holder's address appearing in the Security Register. The Company shall also deliver a copy of such notice of a purchase right to the Trustee. Each notice of a purchase right shall state: (1) the Purchase Date, (2) the date by which the purchase right must be exercised, (3) the Purchase Price, (4) whether the Purchase Price will be paid in the form of cash or Common Stock as provided in this Indenture and that such determination is irrevocable, and (5) the instructions a Holder must follow to exercise its purchase right. 100 No failure of the Company to give the foregoing notice shall limit any Holder's right to exercise a purchase right. The Trustee shall have no affirmative obligation to determine if there shall have occurred a Change in Control. (b) To exercise a purchase right, a Holder shall deliver to the Company (or an agent designated by the Company for such purpose in the notice referred to in (a) above) and to the Trustee on or before the 30th day after the date of transmittal of the notice referred to in (a) above (i) written notice of the Holder's exercise of such right, which notice shall set forth the name of the Holder, the principal amount of the Security or Securities (or portion of a Security) to be purchased, and a statement that an election to exercise the purchase right is being made thereby, and (ii) the Security or Securities with respect to which the purchase right is being exercised, duly endorsed for transfer to the Company. Such written notice shall be irrevocable. If the Purchase Date falls between any Regular Record Date and the corresponding succeeding Interest Payment Date, Securities to be purchased must be accompanied by payment from the Holder of an amount equal to the interest thereon which the registered Holder thereof is to receive on such Interest Payment Date. (c) In the event a purchase right shall be exercised in accordance with the terms hereof, the Company shall on the Purchase Date pay or cause to be paid in cash or shares of Common Stock, as provided herein, to the Holder thereof the Purchase Price of the Security or Securities as to which the purchase right had been exercised. SECTION 14.04. DEPOSIT OF PURCHASE PRICE. On or prior to the Purchase Date, the Company shall deposit with the Trustee or with a Paying Agent (or, if the Company is acting as its own Paying Agent, segregate and hold in trust as provided in Section 10.03) cash or shares of Common Stock, as provided herein, sufficient to pay the Purchase Price of the Securities which are to be repaid on the Purchase Date. SECTION 14.05. SECURITIES NOT PURCHASED ON PURCHASE DATE. If any Security surrendered for purchase shall not be so paid on the Purchase Date, the principal of such Security shall, until paid, bear interest from the Purchase Date at a rate borne by such Security. SECTION 14.06. SECURITIES PURCHASED IN PART. Any Security which is to be purchased only in part shall be surrendered at any office or agency of the Company designated for that purpose pursuant to Section 10.02 (with, if the Company or the Trustee so requires, due endorsement by, or written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the Holder thereof or his attorney duly authorized in writing), and the Company shall execute, and the Trustee shall authenticate and deliver to the Holder of such Security without service charge, a new Security or Securities of any authorized denomination as requested by such Holder, 101 in aggregate principal amount equal to and in exchange for the unpurchased portion of the principal of the Security so surrendered. SECTION 14.07. CERTAIN DEFINITIONS. For purposes of this Article: The term "Beneficial Owner" shall be determined in accordance with Rules 13d-3 and 13d-5 promulgated by the Commission under the Exchange Act, or any successor provision thereto, except that a Person shall be deemed to have "beneficial ownership" of all shares that such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time. A "Change in Control" shall be deemed to have occurred at such time as (a) any Person, or any Persons acting together in a manner which would constitute a "group" (a "Group") for purposes of Section 13(d) of the Exchange Act, or any successor provision thereto, together with any Affiliates thereof, (i) become the Beneficial Owners, directly or indirectly, of capital stock of the Company, entitling such Person or Persons and its or their Affiliates to exercise more than 50% of the total voting power of all classes of the Company's capital stock entitled to vote generally in the election of directors or (ii) shall succeed in having sufficient of its or their nominees (who are not supported by a majority of the then current Board of Directors of the Company) elected to the Board of Directors of the Company such that such nominees, when added to any existing directors remaining on the Board of Directors of the Company after such election who are Affiliates of or acting in concert with any such Persons, shall constitute a majority of the Board of Directors of the Company, (b) the Company shall be a party to any transaction pursuant to which the Common Stock is converted into the right to receive other securities (other than common stock), cash and/or property (or the Company, by dividend, tender or exchange offer or otherwise, distributes other securities, cash and/or property to holders of Common Stock) and the value of all such securities, cash and/or property distributed in such transaction and any other transaction effected within the 12 months preceding consummation of such transaction (as determined in good faith by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution) is more than 50% of the average of the daily Closing Prices for the five consecutive Trading Days ending on the Trading Day immediately preceding the date of such transaction (or, if earlier, the Trading Day immediately preceding the ex date (as defined in paragraph (7) of Section 13.04) for such transaction) or (c) the Company shall consolidate with or merge into any other Person or sell, convey, transfer or lease its properties and assets substantially as an entirety to any Person other than a Subsidiary, or any other Person shall consolidate with or merge into the Company (other than, in the case of this clause (c), pursuant to any consolidation or merger where Persons who are shareholders of the Company immediately prior thereto become the Beneficial Owners of shares of capital stock of the surviving company entitling such Persons to exercise more than 50% of the total voting power of all classes of such surviving company's capital stock entitled to vote generally in the election of directors). 