ITEM 1. BUSINESS
Forward-Looking Statements
All statements in this Annual Report on Form 10-K that are not historical are "forward-looking statements" within the meaning of the federal securities laws. These include statements regarding our "expectations," "beliefs," "hopes," "intentions," "strategies" or the like. Such statements are based on our 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. We cannot assure you 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, those discussed in "Risk Factors" contained in Item 1A
ITEM 1A. RISK FACTORS
Risks Related to the Growth of Our Business
If we do not continually develop and commercialize new or enhanced products and services, our business may not grow.
Our success depends in large part on our continual, timely development and commercialization of new or enhanced products and services that address evolving market requirements and are attractive to customers. The genetic analysis tools market, including the RNA/DNA probe array field, is characterized by rapid and significant technological changes, frequent new product introductions and enhancements, evolving industry standards and changing customer needs. Standardization of tools and systems for genetic research is still ongoing and we cannot assure you that our products will emerge as the standard for genetic research. Other companies may introduce new technologies, techniques, products or services that render our products or services obsolete or uneconomical. If we do not appropriately innovate and invest in new technologies, then our technologies will become dated and our customers could move to new technologies offered by our competitors.
As a result, we are continually looking to develop, license or acquire new or enhanced technologies, products and services to further broaden and deepen our offerings. Some of the factors affecting market acceptance of our products and services include:
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availability, quality and price as compared to competitive technologies, products and services;
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the functionality of new and existing products and services, and whether they address market requirements;
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the timing of introduction of our technologies, products and services as compared to competitive technologies, products and services;
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the existence of product defects;
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scientists’ and customers’ opinions of the utility of our products and services and our ability to incorporate their feedback into future products and services;
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citation of our products in published research; and
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general trends in life science research and life science informatics software development.
Our new or enhanced technologies, products or services may not be accepted by customers in our target markets. For example, once we have developed or obtained a new technology, we may fail to successfully commercialize new products and services based on that technology, particularly to the extent that our new products and services compete with established technologies or the products and services of more established competitors. Risks relating to product adoptions include the inability to accurately forecast demand and difficulties in managing different sales and support requirements due to the type or complexity of the new products.
Further, many of our current and potential customers have limited budgets. Accordingly, we cannot assure you that the successful introduction of new or enhanced products or services will not adversely affect sales of our current products and services or that customers that currently purchase our products or services will increase their aggregate spending as a result of the introduction of new products and services.
The Merger Agreement pursuant to which we have agreed to acquire eBioscience may be terminated in accordance with its terms and the merger may not be completed.
On November 29, 2011, we entered into a Merger Agreement to acquire eBioscience for approximately $330 million in cash, subject to certain adjustments as provided in the Merger Agreement. The merger is subject to a number of conditions which must be fulfilled in order to complete the merger, including our receipt of financing for the merger.
In connection with the Merger Agreement, we entered into a commitment letter with financing sources providing for $190 million of senior secured credit. The conditions to funding these facilities have not been satisfied, and as a result we will not be able to complete the eBioscience acquisition unless the terms of the acquisition and the financing are restructured. We are in discussions with financing sources and with eBioscience but no agreements or understandings have been reached. We have waived eBioscience’s obligations under the non-solicitation provisions set forth in the Merger Agreement and we understand that eBioscience is considering alternatives to the merger. The Merger Agreement may be terminated by either party if the closing of the merger has not occurred by March 31, 2012, so long as a breach of the Merger Agreement by the party seeking to terminate has not been the proximate cause of or resulted in the failure of the merger to occur on or before such date.
If we cannot successfully reach agreement with the financing sources and eBioscience on a restructured merger, the Merger Agreement may be terminated under its terms. The failure of the merger to be completed may result in negative publicity and/or a negative impression of us in the investment community, may cause our stock price to decline and may adversely affect our relationship with employees, customers and other partners in the business community.
Uncertainty associated with the completion of the merger may cause substantial disruptions in our business and eBioscience’s business.
Uncertainty associated with the completion of the merger may cause substantial disruptions in our business and eBioscience’s business, which could have an adverse effect on our financial results. Among other things, such uncertainty may affect our relationships with customers, potential customers and suppliers and our ability to recruit prospective employees or to retain and motivate existing employees. eBioscience may face similar disruptions to its business, which could have an adverse effect on the combined business if the merger is completed. The adverse effect of such disruptions could be exacerbated by further delay in the completion of the merger or termination of the Merger Agreement.
Uncertainty about the completion of the merger also may impair our and eBioscience’s ability to attract, retain and motivate key personnel. Employee retention may be particularly challenging during the pendency of the merger as our employees and those of eBioscience may experience uncertainty about the completion of the merger or their future roles with the combined business if the merger is completed. If our key employees or those of eBioscience depart, we may have to incur significant costs in identifying, hiring and retaining replacements for departing employees, which could reduce our ability to realize the anticipated benefits of the merger.
We are not able to complete the merger unless the terms of the acquisition and the related financing are restructured. If the merger is completed, we may incur a substantial amount of indebtedness, which could adversely affect our business, or issue a significant amount of common stock or other equity securities, which would dilute our existing stockholders.
In connection with the Merger Agreement, we entered into a commitment letter with financing sources providing for $190 million of senior secured credit. The conditions to funding these facilities have not been satisfied, and as a result we will not be able to complete the merger unless the terms of the acquisition and the financing are restructured. Although we are in discussions with financing sources and with eBioscience regarding the possibility of restructuring the committed financing, no agreements or understandings have been reached.
If the merger is completed, we may incur a substantial amount of indebtedness, which could adversely affect us, including by decreasing our business flexibility and increasing our borrowing costs. If we incur indebtedness in connection with the merger, we may significantly increase our interest expense, leverage and debt service requirements. Increased levels of indebtedness may reduce funds available for our investment in product development as well as capital expenditures and other activities, increase our borrowing costs and create competitive disadvantages for us relative to other companies with lower debt levels. In addition, we expect the financing agreements governing any debt financing to contain customary restrictive covenants imposing operating and financial restrictions on us, including restrictions that may limit our ability to finance future operations or capital needs or to engage in other business activities. If an event of default occurs under any debt financing agreement, we may be required to immediately repay all outstanding borrowings, together with accrued interest and other fees. We may not be able to repay all amounts due in the event these amounts are declared due upon an event of default.
If we issue a significant amount of common stock or other equity securities in connection with the merger, our existing stockholders will be diluted, and the market price of our common stock may decline. In addition, such an issuance may require the approval of our stockholders, which would further delay the completion of the merger. There can be no assurance that stockholder approval, if required, would be obtained on a timely basis, or at all.
If the merger is completed, we will incur significant transaction and merger-related costs.
If the merger is completed, we expect to incur a number of non-recurring costs associated with combining the operations of the two companies. The substantial majority of non-recurring expenses resulting from the merger will be comprised of transaction costs related to the merger and financing arrangements and employment-related costs. We also will incur transaction fees and costs related to formulating and implementing integration plans. We continue to assess the magnitude of these costs and additional unanticipated costs may be incurred in the integration of the two companies’ businesses. Although we expect that the elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of the businesses, should allow us to offset incremental transaction and merger-related costs over time, this net benefit may not be achieved in the near term, or at all.
Our growth depends in part on our ability to acquire new businesses and technologies and successfully integrate acquisitions, which may absorb significant resources and may not be successful.
As part of our strategy to develop and identify new technologies, products and services, we have made and may continue to acquire new businesses and technologies. Our integration of the operations of acquired businesses requires significant efforts, including the coordination of information technologies, research and development, sales and marketing, operations, manufacturing and finance. In particular, if our proposed acquisition of eBioscience is completed, its success will depend, in part, on our ability to successfully integrate eBioscience’s business and operations and fully realize the anticipated benefits and synergies from combining our businesses and eBioscience. If we are not able to achieve these objectives following the merger, the anticipated benefits and synergies of the merger may not be realized fully or at all or may take longer to realize than expected. Our efforts to successfully integrate acquisitions may result in additional expenses and divert significant amounts of management’s time from other projects.
Our failure to manage successfully and coordinate the growth of the combined company could also have an adverse impact on our business. In addition, there is no guarantee that some of the businesses we acquire will become profitable or remain so. If our acquisitions do not meet our initial expectations, we may record impairment charges.
Factors that will affect the success of our acquisitions include:
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our ability to retain key employees of the acquired company;
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the performance of the acquired business, technology, product or service;
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our ability to integrate operations, financial and other systems;
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the ability of the combined company to achieve synergies among its constituent companies, such as increasing sales of the combined company’s products and services, achieving expected cost savings and effectively combining technologies to develop new products and services;
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any disruption in order fulfillment or loss of sales due to integration processes;
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the presence or absence of adequate internal controls and/or significant fraud in the financial systems of acquired companies;
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any decrease in customer and distributor loyalty and product orders caused by dissatisfaction with the combined companies’ product lines and sales and marketing practices, including price increases; and
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our assumption of known contingent liabilities that are realized, known liabilities that prove greater than anticipated, or unknown liabilities that come to light, to the extent that the realization of any of these liabilities increases our expenses or adversely affects our business or financial position.
Emerging market opportunities in molecular diagnostics may not develop as quickly as we expect and we depend on the efforts of our partners to be successful.
The clinical applications of our technologies for diagnosing and enabling informed disease management options in the treatment of disease is an emerging market opportunity in molecular diagnostics. At this time, we cannot be certain that molecular diagnostic markets will develop as quickly as we expect. Although we believe that there will be clinical applications of our technologies that will be utilized for diagnosing and enabling informed disease management options in the treatment of disease, there can be no certainty of the technical or commercial success our technologies will achieve in such markets.
Our success in the molecular diagnostics market depends in part on our collaborative relationships and the ability of our collaborative partners to achieve regulatory approval for such products in the United States and in overseas markets, and successfully market and sell products using our technologies.
Risks Related to Our Sales
We face significant competition, and our failure to compete effectively could adversely affect our sales and results of operations.
We compete with companies that develop, manufacture and market genetic analysis tools for the life science and clinical healthcare markets. We face significant competition as our competitors and new companies develop new, improved or more economical products, services and technologies.
The market for our products and services is highly competitive, has high barriers to entry and has several other large companies with significant market share. For example, companies such as Illumina, Inc., Agilent Technologies and Life Technologies Corporation have products for genetic analysis that are directly competitive with certain of our products. In addition, Illumina, Inc., Life Technologies Corporation and Complete Genomics, Inc. also offer DNA sequencing technology which we do not offer. As the costs of DNA sequencing fall, we will face increased competition in certain of our existing and potential markets. We also face competition from established diagnostic companies such as Beckman Coulter, Becton, Dickinson and Company, bioMérieux, Celera Diagnostics, Johnson & Johnson, Gen-Probe Incorporated and Roche Diagnostics, which have made strategic commitments to diagnostics, have financial and other resources to invest in new technologies, and have substantial intellectual property portfolios, substantial experience in new product development and regulatory expertise. In addition, our collaborative partners may compete with us.
Many of our current and potential competitors have significantly greater financial, technical, marketing and other resources than we do. In addition, many current and potential competitors have greater name recognition, more extensive customer bases and access to proprietary genetic content.
Reduction or delay in research and development budgets and government funding may adversely impact our sales.
We expect that our revenue in the foreseeable future will be derived primarily from products and services provided to pharmaceutical and biotechnology companies, as well as a relatively small number of academic, governmental and other research institutions. Our operating results may fluctuate substantially due to reductions and delays in research and development expenditures by these customers.
Factors that could affect the spending levels of our customers include:
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changes in government programs that provide funding to companies and research institutions;
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weakness in the global economy and changing market conditions that affect our customers;
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changes in the extent to which the pharmaceutical industry may use genetic information and genetic testing as a methodology for drug discovery and development;
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changes in the regulatory environment affecting life science companies and life science research;
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impact of consolidation within the pharmaceutical industry; and
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cost reduction initiatives of customers.
As we implement our strategy to expand into new markets, the size and structure of our current sales, marketing and technical support organizations may limit our ability to sell our products and services.
As we implement our strategy to expand into new markets, we may not be able to establish a sales, marketing and technical support organization sufficient to sell, market and support all of our new products, or to cover all of the regions that we target globally. To assist our sales and support activities, we have entered into distribution agreements through certain distributors, principally in markets outside of North America and Europe. In addition, we may enter into distribution arrangements with respect to some of our products that we believe will be better served in such arrangements than our current sales and marketing organizations. We have less control over other third parties on whom we rely for sales, marketing and technical support. In addition, these third parties may decide to develop and sell competitive products or otherwise become our competitors, which could harm our business.
Consolidation trends in both our market and many of our customers’ markets have increased competition.
There has been a trend toward industry consolidation in our markets for the past several years. We expect this trend toward industry consolidation to continue as companies attempt to strengthen or hold their market positions in an evolving industry and as companies are acquired or are unable to continue operations. We believe that industry consolidation may result in stronger competitors that are better able to compete as sole-source vendors for customers. This could lead to more variability in operating results and could harm our business.
Additionally, there has been a trend toward consolidation in many of the customer markets we sell to, in particular the pharmaceutical industry. Consolidation in our customer markets results in increased competition for important market segments and fewer available accounts, and larger consolidated customers may be able to exert increased pricing pressure on companies in our market.
If we are unable to maintain our relationships with collaborative partners, we may have difficulty developing and selling our products and services.
Our commercial success depends in part on our ability to develop and maintain collaborative relationships with key companies as well as with key academic researchers. In particular, we depend on our collaborators for in-licensed technology and components for a variety of our product lines. We collaborate with a number of instrumentation and reagent companies, including Beckman Coulter, CapitalBio Corporation, Genisphere LLC, Life Technologies Corporation, Luminex Corporation, Siemens Medical Solutions Diagnostics, Takara Bio Inc., New England Biolabs, Inc. and Qiagen GmbH. Some of these collaborators, like Life Technologies Corporation, Takara Bio Inc., New England Biolabs, Inc. and Luminex Corporation, are currently sole suppliers of components of some of our reagent kits but they are also our competitors. Relying on our collaborative relationships is risky to our future success because:
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our partners may develop technologies or components competitive with our products and services;
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our existing collaborations may preclude us from entering into additional future arrangements;
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our partners may not obtain regulatory approvals necessary to continue the collaborations in a timely manner;
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some of our agreements may terminate prematurely due to disagreements between us and our partners;
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our partners may not devote sufficient resources to the development and sale of our products and services;
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our partners may be unable to provide the resources required for us to progress in the collaboration on a timely basis;
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our collaborations may be unsuccessful; or
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some of our agreements have expired and we may not be able to negotiate future collaborative arrangements on acceptable terms.
Risks Related to the Manufacturing of Our Products
We depend on a limited number of suppliers. We will be unable to launch or commercialize our products in a timely manner if our suppliers are unable to meet our requirements or if shipments from these suppliers are delayed or interrupted.
We outsource the manufacturing of our instruments to a limited number of suppliers. Some of our instruments and other key parts of our product lines, including components of our manufacturing equipment and certain raw materials used in the manufacture of our products are currently only available from a single supplier. Therefore, we depend on our suppliers to supply our instruments, or components of our products, in required volumes, at appropriate quality and reliability levels, and in compliance with regulatory requirements on a timely basis. If supplies from these vendors do not meet our requirements, or were delayed or interrupted for any reason, we would not be able to commercialize our products successfully or in a timely fashion, and our business could be adversely impacted.
Our business is dependent on our ability to forecast our needs for components and products in our product lines and our suppliers’ ability to deliver such components and products in time to meet critical manufacturing and product release schedules. Our business could be adversely affected, for example, if suppliers fail to meet product release schedules, if we experience supply constraints, if we fail to negotiate favorable pricing or if we experience any other interruption or delay in the supply chain which interferes with our ability to manufacture our products or manage our inventory levels.
We may lose customers or sales if we are unable to meet customer demand for our products on a timely and cost-effective basis, or if we are unable to ensure the proper performance and quality of our products.
We produce our products in an innovative and complicated manufacturing process which has the potential for significant variability in manufacturing yields. We have encountered, and may in the future encounter, difficulties in manufacturing our products and, due to the complexity of our products and our manufacturing process, we may experience delays in the manufacture of our products or fail to ensure their proper performance or quality. As we develop new and enhanced products, we must be able to resolve in a timely, cost-effective manner manufacturing issues that may arise from time to time.
We base our manufacturing capabilities on our forecasted product mix for the quarter. If the actual product mix varies significantly from our forecast, we may not be able to fill some orders during that quarter, which could adversely impact our financial results. Difficulties in meeting customer, collaborator and internal demand could also cause us to lose customers or require us to delay new product introductions, which could in turn result in reduced demand for our products.
We rely on internal quality control procedures to verify our manufacturing processes. Due to the complexity of our products and manufacturing process, however, it is possible that products that do not meet all of our performance specifications may not be identified before they are shipped. If our products do not consistently meet our customers’ performance expectations, demand for our products will decline. In addition, we do not maintain any backup manufacturing capabilities for the production of our products. Any interruption in our ability to continue operations at our existing manufacturing facilities could delay our ability to develop or sell our products, which could result in lost revenue and seriously harm our business, financial condition and results of operations.
We may need to adjust our manufacturing capacity based on business requirements or improvements made to our technological capabilities and there are risks associated with such adjustment.
If demand for our products is reduced or if we implement technologies that increase the density or yields of our wafers, our manufacturing capacity could be under-utilized and some of our long-lived assets, including facilities and equipment, may be impaired, which would increase our expenses. In addition, factory planning decisions may shorten the useful lives of long-lived assets including facilities and equipment, and cause us to accelerate depreciation. These changes in demand for our products, and changes in our customers’ product needs, could have a variety of negative effects on our competitive position and our financial results, and, in certain cases, may reduce our revenue, increase our costs, lower our gross margin percentage or require us to recognize impairments of our assets. In addition, if demand for our products is reduced or we fail to accurately forecast demand, we could be required to write down inventory since certain of our products have a limited shelf life, which would have a negative impact on our gross margin.
