Illumina, Inc.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2006
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to .
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Commission file number:
000-30361
Illumina, Inc.
(Exact name of Registrant as
Specified in Its Charter)
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Delaware
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33-0804655
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(State or other Jurisdiction
of
Incorporation or Organization)
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(I.R.S. Employer
Identification No.)
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9885 Towne Centre
Drive,
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San Diego,
California
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92121
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(Address of Principal Executive
Offices)
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(zip
code)
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Registrants telephone number, including area code:
(858) 202-4500
Securities registered pursuant to Section 12(b) of the
Act:
None
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, $0.01 par value
(Title of class)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of Registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer þ Accelerated
filer o Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of February 1, 2007, there were 60,049,268 shares
of the Registrants Common Stock outstanding. The aggregate
market value of the Common Stock held by non-affiliates of the
Registrant as of June 30, 2006 (the last business day of
the Registrants most recently completed second fiscal
quarter), based on the closing price for the Common Stock on the
NASDAQ Global Market on that date, was $1,289,642,486. This
amount excludes an aggregate of 2,471,651 shares of Common
Stock held by officers and directors and each person known by
the Registrant to own 10% or more of the outstanding Common
Stock. Exclusion of shares held by any person should not be
construed to indicate that such person possesses the power,
directly or indirectly, to direct or cause the direction of the
management or policies of the Registrant, or that the Registrant
is controlled by or under common control with such person.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrants definitive proxy statement for
the annual meeting of stockholders expected to be held on
June 7, 2007 are incorporated by reference into
Items 10 through 14 of Part III of this Report.
ILLUMINA, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006
TABLE OF CONTENTS
1
PART I
This Annual Report on
Form 10-K
may contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, and
Section 21E of the Securities Exchange Act of 1934. These
statements relate to future events or our future financial
performance. We have attempted to identify forward-looking
statements by terminology including anticipates,
believes, can, continue,
could, estimates, expects,
intends, may, plans,
potential, predicts, should
or will or the negative of these terms or other
comparable terminology. These statements are only predictions
and involve known and unknown risks, uncertainties and other
factors, including the risks outlined under Item 1A.
Risk Factors in this Annual Report, that may cause our
actual results, levels of activity, performance or achievements
to be materially different from any future results, levels or
activity, performance or achievements expressed or implied by
these forward-looking statements. Although we believe that the
expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Accordingly, you should
not unduly rely on these forward-looking statements, which speak
only as of the date of this Annual Report. We are not under any
duty to update any of the forward-looking statements after the
date we file this Annual Report on
Form 10-K
or to conform these statements to actual results, unless
required by law. You should, however, review the factors and
risks we describe in the reports we file from time to time with
the Securities and Exchange Commission.
Illumina®,
Array of
Arraystm,
BeadArraytm,
BeadXpresstm,
CSProtm,
DASL®,
GoldenGate®,
Infinium®,
IntelliHybtm,
iSelecttm,
Making Sense Out of
Life®,
Oligator®,
Sentrix®,
VeraCodetm,
Solexa®,
MPSStm
are our trademarks. This report also contains brand names,
trademarks or service marks of companies other than Illumina,
and these brand names, trademarks and service marks are the
property of their respective holders.
Available
Information
Our annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and all amendments to those reports are available free of charge
on our website, www.illumina.com. The information on our website
is not incorporated by reference into this report. Such reports
are made available as soon as reasonably practicable after
filing with, or furnishing to, the Securities and Exchange
Commission. The SEC also maintains an Internet site at
www.sec.gov that contains reports, proxy and information
statements, and other information regarding issuers that
electronically file with the SEC.
Overview
We are a leading developer, manufacturer and marketer of
next-generation life science tools and integrated systems for
the large scale analysis of genetic variation and biological
function. Using our proprietary technologies, we provide a
comprehensive line of products and services that currently serve
the sequencing, genotyping and gene expression markets, and we
expect to enter the market for molecular diagnostics. Our
customers include leading genomic research centers,
pharmaceutical companies, academic institutions, clinical
research organizations and biotechnology companies. Our tools
provide researchers around the world with the performance,
throughput, cost effectiveness and flexibility necessary to
perform the billions of genetic tests needed to extract valuable
medical information from advances in genomics and proteomics. We
believe this information will enable researchers to correlate
genetic variation and biological function, which will enhance
drug discovery and clinical research, allow diseases to be
detected earlier and permit better choices of drugs for
individual patients.
2
On January 26, 2007, we completed the acquisition of
Solexa, Inc. (Solexa) for approximately 13.1 million shares
of our common stock. Solexa develops and commercializes genetic
analysis technologies used to perform a range of analyses,
including whole genome resequencing, gene expression analysis
and small RNA analysis. We believe our combined company is the
only company with genome-scale technology for genotyping, gene
expression and sequencing, the three cornerstones of modern
genetic analysis.
We were incorporated in California in April 1998. We
reincorporated in Delaware in July 2000. Our principal executive
offices are located at 9885 Towne Centre Drive, San Diego,
California 92121. Our telephone number is
(858) 202-4500.
Industry
Background
Genetic
Variation and Biological Function
Every person inherits two copies of each gene, one from each
parent. The two copies of each gene may be identical, or they
may be different. These differences are referred to as genetic
variation. Examples of the physical consequences of genetic
variation include differences in eye and hair color. Genetic
variation can also have important medical consequences. Genetic
variation affects disease susceptibility, including
predisposition to cancer, diabetes, cardiovascular disease and
Alzheimers disease. In addition, genetic variation may
cause people to respond differently to the same drug treatment.
Some people may respond well, others may not respond at all, and
still others may experience adverse side effects. A common form
of genetic variation is a single-nucleotide polymorphism, or
SNP. A SNP is a variation in a single position in a DNA
sequence. It is estimated that the human genome contains over
nine million SNPs.
While in some cases a single SNP will be responsible for
medically important effects, it is now believed that
combinations of SNPs may contribute to the development of most
major diseases. Since there are millions of SNPs, it is
important to investigate many representative, well-chosen SNPs
simultaneously in order to discover medically valuable
information.
Another contributor to disease and dysfunction is the over- or
under-expression of genes within an organisms cells. A
very complex network of genes interacts to maintain health in
complex organisms. The challenge for scientists is to delineate
the associated genes expression patterns and their
relationship to disease. Until recently, this problem was
addressed by investigating effects on a
gene-by-gene
basis. This is time consuming, and difficulties exist when
several pathways cannot be observed or controlled at
the same time. With the advent of microarray technology,
thousands of genes can now be tested at the same time.
SNP
Genotyping
SNP genotyping is the process of determining which base (A, C, G
or T) is present at a particular site in the genome within
an individual or other organism. The use of SNP genotyping to
obtain meaningful statistics on the effect of an individual SNP
or a collection of SNPs, and to apply that information to
clinical trials and diagnostic testing, requires the analysis of
millions of SNP genotypes and the testing of large populations
for each disease. For example, a single large clinical trial
could involve genotyping 300,000 SNPs per patient in
1,000 patients, thus requiring 300 million assays.
Using previously available technologies, this scale of SNP
genotyping was both impractical and prohibitively expensive.
Large-scale SNP genotyping can be used in a variety of ways,
including studies designed to understand the genetic
contributions to disease (disease association studies),
genomics-based drug development, clinical trial analysis,
disease predisposition testing, and disease diagnosis. SNP
genotyping can also be used outside of healthcare, for example
in the development of plants and animals with desirable
commercial characteristics. These markets will require billions
of SNP genotyping assays annually.
3
Gene
Expression Profiling
Gene expression profiling is the process of determining which
genes are active in a specific cell or group of cells and is
accomplished by measuring mRNA, the intermediary messenger
between genes (DNA) and proteins. Variation in gene expression
can cause disease, or act as an important indicator of disease
or predisposition to disease. By comparing gene expression
patterns between cells from different environments, such as
normal tissue compared to diseased tissue or in the presence or
absence of a drug, specific genes or groups of genes that play a
role in these processes can be identified. Studies of this type,
often used in drug discovery, require monitoring thousands, and
preferably tens of thousands, of mRNAs in large numbers of
samples. Once a smaller set of genes of interest has been
identified, researchers can then examine how these genes are
expressed or suppressed across numerous samples, for example,
within a clinical trial.
As gene expression patterns are correlated to specific diseases,
gene expression profiling is becoming an increasingly important
diagnostic tool. Diagnostic use of expression profiling tools is
anticipated to grow rapidly with the combination of the
sequencing of various genomes and the availability of more
cost-effective technologies.
Sequencing
DNA sequencing is the process of determining the order of bases
(A, C, G or T) in a DNA sample, which can be further
divided into de novo sequencing, re-sequencing, and tag
sequencing. In de novo sequencing, the goal is to determine the
sequence of a representative individual from a species never
before sequenced. Understanding the similarities and differences
in DNA sequence between many species can help to improve our
understanding of the function of the structures found in the DNA.
In re-sequencing, one determines the sequences of many
individuals from the same species, generally comparing each to a
standard or reference sequence. This is an extremely
comprehensive form of genotyping, in which every single base is
characterized for possible mutations. Mutations tend to fall in
two categories: those which occur fairly frequently at a tiny
fraction of bases (e.g. at about 0.1% of bases in humans), and
those which occur much less frequently but at a large number of
locations. Both types can contribute to diseases. Genotyping can
subsequently be used to characterize the former, but
re-sequencing is used to assay the latter. With the merger of
Illumina and Solexa, we will have
state-of-the-art
technologies for both.
In tag sequencing, short sequences, each representative of a
larger molecule or genomic location, are detected and counted.
In these applications, the number of times that each tag is seen
provides quantification of an underlying biological process. As
an example, in digital gene expression, one tag sequence may
exist for each gene, and the number of copies of this tag which
are detected in an experiment is a measure of how actively that
gene is being expressed in the tissue sample being analyzed.
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Our
Technologies
BeadArray
Technology
We have developed a proprietary array technology that enables
the large-scale analysis of genetic variation and biological
function. Our BeadArray technology combines microscopic beads
and a substrate in a simple proprietary manufacturing process to
produce arrays that can perform many assays simultaneously. Our
BeadArray technology provides a unique combination of high
throughput, cost effectiveness, and flexibility. We achieve high
throughput with a high density of test sites per array and we
are able to format arrays either in a pattern arranged to match
the wells of standard microtiter plates or in various
configurations in the format of standard microscope slides. We
seek to maximize cost effectiveness by reducing consumption of
expensive reagents and valuable samples, and through the low
manufacturing costs associated with our technologies. Our
ability to vary the size, shape and format of the well patterns
and to create specific bead pools, or sensors, for different
applications provides the flexibility to address multiple
markets and market segments. We believe that these features have
enabled our BeadArray technology to become a leading platform
for the emerging high-growth market of SNP genotyping and expect
they will enable us to become a key player in the gene
expression market.
Our proprietary BeadArray technology combines microwells etched
into a substrate and specially prepared beads that self-assemble
into an array. We have deployed our BeadArray technology in two
different array formats, the Array Matrix and the BeadChip. Our
first bead-based product was the Array Matrix which incorporates
fiber optic bundles. The fiber optic bundles, which we cut into
lengths of less than one inch, are manufactured to our
specifications. Each bundle is comprised of approximately 50,000
individual fibers and 96 of these bundles are placed into an
aluminum plate, which forms an Array Matrix. BeadChips are
fabricated in microscope slide-shaped sizes with varying numbers
of sample sites per slide. Both formats are chemically etched to
create tens to hundreds of thousands of wells for each sample
site.
In a separate process, we create sensors by affixing a specific
type of molecule to each of the billions of microscopic beads in
a batch. We make different batches of beads, with the beads in a
given batch coated with one particular type of molecule. The
particular molecules on a bead define that beads function
as a sensor. For example, we create a batch of SNP sensors by
attaching a particular DNA sequence, or oligo, to each bead in
the batch. We combine batches of coated beads to form a pool
specific to the type of array we intend to create. A bead pool
one milliliter in volume contains sufficient beads to produce
thousands of arrays.
To form an array, a pool of coated beads is brought into contact
with the array surface where they are randomly drawn into the
wells, one bead per well. The tens of thousands of beads in the
wells comprise our individual arrays. Because the beads assemble
randomly into the wells, we perform a final procedure called
decoding in order to determine which bead type
occupies which well in the array. We employ several proprietary
methods for decoding, a process that requires only a few steps
to identify all the beads in the array. One beneficial
by-product of the decoding process is a validation of each bead
in the array. This quality control test characterizes the
performance of each bead and can identify and eliminate use of
any empty wells. We ensure that each bead type on the array is
sufficiently represented by including multiple copies of each
bead type. Multiple bead type copies improve the reliability and
accuracy of the resulting data by allowing statistical
processing of the results of identical beads. We believe we are
the only microarray company to provide this level of quality
control in the industry.
5
An experiment is performed by preparing a sample, such as DNA
from a patient, and introducing it to the array. The design
features of our Array Matrix allow it to be simply dipped into a
solution containing the sample, whereas our BeadChip allows
processing of samples on a slide-sized platform. The molecules
in the sample bind to their matching molecules on the coated
bead. These molecules in either the sample or on the bead are
labeled with a fluorescent dye either before or after the
binding. The BeadArray Reader detects the fluorescent dye by
shining a laser on the fiber optic bundle or on the BeadChip.
This allows the detection of the molecules resulting in a
quantitative analysis of the sample.
