NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007
NOTE 1NATURE OF OPERATIONS
Affymetrix, Inc. ("Affymetrix" or the "Company") is engaged in the development, manufacture, sale and service of systems for genetic analysis for use in
the life sciences and in clinical diagnostics. 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® platform includes: disposable DNA probe arrays (chips) consisting of gene 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 information obtained from
the probe arrays. Related microarray technology also offered by Affymetrix includes instrumentation, software and licenses for fabricating, scanning, collecting and analyzing results from low density
microarrays. 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.
NOTE 2SUMMARY 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. The
Company has accounted for its ownership interest in Perlegen Sciences, Inc. ("Perlegen") using the equity method since March 30, 2001 (see Note 11).
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and
assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results could differ 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 in interest income and other, net and were
comprised of net gains of $0.3 million, $3.0 million and $0.5 million for the years ended December 31, 2007, 2006, and 2005, respectively.
Beginning
April 1, 2006, Affymetrix, UK Ltd, a wholly-owned subsidiary incorporated in the United Kingdom, and Affymetrix Pte Ltd, a wholly-owned subsidiary
incorporated in Singapore, changed their functional currencies from their local currencies to the U.S. dollar. The change in the functional currency of these subsidiaries is in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 52,
Foreign Currency Translation
, ("SFAS 52") and reflects the changed
61
AFFYMETRIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
economic
facts and circumstances pertaining to these subsidiaries. Under the requirements of SFAS 52, the Company assessed the various economic factors relating to Affymetrix, UK Ltd and
Affymetrix Pte Ltd and concluded that due to changes in facts, circumstances, scope of operations and business practices, the U.S. dollar is now the currency of the primary economic environment
in which these subsidiaries operate. Consequently, these subsidiaries will no longer generate translation adjustments which would impact the balance of accumulated other comprehensive income.
Translation adjustments from prior periods will continue to remain in accumulated other comprehensive income.
CASH EQUIVALENTS, AVAILABLE-FOR-SALE SECURITIES AND INVESTMENTS
The Company's investments consist of U.S. government notes and bonds; corporate notes, bonds and asset-backed securities; mortgaged-backed securities, municipal
notes and bonds; and publicly traded equity securities. The Company reports all debt securities with maturities at the date of purchase of three months or less that are readily convertible into cash
and have insignificant interest rate risk as cash equivalents. Cash equivalents and available-for-sale securities consist of marketable equity and debt securities. Management
determines the appropriate classification of debt securities at the time of purchase. As of December 31, 2007 and 2006, the Company's investments in debt securities are classified as
available-for-sale and are carried at fair value with unrealized gains and losses reported in accumulated other comprehensive income (loss) in stockholders' equity. The cost of
debt securities is adjusted for 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 an effective maturity greater than twelve months as of the balance sheet date in non-current assets. The Company monitors its
investment portfolio for impairment on a periodic basis. In the event that the carrying value of an investment exceeds its fair value and the decline in value is determined to be
other-than-temporary, an impairment charge is recorded and a new cost basis for the investment is established. Fair values for investments in public companies are determined
using quoted market prices.
The Company also has investments in non-marketable securities issued by privately held companies. These investments are included in other assets in
the Consolidated Balance Sheets and are primarily carried at cost. The Company periodically monitors the liquidity and financing activities of the respective issuers to determine if any impairment
exists and accordingly writes down to the extent necessary, the cost basis of our 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.
62
AFFYMETRIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
DERIVATIVE INSTRUMENTS
The Company has international operations and during the normal course of business is exposed to foreign currency exchange risks as a result of transactions that
are denominated in currencies other than the United States dollar. 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. In addition, the Company does not enter into foreign currency forward contracts for trading or speculative purposes, is not party to any leveraged derivative
instrument, and may only enter into derivative agreements with highly rated counterparties.
The
foreign currency forward contracts used by the Company are generally short-term in nature, maturing within one year, and are accounted for as cash flow hedges. The effect
of exchange rate changes on foreign currency forward contracts is expected to offset the effect of exchange rate changes on the underlying hedged items. For these contracts, unrealized gains or losses
from the effective portion of the hedge is reported as a component of other comprehensive income (loss) in stockholders' equity and is reclassified using the specific identification method into
earnings in the same period or periods in which the hedged transaction affects earnings, and within the same consolidated statement of operations line item. The gain or loss from the ineffective
portion of the hedge in excess of the cumulative change in the present value of future cash flows of the hedged item, if any, is recognized in interest income and other, net during the period of
change.
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, company-owned buildings are depreciated over 25 years and
leasehold improvements are depreciated over lease terms generally ranging from 3 to 15 years. Maintenance and repair costs are expensed as incurred.
63
AFFYMETRIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
GOODWILL AND ACQUIRED TECHNOLOGY RIGHTS
Goodwill represents the difference between the purchase price and the estimated fair value of the net assets acquired arising from business combinations. In
accordance with SFAS No. 142,
Goodwill and Other Intangible Assets
("SFAS 142"), goodwill is subject to impairment tests annually, or
earlier if indicators of potential impairment exist, using a fair-value-based approach. As of December 31, 2007 and 2006, goodwill relates to the acquisition of Neomorphic in
October 2000 and the acquisition of ParAllele in October 2005. There is no impairment of goodwill for any period presented.
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. Amortization is computed over the estimated useful life of the underlying patents, which has historically ranged from one to thirteen years. SFAS 142 requires purchased intangible
assets other than goodwill to be amortized over their useful lives unless these lives are determined to be indefinite.
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.
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 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, our deferred tax assets and liabilities, and any valuation allowance to
be recorded against our net deferred tax asset. 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 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, changes in overall levels of characterization and geographical mix of pretax earnings (losses) and
ultimate outcomes of income tax audits.
64
AFFYMETRIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 in accordance with SFAS 5,
Accounting for Contingencies
. Any reserves recorded may change in the future due to new
developments in each matter.
REVENUE RECOGNITION
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, revenue is deferred until all the acceptance criteria have been met.
The
Company derives the majority of its revenue from product sales of GeneChip® probe arrays, reagents, and related instrumentation that may be sold individually or combined
with any of the product or product related revenue items listed below. When a sale combines multiple elements, the Company accounts for multiple element arrangements under Emerging Issues Task Force
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. In
accordance with EITF 00-21, 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. In
the absence of fair value of a delivered element, the Company allocates revenue first to the fair value of the undelivered elements and the residual revenue to the delivered elements. The Company
recognizes revenue for delivered elements when the delivered elements have standalone value and the Company has objective and reliable evidence of fair value for each undelivered element. If the fair
value of any undelivered element included in a multiple element arrangement cannot be objectively determined, revenue is deferred until all elements are delivered and services have been performed, or
until fair value can objectively be determined for any remaining undelivered elements.
Product sales, as well as revenues from Perlegen Sciences, include sales of GeneChip® probe arrays, reagents and related instrumentation. Probe array,
reagent 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. Accruals are provided for anticipated warranty expenses at the time the associated revenue is recognized.
65
AFFYMETRIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Product related revenue includes subscription fees earned under GeneChip® array access programs; license fees; milestones and royalties earned from
collaborative product development and supply agreements; equipment service revenue; product related scientific services revenue; and revenue from custom probe array design fees.
Revenue
from subscription fees earned under GeneChip® array access programs is recorded ratably over the related supply term.
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.
Revenue
related to extended warranty arrangements is deferred and recognized ratably over the applicable periods. 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.
Revenue
from scientific and DNA analysis services are recognized upon shipment of the required data to the customer.
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.
Royalty
revenues are earned from the sale of products by third parties who have been licensed under the Company's intellectual property portfolio. Revenue from minimum royalties is
amortized over the term of the creditable royalty period. Any royalties received in excess of minimum royalty payments are recognized under the terms of the related agreement, generally upon
notification of manufacture or shipment of a product by a licensee.
Research
revenues result primarily from research grants received from U.S. Government entities or from subcontracts with other life science research-based companies which receive their
research grant funding from the U.S. Government. Revenues from research contracts are generated from the efforts of the Company's technical staff and include the costs for material and subcontract
efforts. The Company's research grant contracts generally provide for the payment of negotiated fixed hourly rates for labor hours incurred plus reimbursement of other allowable costs. Research
revenue is recorded in the period in which the associated costs are incurred, up to the limit of the prior approval funding
66
AFFYMETRIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
amounts
contained in each agreement. 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.
The Company recognizes revenue 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
SFAS No. 86,
Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed
,
requires the capitalization of certain software development costs subsequent to the establishment of technological feasibility. The Company's software is deemed to have achieved technologically
feasibility at the point a working model of the software product is developed. The Company has capitalized approximately $4.5 million and $2.6 million costs incurred subsequent to the
establishment of technological feasibility for the years ended December 31, 2007 and 2006, respectively. These costs began to be amortized to cost of product sales in the fourth quarter of
2007. The costs of developing routine software enhancements are expensed as research and development as incurred because of the short time between the determination of technological feasibility and
the date of general release of the related products.
The
Company applies Statement of Position No. 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use
. In 2007 and 2006, the Company capitalized approximately $10.7 million and $4.8 million, respectively, related to the implementation of an enterprise
resources planning system. The costs associated with software developed for internal use will be amortized at the time in which the software is ready for its intended use.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising costs were $0.5 million for 2007, $1.5 million for 2006, and $1.9 million for
2005.
67
AFFYMETRIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
STOCK-BASED COMPENSATION
Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123R,
Share-Based
Payment
("SFAS 123R") using the modified prospective transition method. Under the modified prospective transition method, prior periods are not restated for the effect
of SFAS 123R. Commencing with the first quarter of 2006, compensation cost includes all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the
grant date fair value estimated in accordance with the original provisions of SFAS 123, and compensation for all share-based payments granted subsequent to January 1, 2006, based on the
grant date fair value estimated in accordance with the provisions of SFAS 123R. The Company recognizes the fair value of its stock option awards as compensation expense over the requisite
service period of each award, generally four years. Compensation expense related to stock options granted prior to January 1, 2006 is recognized using the graded method while compensation
expense related to stock options granted on or after January 1, 2006 is recognized on a straight-line basis.