We have in the past, and may in the future, adjust our manufacturing capacity based on business requirements, which may include the rationalization of our facilities, including the abandonment of long-lived manufacturing assets and additional charges related to a reduction in capacity. Manufacturing and product quality issues may arise as we launch new products in our Singapore and Ohio facilities and rely increasingly upon manufacturing by third parties. We may lose customers if we are unable to manufacture products or if we experience delays in the manufacture of our products as a result of this transition.
We may not be able to deliver acceptable products to our customers due to the rapidly evolving nature of genetic sequence information upon which our products are based.
The genetic sequence information upon which we rely to develop and manufacture our products is contained in a variety of databases throughout the world. These databases are rapidly expanding and evolving. In addition, the accuracy of these databases and resulting genetic research is dependent on various scientific interpretations and it is not expected that global genetic research efforts will result in standardized genetic sequence databases for particular genomes in the near future.
Although we have implemented ongoing internal quality control efforts to help ensure the quality and accuracy of our products, the fundamental nature of our products requires us to rely on genetic sequence databases and scientific interpretations which are continuously evolving. As a result, these variables may cause us to develop and manufacture products that incorporate sequence errors or ambiguities. The magnitude and importance of these errors will depend upon multiple and complex factors that would be considered in determining the appropriate actions required to remedy any inaccuracies. Our inability to timely deliver acceptable products as a result of these factors would likely adversely affect our relationship with customers, and could have a material adverse effect on our business, financial condition and results of operations.
Risks Related to Our Operations
We may not achieve sustained profitability.
Prior to 2002, we incurred losses each year since our inception, and we reported losses in 2006, and from 2008 through 2011. As a result, we had an accumulated deficit of approximately $478.7 million as of December 31, 2011. Our ability to achieve sustained profitability will depend, in part, on the rate of growth, if any, of our revenue and on the level of our expenses. In 2011, our business was affected by a significant drop in the volume of sales and consumables to our academic and pharmaceutical customers, particularly in North America, which led to a decrease in revenue as compared to 2010. There can be no assurance that our revenue will not continue to decrease in future periods. We expect to continue incurring significant expenses related to research and development, sales and marketing efforts to commercialize our products, litigation and non-cash stock based compensation, and we expect to continue to experience fluctuations in our operating results. If our revenue grows more slowly than we anticipate, or if our operating expenses are above what we expect or cannot be reduced in the event of lower revenue, we may not become profitable on a sustained basis, or at all.
If we do not attract and retain key employees, our business could be impaired.
To be successful, we must attract and retain qualified scientific, engineering, manufacturing, sales, marketing and management personnel. To expand our research, product development and sales efforts we need 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 our compensation arrangements, such as our equity award programs, may not always be successful in attracting new employees and retaining and motivating our existing employees. For example, our stock price has been volatile in recent years, resulting in a significant number of stock options granted to our employees having a strike price that is higher than the current trading price of our common stock. If we are unable to hire, train and retain a sufficient number of qualified employees, we will not be able to expand our business or our business could be adversely affected.
We also rely on our scientific advisors and consultants to assist us in formulating our research, development and commercialization strategy. All of these individuals are engaged by other employers and have commitments to other entities that may limit their availability to us.
Due to the international nature of our business, political or economic changes or other factors could harm our business.
A significant amount of our revenue is currently generated from sales outside the United States. Although such transactions are denominated in both U.S. dollars and foreign currencies, our future revenue, gross margin, expenses and financial condition are still affected by such factors as changes in foreign currency exchange rates; unexpected changes in, or impositions of, legislative or regulatory requirements, including export and trade barriers and taxes; longer payment cycles and greater difficulty in accounts receivable collection.
We also are subject to general geopolitical risks in connection with international operations, such as political, social and economic instability, potential hostilities, epidemics and changes in diplomatic and trade relationships. We cannot assure investors that one or more of the foregoing factors will not have a material adverse effect on our business, financial condition and operating results or require us to modify our current business practices.
Our effective tax rate may vary significantly.
Our operations are subject to income and transaction taxes in the United States and in multiple foreign jurisdictions. Estimates and judgments are required in determining our worldwide provision for income taxes. Some of these estimates are based on interpretations of existing tax laws or regulations. The ultimate amount of tax liability may be uncertain as a result.
Changes in overall levels and the geographic mix of pretax earnings may adversely impact our effective tax rate. Certain jurisdictions have lower tax rates, and the amount of earnings in these jurisdictions may fluctuate. If we do not have profitable operations in these jurisdictions, our effective tax rate could be adversely impacted. Changes in tax laws, regulatory requirements, our treasury plans, and applicability of tax holidays and incentive programs in the countries in which we operate could have a material impact on our tax provision. Tax authorities may challenge the allocation of profits between our subsidiaries and conformance with requirements of tax holidays and incentive programs and we may not prevail in any such challenge. If we were not to prevail, we could be subject to higher tax rates or double tax.
Estimates are required in determining any valuation allowance to be recorded against our net deferred tax assets. Changes in the amount of valuation allowance required may significantly impact our financial results of operations.
In the normal course of business, we are subject to examination by taxing authorities in the U.S. and multiple foreign jurisdictions. During November 2011, the U.S. Internal Revenue Service completed its field examination of our federal income tax returns for the 2004, 2005, 2006, 2008 and 2009 tax years and issued a Revenue Agent’s Report, or RAR, with no proposed adjustments.
Failure in our information technology systems could disrupt our operations and cause the loss of customers or business opportunities.
Information technology (“IT”) systems are used extensively in virtually all aspects of our business, including sales forecast, order fulfillment and billing, customer service, logistics and management of data from running samples on our products. Our success depends, in part, on the continued and uninterrupted performance of our IT systems. IT systems may be vulnerable to damage from a variety of sources, including telecommunications or network failures, human acts and natural disasters. Moreover, despite the security measures we have implemented, our IT systems may be subject to physical or electronic break-ins, computer viruses and similar disruptive problems. We also have taken precautionary measures to prevent unanticipated problems that could affect our IT systems. Nevertheless, we may experience damages to our systems, and system failures and interruptions.
If we experience systems problems, they may interrupt our ability to operate and adversely affect our reputation and result in a loss of customers and revenues.
Risks Related to Our Investments
Our strategic equity investments may result in losses.
We periodically make strategic equity investments in various public and private companies with businesses or technologies that may complement our business. The market values of these strategic equity investments may fluctuate due to market conditions and other conditions over which we have no control. Other-than-temporary declines in the market price and valuations of the securities that we hold in other companies have required us to record losses relative to our ownership interest. This could result in future charges to our earnings. It is uncertain whether or not we will realize any long-term benefits associated with these strategic investments.
Global credit and financial market conditions could negatively impact the value of our current portfolio of cash equivalents or investments and our ability to meet our financing objectives.
Our cash and cash equivalents are maintained in highly liquid investments with remaining maturities of 90 days or less at the time of purchase. Our investments consist primarily of readily marketable debt securities with remaining maturities of more than 90 days at the time of purchase. While as of the date of this filing, we are not aware of any downgrades, material losses, or other significant deterioration in the fair value of our cash equivalents or investments since December 31, 2011, any significant deterioration in conditions of the global credit and financial markets may negatively impact our current portfolio of cash equivalents or investments or our ability to meet our financing objectives. Other-than-temporary declines in the market price and valuation of any of our investments would require us to adjust the carrying value of the investment through an impairment charge.
Risks Related to Government Regulation and Litigation
We and our customers are subject to various government regulations, and we may incur significant expenses to comply with, and experience delays in our product commercialization as a result of, these regulations.
The Food and Drug Administration (“FDA”) has jurisdiction over the commercialization of medical devices, including in-vitro diagnostic test kits and the reagents and instrumentation used in these tests. In-vitro diagnostic tests, reagents, and instruments may be subject to pre-market review and post-market controls by the FDA. Certain in-vitro diagnostic products must also be approved by the regulatory agencies of foreign governments or jurisdictions before the product can be sold outside the United States. Commercialization of our and our collaborative partners’ in-vitro diagnostic products outside of the research environment may depend upon successful completion of clinical trials. Clinical development is a long, expensive and uncertain process and we do not know whether we, or any of our collaborative partners, will be permitted to undertake clinical trials of any potential in-vitro diagnostic products. It may take us or our collaborative partners many years to complete any such testing, and failure can occur at any stage. Delays or rejections of potential products may be encountered based on changes in regulatory policy during the period of product development and regulatory agency review. Moreover, if and when our projects reach clinical trials, we, or our collaborative partners, may decide to discontinue development of any or all of these projects at any time for commercial, scientific or other reasons. Any of the foregoing matters could have a material adverse effect on our business, financial condition and results of operations.
Many of our products are labeled for “research use only”. Products intended for research use only are not subject to clearance or approval by the FDA. However, research use only products may fall under the FDA’s jurisdiction if these are used for clinical rather than research purposes. Even when a product is exempted from FDA clearance or approval, the FDA may impose restrictions as to the types of customers to which we can market and sell our products. Such restrictions may materially and adversely affect our business, financial condition and results of operations.
The FDA, the U.S. Department of Health and Human Services and foreign government regulators are increasingly focused on genetic analysis tools, including the use of arrays, which are labeled for research use only, by clinical laboratories in laboratory-developed tests (“LDTs”) offered by these laboratories, including labs certified under the Clinical Laboratory Improvement Amendments (“CLIA”). We cannot predict the extent of the FDA’s future efforts in regulation and enforcement policies with respect to the sale and use of arrays for the development of LDTs by CLIA-certified laboratories. If regulations or enforcement policies restrict our customers’ development of LDTs using our products labeled for research use only, or if we otherwise are required to obtain FDA premarket clearance or approval prior to commercializing these products, our ability to generate revenue from the sale of our products may be delayed or otherwise adversely affected. Moreover, our failure to comply with governmental rules and regulations related to our products could cause us to incur significant adverse publicity, subject us to investigations and notices of non-compliance or lead to fines or restrictions upon our ability to sell our products. We also may be at risk for liability related to government reimbursement of tests involving the use of our products if it is determined that these tests require FDA-clearance or approval and no such clearance or approval has been obtained.
Medical device laws and regulations are also in effect in many countries, ranging from comprehensive device approval requirements to requests for product data or certifications. The number and scope of these requirements are increasing. We may not be able to obtain regulatory approvals in such countries or may incur significant costs in obtaining or maintaining our foreign regulatory approvals. In addition, the export by us of certain of our products which have not yet been cleared for domestic commercial distribution may be subject to FDA or other export restrictions.
We have agreements relating to the sale of our products to government entities and, as a result, we are subject to various statutes and regulations that apply to companies doing business with the government. A failure to comply with these regulations might result in suspension of these contracts or administrative or other penalties, and could have a material adverse effect on our ability to compete for future government grants, contracts and programs.
Healthcare reform and restrictions on reimbursements may limit our returns on molecular diagnostic products that we may develop with our collaborators.
We are currently collaborating with our partners to develop diagnostic and therapeutic products. The ability of our collaborators to commercialize such products may depend, in part, on the extent to which reimbursement for these products will be available under U.S. and foreign regulations that govern reimbursement for clinical testing services by government authorities, private health insurers and other organizations. In the United States, third-party payer price resistance, the trend towards managed health care and the implementation of the Patient Protection and Affordable Care Act of 2010 could reduce payment rates for health care products and services, adversely affecting the profits of our customers and collaborative partners and reducing our future royalties. Under Medicare rules, diagnostic tests must be ordered by a physician who is treating the beneficiary and who uses the test results in patient management. Under this rule, some Medicare contractors may deny coverage for a test, even if the test has been cleared or approved by the FDA, without proof, as determined sufficient by the contractor, that the test is useful in patient management.
We face risks related to handling of hazardous materials and other regulations governing environmental safety.
Our operations are subject to complex and stringent environmental, health, safety and other governmental laws and regulations that both public officials and private individuals may seek to enforce. Our activities that are subject to these regulations include, among other things, our use of hazardous and radioactive materials and the generation, transportation and storage of waste. We could discover that we or an acquired business is not in material compliance. Existing laws and regulations may also be revised or reinterpreted, or new laws and regulations may become applicable to us, whether retroactively or prospectively, that may have a negative effect on our business and results of operations. It is also impossible to eliminate completely the risk of accidental environmental contamination or injury to individuals. In such an event, we could be liable for any damages that result, which could adversely affect our business.
We may be exposed to liability due to product defects.
The risk of product liability claims is inherent in the testing, manufacturing, marketing and sale of human diagnostic and therapeutic products and we may be subjected to such claims. We may seek to acquire additional insurance for clinical or product liability risks. We may not be able to obtain such insurance or general product liability insurance on acceptable terms or in sufficient amounts. A product liability claim or recall could have a serious adverse effect on our business, financial condition and results of operations.
Ethical, legal and social concerns surrounding the use of genetic information could reduce demand for our products.
Genetic testing has raised ethical issues regarding privacy and the appropriate uses of the resulting information. For these reasons, governmental authorities may call for limits on or regulation of the use of genetic testing or prohibit testing for genetic predisposition to certain conditions, particularly for those that have no known cure. Similarly, such concerns may lead individuals to refuse to use genetics tests even if permissible. Any of these scenarios could reduce the potential markets for our molecular diagnostic products, which could have a material adverse effect on our business, financial condition and results of operations.
Risks Related to Our Intellectual Property
We may be unable to effectively protect or enforce our intellectual property, which could harm our competitive position.
Maintaining a strong patent position is critical to our business. Patent law relating to the scope of claims in the technology fields in which we operate is uncertain, so we cannot be assured the patent rights we have or may obtain will be valuable. Others have filed, and in the future are likely to file, patent applications that are similar or identical to ours or those of our licensors. To determine the priority of inventions, we may have to participate in interference proceedings declared by the United States Patent and Trademark Office that could result in substantial costs in legal fees and could substantially affect the scope of our patent protection. We cannot be assured our patent applications will have priority over those filed by others. Also, our intellectual property may be subject to significant administrative and litigation proceedings such as opposition proceedings against our patents in Europe, Japan and other jurisdictions.
Legal actions to enforce our patent rights can be expensive and may involve the diversion of significant management time. In addition, these legal actions could be unsuccessful and could also result in the invalidation of our patents or a finding that they are unenforceable. We may or may not choose to pursue litigation or interferences against those that have infringed on our patents, or used them without authorization, due to the associated expense and time commitment of monitoring these activities. If we fail to protect or to enforce our intellectual property rights successfully, our competitive position could suffer, which could harm our results of operations.
In addition to patent protection, we also rely upon copyright and trade secret protection, as well as non-disclosure agreements with our employees, consultants and third-parties, to protect our confidential and proprietary information. Such measures may not provide adequate protection for our proprietary information.
Litigation or other proceedings or third party claims of intellectual property infringement could require us to spend significant time and money and could prevent us from selling our products or services or impact our stock price.
Third parties have asserted and may in the future assert that we are employing their proprietary technology without authorization. As we launch new products and enter new markets, we expect that competitors will claim that our products infringe their intellectual property rights as part of business strategies designed to impede our successful commercialization and entry into new markets. We are currently engaged in litigation with third parties who allege that we have infringed their intellectual property rights. See Note 12. “Legal Proceedings” to our Consolidated Financial Statements found elsewhere in this Annual Report on Form 10-K for further information. In addition, we are aware of third-party patents that may relate to our technology. We routinely receive notices claiming infringement from third parties as well as invitations to take licenses under third party patents. Third parties may have obtained, and may in the future obtain, patents allowing them to claim that the use of our technologies infringes these patents.
We could incur substantial costs and divert the attention of our management and technical personnel in defending ourselves against any of these claims. Any adverse ruling or perception of an adverse ruling in defending ourselves against these claims could have a material adverse impact on our stock price, which may be disproportionate to the actual import of the ruling itself. Furthermore, parties making claims against us may be able to obtain injunctive or other relief, which could block our ability to develop, commercialize and sell products, and could result in the award of substantial damages against us. In the event of a successful claim of infringement against us, we may be required to pay damages and obtain one or more licenses from third parties, or be prohibited from selling certain products. In addition, we may be unable to obtain these licenses at a reasonable cost, if at all. We could therefore incur substantial costs related to royalty payments for licenses obtained from third parties, which could negatively affect our gross margins. Moreover, we could encounter delays in product introductions while we attempt to develop alternative methods or products. Defense of any lawsuit or failure to obtain any of these licenses on favorable terms could prevent us from commercializing products, and the prohibition of sale of any of our products could materially affect our ability to grow and maintain profitability.
Risks Related to Our Common Stock
The market price of our common stock has been volatile.
Our common stock traded as low as $3.68 and as high as $8.16 per share during the twelve-month period ending December 31, 2011. Our stock price may be affected by a number of factors, including those listed in these “Risk Factors” and other, unknown factors. Our stock price also may be affected by comments by securities analysts regarding our business or prospects, our issuance of common stock or other equity securities, our inability to meet analysts’ expectations, general fluctuations in the stock market or in the stock prices of our industry peers or our customers and general conditions and publicity regarding the genomics, biotechnology, pharmaceutical or life science industries.
Volatility in the stock price of other companies often has led to securities class action litigation against those companies. Any future securities litigation against us could result in substantial costs and divert management’s attention and resources, which could seriously harm our business, financial condition and results of operations.
Our quarterly results have historically fluctuated significantly and may continue to do so. Failure to meet financial expectations may disappoint securities analysts or investors and result in a decline in our stock price.