VeraCode
Technology
The BeadArray technology is most effective in applications which
require mid- to high levels of multiplexing from low to high
levels of throughput. Multiplexing refers to the number of
individual pieces of information that are simultaneously
extracted from one sample. We believe the molecular diagnostics
market will require systems which are extremely high throughput
and cost effective in the mid- to
low-multiplex
range. To address this market, we acquired the VeraCode
technology through our acquisition of CyVera Corporation in
April 2005. Based on digitally encoded microbeads, VeraCode
enables low-cost multiplexing from 1 to 384-plex in a single
well. We plan to implement the VeraCode technology using our
newly designed BeadXpress system and our existing assays. We
believe that this system will enable lower multiplex genotyping,
gene expression and protein based assays. In the research
market, we expect our customers to utilize our BeadArray
technology for their higher multiplex projects and then move to
our BeadXpress system for their lower multiplex projects
utilizing the same assays. Additionally, we believe that the
cost and multiplex advantages of the BeadXpress system using our
VeraCode technology will be welcomed in the molecular
diagnostics market. We expect to launch the BeadXpress system
during the first quarter of 2007, along with several assays for
the system.
Oligator
Technology
Genomic applications require many different short pieces of DNA
that can be made synthetically, called oligos. We have developed
our proprietary Oligator technology for the parallel synthesis
of many different oligos to meet the requirements of large-scale
genomics applications. We believe that our Oligator technology
is substantially more cost effective and provides significantly
higher throughput than available commercial alternatives. Our
synthesis machines are computer controlled and utilize many
robotic processes to minimize the amount of labor used in the
manufacturing process. In 2005, we implemented our
fourth-generation Oligator technology, which is capable of
manufacturing over 13,000 different oligos per run. This is an
improvement over prior generations of technology where we could
only manufacture approximately 3,000 oligos per run. This
increase in scale was necessary to enable us to support the
manufacture of oligos under our collaboration with Invitrogen as
well as to support our increased internal need for oligos, a
critical component of our BeadArray technology, for product
sales and new product development.
6
Sequencing
Technology
Our DNA sequencing technology, acquired as part of the Solexa
merger which was completed on January 26, 2007, is based on
use of our
sequencing-by-synthesis
(SBS) biochemistry. In SBS, single stranded DNA is extended from
a priming site, one base at a time, using reversible terminator
nucleotides. These are DNA bases which can be added to a growing
second strand, but which initially cannot be further extended.
This means that at each cycle of the chemistry, only one base
can be added. Each base which is added includes a fluorescent
label which is specific to the particular base. Thus following
incorporation, the fluorescence can be imaged, its color
determined, and the base itself can be inferred. Once this is
done, an additional step removes both the fluorescence and the
block that had prevented further extension of the second strand.
This allows another base to be added, and the cycle can be
repeated. We have shown data in which this cycle is repeated up
to 50 times, thus determining DNA sequences which are up to 50
bases long. This may well increase in the future as we further
develop this technology. The reversible terminator bases which
we use are novel synthetic molecules which we manufacture. They
are not well incorporated by naturally occurring polymerases, so
we have also developed proprietary enzymes for this purpose.
Both the nucleotides and enzymes are the subject of significant
intellectual property.
In our DNA sequencing systems, we apply the SBS biochemistry on
microscopic islands of DNA. These are called DNA clusters. Each
cluster starts as a single DNA molecule, typically a few hundred
bases long, attached to the inside surface of a flow cell. We
then use a proprietary amplification biochemistry to create
copies of each starting molecule. As the copies are made, they
are covalently linked to the surface, so they cannot diffuse
away. After a number of cycles of amplification, each cluster
might have 500 to 1,000 copies of the original starting
molecule, but still be only about a micron (one-millionth of a
meter) in diameter. By making so many copies, the fluorescent
signal from each cluster is significantly increased. Because the
clusters are so small though, tens of millions of clusters can
be independently formed inside a single flow cell. This large
number of clusters can then be sequenced simultaneously, by
alternate cycles of SBS biochemistry and electronic imaging.
Key Advantages
of Our Technology
We believe that our technology provides distinct advantages, in
a variety of applications, over competing technologies, by
creating cost-effective, highly miniaturized arrays with the
following characteristics:
High Throughput. The miniaturization of our
BeadArray technology provides very high information content per
unit area. To increase sample throughput, we have formatted our
array matrix in a pattern arranged to match the wells of
standard microtiter plates, allowing throughput levels of up to
nearly 150,000 unique assays per microtiter plate, and we use
laboratory robotics to speed process time. Similarly, we have
patterned our whole-genome expression BeadChips to support up to
48,000 gene expression assays for six samples with each
BeadChip, and our whole-genome genotyping BeadChips to support
up to 650,000 genotypes with each BeadChip. Our Infinium and
GoldenGate assays are supported by full automation and LIMS to
address high throughput laboratories. Our Illumina Genome
Analyzer can analyze the DNA sequences of tens of millions of
clusters at one time.
Cost Effectiveness. Our array products
substantially reduce the cost of our customers experiments
as a result of our proprietary manufacturing process and our
ability to capitalize on cost reductions generated by advances
in fiber optics, plasma etching processes, digital imaging and
bead chemistry. In addition, our products require smaller
reagent volumes than other array technologies, thereby reducing
reagent costs for our customers. Our Oligator technology further
reduces reagent costs, as well as reducing our cost of coating
beads used in our BeadArray and VeraCode technologies. We expect
the Illumina Genome Analyzer to allow DNA sequencing at
1/100th of the cost of conventional capillary instruments.
7
Flexibility. We are able to offer flexible
solutions to our customers based on our ability to attach
different kinds of molecules, including DNA, RNA, proteins and
other chemicals, to our beads. In addition, we can have
BeadChips manufactured in multiple shapes and sizes with wells
organized in various arrangements to optimize them for different
markets and market segments. In combination, the use of beads
and etched wells provides the flexibility and scalability for
our BeadArray technology to be tailored to perform many
applications in many different market segments, from drug
discovery to diagnostics. Our Oligator technology allows us to
manufacture a wide diversity of lengths and quantities of
oligos. DNA sequences determined with our Illumina Genome
Analyzer can also be used to identify larger DNA or RNA
molecules from which the sequences have been derived, which
leads to a series of applications based on tag sequencing,
including digital gene expression analysis and microRNA
discovery and quantification.
Quality and Reproducibility. The quality of
our products is dependent upon each element in the
system the array, the assay used to perform the
experiment and the instrumentation and software used to capture
the results. Each array is manufactured with a high density of
beads, which enables us to have multiple copies of each
individual bead type. We measure the copies simultaneously and
combine them into one data point. This allows us to make a
comparison of each bead against its own population of identical
beads, which permits the statistical calculation of a more
reliable and accurate value for each data point. Finally, the
manufacture of the array includes a proprietary decoding step
that also functions as a quality control test of every bead on
every array, improving the overall quality of the data. When we
develop the assays used with our products, we focus on
performance, cost and ease of use. By developing assays that are
easy to use, we can reduce the potential for the introduction of
error into the experiment. We believe that this enables
researchers to obtain high quality and reproducible data from
their experiments. Additionally, we manufacture substantially
all of the reagents used in our assays, allowing us to control
the quality of the product delivered to the customer.
Our
Strategy
Our goal is to make our BeadArray, BeadXpress and Illumina
Genome Analyzer platforms the industry standard for products and
services addressing the genetic analysis markets. We plan to
achieve this by:
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focusing on emerging high-growth markets;
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rapidly commercializing our BeadLab, BeadStation, BeadXpress,
Illumina Genome Analyzer, Array Matrix and BeadChip products;
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expanding our technologies into multiple product lines,
applications and market segments; and
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strengthening our technological leadership.
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Products and
Services
The first implementation of our BeadArray technology, the Array
Matrix, is a disposable matrix with 96 fiber optic bundles
arranged in a pattern that matches the standard
96-well
microtiter plate. Each fiber optic bundle performs more than
1,500 unique assays. The BeadChip, introduced in 2003, is
fabricated in multiple configurations to support multiple
applications and scanning technologies.
We have provided genotyping services using our proprietary
BeadArray technology since 2001. In addition, we have developed
our first genotyping and gene expression products based on this
technology. These products include disposable Array Matrices and
BeadChips, GoldenGate and Infinium reagent kits for SNP
genotyping, BeadArray Reader scanning instruments and an
evolving portfolio of custom and standard gene expression
products.
8
SNP
Genotyping
In 2001, we introduced the first commercial application of our
BeadArray technology by launching our SNP genotyping services
product line. Since this launch, we have had peak days in which
we operated at over 60 million genotypes per day. To our
knowledge, no other genotyping platform can achieve comparable
levels of throughput while delivering such high accuracy and low
cost.
We designed our first consumable BeadArray product, the Array
Matrix, for SNP genotyping. The Array Matrix uses a universal
format that allows it to analyze any set of SNPs. We have also
developed reagent kits based on GoldenGate assay protocols and
the BeadArray Reader, a laser scanner, which is used to read our
array products.
Depending on throughput and automation requirements, our
customers can select the system configuration to best meet their
needs. For production-scale throughput, our BeadLab would be
appropriate, and for moderate-scale throughput, our BeadStation
would be selected. Our BeadLab includes our BeadArray Reader,
combined with LIMS, standard operating procedures and analytical
software and fluid handling robotics. This production-scale
system was commercialized in late 2002 and when installed, this
system can routinely produce millions of genotypes per day.
The BeadStation, a system for performing moderate-scale
genotyping designed to match the throughput requirements of
individual research groups and core labs, was commercialized in
late 2003. The BeadStation includes our BeadArray Reader and
genotyping
and/or gene
expression analysis software. Multiple BeadStations can be
configured to achieve different levels of desired throughput and
are fully upgradeable to a full BeadLab through various steps
that add automation, sample preparation equipment and LIMS
capability.
In 2003, we announced the availability of an assay set for
genetic linkage analysis. This standard product has been
deployed in our genotyping services operation and is also sold
to customers who use our SNP genotyping systems. Genetic linkage
analysis can help identify chromosomal regions with potential
disease associations across a related set of samples.
In 2005, we announced the introduction of the Major
Histocompatability Complex (MHC) Panel Set, which allows the
interrogation of a
difficult-to-assay
area of the genome, often associated with autoimmune diseases.
In addition, we announced the introduction of Mouse-6 and
MouseRef-8 Gene Expression BeadChip allowing the study of the
levels of gene expression in mouse model.
In 2005, we commenced shipping the Sentrix Human-1 Genotyping
BeadChip for whole-genome genotyping. This BeadChip provides to
scientists the ability to interrogate over 100,000 SNPs located
in high-value genetic regions of the human genome. Also, in the
fourth quarter of 2005, we began shipping the new Sentrix
HumanHap300 Genotyping BeadChip to customers around the world.
Using the Infinium assay, which enables us to select virtually
any SNP in the genome, the HumanHap300 BeadChip allows analysis
of more than 317,000 SNPs. We selected the SNPs for inclusion on
the chip in collaboration with a consortium of scientists that
are leaders in the genotyping field. We believe this
products quality and performance support our expectation
that it will become an important discovery tool for researchers
seeking to understand the genetic basis of common yet complex
diseases.
In 2006, we introduced several new SNP genotyping products,
including:
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Sentrix HumanHap240S BeadChip. The
HumanHap240S BeadChip is a companion to our Sentrix HumanHap300
BeadChip for genome-wide disease association studies that
enables researchers to interrogate an additional 240,000 SNPs
utilizing our Infinium assay. We began shipment of this product
in the first quarter of 2006.
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Sentrix HumanHap550 BeadChip. The HumanHap550
BeadChip contains over 550,000 SNPs on a single microarray. We
began shipment of this product in the second quarter of 2006.
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Sentrix HumanHap650Y BeadChip. The
HumanHap650Y BeadChip contains over 650,000 SNP markers on a
single microarray, which we believe provides the most
comprehensive genomic coverage and highest data quality of any
whole-genome genotyping product currently available. We began
shipment of this product in the third quarter of 2006.
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Sentrix HumanHap550+ BeadChip. The
HumanHap550+ BeadChip allows customers to add up to 120,000
custom SNP markers to supplement the standard content provided
on the existing Sentrix HumanHap550 BeadChip, yielding up to
670,000 markers for association studies.
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iSelect Infinium genotyping products. The
iSelect Infinium genotyping product line is used for focused
content applications. Customers can create a custom array of up
to 60,000 SNP markers per sample with 12 samples per chip. We
began shipment of these products in the third quarter of 2006.
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HumanHap300-Duo and the Human Hap300-Duo+ Genotyping
BeadChips. The
HumanHap300-Duo
allows researchers to analyze two samples simultaneously, with
over 634,000 total tag SNPs on a single BeadChip. The
HumanHap300-Duo+ allows for the addition of 60,000 custom
SNP loci to the base product, enabling researchers to enrich
that product with SNPs of interest in any genomic region. We
began shipment of the HumanHap300-Duo in the fourth quarter of
2006.
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RatRef-12 Expression BeadChip. The RatRef-12
Expression BeadChip enables analysis of 12 samples in
parallel on a single BeadChip. Content for this BeadChip is
derived from the NCBI RefSeq database (Release 16), with
over 22,000 rat transcripts represented. We began shipment of
this product in the fourth quarter of 2006.
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Through an application called Copy Number Polymorphisms, the
HumanHap family of BeadChips also provides high-resolution
information on amplifications, deletions and loss of
heterozygosity throughout the genome, abnormalities common in
cancers and congenital diseases. In addition, we announced
additional standard panels in the first quarter of 2006,
including mouse linkage and cancer panels.
Gene
Expression Profiling
With the addition of application specific accessory kits, our
production-scale BeadLabs and BeadStations are capable of
performing a growing number of applications, including gene
expression profiling.
In 2003, we introduced our focused set gene expression products
on both the Array Matrix and BeadChip platforms. Our system
includes a BeadArray Reader for imaging Array Matrices and
BeadChips, a hybridization chamber and software for data
extraction. In addition, we have developed standard gene
expression products for each of the human, mouse and arabidopsis
genomes with an additional panel that focuses on human
toxicology.
In 2005, we began shipment of the Human-6 and HumanRef-8
Expression BeadChip products. Both products allow large-scale
expression profiling of multiple samples on a single chip and
are imaged using our BeadArray Reader. The Human-6 BeadChip is
designed to analyze six discrete whole-human-genome samples on
one chip, interrogating in each sample approximately 48,000
transcripts from the estimated 30,000 genes in the human genome.