Prior
to the adoption of SFAS 123R, the Company applied SFAS 123, amended by SFAS 148
, Accounting for Stock-Based
CompensationTransition and Disclosure
("SFAS 148"), which allowed companies to apply the existing accounting rules under APB 25, "Accounting for
Stock Issued to Employees," and related Interpretations. In general, as the exercise price of options granted under the Company's plans was equal to the market price of the underlying common stock on
the grant date, no stock-based employee compensation cost was recognized in the Company's net income (loss) for periods prior to the adoption of SFAS 123R. As required by SFAS 148 prior
to the adoption of SFAS 123R, the Company provided pro forma net income (loss) and pro forma net income (loss) per common share disclosures for stock-based awards, as if the
fair-value-based method defined in SFAS 123 had been applied. See Note 14 for further information regarding stock-based compensation.
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is comprised of net income (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 income (loss), changes in fair value of derivatives designated as and effective as cash
flow hedges, and foreign currency translation adjustments. Total comprehensive income (loss) has been disclosed in the consolidated statement of comprehensive income (loss).
The
components of accumulated other comprehensive income (loss) are as follows (in thousands):
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
Foreign currency translation adjustments, net of tax
|
|
$
|
(342
|
)
|
$
|
(752
|
)
|
Unrealized gains (losses) on available-for-sale and non-marketable securities, net of tax
|
|
|
2,356
|
|
|
(947
|
)
|
Unrealized losses on cash flow hedges, net of tax
|
|
|
(16
|
)
|
|
(18
|
)
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss)
|
|
$
|
1,998
|
|
$
|
(1,717
|
)
|
|
|
|
|
|
|
68
AFFYMETRIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
NET INCOME (LOSS) PER COMMON SHARE
Basic net income (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 income (loss) per common share gives effect to dilutive common stock subject to repurchase, stock options and warrants (calculated based on the treasury stock
method), and convertible debt (calculated using an as-if-converted method).
The
following table sets forth a reconciliation of basic and diluted net income (loss) per common share (in thousands, except per share amounts):
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)basic
|
|
$
|
12,593
|
|
$
|
(13,704
|
)
|
$
|
65,787
|
|
|
Add effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on convertible notes (inclusive of amortization of debt issuance costs)
|
|
|
1,937
|
|
|
|
|
|
1,659
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)diluted
|
|
$
|
14,530
|
|
$
|
(13,704
|
)
|
$
|
67,446
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding
|
|
|
68,727
|
|
|
67,479
|
|
|
63,912
|
|
|
Less: weighted-average shares of common stock subject to repurchase
|
|
|
(485
|
)
|
|
(93
|
)
|
|
(96
|
)
|
|
|
|
|
|
|
|
|
Shares used in computing basic net income (loss) per common share
|
|
|
68,242
|
|
|
67,386
|
|
|
63,816
|
|
|
Add effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options
|
|
|
388
|
|
|
|
|
|
2,799
|
|
|
|
Common stock subject to repurchase
|
|
|
65
|
|
|
|
|
|
96
|
|
|
|
Warrants to purchase common stock
|
|
|
|
|
|
|
|
|
5
|
|
|
|
Convertible notes
|
|
|
14,369
|
|
|
|
|
|
3,870
|
|
|
|
|
|
|
|
|
|
Shares used in computing diluted net income (loss) per common share
|
|
|
83,064
|
|
|
67,386
|
|
|
70,586
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per common share
|
|
$
|
0.18
|
|
$
|
(0.20
|
)
|
$
|
1.03
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per common share
|
|
$
|
0.17
|
|
$
|
(0.20
|
)
|
$
|
0.96
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share include certain common share equivalents from outstanding stock options (on the treasury stock method), common stock subject to repurchase, outstanding
warrants to purchase common stock and convertible notes (on the as-if-converted basis).
69
AFFYMETRIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The securities excluded from diluted earnings per common share, on an actual outstanding basis, were as follows (in thousands):
|
|
Year Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
Employee stock options
|
|
3,368
|
|
6,466
|
|
1,427
|
Restricted stock subject to repurchase
|
|
|
|
93
|
|
|
Convertible notes
|
|
|
|
3,870
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
3,368
|
|
10,429
|
|
1,427
|
|
|
|
|
|
|
|
RESTRUCTURING
The Company has in recent years engaged in, and may continue to engage in, restructuring actions, which require management to utilize significant estimates
related to expenses for severance and other employee separation costs, lease cancellation, realizable values of assets that may become duplicative or obsolete, and other exit costs. If the actual
amounts differ from the Company's estimates, the amount of the restructuring charges could be materially impacted. For a full description of the Company's restructuring actions, see Note 3.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2006, the FASB issued FIN 48. Under FIN 48 a company recognizes the benefit from a tax position only if it is
more-likely-than-not that the position would be sustained upon audit based solely on the technical merits of the tax position. FIN 48 clarifies how a company
would measure the income tax benefits from the tax positions that are recognized, provides guidance as to the timing of the derecognition of previously recognized tax benefits and describes the
methods for classifying and disclosing the liabilities within the financial statements for any unrecognized tax benefits. FIN 48 also addresses when a company should record interest and
penalties related to tax positions and how the interest and penalties may be classified within the income statement and presented in the balance sheet. The Company adopted FIN 48 effective
January 1, 2007 as described in Note 15.
In
September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
("SFAS 157"). SFAS 157 establishes a
framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements.
SFAS 157 does not require any new fair value measurement SFAS 157 requires prospective application for fiscal year ending December 31, 2008.
In
February 2007, FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an Amendment of FASB
No. 115
("SFAS 159"). The Statement permits entities to choose, at specified election dates, to measure many financial instruments and certain other items at fair
value that are not currently measured at fair value. Unrealized gains and losses on items for which the fair value option has been elected would be reported in earnings at each subsequent reporting
date. SFAS 159 also establishes presentation and disclosure requirements in order to facilitate comparisons between entities choosing different measurement attributes for similar types of
assets and liabilities. SFAS 159 does not affect existing accounting requirements for certain assets and liabilities to
70
AFFYMETRIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
be
carried at fair value. This statement is effective for fiscal years beginning after November 15, 2007 and is required to be adopted by the Company for the fiscal year ending
December 31, 2008. The Company does not believe that the adoption of SFAS No. 159 will have a material impact on its consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 141R,
Business Combinations
("SFAS No. 141R"). SFAS No. 141R amends
SFAS 141 and provides revised guidance for recognizing and measuring identifiable assets and goodwill acquired, liabilities assumed, and any noncontrolling interest in the acquiree. It also
provides disclosure requirements to enable users of the financial statements to evaluate the nature and financial effects of the business combination. It is effective for fiscal years beginning on or
after December 15, 2008 and will be applied prospectively.
NOTE 3RESTRUCTURING
Fiscal 2007 Restructuring Plan
In July 2007, the Company announced that it was consolidating an administrative facility located in Sunnyvale, California into its main campus in Santa Clara,
California during the fourth quarter of 2007 (the "2007 Plan"). Additionally, in August and December 2007, the Company terminated certain employees in the research and development and selling, general
and administrative functions. The
Company estimates that the total restructuring expenses to be incurred in connection with the 2007 Plan will be approximately $4.6 million. Of this total, the Company estimates that
approximately $3.0 million relates to employee severance and approximately $1.4 million relates to contract termination and $0.2 million of other costs associated with vacating
the leased Kifer facility, net of estimated sublease income of $1.6 million. The Kifer facility was vacated during the fourth quarter of 2007. The estimated cash outlays to be incurred in
connection with these restructuring activities are estimated to be approximately $4.6 million. In accordance with SFAS No. 146
, Accounting for Costs Associated
with Exit or Disposal Activities
("SFAS 146"), the costs relating to employee severance are being accrued over the remaining service periods of the employees.
During
2007, the Company recognized approximately $2.9 million of expense related to employee termination benefits associated with the 2007 Plan, which was presented as a
component of the line item labeled "Restructuring charges" in its Consolidated Statements of Operations.
71
AFFYMETRIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
NOTE 3RESTRUCTURING (Continued)
The
activity in the accrued restructuring balances related to the 2007 Plan described above for the year ended December 31, 2007 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007
|
|
|
Balance as of
December 31,
2006
|
|
2007
Charges
|
|
Cash
Payments
|
|
Non-Cash
Settlements
|
|
Balance as of
December 31,
2007
|
|
Total costs to date
|
|
Total expected costs
|
Employee severance and relocation benefits
|
|
$
|
|
|
$
|
2,887
|
|
$
|
(1,333
|
)
|
$
|
(259
|
)
|
$
|
1,295
|
|
$
|
2,887
|
|
$
|
3,000
|
Contract termination costs
|
|
|
|
|
|
1,216
|
|
|
(94
|
)
|
|
|
|
|
1,122
|
|
|
1,216
|
|
|
1,400
|
Other restructuring costs
|
|
|
|
|
|
114
|
|
|
|
|
|
(114
|
)
|
|
|
|
|
114
|
|
|
200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring costs
|
|
$
|
|
|
$
|
4,217
|
|
$
|
(1,427
|
)
|
$
|
(373
|
)
|
$
|
2,417
|
|
$
|
4,217
|
|
$
|
4,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2006 Restructuring Plan
In the third quarter of 2006, the Company initiated a restructuring plan (the "2006 Plan") to better align certain of its expenses with the Company's current
business outlook. The Company's primary focus of the 2006 Plan was in the general and administrative functions and included rationalizing its facilities. In August 2006, the Company terminated certain
employees in the general and administrative functions. Additionally, in September, the Company announced its plan to close its Bedford, Massachusetts based instrumentation manufacturing and
development facility. The Company consolidated the Bedford facility's instrument manufacturing operations with its probe array manufacturing facility in West Sacramento, California. The Company's
instrumentation development capabilities were consolidated with its principal research and development facilities located in Santa Clara, California. Implementation of the 2006 Plan began in the
fourth quarter of 2006 and continued into the first half of 2007 and eliminated or transferred certain positions. The closure of the Bedford, Massachusetts facility was substantially completed by the
third quarter of fiscal 2007.
The
Company estimates that the total restructuring expenses to be incurred in connection with the 2006 Plan will be approximately $25.3 million. Of this total, the Company
estimates that $20.2 million relates to employee severance and relocation benefits, $2.9 million relates to contract termination costs associated with vacating the leased Bedford
facility, net of estimated sublease income of $6.7 million,
and approximately $2.2 million relates to other restructuring costs such as fixed asset write-downs and equipment and inventory relocation costs. The Company incurred restructuring expenses
beginning in the third quarter of 2006 and continued incurring related expenses through the third quarter of 2007. Cash outlays incurred in connection with these restructuring activities are estimated
to be approximately $16.8 million. In accordance with SFAS 146, the costs relating to employee severance and relocation were accrued over the remaining service periods of the employees.