102 Notwithstanding the foregoing, a "Change in Control" will be deemed not to have occurred (i) if the Closing Price of the Common Stock for any five Trading Days during the ten Trading Days immediately preceding the Change in Control is at least equal to 105% of the conversion price in effect immediately preceding the Change in Control or (ii) if at least 90% of the consideration (excluding cash payments for fractional shares or cash payments for appraisal rights) received or to be received by the shareholders of the Company in the transaction or transactions constituting the Change in Control consists of (x) shares of common stock of an entity organized and validly existing under the laws of the United States of America, any State thereof or the District of Columbia the common stock of which is, or upon issuance will be, traded on a national securities exchange in the United States of America or through Nasdaq or (y) shares of common stock of an entity organized and validly existing under the laws of a jurisdiction outside of the United States of America, or American Depositary Shares representing such shares of common stock, that are, or upon issuance will be, traded on a national securities exchange in the United States of America or through Nasdaq, if such entity has a worldwide total market capitalization of its equity securities of at least U.S. $5 billion. ARTICLE XV DEFEASANCE AND COVENANT DEFEASANCE SECTION 15.01. COMPANY'S OPTION TO EFFECT DEFEASANCE OR COVENANT DEFEASANCE. The Company may at its option by Board Resolution, at any time, elect to have either Section 15.02 or Section 15.03 applied to the Outstanding Securities upon compliance with the conditions set forth below in this Article XV. SECTION 15.02. DEFEASANCE AND DISCHARGE. Upon the Company's exercise of the option provided in Section 15.01 applicable to this Section, the Company shall be deemed to have been discharged from its obligations with respect to the Outstanding Securities (other than those specified below), the Holders and any holders of Senior Indebtedness, and the provisions of Article XII hereof shall cease to be effective, on the date the conditions set forth below are satisfied (hereinafter, "defeasance"). For this purpose, such defeasance means that the Company shall be deemed to have paid and discharged the entire indebtedness represented by the Outstanding Securities, the Company shall be deemed to have satisfied all their other obligations under such Securities and this Indenture insofar as such Securities are concerned (and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging the same), except for the following which shall survive until otherwise terminated or discharged hereunder: (A) the rights of Holders of such Securities to receive, solely from the trust fund described in Section 15.04 and as more fully set forth in such Section, payments in 103 respect of the principal of, premium, if any and interest on such Securities when such payments are due, (B) the Company's obligations with respect to such Securities under Sections 3.04, 3.05, 3.06, 10.02, 10.03, 10.11, Article XIII and Article XIV, (C) the rights, powers, trusts, duties and immunities of the Trustee hereunder and (D) this Article XV. Subject to compliance with this Article XV, the Company may exercise its option under this Section 15.02 notwithstanding the prior exercise of its option under Section 15.03. SECTION 15.03. COVENANT DEFEASANCE. Upon the Company's exercise of the option provided in Section 15.01 applicable to this Section, (i) the Company shall be released from its obligations under Section 10.06 and Section 10.07, (ii) the occurrence of an event specified in Section 5.01(4) (with respect to either of Section 10.06 or Section 10.07) or 5.01(5) shall not be deemed to be an Event of Default and (iii) the provisions of Article XII hereof shall cease to be effective on and after the date the conditions set forth below are satisfied (hereinafter, "covenant defeasance"). For this purpose, such covenant defeasance means that the Company may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such Section or Article, whether directly or indirectly by reason of any reference elsewhere herein to any such Section or Article or by reason of any reference in any such Section or Article to any other provision herein or in any other document, but the remainder of this Indenture and such Securities shall be unaffected thereby. SECTION 15.04. CONDITIONS TO DEFEASANCE OR COVENANT DEFEASANCE. The following shall be the conditions to application of either Section 15.02 or Section 15.03 to the then Outstanding Securities: 104 (1) The Company shall irrevocably have deposited or caused to be deposited with the Trustee (or another trustee satisfying the requirements of Section 6.09 who shall agree to comply with the provisions of this Article XV applicable to it) as trust funds in trust for the purpose of making the following payments, specifically pledged as security for, and dedicated solely to, the benefit of the Holders of such Securities, (A) money in an amount, or (B) U.S. Government Obligations which through the scheduled payment of principal and interest in respect thereof in accordance with their terms will provide, not later than one day before the due date of any payment, money in an amount, or (C) a combination thereof, sufficient, in the written opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay and discharge, and which shall be applied by the Trustee (or other qualifying trustee) to pay and discharge, the principal of, premium, if any, and each installment of interest on the Securities on the Stated Maturity of such principal or installment of interest in accordance with the terms of this Indenture and of such Securities. For this purpose, "U.S. Government Obligations" means securities that are (x) direct obligations of the United States of America for the payment of which its full faith and credit is pledged or (y) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America the payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America, which, in either case, are not callable or redeemable at the option of the issuer thereof, and shall also include a depository receipt issued by a bank (as defined in Section 3(a)(2) of the Securities Act) as custodian with respect to any such U.S. Government Obligation or a specific payment of principal of or interest on any such U.S. Government Obligation held by such custodian for the account of the holder of such depository receipt; PROVIDED that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the U.S. Government Obligation or the specific payment of principal of or interest on the U.S. Government Obligation evidenced by such depository receipt. (2) In the case of an election under Section 15.02, the Company shall have delivered to the Trustee an Opinion of Counsel stating that (x) the Company has received from, or there has been published by, the Internal Revenue Service a ruling, or (y) since the date of this Indenture there has been a change in the applicable Federal income tax law, in either case to the effect that, and based thereon such opinion shall confirm that, the Holders of the Outstanding Securities will not recognize gain or loss for Federal income tax purposes as a result of such deposit, defeasance and discharge and will be subject to Federal income tax on the 105 same amount, in the same manner and at the same times as would have been the case if such deposit, defeasance and discharge had not occurred. (3) In the case of an election under Section 15.03, the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that the Holders of the Outstanding Securities will not recognize gain or loss for Federal income tax purposes as a result of such deposit and covenant defeasance and will be subject to Federal income tax on the same amount, in the same manner and at the same times as would have been the case if such deposit and covenant defeasance had not occurred. (4) The Company shall have delivered to the Trustee an Officers' Certificate to the effect that the Securities, if then listed on any securities exchange, will not be delisted as a result of such deposit. (5) Such defeasance or covenant defeasance shall not cause the Trustee to have a conflicting interest as defined in Section 6.08 and