The HumanRef-8 BeadChip product analyzes eight samples in
parallel against 24,000 transcripts from the roughly 22,000
genes represented in the consensus RefSeq database, a
well-characterized whole-genome subset used broadly in genetic
analysis. We expect that these gene expression BeadChips will
dramatically reduce the cost of whole-genome expression
analysis, allowing researchers to expand the scale and
reproducibility of large-scale biological experimentation. In
2006, we began shipment of the RatRef-12, which analyzes twelve
samples in parallel against 22,226 transcripts from the roughly
21,910 genes represented in the RefSeq database, release 16.
10
Scanning
Instrumentation
The BeadArray Reader, an instrument we developed, is a key
component of both our
production-scale
BeadLab and our benchtop BeadStation. This scanning equipment
uses a laser to read the results of experiments that are
captured on our arrays and was designed to be used in all areas
of genetic analysis that use our Array Matrices and BeadChips.
In the second quarter of 2006, we began shipment of the
AutoLoader, which automates BeadChip loading and scanning and
increases lab throughput. The Autoloader is designed to support
up to two BeadArray Readers simultaneously for unattended
operation.
High-Throughput
Oligo Synthesis
We have put in place a
state-of-the-art
oligo manufacturing facility. This facility serves both the
commercial needs under our collaboration with Invitrogen and our
internal needs. In addition to their use to coat beads, these
oligos are components of the reagent kits for our BeadArray
products and are used for assay development. We manufacture
oligos in a wide range of lengths and in several scales, with
the ability to add many types of modifications. We offer a range
of quality control options and have implemented a laboratory
information management system to control much of the
manufacturing process. In 2005, we stopped selling oligos
directly into the market and began shipping oligos under our
collaboration with Invitrogen.
Our Collaborative
Partners
Invitrogen
Corporation
In December 2004, we entered into a strategic collaboration with
Invitrogen. The goal of the collaboration is to combine our
expertise in oligo manufacturing with the sales, marketing and
distribution capabilities of Invitrogen. In connection with the
collaboration, we have developed the next generation Oligator
DNA synthesis technology. This technology includes both
plate-and
tube-based
capabilities. Under the terms of the agreement, Invitrogen paid
us an upfront non-refundable collaboration payment of
$2.3 million in the first quarter of 2005. Additionally,
upon the achievement of a certain milestone, Invitrogen was
obligated to make a milestone payment of $1.1 million to
us. During 2005, this milestone was achieved and the milestone
payment was received. We used these funds to invest in our
San Diego facility to enable the development and
implementation of fourth-generation Oligator technology and to
extend the technology into the larger market for tube-based
oligo products. We began manufacturing and shipping the
plate-based and certain tube-based oligo products under the
collaboration in the third quarter of 2005. In addition, the
agreement provides for the transfer of our Oligator technology
into two Invitrogen facilities outside North America.
Collaboration profit from the sale of collaboration products is
divided equally between the two companies.
11
deCODE
genetics
In May 2006, we executed a Joint Development and Licensing
Agreement (the Development Agreement) with deCODE genetics, ehf.
(deCODE). Pursuant to the Development Agreement, the parties
agreed to collaborate exclusively to develop, validate and
commercialize specific diagnostic tests for variants in genes
involved in three disease-related pathways: the gene-encoding
leukotriene A4 hydrolase, linked to heart attack; the
gene-encoding transcription factor 7-like 2 (TCF7L2), linked to
type 2 diabetes; and the gene-encoding BARD1, linked to breast
cancer. With deCODE, we are developing diagnostic tests based on
these variants for use on our BeadXpress system. Under the
agreement, we will be responsible for the manufacturing,
marketing and selling of the diagnostic products. The companies
will share the development costs of these products and split the
profits from sales of the diagnostics tests. The Development
Agreement may be terminated as to a particular product under
development if one party decides to discontinue funding the
development of that product, and may be terminated in whole by
either party if the other party commits an uncured material
breach, files for bankruptcy or becomes insolvent. Under a
separate supply agreement, we installed instrumentation at
deCODE that will enable deCODE to perform whole genome
association studies on up to 100,000 samples using the our
Sentrix HumanHap300 BeadChips and associated reagents.
Intellectual
Property
We have an extensive patent portfolio, including, as of
February 1, 2007, ownership of, or exclusive licenses to,
106 issued U.S. patents and 149 pending U.S. patent
applications, including five allowed applications that have not
yet issued as patents, some of which derive from a common parent
application. This portfolio includes patents acquired as part of
the Solexa merger on January 26, 2007. Our issued patents,
which are directed at various aspects of our array, assay, oligo
synthesis, instrument and chemical detection technologies,
expire between 2011 and 2024. We are seeking to extend the
patents directed at the full range of our technologies. We have
received or filed counterparts for many of these patents and
applications in one or more foreign countries.
We also rely upon trade secrets, know-how, copyright and
trademark protection, as well as continuing technological
innovation and licensing opportunities to develop and maintain
our competitive position. Our success will depend in part on our
ability to obtain patent protection for our products and
processes, to preserve our copyrights and trade secrets, to
operate without infringing the proprietary rights of third
parties and to acquire licenses related to enabling technology
or products.
We are party to various exclusive and non-exclusive license
agreements with third parties, which grant us rights to use key
aspects of our array and sequencing technologies, assay methods,
chemical detection methods, reagent kits and scanning equipment.
We have exclusive licenses from Tufts University to patents that
are directed at our use of BeadArray technology. These patents
were filed by Dr. David Walt, a member of our board of
directors, the Chairman of our Scientific Advisory Board and one
of our founders. Our exclusive licenses expire with the
termination of the underlying patents, which will occur between
2010 and 2020. We also have additional nonexclusive licenses
from various third parties for other components of our products.
In all cases, the agreements remain in effect over the term of
the underlying patents, may be terminated at our request without
further obligation and require that we pay customary royalties
while the agreement is in effect.
Research and
Development
We have made substantial investments in research and development
since our inception. We have assembled a team of skilled
engineers and scientists who are specialists in biology,
chemistry, informatics, instrumentation, optical systems,
software, manufacturing and other related areas required to
complete the development of our products. Our research and
development efforts have focused primarily on the tasks required
to optimize our BeadArray and Oligator technologies and to
support commercialization of the products and services derived
from these technologies. As of December 31, 2006, we had a
total of 144 employees engaged in research and development
activities.
12
Our research and development expenses for 2006, 2005 and 2004
(inclusive of charges relating to stock-based compensation of
$3.9 million, $0.1 million, and $0.3 million,
respectively) were $33.4 million, $27.8 million and
$21.5 million, respectively. Compared to 2006, we expect
research and development expense to increase in absolute dollars
and as a percentage of overall revenue during 2007 as we
continue to expand our research and product development efforts,
including research and development projects associated with our
acquisition of Solexa.
Marketing and
Distribution
Our current products address the genetic analysis portion of the
life sciences market, in particular, experiments involving
sequencing, SNP genotyping and gene expression profiling. These
experiments may be involved in many areas of biologic research,
including basic human disease research, pharmaceutical drug
discovery and development, pharmacogenomics, toxicogenomics and
agricultural research. Our potential customers include
pharmaceutical, biotechnology, agrichemical, diagnostics and
consumer products companies, as well as academic or private
research centers. The genetic analysis market is relatively new
and emerging and its size and speed of development will be
ultimately driven by, among other items:
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the ability of the research community to extract medically
valuable information from genomics and to apply that knowledge
to multiple areas of disease-related research and treatment;
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the availability of sufficiently low cost, high-throughput
research tools to enable the large amount of experimentation
required to study genetic variation and biological
function; and
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the availability of government and private industry funding to
perform the research required to extract medically relevant
information from genomic analysis.
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We market and distribute our products directly to customers in
North America, major European markets, Japan and Singapore. In
each of these areas, we have dedicated sales, service and
application support personnel responsible for expanding and
managing their respective customer bases. In smaller markets in
the Pacific Rim countries and Europe, we sell our products and
provide services to customers through distributors that
specialize in life science products. We expect to significantly
increase our sales and distribution resources during 2007 and
beyond as we launch a number of new products and expand the
number of customers that can use our products.
Manufacturing
We manufacture our array platforms, reagent kits, scanning
equipment and oligos in-house. Our manufacturing capacity for
BeadChips has increased approximately fourfold over the level as
of January 1, 2006. We intend to continue to increase
capacity as needed to manufacture our products in sufficient
quantity to meet our business plan for 2007. We are focused on
continuing to enhance the quality and manufacturing yield of our
Array Matrices and BeadChips and are exploring ways to continue
increasing the level of automation in the manufacturing process.
In addition, we have implemented information management systems
for many of our manufacturing and services operations to manage
all aspects of material and sample use. We adhere to access and
safety standards required by federal, state and local health
ordinances, such as standards for the use, handling and disposal
of hazardous substances.
We intend to add capacity to manufacture Array Matrices and
BeadChips throughout 2007. We currently depend upon outside
suppliers for materials used in the manufacture of our products.
We intend to continue, and may extend, the outsourcing of
portions of our manufacturing process to subcontractors where we
determine it is in our best commercial interests.
13
Competition
Although we expect that our BeadArray products and services will
provide significant advantages over currently available products
and services, we expect to encounter intense competition from
other companies that offer products and services for the SNP
genotyping, gene expression and sequencing markets. These
include companies such as Affymetrix, Agilent, Amersham
Biosciences (acquired by GE Corp. and now named GE
Healthcare), Applera Corporation, Applied Biosystems, Beckman
Coulter, Caliper Technologies, Luminex, Monogram Biosciences,
NimbleGen, Perlegen Sciences, Roche Diagnostics in partnership
with 454 Life Sciences, Sequenom and Third Wave Technologies.
Some of these companies have or will have substantially greater
financial, technical, research, and other resources and larger,
more established marketing, sales, distribution and service
organizations than we do. In addition, they may have greater
name recognition than we do in the markets we need to address
and in some cases a large installed base of systems. Each of
these markets is very competitive and we expect new competitors
to emerge and the intensity of competition to increase in the
future. In order to effectively compete with these companies, we
will need to demonstrate that our products have superior
throughput, cost and accuracy advantages over the existing
products. Rapid technological development may result in our
products or technologies becoming obsolete. Products offered by
us could be made obsolete either by less expensive or more
effective products based on similar or other technologies.
Although we believe that our technology and products will offer
advantages that will enable us to compete effectively with these
companies, we cannot assure you that we will be successful.
Segment and
Geographic Information
We operate in one business segment, for the development,
manufacture and commercialization of tools for genetic analysis.
Our operations are treated as one segment as we only report
operating results on an aggregate basis to our chief operating
decision maker, our Chief Executive Officer.
During 2006, $81.5 million, or 44%, of our total revenue
came from shipments to customers outside the United States,
compared to $28.0 million, or 38%, in 2005. Sales to
territories outside of the United States are generally
denominated in U.S. dollars. We expect that sales to
international customers will continue to be an important and
growing source of revenue. We have sales support resources in
Western Europe and direct sales offices in Japan, Singapore and
China. In addition, we have distributor relationships in various
countries in the Pacific Rim region and Europe.
Seasonality
Historically, customer purchasing patterns have not shown
significant seasonal variation, although demand for our products
is usually lowest in the first quarter of the calendar year and
highest in the third quarter of the calendar year as academic
customers spend unused budget allocations before the end of the
governments fiscal year.
Environmental
Matters
We are dedicated to the protection of our employees and the
environment. Our operations require the use of hazardous
materials which subject us to a variety of federal, state and
local environmental and safety laws and regulations. We believe
we are in material compliance with current applicable laws and
regulations; however, we could be held liable for damages and
fines should contamination of the environment or individual
exposures to hazardous substances occur. In addition, we cannot
predict how changes in these laws and regulations, or the
development of new laws and regulations, will affect our
business operations or the cost of compliance.
Employees
As of December 31, 2006, we had a total of 596 employees,
73 of whom hold Ph.D. degrees. 43 of our employees with Ph.D.
degrees are engaged in full-time research and development
activities. None of our employees are represented by a labor
union. We consider our employee relations to be positive.
14
Executive
Officers
Our executive officers as of February 1, 2007, are as
follows:
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Name
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Age
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Position
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Jay T. Flatley
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54
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President, Chief Executive Officer
and Director
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Christian O. Henry
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38
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Senior Vice President and Chief
Financial Officer
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Christian G. Cabou
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58
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Senior Vice President, General
Counsel and Secretary
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Arthur L. Holden
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54
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Senior Vice President of Corporate
and Market Development
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Tristan B. Orpin
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40
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Senior Vice President of
Commercial Operations
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John R. Stuelpnagel, DVM
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49
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Co-Founder, Senior Vice President
and General Manager, Microarray Business, Chief Operating
Officer and Director
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John West
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50
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Senior Vice President and General
Manager of DNA Sequencing
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Jay Flatley is President and Chief Executive Officer of
Illumina. Prior to his appointment in 1999, Mr. Flatley was
the President and Chief Executive Officer of Molecular Dynamics,
later acquired by Amersham Pharmacia Biotech in 1998 and now a
part of GE Healthcare. Mr. Flatley, who was a founder and
member of the board of directors for Molecular Dynamics, lead
the company to its initial public offering (IPO) in 1993, in
addition to helping the company develop and launch over 15 major
instrumentation systems, including the worlds first
capillary-based DNA sequencer. Prior to joining Molecular
Dynamics, Mr. Flatley was Vice President of Engineering and
Strategic Planning for Plexus Computers, a manufacturer of
high-performance Unix super-microcomputers. Before his career at
Plexus, Mr. Flatley was Executive Vice President for
Manning Technologies and held various manufacturing positions
while working for the Autolab division of Spectra Physics.
Mr. Flatley received a bachelor of arts degree in economics
from Claremont McKenna College (Claremont, CA) and a bachelor of
science and master of science (summa cum laude) in industrial
engineering from Stanford University (Stanford, CA). Currently,
he serves as a member of the board of directors of both Illumina
and GenVault Corporation.