Our revenue and operating results may fluctuate significantly due in part to factors that are beyond our control and which we cannot predict. The timing of our customers’ orders may fluctuate from quarter to quarter. Historically, we have experienced customer ordering patterns for instrumentation and consumables in which the majority of the shipments occur in the last month of the quarter. These ordering patterns may limit management’s ability to accurately forecast our future revenue or product mix. Additionally, license revenue may also be unpredictable and may fluctuate due to the timing of payments of non-recurring licensing fees. Because our expenses are largely fixed in the short to medium term, any material shortfall in revenue may cause us to experience material losses.
Because of this difficulty in predicting future performance, our operating results may fall below our own expectations and the expectations of securities analysts or investors in some future quarter or quarters. Our failure in the past to meet these expectations has adversely affected the market price of our common stock and may continue to do so.
In addition to factors that affect the spending levels of our customers described above, additional factors could cause our operating results to fluctuate, including:
·
competition;
·
our inability to produce products in sufficient quantities and with appropriate quality;
·
the frequency of experiments conducted by our customers;
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our customers’ inventory of products;
·
the receipt of relatively large orders with short lead times; and
·
our customers’ expectations as to how long it takes us to fill future orders.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
ITEM 2. PROPERTIES
Our corporate headquarters is located in Santa Clara, California, where we lease approximately 200,000 square feet and we have manufacturing facilities located in Singapore and Cleveland, Ohio, where we lease approximately 150,000 square feet and 15,000 square feet, respectively. We lease approximately 140,000 square feet of administrative and research and development space in California (Emeryville and Sunnyvale), Ohio (Cleveland and Maumee), China (Shanghai), Germany (Freiburg), Japan (Osaka and Tokyo) and the United Kingdom (Wooburn Green). We have also entered into agreements to sublease to third parties approximately 80,000 square feet of administrative and research and development space in Massachusetts (Bedford).
Additionally, we own a 170,000 square foot facility in West Sacramento, California that is currently vacant. In the fourth quarter of 2011, we entered into a non-binding letter of intent to sell the facility to a third-party. As of December 31, 2011, an executed purchase agreement has not been entered into and neither party has any binding obligations under the letter of intent.
We believe that our existing properties are in good condition and are suitable for the conduct of our business.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Information pertaining to legal proceedings can be found in “Item 8. Financial Statements and Supplementary Data-Note 12. Legal Proceedings” of this Annual Report on Form 10-K, and is incorporated by reference herein.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER REPURCHASES OF EQUITY SECURITIES
Our common stock is traded on The Nasdaq Global Select Market under the symbol of AFFX. The following table sets forth on a per share basis, for the periods indicated, the low and high closing prices of our common stock as reported by The Nasdaq Global Select Market.
As of February 22, 2012, there were approximately 292 holders of record of our common stock, one of which is Cede & Co., a nominee for Depository Trust Company (“DTC”). All of the shares of common stock held by brokerage firms, banks and other financial institutions as nominees for beneficial owners are deposited into participant accounts at DTC and therefore are considered to be held of record by Cede & Co. as one shareholder.
No cash dividends have been paid on our common stock. We currently intend to retain all future earnings, if any, for use in our business and do not anticipate paying any cash dividends on our common stock in the foreseeable future.
No equity securities were sold during 2011 that were not registered under the Securities Act of 1933, as amended (the “Securities Act”). We did not repurchase any shares of our common stock during the fourth quarter of 2011.
For information regarding compensation plans under which equity securities were authorized for issuance, see the section of the Proxy Statement to be filed in connection with our 2012 Annual Meeting of Shareholders entitled “Equity Compensation Plan Information,” incorporated by reference into Item 12 of this Annual Report on Form 10-K.
Performance Graph
The graph below compares the cumulative total return* on our common stock for the period commencing on December 31, 2006 and ending December 31, 2011 compared to the CRSP Total Return Index for the Nasdaq National Market (U.S. companies) and the CRSP Total Return Index for the Nasdaq Pharmaceutical Stocks (SIC 283). The stock price performance shown on the graph below is not necessarily indicative of future price performance.
*Assumes $100 invested on December 31, 2006 in our common stock and in each index listed above. The total return for our common stock and the indices used assumes the reinvestment of dividends, even though dividends have never been declared on our common stock.
The information under the caption “Performance Graph” is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference in any filing of Affymetrix under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (the “Exchange Act”), whether made before or after the date of this Annual Report on Form 10-K and irrespective of any general incorporation language in such filings.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical consolidated financial information has been derived from our audited consolidated financial statements. The information below is not necessarily indicative of our future results of operations and should be read in conjunction with Item 1A, “Risk Factors,” Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Item 8, “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K in order to fully understand the factors that may affect the comparability of the information presented below:
(1)
During 2010 and 2009, we repurchased $151.7 million and $69.1 million, respectively, of our 3.50% senior convertible notes and the resulting gain is labeled as “Gain from repurchase of convertible notes” in a single line item in our Consolidated Statements of Operations (See (4) for further details):
·
In 2010, we recognized a net gain of $6.3 million on repurchases totaling $151.7 million in aggregate principal amount; and
·
In 2009, we recognized a net gain of $17.4 million on the repurchase of $69.1 million in aggregate principal amount.
In 2008, we recognized a goodwill impairment charge of $239.1 million that is presented in a single line item labeled “Goodwill impairment charges” in our Consolidated Statements of Operations as well as an income tax provision of $65.9 million primarily resulting from a full valuation allowance recorded against all U.S. deferred tax assets.
Additionally, we recognized $2.2 million, $43.7 million and $15.3 million in 2009, 2008 and 2007, respectively, of expense related to our restructuring plans that was presented in a single line item labeled “Restructuring charges” in our Consolidated Statements of Operations.
(2)
In 2008, we completed the acquisitions of USB Corporation (“USB”), True Materials, Inc. (“TMI”), and Panomics, Inc. for aggregate cash consideration of $163.0 million.
(3)
In 2007, we issued $316.3 million aggregate principal amount of 3.50% senior convertible notes.
(4)
In 2010 and 2009, we partially repurchased our 3.50% convertible notes:
·
In 2010, a total of $151.7 million aggregate principal amount was purchased for cash consideration of $143.6 million, including accrued interest and transaction costs; and
·
In 2009, $69.1 million aggregate principal amount was purchased for cash consideration of $50.6 million, including accrued interest and transactions costs.
In 2008, a total of $119.9 million aggregate principal amount of our 0.75% senior convertible notes was redeemed for cash as investors exercised their put right. We repurchased an additional $0.1 million aggregate principal amount of such notes in 2009.
(5)
On February 3, 2012, we commenced a cash tender offer to repurchase the entire aggregate outstanding principal amount of our Notes at par plus accrued and unpaid interest from the last interest payment date applicable to the Notes to, but not including, the settlement date for the tender offer. See “Item 8. Financial Statements and Supplementary Data-Note 20. Subsequent Events” in this Annual Report on Form 10-K.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated financial statements and the related notes that appear elsewhere in this document.
The purpose of the following discussion and analysis is to provide an overview of the business to help facilitate an understanding of significant factors influencing our historical operating results, financial condition and cash flows and also to convey our expectations of the potential impact of known trends, events, or uncertainties that may impact our future results. The discussion and analysis in this Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, strategies, objectives, expectations, intentions and adequacy of resources. Forward-looking statements are subject to known and unknown risks and uncertainties and are based on potentially inaccurate assumptions that could cause actual results to differ materially from those expected or implied by the forward looking statements. Words such as “anticipate,” “believe,” “continue,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project” or similar words or phrases, or the negatives of these words, may identify forward-looking statements, but the absence of these words does not necessarily mean that a statement is not forward looking. Examples of forward-looking statements include, among others, statements regarding the integration of our acquired technologies with our existing technology, the commercial launch of new products and the duration which our existing cash and other resources is expected to fund our operating activities. This discussion should be read in conjunction with the other sections of this Annual Report on Form 10-K, including “Item 1: Business”; “Item 1A: Risk Factors”; “Item 6: Selected Financial Data”; and “Item 8: Financial Statements and Supplementary Data.”
Overview
We develop, manufacture and sell products and services for genetic analysis to the life science research and clinical healthcare markets. Researchers around the world use our technology to better understand the role that genes play in disease, the effectiveness and safety of therapies and many other biological factors that affect human well-being. We sell our products to some of the world’s largest pharmaceutical, diagnostic and biotechnology companies, as well as leading academic, government and not-for-profit research institutions and more than 24,000 peer-reviewed papers have been published based on work using our products. We have almost 900 employees worldwide and maintain sales and distribution operations across the United States, Europe, Asia and Latin America.
We offer a comprehensive line of products for two principal applications: gene expression and genotyping. Our product sales consist primarily of sales of instruments and related consumables. We have three instrument systems, GeneTitan®, GeneChip® and GeneAtlas™, that include instruments, consumables and software. Our GeneChip® instruments run arrays packaged in cartridges and our GeneTitan® and GeneAtlasTM instruments run arrays packaged in a peg format.
We also offer a variety of assays for gene expression targeting low- to mid-plex markets that are downstream of our whole genome arrays and a range of reagent kits that are compatible with our platforms as well as the products of other vendors.
Overview of Fiscal Year 2011 and Strategic Initiatives
In 2011, our business was affected by a significant drop in the volume of sales of consumables to our academic and pharmaceutical customers, particularly in North America, which led to a decrease in revenue as compared to the same period in 2010. Primarily due to lower revenues from product sales, we incurred a net loss of $28.2 million for the year. Despite the lower revenues, we were able to generate cash flows from operations of almost $40 million in 2011.
Our focus remains on carrying out the following strategic initiatives:
Entering new markets and expanding our product lines. Our goal continues to be to expand our revenue base by entering new markets, growing our customer base and successfully commercializing our established and acquired technologies. In the future, we intend to continue to expand our focus to include the validation and routine testing markets which we believe offer attractive compound annual growth rates and opportunities for more recurring revenue growth in the future. We seek to expand our product line with new products that combine automated instrumentation, powerful new biological assays, and new array designs and content.
Improving operating leverage. We remain focused on improving our operating leverage and were successful in lowering our operating expenses in 2011 as compared to 2010. Profitability in the future will depend on a number of factors, including but not limited to, increasing top-line revenue and sustained operating leverage.
CRITICAL ACCOUNTING POLICIES & ESTIMATES
General
The following section of Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“US GAAP”). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Our significant accounting policies are fully described in “Item 8. Financial Statements and Supplementary Data-Note 2. Summary of Significant Accounting Policies.” However, certain accounting policies are particularly important to the reporting of our financial position and results of operations and require the application of significant judgment by our management. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the financial statements. Management believes the following critical accounting policies reflect its more significant estimates and assumptions used in the preparation of the consolidated financial statements.
REVENUE RECOGNITION
We enter into contracts to sell our products and, while the majority of our sales agreements contain standard terms and conditions, there are agreements that contain multiple elements or non-standard terms and conditions. As a result, significant contract interpretation is sometimes required to determine the appropriate accounting, including whether the deliverables specified in a multiple element arrangement should be treated as separate units of accounting for revenue recognition purposes, and if so, how the value of the arrangement should be allocated among the deliverable elements, when and how to recognize revenue for each element, and the period over which revenue should be recognized.
INVENTORIES
We enter into inventory purchases and commitments so that we can meet future shipment schedules based on forecasted demand for our products. The business environment in which we operate is subject to rapid changes in technology and customer demand. We perform a detailed assessment of inventory each period, which includes a review of, among other factors, demand requirements, product life cycle and development plans, component cost trends, product pricing, product expiration and quality issues. Based on this analysis, we record adjustments to inventory for potentially excess, obsolete or impaired goods, when appropriate, in order to report inventory at net realizable value. These inventory adjustments may be required if actual demand, component costs, supplier arrangements, or product life cycles differ from our estimates. Any such adjustments would result in a charge to our results of operations.
NON-MARKETABLE EQUITY SECURITIES
As part of our strategic efforts to gain access to potential new products and technologies, we invest in equity securities of certain private biotechnology companies. These investments are included in other assets in our Consolidated Balance Sheets and are carried at cost. We also invest in a limited partnership investment fund that is accounted for under the equity method. We periodically review our investments for impairment; however, the impairment analysis requires significant judgment in identifying events or circumstances that would likely have significant adverse effect on the fair value of the investment. The analysis may include assessment of the investee’s (i) revenue and earnings trend, (ii) business outlook for its products and technologies, (iii) liquidity position and the rate at which it is using its cash, and (iv) likelihood of obtaining subsequent rounds of financing. If an investee obtains additional funding at a valuation lower than our carrying value, we presume that the investment is other than temporarily impaired. We have experienced impairments in our portfolio due to the decline in the value of certain of our non-marketable investments over the past few years.
INCOME TAXES
Income tax expense is based on pretax financial accounting income. Under the asset and liability method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. We must assess the likelihood that the resulting deferred tax assets will be realized. To the extent we believe that realization is not more likely than not, we establish a valuation allowance. Significant estimates are required in determining our provision for income taxes, our deferred tax assets and liabilities, and any valuation allowance to be recorded against our deferred tax assets. Some of these estimates are based on interpretations of existing tax laws or regulations. We believe that our estimates are reasonable and that our reserves for income tax related uncertainties are adequate. Various internal and external factors may have favorable or unfavorable effects on our future effective tax rate. These factors include, but are not limited to, changes in overall levels, character, or geographical mix of pretax earnings, changes in tax laws, regulations and/or rates, changing interpretations of existing tax laws or regulations, changes in the valuation of our deferred tax assets or liabilities, future levels of research and development spending, nondeductible expenses, applicability of tax holidays, and ultimate outcomes of income tax audits.
The total amount of unrecognized tax benefits as of December 31, 2011 was approximately $16.5 million. If recognized, the amount of unrecognized tax benefits that would impact income tax expense is $2.7 million. As of December 31, 2011, we do not anticipate any material changes to the amount of unrecognized tax benefit during the next twelve months.
We classify interest and penalties related to tax positions as components of income tax expense. For the year ended December 31, 2011, the amount of accrued interest and penalties related to tax uncertainties was approximately $0.2 million for a total cumulative amount of $0.7 million of non-current income taxes payable as of December 31, 2011.
We file U.S. federal, state, and foreign income tax returns in jurisdictions with varying statutes of limitations. During November 2011, the U.S. Internal Revenue Service completed its field examination of our federal income tax returns for the 2004, 2005, 2006, 2008 and 2009 tax years and issued a Revenue Agent’s Report, or RAR, with no proposed adjustments. We consider all tax positions taken in the 2004, 2005, 2006, 2008 and 2009 tax years to be effectively settled, because the U.S. Internal Revenue Service has completed its examination procedures and we believe that there is a remote possibility that the U.S. Internal Revenue Service will re-examine the settled positions. As a result, we have released reserves of approximately $5.8 million related to uncertain tax positions for those periods and recorded a full valuation allowance against these deferred tax assets. However, the federal and California statute of limitations on assessment still remain open for the tax years 1992 through 2011. In significant foreign jurisdictions, the 2006 through 2011 tax years generally remain subject to examination by their respective tax authorities.
CONTINGENCIES
We are subject to legal proceedings principally related to intellectual property matters. Based on the information available at the balance sheet dates, we assess the likelihood of any adverse judgments or outcomes to these matters, as well as potential ranges of probable losses. If losses are probable and reasonably estimable, we will record a reserve which may change in the future due to new developments in each matter.
ACCOUNTING FOR SHARE-BASED COMPENSATION
We account for employee share-based compensation by estimating the fair value of our employee stock awards at the date of grant using the Black-Scholes option-pricing model, which requires the use of certain subjective assumptions. The most significant of these assumptions are our estimates of the expected term, volatility and forfeiture rates of the awards. The expected stock price volatility assumption was determined using a combination of historical and implied volatility of our common stock. We determined that blended volatility is more reflective of market conditions and a better indicator of expected volatility than historical volatility. The estimate of these key assumptions is based on historical information and judgment regarding market factors and trends. As required under the accounting rules, we review our valuation assumptions at each grant date and, as a result, we are likely to change our valuation assumptions used to value employee share-based awards granted in future periods.
US GAAP requires that employee share-based compensation costs be recognized over the requisite service period, or the vesting period, in a manner similar to all other forms of compensation paid to employees. Accordingly, in 2011, we recognized employee share-based compensation of $8.8 million, which consisted of $1.1 million in cost of product sales, $1.9 million in research and development expense and $5.8 million in selling, general and administrative expenses. As of December 31, 2011, $16.0 million of total unrecognized compensation cost related to non-vested employee stock awards is expected to be recognized as future cost of sales and operating expenses over a weighted-average period of 2.7 years.
RESULTS OF OPERATIONS
The following discussion compares the historical results of operations for the years ended December 31, 2011, 2010 and 2009.
PRODUCT SALES
The components of product sales are as follows:
Total product sales decreased in 2011 as compared to 2010 primarily due to volume decreases. Chip volumes shipped were lower across all products while overall average selling price remained flat. Reagent revenue decreased primarily due to lower volume Genechip® shipments combined with lower average selling price caused by a shift in product mix. Instruments were lower due to fewer GeneTitan® sales partially offset by increased sales of the lower-priced GeneAtlas™.
Total product sales decreased $1.4 million or 1% in 2010 as compared to 2009. Consumables sales decreased primarily due to a decrease in the sales of our RNA reagents partially offset by an increase in sales of our DNA reagents. In both areas, sales of our lower price products have increased as a percentage of the total mix. Instrument sales grew in 2010 as compared to 2009, primarily due to the increased adoption of GeneTitan® and introduction of GeneAtlasTM families of instruments, which were introduced in late 2009 and early 2010, respectively, partially offset by declines in the volume of sales of older instruments.
SERVICES
Total services revenue remained consistent in 2011 as compared to 2010 which was in line with our expectations.
Total services revenue decreased in 2010 as compared to 2009, primarily due to the completion in late 2009 of several genotyping projects that began in the fourth quarter of 2008, including the Wellcome Trust Case Consortium and the National Institutes of Health projects.
