Back to GetFilings.com

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

COMMISSION FILE NO. 0-28218

AFFYMETRIX, INC.
(Exact name of Registrant as specified in its charter)

Registrant's telephone number, including area code: (408) 731-5000

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ý    No o

COMMON SHARES OUTSTANDING ON JULY 31, 2003: 58,942,650

AFFYMETRIX, INC.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AFFYMETRIX, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)

Note

1:   The condensed consolidated balance sheet at December 31, 2002 has been derived from the audited consolidated financial statements at that date included in the Company's Form 10-K for the fiscal year ended December 31, 2002.

See accompanying notes.

2

AFFYMETRIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)

See accompanying notes.

3

AFFYMETRIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

See accompanying notes.

4

AFFYMETRIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(UNAUDITED)

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES

Basis of Presentation

        The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The condensed consolidated financial statements include the accounts of Affymetrix, Inc. ("Affymetrix" or the "Company") and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. In the opinion of management, all adjustments (consisting of normal recurring entries) considered necessary for a fair presentation have been included.

        Results for any interim period are not necessarily indicative of results for any future interim period or for the entire year. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002.

Reclassifications

        Certain amounts in 2002 have been reclassified to conform to the 2003 presentation.

Revenue Recognition

Product Sales

        Product sales and revenues from Perlegen Sciences include sales of GeneChip® probe arrays and related instrumentation. Probe array and instrumentation revenues are recognized when earned, which is generally upon shipment and transfer of title to the customer and fulfillment of any significant post-delivery obligations. Reserves are provided for anticipated warranty expenses at the time the associated revenue is recognized.

Product Related Revenue

        Product related revenue includes subscription fees earned under EasyAccess™ agreements and license fees, milestones and royalties earned from collaborative product development and supply agreements, service revenue, revenue from custom probe array design fees and software revenue.

        Revenue from subscription fees is recorded ratably over the term of the related EasyAccess™ agreements.

        The Company has entered 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, product supply and distribution arrangements and royalties based on the sale of final product by the partner. In these arrangements, up-front nonrefundable payments are generally recognized over the research and product development phase, milestones are recognized when earned, revenue from the sale of product is recognized as a component of product sales when the product is shipped to the partner and royalties are recognized when earned, generally when the partner sells the final product to end customers. Any payments received which are not yet earned are included in deferred revenue.

5

        Revenue related to extended warranty arrangements is deferred and recognized over the applicable periods. Revenue from custom probe array design fees associated with our GeneChip® CustomExpress™ and CustomSeq™ products are recognized when the associated products are shipped. In 2002, custom probe array design fees were included in research revenue based on the fact that the Company had not fully commercialized this product offering.

Royalties and Other Revenue

        Royalties and other revenue include royalties earned from third party license agreements and research revenue which mainly consists of amounts earned under government grants. Additionally, other revenue includes fees earned through the license of the Company's intellectual property. In 2002, research revenue also included custom probe array design fees.

        Royalty revenues include amounts earned from the sale of products by third parties which have been licensed under the Company's intellectual property portfolio. Royalty revenues are recognized under the terms of the related agreements generally upon manufacture or shipment of a product by a licensee.

        Research revenue is mainly comprised of amounts earned under government grants. Research revenue is recorded in the period in which the associated costs are incurred. The costs associated with these grants are reported as research and development expense.

        License revenues are generally recognized upon execution of the agreement unless the Company has continuing performance obligations, in which case the license revenue is recognized ratably over the period of expected performance.

Derivative Instruments

        During the normal course of business, the Company is exposed to foreign currency exchange risk arising from transactions that are denominated in currencies other than the United States dollar. To manage the risks associated with foreign currency exchange, the Company began utilizing derivative financial instruments in the first quarter of 2003. Derivatives are financial instruments that derive their value from one or more underlying financial instruments. As a matter of policy, the Company may only enter into derivative instruments that are either foreign currency forward contracts or swaps. The Company's derivative instruments are entered into for periods consistent with the related underlying exposures and do not constitute positions that are independent of those exposures. In addition, the Company does not enter into derivative contracts for trading or speculative purposes, and is not party to any leveraged derivative instrument. The notional amounts of derivatives do not represent actual amounts exchanged by the parties to the instrument, and, thus, are not a measure of exposure to the Company through its use of derivatives. Additionally, the Company enters into derivative agreements only with highly rated counterparties and does not expect to incur any losses resulting from non-performance by other parties.