Christian Henry is Senior Vice President and Chief
Financial Officer of Illumina. Mr. Henry joined Illumina in
June 2005 and is responsible for worldwide financial operations,
controllership functions and facilities management.
Mr. Henry served previously as the Chief Financial Officer
for Tickets.com, a publicly traded, online ticket provider that
was recently acquired by Major League Baseball Advanced Media,
LP. Prior to that, Mr. Henry was Vice President, Finance
and Corporate Controller of Affymetrix, Inc., a publicly traded
life sciences company, where he oversaw accounting, planning,
SEC and management reporting, and treasury and risk management.
He previously held a similar position at Nektar Therapeutics
(formerly Inhale Therapeutic Systems, Inc.). Mr. Henry
received a bachelor of administration degree in biochemistry and
cell biology from the University of California, San Diego,
and a master of business administration degree from the
University of California, Irvine. He is a certified public
accountant.
15
Christian Cabou is Senior Vice President, General Counsel
and Secretary of Illumina. Mr. Cabou joined Illumina in May
2006 and has worldwide responsibility for all legal and
intellectual property matters, in addition to being responsible
for the Companys human resources function. Mr. Cabou
is also Illuminas Code of Ethics Compliance Officer.
Before joining Illumina, Mr. Cabou spent five years as
General Counsel for GE Global Research and, before that, was
Senior Counsel of Global Intellectual Property for GE Medical
Systems. Prior to his position at GE, Mr. Cabou spent seven
years with the law firm Foley & Lardner where he was a
partner. He had twenty years of experience in engineering design
and management prior to his career in law and intellectual
property. Mr. Cabou received a J.D. from Northwestern
Universitys School of Law (Chicago, IL.) in addition to a
master of engineering management degree from Northwestern
University. Mr. Cabou was awarded a MSEE (equivalent)
degree from the Conservatoire National des Arts et Métiers
(Paris, France) and a bachelor of science (equivalent) degree
from the Lycée Technique dEtat (Armentières,
France).
Arthur Holden is the Senior Vice President of Corporate
and Business Development for Illumina. Mr. Holden joined
Illumina in April 2006 and is responsible for leading business
development and the development of relationships and
partnerships with pharmaceutical firms, large-scale research
consortia, and governmental bodies such as the National
Institute of Health (NIH) and the Food and Drug Administration
(FDA). Mr. Holden was most recently the principal founder,
chairman and chief executive officer for First Genetic Trust.
Prior to this he was Chairman and Chief Executive Officer of the
SNP Consortium, Ltd. and Chief Executive Officer and
Director of Celsis International, PLC. From 1983 to 1994
Mr. Holden held various executive positions at Baxter
International. A winner of multiple awards, including the Laura
Jackson Achievement Award for outstanding leadership in the
healthcare industry, the Illinois Technology
Innovation & Entrepreneurship award and the STRIVE
Entrepreneurial award, Mr. Holden currently serves on a
number of commercial and non-profit boards. He is chairman of
the Pharmaceutical Biomedical Research and the Serious Adverse
Event Consortia. In addition, he is Chairman of the Advisory
Board for the Biotechnology Management Program at the J.L.
Kellogg Graduate School of Management. He is a director of iBIO
and the Illinois Technology Development Alliance.
Mr. Holden earned a master of business administration
degree from Northwestern Universitys Kellogg School of
Management (Chicago, IL) and a bachelor of science degree
from Union College (Schenectady, NY).
Tristan Orpin joined Illumina in December of 2002 in the
role of Vice President of Worldwide Sales, and in January of
2007 was promoted to the position of Senior Vice President of
Commercial Operations. Before joining Illumina, Mr. Orpin
was Director of Sales and Marketing for Sequenom from September
1999 to August 2001. Later Mr. Orpin was elected Vice
President of Sales and Marketing and held this position from
August 2001 to November 2002. Prior to 2001, Mr. Orpin
served in several senior sales and marketing positions at
Bio-Rad Laboratories. Mr. Orpin received a bachelor of
science in genetics and biochemistry with first class honors
from the University of Melbourne (Melbourne, Australia).
John Stuelpnagel, D.V.M., one of Illuminas
co-founders, is General Manager for Illuminas Microarray
business and Chief Operating Officer. He has served as the
Companys Chief Operating Officer since January 2005 and a
Director since April 1998. From April 1998 to October 1999, he
served as acting President and Chief Executive Officer and from
April 1998 to April 2000 as acting Chief Financial Officer.
Between October 1999 and January 2005, Dr. Stuelpnagel was
Vice President of Business Development and later as Senior Vice
President of Operations. While founding Illumina,
Dr. Stuelpnagel was an associate with CW Group, a venture
capital firm. Dr. Stuelpnagel received both a bachelor of
science degree in biochemistry and a doctorate degree in
veterinary medicine from the University of California (Davis,
CA), and went on to receive a master of business administration
degree from the University of California, Los Angeles.
16
John West is Senior Vice President and General Manager
for Illuminas DNA Sequencing business. Mr. West
joined Illumina from Solexa, where he was Chief Executive
Officer. Before Solexa, he was Vice President of DNA Platforms
for Applied Biosystems, Inc. (AB) and was responsible for the
companys instrument and reagent products for DNA
sequencing, gene expression, genotyping, PCR, and DNA synthesis.
His group developed and launched the instruments that now
populate virtually all genome sequencing centers worldwide. He
also had business responsibility for ABs first gene
expression array system, for its real-time PCR instruments, and
for its microfluidic PCR products. Previously, Mr. West
held a number of senior positions, including President of
Princeton Instruments, Inc., President and Founder of
BioAutomation, Inc. and Marketing Director for Microfluidics at
Microcosm Technologies, Inc. During Mr. Wests term at
Princeton Instruments, the company introduced the first low
light imaging system for single molecule
fluorescence and Solexa, at that time a startup,
bought one of the first units. Mr. West received both
bachelor of science and master of science degrees in engineering
from MIT, and a master of business administration in finance
from the Wharton School of Business at the University of
Pennsylvania.
Our business is subject to various risks, including those
described below. In addition to the other information included
in this
Form 10-K,
the following issues could adversely affect our operating
results or our stock price.
Litigation or
other proceedings or third party claims of intellectual property
infringement could require us to spend significant time and
money and could prevent us from selling our products or services
or impact our stock price.
Our commercial success depends in part on our non-infringement
of the patents or proprietary rights of third parties and on our
ability to protect our own intellectual property. As we have
previously disclosed, Affymetrix, Inc. filed a complaint against
us in July 2004, alleging infringement of six of its patents.
On June 30, 2006, the court dismissed a patent Affymetrix
had sought to withdraw from its suit leaving five patents being
asserted against us. On August 16, 2006, the court issued a
ruling on the claim construction hearing that it had held on
April 20, 2006 as part of this litigation. We believe the
courts mixed ruling interpreted certain claim terms in our
favor, and did not adversely impact our defenses and
counterclaims which are still pending. At the request of both
parties, trial has been rescheduled to March 5, 2007 from
October 16, 2006. A pre-trial conference was held on
February 8, 2007 during which the court established a
multi-phase trial structure with the first phase of the trial to
begin on March 5, 2007, and addressed related issues. Any
adverse ruling or perception of an adverse ruling throughout
these proceedings may have an adverse impact on our stock price,
and such impact may be disproportionate to the actual import of
the ruling itself.
17
Third parties, including Affymetrix, have asserted or may assert
that we are employing their proprietary technology without
authorization. As we enter new markets, we expect that
competitors will likely assert that our products infringe their
intellectual property rights as part of a business strategy to
impede our successful entry into those markets. In addition,
third parties may have obtained and may in the future obtain
patents allowing them to claim that the use of our technologies
infringes these patents. We could incur substantial costs and
divert the attention of our management and technical personnel
in defending ourselves against any of these claims. Furthermore,
parties making claims against us may be able to obtain
injunctive or other relief, which effectively could block our
ability to develop further, commercialize and sell products, and
could result in the award of substantial damages against us. In
the event of a successful claim of infringement against us, we
may be required to pay damages and obtain one or more licenses
from third parties, or be prohibited from selling certain
products. We may not be able to obtain these licenses at a
reasonable cost, if at all. We could therefore incur substantial
costs related to royalty payments for licenses obtained from
third parties, which could negatively affect our gross margins.
In addition, we could encounter delays in product introductions
while we attempt to develop alternative methods or products.
Defense of any lawsuit or failure to obtain any of these
licenses on favorable terms could prevent us from
commercializing products, and the prohibition of sale of any of
our products could materially affect our ability to grow and
maintain profitability.
We expect
intense competition in our target markets, which could render
our products obsolete, result in significant price reductions or
substantially limit the volume of products that we sell. This
would limit our ability to compete and maintain profitability.
If we cannot continuously develop and commercialize new
products, our revenue may not grow as intended.
We compete with life sciences companies that design, manufacture
and market instruments for analysis of genetic variation and
biological function and other applications using technologies
such as two-dimensional electrophoresis, capillary
electrophoresis, mass spectrometry, flow cytometry,
microfluidics, nanotechnology, next-generation DNA sequencing
and mechanically deposited, inkjet and photolithographic arrays.
We anticipate that we will face increased competition in the
future as existing companies develop new or improved products
and as new companies enter the market with new technologies. The
markets for our products are characterized by rapidly changing
technology, evolving industry standards, changes in customer
needs, emerging competition, new product introductions and
strong price competition. For example, prices per data point for
genotyping have fallen significantly over the last two years and
we anticipate that prices will continue to fall. One or more of
our competitors may render our technology obsolete or
uneconomical. Some of our competitors have greater financial and
personnel resources, broader product lines, a more established
customer base and more experience in research and development
than we do. Furthermore, life sciences and pharmaceutical
companies, which are our potential customers and strategic
partners, could develop competing products. If we are unable to
develop enhancements to our technology and rapidly deploy new
product offerings, our business, financial condition and results
of operations will suffer.
Any inability
to adequately protect our proprietary technologies could harm
our competitive position.
Our success will depend in part on our ability to obtain patents
and maintain adequate protection of our intellectual property in
the United States and other countries. If we do not protect our
intellectual property adequately, competitors may be able to use
our technologies and thereby erode our competitive advantage.
The laws of some foreign countries do not protect proprietary
rights to the same extent as the laws of the United States, and
many companies have encountered significant challenges in
protecting their proprietary rights abroad. These challenges can
be caused by the absence of rules and methods for the
establishment and enforcement of intellectual property rights
abroad.
18
The patent positions of companies developing tools for the life
sciences and pharmaceutical industries, including our patent
position, generally are uncertain and involve complex legal and
factual questions. We will be able to protect our proprietary
rights from unauthorized use by third parties only to the extent
that our proprietary technologies are covered by valid and
enforceable patents or are effectively maintained as trade
secrets. We intend to apply for patents covering our
technologies and products, as we deem appropriate. However, our
patent applications may be challenged and may not result in
issued patents or may be invalidated or narrowed in scope after
they are issued. Questions as to inventorship may also arise.
For example, in June 2005, a former employee filed a complaint
against us, claiming he is entitled to be named as joint
inventor of certain of our U.S. patents and pending
U.S. and foreign patent applications, and seeking a
judgment that the related patents and applications are
unenforceable. Any finding that our patents and applications are
unenforceable could harm our ability to prevent others from
practicing the related technology, and a finding that others
have inventorship rights to our patents and applications could
require us to obtain certain rights to practice related
technologies, which may not be available on favorable terms, if
at all.
In addition, our existing patents and any future patents we
obtain may not be sufficiently broad to prevent others from
practicing our technologies or from developing competing
products. There also is risk that others may independently
develop similar or alternative technologies or design around our
patented technologies. Also, our patents may fail to provide us
with any competitive advantage. We may need to initiate
additional lawsuits to protect or enforce our patents, or
litigate against third party claims, which would be expensive
and, if we lose, may cause us to lose some of our intellectual
property rights and reduce our ability to compete in the
marketplace. Furthermore, these lawsuits may divert the
attention of our management and technical personnel.
We also rely upon trade secret protection for our confidential
and proprietary information. We have taken security measures to
protect our confidential information. These measures, however,
may not provide adequate protection for our trade secrets or
other confidential information. Among other things, we seek to
protect our trade secrets and confidential information by
entering into confidentiality agreements with employees,
collaborators and consultants. Nevertheless, employees,
collaborators or consultants may still disclose our confidential
information, and we may not otherwise be able to effectively
protect our trade secrets. Accordingly, others may gain access
to our confidential information, or may independently develop
substantially equivalent information or techniques.
If we are
unable to develop and maintain operation of our manufacturing
capability, we may not be able to launch or support our products
in a timely manner, or at all.
We currently possess limited facilities capable of manufacturing
our principle products and services for both sale to our
customers and internal use. If a natural disaster were to
significantly damage our facility or if other events were to
cause our operations to fail, these events could prevent us from
developing and manufacturing our products and services. Also,
many of our manufacturing processes are automated and are
controlled by our custom-designed Laboratory Information
Management System (LIMS). Additionally, as part of the decoding
step in our array manufacturing process, we record several
images of each array to identify what bead is in each location
on the array and to validate each bead in the array. This
requires significant network and storage infrastructure. If
either our LIMS system or our networks or storage infrastructure
were to fail for an extended period of time, it would adversely
impact our ability to manufacture our products on a timely basis
and may prevent us from achieving our expected shipments in any
given period.
19
Our
manufacturing capacity may limit our ability to sell our
products.
We continue to ramp up our capacity to meet our anticipated
demand for our products. Although we have significantly
increased our manufacturing capacity and we believe that we have
sufficient plans in place to ensure we have adequate capacity to
meet our business plan in 2007 and 2008, there are uncertainties
inherent in expanding our manufacturing capabilities and we may
not be able to increase our capacity in a timely manner. For
example, manufacturing and product quality issues may arise as
we increase production rates at our manufacturing facility and
launch new products. As a result, we may experience difficulties
in meeting customer, collaborator and internal demand, in which
case we could lose customers or be required to delay new product
introductions, and demand for our products could decline.