ROYALTY AND OTHER REVENUE
Royalties and other revenue in 2010 was higher as compared to 2011 and 2009 primarily due to the receipt of a non-recurring $4.8 million license payment that was received in the fourth quarter of 2010. In addition to the non-recurring license payment, royalties and other revenue was lower in 2011 as compared to 2010 due to lower royalties and research activity.
PRODUCT AND SERVICES GROSS MARGINS
Despite lower product sales in 2011, product gross margin as a percentage of product sales increased during the year as compared to 2010 primarily due to a mix shift to higher margin products along with lower material, warranty and excess and obsolescence costs in 2011 as well as plant consolidation costs that occurred in 2010. These cost improvements were partially offset by lower cost absorption due to higher production levels in 2010. We note a downward trend in product gross margin within 2011 when comparing quarterly results driven by increased absorption cost due to lower sales.
Product gross margin increased in 2010 as compared to 2009 primarily due to a reduction in plant consolidation costs from $9.4 million in 2009 to $1.6 million in 2010, as the majority of the West Sacramento manufacturing facility closure took place in 2009. Additionally, favorable pricing and absorption in chips contributed to the increased product margin. These increases were partially offset by higher excess and obsolescence costs for products with finite lives.
Service gross margin increased in 2011 as compared to 2010 primarily due to costs associated with the West Sacramento manufacturing facility closure that was completed in the second quarter of 2010. Service gross margin was lower in 2010 as compared to 2009 primarily as a result of the Wellcome Trust Case Consortium and National Institutes of Health projects which had higher margins and were completed in 2009.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses decreased in 2011 and 2010 as compared to 2009 primarily due to savings in head count-related expenses and variable compensation of $3.2 million and $5.7 million, respectively and decreased spending on supplies of $2.6 million and $2.2 million, respectively as a result of cost-control measures. This was partially offset by an increase in facilities expenses primarily due to a one-time expense of $1.2 million related to the plant consolidation activities of our Oakmead facility in Santa Clara during the third quarter of 2011.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased in 2011 as compared to 2010 primarily due to lower legal expenses of $4.2 million as a result of a litigation settlement at the end of 2010. Other cost savings include variable compensation adjustments of $1.6 million, lower spending on consulting and other services of $1.5 million and advertising expenses of $0.8 million. These savings were partially offset by one-time severance benefits provided to our former chief executive officer of $1.4 million, rent expense of $1.8 million primarily due to the acceleration of future lease payments as a result of the plant consolidation activities of our Oakmead facility in Santa Clara and acquisition costs of $2.9 million incurred on the anticipated eBioscience transaction.
In 2010, selling, general and administrative expenses decreased as compared to 2009 primarily due to lower compensation and benefits expenses of $11.0 million as a result of lower headcount and decreased variable compensation. Additionally, legal expenses decreased by $2.1 million primarily due to timing of legal proceedings with third-parties, consulting and purchased services decreased by $1.8 million as a result of various general and administrative cost reductions, and rent expense decreased by $1.4 million due primarily to the relocation of our Japan office and other site consolidation efforts.
INTEREST INCOME AND OTHER, NET
The components of interest income and other, net, are as follows:
Interest income and other, net decreased in 2011 as compared to 2010 due to the following:
·
Realized loss on equity investments decreased in 2011 as compared to 2010 as we recognized fewer other-than-temporary impairments (“OTTI”). In 2011, we recognized $2.1 million in OTTI on our non-marketable investment in a limited partnership investment fund, a non-marketable investment in a private biotechnology company and an investment classified as available-for-sale in a publicly-traded company. In 2010, we recognized $5.6 million in OTTI on two non-marketable investments;
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Currency loss, net, increased primarily due to the weakening of the U.S. dollar against the Euro in 2011 as compared to 2010; and
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Other changed in 2011 due to a $2.2 million provision against a note receivable from a private biotechnology company and a $1.7 million impairment charge recorded against our West Sacramento facility during 2011.
Interest income and other, net changed by $4.1 million in 2010 as compared to 2009 due to the following:
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Interest income decreased by $1.6 million in 2010 as compared to 2009 due to lower average cash and investment balances as a result of the repurchase of a portion of our 3.50% convertible notes during 2010, partially offset by higher effective interest rates in 2010;
·
Realized loss in equity investments increased by $3.4 million in 2010 as we recognized $5.6 million of other-than-temporary impairment expense, largely as a result of our recognition of impairment charges on two non-marketable investments. This was partially offset by a net realized gain from our investment in a limited partnership investment fund of $1.3 million. In 2009, we recognized a net realized loss of $0.9 million primarily due to OTTI on our non-marketable investment in a limited partnership investment fund;
·
Currency loss decreased in 2010 by $2.8 million due to favorable currency movements in 2010; and
·
Other income decreased primarily due to a nonrecurring sale of equipment in 2009 totaling $0.9 million.
INTEREST EXPENSE
Interest expense decreased in 2011 as compared to 2010 and 2009 primarily due to a lower aggregate principal balance of our 3.50 % convertible notes as a result of our repurchases totaling $151.7 million in aggregate principal amount during 2010. There were no further purchases in 2011.
INCOME TAX PROVISION (BENEFIT)
The income tax provision was approximately $1.4 million and $2.2 million in 2011 and 2010, respectively, which consisted primarily of foreign taxes. The income tax benefit in 2009 of $0.2 million consisted of foreign taxes similar to 2011 and 2010 offset by refundable U.S. credits.
Deferred tax assets are recognized if realization of such assets is more likely than not. As of December 31, 2011, we provided for a valuation allowance of $154.1 million against our net deferred tax assets. As a result of negative evidence based on our cumulative net loss position, we have placed a full valuation allowance on U.S. and certain foreign deferred tax assets. We intend to maintain the valuation allowance until sufficient positive evidence exists to assure realization of these tax benefits through future taxable income.
As of December 31, 2011, we had total net operating loss carryforwards of $288.6 million, comprised of $162.0 million for U.S. federal purposes, which expire in the years 2021 through 2031 if not utilized, and $126.6 million for state purposes, the majority of which expire in the years 2012 through 2031 if not utilized. Utilization of net operating loss carryforwards may be subject to substantial annual limitations due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such an annual limitation may result in the expiration of the net operating loss before utilization.
During 2011, due to potential future transactions that would require cash outflows, we changed our assertion such that foreign earnings are no longer intended to be permanently reinvested. As a result, we recorded a net deferred tax liability of approximately $0.8 million related to the foreign undistributed earnings, which was offset by a reduction in our valuation allowance against our deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Historically, we have financed our operations primarily through product sales; sales of equity and debt securities such as our 3.50% convertible notes in 2007, collaborative agreements; interest income; licensing of our technology; and, when necessary, financing arrangements with third party creditors.
Our cash outflows have generally been as follows: cash used in operating activities such as research and development programs, sales and marketing activity, compensation and benefits of our employees and other working capital needs; cash paid for acquisitions; cash paid for litigation activity and settlements; and cash used for our debt repurchases and repurchases of our convertible notes as well as interest payments on our convertible notes obligations.
As of December 31, 2011, we had cash, cash equivalents, and available-for-sale securities of approximately $265.1 million. We anticipate that our existing capital resources along with the cash to be generated from operations will enable us to maintain currently planned operations, debt repayments or repurchases, and capital expenditures, for the foreseeable future.
These expectations are based on our current operating and financing plans, which are subject to change, and therefore we could require further funding. Factors that may cause us to require additional funding may include, but are not limited to: financing arrangements that we may enter into in connection with our acquisition of eBioscience or future acquisitions; a decline in cash generated by sales of our products and services; our ability to maintain existing collaborative and customer arrangements and establish and maintain new collaboration and customer arrangements; the progress of our 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.
On November 29, 2011, we entered into a Merger Agreement to acquire eBioscience for approximately $330 million in cash, subject to certain adjustments as provided in the Merger Agreement. The merger is subject to customary closing conditions, including our receipt of financing for the merger.
In connection with the Merger Agreement, we entered into a commitment letter with financing sources providing for $190 million of senior secured credit. The conditions to funding these facilities have not been satisfied, and as a result, we will not be able to complete the eBioscience acquisition unless the terms of the acquisition and the financing are restructured. We are in discussions with financing sources and with eBioscience regarding the possibility of restructuring the committed financing but no agreement or understandings have been reached. We have waived eBioscience’s obligations under the non-solicitation provisions set forth in the Merger Agreement and we understand that eBioscience is considering alternatives to the merger. The Merger Agreement may be terminated by either party if the closing of the merger has not occurred by March 31, 2012, so long as a breach of the Merger Agreement by the party seeking to terminate has not been the proximate cause of or resulted in the failure of the merger to occur on or before such date.
On December 29, 2011, we received notice that Tang Capital Partners, LP, a holder of our 3.50% Senior Convertible Notes Due 2038 (the "Notes"), had commenced class action litigation against us in the Superior Court of California, County of Santa Clara. The complaint alleged a variety of claims relating to our proposed acquisition of eBioscience, including that the acquisition would constitute a Fundamental Change under the indenture governing the Notes. The complaint sought unspecified damages, temporary and permanent injunctive relief against completion of the eBioscience acquisition, and other remedies. On January 21, 2012, we entered into an agreement to settle the purported class action litigation. As part of the settlement, we agreed to commence a tender offer to repurchase the entire aggregate outstanding principal amount of Notes at par plus accrued interest. Tang Capital Partners, LP, which owned approximately $78.3 million principal amount of the Notes, agreed to tender all of its Notes into the offer.
As of December 31, 2011, we have no credit facility or other committed sources of capital. To the extent capital resources are insufficient to meet future capital requirements; we will have to raise additional funds to continue the development of our 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 our stockholders. If adequate funds are not available, we may be required to curtail operations significantly or to obtain funds by entering into collaboration agreements on unattractive terms. Our inability to raise capital would have a material adverse effect on our business, financial condition and results of operations.
From time to time, we may seek to retire, repurchase or exchange convertible securities or common stock in open market purchases, privately negotiated transactions dependent on market conditions, liquidity, and contractual obligations and other factors. We did not retire, repurchase or exchange any of our common stock or remaining outstanding convertible securities during the year ended December 31, 2011. As noted above, on February 3, 2012, we commenced a cash tender offer to repurchase the entire aggregate outstanding principal amount of our Notes at par plus accrued and unpaid interest from the last interest payment date applicable to the Notes, to, but not including, the settlement date for the tender offer. See “Item 8. Financial Statements and Supplementary Data-Note 20. Subsequent Events” in this Annual Report on Form 10-K.
Cashflow (in thousands)
Operating Activities
Net cash provided by operating activities for the year ended December 31, 2011 was comprised of a net loss of $28.2 million, net of non-cash charges of $49.7 million and a $17.8 million increase in working capital. Adjustments for non-cash expenses include depreciation and amortization expense of $32.3 million, a net realized loss on investments of $4.8 million, which included other-than-temporary impairment charges totaling $2.1 million, a provision against a notes receivable from a private biotechnology company of $2.2 million, an impairment charge on property and equipment of $1.7 million and share-based compensation expense of $8.8 million.
Investing Activities
We liquidated a number of investments during the fourth quarter of 2011 to fund the anticipated eBioscience acquisition that resulted in a net inflow from investing activities from the purchase, sales and maturities of available-for-sale securities totaling $136.2 million during 2011. Our investing activities further included capital expenditures of $5.8 million and purchased technology rights of $3.2 million in 2011.
Financing Activities
Our financing activities generally consist of stock option exercise activity under our employee stock plan. Cash used in the issuance of stock under our employee stock plan, net of treasury shares withheld for taxes, was $0.7 million for the year ended December 31, 2011.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
As of December 31, 2011, we had no off-balance sheet arrangements. The impact that our contractual obligations as of December 31, 2011 are expected to have on our liquidity and cash flow in future periods is as follows (in thousands):
(1)
Our 3.50% senior convertible notes are due in 2038. However, holders may require us to repurchase all or a portion of their notes on January 15, 2013, 2018 and 2028. On February 3, 2012, we commenced a cash tender offer to repurchase the entire aggregate outstanding principal amount of our Notes at par plus accrued and unpaid interest from the last interest payment date applicable to the Notes to, but not including, the settlement date for the tender offer. See “Item 8. Financial Statements and Supplementary Data-Note 20. Subsequent Events” in this Annual Report on Form 10-K.
(2)
Purchase commitments include agreements to purchase goods or services that are enforceable and legally binding on Affymetrix and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancelable without penalty.
The above table does not reflect unrecognized tax benefits of approximately $16.5 million, the timing of which is uncertain. Refer to “Item 8. Financial Statements and Supplementary Data-Note 15. Income Taxes” for additional discussion on unrecognized tax benefits.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, we are exposed to foreign currency exchange rate, interest rate and equity price risks that could impact our financial position and results of operations. Our risk management strategy with respect to these three market risks may include the use of derivative financial instruments. We use derivative contracts only to manage existing underlying exposures of Affymetrix. Accordingly, we do not use derivative contracts for speculative purposes. Our risks, risk management strategy and a sensitivity analysis estimating the effects of changes in fair values for each of these exposures are outlined below.
Actual gains and losses in the future may differ materially from the sensitivity analyses based on changes in the timing and amount of interest rate, foreign currency exchange rate and equity price movements and our actual exposures and hedges.
Interest Rate Risk
Our exposure to interest rate risk relates primarily to our investment portfolio. Fixed rate securities may have their fair market value adversely impacted due to fluctuations in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or we 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 our investment activities is to preserve principal while at the same time maximize yields without significantly increasing risk. To achieve this objective, we invest our excess cash in debt instruments of the U.S. Government and its agencies and high-quality corporate issuers, and, by policy, restrict our exposure to any single corporate issuer by imposing concentration limits. To minimize the exposure due to adverse shifts in interest rates, we maintain investments at an average maturity of less than three years.
(1) In 2013, the security holders of our 3.50% senior convertible notes have the option to require us to repurchase the notes at a price equal to 100% of the outstanding principal amount plus accrued interest. On February 3, 2012, we commenced a cash tender offer to repurchase the remaining aggregate outstanding principal amount of our Notes at par plus accrued and unpaid interest from the last interest payment date applicable to the Notes to, but not including, the settlement date for the tender offer. See “Item 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AFFYMETRIX, INC.
Page No.
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Loss
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Affymetrix, Inc.
We have audited the accompanying consolidated balance sheets of Affymetrix, Inc. as of December 31, 2011 and 2010, and the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2011. Our audits also included the financial statement schedule listed in the Index at Item 15(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 the standards of the Public Company Accounting Oversight Board (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, 2011 and 2010, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2011, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Affymetrix, Inc.’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2012 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
San Jose, California
February 28, 2012
AFFYMETRIX, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(1) See “Note 20. Subsequent Events” for further information.
See Accompanying Notes
AFFYMETRIX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
See Accompanying Notes
AFFYMETRIX, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
See Accompanying Notes
AFFYMETRIX, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
See Accompanying Notes
AFFYMETRIX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
See Accompanying Notes
AFFYMETRIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011
NOTE 1-NATURE OF OPERATIONS
Affymetrix, Inc. (“Affymetrix” or the “Company”) is engaged in the development, manufacture, sale and service of consumables and systems for genetic analysis in the life sciences and clinical healthcare markets. Affymetrix has developed its GeneChip® system and related microarray technology as the platform of choice for acquiring, analyzing and managing complex genetic information. The Company’s integrated GeneChip® microarray platform includes: disposable DNA probe arrays (chips) consisting of nucleic acid sequences set out in an ordered, high density pattern, certain reagents for use with the probe arrays, a scanner and other instruments used to process the probe arrays, and software to analyze and manage genomic or genetic information obtained from the probe arrays. Related microarray technology also offered by Affymetrix includes licenses for fabricating, scanning, collecting and analyzing results from complementary technologies. The Company currently sells its products directly to pharmaceutical, biotechnology, agrichemical, diagnostics and consumer products companies as well as academic research centers, government research laboratories, private foundation laboratories and clinical reference laboratories in North America and Europe. The Company also sells some of its products through life science supply specialists acting as authorized distributors in Latin America, India, the Middle East and Asia Pacific regions, including China.
On November 29, 2011, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) to acquire eBioscience Holding Company, Inc. (“eBioscience”) for approximately $330 million in cash, subject to certain adjustments as provided in the Merger Agreement. eBioscience is a privately-held San Diego, California-based company engaged in the development, manufacture and sale of flow cytometry and immunoassay reagents for immunology and oncology research and diagnostics. The merger is subject to customary closing conditions, including the receipt of financing for the merger.
In connection with the Merger Agreement, the Company entered into a commitment letter with financing sources providing for $190 million of senior secured credit. The conditions to funding these facilities have not been satisfied, and as a result we will not be able to complete the eBioscience acquisition unless the terms of the acquisition and the financing are restructured. The Company is in discussions with financing sources and with eBioscience regarding the possibility of restructuring the committed financing but no agreements or understandings has been reached. The Company has waived eBioscience’s obligations under the non-solicitation provisions set forth in the Merger Agreement and understands that eBioscience is considering alternatives to the merger. The Merger Agreement may be terminated by either party if the closing of the merger has not occurred by March 31, 2012, so long as the breach of the Merger Agreement by the party seeking to terminate has not been the proximate cause of or resulted in the failure of the merger to occur on or before such date.
NOTE 2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Affymetrix and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Certain prior year amounts on the Company’s Consolidated Statements of Comprehensive Loss and Consolidated Statements of Cash Flows have been reclassified to conform to the current period presentation.
USE OF ESTIMATES
The preparation of the consolidated financial statements is in conformity with U.S. generally accepted accounting principles (“US GAAP”) which require management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates.