for purposes of the Trust Indenture Act with respect to any securities of the Company. (6) At the time of such deposit: (A) no default in the payment of all or a portion of principal of (or premium, if any) or interest on or other obligations in respect of any Senior Indebtedness shall have occurred and be continuing, and no event of default with respect to any Senior Indebtedness shall have occurred and be continuing and shall have resulted in such Senior Indebtedness becoming or being declared due and payable prior to the date on which it would otherwise have become due and payable and (B) no other event with respect to any Senior Indebtedness shall have occurred and be continuing permitting (after notice or the lapse of time, or both) the holders of such Senior Indebtedness (or a trustee on behalf of the holders thereof) to declare such Senior Indebtedness due and payable prior to the date on which it would otherwise have become due and payable, or, in the case of either clause (A) or clause (B) above, each such default or event of default shall have been cured or waived or shall have ceased to exist. (7) No Event of Default or event which with notice or lapse of time or both would become an Event of Default shall have occurred and be continuing on the date of such deposit or, insofar as subsections 5.01(6) and (7) are concerned, at any time during the period ending on the 121st day after the date of such deposit (it being understood that this condition shall not be deemed satisfied until the expiration of such period). 106 (8) Such defeasance or covenant defeasance shall not result in a breach or violation of, or constitute a default under, any other agreement or instrument to which the Company is a party or by which it is bound. (9) The Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent provided for relating to either the defeasance under Section 15.02 or the covenant defeasance under Section 15.03 and Section 15.04 (as the case may be) have been complied with. (10) Such defeasance or covenant defeasance shall not result in the trust arising from such deposit constituting an investment company as defined in the Investment Company Act of 1940, as amended, or such trust shall be qualified under such act or exempt from regulation thereunder. SECTION 15.05. DEPOSITED MONEY AND U.S. GOVERNMENT OBLIGATIONS TO BE HELD IN TRUST; OTHER MISCELLANEOUS PROVISIONS. Subject to the provisions of the last paragraph of Section 10.03, all money and U.S. Government Obligations (including the proceeds thereof) deposited with the Trustee (or other qualifying trustee collectively, for purposes of this Section 15.05, the "Trustee") pursuant to Section 15.04 in respect of the Securities shall be held in trust and applied by the Trustee, in accordance with the provisions of such Securities and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Holders of such Securities, of all sums due and to become due thereon in respect of principal, premium, if any, and interest. Money so held in trust shall not be subject to the provisions of Article XII. The Company shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the U.S. Government Obligations deposited pursuant to Section 15.04 or the principal and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the Holders of the Outstanding Securities. Anything in this Article XV to the contrary notwithstanding, the Trustee shall deliver or pay to the Company from time to time upon Company Request any money or U.S. Government Obligations held by it as provided in Section 15.04 which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, are in excess of the amount thereof which would then be required to be deposited to effect an equivalent defeasance or covenant defeasance. 107 SECTION 15.06. REINSTATEMENT. If the Trustee or the Paying Agent is unable to apply any money in accordance with Section 15.02 or 15.03 by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then the Company's obligations under this Indenture and the Securities shall be revived and reinstated as though no deposit had occurred pursuant to this Article XV until such time as the Trustee or Paying Agent is permitted to apply all such money in accordance with Section 15.02 or 15.03; PROVIDED, HOWEVER, that if the Company makes any payment of principal of, premium, if any, or interest on any Security following the reinstatement of its obligations, the Company shall be subrogated to the rights of the Holders of such Securities to receive such payment from the money held by the Trustee or the Paying Agent. ARTICLE XVI IMMUNITY SECTION 16.01. PERSONAL IMMUNITY OF INCORPORATORS, SHAREHOLDERS, DIRECTORS AND OFFICERS. No recourse for the payment of the principal of or interest on the Securities, and no recourse under or upon any obligation, covenant or agreement contained in this Indenture or in any indenture supplemental hereto, or in the Securities, or because of any indebtedness evidenced thereby, shall be had against any incorporator, or against any past, present or future shareholder, officer or director, as such, of the Company or any successor corporation, either directly or through the Company or any successor corporation, under any rule of law, statute or constitutional provision or by the enforcement of any assessment or by any legal or equitable proceeding or otherwise, all such liability being expressly waived and released by the acceptance of the Securities by the Holders thereof and as part of the consideration for the issue of the Securities. Each and every Holder of the Securities, by receiving and holding the same, agrees to the provisions of this Section 16.01 and waives and releases any and all such recourse, claim and liability. This instrument may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed as of the day and year first above written. AFFYMETRIX, INC. by________________________________________ Name: Title: THE BANK OF NEW YORK, by________________________________________ Name: Title: EX-4.4 3 EXHIBIT 4.4 EXECUTION COPY Up to $225,000,000 Affymetrix, Inc. 4.75% Convertible Subordinated Notes due 2007 REGISTRATION RIGHTS AGREEMENT February 14, 2000 Credit Suisse First Boston Corporation, as Representative of the several Initial Purchasers referred to herein, c/o Credit Suisse First Boston Corporation Eleven Madison Avenue New York, New York 10010-3629 Dear Sirs: 2 Affymetrix, Inc., a Delaware corporation (the "Company"), proposes to issue and sell to Credit Suisse First Boston Corporation ("CSFBC") and the other initial purchasers named in Schedule A to the Purchase Agreement (as defined below) (collectively, the "Initial Purchasers"), upon the terms set forth in a purchase agreement dated as of February 8, 2000 (the "Purchase Agreement") between the Company and the Initial Purchasers, $175,000,000 aggregate principal amount (plus up to an additional $50,000,000 principal amount) of 4.75% Convertible Subordinated Notes Due 2007 (the "Notes") of the Company. The Notes will be convertible into shares of Common Stock, par value $0.01 per share, of the Company (the "Common Stock") at the conversion price set forth in the Offering Circular dated February 8, 2000. The Notes will be issued pursuant to an Indenture, dated as of February 14, 2000 (the "Indenture"), between the Company and The Bank of New York (the "Trustee"). As an inducement to the Initial Purchasers to enter into the Purchase Agreement and in satisfaction of a condition to the Initial Purchasers' obligations thereunder, the