During
the third and fourth quarters of 2006, the Company recognized approximately $13.5 million of expense which was presented in a single line item labeled "Restructuring
charges" in the Company's Consolidated Statements of Operations, of which approximately $7.5 million of the expense related to the modification of a former Neomorphic employee's equity awards,
all of which became fully vested
72
AFFYMETRIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
NOTE 3RESTRUCTURING (Continued)
under
the terms of a prior leave of absence agreement when he was involuntarily terminated in connection with the plan.
The
activity in the accrued restructuring balances related to the 2006 Plan described above for the year ended December 31, 2007 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
As of
December 31, 2007
|
|
|
Balance as of
December 31,
2006
|
|
2007 Charges
|
|
Cash Payments
|
|
Non-Cash Settlements
|
|
Balance as of
December 31,
2007
|
|
Total costs to date
|
|
Total expected costs
|
Employee severance and relocation benefits
|
|
$
|
4,130
|
|
$
|
6,700
|
|
$
|
(10,726
|
)
|
$
|
36
|
|
$
|
140
|
|
$
|
20,197
|
|
$
|
20,200
|
Contract termination costs
|
|
|
|
|
|
2,391
|
|
|
(630
|
)
|
|
|
|
|
1,761
|
|
|
2,391
|
|
|
2,900
|
Other restructuring costs
|
|
|
|
|
|
1,988
|
|
|
(986
|
)
|
|
(1,002
|
)
|
|
|
|
|
1,988
|
|
|
2,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring costs
|
|
$
|
4,130
|
|
$
|
11,079
|
|
$
|
(12,342
|
)
|
$
|
(966
|
)
|
$
|
1,901
|
|
$
|
24,576
|
|
$
|
25,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
February 2008, the Company implemented a restructuring plan in order to optimize our production capacity and cost structure to enable us to increase its future gross margins. The
Company intends to move, by the end of 2008, the majority of our probe array manufacturing from its West Sacramento, California facility to its Singapore facility. In connection with this plan, the
Company expects to incur total non-cash charges in the first quarter of 2008 of $12 million to $15 million related to the abandonment of certain long-lived
manufacturing assets and approximately $0.5 million in cash outlays related to employee severance. Depending on the rate at which the Company transfers production capacity to Singapore, it may
incur additional charges in 2008 associated with the reduction of capacity in West Sacramento, California.
NOTE 4COLLABORATIVE AGREEMENTS
The Company has agreements with several entities to develop and test probe arrays for the detection of certain gene sequences, mutations or organisms. Under such
agreements, the Company may receive development fees and may receive payments upon achievement of certain technical goals. The
Company also has research agreements with many universities and research organizations. The Company's material agreement is described below.
F. Hoffmann-La Roche Ltd. ("Roche")
In February 1998, the Company entered into a non-exclusive collaborative development agreement with F. Hoffmann-La Roche Ltd.
("Roche") to initially develop human probe array-based diagnostic products. Under the terms of the agreement the parties are collaborating to develop mutually agreed upon arrays, as well as associated
instrumentation, software, and reagents. In January 2003, the Company expanded its collaboration with Roche by granting Roche access to our
GeneChip
®
technologies to develop and commercialize GeneChip® diagnostic laboratory tests for DNA analysis, genotyping and
resequencing applications, as well as for RNA expression analysis, in a broad range of human disease areas. Using our GeneChip® technologies, Roche intends to develop and market diagnostic
tests for diseases such as cancer and osteoporosis and cardiovascular, metabolic, infectious
73
AFFYMETRIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
NOTE 4COLLABORATIVE AGREEMENTS (Continued)
and
inflammatory diseases. Affymetrix and Roche believe that developing targeted microarray expression profiles for cancer, plus genotyping and resequencing profiles for other diseases will enable the
creation and commercialization of novel standardized diagnostic solutions. These solutions ultimately will allow physicians to better diagnose and treat human disease. Under the terms of the
collaborative agreement, Roche paid the Company an access fee of $70 million and the agreement also includes a broad range of other compensation payable by Roche to Affymetrix throughout the
life of the agreement based on royalties on sales of diagnostic kits and milestone payments for technical and commercial achievements. As part of the agreement, Affymetrix will manufacture and supply
Roche with microarrays and related instrumentation based on Affymetrix' GeneChip® platform. In 2003, Roche launched the AmpliChip® CYP450 array product initially for research
use only, but in late 2004 obtained CE marking and FDA regulatory approvals of the product for in-vitro diagnostic use.
The
parties amended the collaborative development agreement in December 2006. Under the terms of the amendment, Roche is relieved of certain future license installment payments that
would have been payable by Roche to Affymetrix under the agreement beginning in 2008, Affymetrix is relieved of certain "most favorable terms and conditions" obligations to Roche, and Roche has agreed
to pay to Affymetrix additional milestone payments related to future commercial achievements. The license agreement is subject to Roche's option to terminate on December 31, 2010 or any time on
or after December 31, 2015, with one year's prior notice. As part of the arrangement between the parties, Affymetrix will continue to manufacture and supply Roche with microarrays and related
instrumentation based on Affymetrix' GeneChip® platform.
The
Company has assessed the revenue recognition of the December 2006 collaborative agreement amendment in accordance with EITF 00-21 to account for the multiple
deliverables in the arrangement and to evaluate the revenue allocated to each of the units of accounting (the research
and development period and the manufacturing and supply period). The Company has established objective and reliable evidence of fair market value for the manufacturing and supply period undelivered
unit of accounting based on analysis of the pricing for similar manufacturing and supply agreements sold to other Powered by Affymetrix partners on a standalone basis that do not contain
a research and development period. The Company has determined that the product transfer pricing, royalties on sales of diagnostic kits and milestone payments for technical and commercial achievements
for the manufacturing and supply period unit of accounting in the amended Roche collaborative agreement reflects the established fair market value for these deliverables. In addition, the Company
re-assessed the estimated remaining research and development period and determined that Roche's one-time, upfront payment of $70 million under the license agreement,
which was paid to Affymetrix in the first quarter of 2003, should continue to be recognized as a component of product related revenue over the remaining estimated research and development period which
was estimated to be through fiscal 2007. Research revenue under this contract was approximately $14.2 million for each of the three years ended December 31, 2007, 2006 and 2005,
respectively. The amortization of this license agreement was completed in December 2007. The associated research costs are not significant for each of the years presented.
74
AFFYMETRIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
NOTE 5CONCENTRATIONS OF RISK
Cash equivalents and investments are financial instruments that potentially subject Affymetrix to concentrations of risk to the extent of amounts recorded in the
consolidated balance 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.
Approximately
51% of the Company's product and product related revenue is 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 and its foreign currency hedging program.
NOTE 6AVAILABLE-FOR-SALE SECURITIES AND OTHER FINANCIAL INSTRUMENTS
Investments in Debt and Equity Securities
The fair values of all available-for-sale securities are based on quoted market prices and are included in cash and cash equivalents,
available-for-sale securitiesshort-term and available-for-sale
75
AFFYMETRIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
NOTE 6AVAILABLE-FOR-SALE SECURITIES AND OTHER FINANCIAL INSTRUMENTS (Continued)
securitieslong-term
on the Company's Consolidated Balance Sheets based on the securities maturity. The following is a summary of available-for-sale securities as
of December 31, 2007 (in thousands):
|
|
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
U.S. Government obligations and agency securities
|
|
$
|
409,002
|
|
$
|
569
|
|
$
|
|
|
$
|
409,571
|
U.S. corporate debt securities
|
|
|
128,469
|
|
|
11
|
|
|
(1,453
|
)
|
|
127,027
|
Non-U.S. equity securities
|
|
|
917
|
|
|
|
|
|
(27
|
)
|
|
890
|
|
|
|
|
|
|
|
|
|
|
Total securities
|
|
$
|
538,388
|
|
$
|
580
|
|
$
|
(1,480
|
)
|
$
|
537,488
|
|
|
|
|
|
|
|
|
|
Amounts included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
241,997
|
|
$
|
35
|
|
$
|
|
|
$
|
242,032
|
|
Available-for-sale securites
|
|
|
296,391
|
|
|
545
|
|
|
(1,480
|
)
|
|
295,456
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
|
|
$
|
538,388
|
|
$
|
580
|
|
$
|
(1,480
|
)
|
$
|
537,488
|
|
|
|
|
|
|
|
|
|
Amounts mature in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than one year
|
|
$
|
447,194
|
|
$
|
409
|
|
$
|
(27
|
)
|
$
|
447,576
|
|
One to two years
|
|
|
91,194
|
|
|
171
|
|
|
(1,453
|
)
|
|
89,912
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
|
|
$
|
538,388
|
|
$
|
580
|
|
$
|
(1,480
|
)
|
$
|
537,488
|
|
|
|
|
|
|
|
|
|
The
following is a summary of available-for-sale securities as of December 31, 2006 (in thousands):
|
|
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
U.S. Government obligations and agency securities
|
|
$
|
16,800
|
|
$
|
|
|
$
|
(34
|
)
|
$
|
16,766
|
U.S. corporate debt securities
|
|
|
120,967
|
|
|
86
|
|
|
(135
|
)
|
|
120,918
|
Non-U.S. equity securities
|
|
|
2,000
|
|
|
|
|
|
(707
|
)
|
|
1,293
|
|
|
|
|
|
|
|
|
|
|
Total securities
|
|
$
|
139,767
|
|
$
|
86
|
|
$
|
(876
|
)
|
$
|
138,977
|
|
|
|
|
|
|
|
|
|
Amounts included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
10,288
|
|
$
|
|
|
$
|
|
|
$
|
10,288
|
|
Available-for-sale securites
|
|
|
129,479
|
|
|
86
|
|
|
(876
|
)
|
|
128,689
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
|
|
$
|
139,767
|
|
$
|
86
|
|
$
|
(876
|
)
|
$
|
138,977
|
|
|
|
|
|
|
|
|
|
Amounts mature in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than one year
|
|
$
|
129,121
|
|
$
|
|
|
$
|
(745
|
)
|
$
|
128,376
|
|
One to two years
|
|
|
10,646
|
|
|
86
|
|
|
(131
|
)
|
|
10,601
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
|
|
$
|
139,767
|
|
$
|
86
|
|
$
|
(876
|
)
|
$
|
138,977
|
|
|
|
|
|
|
|
|
|
Realized
gains and (losses) for the year ended December 31, 2007 were $0.2 million and $(0.2) million, respectively. Realized gains and (losses) for the year ended
December 31, 2006 were $0.2 million and $(0.2) million, respectively. Realized gains and (losses) are included in interest income
76
AFFYMETRIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
NOTE 6AVAILABLE-FOR-SALE SECURITIES AND OTHER FINANCIAL INSTRUMENTS (Continued)
and
other, net in the accompanying Consolidated Statements of Operations. The gross unrealized losses as of December 31, 2007 and 2006, above were primarily caused by credit concerns in the
securitized market and interest rate increases, respectively. No significant facts or circumstances have arisen to indicate that there has been any deterioration in the creditworthiness of the issuers
of our securities. Based on the Company's review of these securities, including the assessment of the severity of the related unrealized losses, the Company has not recorded any
other-than-temporary impairments on these securities.