FOREIGN CURRENCY
Assets and liabilities of non-U.S. subsidiaries that use the local currency as their functional currency are translated to U.S. dollars at exchange rates in effect at the balance sheet date, with the resulting translation adjustments directly recorded to a separate component of accumulated other comprehensive income (loss) within stockholders’ equity. Income and expense accounts are translated at average exchange rates during the year. Foreign currency transaction gains and losses are recognized, net of hedging activity, in interest income and other, net and were comprised of net losses of $2.5 million, less than $0.1 million and $2.8 million for the years ended December 31, 2011, 2010 and 2009, respectively.
CASH EQUIVALENTS, AVAILABLE-FOR-SALE SECURITIES AND INVESTMENTS
Restricted Cash
The Company’s restricted cash balances consist primarily of outstanding letters of credits that are fully cash collateralized and reserves for value added tax in foreign locations.
Marketable Securities
The Company’s investments consist of marketable equity and debt securities, including U.S. government notes and bonds; corporate notes, bonds and asset-backed securities; mortgage-backed securities, municipal notes and bonds; and publicly traded equity securities. The Company reports all securities with maturities at the date of purchase of 90 days or less that are readily convertible into cash and have insignificant interest rate risk as cash equivalents. The Company’s investments are carried at fair value with unrealized gains and losses reported in accumulated other comprehensive income (loss) in stockholders’ equity. The cost of its marketable securities is adjusted for the amortization of premiums and discounts to maturity. This amortization is included in interest income and other, net. Realized gains and losses, as well as interest income, on available-for-sale securities are also included in interest income and other, net. The cost of securities sold is based on the specific identification method. The fair values of securities are based on quoted market prices. The Company includes its available-for-sale securities that have an effective maturity of less than twelve months as of the balance sheet date in current assets and those with a maturity greater than twelve months as of the balance sheet date in non-current assets.
Non-marketable Securities
As part of the Company’s strategic efforts to gain access to potential new products and technologies, it invests in equity securities of certain private biotechnology companies. These investments are included in other assets in the Consolidated Balance Sheets and are carried at cost. The Company also owns approximately 6% interest in a limited partnership investment fund that is accounted for under the equity method.
Other-than-temporary Impairment
All of the Company’s marketable and non-marketable securities are subject to quarterly reviews for impairment that is deemed to be other-than-temporary (“OTTI”). An investment is considered other-than-temporarily impaired when its fair value is below its amortized cost and (1) the Company intends to sell the security; (2) it is “more likely than not” that the Company will be required to sell the security before recovery of its amortized cost basis or (3) the present value of expected cash flows is not expected to recover the entire amortized cost basis. Below is a summary of the Company’s analysis:
●
Marketable securities -As part of its review, the Company is required to take into consideration current market conditions, extent and nature of change in fair value, issuer rating changes and trends, volatility of earnings, current analysts’ evaluations, all available information relevant to the collectability of debt securities and other factors when evaluating for the existence of OTTI in its securities portfolio. OTTI is separated into credit-related losses, which exist when amortized cost basis is not expected to be fully recovered, and non-credit related losses, which are the result of all other factors, such as illiquidity. Any credit-related OTTI is recognized in earnings while noncredit-related OTTI is recorded in other comprehensive income (loss) (“OCI”). During the year ended December 31, 2011, the Company recorded an impairment charge of $0.8 million due to OTTI of its investment in a publicly-traded company. Refer to Note 5. “Financial Instruments - Investments in Debt and Equity Securities” for further information.
●
Non-marketable securities - The Company periodically monitors the liquidity and financing activities of its non-marketable securities to determine if any impairment exists and accordingly writes down, to the extent necessary, the carrying value of the non-marketable equity securities to their estimated fair values. In order to determine whether a decline in value is other-than-temporary, the Company evaluates, among other factors: the duration and extent to which the fair value has been less than the carrying value; the financial condition of and business outlook of the issuer for the company, including key operational and cash flow metrics, current market conditions; and the Company’s intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in estimated fair value. During the year ended December 31, 2011, the Company recorded impairment charges totaling $1.3 million, primarily related to its investment in a limited partnership investment fund. Refer to Note 5. “Financial Instruments - Non-Marketable Securities” for further information.
ACCOUNTS RECEIVABLE
Trade accounts receivable are recorded at net invoice value. The Company considers amounts past due based on the related terms of the invoice. The Company reviews its exposure to amounts receivable and provides an allowance for specific amounts if collectability is no longer reasonably assured. The Company also provides an allowance for a percentage of the gross trade receivable balance (excluding any specifically reserved amounts) based on its collection history. The allowance for doubtful accounts was not material at December 31, 2011 and 2010.
DERIVATIVE INSTRUMENTS
The Company accounts for its derivative instruments as either assets or liabilities and carries them at fair value. Derivatives that are not defined as hedges must be adjusted to fair value through earnings at each reporting date.
For derivative instruments that hedge the exposure to variability in expected future cash flows that are designated as cash flow hedges, the Company measures the effectiveness of the derivative instruments by comparing the cumulative change in the hedge contract with the cumulative change in the hedged item. The effective portion of the gain or loss on the derivative instrument is reported as a component of OCI in stockholders’ equity and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The ineffective portion of the gain or loss on the derivative instrument is recognized in current earnings. To receive hedge accounting treatment, cash flow hedges must be highly effective in offsetting changes to expected future cash flows on hedged transactions. The net gain or loss on the effective portion of a derivative instrument that is designated as an economic hedge of the foreign currency translation exposure of the net investment in a foreign operation is reported in the same manner as a foreign currency translation adjustment. Refer to Note 5. “Financial Instruments - Derivative Financial Instruments” for further information.
INVENTORIES
Inventory cost is computed on an adjusted standard basis (which approximates actual cost on a first-in, first-out basis). Provisions for slow moving, potentially excess and obsolete inventories are provided based on estimated demand requirements, product life cycle and development plans, component cost trends, product pricing, product expiration and quality issues.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and are depreciated using the straight-line method over the estimated useful lives of the assets or the lease term, whichever is shorter. Equipment and furniture is depreciated over useful lives generally ranging from 3 to 7 years and leasehold improvements are depreciated over the shorter of the expected life of the asset or lease terms generally ranging from 3 to 15 years. Maintenance and repair costs are expensed as incurred. The Company reassesses the useful life on its property and equipment on a periodic basis and may adjust the lives accordingly.
In the fourth quarter of 2011, the Company entered into a non-binding letter of intent to sell its facility located in West Sacramento, California to a third-party. As a result of the letter of intent, the Company reclassified the facility from long-lived assets held and used to held-for-sale and recognized an impairment charge of $1.7 million to bring the carrying value of the facility to its estimated fair market value, which is the anticipated selling price under the non-binding letter of intent. As of December 31, 2011, an executed purchase agreement has not been entered into and neither party has any binding obligations under the letter of intent.
ACQUIRED TECHNOLOGY RIGHTS
Acquired technology rights are carried at cost less accumulated amortization and are comprised of licenses to technology covered by patents held by third parties or acquired by the Company. Purchased intangible assets other than goodwill are required to be amortized over their useful lives unless these lives are determined to be indefinite. Amortization is recorded over the estimated useful life of the underlying patents, which has historically ranged from one to thirteen years. In 2011 and 2010, the Company did not identify any indicators of impairment during its annual test on the acquired technology rights and did not recognize any impairment losses. Refer to Note 8, “Acquired Technology Rights”, for further information.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets and certain identifiable intangible assets are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the assets, the assets are written down to their estimated fair values. For the years ended December 31, 2011 and 2010, the Company recognized $1.7 million and $0.3 million, respectively, of impairment charges on its long-lived assets. No impairment was recorded for the year ended December 31, 2009.
INCOME TAXES
Income tax expense is based on pre-tax financial accounting income. Under the liability method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company must then assess the likelihood that the resulting deferred tax assets will be realized. To the extent the Company believes that realization of the deferred tax assets is not more likely than not, the Company establishes a valuation allowance. Significant estimates are required in determining the Company’s provision for income taxes, deferred tax assets and liabilities, and any valuation allowance to be recorded against net deferred tax assets. Some of these estimates are based on interpretations of existing tax laws or regulations. The Company believes that its estimates are reasonable and that its reserves for income tax related uncertainties are adequate. Various internal and external factors may have favorable or unfavorable effects on the Company’s future effective tax rate. These factors include, but are not limited to, changes in overall levels of characterization and geographical mix of pretax earnings (losses), changes in tax laws, regulations and/or rates, changing interpretations of existing tax laws or regulations, changes in the valuation of deferred tax assets or liabilities, future levels of research and development spending, nondeductible expenses, applicability of tax holidays and ultimate outcomes of income tax audits. Relative to uncertain tax positions, the Company only recognizes the tax benefit if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the Company’s financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.
CONTINGENCIES
The Company is subject to various legal proceedings principally related to intellectual property matters. Based on the information available at the most recent balance sheet date, the Company assesses the likelihood of any material adverse judgments or outcomes that may result from these matters, as well as the range of possible or probable loss, if any. If losses are probable and reasonably estimable, the Company will record a reserve. Any reserves recorded may change in the future due to new developments in each matter.
REVENUE RECOGNITION
Overview
The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is reasonably assured. In instances where final acceptance of the product or system is required or performance obligations remain, revenue is deferred until all the acceptance criteria or performance obligations have been met.
The Company derives the majority of its revenue from product sales of probe arrays, reagents, and related instrumentation that may be sold individually or combined with any of the products, services or other sources of revenue. When a sale combines multiple elements upon delivery or performance of multiple products, services and/or rights to use assets, the Company allocates revenue for transactions or collaborations that include multiple elements to each unit of accounting based on its relative fair value, and recognizes revenue for each unit of accounting when the revenue recognition criteria have been met. The price charged when the element is sold separately generally determines fair value.
Effective January 1, 2010, the Company adopted Auditing Standards Update (“ASU”) No. 2009-13, Revenue Recognition (ASC Topic 605) - Multiple-Deliverable Revenue Arrangements on a prospective basis, which establishes the relative selling price method whereby the Company is required to allocate consideration to all deliverables at the inception of the arrangement based on their relative selling prices. This change in accounting principle did not have a material impact on the Company’s financial results.
Product Sales
Product sales include sales of probe arrays, reagents and related instrumentation. Probe array, reagent and instrumentation revenue is recognized when earned, which is generally upon shipment and transfer of title to the customer and fulfillment of any significant post-delivery obligations. Accruals are provided for anticipated warranty expenses at the time the associated revenue is recognized.
Services
Services revenue includes equipment service revenue; scientific services revenue, which includes associated consumables; and revenue from custom probe array design fees. Revenue from equipment service contracts are recognized ratably over the life of the contract.
Revenue from scientific and DNA analysis services are recognized upon shipment of the required data to the customer.
Revenue from custom probe array design fees associated with the Company’s GeneChip® CustomExpress™ and CustomSeq™ products are recognized when the associated products are shipped.
Royalties and Other Revenue
Royalties and other revenue include license revenue; royalties earned from third party license agreements; milestones and royalties earned from collaborative product development and supply agreements; subscription fees earned under GeneChip® array access programs; research revenue, which mainly consists of amounts earned under government grants.
License revenue is generally recognized upon the execution of an agreement or is recognized ratably over the period of expected performance.
Revenue from royalties is recognized under the terms of the related agreement.
The Company enters into collaborative arrangements which generally include a research and product development phase and a manufacturing and product supply phase. These arrangements may include up-front nonrefundable license fees, milestones, the rights to royalties based on the sale of final product by the partner, product supply agreements and distribution arrangements.
Any up-front, nonrefundable payments from collaborative product development agreements are recognized ratably over the research and product development period, and at-risk substantive based milestones are recognized when earned. Any payments received which are not yet earned are included in deferred revenue.
Transactions with Distributors
The Company recognizes revenue from transactions with distributors when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller’s price is fixed or determinable, and collectability is reasonably assured. The Company’s agreements with distributors do not include rights of return.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses consist of costs incurred for internal, collaborative and grant-sponsored research and development. Research and development expenses include salaries, contractor fees, building costs, utilities and allocations of shared corporate services. In addition, the Company funds research and development at other companies and research institutions under agreements which are generally cancelable. All such costs are charged to research and development expense as incurred.
SOFTWARE DEVELOPMENT COSTS
Development Costs of Software to Be Sold, Leased or Marketed
Certain software development costs subsequent to the establishment of technological feasibility are capitalized. The Company’s software is deemed to have achieved technological feasibility at the point a working model of the software product is developed. For the years ended December 31, 2011 and 2010, the Company did not capitalize any software development costs. Amortization costs for the years ended December 31, 2011 and 2010 on software development costs previously capitalized were $0.7 million for both years and $1.1 million for the year ended December 31, 2009. The costs of developing routine software enhancements are expensed as research and development when incurred because of the short time between the determination of technological feasibility and the date of general release of the related products.
Internal-Use Software
For the year ended December 31, 2011, the Company did not capitalize any costs associated with internal-use software. For the year ended December 31, 2010, the Company capitalized approximately $0.7 million. All costs associated with software developed for internal use will be amortized from the time at which the software is ready for its intended use. As of December 31, 2011, the Company had recognized total cumulative amortization costs of $0.5 million.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising costs recorded for the years ended December 31, 2011, 2010 and 2009 were $0.6 million, $1.2 million and $0.9 million, respectively.
SHARE-BASED COMPENSATION
The Company estimates the fair value of its stock options using the Black-Scholes-Merton (“BSM”) option pricing model. This model requires the use of certain estimates and assumptions such as the expected term of options, estimated forfeitures, expected volatility of the Company’s stock price, expected dividends and the risk-free interest rate at the grant date to determine the fair value of the stock options. The fair value of its restricted stock and restricted stock units, collectively referred to as restricted stock awards (“RSAs”), is based on the market price of the Company’s common stock on the grant date. The Company recognizes the fair value of its share-based compensation as expense on a straight-line basis over the requisite service period of each award, generally four years. Refer to Note 14, “Stockholders’ Equity and Share-Based Compensation Expense” for further information.
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is comprised of net loss and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses on the Company’s available-for-sale securities that are excluded from net loss, unrealized gains and losses on cash flow hedges and foreign currency translation adjustments. Total comprehensive income (loss) has been disclosed in the Company’s Consolidated Statements of Comprehensive Loss.
At December 31, 2011 and 2010, the components of accumulated other comprehensive income, net of tax, are as follows (in thousands):
NET LOSS PER COMMON SHARE
Basic net loss per common share is calculated using the weighted-average number of common shares outstanding during the period less the weighted-average shares subject to repurchase. Diluted net loss per common share gives effect to dilutive common stock subject to repurchase, stock options (calculated based on the treasury stock method), shares purchased under the employee stock purchase plan and convertible debt (calculated using an as-if-converted method).
Diluted earnings per share, if any, include certain potential dilutive securities from common stock subject to repurchase, outstanding stock options (on the treasury stock method), shares purchased under the employee stock purchase plan and convertible notes (on the as-if-converted basis). The potentially dilutive securities excluded from diluted earnings per common share because their effect would have been anti-dilutive, on an actual outstanding basis, were as follows (in thousands):
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2011, the FASB issued an amendment to an existing accounting standard which requires companies to present net income and other comprehensive income in one continuous statement or in two separate, but consecutive, statements. In addition, in December 2011, the FASB issued an amendment to an existing accounting standard which defers the requirement to present components of reclassifications of other comprehensive income on the face of the income statement. The Company adopted this guidance on a retrospective basis and the adoption did not have a material effect on its consolidated financial statements.
In May 2011, the FASB issued a new accounting standard update, which amends the fair value measurement guidance and includes some enhanced disclosure requirements. The most significant change in disclosures is an expansion of the information required for Level 3 measurements based on unobservable inputs. The standard is effective for fiscal years beginning after December 15, 2011. The Company adopted this standard in the first quarter of 2012 and the adoption will not have a material impact on its financial statements and disclosures.
NOTE 3-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 Company’s Consolidated Balance Sheets. Company 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 significant credit losses from its accounts receivable. Affymetrix performs a regular review of its customer activity and associated credit risks and does not require collateral from its customers. The Company maintains an allowance for doubtful accounts receivable based upon the expected collectability of accounts receivable.
Certain raw materials or components used in the synthesis of probe arrays or the assembly of instrumentation are currently available only from a single source or limited sources. No assurance can be given that these raw materials or other components of the GeneChip® system will be available in commercial quantities at acceptable costs from other vendors should the need arise. If the Company is required to seek alternative sources of supply, it could be time consuming and expensive.
In addition, the Company is dependent on its vendors to provide components of appropriate quality and reliability and to meet applicable regulatory requirements. Consequently, in the event that supplies from these vendors 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.
For the years ended December 31, 2011, 2010 and 2009, approximately 47%, 43% and 42%, respectively, of the Company’s total revenue was generated from sales outside the United States. The Company’s results of operations are affected by such factors as changes in foreign currency exchange rates, trade protection measures, longer accounts receivable collection patterns and changes in regional or worldwide economic or political conditions. The risks of the Company’s international operations are mitigated in part by the extent to which its sales are geographically distributed.
NOTE 4-FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and consider assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions and risk of nonperformance.
A fair value hierarchy was established which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels of inputs that may be used to measure fair value are as follows:
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Level 1: quoted prices in active markets for identical assets or liabilities;
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Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or
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Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The Company considers an active market to be one in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis, and views an inactive market as one in which there are few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers. Where appropriate the Company’s or the counterparty’s non-performance risk is considered in determining the fair values of liabilities and assets, respectively.
The fair values of the Company’s Level 1 and Level 2 available-for-sale securities are based on quoted market prices and are included in cash and cash equivalents, available-for-sale securities-short-term portion and available-for-sale securities-long-term portion on the Company’s Consolidated Balance Sheets based on the maturity of the securities. As of December 31, 2011 and 2010, the Company had no financial assets or liabilities requiring Level 3 classification, including those that have unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets and liabilities.