Company agrees with the Initial Purchasers, (i) for the benefit of the Initial Purchasers and (ii) for the benefit of the holders of the Notes and the Common Stock issuable upon conversion of the Notes (collectively, the "Securities") from time to time until such time as such Securities have been sold pursuant to a Shelf Registration Statement (as defined below) (each of the foregoing a "Holder" and together the "Holders"), as follows: 1. SHELF REGISTRATION. The Company shall take the following actions: (a) The Company shall, at its cost, prepare and, as promptly as practicable (but in no event more than 90 days after so required or requested pursuant to this Section 1) file with the Securities and Exchange Commission (the "Commission") and thereafter shall use its commercially reasonable best efforts to cause to be declared effective as soon as practicable a registration statement on Form S-3 (the "Shelf Registration Statement") covering the offer and sale of the Transfer Restricted Securities (as defined in Section 5 hereof) by the Holders thereof from time to time in accordance with the methods of distribution set forth in the Shelf Registration Statement and Rule 415 under the Securities Act of 1933, as amended (the "Securities Act") (hereinafter, the "Shelf Registration"); PROVIDED, HOWEVER, that no Holder (other than the Initial Purchasers) shall be entitled to have the Securities held by it covered by such Shelf Registration Statement unless such Holder agrees in writing to be bound by all the provisions of this Agreement applicable to such Holder. (b) The Company shall use its commercially reasonable best efforts to keep the Shelf Registration Statement 3 continuously effective in order to permit the prospectus included therein (the "Prospectus") to be lawfully delivered by the Holders of the relevant Securities, for a period of two years (or for such longer period if extended pursuant to Section 2(h) below) from the date of its effectiveness or such shorter period that will terminate when all the Securities covered by the Shelf Registration Statement (i) have been sold pursuant thereto or (ii) may be sold pursuant to Rule 144(k) under the Securities Act (or any successor rule therefore), assuming for this purpose that the Holders thereof are not affiliates of the Company (in any such case, such period being called the "Shelf Registration Period"). The Company shall be deemed not to have used its commercially reasonable best efforts to keep the Shelf Registration Statement effective during the requisite period if it voluntarily takes any action that would result in Holders of Securities covered thereby not being able to offer and sell such Securities during that period, unless such action is (i) required by applicable law or (ii) taken by the Company in good faith and for valid business reasons upon the occurrence of any event contemplated by Section 2(b)(v) below, and the Company thereafter complies with the requirements of Section 2(h). (c) Notwithstanding any other provisions of this Agreement to the contrary, the Company shall cause the Shelf Registration Statement and the Prospectus and any amendment or supplement thereto, as of the effective date of the Shelf Registration Statement, amendment or supplement, (i) to comply in all material respects with the applicable requirements of the Securities Act and the rules and regulations of the Commission and (ii) not to contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. 2. REGISTRATION PROCEDURES. In connection with the Shelf Registration contemplated by Section 1 hereof, the following provisions shall apply: (a) The Company shall (i) furnish to each of the Initial Purchasers, prior to the filing thereof with the Commission, a copy of the Shelf Registration Statement and each amendment thereof and each amendment or supplement, if any, to the prospectus included therein and, in the event that an Initial Purchaser (with respect to any portion of an unsold allotment from the original offering) is participating in the Shelf Registration Statement, use its commercially reasonable best efforts to reflect in each such document, when so filed with the Commission, such comments as such Initial Purchaser reasonably may propose and (ii) include the names of the Holders who propose to sell Securities pursuant to the Shelf Registration Statement, as selling security holders. 4 (b) The Company shall give written notice to the Initial Purchasers and the Holders (which notice pursuant to clauses (ii)-(v) hereof shall be accompanied by an instruction to suspend the use of the prospectus until the requisite changes have been made): (i) when the Shelf Registration Statement or any amendment thereto has been filed with the Commission and when the Shelf Registration Statement or any post-effective amendment thereto has become effective; (ii) of any request by the Commission for amendments or supplements to the Shelf Registration Statement or the prospectus included therein or for additional information; (iii) of the issuance by the Commission of any stop order suspending the effectiveness of the Shelf Registration Statement or the initiation of any proceedings for that purpose; (iv) of the receipt by the Company or its legal counsel of any notification with respect to the suspension of the qualification of the Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; and (v) of the happening of any event or circumstance that would require the Company to make changes in the Shelf Registration Statement or the Prospectus in order that the Shelf Registration Statement or the Prospectus does not contain an untrue statement of a material fact nor omit to state a material fact required to be stated therein or necessary to make the statements therein (in the case of the Prospectus, in light of the circumstances under which they were made) not misleading, which written notice need not provide any detail as to the nature of such event. (c) The Company shall make every reasonable effort to obtain the withdrawal, at the earliest possible time, of any order suspending the effectiveness of the Shelf Registration Statement. (d) The Company shall furnish to each Holder of Securities included within the coverage of the Shelf Registration, without charge, at least one copy of the Shelf Registration Statement and any post-effective amendment thereto, including financial statements and schedules, and, if the Holder so requests in writing, all exhibits thereto (including those, if any, incorporated by reference). 