Additionally, in the past, we have experienced variations in
manufacturing conditions that have temporarily reduced
production yields. Due to the intricate nature of manufacturing
products that contain DNA, we may encounter similar or
previously unknown manufacturing difficulties in the future that
could significantly reduce production yields, impact our ability
to launch or sell these products, or to produce them
economically, prevent us from achieving expected performance
levels or cause us to set prices that hinder wide adoption by
customers.
If we are
unable to find third-party manufacturers to manufacture
components of our products, we may not be able to launch or
support our products in a timely manner, or at
all.
The nature of our products requires customized components that
currently are available from a limited number of sources. For
example, we currently obtain the fiber optic bundles and
BeadChip slides included in our products from single vendors. If
we are unable to secure a sufficient supply of those or other
product components, we will be unable to meet demand for our
products. We may need to enter into contractual relationships
with manufacturers for commercial-scale production of some of
our products, or develop these capabilities internally, and we
cannot assure you that we will be able to do this on a timely
basis, for sufficient quantities or on commercially reasonable
terms. Accordingly, we may not be able to establish or maintain
reliable, high-volume manufacturing at commercially reasonable
costs.
We may
encounter difficulties in integrating acquisitions that could
adversely affect our business.
We acquired Solexa in January 2007 and CyVera Corporation in
April 2005 and we may in the future acquire technology, products
or businesses related to our current or future business. We have
limited experience in acquisition activities and may have to
devote substantial time and resources in order to complete
acquisitions. Further, these potential acquisitions entail
risks, uncertainties and potential disruptions to our business.
For example, we may not be able to successfully integrate a
companys operations, technologies, products and services,
information systems and personnel into our business. An
acquisition may further strain our existing financial and
managerial resources, and divert managements attention
away from our other business concerns. In connection with these
acquisitions, we assumed certain liabilities and hired certain
employees, which is expected to continue to result in an
increase in our research and development expenses and capital
expenditures. There may also be unanticipated costs and
liabilities associated with an acquisition that could adversely
affect our operating results. To finance any acquisitions, we
may choose to issue shares of our common stock as consideration,
which would result in dilution to our stockholders.
Additionally, an acquisition may have a substantial negative
impact on near-term expected financial results.
The success of the Solexa merger will depend, in part, on our
ability to realize the anticipated synergies, growth
opportunities and cost savings from integrating Solexas
businesses with our businesses. Our success in realizing these
benefits and the timing of this realization depend upon the
successful integration of the operations of Solexa. The
integration of two independent companies is a complex, costly
and time-consuming process. The difficulties of combining the
operations of the companies include, among other factors:
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lost sales and customers as a result of certain customers of
either of the two companies deciding not to do business with the
combined company;
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20
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complexities associated with managing the combined businesses;
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integrating personnel from diverse corporate cultures while
maintaining focus on providing consistent, high quality products
and customer service;
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coordinating geographically separated organizations, systems and
facilities;
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potential unknown liabilities and unforeseen increased expenses
or delays associated with the merger; and
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performance shortfalls at one or both of the companies as a
result of the diversion of managements attention to the
merger.
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If we are unable to successfully combine the businesses in a
manner that permits the combined company to achieve the cost
savings and operating synergies anticipated to result from the
merger, such anticipated benefits of the merger may not be
realized fully or at all or may take longer to realize than
expected. In addition, we and Solexa have operated and will
continue to operate independently. It is possible that the
integration process could result in the loss of key employees,
diversion of each companys managements attention,
the disruption or interruption of, or the loss of momentum in,
each companys ongoing businesses or inconsistencies in
standards, controls, procedures and policies, any of which could
adversely affect our ability to maintain relationships with
customers and employees or our ability to achieve the
anticipated benefits of the merger, or could reduce our earnings
or otherwise adversely affect the business and financial results
of the combined company.
The combined
company may fail to realize the anticipated benefits of the
merger as a result of our failure to achieve anticipated revenue
growth following the merger.
Solexas business faces significant risks. These risks
include the fact that Solexas technology is at the
development stage and, although Solexa has accepted orders for
its Genome Analyzer and has shipped and installed those systems,
Solexa has not completed performance specifications for those
systems and has not invoiced customers for them. There can be no
assurance it will be able to do so. These risks also include
those described under the caption Risk Factors of
Solexas Quarterly Report on
Form 10-Q
filed with the Securities and Exchange Commission for the
quarterly period ended September 30, 2006, and may include
additional risks of which we are not currently aware or which we
currently do not believe are material. If any of the events or
circumstances underlying these risks actually occur,
Solexas business, financial condition or results of
operations could be harmed and, as a result, Solexa may, among
other things, fail to achieve the anticipated revenue growth
following the merger.
The merger
will cause dilution of Illuminas earnings per
share.
The merger and the transactions contemplated by the merger
agreement are expected to have a dilutive effect on our earnings
per share at least through 2007 due to losses of Solexa, the
additional shares of Illumina common stock that were issued in
the merger, the transaction and integration-related costs and
other factors such as the potential failure to realize any
benefit from synergies anticipated in the merger. These factors
could adversely affect the market price of our common stock.
21
Solexa had a
material weakness in its internal controls over financial
reporting as of December 31, 2005. If additional material
weaknesses are identified in the future, current and potential
stockholders could lose confidence in our consolidated financial
reporting, which could harm our business and the trading of our
common stock.
As of December 31, 2005, Solexa did not maintain effective
control over the application of GAAP related to the financial
reporting process. This control deficiency resulted in numerous
adjustments being required to bring Solexas financial
statements into compliance with GAAP. Additionally, this
deficiency could have resulted in material misstatement of the
annual or interim consolidated financial statements that would
not be prevented or detected. Accordingly, Solexas
management determined that this control deficiency constituted a
material weakness. Because of this material weakness,
Solexas management concluded that, as of December 31,
2005, it did not maintain effective internal control over
financial reporting based on those criteria. Should we, or our
independent registered public accounting firm, determine in
future fiscal periods that there are material weaknesses in our
consolidated internal controls over financial reporting
(including Solexa), the reliability of our financial reports may
be impacted, and our results of operations or financial
condition may be harmed and the price of our common stock may
decline.
We expect that
our results of operations will fluctuate. This fluctuation could
cause our stock price to decline.
Our revenue is subject to fluctuations due to the timing of
sales of high-value products and services projects, the impact
of seasonal spending patterns, the timing and size of research
projects our customers perform, changes in overall spending
levels in the life sciences industry, and other unpredictable
factors that may affect customer ordering patterns. Given the
difficulty in predicting the timing and magnitude of sales for
our products and services, we may experience
quarter-to-quarter
fluctuations in revenue resulting in the potential for a
sequential decline in quarterly revenue. A large portion of our
expenses are relatively fixed, including expenses for
facilities, equipment and personnel. In addition, we expect
operating expenses to continue to increase significantly.
Accordingly, if revenue does not grow as anticipated, we may not
be able to maintain annual profitability. Any significant delays
in the commercial launch of our products, unfavorable sales
trends in our existing product lines, or impacts from the other
factors mentioned above, could adversely affect our future
revenue growth or cause a sequential decline in quarterly
revenue. Due to the possibility of fluctuations in our revenue
and expenses, we believe that quarterly comparisons of our
operating results are not a good indication of our future
performance. If our operating results fluctuate or do not meet
the expectations of stock market analysts and investors, our
stock price could decline.
We have a
limited history of commercial sales of systems and consumable
products, and our success depends on our ability to develop
commercially successful products and on market acceptance of our
new and relatively unproven technologies.
We may not possess all of the resources, capability and
intellectual property necessary to develop and commercialize all
the products or services that may result from our technologies.
Sales of our genotyping and gene expression systems only began
in 2003, and some of our other technologies are in the early
stages of commercialization or are still in development. You
should evaluate us in light of the uncertainties and
complexities affecting similarly situated companies developing
tools for the life sciences and pharmaceutical industries. We
must conduct a substantial amount of additional research and
development before some of our products will be ready for sale,
and we currently have fewer resources available for research and
development activities than some of our competitors. We may not
be able to develop or launch new products in a timely manner, or
at all, or they may not meet customer requirements or be of
sufficient quality or at a price that enables us to compete
effectively in the marketplace. Problems frequently encountered
in connection with the development or early commercialization of
products and services using new and relatively unproven
technologies might limit our ability to develop and successfully
commercialize these products and services. In addition, we may
need to enter into agreements to obtain intellectual property
necessary to commercialize some of our products or services,
which may not be available on favorable terms, or at all.
22
Historically, life sciences and pharmaceutical companies have
analyzed genetic variation and biological function using a
variety of technologies. In order to be successful, our products
must meet the commercial requirements of the life sciences and
pharmaceutical industries as tools for the large-scale analysis
of genetic variation and biological function.
Market acceptance will depend on many factors, including:
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our ability to demonstrate to potential customers the benefits
and cost effectiveness of our products and services relative to
others available in the market;
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the extent and effectiveness of our efforts to market, sell and
distribute our products;
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our ability to manufacture products in sufficient quantities
with acceptable quality and reliability and at an acceptable
cost;
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the willingness and ability of customers to adopt new
technologies requiring capital investments; and
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the extended time lag and sales expenses involved between the
time a potential customer is contacted on a possible sale of our
products and services and the time the sale is consummated or
rejected by the customer.
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Our sales,
marketing and technical support organization may limit our
ability to sell our products.
We currently have fewer resources available for sales and
marketing and technical support services compared to some of our
primary competitors. In order to effectively commercialize our
sequencing, genotyping and gene expression systems and other
products to follow, we will need to expand our sales, marketing
and technical support staff both domestically and
internationally. We may not be successful in establishing or
maintaining either a direct sales force or distribution
arrangements to market our products and services. In addition,
we compete primarily with much larger companies that have larger
sales and distribution staffs and a significant installed base
of products in place, and the efforts from a limited sales and
marketing force may not be sufficient to build the market
acceptance of our products required to support continued growth
of our business.
We have only
recently achieved annual operating profitability.
Prior to 2006, we had incurred net losses each year since our
inception. As of December 31, 2006, our accumulated deficit
was $104.6 million. Our ability to sustain annual
profitability will depend, in part, on the rate of growth, if
any, of our revenue and on the level of our expenses.
SFAS No. 123R is also likely to adversely affect our
future profitability. We expect to continue incurring
significant expenses related to research and development, sales
and marketing efforts to commercialize our products and the
continued development of our manufacturing capabilities. In
addition, we expect that our research and development and
selling and marketing expenses will increase at a higher rate in
the future as a result of the development and launch of new
products. Even if we maintain profitability, we may not be able
to increase profitability on a quarterly basis.
We may
encounter difficulties in managing our growth. These
difficulties could impair our profitability.
We have experienced, and we may expect to continue to experience
rapid and substantial growth in order to achieve our operating
plans, which will place a strain on our human and capital
resources. If we are unable to manage this growth effectively,
our profitability could suffer. Our ability to manage our
operations and growth effectively requires us to continue to
expend funds to enhance our operational, financial and
management controls, reporting systems and procedures and to
attract and retain sufficient numbers of talented employees. If
we are unable to scale up and implement improvements to our
manufacturing process and control systems in an efficient or
timely manner, or if we encounter deficiencies in existing
systems and controls, then we will not be able to make available
the products required to successfully commercialize our
technology. Failure to attract and retain sufficient numbers of
talented employees will further strain our human resources and
could impede our growth.
23
Our effective
tax rate may vary significantly.
Our future effective tax rates could be adversely affected by
various internal and external factors. These factors, include
but are not limited to, earnings being lower than anticipated in
countries where we have lower statutory rates and higher than
anticipated in countries where we have higher statutory rates;
changes in the valuation of our deferred tax assets and
liabilities; or changes in tax laws or interpretations thereof;
changes in tax rates, future levels of research and development
spending, and changes in overall levels of pretax earnings. Any
new interpretative guidance relating to accounting for uncertain
tax positions could adversely affect our tax provision.
If we lose our
key personnel or are unable to attract and retain additional
personnel, we may be unable to achieve our goals.
We are highly dependent on our management and scientific
personnel, including Jay Flatley, our president and chief
executive officer, John Stuelpnagel, our senior vice president
and chief operating officer and John West, our senior vice
president and general manager of DNA sequencing . The loss of
their services could adversely impact our ability to achieve our
business objectives. We will need to hire additional qualified
personnel with expertise in molecular biology, chemistry,
biological information processing, sales, marketing and
technical support. We compete for qualified management and
scientific personnel with other life science companies,
universities and research institutions, particularly those
focusing on genomics. Competition for these individuals,
particularly in the San Diego area, is intense, and the
turnover rate can be high. Failure to attract and retain
management and scientific personnel would prevent us from
pursuing collaborations or developing our products or
technologies.
Our planned activities will require additional expertise in
specific industries and areas applicable to the products
developed through our technologies, including the life sciences
and healthcare industries. Thus, we will need to add new
personnel, including management, and develop the expertise of
existing management. The failure to do so could impair the
growth of our business.
A significant
portion of our sales are to international
customers.
Approximately 44% and 38% of our revenue for the years ended
December 31, 2006 and January 1, 2006, respectively,
was derived from shipments to customers outside the United
States. We intend to continue to expand our international
presence and export sales to international customers and we
expect the total amount of
non-U.S. sales
to continue to grow. Export sales entail a variety of risks,
including:
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currency exchange fluctuations;
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unexpected changes in legislative or regulatory requirements of
foreign countries into which we import our products;
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difficulties in obtaining export licenses or in overcoming other
trade barriers and restrictions resulting in delivery
delays; and
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significant taxes or other burdens of complying with a variety
of foreign laws.