The fair value of the Company’s foreign currency derivative assets and liabilities is determined based on the estimated consideration the Company would pay or receive to terminate these agreements on the reporting date. The foreign currency derivative assets and liabilities are located in other current assets and accrued expenses, respectively, in the Company’s Consolidated Balance Sheets.
The fair value of the Company’s convertible notes is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for the convertible notes of the same remaining maturities. As of December 31, 2011 and 2010, the estimated fair value of the convertible notes was $95.5 million.
Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table represents the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2011 and 2010 (in thousands):
* As of December 31, 2011, the Company had no investments in mortgage-backed securities in its portfolio. As of December 31, 2010, approximately 4% of the Company’s total portfolio was in mortgage-backed investments.
NOTE 5-FINANCIAL INSTRUMENTS
Investments in Debt and Equity Securities
The following is a summary of available-for-sale securities as of December 31, 2011 (in thousands):
* As of December 31, 2011, the Company had no investments in mortgage-backed securities in its portfolio.
The following is a summary of available-for-sale securities as of December 31, 2010 (in thousands):
* As of December 31, 2010, approximately 4% of the Company’s total portfolio was in mortgage-backed investments.
Realized gains for the years ended December 31, 2011 and 2010 were $0.6 million and $0.8 million, respectively. For the years ended December 31, 2011 and 2010, realized losses were $1.6 million and $0.3 million, respectively. Realized gains and losses are included in interest income and other, net in the Company’s Consolidated Statements of Operations. The gross unrealized losses as of December 31, 2010 were primarily related to a mortgage-backed security with a carrying value of $0.6 million that was impacted by the weakening of the global economy caused by a lack of liquidity in the credit markets which had not fully recovered. The mortgage-backed security was sold in 2011 for a realized loss of $0.3 million. During the year ended December 31, 2011, an equity security that experienced a decline in fair value was deemed other-than-temporarily impaired and impairment charges totaling $0.8 million was recorded. No significant facts or circumstances have arisen to indicate that there has been any deterioration in the creditworthiness of the issuers of the Company’s other securities.
Non-Marketable Securities
As of December 31, 2011 and 2010, the carrying amounts of the Company’s non-marketable securities, totaling $5.0 million and $6.8 million, respectively, equaled their estimated fair values. Their estimated fair values were based on liquidation and net realizable values. During the year ended December 31, 2011, the Company recorded impairment charges on its non-marketable securities totaling $1.3 million primarily related to its limited partnership investment fund. During the year ended December 31, 2010, the Company recorded impairment charges on its non-marketable securities totaling $5.6 million, primarily due to declines in the estimated fair values of two of its investments in private biotechnology companies that were determined to be other-than-temporary as a result of the respective price per share paid by investors in the most recent round of financing for each company which, in each case, was significantly lower than the carrying value of the Company’s investment. Net investment losses are included in interest income and other, net in the Company’s Consolidated Statements of Operations. Depending on market conditions, the Company may incur additional charges on this investment portfolio in the future.
Derivative Financial Instruments
The Company derives a portion of its revenues in foreign currencies, predominantly in Europe and Japan, as part of its ongoing business operations. In addition, a portion of its assets are held in the nonfunctional currencies of its subsidiaries. The Company enters into foreign currency forward contracts to manage a portion of the volatility related to transactions that are denominated in foreign currencies. The Company’s foreign currency forward contracts are entered into for periods consistent with the related underlying exposures and do not constitute positions that are independent of those exposures. The Company’s accounting policies for these instruments are based on whether the instruments are classified as designated or non-designated hedging instruments. The Company records all derivatives on the Company’s Consolidated Balance Sheets at fair value. The effective portions of designated cash flow hedges are recorded in OCI until the hedged item is recognized in operations. As of December 31, 2011, the Company’s existing foreign currency forward exchange contracts mature within 12 months. The deferred amount related to the Company’s derivatives currently recorded in OCI and expected to be recognized into earnings over the next 12 months is a net gain of $0.8 million. Derivatives that are not designated as hedging instruments and the ineffective portions of cash flow hedges are adjusted to fair value through earnings.
Derivative instruments designated as cash flow hedges must be de-designated as hedges when it is probable the forecasted hedged transaction will not occur in the initially identified time period or within a subsequent two-month time period. Deferred gains and losses in other comprehensive income (loss) associated with such derivative instruments are reclassified immediately into operations through other income and expense. Any subsequent changes in fair value of such derivative instruments are reflected in other income and expense unless they are re-designated as hedges of other transactions. The Company did not recognize any net gains or losses related to the loss of hedge designation on discontinued cash flow hedges during 2011.
As of December 31, 2011, the total notional values of the Company’s foreign currency forward contracts that mature within 12 months are as follows (in thousands):
As of December 31, 2010, the Company did not have any unsettled foreign currency contracts in place.
As a result of the use of derivative instruments, the Company is exposed to the risk that the counterparties may be unable to meet the terms of the agreements. To mitigate the risk, only contracts with carefully selected highly-rated major financial institutions are entered into. In the event of non-performance by these counterparties, the asset position carrying values of the financial instruments represent the maximum amount of loss that can be incurred, however, no losses as a result of counterparty defaults are expected. The Company does not require and is not required to pledge collateral for these financial instruments. The Company does not enter into foreign currency forward contracts for trading or speculative purposes and is not party to any leveraged derivative instruments.
The following table shows the Company’s foreign currency derivatives measured at fair value as reflected on the Company’s Consolidated Balance Sheets as of December 31, 2011 (in thousands):
The Company did not have any foreign currency derivatives as of December 31, 2010.
The following table shows the pre-tax effect of the Company’s derivative instruments on OCI for the years ended December 31, 2011 and 2010 (in thousands):
There were no amounts classified from OCI into operations during the year ended December 31, 2011.
The following table shows the pre-tax effect of the Company’s derivative instruments on the Company’s Consolidated Statements of Operations for the years ended December 31, 2011 and 2010 (in thousands):
NOTE 6-INVENTORIES
Inventories consist of the following at December 31, 2011 and 2010 (in thousands):
NOTE 7-PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31, 2011 and 2010 (in thousands):
(1) Included in the balance as of December 31, 2011 was the Company’s West Sacramento facility that was reclassified to held-for-sale on the Company’s Consolidated Balance Sheets. The facility had an estimated fair value of
$9.0 million at December 31, 2011.
For the years ended December 31, 2011, 2010 and 2009, the Company recorded depreciation expense of $19.0 million, $22.2 million and $29.6 million, respectively.
For the year ended December 31, 2011, the Company recognized $1.7 million of impairment charges on its facility in West Sacramento, California.
NOTE 8-ACQUIRED TECHNOLOGY RIGHTS
Acquired technology rights, with a gross carrying value of $113.7 million, are comprised of customer relationships, licenses to technology covered by patents owned by third parties or patents acquired by the Company and are amortized over the expected useful lives of these assets, which range from two to fifteen years. At December 31, 2011 and 2010, accumulated amortization of these rights amounted to $84.2 million and $71.6 million, respectively.
During the years ended December 31, 2011 and 2010, the Company concluded that here were no indicators of impairment during its annual impairment test of its acquired technology rights and the remaining balance at December 31, 2011 is expected to be recoverable.
The expected future annual amortization expense of the Company’s acquired technology rights is as follows (in thousands):
NOTE 9-ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities as of December 31, 2011 and 2010 consist of the following (in thousands):
NOTE 10-COMMITMENTS
Operating Leases
The Company leases laboratory, office and manufacturing facilities under non-cancelable operating leases that expire at various times through 2023. Some of these leases contain renewal options ranging from two to five years and escalation clauses. Rent expense related to operating leases for the years ended December 31, 2011, 2010 and 2009 was approximately $11.0 million, $9.7 million and $10.2 million, respectively. In connection with some of these facility leases, the Company has made security deposits totaling $1.8 million, which are included in long-term other assets in the Company’s Consolidated Balance Sheets.
Future minimum lease obligations, net of sublease income, at December 31, 2011 under all non-cancelable operating leases are as follows (in thousands):
Sublease income is expected to be approximately $0.9 million and $0.7 million for the years ended December 31, 2012 and 2013, respectively, and $0 thereafter.
Non-Cancelable Supply Agreements
As of December 31, 2011, the Company had approximately $1.3 million of non-cancelable inventory supply agreements that are in effect through 2012.
Indemnifications
From time to time the Company has entered into indemnification provisions under certain of its agreements with other companies in the ordinary course of business, typically with business partners, customers, and suppliers. Pursuant to these agreements, the Company generally indemnifies, holds harmless, and agrees to reimburse the indemnified parties on a case by case basis for losses suffered or incurred by the indemnified parties in connection with any U.S. patent or other intellectual property infringement claim by any third party with respect to its products. The term of these indemnification provisions is generally perpetual from the time of the execution of the agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions is unlimited. In addition, the Company has entered into indemnification agreements with its officers and directors. The Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification provisions. As of December 31, 2011, the Company had not accrued a liability for this guarantee, because the likelihood of incurring a payment obligation in connection with this guarantee is remote.
NOTE 11-WARRANTIES
The Company provides for anticipated warranty costs at the time the associated revenue is recognized. Product warranty costs are estimated based upon the Company’s historical experience and the warranty period. The Company periodically reviews the adequacy of its warranty reserve and adjusts, if necessary, the warranty percentage and accrual based on actual experience and estimated costs to be incurred. In 2010, the Company experienced more warranty claims for instruments than expected. Information regarding the changes in the Company’s product warranty liability for the years ended December 31, 2011 and 2010 is as follows (in thousands):
NOTE 12-LEGAL PROCEEDINGS
The Company has been in the past, and continues to be, a party to litigation which has consumed, and may continue to consume, substantial financial and managerial resources. While the results of any litigation or any other legal proceedings are uncertain, the Company does not believe the ultimate resolution of any pending legal matters is likely to have a material adverse effect on the Company’s financial position or results of operations.
Illumina Lawsuit
On May 4, 2009 and November 3, 2009, the Company was named as a defendant in complaints filed by plaintiff Illumina, Inc., in the United States District Court for the Western District of Wisconsin (the “District Court”). In the complaints, plaintiff alleged that the Company is infringing Patent Nos. 7,510,841 and 7,612,020 (the “Patents”) by making and selling certain of the GeneChip® products. In December 2010, the District Court granted the Company’s motion for summary judgment that it did not infringe the patents held by Illumina. Illumina appealed the District Court’s decision in August 2011 and the Court of Appeals for the Federal Circuit affirmed the District Court’s decision.
E8 Pharmaceuticals LLC
On July 1, 2008, the Company was named as a defendant in a complaint filed by plaintiffs E8 Pharmaceuticals LLC and Massachusetts Institute of Technology ("MIT") in the United States District Court of Massachusetts. In the complaint, the plaintiffs allege that the Company is infringing one patent owned by MIT and licensed to E8 Pharmaceuticals by making and selling the Company’s GeneChip® products to customers and teaching its customers how to use the products. The plaintiffs seek a permanent injunction enjoining the Company from further infringement, unspecified monetary damages, enhanced damages pursuant to 35 U.S.C. §284, costs, attorneys’ fees and other relief as the court deems just and proper. The Company will vigorously defend against plaintiffs’ claims. There is no trial date set in this matter.
Enzo Litigation
On October 28, 2003, Enzo Life Sciences, Inc., a wholly-owned subsidiary of Enzo Biochem, Inc. (collectively “Enzo”), filed a complaint against the Company that is pending in the United States District Court for the Southern District of New York for breach of contract, injunctive relief and declaratory judgment. The Enzo complaint relates to a 1998 distributorship agreement with Enzo under which the Company served as a non-exclusive distributor of certain reagent labeling kits supplied by Enzo. In its complaint, Enzo seeks monetary damages and an injunction against the Company from using, manufacturing or selling Enzo products and from inducing collaborators and customers to use Enzo products in violation of the 1998 agreement. Enzo also seeks the transfer of certain Affymetrix patents to Enzo. In connection with its complaint, Enzo provided the Company with a notice of termination of the 1998 agreement effective on November 12, 2003.
On November 10, 2003, the Company filed a complaint against Enzo in the United States District Court for the Southern District of New York for declaratory judgment, breach of contract and injunctive relief relating to the 1998 agreement. In its complaint, the Company alleges that Enzo has engaged in a pattern of wrongful conduct against it and other Enzo labeling reagent customers by, among other things, asserting improperly broad rights in its patent portfolio, improperly using the 1998 agreement and distributorship agreements with others in order to corner the market for non-radioactive labeling reagents, and improperly using the 1998 agreement to claim ownership rights to the Company’s proprietary technology. The Company seeks declarations that it has not breached the 1998 agreement and that nine Enzo patents that are identified in the 1998 agreement are invalid and/or not infringed by it. The Company also seeks damages and injunctive relief to redress Enzo’s alleged breaches of the 1998 agreement, its alleged tortuous interference with the Company’s business relationships and prospective economic advantage, and Enzo’s alleged unfair competition. The Company filed a notice of related case stating that its complaint against Enzo is related to the complaints already pending in the Southern District of New York against eight other former Enzo distributors. The Company’s case has been related to complaints previously pending in the Southern District of New York against eight other former Enzo distributors. There is no trial date in the actions between Enzo and the Company.
Noteholder Litigation
On December 29, 2011, Tang Capital Partners, LP, a holder of the Company's 3.50% Senior Convertible Notes Due 2038 (the "Notes"), commenced class action litigation against the Company in the Superior Court of California, County of Santa Clara. The complaint alleges a variety of claims relating to the Company's proposed acquisition of eBioscience Holding Company, Inc., including that the acquisition would constitute a Fundamental Change under the indenture governing the Notes. The complaint seeks unspecified damages, temporary and permanent injunctive relief against completion of the eBioscience acquisition, and other remedies. On January 21, 2012, the Company entered into an agreement to settle the purported class action litigation. As part of the settlement, the Company agreed to commence a tender offer to repurchase the entire aggregate outstanding principal amount of Notes at par plus accrued interest. Tang Capital Partners, LP, which owns approximately $78.3 million principal amount of the Notes, agreed to tender all of its Notes into the offer. Refer to Note 20, “Subsequent Events” for further discussion.
Administrative Proceedings
The Company’s intellectual property is subject to a number of significant administrative actions. These proceedings could result in the Company’s patent protection being significantly modified or reduced, and the incurrence of significant costs and the consumption of substantial managerial resources. For the year ended December 31, 2011, the Company had not incurred significant costs in connection with administrative proceedings.
NOTE 13-SENIOR CONVERTIBLE NOTES
On November 13, 2007, the Company issued $316.3 million principal amount of 3.50% Senior Convertible Notes (the “Notes”) due January 15, 2038. The net proceeds after issuance costs from the Notes offering were approximately $309.4 million. The Notes bear interest of 3.50% per year on the principal amount payable semi-annually in arrears on January 15 and July 15 of each year. The Company incurred underwriter discount and issuance costs of approximately $6.9 million, which are being amortized over the effective life of the Notes which is five years, the period up to the first date that the holders of the Notes (the “Holders”) can require the Company to repurchase the Notes.
The Notes are convertible into 33.1991 shares of Affymetrix common stock per $1,000 principal amount of Notes which equates to 10,499,215 shares of common stock, or a conversion price equivalent of $30.12 per share of common stock. The conversion rate is subject to adjustment upon the occurrence of the following specified events:
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issuing shares of the Company’s common stock as a dividend or distribution of the Company’s common stock;
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effecting a stock split or stock combination;
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issuing to all or substantially all Holders of the Company’s common stock any rights or warrants under certain circumstances and with certain entitlements;
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distributing shares of the Company’s common stock, evidences of indebtedness or other assets or property, to all or substantially all Holders of the Company’s common stock, with certain exceptions;
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making cash distributions to all or substantially all Holders of the Company’s common stock; or
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should the Company or any of its subsidiaries purchase shares of its common stock pursuant to a tender offer at a premium to market.
Holders may convert their Notes into shares of Affymetrix stock at any time at their option at the initial conversion rate, subject to adjustment, prior to the close of business on the business day prior to the maturity date.
On January 15, 2013, 2018 and 2028, the security holders have the option to require the Company to repurchase the Notes at a price equal to 100% of the principal amount of the Notes plus accrued interest. Additionally, on or after January 15, 2013, Affymetrix has the option of redeeming for cash at 100% of the principal amount all or part of the then outstanding Notes plus accrued interest.
The Notes are unsecured and rank equally with the Company’s other existing and future senior indebtedness. The Notes are structurally subordinated to any current or future indebtedness and other liabilities of the Company’s subsidiaries.
There were no purchases of Notes in 2011. In 2010 and 2009, the Company repurchased a total of $220.8 million of aggregate principal amount of the Notes for total cash consideration of $194.2 million, including accrued interest of $2.4 million. The recognized gain on debt repurchase of $23.7 million is net of transaction costs of $1.3 million and accelerated amortization of deferred financing costs of $2.4 million.
As of December 31, 2011, the balance remaining on the Notes was $95.5 million.
On February 3, 2012, the Company commenced a cash tender offer to repurchase the entire aggregate outstanding principal amount of its Notes at par plus accrued and unpaid interest from the last interest payment date applicable to the Notes to, but not including, the settlement date for the tender offer. Refer to Note 20, “Subsequent Events” for further information.
NOTE 14-STOCKHOLDERS’ EQUITY AND SHARE-BASED COMPENSATION EXPENSE
Convertible Preferred Stock
The Company’s Board of Directors has authorized 5.0 million shares of convertible redeemable preferred stock, $0.01 par value. At December 31, 2011 and 2010, there were no such shares issued or outstanding.