Excluding
our available-for-sale marketable securities, the declines in estimated fair values of certain investments were determined to be
other-than-temporary. Accordingly, the Company recorded net impairment losses on certain investments in both publicly-traded and non-marketable equity securities of
$0.9 million, $0.2 million and $2.2 million during the years ended December 31, 2007, 2006 and 2005, respectively. Net investment losses are included in interest income and
other, net in the 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. In addition, a portion of its assets are held in
nonfunctional currencies of its subsidiaries. In 2003, the Company began hedging activities by using currency forward contracts to manage a portion of the currency exposures created from its
activities denominated in foreign currencies. The Company's hedging program is designed to reduce, but does not entirely eliminate, the impact of currency exchange rate movements. Prior to 2007, the
Company hedged a percentage of forecasted international revenue with forward contracts and the gains and losses on these contracts largely offset gains and losses on the transactions being hedged. The
Company's revenue hedging policy is designed to reduce the negative impact on its forecasted revenue due to foreign currency exchange rate movements. During 2007, the Company did not carry or initiate
new currency forward contracts on a percentage of forecasted international revenue, based on management's internal assessment of the risk posed by extrapolating historical and potential future
currency rate changes. Management will continue to reevaluate this risk on an ongoing basis.
The
net realized foreign currency gains (losses) related to the foreign currency forward contracts related to revenue were $0.3 million and $1.4 million for the years ended
December 31, 2006 and 2005, respectively. At December 31, 2007 and 2006, total outstanding contracts included the notional equivalent of zero and $35.8 million, respectively, in
foreign currency forward exchange contracts with a fair value of zero for both years. The Company applies hedge accounting based upon the criteria established by SFAS No. 133,
Accounting for Derivative Instruments and
Hedging Activities
("SFAS 133"), whereby the Company designated its 2006 derivatives for revenue
hedging purposes as cash flow hedges. The Company has elected not to designate its derivatives for balance sheet purposes as fair value hedges under SFAS 133 and have appropriately recorded any
changes in fair value to interest income and other, net. During the years ended December 31, 2007 and 2006, all of the Company's hedges under SFAS 133 were deemed effective.
77
AFFYMETRIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
NOTE 6AVAILABLE-FOR-SALE SECURITIES AND OTHER FINANCIAL INSTRUMENTS (Continued)
Other Financial Instruments
The carrying amounts and estimated fair values of financial instruments, other than those accounted for in accordance with SFAS No. 115,
Accounting for
Certain Investments in Debt and Equity Securities,
were as follows at December 31, 2007 and 2006 (in thousands):
|
|
2007
|
|
2006
|
|
|
Carrying
Amount
|
|
Estimated
Fair Value
|
|
Carrying
Amount
|
|
Estimated
Fair Value
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-marketable equity securities
|
|
$
|
20,710
|
|
$
|
20,710
|
|
$
|
18,739
|
|
$
|
18,739
|
|
Employee loans receivable
|
|
|
1,863
|
|
|
1,863
|
|
|
2,186
|
|
|
2,186
|
Liability:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible notes
|
|
|
436,250
|
|
|
461,409
|
|
|
120,000
|
|
|
120,473
|
The
fair value estimates provided above for the Company's convertible notes were based on quoted market prices available at December 31, 2007 and 2006. All other fair values were
based on current market rates, liquidation and net realizable values.
NOTE 7INVENTORIES
Inventories consist of the following at December 31, 2007 and 2006 (in thousands):
|
|
2007
|
|
2006
|
Raw materials
|
|
$
|
20,507
|
|
$
|
21,612
|
Work-in-process
|
|
|
11,297
|
|
|
13,127
|
Finished goods
|
|
|
11,108
|
|
|
11,767
|
|
|
|
|
|
|
Total
|
|
$
|
42,912
|
|
$
|
46,506
|
|
|
|
|
|
NOTE 8PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31, 2007 and 2006 (in thousands):
|
|
2007
|
|
2006
|
|
Property and equipment:
|
|
|
|
|
|
|
|
|
Construction-in-progress
|
|
$
|
55,209
|
|
$
|
75,870
|
|
|
Equipment and furniture
|
|
|
140,237
|
|
|
130,355
|
|
|
Building and leasehold improvements
|
|
|
91,188
|
|
|
62,872
|
|
|
Land
|
|
|
1,310
|
|
|
1,310
|
|
|
|
|
|
|
|
|
|
|
287,944
|
|
|
270,407
|
|
Less: accumulated depreciation and amortization
|
|
|
(144,060
|
)
|
|
(129,085
|
)
|
|
|
|
|
|
|
|
Net property and equipment
|
|
$
|
143,884
|
|
$
|
141,322
|
|
|
|
|
|
|
|
78
AFFYMETRIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
NOTE 8PROPERTY AND EQUIPMENT (Continued)
Construction-in-progress
includes construction costs for new and upgraded facilities in Singapore and West Sacramento, as well as related purchased equipment not
yet placed in service and costs for the new ERP system. For the years ended December 31, 2007, 2006 and 2005, the Company recorded depreciation expense of $23.6 million,
$22.8 million and $20.5 million, respectively.
NOTE 9ACQUIRED TECHNOLOGY RIGHTS
Acquired technology rights are comprised of 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 one to fifteen years. Accumulated amortization of these rights amounted to $39.0 million and $30.2 million at
December 31, 2007 and 2006, respectively.
The
expected future annual amortization expense of the Company's acquired technology rights is as follows (in thousands):
For the Year Ending December 31,
|
|
Amortization
Expense
|
2008
|
|
$
|
8,314
|
2009
|
|
|
7,446
|
2010
|
|
|
6,676
|
2011
|
|
|
6,280
|
2012
|
|
|
5,391
|
Thereafter
|
|
|
12,690
|
|
|
|
|
Total
|
|
$
|
46,797
|
|
|
|
NOTE 10ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities as of December 31, 2007 and 2006 consist of the following (in thousands):
|
|
2007
|
|
2006
|
Accounts payable
|
|
$
|
14,795
|
|
$
|
23,248
|
Accrued compensation and related liabilities
|
|
|
29,519
|
|
|
19,050
|
Accrued taxes
|
|
|
5,292
|
|
|
6,362
|
Accrued legal
|
|
|
1,244
|
|
|
2,426
|
Accrued warranties
|
|
|
3,007
|
|
|
6,801
|
Other
|
|
|
7,686
|
|
|
5,006
|
|
|
|
|
|
|
Total
|
|
$
|
61,543
|
|
$
|
62,893
|
|
|
|
|
|
79
AFFYMETRIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
NOTE 11RELATED PARTY TRANSACTIONS AND NOTES RECEIVABLE FROM EMPLOYEES
Related Party Transactions
As of December 31, 2007, the Company, and certain of its affiliates, including the Company's chief executive officer and members of the board of directors,
held approximately 22% ownership interest in Perlegen Sciences, Inc. ("Perlegen"), a privately-held biotechnology company. In addition, two members of Perlegen's board of directors
are also members of the Company's board of directors.
The
Company formed Perlegen in October 2000 as a wholly-owned subsidiary and spun it off in March 2001 in a $100 million private equity financing. The Company acquired its initial
ownership interest in Perlegen in an arrangement which provides Perlegen rights to use certain of the Company's intellectual property in its development efforts, and also provides the Company rights
to use and commercialize certain data generated by Perlegen in the array field.
The
Company accounts for its ownership interest in Perlegen using the equity method as the Company and its affiliates do not control the strategic, operating, investing and financing
activities of Perlegen; however, the Company does have significant influence over Perlegen's operating activities. Further, the Company has no obligations to provide funding to Perlegen nor does it
guarantee or otherwise have any obligations related to the liabilities or results of operations of Perlegen or its investors. Through January 2005, the Company's investment in Perlegen had no cost
basis; accordingly, the Company has not recorded its proportionate share of Perlegen's operating losses in its financial statements since the
completion of Perlegen's initial financing. In February 2005, the Company participated in Perlegen's Series D preferred stock financing and recorded a $2.0 million investment related to
this transaction, which was included in the Company's balance sheet as a component of other assets. As of June 30, 2005, the Company had reduced the carrying value of its investment to zero
through the recording of its proportionate share of Perlegen's operating losses.
In
accordance with Financial Accounting Standards Board Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51
as amended, the Company has concluded that Perlegen is a variable interest entity in which the Company holds a variable interest, and that
the Company is not the primary beneficiary.
In
December 2003, the Company sold 950,000 shares of Perlegen preferred stock and realized a gain of $1.4 million which was included in interest and other income, net.
Additionally, in January 2004, the Company sold 400,000 shares of Perlegen preferred stock and realized a gain of $0.6 million, which was included in interest income and other, net.
In
June 2005, the Company executed an agreement with a customer pursuant to which the Company agreed to provide genotypic data in the context of whole genome association studies. The
Company had subcontracted certain elements of this agreement to Perlegen, which will use Affymetrix GeneChip® technology to provide the genotypic data. The agreement ended in the third
quarter of 2006 and no expenses were incurred.
In
October 2006, the Company entered into four new supply and license agreements with Perlegen. These four agreements, consisting of a commercial products supply agreement, a
non-commercial products supply agreement and two intellectual property license agreements, replace the prior supply and intellectual property license agreements entered into by the Company
and Perlegen in 2003. Under
80
AFFYMETRIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
NOTE 11RELATED PARTY TRANSACTIONS AND NOTES RECEIVABLE FROM EMPLOYEES (Continued)
the
new supply agreements, which include terms that are generally consistent with the Company's standard supply terms, the Company shall supply commercial GeneChip products and certain
non-commercial custom GeneChip products for Perlegen's use in defined fields.