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In addition, sales to international customers typically result
in longer payment cycles and greater difficulty in accounts
receivable collection. We are also subject to general
geopolitical risks, such as political, social and economic
instability and changes in diplomatic and trade relations. One
or more of these factors could have a material adverse effect on
our business, financial condition and operating results.
24
Our success
depends upon the continued emergence and growth of markets for
analysis of genetic variation and biological
function.
We design our products primarily for applications in the life
sciences and pharmaceutical industries. The usefulness of our
technology depends in part upon the availability of genetic data
and its usefulness in identifying or treating disease. We are
initially focusing on markets for analysis of genetic variation
and biological function, namely SNP genotyping and gene
expression profiling. Both of these markets are new and
emerging, and they may not develop as quickly as we anticipate,
or reach their full potential. Other methods of analysis of
genetic variation and biological function may emerge and
displace the methods we are developing. Also, researchers may
not seek or be able to convert raw genetic data into medically
valuable information through the analysis of genetic variation
and biological function. In addition, factors affecting research
and development spending generally, such as changes in the
regulatory environment affecting life sciences and
pharmaceutical companies, and changes in government programs
that provide funding to companies and research institutions,
could harm our business. If useful genetic data is not available
or if our target markets do not develop in a timely manner,
demand for our products may grow at a slower rate than we
expect, and we may not be able to achieve or sustain annual
profitability.
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Item 1B.
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Unresolved
Staff Comments.
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None.
The following chart indicates the facilities that we lease, the
location and size of each such facility and their designated
use. We anticipate needing to expand our facilities over the
next several years as we continue to expand our worldwide
commercial operations and our manufacturing capabilities.
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Approximate
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Lease
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Location
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Square
Feet
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Operation
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Expiration
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San Diego, CA
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116,000 sq. ft.
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R&D, Manufacturing,
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2023
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Administrative
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17,300 sq. ft.
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Administrative
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2009
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9,000 sq. ft.
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Storage and Distribution
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2011
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Wallingford, CT
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14,500 sq. ft.
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R&D
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2008
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Netherlands
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4,100 sq. ft.
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Administrative and
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2011
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Distribution
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Tokyo, Japan
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3,300 sq. ft.
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Administrative
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2009
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Singapore
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1,600 sq. ft.
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Administrative
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2009
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Beijing, China
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200 sq. ft.
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Administrative
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2007
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As part of our acquisition of Solexa on January 26, 2007,
we assumed a non-cancelable operating lease for facilities space
of approximately 147,000 square feet in two buildings in
Hayward, California. One of the buildings is utilized for
administrative operations, research and development, genomics
services production and instrument production. The remaining
space may be developed and occupied in phases, depending on
growth. The Hayward lease runs through December 2008. We have an
option to extend the lease for an additional five-year period,
subject to certain conditions. We also lease approximately
23,000 square feet in Little Chesterford, United Kingdom,
which is occupied by Solexa Limited, our wholly-owned
subsidiary. The Chesterford lease expires in July 2008.
25
On February 14, 2007, we entered into a lease agreement
with BioMed Realty Trust, Inc. (BioMed) to expand into a new
office building BioMed will build in San Diego, California.
The new building will be used for research and development,
manufacturing and administrative purposes. The lease covers
approximately 84,000 square feet, which is to be occupied
in three phases, the first of which is expected to be occupied
by October 1, 2008. The lease expires 15 years from
the date the first phase is occupied, subject to our right to
extend the term for up to three additional five-year periods.
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Item 3.
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Legal
Proceedings.
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We have incurred substantial costs in defending ourselves
against patent infringement claims, and expect to devote
substantial financial and managerial resources to protect our
intellectual property and to defend against the claims described
below as well as any future claims asserted against us.
Affymetrix
Litigation
On July 26, 2004, Affymetrix, Inc. (Affymetrix) filed a
complaint in the U.S. District Court for the District of
Delaware alleging that the use, manufacture and sale of our
BeadArray products and services, including our Array Matrix and
BeadChip products, infringe six Affymetrix patents. Affymetrix
seeks an injunction against the sale of products, if any, that
are determined to infringe these patents, unspecified monetary
damages, interest and attorneys fees. On
September 15, 2004, we filed our answer to Affymetrix
complaint, seeking declaratory judgments from the court that we
do not infringe the Affymetrix patents and that such patents are
invalid. We also filed counterclaims against Affymetrix for
unfair competition and interference with actual and prospective
economic advantage.
On February 15, 2006, the court allowed us to file our
first amended answer and counterclaims, adding allegations of
inequitable conduct with respect to all six asserted Affymetrix
patents, violation of Section 2 of the Sherman Act, and
unclean hands. In March 2006, Affymetrix notified us of its
decision to drop one of the six patents from the suit and of its
intention to assert infringement of certain additional claims of
the remaining five patents. We have filed a motion to preclude
Affymetrix from asserting infringement of those additional
claims. That motion is still pending at this time. On
June 30, 2006, the court dismissed the patent Affymetrix
had sought to withdraw from the suit. Both parties filed summary
judgment motions by the July 14, 2006 deadline established
by the court. On August 16, 2006, the court issued a ruling
on the claim construction hearing that it had held on
April 20, 2006. We believe the courts opinion
construed several key claim terms in our favor, and did not
adversely impact our defenses and pending counterclaims in any
material respect. Trial has been rescheduled to March 5,
2007 from October 16, 2006 at the request of both parties.
A pre-trial conference was held on February 8, 2007 during
which the court established a multi-phase trial structure with
the first phase of the trial to begin on March 5, 2007, and
addressed related issues. We believe we have meritorious
defenses against each of the infringement claims alleged by
Affymetrix, and intend to defend vigorously against this suit.
However, we cannot be sure that we will prevail in this matter.
Any unfavorable determination, and in particular, any
significant cash amounts required to be paid by us or
prohibition of the sale of our products and services, could
result in a material adverse effect on our business, financial
condition and results of operations.
26
Dr. Anthony
W. Czarnik v. Illumina, Inc.
On June 15, 2005, Dr. Anthony Czarnik, a former
employee, filed suit against us in the U.S. District Court
for the District of Delaware seeking correction of inventorship
of certain of our patents and patent applications and alleging
that we committed inequitable conduct and fraud in not naming
him as an inventor. Dr. Czarnik seeks an order requiring us
and the U.S. Patent and Trademark Office to correct the
inventorship of certain of our patents and patent applications
by adding Dr. Czarnik as an inventor, a judgment declaring
certain of our patents and patent applications unenforceable,
unspecified monetary damages and attorneys fees. On
August 4, 2005, we filed a motion to dismiss the complaint
for lack of standing and failure to state a claim. While this
motion was pending, Dr. Czarnik filed an amended complaint
on September 23, 2005. On October 7, 2005, we filed a
motion to dismiss the amended complaint for lack of standing and
failure to state a claim. On July 13, 2006, the court
granted our motion to dismiss the counts of
Dr. Czarniks complaint dealing with correction of
inventorship in pending applications and inequitable conduct. On
July 27, 2006, we filed an answer to the two remaining
counts of the amended complaint (correction of inventorship in
issued patents and fraud). There has been no trial date set for
this case. We believe we have meritorious defenses against these
claims.
Applied
Biosystems Litigation
On December 26, 2006, the Applied Biosystems Group of
Applera Corporation filed suit against Solexa, which we acquired
in a
stock-for-stock
merger on January 26, 2007. Applied Biosystems action
against Solexa, which was filed in California state court in
Santa Clara County, seeks ownership of patents covering
Sequencing-by-Ligation
technologies. We filed our answer to the complaint by the
required deadline. The patents at issue were assigned in 1995 to
Solexas predecessor company (Lynx Therapeutics) by a
former employee, Dr. Stephen Macevicz, who is named as a
co-defendant in the suit. Lynx, which was originally a unit of
Applied Biosystems, was spun out of Applied Biosystems in 1992.
The patents at issue in the suit relate to methods for
sequencing DNA using successive rounds of oligonucleotide probe
ligation
(Sequencing-by-Ligation).
Our new Illumina Genome Analyzer system uses a different
technology, DNA
Sequencing-by-Synthesis
(SBS), which we believe is not covered by any of the patents at
issue in the suit. We also believe the MPSS technology used by
Lynx did not use the methods covered by these patents, and in
any event our subsidiary no longer uses the MPSS technologies.
We believe that the suit is not material to our current or
future business, and we have no plans to use any of the
Sequencing-by-Ligation
technologies covered by the patents at issue in the suit.
Applied Biosystems does not assert any claim for patent
infringement in the suit.
Termination-of-Employment
Lawsuit
In March 2001, a complaint seeking damages of an unspecified
amount was filed against us by Dr. Czarnik in the Superior
Court of the State of California in connection with the
employees termination of employment with Illumina. In June
2002, a California Superior Court judgment was rendered against
us and we recorded a $7.7 million charge in our financial
results for the second quarter of 2002 to cover total damages
and remaining expenses. We appealed the decision, and in
December 2004, the Fourth Appellate District Court of Appeal, in
San Diego, California, reduced the amount of the award. We
recorded interest expense on the $7.7 million during the
appeal based on the statutory rate. As a result of the revised
judgment, we reduced the $9.2 million liability on our
balance sheet to $5.9 million and recorded a gain of
$3.3 million as a litigation judgment in the fourth quarter
of 2004. In January 2005, we paid the $5.9 million and
removed the liability from our balance sheet.
|
|
Item 4.
|
Submission of
Matters to a Vote of Security Holders.
|
No matters were submitted to a vote of security holders during
the fourth quarter of 2006.
27
PART II
|
|
Item 5.
|
Market for
Registrants Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities.
|
Our common stock has been quoted on the NASDAQ Global Market
under the symbol ILMN since July 28, 2000.
Prior to that time, there was no public market for our common
stock. The following table sets forth, for the periods
indicated, the quarterly high and low sales prices per share of
our common stock as reported on the NASDAQ Global Market. Our
present policy is to retain earnings, if any, to finance future
growth. We have never paid cash dividends and have no present
intention to pay cash dividends in the foreseeable future. In
addition, the indenture for our convertible senior notes due
2014, which are convertible into cash and, in certain
circumstances, shares of our common stock, requires us to
increase the conversion rate applicable to the notes if we pay
any cash dividends.
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
High
|
|
|
Low
|
|
|
First Quarter
|
|
$
|
27.98
|
|
|
$
|
16.10
|
|
Second Quarter
|
|
|
32.00
|
|
|
|
21.60
|
|
Third Quarter
|
|
|
40.00
|
|
|
|
27.02
|
|
Fourth Quarter
|
|
|
45.87
|
|
|
|
32.20
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
High
|
|
|
Low
|
|
|
First Quarter
|
|
$
|
11.35
|
|
|
$
|
6.72
|
|
Second Quarter
|
|
|
12.95
|
|
|
|
7.90
|
|
Third Quarter
|
|
|
14.83
|
|
|
|
10.82
|
|
Fourth Quarter
|
|
|
16.80
|
|
|
|
12.76
|
|
At February 1, 2007, there were approximately 1,500
stockholders of record, and the closing price per share of our
common stock, as reported on the NASDAQ Global Market on such
date, was $41.56.
Sales of
Unregistered Securities
None during fiscal 2006.
Issuer Purchases
of Equity Securities
None during fiscal 2006.
Use of
Proceeds
We completed our initial public offering of common stock in July
2000, resulting in net proceeds of $101.3 million. Through
December 31, 2006, we used approximately $46.0 million
to purchase property, plant and equipment, approximately
$2.4 million for the acquisition of CyVera, and
approximately $52.9 million to fund general operating
expenses.
28
|
|
Item 6.
|
Selected
Financial Data.
|
The following selected historical consolidated financial data
has been derived from our audited consolidated financial
statements. The balance sheet data as of December 31, 2006
and January 1, 2006 and statement of operations data for
each of the three years in the period ended December 31,
2006 are derived from audited consolidated financial statements
included in this Annual Report on
Form 10-K.
The balance sheet data as of January 2, 2005,
December 28, 2003, and December 29, 2002 and statement
of operations data for each of the two years in the period ended
December 28, 2003 are derived from our audited consolidated
financial statements that are not included in this Annual Report
on
Form 10-K.
The Companys fiscal year is 52 or 53 weeks ending the
Sunday closest to December 31, with quarters of 13 or
14 weeks ending the Sunday closest to March 31,
June 30, and September 30. The years ended
December 31, 2006 and January 1, 2006 were both
52 weeks. The year ended January 2, 2005 was
53 weeks. You should read this table in conjunction with
Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations, and
Item 8, Financial Statements and Supplementary
Data.