Share-based Compensation Plans
The Company has a share-based compensation program that provides the Board of Directors broad discretion in creating equity incentives for employees, officers, directors and consultants. This program includes incentive and non-qualified stock options and RSAs, granted under various stock plans. Stock options are issued at a price of at least 100% of the fair value of the Company’s common stock on the date of grant (110% in certain circumstances), as determined by the Board of Directors. Options generally expire 7 to 10 years from the grant date and may be granted with different vesting terms from time to time as determined by the Board of Directors, usually over a period of four years on each anniversary of the grant date. In general, RSAs vest on an annual basis over a period of four years on each anniversary of the grant date, are subject to the employees’ continued employment and are paid upon vesting in shares of the Company’s common stock on a one-for-one basis. As of December 31, 2011, the Company had approximately 4.9 million shares of common stock reserved for future issuance under its share-based compensation plans. New shares are issued as a result of stock option exercises, restricted stock units vesting and restricted stock award grants. A more detailed description of the Company’s current share-based compensation plans follows below.
In 1998, the Board of Directors adopted the Affymetrix 1998 Stock Incentive Plan (the “1998 Stock Plan”) under which nonqualified stock options and restricted stock may be granted to employees and outside consultants, except that members of the Board of Directors and individuals who are considered officers of the Company under the rules of the National Association of Securities Dealers shall not be eligible. Options granted under the 1998 Stock Plan expire no later than ten years from the date of grant. A total of 3.6 million shares of common stock are authorized for issuance under the 1998 Stock Plan.
In 2000, the Board of Directors adopted the Amended and Restated 2000 Equity Incentive Plan (the “2000 Stock Plan”), which was amended and restated in 2001, under which RSAs, stock options, performance-based shares and stock appreciation rights may be granted to employees, outside directors and consultants. In the second quarter of 2010, 4.5 million shares of common stock were added under the 2000 Stock Plan bringing the total shares of common stock authorized for issuance under the 2000 Stock Plan to 16.2 million.
The following table sets forth the total share-based compensation expense resulting from stock options and RSAs included in the Company’s Consolidated Statements of Operations (in thousands):
As of December 31, 2011, $16.0 million of total unrecognized share-based compensation expense related to non-vested awards is expected to be recognized over the respective vesting terms of each award through 2015. The weighted-average term of the unrecognized share-based compensation expense is 2.7 years.
Stock Options
The fair value of options was estimated at the date of grant using the BSM option pricing model with the following weighted-average assumptions:
The risk free interest rate for periods within the contractual life of the Company’s stock options is based on the U.S. Treasury yield curve in effect at the time of grant. The expected term is derived from an analysis of the Company’s historical exercise trends over ten years. The expected volatility for the years ended December 31, 2011 and 2010 is based on a blend of historical and market-based implied volatility. Using the assumptions above, the weighted-average grant date fair value of options granted during the years ended December 31, 2011, 2010 and 2009 was $2.86, $2.66 and $3.03, respectively.
Activity under the Company’s stock plans for the year ended December 31, 2011 is as follows (in thousands, except per share amounts):
The following table summarizes information concerning currently outstanding and exercisable options at December 31, 2011:
The aggregate intrinsic value in the table above represents the total pretax intrinsic value (i.e., the difference between the Company’s closing stock price on the last trading day of its fourth quarter of 2011 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2011. The amount changes based on the fair market value of the Company’s common stock. For the years ended December 31, 2011, 2010 and 2009, total intrinsic value of options exercised was $0.4 million, $0.2 million and less than $0.1 million, respectively.
Reserved Shares
At December 31, 2011, the Company has shares reserved for future issuance as follows (in thousands):
Restricted Stock
The following table summarizes the Company’s RSAs activity for the year ended December 31, 2011 (in thousands, except per share amounts):
For the years ended December 31, 2011 and 2010, total fair value of RSAs vested was $14.6 million and $13.3 million, respectively.
Performance-Based Awards
In 2011, the Compensation Committee approved a grant of performance-based restricted stock units (“PRSUs”) under the Plan to an executive officer that is earned annually in four equal tranches (the “Performance Period”). The PRSUs entitle the executive to receive a certain number of shares of the Company’s common stock based on the Company’s satisfaction of certain financial and strategic performance goals as set and approved by the Board of Directors annually during the first quarter of the specific performance period. Based on the achievement of the performance conditions during the Performance Period, the final settlement of the PRSU award will vest twelve months following the end of the Performance Period. The PRSU award will be forfeited if the performance goals are not met or if the executive officer is no longer employed at the vest date.
The number of shares underlying the PRSUs that were granted to the executive officer during the year ended December 31, 2011 totaled 240,000 shares and had a grant date fair value of $6.71 per share. As of December 31, 2011, the Company expects that 60,000 shares of the PRSUs will vest and the fair value of such shares is being amortized on a straight-line basis over the remaining service period. The total compensation cost related to PRSUs granted but not yet recognized was approximately $1.5 million as of December 31, 2011.
Employee Stock Purchase Plan
In August 2011, the Company’s Board of Directors adopted the 2011 Employee Stock Purchase Plan (“ESPP”) that is subject to approval by the stockholders at the next annual meeting. The ESPP reserved a total of 7.0 million shares of the Company’s common stock for issuance under the plan and permits eligible employees to purchase common stock at a discount through payroll deductions.
The price at which stock is purchased under the ESPP is equal to 85% of the fair market value of the common stock on the first day of the offering period or the last day of the purchase period, whichever is lower. The offering periods are twelve months and include two six month purchase periods that result in a look-back for determining the purchase price of up to 12 months. Employees can invest up to 15% of their gross compensation through payroll deductions. In no event would an employee be permitted to purchase more than 750 shares of common stock during any six-month purchase period. The initial offering period commenced in November 2011. As of the year ended December 31, 2011, there were 245 participants in the plan and no shares were issued under the ESPP.
NOTE 15-INCOME TAXES
The following table presents the U.S. and foreign components of consolidated loss before income taxes and the provision (benefit) for income taxes (in thousands):
The difference between the provision (benefit) for income taxes and the amount computed by applying the federal statutory income tax rate (35%) to loss before taxes is explained as follows (in thousands):
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s assets are as follows (in thousands):
As of December 31, 2011, the Company had total U.S. net operating loss carryforwards of $288.6 million, comprised of $162.0 million for U.S. federal purposes, which expire in the years 2021 through 2031 if not utilized, and $126.6 million for state purposes, the majority of which expire in the years 2012 through 2031 if not utilized. Additionally, the Company has federal research and development tax credit carryforwards of approximately $23.6 million, which expire in the years 2017 through 2031 if not utilized. The Company also has state research and development tax credit carryforwards and other various tax credit carryforwards of approximately $39.1 million. Substantially all of the state tax credits can be carried forward indefinitely. Utilization of net operating loss and tax credit carryforwards may be subject to substantial annual limitations due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such an annual limitation may result in the expiration of the net operating loss before utilization.
As of December 31, 2011, the Company has recorded a full valuation allowance against all U.S. and certain foreign deferred tax assets. The valuation allowance increased by $11.5 million and $3.2 million for the years ended December 31, 2011 and 2010, respectively. The increase during the year ended December 31, 2011 is attributable to U.S. losses and a release in reserves related to uncertain tax positions. Approximately $28.7 million of the valuation allowance as of December 31, 2011 is attributable to the income tax benefits of share-based compensation, the benefit of which will be credited to stockholders’ equity when, and if, realized.
Not included in the deferred tax assets as of December 31, 2011 is approximately $4.7 million of tax benefits related to share-based compensation. When realized, the tax benefit of these assets will be accounted for as a credit to stockholders’ equity, rather than a reduction of the income tax provision.
Of the total tax benefits realized from the share-based compensation the amounts recorded to stockholders’ equity were approximately less than $0.1 million and $0.1 million for the years ended December 31, 2011 and 2010, respectively.
During the year ended December 31, 2011, due to potential future transactions that would require cash outflows, the Company changed its assertion such that foreign earnings are no longer intended to be permanently reinvested. As a result, the Company recorded a net deferred tax liability of approximately $0.8 million related to foreign undistributed earnings, which was offset by a reduction in the Company’s valuation allowance against its deferred tax assets.
A portion of the Company’s operations in Singapore operate under various tax holidays and tax incentive programs, which expire in whole or in part at various dates through 2017. There was a minimal net impact of these tax holidays and tax incentive programs for the year ended December 31, 2011.
The following table presents the Company’s total amount of gross unrecognized tax benefits (in thousands):
If recognized, the amount of unrecognized tax benefits that would impact income tax expense is $2.7 million. As of December 31, 2011, the Company does not anticipate any material changes to the amount of unrecognized tax benefits during the next 12 months. The Company classifies interest and penalties related to tax positions as components of income tax expense. For the year ended December 31, 2011, the amount of accrued interest and penalties related to tax uncertainties was approximately $0.2 million for a total cumulative amount included in non-current income taxes payable of $0.7 million as of December 31, 2011.
The Company files U.S. federal, state, and foreign income tax returns in jurisdictions with varying statutes of limitations. The Company’s major tax jurisdictions are the U.S., California, Singapore, and the U.K.
During November 2011, the U.S. Internal Revenue Service completed its field examination of the Company’s federal income tax returns for the 2004, 2005, 2006, 2008 and 2009 tax years and issued a Revenue Agent’s Report, or RAR, with no proposed adjustments. The Company considers all tax positions taken in the 2004, 2005, 2006, 2008 and 2009 tax years to be effectively settled, because the U.S. Internal Revenue Service has completed its examination procedures and the Company believes that there is a remote possibility that the U.S. Internal Revenue Service will re-examine the settled positions. As a result, the Company has released $5.8 million of reserves related to uncertain tax positions for those periods and recorded a full valuation allowance against these deferred tax assets. However, the federal and California statute of limitations on assessment still remain open for the tax years 1992 through 2011. The Company’s major foreign jurisdictions remain open for examination in general for tax years 2006 through 2011.
NOTE 16-SEGMENT AND GEOGRAPHIC INFORMATION
The Company has determined that it operates in one segment as it only reports operating results on an aggregate basis to the chief operating decision maker of the Company.
The Company reported total revenue by region is as follows (in thousands):
There were no customers representing 10% or more of total revenue in 2011, 2010 and 2009.
The Company’s long-lived assets other than purchased intangible assets, which the Company does not allocate to specific geographic locations as it is impracticable to do so, are composed principally of net property and equipment.
Net property and equipment, classified by major geographic areas in which the Company operates was as follows (in thousands):
(1) Included in the balance as of December 31, 2011 was the Company’s West Sacramento facility that was reclassified to held-for-sale on the Company’s Consolidated Balance Sheets. The facility had an estimated fair value of $9.0 million at December 31, 2011.
NOTE 17-DEFINED-CONTRIBUTION SAVINGS PLANS
The Company maintains a defined-contribution savings plan which is qualified 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. The Company’s expense associated with matching employee contributions for the years ended December 31, 2011, 2010 and 2009 totaled $3.0 million, $2.8 million and $3.2 million, respectively. Company contributions to employees vest ratably over four years.
NOTE 18-UNAUDITED QUARTERLY FINANCIAL INFORMATION
In 2010, the Company recognized total gains of $6.3 million as part of the repurchases of its Notes.
NOTE 19-RELATED PARTY TRANSACTIONS
In December 2011, the Company entered into an agreement under which it assigned one patent application and related know-how to Cellular Research, Inc. (“Cellular Research”), a company founded by the Company’s Chairman, Dr. Stephen P.A. Fodor. Dr. Fodor also owns a majority of the shares of Cellular Research. Pursuant to the agreement, Cellular Research shall pay single digit royalties to Affymetrix on sales of products covered by the assigned technology, and starting in December 2015, an annual minimum fee of $100,000. Affymetrix shall also have a right of first refusal to collaborate with Cellular Research for the development of certain new products and to supply arrays to Cellular Research under certain terms and conditions. As of December 31, 2011, no royalties were earned pertaining to this agreement.
NOTE 20-SUBSEQUENT EVENTS
On January 21, 2012, the Company entered into an agreement to settle the purported class action litigation brought against the Company by holders of the Company’s 3.50% Senior Convertible Notes Due 2038 (the “Notes”) in the Superior Court of California, County of Santa Clara. As part of the settlement, on February 3, 2012, the Company commenced a cash tender offer (the “Offer”) for the entire remaining aggregate outstanding principal amount of $95.5 million of its Notes. The Company offered to purchase the Notes at par plus accrued and unpaid interest up to, but not including, the date of settlement.
The Company will fund the purchases of the Notes tendered in the Offer with cash on hand.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15, Affymetrix’ management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation as of the end of the period covered by this report, of the effectiveness of Affymetrix’ disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) and 15d-15(e). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that Affymetrix’ disclosure controls and procedures were effective as of the end of the period covered by this report.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision of our Chief Executive Officer and Chief Financial Officer and with the participation of our management, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2011 based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2011.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during our last fiscal quarter that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.
The effectiveness of our internal control over financial reporting as of December 31, 2011, has been audited by Ernst & Young LLP, our independent registered public accounting firm, as stated in their report which is included as follows.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Affymetrix, Inc.
We have audited Affymetrix, Inc.’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). Affymetrix, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Affymetrix, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Affymetrix, Inc. as of December 31, 2011 and 2010, and the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for each of the three fiscal years in the period ended December 31, 2011 of Affymetrix, Inc. and our report dated February 28, 2012 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
San Jose, California
February 28, 2012
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information regarding our directors and executive officers is incorporated by reference to the sections of the Company’s proxy statement for the 2012 Annual Meeting of Stockholders (the “Proxy Statement”) entitled “Election of Directors” and “Management.”
The information concerning our corporate governance, including our audit committee, required by this Item is incorporated by reference to the sections of the Proxy Statement entitled “Governance of the Company” and “Report of the Audit Committee.”
The information concerning compliance with Section 16(a) of the Exchange Act required by this Item is incorporated by reference to the section of the Proxy Statement entitled “Section 16(a) Beneficial Ownership Reporting Compliance.”
CODE OF ETHICS
Affymetrix has adopted a code of business conduct and ethics for directors, officers (including Affymetrix’ Chief Executive Officer, Chief Financial Officer and Corporate Controller) and employees, known as the Code of Business Conduct and Ethics. The Code of Business Conduct and Ethics is available on Affymetrix’ website at www.affymetrix.com in the Corporate Governance section under the “Investors” link. Stockholders may request a free copy of the Code of Business Conduct and Ethics by sending an email request to investor@affymetrix.com.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the sections of the Proxy Statement entitled “Executive Compensation,” “Compensation Discussion and Analysis,” “Compensation Committee Report,” “Certain Transactions” and “Compensation of Directors.”
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Incorporated by reference to the section of the Proxy Statement entitled “Stock Ownership of Principal Stockholders and Management.”
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Incorporated by reference to the sections of the Proxy Statement entitled “Certain Transactions” and “Governance of the Company.”
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information about principal accountant fees and services as well as related pre-approval policies appears under “Fees Paid to Ernst & Young LLP” and “Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Registered Public Accounting Firm” in the Proxy Statement. Those portions of the Proxy Statement are incorporated by reference into this report.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements. The financial statements as set forth under Item 8 of this report on Form 10-K are incorporated herein by reference.
(a)(2) Financial Statement Schedule-Schedule II-Valuation and Qualifying Accounts. All other schedules have been omitted as they are not required, not applicable or the information is otherwise included.
(a)(3) Exhibits:
EXHIBIT
NUMBER
DESCRIPTION OF DOCUMENT
2.1(1)
Agreement and Plan of Merger by and among Panomics, Inc., the Company, Panda Acquisition Corporation and the Equityholders’ Representative dated as of November 11, 2008.
2.2(2)
Agreement and Plan of Merger dated as of November 29, 2011 among the Company, eBioscience Holding Company, Inc., Excalibur Acquisition Sub, Inc. and the Securityholders’ Representative.
3.1(3)
Restated Certificate of Incorporation.
3.2(4)
Amended and Restated Bylaws.
4.2(5)
Indenture dated as of November 16, 2007, between the Company and the Bank of New York Trust Company, N.A. as Trustee.
10.1(6)‡
1993 Stock Plan, as amended.
10.2(6)‡
1996 Nonemployee Directors Stock Option Plan.
10.3(7)‡
1998 Stock Incentive Plan.
10.4(8)‡
Amendment No. 1 to the 1996 Nonemployee Directors Stock Option Plan of the Company
10.5(9)‡
Amended and Restated 1996 Non-Employee Directors Stock Plan.
10.6(10)‡
Affymetrix, Inc. Amended and Restated 2000 Equity Incentive Plan, as adopted effective March 9, 2000 and amended through May 14, 2010.
10.7(11)‡
Form of Non-Qualified Stock Option Agreement under the Affymetrix, Inc. Amended and Restated 1996 Non-Employee Directors Stock Plan.
10.8(11)‡
Form of Stock Option Agreement under the Affymetrix, Inc. Amended and Restated 2000 Equity Incentive Plan.
10.9(1)‡
Form of Restricted Stock Agreement under the Affymetrix, Inc. Amended and Restated 2000 Equity Incentive Plan.
10.10(12)
First Amendment to Affymetrix, Inc. 1998 Stock Incentive Plan.
10.11(2)‡
Performance Based Restricted Stock Unit Grant Notice and Agreement between the Company and Frank Witney, Ph.D. dated July 21, 2011.
10.12(13)‡
2011 Employee Stock Purchase Plan.
10.13(14)
Lease between Sobrato Interests and the Company dated June 12, 1996 (3380 Central Expressway, Santa Clara, CA).
10.14(15)
Fifth Amendment to Lease between Sobrato Interests and the Company dated July 3, 2002 (3380 Central Expressway, Santa Clara, CA).
10.15(16)
Sixth Amendment to Lease between SI 34, LLC, as successor in interest to Sobrato Interests, and the Company dated July 11, 2011 (3380 Central Expressway, Santa Clara, CA)
10.16(14)
Lease between Sobrato Interests and the Company dated May 31, 1996 (3450 Central Expressway, Santa Clara, CA).
10.17(15)
First Amendment to Lease between Sobrato Interests and the Company dated July 3, 2002 (3450 Central Expressway, Santa Clara, CA).