Notes Receivable from Employees
The Company has notes receivable from employees totaling $1.9 million and $2.2 million as of December 31, 2007 and 2006, respectively. The
notes are generally due four to five years after the date of issuance and accrued interest is due based on the Internal Revenue Service imputed interest rate at the date of issuance. Interest rates
have generally been between 2% and 6%.
NOTE 12COMMITMENTS AND CONTINGENCIES
Operating Leases
Affymetrix leases laboratory, office and manufacturing facilities under non-cancelable operating leases that expire at various times through 2016.
Some of these leases contain renewal options ranging from two to five years and escalation clauses. Rent expense related to operating leases was approximately $14.6 million in 2007,
$10.9 million in 2006 and $8.9 million in 2005. In connection with some of these facility leases, the Company has made security deposits totaling $2.8 million, which are included
in long-term other assets in the Consolidated Balance Sheets. Future minimum lease obligations at December 31, 2007 under all non-cancelable operating leases are as
follows (in thousands):
For the Year Ending December 31,
|
|
Amount
|
2008
|
|
$
|
10,711
|
2009
|
|
|
7,364
|
2010
|
|
|
6,265
|
2011
|
|
|
5,857
|
2012
|
|
|
5,838
|
Thereafter
|
|
|
5,200
|
|
|
|
|
Total
|
|
$
|
41,235
|
|
|
|
Product Warranty Commitment
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 2006, the Company reserved approximately $1.3 million to replace chips damaged due to a manufacturing process defect. This manufacturing
process error was resolved by December 31, 2006. Since the beginning of 2007, the Company has noted that improvement in its internal quality control programs has resulted in an overall decline
in product replacement claims. As a result, an adjustment decreasing the warranty reserve balance was made in 2007. Information regarding
81
AFFYMETRIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
NOTE 12COMMITMENTS AND CONTINGENCIES (Continued)
the
changes in the Company's product warranty liability for the years ended December 31, 2006 and December 31, 2007 is as follows (in thousands):
|
|
Amount
|
|
Balance at December 31, 2005
|
|
$
|
6,223
|
|
|
New warranties issued
|
|
|
5,964
|
|
|
Repairs and replacements
|
|
|
(6,643
|
)
|
|
Adjustments
|
|
|
1,257
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
6,801
|
|
|
New warranties issued
|
|
|
3,310
|
|
|
Repairs and replacements
|
|
|
(5,167
|
)
|
|
Adjustments
|
|
|
(1,937
|
)
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
3,007
|
|
|
|
|
|
Non-Cancelable Supply Agreements
As of December 31, 2007, the Company had approximately $1.1 million of non-cancelable inventory supply agreements that are in effect
through 2008.
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, 2007, 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.
Legal Proceedings
The Company has been in the past and continues to be a party to litigation which has consumed and may in the future continue to consume substantial financial and
managerial resources and which could adversely affect its business, financial condition and results of operations. If in any pending or future intellectual property litigation involving the Company or
its collaborative partners, the Company is found to have infringed the valid intellectual property rights of third parties, the Company, or its collaborative partners, could be subject to significant
liability for damages, could be required to obtain a license from a third party, which may not be available on reasonable terms or at all, or could be
82
AFFYMETRIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
NOTE 12COMMITMENTS AND CONTINGENCIES (Continued)
prevented
from manufacturing and selling its products. In addition, if the Company is unable to enforce its patents and other intellectual property rights against others, or if its patents are found
to be invalid or unenforceable, third parties may more easily be able to introduce and sell DNA array technologies that compete with the Company's GeneChip® brand technology, and the
Company's competitive position could suffer. The Company expects to devote substantial financial and managerial resources to protect its intellectual property rights and to defend against the claims
described below as well as any future claims asserted against it. Further, because of the substantial amount of discovery required in connection with any litigation, there is a risk that confidential
information could be compromised by disclosure.
In 2006, three shareholders of the Company filed purported derivative lawsuits on behalf of the Company, which lawsuits name the Company (as nominal defendant)
and several of the Company's current and former officers and directors, and allege that these officers and directors breached their fiduciary duties and breached other laws by participating in
backdating stock options grants. Two of these lawsuits were filed in the United States District Court for the Northern District of California, one on August 30, 2006 and the other on
September 13, 2006, and were subsequently consolidated. The third lawsuit was filed in the Superior Court of the State of California on October 20, 2006. The substance of the allegations
in these cases is similar, and includes claims against the individual defendants for breach of fiduciary duties, unjust enrichment, and violations of federal securities laws, Generally Accepted
Accounting Principles, Section 162(m) of the Internal Revenue Code, and certain state laws in each case in connection with the allegedly backdated options. The plaintiffs seek monetary and
equitable relief on behalf of the Company, including damages and disgorgement from the individual defendants, changes in the Company's corporate governance and internal control procedures, and an
award of attorneys' fees and costs. As previously disclosed in the Company's Form 10-K/A's for the year ended December 31, 2005, the Company's decision to restate its
consolidated financial statements was based on the results of an internal review of its historical stock option granting practices from January 1, 1997 through May 31, 2006 performed
under the direction of the Audit Committee of the Board of Directors. The review did not find any pattern or practice of inappropriately identifying grant dates with hindsight in order to provide
"discounted" or "in-the-money"
grants. The Company does not believe that the claims in these derivative lawsuits have merit and the Company intends to vigorously defend the cases.
On September 12, 2006, the Company received written notice from the Securities and Exchange Commission that it is conducting an informal inquiry into the
Company's stock option practices. The Company has responded to the request for information and is cooperating fully in the informal inquiry. The Company was advised in the SEC's notice that the SEC's
request should not be construed as an indication by the SEC or its staff that any violations of law have occurred; and nor should the request be considered an adverse reflection upon any person,
entity or security.
83
AFFYMETRIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
NOTE 12COMMITMENTS AND CONTINGENCIES (Continued)
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 now 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 tortious 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 U.S. District Court for the Southern District of New York has related
the Company's case. There is no trial date in the actions between Enzo and the Company.
The
Company believes that the claims set forth in Enzo's complaint are without merit and have filed the action in the Southern District of New York to protect its interests. However, the
Company cannot be sure that it will prevail in these matters. The Company's failure to successfully defend against these allegations could result in a material adverse effect on its business,
financial condition and results of operation.
The Company's intellectual property is subject to a number of significant administrative and litigation actions. For example, in Europe and Japan, we expect third
parties to oppose significant patents that the Company owns or controls. Currently, third parties, including several of the Company's competitors, have filed oppositions against several of the
Company's European patents in the European Patent Office. These opposition proceedings are at various procedural stages and will result in the respective patents being either upheld in their entirety,
allowed to issue in amended form in designated European countries, or revoked. Further, in the United States, the Company expects that third parties will continue to "copy" the claims of its patents
in order to provoke interferences in the United States
84
AFFYMETRIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
NOTE 12COMMITMENTS AND CONTINGENCIES (Continued)
Patent &
Trademark Office. These proceedings could result in the Company's patent protection being significantly modified or reduced, in the incurrence of significant costs and the consumption
of substantial managerial resources.
NOTE 13SENIOR CONVERTIBLE NOTES
3.50% Senior Convertible Notes
On November 13, 2007, the Company issued $316.3 million principal amount of 3.50% Senior Convertible Notes (the "3.50% Notes") due
January 15, 2038. The net proceeds after issuance costs from the 3.50% Notes offering were approximately $309.4 million. The 3.50% 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, beginning July 15, 2008. The Company intends to use the net proceeds of the offering
for working capital and general corporate purposes, which may include funding the Company's operations, capital expenditures, potential acquisitions of businesses, products or technologies believed to
be of strategic importance and repurchases or redemptions of all or a portion of the Company's 0.75% Senior Convertible Notes due 2033. The Company incurred underwriter discount and issuance costs of
approximately $6.9 million, which are being amortized over the effective life of the 3.50% Notes. The effective life of the 3.50% Notes due 2038 is five years, the period up to the first date
that the Holders can require the Company to repurchase the notes.
The
3.50% 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:
-
-
issuing
shares of the Company's common stock as a dividend or distribution of the Company's common stock;
-
-
effecting
a stock split or stock combination;
-
-
issuing
to all or substantially all Holders of the Company's common stock any rights or warrants under certain circumstances and with certain entitlements;
-
-
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;
-
-
making
cash distributions to all or substantially all Holders of the Company's common stock; or
-
-
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 3.50% Notes into shares of Affymetrix stock, 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 3.50% Notes at a price equal to 100% of the principal amount of
the 3.50% Notes plus accrued and unpaid 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 3.50% Notes plus accrued but unpaid interest.
85
AFFYMETRIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
NOTE 13SENIOR CONVERTIBLE NOTES (Continued)
The
3.50% Notes are unsecured and rank equally with the Company's other existing and future senior indebtedness. The 3.50% Notes are structurally subordinated to any current or future
indebtedness and other liabilities of the Company's subsidiaries.
0.75% Senior Convertible Notes
On December 10, 2003, the Company issued $120.0 million of 0.75% Senior Convertible Notes (the "0.75% Notes") due December 15, 2033. The net
proceeds after issuance costs from the 0.75% Notes offering were approximately $116.0 million. The 0.75% Notes bear interest of 0.75% per year on the principal amount payable
semi-annually in arrears on June 15 and December 15 of each year, beginning June 15, 2004. The Company used the net proceeds of the offering to repurchase its 4.75%
Notes. The Company incurred broker discount and issuance costs of approximately $3.8 million which are being amortized over the effective life of the 0.75% Notes. The effective life of the
0.75% Notes due 2033 is five years, the period up to the first date that the Holders can require the Company to repurchase the notes.
The
0.75% Notes are convertible into 32.2431 shares of Affymetrix common stock per $1,000 principal amount of notes which equates to 3,869,172 shares of common stock, or a conversion
price equivalent of $31.01 per share of common stock. The conversion rate is subject to adjustment upon the occurrence of the following specified events:
-
-
issuing
shares of the Company's common stock as a dividend or distribution of the Company's common stock;
-
-
effecting
a stock split or stock combination;
-
-
issuing
to all or substantially all Holders of the Company's common stock any rights or warrants under certain circumstances and with certain entitlements;
-
-
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;
-
-
making
cash distributions to all or substantially all Holders of the Company's common stock; or
-
-
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 0.75% Notes into shares of Affymetrix' common stock prior to the close of business on the business day prior to the maturity date under the following
circumstances: (1) during any quarterly conversion period prior to December 15, 2028, if the sales price of the Company's common stock for at least 20 trading days in the 30 consecutive
trading-day period ending on the first day of such conversion period reaches a specified threshold, (2) on or after December 28, 2028, at any time after the sale price of the
Company's common stock on any date is greater than 130% of the then current conversion price, (3) during the five consecutive trading-day period in which the average of the trading
prices for the notes was less than 98% of the average of the sale price of the Company's common stock multiplied by the then applicable conversion rate, (4) the 0.75% Notes are called for
redemption, or (5) specified corporate transactions have occurred.