5 (e) The Company shall, during the Shelf Registration Period, deliver to each Holder of Securities included within the coverage of the Shelf Registration Statement, without charge, as many copies of the Prospectus (including each preliminary prospectus) included in the Shelf Registration Statement and any amendment or supplement thereto as such person may reasonably request. The Company consents, subject to the provisions of this Agreement, to the use of the Prospectus or any amendment or supplement thereto by each of the selling Holders in connection with the offering and sale of the Securities covered by the Prospectus, or any amendment or supplement thereto, included in the Shelf Registration Statement. (f) Prior to any public offering of the Securities pursuant to the Shelf Registration Statement, the Company shall register or qualify or cooperate with the Holders of the Securities included therein and their respective counsel in connection with the registration or qualification of such Securities for offer and sale under the securities or "blue sky" laws of such states of the United States as any such Holder reasonably requests in writing and do any and all other acts or things necessary or advisable to enable the offer and sale in such jurisdictions of the Securities covered by the Shelf Registration Statement; PROVIDED, HOWEVER, that the Company shall not be required to (i) qualify generally to do business in any jurisdiction where it is not then so qualified or (ii) take any action which would subject it to general service of process or to taxation in any jurisdiction where it is not then so subject. (g) The Company shall cooperate with the Holders of the Securities to facilitate the timely preparation and delivery of certificates representing the Securities to be sold pursuant to the Shelf Registration Statement free of any restrictive legends and in such denominations and registered in such names as the Holders may request a reasonable period of time prior to sales of the Securities pursuant to the Shelf Registration Statement. (h) Upon the occurrence of any event contemplated by paragraphs (ii) through (v) of Section 2(b) above during the period for which the Company is required to maintain an effective Shelf Registration Statement, the Company shall, as required hereby, prepare and file a post-effective amendment to the Shelf Registration Statement or an amendment or supplement to the Prospectus and any other required document so that, as thereafter delivered to Holders or purchasers of Securities, the Prospectus will not contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. If the Company notifies the Initial Purchasers and the Holders in 6 accordance with paragraphs (ii) through (v) of Section 2(b) above to suspend the use of the Prospectus until the requisite changes to the Prospectus have been made, then the Initial Purchasers and the Holders shall suspend use of such prospectus and the period of effectiveness of the Shelf Registration Statement provided for in Section 1(b) above shall be extended by the number of days from and including the date of giving such notice to and including the date when the Initial Purchasers and the Holders shall have received such amended or supplemented prospectus pursuant to this Section 2(h). Any such amendment, supplement or document will be prepared and filed as promptly as practicable under the circumstances, as determined in good faith by the Company, it being understood that the Company may have bona fide reasons to delay such preparation and filing for a period which may not in any event exceed 60 days. (i) Not later than the effective date of the Shelf Registration Statement, the Company will provide CUSIP numbers for the Notes and the Common Stock registered under the Shelf Registration Statement, and provide the Trustee with printed certificates for such Notes, in a form eligible for deposit with The Depository Trust Company. (j) The Company will comply with all rules and regulations of the Commission to the extent and so long as they are applicable to the Shelf Registration and will make generally available to its security holders (or otherwise provide in accordance with Section 11(a) of the Securities Act) an earnings statement satisfying the provisions of Section 11(a) of the Securities Act, no later than 45 days after the end of a 12-month period (or 90 days, if such period is a fiscal year) beginning with the first month of the Company's first fiscal quarter commencing after the effective date of the Shelf Registration Statement, which statement shall cover such 12-month period. (k) The Company shall cause the Indenture to be qualified under the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"), in a timely manner and containing such changes, if any, as shall be necessary for such qualification. In the event that such qualification would require the appointment of a new trustee under the Indenture, the Company shall appoint a new trustee thereunder pursuant to the applicable provisions of the Indenture. (l) The Company may require each Holder of Securities to be sold pursuant to the Shelf Registration Statement to furnish to the Company such information regarding the Holder and the distribution of the Securities as the Company may from time to time reasonably require for inclusion in the Shelf Registration Statement, and the Company may exclude from such registration the Securities of any Holder that fails to furnish 7 such information within a reasonable time after receiving such request. (m) The Company shall enter into such customary agreements (including, if requested, an underwriting agreement in customary form) and take all other actions, if any, as any Holder shall reasonably request in order to facilitate the disposition of the Securities pursuant to the Shelf Registration, PROVIDED, HOWEVER, that the Company shall not be required to facilitate an underwritten offering pursuant to the Shelf Registration Statement by any Holders unless the offering relates to at least $50,000,000 principal amount of the Notes or the equivalent number of shares of Common Stock into which such Notes are convertible. (n) The Company shall (i) make reasonably available for inspection by the Holders, any underwriter participating in any distribution pursuant to the Shelf Registration Statement and any attorney, accountant or other agent retained by the Holders or any such underwriter, all relevant financial and other records, pertinent corporate documents and properties of the Company and (ii) cause the Company's officers, directors, employees, accountants and auditors to supply all relevant information reasonably requested by the Holders or any such underwriter, attorney, accountant or agent in connection with the Shelf Registration Statement, in each case, as shall be reasonably necessary to enable such persons to conduct a reasonable investigation within the meaning of Section 11 of the Securities Act; PROVIDED, HOWEVER, that the foregoing inspection and information gathering (i) shall be coordinated on behalf of the Initial Purchasers by you and on behalf of the other parties, by one counsel designated by and on behalf of the other parties as described in Section 3 hereof. (o) The Company, if requested by any Holder of Securities covered by Shelf Registration Statement, shall cause (i) its counsel (which may include the Company's general counsel for one or more of the opinions) to deliver an opinion and updates thereof relating to the Securities in customary form addressed to such Holders and the managing underwriters, if any, thereof, and dated, in the case of the initial opinion, the effective date of the Shelf Registration Statement (it being agreed that the matters to be covered by such opinion shall include, without limitation, (A) the due incorporation and good standing of the Company; (B) the qualification of the Company to transact business as a foreign corporation; the due authorization, execution and delivery of the relevant agreement of the type referred to in Section 2(m) hereof; (C) the due authorization, execution, authentication and issuance, and the validity and enforceability, of the Securities; (D) the absence of material legal or governmental proceedings involving the 8 Company; (E) the absence of governmental approvals required to be obtained in connection with the Shelf Registration Statement, the offering and sale of the Securities, or any agreement of the type referred to in