Basic and Diluted Net Income (Loss) Per Share

        Basic net income (loss) per share is calculated using the weighted average number of shares of common stock outstanding during the period less the weighted-average number of shares of common stock subject to the Company's right of repurchase. Diluted net income (loss) per share gives effect to dilutive stock options and warrants (calculated based on the treasury stock method) and dilutive convertible debt (calculated on an as-if-converted method). The calculation of diluted net loss per share excludes shares of potential common stock if their effect is anti-dilutive.

6

        The following table sets forth the computation of the weighted-average shares used in the basic and diluted net income (loss) per share calculations (in thousands):

        The securities excluded from the weighted average shares outstanding, on an actual outstanding basis, were as follows (in thousands):

Stock-Based Compensation

        At June 30, 2003, the Company has six stock-based employee and non-employee director compensation plans, which are more fully described in the Company's 2002 Annual Report on Form 10-K. The Company has elected to continue to follow the recognition and measurement principles of Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees", and related interpretations for these plans. During the three month periods ended June 30, 2003 and June 30, 2002 and the six month period ended June 30, 2003, no employee stock-based compensation cost is reflected in net income (loss), as all options granted to employees under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant in accordance with the Statement of Financial Accounting Standards No. 148 ("SFAS 148") "Accounting For Stock-Based Compensation—Transition and Disclosure". During the six month period ended June 30, 2002, employee-based stock compensation included in net loss—as reported, related to the modification of certain previously granted awards.

        The following table illustrates the effect on net income (loss) and net income (loss) per share if the Company had applied the fair value recognition provisions of Financial Accounting Standards

7

Board Statement No. 123 ("SFAS 123") "Accounting For Stock Based Compensation", as amended by SFAS 148, to stock-based employee compensation (in thousands, except per share amounts):

Recent Accounting Pronouncements

        In November 2002, the Financial Accounting Standards Board ("FASB") issued the FASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," which clarifies the requirements for a guarantor's accounting and disclosures of certain guarantees issued and outstanding. This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor's fiscal year-end. The disclosure requirements in this Interpretation were effective beginning in January 2003. The adoption of FIN 45 did not have a significant impact on the Company's results of operations or financial condition (See Note 12).

        In November 2002, The Emerging Issues Task Force reached a consensus on Issue No. 00-21 ("EITF 00-21"), "Revenue Arrangements with Multiple Deliverables." EITF 00-21 provides guidance on accounting for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF 00-21 will apply to revenue arrangements entered into by the Company after June 15, 2003. The Company has assessed the effect of EITF 00-21 and does not expect the adoption of EITF 00-21 to have a material effect on its results of operations or financial condition.

        In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51." FIN 46 requires an investor with a majority of the variable interests in a variable interest entity (VIE) to consolidate the entity and also requires majority and significant variable interest investors to provide certain disclosures. A VIE is an entity in which the equity investors do not have a controlling interest, or the equity investment at risk is insufficient to finance the entity's activities without receiving additional subordinated financial support from the other parties. For arrangements entered into with VIEs created prior to January 31, 2003, the provisions of FIN 46 are required to be adopted at the beginning of the first interim or annual period beginning after June 15, 2003. The provisions of FIN 46 are effective immediately for all arrangements entered into with new VIEs created after January 31, 2003. The Company has not invested in any new VIEs created after January 31, 2003 and does not expect that the adoption of FIN 46 will have a material impact on its results of operations or financial condition.

8

        In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149 ("SFAS 149"), "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS 149 amends and clarifies the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 149 is generally effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The Company does not expect the adoption of SFAS 149 to have a material effect on its results of operations or financial condition.

        In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150 ("SFAS 150"), "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS 150 requires that certain financial instruments, which under previous guidance were accounted for as equity, must now be accounted for as liabilities. The financial instruments affected include mandatorily redeemable stock, certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares of stock. SFAS 150 is effective for all financial instruments entered into or modified after May 31, 2003 and must be applied to any existing financial instruments effective July 1, 2003. The Company does not expect the adoption of SFAS 150 to have a material effect on its results of operations or financial condition.

NOTE 2—PRODUCT SALES AND PRODUCT RELATED REVENUE

        The components of product sales are as follows (in thousands):

        The components of product related revenue are as follows (in thousands):