86
AFFYMETRIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
NOTE 13SENIOR CONVERTIBLE NOTES (Continued)
On
December 15, 2008, 2013, 2018, 2023 and 2028 the security Holders have the option to require the Company to repurchase the 0.75% Notes at a price equal to 100% of the principal
amount of the 0.75% Notes plus accrued and unpaid interest. Additionally, on or after December 15, 2008, Affymetrix has the option of redeeming for cash at 100% of the principal amount all or
part of the then outstanding 0.75% Notes plus accrued but unpaid interest.
The
0.75% 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.
NOTE 14STOCKHOLDERS' EQUITY
Stockholder Rights Plan
On October 15, 1998, the Board of Directors of the Company declared a dividend of (i) one preferred share purchase right (a "Right") for each
outstanding share of common stock of the Company, and
(ii) a number of Rights for each share of Series AA Preferred Stock of the Company equal to the number of shares of common stock into which such share of Series AA Preferred Stock
was convertible. The dividend was paid on October 27, 1998 (the "Record Date") to the stockholders of record on that date. Each Right entitles the registered holder to purchase from the Company
one one-thousandth of a share of Series B Junior Participating Preferred Stock, par value $.01 per share, of the Company (the "Series B Preferred Stock") at a price of $62.50
per one one-thousandth of a share of Series B Preferred Stock, subject to adjustment. The Rights will be exercisable if a person or group hereafter acquires beneficial ownership of
15% or more of the common stock of the Company or announces a tender offer for 15% or more of the common stock. The Board of Directors will be entitled to redeem the Rights at one cent per Right at
any time before any such person acquires beneficial ownership of 15% or more of the outstanding common stock. If a person or group acquires 15% or more of the outstanding common stock of the Company,
each Right will entitle its holder to purchase, at the Right's exercise price, a number of shares of common stock having a market value at that time of twice the Right's exercise price. Rights held by
the 15% holder will become void and will not be exercisable to purchase shares at the bargain purchase price. If the Company is acquired in a merger or other business combination transaction after a
person acquires 15% or more of the Company's common stock, each Right will entitle its holder to purchase, at the Right's then-current exercise price, a number of the acquiring company's
common shares having a market value at that time of twice the Right's exercise price.
On
February 7, 2000, the Company's Board of the Directors approved an amendment to its stockholders rights plan. The amendment increases the exercise price of the Preferred Share
Purchase Rights to $625.00 and extends the expiration date of the plan to February 2010. Under the amended plan, each Preferred Share Purchase Right entitles stockholders to buy one
one-thousandth of a share of Series B Junior Participating Preferred Stock of the Company at the new exercise price of $625.00. The Rights will be exercisable if a person or group
acquires beneficial ownership of 15% or more of the common stock of the Company or announces a tender offer for 15% or more of the common stock.
87
AFFYMETRIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
NOTE 14STOCKHOLDERS' EQUITY (Continued)
Stock-Based Compensation Plans
The Company has a stock-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 non-vested stock awards (also known as restricted stock) granted under various
stock plans. Stock options are generally time-based, vesting 25% on each annual anniversary of the grant date over four years and expire 7 to 10 years from the grant date.
Non-vested restricted stock awards are generally time-based, vesting 33% on each of the second, third and fourth anniversaries of the grant date. As of December 31,
2007, the Company had approximately 1.1 million shares of common stock reserved for future issuance under its stock-based compensation plans. New shares are
issued as a result of stock option exercises and non-vested restricted stock awards. A more detailed description of the Company's current stock option 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. The option price shall be 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 may be granted with different vesting terms from time to time as
determined by the Board of Directors. A total of 3,600,000 shares of common stock are authorized for issuance under the 1998 Stock Plan.
In
2000, the Board of Directors adopted the 2000 Equity Incentive Plan (the "2000 Stock Plan"), which was amended and restated in 2001, under which restricted shares, stock units, stock
options and stock appreciation rights may be granted to employees, outside directors and consultants. Options granted under the 2000 Stock Plan expire no later than ten years from the date of grant.
The option price shall be at least 100% of the fair value of the Company's common stock on the date of grant (110% in certain circumstances), as determined by the Board of Directors. Options may be
granted with different vesting terms from time to time as determined by the Board of Directors. In 2004, the 2000 Stock Plan was amended and restated to increase share availability by 2,500,000 shares
bringing the total shares of common stock authorized for issuance under the 2000 Stock Plan to 7,500,000.
Adoption of SFAS 123R
Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS 123R using the modified prospective transition method.
Under the modified prospective transition method, prior periods are not restated for the effect of SFAS 123R. Commencing with the first quarter of 2006, compensation cost includes all
share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, and
compensation for all share-based payments granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. The Company
recognizes the fair value of its stock option awards as compensation expense over the requisite service period of each award, generally four years. Compensation expense related to
88
AFFYMETRIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
NOTE 14STOCKHOLDERS' EQUITY (Continued)
stock
options granted prior to January 1, 2006 is recognized using the graded method while compensation expense related to stock options granted on or after January 1, 2006 is recognized
on a straight-line basis.
Prior
to the adoption of SFAS 123R, the Company applied SFAS 123, amended by SFAS 148, which allowed companies to apply the existing accounting rules under
APB 25,
Accounting for Stock Issued to Employees
, and related Interpretations. In general, as the exercise price of options granted under the
Company's plans was equal to the market price of the underlying common stock on the grant date, no stock-based employee compensation cost was recognized in the Company's net income (loss) for periods
prior to the adoption of SFAS 123R. As required by SFAS 148 prior to the adoption of SFAS 123R, the Company provided pro forma net income (loss) and pro forma net income (loss)
per common share disclosures for stock-based awards, as if the fair-value-based method defined in SFAS 123 had been applied.
As
a result of adopting SFAS 123R, the Company's loss before taxes, net loss and basic and diluted loss per share for the year ended December 31, 2006 was
$14.1 million, $10.0 million, $0.15 lower, respectively, than if the Company had continued to account for stock-based compensation under APB Opinion No. 25. In accordance with
SFAS 123R, the Company is also required to present excess tax benefits from the exercise of stock options, if any, as financing cash flows rather than operating cash flows. Income tax benefit
of $5.3 million and $7.2 million was realized from stock option exercises during the years ended December 31, 2007 and 2006, respectively.
Impact of SFAS 123R
The following table sets forth the total stock-based compensation expense resulting from stock options and non-vested stock awards included in the
Company's Condensed Consolidated Statements of Income (Loss) upon the adoption of SFAS 123R (in thousands):
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
Costs of product sales
|
|
$
|
1,107
|
|
$
|
1,389
|
|
Research and development
|
|
|
2,064
|
|
|
3,653
|
|
Selling, general and administrative
|
|
|
7,215
|
|
|
10,008
|
|
Restructuring
|
|
|
340
|
|
|
7,544
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
|
10,726
|
|
|
22,594
|
|
Income tax benefit
|
|
|
(3,642
|
)
|
|
(4,567
|
)
|
|
|
|
|
|
|
|
Total stock-based compensation expense, net of tax
|
|
$
|
7,084
|
|
$
|
18,027
|
|
|
|
|
|
|
|
Selling,
general and administrative expense included a $1.1 million charge in the second quarter of 2006 due to the modification of an executive officer's stock option grant to
include an extension of time to exercise, as well as the vesting of certain stock options without a requisite service period. Restructuring expense included a $7.5 million charge in the third
quarter of 2006 due to the modification of a former Neomorphic employee's equity awards, all of which became fully vested under
89
AFFYMETRIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
NOTE 14STOCKHOLDERS' EQUITY (Continued)
the
terms of a prior leave of absence agreement when he was involuntarily terminated in connection with the Company's third quarter restructuring effort.
As
of December 31, 2007, $28.4 million of total unrecognized stock-based compensation expense related to non-vested awards is expected to be recognized over the
respective vesting terms of each award through 2011. The weighted-average term of the unrecognized stock-based compensation expense is 2.5 years.
The
following table illustrates the effect on net income and net income per share if the Company had applied the fair value recognition provisions of SFAS 123, as amended by
SFAS 148, to stock-based employee compensation for fiscal 2005 (in thousands, except per share amounts):
|
|
Year Ended December 31, 2005
|
|
Net incomeas reported
|
|
$
|
65,787
|
|
Add: Stock-based employee compensation expense included in reported net income, net of tax
|
|
|
384
|
|
Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of tax
|
|
|
(15,800
|
)
|
|
|
|
|
Pro forma net income
|
|
$
|
50,371
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
Basic net income per common shareas reported
|
|
$
|
1.03
|
|
|
Diluted net income per common shareas reported
|
|
$
|
0.96
|
|
|
Basic net income per common sharepro forma
|
|
$
|
0.79
|
|
|
Diluted net income per common sharepro forma
|
|
$
|
0.74
|
|
Stock Options
The fair value of options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions:
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Risk free interest rate
|
|
4.4
|
%
|
5.0
|
%
|
4.1
|
%
|
Expected dividend yield
|
|
0.0
|
%
|
0.0
|
%
|
0.0
|
%
|
Expected volatility
|
|
42
|
%
|
40
|
%
|
45
|
%
|
Expected option term (in years)
|
|
4.5
|
|
4.5
|
|
3.6
|
|
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, 2007 and 2006 is based on a blend of
historical and market-based implied volatility. The expected volatility for the year ended December 31, 2005 is based solely on historical volatility. The Company's management changed its
expected volatility estimation approach based upon
90
AFFYMETRIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
NOTE 14STOCKHOLDERS' EQUITY (Continued)
the
availability of actively traded options on the Company's common stock and because management believes this blended method is more representative of future stock price trends than historical
volatility alone. Using the assumptions above, the weighted average grant date fair value of options granted during the years ended December 31, 2007, 2006 and 2005 was $10.18, $11.61 and
$18.97, respectively.