Section 2(m) hereof; (F) the compliance as to form of the Shelf Registration Statement and any documents incorporated by reference therein and of the Indenture with the requirements of the Securities Act and the Trust Indenture Act, respectively; and, (G) as of the date of the opinion and as of the effective date of the Shelf Registration Statement or most recent post-effective amendment thereto, as the case may be, the absence from the Shelf Registration Statement and the prospectus included therein, as then amended or supplemented, and from any documents incorporated by reference therein of an untrue statement of a material fact or the omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading (in the case of any such documents, in the light of the circumstances existing at the time that such documents were filed with the Commission under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), it being understood that the items contained in this clause (G) may be in the form of a statement), (ii) its officers to execute and deliver all customary documents and certificates and updates thereof requested by any underwriters of the Securities or counsel for the Holders and (iii) its independent public accountants and the independent public accountants with respect to any other entity for which financial information is provided in the Shelf Registration Statement to provide to the selling Holders of the Securities and any underwriter therefor a comfort letter in customary form and covering matters of the type customarily covered in comfort letters in connection with primary underwritten offerings, subject to receipt of appropriate documentation as contemplated, and only if permitted, by Statement of Auditing Standards No. 72. (p) The Company shall use its best efforts to take all other steps necessary to effect the registration of the Securities covered by the Shelf Registration Statement. 3. REGISTRATION EXPENSES. The Company shall bear all fees and expenses incurred in connection with the performance of its obligations under Sections 1 and 2 hereof (including the reasonable fees and expenses, if any, of counsel for the Initial Purchasers, incurred in connection with the Shelf Registration), whether or not the Shelf Registration Statement is filed or becomes effective, and shall bear or reimburse the Holders of the Securities covered by the Shelf Registration for the reasonable fees and disbursements of one firm of counsel designated by the Holders of a majority in principal amount of the Securities covered by the Shelf Registration Statement (provided that Holders of Common Stock issued upon the conversion of the Notes shall be deemed to be Holders of the aggregate principal amount 9 of Notes from which such Common Stock was converted) to act as counsel for the Holders in connection therewith. 4. INDEMNIFICATION. (a) The Company agrees to indemnify and hold harmless each Holder and each person, if any, who controls such Holder within the meaning of the Securities Act or the Exchange Act (each Holder and such controlling persons are referred to collectively as the "Indemnified Parties") from and against any losses, claims, damages or liabilities, joint or several, or any actions in respect thereof (including, but not limited to, any losses, claims, damages, liabilities or actions relating to purchases and sales of the Securities) to which each Indemnified Party becomes subject under the Securities Act, the Exchange Act or otherwise, insofar as such losses, claims, damages, liabilities or actions arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the Shelf Registration Statement or Prospectus, including any document incorporated by reference therein, or in any amendment or supplement thereto or in any preliminary prospectus relating to the Shelf Registration, or arise out of, or are based upon, the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and shall reimburse, as incurred, the Indemnified Parties for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action in respect thereof; PROVIDED, HOWEVER, that (i) the Company shall not be liable in any such case to the extent that such loss, claim, damage or liability arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in the Shelf Registration Statement or Prospectus or in any amendment or supplement thereto or in any preliminary prospectus relating to the Shelf Registration in reliance upon and in conformity with written information pertaining to such Holder and furnished to the Company by or on behalf of such Holder specifically for inclusion therein and (ii) with respect to any untrue statement or omission or alleged untrue statement or omission made in any preliminary prospectus relating to the Shelf Registration Statement, the indemnity agreement contained in this subsection (a) shall not inure to the benefit of any Holder from whom the person asserting any such losses, claims, damages or liabilities purchased the Securities concerned, to the extent that a prospectus relating to such Securities was required to be delivered by such Holder under the Securities Act in connection with such purchase and any such loss, claim, damage or liability of such Holder results from the fact that there was not sent or given to such person, at or prior to the written confirmation of the sale of such Securities to such person, a copy of the final prospectus if the Company had previously furnished copies thereof to such Holder; PROVIDED FURTHER, HOWEVER, that this indemnity agreement will be in 10 addition to any liability which the Company may otherwise have to such Indemnified Party. The Company shall also indemnify the underwriters, their officers and directors and each person who controls such underwriters within the meaning of the Securities Act or the Exchange Act to the same extent as provided above with respect to the indemnification of the Holders if requested by such Holders. (b) Each Holder, severally and not jointly, will indemnify and hold harmless the Company, its officers and directors and each person, if any, who controls the Company within the meaning of the Securities Act or the Exchange Act from and against any losses, claims, damages or liabilities or any actions in respect thereof, to which the Company or any such controlling person may become subject under the Securities Act, the Exchange Act or otherwise, insofar as such losses, claims, damages, liabilities or actions arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in a Shelf Registration Statement or prospectus or in any amendment or supplement thereto or in any preliminary prospectus relating to a Shelf Registration, or arise out of or are based upon the omission or alleged omission to state therein a material fact necessary to make the statements therein not misleading, but in each case only to the extent that the untrue statement or omission or alleged untrue statement or omission was made in reliance upon and in conformity with written information pertaining to such Holder and furnished to the Company by or on behalf of such Holder specifically for inclusion therein; and, subject to the limitation set forth immediately preceding this clause, shall reimburse, as incurred, the Company for any legal or other expenses reasonably incurred by the Company or any such controlling person in connection with investigating or defending any loss, claim, damage, liability or action in respect thereof. This indemnity agreement will be in addition to any liability which such Holder may otherwise have to the Company or any of its controlling persons. (c) Promptly after receipt by an indemnified party under this Section 4 of notice of the commencement of any action or proceeding (including a governmental investigation), such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section 4, notify the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not, in any event, relieve the indemnifying party from any obligations to any indemnified party other than the indemnification obligation provided in subsections (a) or (b) above. In case any such action is brought against any indemnified party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, 11 to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party), and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof the indemnifying party will not be liable to such indemnified party under this Section 4 for any legal or other expenses, other than reasonable costs of investigation, subsequently incurred by such indemnified party in connection with the defense thereof. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened action in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party unless such settlement includes an unconditional release of such indemnified party from all liability on any claims that are the subject matter of such action. (d) If the indemnification provided for in this Section 4 is unavailable or insufficient to hold harmless an indemnified party under subsections (a) or (b) above, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to in subsections (a) or (b) above (i) in such proportion as is appropriate to reflect the relative benefits received by the indemnifying party or parties on the one hand and the indemnified party on the other from the registration of the Securities, pursuant to the Shelf Registration, or (ii) if the allocation provided by the foregoing clause (i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the indemnifying party or parties on the one hand and the indemnified party on the other in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities (or actions in respect thereof) as well as any other relevant equitable considerations. The relative fault of the parties shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or such Holder or such other indemnified party, as the case may be, on the other, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid by an indemnified party as a result of the losses, claims, damages or liabilities referred to in the first sentence of this subsection (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified 12 party in connection with investigating or defending any action or claim which is the subject of this subsection (d). Notwithstanding any other provision of this Section 4(d), the Holders shall not be required to contribute any amount in excess of the amount by which the net proceeds received by such Holders from the sale of the Securities pursuant to the Shelf Registration Statement exceeds the amount of damages which such Holders have otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this paragraph (d), each person, if any, who controls such indemnified party within the meaning of the Securities Act or the Exchange Act shall have the same rights to contribution as such indemnified party and each person, if any, who controls the Company within the meaning of the Securities Act or the Exchange Act shall have the same rights to contribution as the Company. (e) The agreements contained in this Section 4 shall survive the sale of the Securities pursuant to the Shelf Registration Statement and shall remain in full force and effect, regardless of any termination or cancellation of this Agreement or any investigation made by or on behalf of any indemnified party. 5. ADDITIONAL INTEREST UNDER CERTAIN CIRCUMSTANCES. (a) Additional interest (the "Additional Interest") with respect to the Notes shall be assessed as follows if any of the following events occur (each such event in clauses (i) through (iii) below being herein called a "Registration Default"): (i) the Shelf Registration Statement has not been filed with the Commission by the 90th day after the first date of original issuance of the Notes; (ii) the Shelf Registration Statement has not been declared effective by the Commission by the 150th day after the first date of original issuance of the Notes; or (iii) the Shelf Registration Statement is declared effective but (A) the Shelf Registration Statement thereafter ceases to be effective; or (B) the Shelf Registration Statement or the Prospectus ceases to be usable in connection with resales of Transfer Restricted Securities (as defined below) during the periods specified herein because either (1) any event occurs as a result of which the Prospectus forming part of such Shelf Registration Statement would include any untrue statement of a material fact or omit to state any material fact necessary to make the 13 statements therein in the light of the circumstances under which they were made not misleading, or (2) it shall be necessary to amend such Shelf Registration Statement or supplement the related prospectus, to comply with the Securities Act or the Exchange Act or the respective rules thereunder. Additional Interest shall accrue on the Notes over and above the interest set forth in the title of the Notes from and including the date on which any such Registration Default shall occur, to but excluding the date on which all such Registration Defaults have been cured, at a rate of 0.50% per annum. (b) A Registration Default referred to in Section 5(a)(iii)(B) shall be deemed not to have occurred and be continuing in relation to the Shelf Registration Statement or the Prospectus if (i) such Registration Default has occurred solely as a result of (x) the filing of a post-effective amendment to the Shelf Registration Statement to incorporate annual audited financial information with respect to the Company where such post-effective amendment is not yet effective and needs to be declared effective to permit Holders to use the related prospectus or (y) other material events, with respect to the Company that would need to be described in the Shelf Registration Statement or the related prospectus and (ii) in the case of clause (y), the Company is proceeding in good faith to amend or supplement the Shelf Registration Statement and related prospectus to describe such events as required by paragraph 2(h) hereof; PROVIDED, HOWEVER, that in any case if such Registration Default occurs for a continuous period in excess of 90 days, Additional Interest shall be payable in accordance with the above paragraph from the day such Registration Default occurs until such Registration Default is cured. (c) Any amounts of Additional Interest due pursuant to Section 5(a) will be payable in cash on the regular interest payment dates with respect to the Notes. The amount of Additional Interest will be determined by multiplying the applicable Additional Interest rate by the principal amount of the Notes, further multiplied by a fraction, the numerator of which is the number of days such Additional Interest rate was applicable during such period (determined on the basis of a 360- day year comprised of twelve 30-day months), and the denominator of which is 360. The indebtedness represented by the Additional Interest shall be subordinated in right of payment to all existing and future Senior Indebtedness (as defined in the Indenture) as and to the same extent as the