Statement of
Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
January 1,
|
|
|
January 2,
|
|
|
December 28,
|
|
|
December 29,
|
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2003
|
|
|
2002
|
|
|
|
(In thousands,
except per share data)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue
|
|
$
|
155,811
|
|
|
$
|
57,752
|
|
|
$
|
40,497
|
|
|
$
|
18,378
|
|
|
$
|
4,103
|
|
Service and other revenue
|
|
|
27,486
|
|
|
|
13,935
|
|
|
|
8,075
|
|
|
|
6,496
|
|
|
|
3,305
|
|
Research revenue
|
|
|
1,289
|
|
|
|
1,814
|
|
|
|
2,011
|
|
|
|
3,161
|
|
|
|
2,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
184,586
|
|
|
|
73,501
|
|
|
|
50,583
|
|
|
|
28,035
|
|
|
|
10,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenue (including
non-cash stock compensation expense of $1,289, $0, $0, $0 and
$0, respectively)
|
|
|
51,271
|
|
|
|
19,920
|
|
|
|
11,572
|
|
|
|
7,437
|
|
|
|
1,815
|
|
Cost of service and other revenue
(including non-cash stock compensation expense of $235, $0, $0,
$0 and $0, respectively)
|
|
|
8,073
|
|
|
|
3,261
|
|
|
|
1,687
|
|
|
|
2,600
|
|
|
|
1,721
|
|
Research and development (including
non-cash stock compensation expense of $3,891, $84, $348, $1,289
and $2,399, respectively)
|
|
|
33,373
|
|
|
|
27,809
|
|
|
|
21,462
|
|
|
|
23,800
|
|
|
|
29,247
|
|
Selling, general and administrative
(including non-cash stock compensation expense of $8,889, $186,
$496, $1,165 and $1,961, respectively)
|
|
|
54,057
|
|
|
|
28,158
|
|
|
|
25,576
|
|
|
|
20,064
|
|
|
|
11,060
|
|
Acquired in-process research and
development
|
|
|
|
|
|
|
15,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Litigation judgment (settlement),
net
|
|
|
|
|
|
|
|
|
|
|
(4,201
|
)
|
|
|
756
|
|
|
|
8,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
146,774
|
|
|
|
94,948
|
|
|
|
56,096
|
|
|
|
54,657
|
|
|
|
51,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
37,812
|
|
|
|
(21,447
|
)
|
|
|
(5,513
|
)
|
|
|
(26,622
|
)
|
|
|
(41,855
|
)
|
Interest income
|
|
|
5,368
|
|
|
|
1,404
|
|
|
|
941
|
|
|
|
1,821
|
|
|
|
3,805
|
|
Interest and other expense, net
|
|
|
(560
|
)
|
|
|
(668
|
)
|
|
|
(1,518
|
)
|
|
|
(2,262
|
)
|
|
|
(2,281
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
42,620
|
|
|
|
(20,711
|
)
|
|
|
(6,090
|
)
|
|
|
(27,063
|
)
|
|
|
(40,331
|
)
|
Provision for income taxes
|
|
|
2,652
|
|
|
|
163
|
|
|
|
135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
39,968
|
|
|
$
|
(20,874
|
)
|
|
$
|
(6,225
|
)
|
|
$
|
(27,063
|
)
|
|
$
|
(40,331
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per basic share
|
|
$
|
0.90
|
|
|
$
|
(0.52
|
)
|
|
$
|
(0.17
|
)
|
|
$
|
(0.85
|
)
|
|
$
|
(1.31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per diluted share
|
|
$
|
0.82
|
|
|
$
|
(0.52
|
)
|
|
$
|
(0.17
|
)
|
|
$
|
(0.85
|
)
|
|
$
|
(1.31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in calculating basic
net income (loss) per share
|
|
|
44,501
|
|
|
|
40,147
|
|
|
|
35,845
|
|
|
|
31,925
|
|
|
|
30,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in calculating diluted
net income (loss) per share
|
|
|
48,754
|
|
|
|
40,147
|
|
|
|
35,845
|
|
|
|
31,925
|
|
|
|
30,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
See Note 1 to the consolidated financial statements for an
explanation of the determination of the number of shares used to
compute basic and diluted net income (loss) per share.
Balance Sheet
Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
January 1,
|
|
|
January 2,
|
|
|
December 28,
|
|
|
December 29,
|
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2003
|
|
|
2002
|
|
|
|
(In
thousands)
|
|
|
Cash, cash equivalents and
short-term investments
|
|
$
|
130,804
|
|
|
$
|
50,822
|
|
|
$
|
66,994
|
|
|
$
|
33,882
|
|
|
$
|
66,294
|
|
Working capital
|
|
|
159,950
|
|
|
|
57,992
|
|
|
|
64,643
|
|
|
|
32,229
|
|
|
|
58,522
|
|
Total assets
|
|
|
300,584
|
|
|
|
100,610
|
|
|
|
94,907
|
|
|
|
99,234
|
|
|
|
121,906
|
|
Long-term debt, less current
portion
|
|
|
|
|
|
|
54
|
|
|
|
|
|
|
|
24,999
|
|
|
|
25,620
|
|
Accumulated deficit
|
|
|
(104,618
|
)
|
|
|
(144,586
|
)
|
|
|
(123,712
|
)
|
|
|
(117,487
|
)
|
|
|
(90,424
|
)
|
Total stockholders equity
|
|
|
247,342
|
|
|
|
72,497
|
|
|
|
72,262
|
|
|
|
47,388
|
|
|
|
71,744
|
|
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operation.
|
The following discussion and analysis should be read with
Item 6. Selected Financial Data and our
consolidated financial statements and notes thereto included
elsewhere in this Annual Report on
Form 10-K.
The discussion and analysis in this Annual Report on
Form 10-K
contains forward-looking statements that involve risks and
uncertainties, such as statements of our plans, objectives,
expectations and intentions. Words such as
anticipate, believe,
continue, estimate, expect,
intend, may, plan,
potential, predict, project
or similar words or phrases, or the negatives of these words,
may identify forward-looking statements, but the absence of
these words does not necessarily mean that a statement is not
forward looking. Examples of forward-looking statements include,
among others, statements regarding the integration of
Solexas and CyVeras technology with our existing
technology, the commercial launch of new products, including
products based on Solexas and CyVeras technology,
and the duration which our existing cash and other resources is
expected to fund our operating activities.
Forward-looking statements are subject to known and unknown
risks and uncertainties and are based on potentially inaccurate
assumptions that could cause actual results to differ materially
from those expected or implied by the forward looking
statements. Factors that could cause or contribute to these
differences include those discussed in Item 1A. Risk
Factors as well as those discussed elsewhere. The risk
factors and other cautionary statements made in this Annual
Report on
Form 10-K
should be read as applying to all related forward-looking
statements wherever they appear in this Annual Report on
Form 10-K.
Overview
We are a leading developer, manufacturer and marketer of
next-generation life science tools and integrated systems for
the large scale analysis of genetic variation and biological
function. Using our proprietary technologies, we provide a
comprehensive line of products and services that currently serve
the sequencing, genotyping and gene expression markets, and we
expect to enter the market for molecular diagnostics. Our
customers include leading genomic research centers,
pharmaceutical companies, academic institutions, clinical
research organizations and biotechnology companies. Our tools
provide researchers around the world with the performance,
throughput, cost effectiveness and flexibility necessary to
perform the billions of genetic tests needed to extract valuable
medical information from advances in genomics and proteomics. We
believe this information will enable researchers to correlate
genetic variation and biological function, which will enhance
drug discovery and clinical research, allow diseases to be
detected earlier and permit better choices of drugs for
individual patients.
30
On January 26, 2007, we completed the acquisition of Solexa
for approximately 13.1 million shares of our common stock.
Solexa develops and commercializes genetic analysis technologies
used to perform a range of analyses including whole genome
resequencing, gene expressing analysis and small RNA analysis.
We believe our combined company is the only company with
genome-scale technology for genotyping, gene expression and
sequencing, the three cornerstones of modern genetic analysis.
Our revenue is subject to fluctuations due to the timing of
sales of high-value products and service projects, the impact of
seasonal spending patterns, the timing and size of research
projects our customers perform, changes in overall spending
levels in the life science industry and other unpredictable
factors that may affect our customer ordering patterns. Any
significant delays in the commercial launch or any lack or delay
of commercial acceptance of new products, unfavorable sales
trends in our existing product lines, or impacts from the other
factors mentioned above, could adversely affect our revenue
growth or cause a sequential decline in quarterly revenue. Due
to the possibility of fluctuations in our revenue and net income
or loss, we believe quarterly comparisons of our operating
results are not a good indication of our future performance.
Prior to 2006, we incurred substantial operating losses. As of
December 31, 2006, our accumulated deficit was
$104.6 million and total stockholders equity was
$247.3 million. Losses prior to 2006 have principally
occurred as a result of the substantial resources required for
the research, development and manufacturing
scale-up
effort required to commercialize our products and services, an
acquired
in-process
research and development charge of $15.8 million related to
our acquisition of CyVera in 2005 and a charge of
$5.9 million in 2004 related to a
termination-of-employment
lawsuit. We expect to continue to incur substantial costs for
research, development and manufacturing
scale-up
activities over the next several years. We will also need to
increase our selling, general and administrative costs as we
build up our sales and marketing infrastructure to expand and
support the sale of systems, other products and services.
Critical
Accounting Policies and Estimates
General
Our discussion and analysis of our financial condition and
results of operations is based upon our consolidated financial
statements, which have been prepared in accordance with
U.S. generally accepted accounting principles. The
preparation of financial statements requires that management
make estimates, assumptions and judgments with respect to the
application of accounting policies that affect the reported
amounts of assets, liabilities, revenue and expenses, and the
disclosures of contingent assets and liabilities. Actual results
could differ from those estimates.
Our significant accounting policies are described in Note 1
to our consolidated financial statements. Certain accounting
policies are deemed critical if 1) they require an
accounting estimate to be made based on assumptions that were
highly uncertain at the time the estimate was made, and
2) changes in the estimate that are reasonably likely to
occur, or different estimates that we reasonably could have used
would have a material effect on our consolidated financial
statements.
Management has discussed the development and selection of these
critical accounting policies with the Audit Committee of our
Board of Directors, and the Audit Committee has reviewed the
disclosure. In addition, there are other items within our
financial statements that require estimation, but are not deemed
critical as defined above.
We believe the following critical accounting policies reflect
our more significant estimates and assumptions used in the
preparation of the consolidated financial statements.
31
Revenue
Recognition
Our revenue is generated primarily from the sale of products and
services. Product revenue consists of sales of arrays, reagents,
instrumentation and oligos. Service and other revenue consists
of revenue received for performing genotyping services, extended
warranty sales and revenue earned from milestone payments.
We recognize revenue when persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered,
the sellers price to the customer is fixed or determinable
and collectibility 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. All
revenue is recorded net of any applicable allowances for returns
or discounts.
Revenue for product sales is recognized generally upon shipment
and transfer of title to the customer, provided no significant
obligations remain and collection of the receivables is
reasonably assured. Revenue from the sale of instrumentation is
recognized when earned, which is generally upon shipment.
However, in the case of BeadLabs, revenue is recognized upon the
completion of installation, training and customer acceptance.
Revenue for genotyping services is recognized when earned, which
is generally at the time the genotyping analysis data is
delivered to the customer or as specific milestones are achieved.
In order to assess whether the price is fixed and determinable,
we ensure there are no refund rights. If payment terms are based
on future performance or a right of return exists, we defer
revenue recognition until the price becomes fixed and
determinable. We assess collectibility based on a number of
factors, including past transaction history with the customer
and the creditworthiness of the customer. If we determine that
collection of a payment is not reasonably assured, revenue
recognition is deferred until the time collection becomes
reasonably assured, which is generally upon receipt of payment.
Sales of instrumentation generally include a standard one-year
warranty. We also sell separately priced maintenance (extended
warranty) contracts, which are generally for one or two years,
upon the expiration of the initial warranty. Revenue for
extended warranty sales is recognized ratably over the term of
the extended warranty period. Reserves are provided for
estimated product warranty expenses at the time the associated
revenue is recognized. If we were to experience an increase in
warranty claims or if costs of servicing our warrantied products
were greater than our estimates, gross margins could be
adversely affected.
While the majority of our sales agreements contain standard
terms and conditions, we do enter into agreements that contain
multiple elements or non-standard terms and conditions. Emerging
Issues Task Force (EITF)
No. 00-21,
Revenue Arrangements with Multiple Deliverables, provides
guidance on accounting for arrangements that involve the
delivery or performance of multiple products, services, or
rights to use assets within contractually binding arrangements.
Significant contract interpretation is sometimes required to
determine the appropriate accounting, including whether the
deliverables specified in a multiple element arrangement should
be treated as separate units of accounting for revenue
recognition purposes, and if so, how the price should be
allocated among the deliverable elements, when to recognize
revenue for each element, and the period over which revenue
should be recognized. We recognize revenue for delivered
elements only when we determine that the fair values of
undelivered elements are known and there are no uncertainties
regarding customer acceptance.
32
Some of our agreements contain multiple elements that include
milestone payments. Revenue from a milestone achievement is
recognized when earned, as evidenced by acknowledgement from our
collaborator, provided that (i) the milestone event is
substantive and its achievability was not reasonably assured at
the inception of the agreement, (ii) the milestone
represents the culmination of an earnings process,
(iii) the milestone payment is non-refundable and
(iv) the performance obligations for both us and our
collaborators after the milestone achievement will continue at a
level comparable to the level before the milestone achievement.
If all of these criteria are not met, the milestone achievement
is recognized over the remaining minimum period of our
performance obligations under the agreement. We defer
non-refundable upfront fees received under our collaborations
and recognize them over the period the related services are
provided or over the estimated collaboration term using various
factors specific to the collaboration. Advance payments received
in excess of amounts earned are classified as deferred revenue
until earned.
Research revenue consists of amounts earned under research
agreements with government grants, which is recognized in the
period during which the related costs are incurred.
Allowance for
Doubtful Accounts
We maintain an allowance for doubtful accounts for estimated
losses resulting from the inability of our customers to make
required payments. We evaluate the collectibility of our
accounts receivable based on a combination of factors. We
regularly analyze customer accounts, review the length of time
receivables are outstanding and review historical loss rates. If
the financial condition of our customers were to deteriorate,
additional allowances could be required.
Inventory
Valuation
We record adjustments to inventory for potentially excess,
obsolete or impaired goods in order to state inventory at net
realizable value. We must make assumptions about future demand,
market conditions and the release of new products that will
supercede old ones. We regularly review inventory for excess and
obsolete products and components, taking into account product
life cycle and development plans, product expiration and quality
issues, historical experience and our current inventory levels.
If actual market conditions are less favorable than anticipated,
additional inventory adjustments could be required.
Contingencies
We are subject to legal proceedings primarily related to
intellectual property matters. Based on the information
available at the balance sheet dates and through consultation
with our legal counsel, we assess the likelihood of any adverse
judgments or outcomes of these matters, as well as the potential
ranges of probable losses. If losses are probable and reasonably
estimable, we will record a liability in accordance with
Statement of Financial Accounting Standards (SFAS) No. 5,
Accounting for Contingencies. Currently, we have no such
liabilities recorded. This may change in the future depending
upon new developments.