Activity
under the Company's stock plans for the year ended December 31, 2007 is as follows (in thousands, except per share amounts):
|
|
Shares
|
|
Weighted-Average
Exercise Price
Per Share
|
|
Weighted-Average
Remaining
Contractual Terms
|
|
Aggregate
Intrinsic Value
|
|
|
|
|
|
|
(in years)
|
|
|
Outstanding at December 31, 2006
|
|
6,466
|
|
$
|
31.42
|
|
|
|
|
|
Grants
|
|
946
|
|
|
24.87
|
|
|
|
|
|
Exercises
|
|
(768
|
)
|
|
18.82
|
|
|
|
|
|
Forfeitures
|
|
(565
|
)
|
|
33.78
|
|
|
|
|
|
Expirations
|
|
(604
|
)
|
|
39.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
5,475
|
|
$
|
30.91
|
|
3.7
|
|
$
|
3,517
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2007
|
|
3,802
|
|
$
|
32.09
|
|
2.7
|
|
$
|
2,908
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at December 31, 2007
|
|
5,091
|
|
$
|
31.09
|
|
3.5
|
|
$
|
3,381
|
|
|
|
|
|
|
|
|
|
|
|
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 2007 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, 2007. This amount changes based on the fair market value of the Company's common stock. Total intrinsic value of options exercised is
$6.2 million, $6.2 million, and $74.2 million for the years ended December 31, 2007, 2006 and 2005, respectively.
Restricted Stock
The following table summarizes the Company's non-vested restricted stock activity for the year ended December 31, 2007 (in thousands, except
per share amounts):
|
|
Number of Shares
|
|
Weighted-Average
Grant Date Fair Value
|
Non-vested stock outstanding at December 31, 2006
|
|
247
|
|
$
|
30.81
|
Granted
|
|
701
|
|
$
|
25.17
|
Vested
|
|
(77
|
)
|
$
|
25.95
|
Forfeited
|
|
(147
|
)
|
$
|
32.31
|
|
|
|
|
|
|
Non-vested stock outstanding at December 31, 2007
|
|
724
|
|
$
|
25.53
|
|
|
|
|
|
|
91
AFFYMETRIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
NOTE 14STOCKHOLDERS' EQUITY (Continued)
Total
fair value of shares vested is $18.5 million and $7.6 million for the years ended December 31, 2007 and 2006, respectively. The Company did not grant
restricted stock prior to the year ended December 31, 2005.
The
following table summarizes information concerning currently outstanding and exercisable options at December 31, 2007:
|
|
Options Outstanding
|
|
Options Exercisable
|
Range of Exercise Prices
|
|
Number
|
|
Weighted-Average
Remaining
Contractual Life
|
|
Weighted-Average
Exercise Price
Per Share
|
|
Number
|
|
Weighted-Average
Exercise Price
Per Share
|
|
|
(in thousands)
|
|
(in years)
|
|
|
|
(in thousands)
|
|
|
$0.26 - $21.96
|
|
808
|
|
4.73
|
|
$
|
18.79
|
|
454
|
|
$
|
16.74
|
$22.20 - $24.44
|
|
918
|
|
1.86
|
|
$
|
24.12
|
|
866
|
|
$
|
24.15
|
$24.55 - $27.02
|
|
825
|
|
4.84
|
|
$
|
25.66
|
|
365
|
|
$
|
25.78
|
$27.05 - $30.45
|
|
1,167
|
|
4.21
|
|
$
|
29.08
|
|
693
|
|
$
|
29.50
|
$30.47 - $46.75
|
|
831
|
|
4.18
|
|
$
|
36.92
|
|
550
|
|
$
|
36.60
|
$46.94 - $53.22
|
|
785
|
|
2.14
|
|
$
|
48.08
|
|
745
|
|
$
|
48.01
|
$53.39 - $132.59
|
|
141
|
|
4.60
|
|
$
|
59.38
|
|
129
|
|
$
|
59.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
5,475
|
|
3.70
|
|
$
|
30.91
|
|
3,802
|
|
$
|
32.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserved Shares
At December 31, 2007, the Company has shares reserved for future issuance as follows (in thousands):
Options outstanding
|
|
5,475
|
Options available for future grants
|
|
1,097
|
Convertible subordinated notes
|
|
14,369
|
|
|
|
|
|
20,941
|
|
|
|
92
AFFYMETRIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
NOTE 15INCOME TAXES
The following table presents the U.S. and foreign components of consolidated income (loss) before income taxes and the provision for income taxes (in thousands).
Note that certain prior year information has been reclassified to conform to current year presentation:
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
INCOME (LOSS) BEFORE INCOME TAXES:
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
11,370
|
|
$
|
14,760
|
|
$
|
127,382
|
|
|
Foreign
|
|
|
6,910
|
|
|
(20,827
|
)
|
|
(64,774
|
)
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
18,280
|
|
$
|
(6,067
|
)
|
$
|
62,608
|
|
|
|
|
|
|
|
|
|
PROVISION (BENEFIT) FOR INCOME TAXES:
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
153
|
|
|
13,203
|
|
|
30,380
|
|
|
State
|
|
|
14
|
|
|
888
|
|
|
2,663
|
|
|
Foreign
|
|
|
2,002
|
|
|
41
|
|
|
1,969
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
2,169
|
|
|
14,132
|
|
|
35,012
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
5,251
|
|
|
(5,565
|
)
|
|
(36,536
|
)
|
|
State
|
|
|
(1,207
|
)
|
|
(1,261
|
)
|
|
(905
|
)
|
|
Foreign
|
|
|
(524
|
)
|
|
331
|
|
|
(750
|
)
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
3,520
|
|
|
(6,495
|
)
|
|
(38,191
|
)
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes
|
|
$
|
5,689
|
|
$
|
7,637
|
|
$
|
(3,179
|
)
|
|
|
|
|
|
|
|
|
The
difference between the provision (benefit) for income taxes and the amount computed by applying the federal statutory income tax rate (35%) to income (loss) before taxes is explained
as follows (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Tax at federal statutory rate
|
|
$
|
6,398
|
|
$
|
(2,123
|
)
|
$
|
21,913
|
|
Previously unbenefited losses
|
|
|
749
|
|
|
|
|
|
(57,550
|
)
|
State taxes, net
|
|
|
(1,213
|
)
|
|
704
|
|
|
4,042
|
|
Non-deductible stock compensation
|
|
|
559
|
|
|
3,840
|
|
|
281
|
|
Foreign rate differential
|
|
|
(585
|
)
|
|
7,018
|
|
|
29,120
|
|
Non-deductible in-process research and development
|
|
|
|
|
|
|
|
|
2,910
|
|
Research credits
|
|
|
(849
|
)
|
|
(2,163
|
)
|
|
(2,137
|
)
|
Export tax benefits
|
|
|
|
|
|
|
|
|
(1,142
|
)
|
Domestic manufacturing deduction
|
|
|
|
|
|
|
|
|
(840
|
)
|
Other
|
|
|
630
|
|
|
361
|
|
|
224
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,689
|
|
$
|
7,637
|
|
$
|
(3,179
|
)
|
|
|
|
|
|
|
|
|
93
AFFYMETRIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
NOTE 15INCOME TAXES (Continued)
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):
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
46,367
|
|
$
|
38,779
|
|
|
Tax credit carryforwards
|
|
|
35,088
|
|
|
32,268
|
|
|
Deferred revenue
|
|
|
2,022
|
|
|
7,843
|
|
|
Capitalized research and development costs
|
|
|
1,706
|
|
|
2,416
|
|
|
Intangibles
|
|
|
685
|
|
|
1,339
|
|
|
Stock-based compensation
|
|
|
8,512
|
|
|
6,215
|
|
|
Accrued compensation
|
|
|
2,850
|
|
|
2,882
|
|
|
Accrued warranty
|
|
|
1,206
|
|
|
2,673
|
|
|
Inventory reserve
|
|
|
4,213
|
|
|
7,103
|
|
|
Reserves and other
|
|
|
6,393
|
|
|
8,813
|
|
|
Depreciation and amortization
|
|
|
6,031
|
|
|
4,198
|
|
|
Other, net
|
|
|
1,097
|
|
|
476
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
116,170
|
|
|
115,005
|
|
Valuation allowance for deferred tax assets
|
|
|
(64,592
|
)
|
|
(68,029
|
)
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
51,578
|
|
|
46,976
|
|
|
|
|
|
|
|
Net deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Acquired intangibles
|
|
|
(1,235
|
)
|
|
(1,498
|
)
|
|
Other, net
|
|
|
(3,333
|
)
|
|
(2,774
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(4,568
|
)
|
|
(4,272
|
)
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
47,010
|
|
$
|
42,704
|
|
|
|
|
|
|
|
As
of December 31, 2007, the Company had total net operating loss carryforwards of $198.6 million, comprised of $133.9 million for U.S. federal purposes, which
expire in the years 2020 through 2027 if not utilized, and $64.7 million for state purposes, which expire in the years 2010 through 2017 if not utilized. Additionally, the Company has federal
and state research and development tax credit carryforwards and other various tax credit carryforwards of approximately $50.4 million, which expire in the years 2008 through 2027 if not
utilized. Utilization of the Company's 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 could result in the expiration of the net operating loss before utilization.
The
valuation allowance decreased by $3.4 million and $8.6 million for the years ended December 31, 2007 and 2006, respectively. The remaining valuation allowance as
of December 31, 2007 is $64.6 million, primarily due to the benefit of stock options that have not been realized on a tax return. In assessing the realizability of its deferred tax
assets, the Company considered whether it is
94
AFFYMETRIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
NOTE 15INCOME TAXES (Continued)
more
likely than not that some portion or all of the deferred tax assets will not be realized. The Company considered historical book income, the scheduled reversal of deferred tax assets, and
projected future book and taxable income in making this assessment. Based upon a detailed analysis of historical and projected book and taxable income, the Company determined that the realization of
certain deferred tax assets is considered more likely than not.
Approximately
$53.1 million of the valuation allowance as of December 31, 2007 is attributable to the income tax benefits of stock option deductions, the benefit of which
will be credited to stockholders' equity when, and if, realized. Approximately $9.3 million of the valuation allowance as of December 31, 2007 is attributable to the acquisition of
certain ParAllele tax attributes, the benefit of which will be credited to goodwill when, and if, realized.