Notes. (d) "Transfer Restricted Securities" means each Security until (i) the date on which such Security has been effectively registered under the Securities Act and disposed of 14 in accordance with the Shelf Registration Statement or (ii) the date on which such Security is distributed to the public pursuant to Rule 144 under the Securities Act or is saleable pursuant to Rule 144(k) under the Securities Act. 6. RULES 144 AND 144A. The Company shall use its best efforts to file the reports required to be filed by it under the Securities Act and the Exchange Act in a timely manner and, if at any time the Company is not required to file such reports, it will, upon the request of any Holder, make publicly available other information so long as necessary to permit sales of their securities pursuant to Rules 144 and 144A. The Company covenants that it will take such further action as any Holder may reasonably request, all to the extent required from time to time to enable such Holder to sell Transfer Restricted Securities without registration under the Securities Act within the limitations of the exemptions provided by Rules 144 and 144A (including the requirements of Rule 144A(d)(4)). The Company will provide a copy of this Agreement to prospective purchasers of Securities identified to the Company by the Initial Purchaser upon request. Upon the request of any Holder, the Company shall deliver to such Holder a written statement as to whether it has complied with such requirements. Notwithstanding the foregoing, nothing in this Section 6 shall be deemed to require the Company to register any of its securities pursuant to the Exchange Act. 7. UNDERWRITTEN REGISTRATIONS. If any of the Transfer Restricted Securities covered by the Shelf Registration are to be sold in an underwritten offering, the investment banker or investment bankers and manager or managers that will administer the offering ("Managing Underwriters") will be selected by the Company. No person may participate in any underwritten registration hereunder unless such person (i) agrees to sell such person's Transfer Restricted Securities on the basis reasonably provided in any underwriting arrangements approved by the persons entitled hereunder to approve such arrangements and (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements. 8. MISCELLANEOUS. (a) AMENDMENTS AND WAIVERS. The provisions of this Agreement may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, except by the Company and the written consent of the Holders of a majority in principal amount of the Securities (provided that Holders of Common Stock issued 15 upon conversion of Notes shall not be deemed Holders of Common Stock, but shall be deemed to be Holders of the aggregate principal amount of Notes from which such Common Stock was converted) affected by such amendment, modification, supplement, waiver or consents. (b) NOTICES. All notices and other communications provided for or permitted hereunder shall be made in writing by hand delivery, first-class mail, facsimile transmission, or air courier which guarantees overnight delivery: (1) if to a Holder, at the most current address given by such Holder to the Company; (2) if to the Initial Purchasers: Credit Suisse First Boston Corporation Eleven Madison Avenue New York, NY 10010-3629 Fax No.: (212) 325-8278 Attention: Transactions Advisory Group 16 with a copy to: Cravath, Swaine & Moore Worldwide Plaza 825 Eighth Avenue New York, NY 10019 Fax No.: (212) 474-3700 Attention: Kris Heinzelman, Esq. (3) if to the Company, at its address as follows: Affymetrix, Inc. 3380 Central Expressway Santa Clara, CA 95051 Fax No.: (408) 731-5000 Attention: Vernon A. Norviel with a copy to: Sullivan & Cromwell 1888 Century Park East Los Angles, CA 90067-1725 Fax No.: (310) 712-8800 Attention: Stanley F. Farrar, Esq. All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; three business days after being deposited in the mail, postage prepaid, if mailed; when receipt is acknowledged by recipient's facsimile machine operator, if sent by facsimile transmission; and on the day delivered, if sent by overnight air courier guaranteeing next day delivery. (c) NO INCONSISTENT AGREEMENTS. The Company has not, as of the date hereof, entered into, nor shall it, on or after the date hereof, without the prior consent of CSFBC, enter into, any agreement with respect to its securities that is inconsistent with the rights granted to the Holders herein or otherwise conflicts with the provisions hereof. (d) SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the Company and its successors and assigns. (e) COUNTERPARTS. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. 17 (f) HEADINGS. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (g) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS. By the execution and delivery of this Agreement, the Company submits to the nonexclusive jurisdiction of any federal or state court in the State of New York. (h) SEVERABILITY. If any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. (i) SECURITIES HELD BY THE COMPANY. Whenever the consent or approval of Holders of a specified percentage of principal amount of Securities is required hereunder, Securities held by the Company or its affiliates (other than subsequent Holders of Securities if such subsequent Holders are deemed to be affiliates solely by reason of their holdings of such Securities) shall not be counted in determining whether such consent or approval was given by the Holders of such required percentage. If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Company a counterpart hereof, whereupon this instrument, along with all counterparts, will become a binding agreement among the Initial Purchasers and the Company in accordance with its terms. Very truly yours, AFFYMETRIX, INC. By:______________________ Name: Title: The foregoing Registration Rights Agreement is hereby confirmed and accepted as of the date first above written. CREDIT SUISSE FIRST BOSTON CORPORATION, Acting on behalf of themselves and as The Representative of the several Initial Purchasers CREDIT SUISSE FIRST BOSTON CORPORATION, By:___________________________________ Name: Title: EX-21 4 EXHIBIT 21 EXHIBIT 21 LIST OF SUBSIDIARIES Affymetrix UK, Ltd., incorporated in the United Kingdom and doing business under such name. Genetic MicroSystems, Inc., incorporated in Massachusetts and doing business under such name. EX-23 5 EXHIBIT 23 EXHIBIT 23 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Forms S-8 No. 333-11299, No. 333-35287 and No. 333-85575) pertaining to the 1993 Stock Option Plan, the 1996 Non-employee Directors Stock Option Plan and the 1998 Stock Incentive Plan of Affymetrix, Inc., of our report dated February 2, 2000 with respect to the consolidated financial statements and schedule of Affymetrix, Inc. included in this Annual Report (Form 10-K) for the year ended December 31, 1999. /s/ Ernst & Young Palo Alto, California March 29, 2000 EX-27.1 6 EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY CONSOLIDATED FINANCIAL INFORMTION EXTRACED FROM ITEM 1 OF THE COMPANY'S FORM 10K FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOKIDATED FINANCIAL STATEMENTS. 0000913077 AFFYMETRIX, INC 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 11280 213763 22203 975 11362 262713 56333 (16459) 320298 33956 150000 0 0 262 131080 320298 86076 96855 35333 35333 89241 0 2270 (25140) 0 (25140) 0 0 0 (25140) (1.02) (1.02)
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