10.18(16)
Second Amendment to Lease between SI 34, LLC, as successor in interest to Sobrato Interests, and the Company dated July 11, 2011 (3450 Central Expressway, Santa Clara, CA).
10.19(17)
Lease between Sobrato Interests and the Company dated July 3, 2002 (3420 Central Expressway, Santa Clara, CA).
10.20(17)
First Amendment to Lease between Sobrato Interests and the Company dated September 30, 2003 (3420 Central Expressway, Santa Clara, CA).
10.21(16)
Second Amendment to Lease between SI 34, LLC, as successor in interest to Sobrato Interests, and the Company dated July 11, 2011 (3420 Central Expressway, Santa Clara, CA).
10.22(18)
Lease between Keppel Logistics Pte Ltd. and Affymetrix Pte Ltd. dated as of January 1, 2006 (7 Gul Circle, Singapore 629363).
10.23(19)
Addendum to Lease Agreement between Keppel Logistics Pte Ltd. and Affymetrix Pte Ltd. dated June 1, 2010 (7 Gul Circle, Singapore 629363)
10.24(20)
Lease Agreement between SBP Limited Partnership and the Company dated August 10, 2008 (26309 Miles Road, Warrensville Heights, OH).
10.25(20)
First Amendment and Lease Expansion Agreement between SBP Limited Partnership and the Company dated May 20, 2009 (26309 Miles Road, Warrensville Heights, OH).
10.26(20)
Lease Agreement between OTR, acting as the duly authorized nominee of The State Teacher Retirement System of Ohio and Anatrace, Inc. dated February 14, 2001 (434 Dussel Drive, Maumee, OH).
10.27(20)
Assignment and Assumption of Lease between Anatrace, Inc. and USB Acquisition dated April 30, 2005 (434 Dussel Drive, Maumee, OH).
10.28(21)
Lease Agreement between the Company and Miles/Commerce Ltd. dated April 1, 2010 (26101 Miles Road, Warrensville Heights, OH).
10.29(21)
Lease Agreement between the Company and 26111 Miles Road Ltd. dated April 1, 2010 (26111 Miles Road, Warrensville Heights, OH).
10.30(22)‡
Offer Letter from the Company to John F. (Rick) Runkel dated October 6, 2008.
10.31(20)‡
Offer Letter from the Company to Andrew J. Last, Ph.D. dated November 2, 2009.
10.32(21)‡
Offer Letter from the Company to Timothy C. Barabe dated March 9, 2010.
10.33(23) ‡
Offer Letter from the Company to Frank Witney, Ph.D. dated May 26, 2011.
10.34(23)‡
Separation Agreement between the Company and Kevin M. King dated May 31, 2011.
10.35(7)‡
Form of Officer and Director Indemnification Agreement.
10.36(24)‡
Affymetrix, Inc. Change of Control Plan, as amended through May 14, 2010.
10.37(24)‡
Executive Severance Policy dated May 14, 2010.
10.38(25)
Settlement and Release Agreement dated January 9, 2008 between the Company and Illumina, Inc.
10.39(26)
Stipulation of Settlement regarding the Affymetrix Derivative Litigation in the United States District Court, Northern District of California.
10.40(27) Letter Agreement dated as of January 21, 2012 between the Company and Tang Capital Partners, LP.
List of Subsidiaries.
Consent of Independent Registered Public Accounting Firm.
31.1
Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
31.2
Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
EX-101.INS
XBRL Instance Document
EX-101.SCH
XBRL Taxonomy Schema Document
EX-101.CAL
XBRL Calculation Linkbase Document
EX-101.LAB
XBRL Label Linkbase Document
EX-101.PRE
XBRL Presentation Linkbase Document
(1)
Incorporated by reference to Registrant’s Annual Report on Form 10-K as filed on March 2, 2009 (File No. 000-28218).
(2)
Filed herewith.
(3)
Incorporated by reference to Registrant’s Current Report on Form 8-K as filed on June 13, 2000 (File No. 000-28218).
(4)
Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q as filed on August 7, 2009 (File No. 000-28218).
(5)
Incorporated by reference to Registrant’s Current Report on Form 8-K as filed on November 19, 2007 (File No. 000-28218).
(6)
Incorporated by reference to Registrant’s Registration Statement on Form S-1 (File No. 333-3648), as amended.
(7)
Incorporated by reference to Registrant’s Annual Report on Form 10-K as filed on March 31, 1999 (File No. 000-28218).
(8)
Incorporated by reference to Registrant’s Registration Statement on Form S-3 as filed on July 12, 1999 (File No. 333-82685), as amended.
(9)
Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q as filed on May 15, 2001 (File No. 000-28218).
(10)
Incorporated by reference to Registrant’s Registration Statement on Form S-8 as filed on May 17, 2010 (File No. 333-166894).
(11)
Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q as filed on November 9, 2004 (File No. 000-28218).
(12)
Incorporated by reference to Registrant’s Registration Statement on Form S-8 as filed on April 18, 2001 (File No. 333-59158).
(13)
Incorporated by reference to Registrant’s Registration Statement on Form S-8 as filed on September 1, 2011 (File No. 333-176638).
(14)
Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q as filed on August 14, 1996 (File No. 000-28218).
(15)
Incorporated by reference to Registrant’s Annual Report on Form 10-K as filed on March 16, 2005 (File No. 000-28218).
(16)
Incorporated by reference to Registrant’s Current Report on Form 8-K as filed on July 15, 2011 (File No. 000-28218).
(17)
Incorporated by reference to Registrant’s Annual Report on Form 10-K as filed on March 15, 2004 (File No. 000-28218).
(18)
Incorporated by reference to Registrant’s Annual Report on Form 10-K as filed on March 9, 2006 (File No. 000-28218).
(19)
Incorporated by reference to Registrant’s Annual Report on Form 10-K as filed on February 28, 2011 (File No. 000-28218).
(20)
Incorporated by reference to Registrant’s Annual Report on Form 10-K as filed on March 1, 2010 (File No. 000-28218).
(21)
Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q as filed on May 6, 2010 (File No. 000-28218).
(22)
Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q as filed on November 7, 2008 (File No. 000-28218).
(23)
Incorporated by reference to Registrant’s Current Report on Form 8-K/A as filed on August 4, 2011 (File No. 000-28218).
(24)
Incorporated by reference to Registrant’s Current Report on Form 8-K as filed on May 18, 2010 (File No. 000-28218).
(25)
Incorporated by reference to Registrant’s Annual Report on Form 10-K as filed on February 29, 2008 (File No. 000-28218).
(26)
Incorporated by reference to Registrant’s Current Report on Form 8-K as filed on May 20, 2009 (File No. 000-28218).
(27)
Incorporated by reference to Registrant’s Schedule TO as filed on February 3, 2012 (File No. 005-48829).
‡
Management contract, compensatory plan, contract or arrangement
AFFYMETRIX, INC.
Schedule II-Valuation and Qualifying Accounts
(in thousands)
SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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.
Each individual whose signature appears below constitutes and appoints John F. Runkel, Jr. and Timothy C. Barabe, and each of them singly, his or her true and lawful attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the U.S. Securities and Exchange Commission, hereby ratifies and confirms all that said attorneys-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue thereof.
Name
Title
Date
By:
/s/ Frank Witney
Director, President and Chief Executive Officer (Principal Executive Officer)
February 28, 2012
Frank Witney
By:
/s/ Timothy C. Barabe
Executive Vice President and Chief Financial Officer
February 28, 2012
Timothy C. Barabe
(Principal Financial and Accounting Officer)
By:
/s/ Stephen P.A. Fodor, Ph.D.
Founder and Chairman of the Board
February 28, 2012
Stephen P.A. Fodor, Ph.D.
By:
/s/ Nelson C. Chan
Director
February 28, 2012
Nelson C. Chan
By:
/s/ John D. Diekman, Ph.D.
Director
February 28, 2012
John D. Diekman, Ph.D.
By:
/s/ Gary S. Guthart, Ph.D.
Director
February 28, 2012
Gary S. Guthart, Ph.D.
By:
/s/ Jami Dover Nachtsheim
Director
February 28, 2012
Jami Dover Nachtsheim
By:
/s/ Robert H. Trice, Ph.D.
Director
February 28, 2012
Robert H. Trice, Ph.D.
By:
/s/ Robert P. Wayman
Director
February 28, 2012
Robert P. Wayman
INDEX TO EXHIBITS
EXHIBIT
NUMBER
DESCRIPTION OF DOCUMENT
2.1(1)
Agreement and Plan of Merger by and among Panomics, Inc., the Company, Panda Acquisition Corporation and the Equityholders’ Representative dated as of November 11, 2008.
2.2(2)
Agreement and Plan of Merger dated as of November 29, 2011 among the Company, eBioscience Holding Company, Inc., Excalibur Acquisition Sub, Inc. and the Securityholders’ Representative.
3.1(3)
Restated Certificate of Incorporation.
3.2(4)
Amended and Restated Bylaws.
4.2(5)
Indenture dated as of November 16, 2007, between the Company and the Bank of New York Trust Company, N.A. as Trustee.
10.1(6)‡
1993 Stock Plan, as amended.
10.2(6)‡
1996 Nonemployee Directors Stock Option Plan.
10.3(7)‡
1998 Stock Incentive Plan.
10.4(8)‡
Amendment No. 1 to the 1996 Nonemployee Directors Stock Option Plan of the Company
10.5(9)‡
Amended and Restated 1996 Non-Employee Directors Stock Plan.
10.6(10)‡
Affymetrix, Inc. Amended and Restated 2000 Equity Incentive Plan, as adopted effective March 9, 2000 and amended through May 14, 2010.
10.7(11)‡
Form of Non-Qualified Stock Option Agreement under the Affymetrix, Inc. Amended and Restated 1996 Non-Employee Directors Stock Plan.
10.8(11)‡
Form of Stock Option Agreement under the Affymetrix, Inc. Amended and Restated 2000 Equity Incentive Plan.
10.9(1)‡
Form of Restricted Stock Agreement under the Affymetrix, Inc. Amended and Restated 2000 Equity Incentive Plan.
10.10(12)
First Amendment to Affymetrix, Inc. 1998 Stock Incentive Plan.
10.11(2)‡
Performance Based Restricted Stock Unit Grant Notice and Agreement between the Company and Frank Witney, Ph.D. dated July 21, 2011.
10.12(13)‡
2011 Employee Stock Purchase Plan.
10.13(14)
Lease between Sobrato Interests and the Company dated June 12, 1996 (3380 Central Expressway, Santa Clara, CA).
10.14(15)
Fifth Amendment to Lease between Sobrato Interests and the Company dated July 3, 2002 (3380 Central Expressway, Santa Clara, CA).
10.15(16)
Sixth Amendment to Lease between SI 34, LLC, as successor in interest to Sobrato Interests, and the Company dated July 11, 2011 (3380 Central Expressway, Santa Clara, CA)
10.16(14)
Lease between Sobrato Interests and the Company dated May 31, 1996 (3450 Central Expressway, Santa Clara, CA).
10.17(15)
First Amendment to Lease between Sobrato Interests and the Company dated July 3, 2002 (3450 Central Expressway, Santa Clara, CA).
10.18(16)
Second Amendment to Lease between SI 34, LLC, as successor in interest to Sobrato Interests, and the Company dated July 11, 2011 (3450 Central Expressway, Santa Clara, CA).
10.19(17)
Lease between Sobrato Interests and the Company dated July 3, 2002 (3420 Central Expressway, Santa Clara, CA).
10.20(17)
First Amendment to Lease between Sobrato Interests and the Company dated September 30, 2003 (3420 Central Expressway, Santa Clara, CA).
10.21(16)
Second Amendment to Lease between SI 34, LLC, as successor in interest to Sobrato Interests, and the Company dated July 11, 2011 (3420 Central Expressway, Santa Clara, CA).
10.22(18)
Lease between Keppel Logistics Pte Ltd. and Affymetrix Pte Ltd. dated as of January 1, 2006 (7 Gul Circle, Singapore 629363).
10.23(19)
Addendum to Lease Agreement between Keppel Logistics Pte Ltd. and Affymetrix Pte Ltd. dated June 1, 2010 (7 Gul Circle, Singapore 629363)
10.24(20)
Lease Agreement between SBP Limited Partnership and the Company dated August 10, 2008 (26309 Miles Road, Warrensville Heights, OH).
10.25(20)
First Amendment and Lease Expansion Agreement between SBP Limited Partnership and the Company dated May 20, 2009 (26309 Miles Road, Warrensville Heights, OH).
10.26(20)
Lease Agreement between OTR, acting as the duly authorized nominee of The State Teacher Retirement System of Ohio and Anatrace, Inc. dated February 14, 2001 (434 Dussel Drive, Maumee, OH).
10.27(20)
Assignment and Assumption of Lease between Anatrace, Inc. and USB Acquisition dated April 30, 2005 (434 Dussel Drive, Maumee, OH).
10.28(21)
Lease Agreement between the Company and Miles/Commerce Ltd. dated April 1, 2010 (26101 Miles Road, Warrensville Heights, OH).
10.29(21)
Lease Agreement between the Company and 26111 Miles Road Ltd. dated April 1, 2010 (26111 Miles Road, Warrensville Heights, OH).
10.30(22)‡
Offer Letter from the Company to John F. (Rick) Runkel dated October 6, 2008.
10.31(20)‡
Offer Letter from the Company to Andrew J. Last, Ph.D. dated November 2, 2009.
10.32(21)‡
Offer Letter from the Company to Timothy C. Barabe dated March 9, 2010.
10.33(23) ‡
Offer Letter from the Company to Frank Witney, Ph.D. dated May 26, 2011.
10.34(23)‡
Separation Agreement between the Company and Kevin M. King dated May 31, 2011.
10.35(7)‡
Form of Officer and Director Indemnification Agreement.
10.36(24)‡
Affymetrix, Inc. Change of Control Plan, as amended through May 14, 2010.
10.37(24)‡
Executive Severance Policy dated May 14, 2010
10.38(25)
Settlement and Release Agreement dated January 9, 2008 between the Company and Illumina, Inc.
10.39(26)
Stipulation of Settlement regarding the Affymetrix Derivative Litigation in the United States District Court, Northern District of California.
10.40(27) Letter Agreement dated as of January 21, 2012 between the Company and Tang Capital Partners, LP.
List of Subsidiaries.
Consent of Independent Registered Public Accounting Firm.
31.1
Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
31.2
Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
EX-101.INS
XBRL Instance Document
EX-101.SCH
XBRL Taxonomy Schema Document
EX-101.CAL
XBRL Calculation Linkbase Document
EX-101.LAB
XBRL Label Linkbase Document
EX-101.PRE
XBRL Presentation Linkbase Document
(1)
Incorporated by reference to Registrant’s Annual Report on Form 10-K as filed on March 2, 2009 (File No. 000-28218).
(2)
Filed herewith.
(3)
Incorporated by reference to Registrant’s Current Report on Form 8-K as filed on June 13, 2000 (File No. 000-28218).
(4)
Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q as filed on August 7, 2009 (File No. 000-28218).
(5)
Incorporated by reference to Registrant’s Current Report on Form 8-K as filed on November 19, 2007 (File No. 000-28218).
(6)
Incorporated by reference to Registrant’s Registration Statement on Form S-1 (File No. 333-3648), as amended.
(7)
Incorporated by reference to Registrant’s Annual Report on Form 10-K as filed on March 31, 1999 (File No. 000-28218).
(8)
Incorporated by reference to Registrant’s Registration Statement on Form S-3 as filed on July 12, 1999 (File No. 333-82685), as amended.
(9)
Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q as filed on May 15, 2001 (File No. 000-28218).
(10)
Incorporated by reference to Registrant’s Registration Statement on Form S-8 as filed on May 17, 2010 (File No. 333-166894).
(11)
Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q as filed on November 9, 2004 (File No. 000-28218).
(12)
Incorporated by reference to Registrant’s Registration Statement on Form S-8 as filed on April 18, 2001 (File No. 333-59158).
(13)
Incorporated by reference to Registrant’s Registration Statement on Form S-8 as filed on September 1, 2011 (File No. 333-176638).
(14)
Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q as filed on August 14, 1996 (File No. 000-28218).
(15)
Incorporated by reference to Registrant’s Annual Report on Form 10-K as filed on March 16, 2005 (File No. 000-28218).
(16)
Incorporated by reference to Registrant’s Current Report on Form 8-K as filed on July 15, 2011 (File No. 000-28218).
(17)
Incorporated by reference to Registrant’s Annual Report on Form 10-K as filed on March 15, 2004 (File No. 000-28218).
(18)
Incorporated by reference to Registrant’s Annual Report on Form 10-K as filed on March 9, 2006 (File No. 000-28218).
(19)
Incorporated by reference to Registrant’s Annual Report on Form 10-K as filed on February 28, 2011 (File No. 000-28218).
(20)
Incorporated by reference to Registrant’s Annual Report on Form 10-K as filed on March 1, 2010 (File No. 000-28218).
(21)
Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q as filed on May 6, 2010 (File No. 000-28218).
(22)
Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q as filed on November 7, 2008 (File No. 000-28218).
(23)
Incorporated by reference to Registrant’s Current Report on Form 8-K/A as filed on August 4, 2011 (File No. 000-28218).
(24)
Incorporated by reference to Registrant’s Current Report on Form 8-K as filed on May 18, 2010 (File No. 000-28218).
(25)
Incorporated by reference to Registrant’s Annual Report on Form 10-K as filed on February 29, 2008 (File No. 000-28218).
(26)
Incorporated by reference to Registrant’s Current Report on Form 8-K as filed on May 20, 2009 (File No. 000-28218).
(27)
Incorporated by reference to Registrant’s Schedule TO as filed on February 3, 2012 (File No. 005-48829).
‡
Management contract, compensatory plan, contract or arrangement