A
deferred tax liability of approximately $1.5 million has been recorded against the unrealized gain on certain investments, which is included in accumulated other comprehensive
income, as of December 31, 2007.
Not
included in the deferred tax assets as of December 31, 2007 is approximately $4.2 million of tax benefits related to employee stock plans. When realized, the tax
benefit of these assets will be accounted for as a credit to additional paid-in capital, rather than a reduction of the income tax provision.
As
of December 31, 2007, cumulative un-remitted foreign earnings that are considered to be permanently invested outside the United States and on which no U.S. taxes
have been provided were approximately $15.4 million. The residual U.S. tax liability, if such amounts were remitted, would be nominal.
Of
the total tax benefits resulting from the exercise of employee stock options and other employee stock programs, the amounts booked to stockholders' equity were approximately
$5.4 million and $7.6 million for the years ended December 31, 2007 and 2006 respectively.
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, 2007.
Effective
January 1, 2007, the Company adopted Financial Interpretation No. 48
, Accounting for Uncertainty in Income Taxes, an interpretation of
FASB Statement No. 109
("FIN48"), as a change in accounting principle. As a result, prior periods are not restated for the effect of FIN 48, and the cumulative
effect of applying FIN 48 was recorded as an adjustment to accumulated deficit as of the beginning of the period of adoption. The cumulative effect of adoption was an increase of
$0.6 million to the opening balance of accumulated deficit as a change in accounting principle.
95
AFFYMETRIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
NOTE 15INCOME TAXES (Continued)
The
following table presents the total amount of unrecognized tax benefits (in thousands):
Unrecognized tax benefits, January 1, 2007
|
|
$
|
13,871
|
|
Gross increasestax positions in prior period
|
|
|
93
|
|
Gross decreasestax positions in prior period
|
|
|
(37
|
)
|
Gross increasescurrent period tax positions
|
|
|
1,246
|
|
Settlements
|
|
|
(239
|
)
|
Lapse of statute of limitations
|
|
|
|
|
|
|
|
|
Unrecognized tax benefits, December 31, 2007
|
|
$
|
14,934
|
|
|
|
|
|
If
recognized, the amount of unrecognized tax benefits that would impact income from continuing operations and the effective tax rate is $14.0 million. Any changes to acquisition
related unrecognized tax benefits of approximately $0.9 million will impact goodwill. As of December 31, 2007, 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, 2007, the amount of accrued interest and penalties related to tax uncertainties was approximately $0.1 million for a total cumulative amount of $0.2 million as of
December 31, 2007.
The
Company files U.S. federal, state, and foreign income tax returns in jurisdictions with varying statutes of limitations. The 1992 through 2007 tax years generally remain
subject to examination by federal and state tax authorities. In significant foreign jurisdictions, the 2002 through 2007 tax years generally remain subject to examination by their respective tax
authorities.
NOTE 16PRODUCT SALES, GEOGRAPHIC SALES, AND SIGNIFICANT CUSTOMERS
The Company has determined that, in accordance with SFAS No. 131,
Disclosures about Segments of an Enterprise and Related
Information
, it operates in one segment as it only reports operating results
96
AFFYMETRIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
NOTE 16PRODUCT SALES, GEOGRAPHIC SALES, AND SIGNIFICANT CUSTOMERS (Continued)
on
an aggregate basis to the chief operating decision maker of the Company. The Company reported product and product related revenue by type and by region as follows (in thousands):
|
|
Year Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
Total product and product related revenue:
|
|
|
|
|
|
|
|
|
|
|
Probe arrays
|
|
$
|
181,202
|
|
$
|
170,359
|
|
$
|
197,949
|
|
Reagents
|
|
|
59,902
|
|
|
43,283
|
|
|
42,428
|
|
Instruments
|
|
|
38,679
|
|
|
47,101
|
|
|
62,636
|
|
Subscription fees
|
|
|
3,809
|
|
|
7,237
|
|
|
12,448
|
|
Service and other
|
|
|
39,346
|
|
|
41,235
|
|
|
20,172
|
|
License fee and milestone revenue
|
|
|
14,649
|
|
|
14,568
|
|
|
14,557
|
|
|
|
|
|
|
|
|
|
Total product and product related revenue
|
|
$
|
337,587
|
|
$
|
323,783
|
|
$
|
350,190
|
|
|
|
|
|
|
|
Customer location:
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
164,166
|
|
$
|
155,737
|
|
$
|
173,496
|
|
Europe
|
|
|
114,228
|
|
|
108,215
|
|
|
108,907
|
|
Japan
|
|
|
31,550
|
|
|
37,403
|
|
|
47,920
|
|
Other
|
|
|
27,643
|
|
|
22,428
|
|
|
19,867
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
337,587
|
|
$
|
323,783
|
|
$
|
350,190
|
|
|
|
|
|
|
|
There
were no customers representing 10% or more of total revenue in 2007, 2006 and 2005.
NOTE 17DEFINED-CONTRIBUTION SAVINGS PLANS
401(k) Plan
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 totaled $3.7 million in 2007, $3.8 million in 2006 and $3.3 million in 2005. Company contributions to employees
vest ratably over four years.
Director and Executive Deferred Compensation Plan
In December 2004, the Board of Directors approved the creation of the Affymetrix, Inc. Deferred Compensation Plan (the "Plan"). The Plan provides
directors, executive officers and other eligible employees with the opportunity to enter into agreements to defer specified percentages of their cash compensation derived from base salary, bonus
awards and other specified compensation (including director fees). Distributions occur upon termination of service (or the 6-month anniversary after termination), death, or upon such other
dates that may be elected by the participant in accordance with the terms of the Plan. Generally, participants may elect for distributions of deferred amounts upon termination or death to be paid in
the form of either a lump sum or in annual installments.
97
AFFYMETRIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
NOTE 17DEFINED-CONTRIBUTION SAVINGS PLANS (Continued)
Distributions
would be made in the event of a change of control of Affymetrix. Deferrals are adjusted for gain or loss based on the performance of one or more investment options selected by the
participant from among investment funds chosen by the Compensation Committee of the Board. The Company in its sole discretion may suspend or terminate the Plan or revise or amend it in any respect,
except that no such action may reduce vested amounts credited to deferral accounts, and such accounts will continue to be owed to the participants or beneficiaries and will continue to be a liability
of the Company until paid. For the years ended December 31, 2007 and 2006, the Company incurred no significant expenses in connection with the Plan.
NOTE 18SUBSEQUENT EVENTS
Intellectual Property Payment
On January 10, 2008, the Company and Illumina, Inc. announced that they had entered into a settlement agreement to resolve their patent litigation.
Under the terms of the settlement, Illumina agreed, without admitting liability, to make a one-time payment to the Company of $90 million. The Company agreed to dismiss with
prejudice all lawsuits it had brought against Illumina. Illumina
agreed to dismiss with prejudice its counterclaims in the relevant lawsuits. In exchange for the payment, the Company granted Illumina, its affiliates and its customers a perpetual covenant not to sue
for making, using or selling any of Illumina's current products, evolutions of those products and services related thereto. In addition, the Company extended the covenant not to sue for four years for
making, using or selling Illumina products or services that are based on future technology developments. The covenant not to sue covers all fields other than photolithography, the process by which the
Company manufactures its arrays and a field in which Illumina does not operate.
The
settlement will resolve all litigations and payments resulting from lawsuits the Company commenced against Illumina in United States District Court for the District of Delaware, in
Regional Court in Düsseldorf (Germany), and in High Court of Justice, Chancery DivisionPatents Court in London (United Kingdom). Payment of the settlement amount was
received in January 2008 and will be recognized as revenue in the first quarter of 2008.
USB Acquisition
On January 31, 2008, the Company announced the completion of its acquisition of USB Corporation, a privately held Cleveland, Ohio-based company
that develops, manufactures and markets an extensive line of molecular biology and biochemical reagent products. The acquisition will enable the Company to accelerate the development and
commercialization of new genetic analysis solutions and increase the value of its current product portfolio. The purchase price was approximately $75 million plus direct expenses. The results
of operations from USB Corporation will be included in the Company's consolidated financial statements from January 31, 2008, the date of closing.
98
AFFYMETRIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
NOTE 19UNAUDITED QUARTERLY FINANCIAL INFORMATION
|
|
2007
|
|
2006
|
|
|
Fourth
Quarter
|
|
Third
Quarter
|
|
Second
Quarter
|
|
First
Quarter
|
|
Fourth
Quarter
|
|
Third
Quarter
|
|
Second
Quarter
|
|
First
Quarter
|
|
|
(in thousands, except per share amounts)
|
Total revenue (excluding Perlegen)
|
|
$
|
107,002
|
|
$
|
94,631
|
|
$
|
83,884
|
|
$
|
73,757
|
|
$
|
101,585
|
|
$
|
80,079
|
|
$
|
77,869
|
|
$
|
81,091
|
Perlegen revenue
|
|
$
|
590
|
|
$
|
355
|
|
$
|
4,423
|
|
$
|
6,678
|
|
$
|
2,603
|
|
$
|
4,593
|
|
$
|
2,197
|
|
$
|
5,300
|
Total cost of goods sold (excluding Perlegen)
|
|
$
|
37,667
|
|
$
|
35,426
|
|
$
|
34,659
|
|
$
|
26,196
|
|
$
|
38,675
|
|
$
|
32,477
|
|
$
|
27,058
|
|
$
|
25,515
|
Perlegen cost of goods sold
|
|
$
|
274
|
|
$
|
166
|
|
$
|
1,907
|
|
$
|
2,421
|
|
$
|
914
|
|
$
|
1,646
|
|
$
|
1,074
|
|
$
|
1,584
|
Net income (loss)
|
|
$
|
12,777
|
|
$
|
2,580
|
|
$
|
1,242
|
|
$
|
(4,006
|
)
|
$
|
8,680
|
|
$
|
(14,155
|
)
|
$
|
(10,054
|
)
|
$
|
1,825
|
Basic net income (loss) per common share
|
|
$
|
0.19
|
|
$
|
0.04
|
|
$
|
0.02
|
|
$
|
0.06
|
|
$
|
0.13
|
|
$
|
(0.21
|
)
|
$
|
(0.15
|
)
|
$
|
0.03
|
Diluted net income (loss) per common share
|
|
$
|
0.17
|
|
$
|
0.04
|
|
$
|
0.02
|
|
$
|
0.06
|
|
$
|
0.13
|
|
$
|
(0.21
|
)
|
$
|
(0.15
|
)
|
$
|
0.03
|
99