Income
Taxes
In accordance with SFAS No. 109, Accounting for
Income Taxes, the provision for income taxes is computed
using the asset and liability method, under which deferred tax
assets and liabilities are recognized for the expected future
tax consequences of temporary differences between the financial
reporting and tax bases of assets and liabilities, and for the
expected future tax benefit to be derived from tax loss and
credit carryforwards. Deferred tax assets and liabilities are
determined using the enacted tax rates in effect for the years
in which those tax assets are expected to be realized. A
valuation allowance is established when it is more likely than
not the future realization of all or some of the deferred tax
assets will not be achieved. The evaluation of the need for a
valuation allowance is performed on a jurisdiction by
jurisdiction basis, and includes a review of all available
positive and negative evidence.
33
Due to the adoption of SFAS No. 123 (revised 2004),
Share-Based Payment, we recognize excess tax benefits associated
with share-based compensation to stockholders equity only
when realized. When assessing whether excess tax benefits
relating to share-based compensation have been realized, we
follow the
with-and-without
approach excluding any indirect effects of the excess tax
deductions. Under this approach, excess tax benefits related to
share-based compensation are not deemed to be realized until
after the utilization of all other tax benefits available to us.
Goodwill and
Intangible Asset Valuation
The purchase method of accounting for acquisitions requires
extensive use of accounting estimates and judgments to allocate
the purchase price to the fair value of the net tangible and
intangible assets acquired, including in-process research and
development (IPR&D). Goodwill and intangible assets deemed
to have indefinite lives are not amortized, but are subject to
at least annual impairment tests. The amounts and useful lives
assigned to other acquired intangible assets impact future
amortization, and the amount assigned to IPR&D is expensed
immediately. Determining the fair values and useful lives of
intangible assets especially requires the exercise of judgment.
While there are a number of different acceptable generally
accepted valuation methods to estimate the value of intangible
assets acquired, we primarily use the discounted cash flow
method. This method requires significant management judgment to
forecast the future operating results used in the analysis. In
addition, other significant estimates are required such as
residual growth rates and discount factors. The estimates we use
to value and amortize intangible assets are consistent with the
plans and estimates that we use to manage our business and are
based on available historical information and industry estimates
and averages. These judgments can significantly affect our net
operating results.
SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 142 requires that goodwill and
certain intangible assets be assessed for impairment using fair
value measurement techniques. If the carrying amount of a
reporting unit exceeds its fair value, then a goodwill
impairment test is performed to measure the amount of the
impairment loss, if any. The goodwill impairment test compares
the implied fair value of the reporting units goodwill
with the carrying amount of that goodwill. The implied fair
value of goodwill is determined in the same manner as in a
business combination. Determining the fair value of the implied
goodwill is judgmental in nature and often involves the use of
significant estimates and assumptions. These estimates and
assumptions could have a significant impact on whether or not an
impairment charge is recognized and also the magnitude of any
such charge. Estimates of fair value are primarily determined
using discounted cash flows and market comparisons. These
approaches use significant estimates and assumptions, including
projection and timing of future cash flows, discount rates
reflecting the risk inherent in future cash flows, perpetual
growth rates, determination of appropriate market comparables,
and determination of whether a premium or discount should be
applied to comparables. It is reasonably possible that the plans
and estimates used to value these assets may be incorrect. If
our actual results, or the plans and estimates used in future
impairment analyses, are lower than the original estimates used
to assess the recoverability of these assets, we could incur
additional impairment charges. As of December 31, 2006, we
had $2.1 million of goodwill. This goodwill is reported as
a separate line item in the balance sheet. We have performed our
annual test of goodwill as of May 1, 2006 and have
determined there has been no impairment of goodwill as of
December 31, 2006.
Stock-Based
Compensation
We account for stock-based compensation in accordance with
SFAS No. 123R, Share-Based Payment. Under the
provisions of SFAS No. 123R, stock-based compensation
cost is estimated at the grant date based on the awards
fair-value as calculated by the Black-Scholes-Merton (BSM)
option-pricing
model and is recognized as expense over the requisite service
period. The BSM model requires various highly judgmental
assumptions including volatility, forfeiture rates, and expected
option life. If any of these assumptions used in the BSM model
change significantly, stock-based compensation expense may
differ materially in the future from that recorded in the
current period.
34
Results of
Operations
To enhance comparability, the following table sets forth audited
consolidated statement of operations data for the years ended
December 31, 2006, January 1, 2006, and
January 2, 2005 stated as a percentage of total
revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
January 1,
|
|
|
January 2
|
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue
|
|
|
84
|
%
|
|
|
79
|
%
|
|
|
80
|
%
|
Service and other revenue
|
|
|
15
|
|
|
|
19
|
|
|
|
16
|
|
Research revenue
|
|
|
1
|
|
|
|
2
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenue
|
|
|
28
|
|
|
|
27
|
|
|
|
23
|
|
Cost of service and other revenue
|
|
|
5
|
|
|
|
4
|
|
|
|
3
|
|
Research and development
|
|
|
18
|
|
|
|
38
|
|
|
|
42
|
|
Selling, general and administrative
|
|
|
29
|
|
|
|
38
|
|
|
|
51
|
|
Acquired in-process research and
development
|
|
|
|
|
|
|
22
|
|
|
|
|
|
Litigation judgment (settlement),
net
|
|
|
|
|
|
|
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
80
|
|
|
|
129
|
|
|
|
111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
20
|
|
|
|
(29
|
)
|
|
|
(11
|
)
|
Interest income
|
|
|
3
|
|
|
|
2
|
|
|
|
2
|
|
Interest and other expense, net
|
|
|
|
|
|
|
(1
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
23
|
|
|
|
(28
|
)
|
|
|
(12
|
)
|
Provision for income taxes
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
22
|
%
|
|
|
(28
|
%)
|
|
|
(12
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison of
Years Ended December 31, 2006 and January 1,
2006
Our fiscal year is 52 or 53 weeks ending the Sunday closest
to December 31, with quarters of 13 or 14 weeks ending
the Sunday closest to March 31, June 30, and
September 30. The years ended December 31, 2006 and
January 1, 2006 were both 52 weeks.
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
January 1,
|
|
|
Percentage
|
|
|
|
2006
|
|
|
2006
|
|
|
Change
|
|
|
|
(In
thousands)
|
|
|
|
|
|
Product revenue
|
|
$
|
155,811
|
|
|
$
|
57,752
|
|
|
|
170
|
%
|
Service and other revenue
|
|
|
27,486
|
|
|
|
13,935
|
|
|
|
97
|
|
Research revenue
|
|
|
1,289
|
|
|
|
1,814
|
|
|
|
(29
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
184,586
|
|
|
$
|
73,501
|
|
|
|
151
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue for the years ended December 31, 2006 and
January 1, 2006 was $184.6 million and
$73.5 million, respectively. This represents an increase of
$111.1 million for 2006, or 151%, compared to 2005.
35
Product revenue increased to $155.8 million for the year
ended December 31, 2006 from $57.8 million for the
year ended January 1, 2006. The increase in 2006 resulted
primarily from higher consumable and BeadStation sales. Growth
in consumable revenue was primarily attributable to the launch
and shipment of our whole genome genotyping products, the
HumanHap300 and HumanHap550 BeadChips. In addition, growth in
consumable revenue can be attributed to the growth in our
installed base of BeadArray Readers, which has nearly doubled
since January 1, 2006. Consumable products constituted 66%
of product revenue for year ended December 31, 2006,
compared to 47% in the year ended January 1, 2006. We
expect to see continued growth in product revenue, which can be
partially attributed to the launch of several new products, as
well as the growth of our installed base of instruments.
Service and other revenue increased to $27.5 million for
the year ended December 31, 2006 from $13.9 million
for the year ended January 1, 2006. The increase in service
and other revenue is primarily due to the completion of several
significant Infinium and GoldenGate SNP genotyping service
contracts. We introduced our Infinium services in early 2006. We
expect sales from SNP genotyping services contracts to fluctuate
on a yearly and quarterly basis, depending on the mix and number
of contracts that are completed. The timing of completion of a
SNP genotyping services contract is highly dependent on the
customers schedule for delivering the SNPs and samples to
us.
Government grants and other research funding decreased to
$1.3 million for the year ended December 31, 2006 from
$1.8 million for the year ended January 1, 2006, due
primarily to the completion of several projects funded by grants
from the National Institutes of Health. We do not expect
research revenue to be a material component of our revenue going
forward.
Cost of Product
and Service and Other Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
January 1,
|
|
|
Percentage
|
|
|
|
2006
|
|
|
2006
|
|
|
Change
|
|
|
|
(In
thousands)
|
|
|
|
|
|
Cost of product revenue
|
|
$
|
51,271
|
|
|
$
|
19,920
|
|
|
|
157
|
%
|
Cost of service and other revenue
|
|
|
8,073
|
|
|
|
3,261
|
|
|
|
148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of product and service
and other revenue
|
|
$
|
59,344
|
|
|
$
|
23,181
|
|
|
|
156
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product and service and other revenue represents
manufacturing costs incurred in the production process,
including component materials, assembly labor and overhead,
installation, warranty, packaging and delivery costs, as well as
costs associated with performing genotyping services on behalf
of our customers. Costs related to research revenue are included
in research and development expense. Cost of product revenue
increased to $51.3 million for the year ended
December 31, 2006, compared to $19.9 million for the
year ended January 1, 2006, primarily driven by higher
consumable and instrument sales. Cost of product revenue for the
year ended December 31, 2006 included stock-based
compensation expenses resulting from the adoption of
SFAS No. 123R totaling $1.3 million. Gross margin
on product revenue increased to 67.1% for the year ended
December 31, 2006, compared to 65.5% for the year ended
January 1, 2006. The increase in gross margin percentage is
primarily due to the impact of favorable product mix, as well as
decreased manufacturing costs. A higher percentage of our
revenue in 2006 was generated from the sale of consumables,
which generally have a more favorable gross margin than other
products. The decrease in manufacturing costs is primarily due
to reduced raw material costs as a result of more favorable
negotiated contracts with our vendors and improvements in our
manufacturing processes. This increase in gross margin was
offset, in part, by the impact of stock-based compensation
charges, which decreased our gross margin by 83 basis
points in 2006 compared to 2005.
Cost of service and other revenue increased to $8.1 million
for the year ended December 31, 2006, compared to
$3.3 million for the year ended January 1, 2006,
primarily due to higher service revenue. Cost of service and
other revenue for the year ended December 31, 2006 included
stock-based
36
compensation expenses resulting from the adoption of
SFAS No. 123R totaling $0.2 million. Gross margin
on service and other revenue decreased to 70.6% for the year
ended December 31, 2006, compared to 76.6% for the year
ended January 1, 2006. The decrease is due primarily to a
change in the mix of projects, as well as the impact of
stock-based compensation charges, the latter having decreased
our service and other revenue gross margin by 85 basis
points in 2006 compared to 2005.
We expect product mix to continue to affect our future gross
margins. However, we expect our market to become increasingly
price competitive and our margins may fluctuate from year to
year and quarter to quarter.
Research and
Development Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
January 1,
|
|
|
Percentage
|
|
|
|
2006
|
|
|
2006
|
|
|
Change
|
|
|
|
(In
thousands)
|
|
|
|
|
|
Research and development
|
|
$
|
33,373
|
|
|
$
|
27,809
|
|
|
|
20
|
%
|
Our research and development expenses consist primarily of
salaries and other personnel-related expenses, laboratory
supplies and other expenses related to the design, development,
testing and enhancement of our products. We expense our research
and development expenses as they are incurred.
Research and development expenses increased to
$33.4 million for the year ended December 31, 2006,
compared to $27.8 million for the year ended
January 1, 2006. Research and development expenses for the
years ended December 31, 2006 and January 1, 2006
included stock-based compensation expenses primarily resulting
from the adoption of SFAS No. 123R totaling
$3.9 million and $0.1 million, respectively. Exclusive
of these stock-based compensation charges, the increase in
research and development expenses for the year ended
December 31, 2006 is primarily due to the development of
our recently-acquired VeraCode technology purchased in
conjunction with our acquisition of CyVera in April 2005. The
Company plans to launch its first products resulting from this
acquisition during the first quarter of 2007. Research and
development expenses related to the VeraCode technology
increased $2.7 million for the year ended December 31,
2006, compared to the year ended January 1, 2006. In
addition, costs to support our Oligator technology platform and
BeadArray research activities decreased $1.0 million for
the year ended December 31, 2006, compared to the year
ended January 1, 2006.
We believe a substantial investment in research and development
is essential to remaining competitive and expanding into
additional markets. Accordingly, we expect our research and
development expenses to increase in absolute dollars as we
expand our product base and integrate the operations of Solexa
into our business.
Selling, General
and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
January 1,
|
|
|
Percentage
|
|
|
|
2006
|
|
|
2006
|
|
|
Change
|
|
|
|
(In
thousands)
|
|
|
|
|
|
Selling, general and administrative
|
|
$
|
54,057
|
|
|
$
|
28,158
|
|
|
|
92
|
%
|
Our selling, general and administrative expenses consist
primarily of personnel costs for sales and marketing, finance,
human resources, business development, legal and general
management, as well as professional fees, such as expenses for
legal and accounting services. Selling, general and
administrative expenses increased to $54.1 million for the
year ended December 31, 2006, compared to
$28.2 million for the year ended January 1, 2006.
Selling, general and administrative expenses for the years ended
December 31, 2006 and January 1, 2006 included
stock-based compensation expenses primarily resulting from the
adoption of SFAS No. 123R totaling $8.9 million
and $0.2 million, respectively.
Sales and marketing expenses increased $10.6 million during
the year ended December 31, 2006, compared to the year
ended January 1, 2006. The increase is primarily due to
increases of $6.5 million attributable to personnel-related
expenses, $3.2 million of stock-based compensation expense
and
37
$0.9 million attributable to other non-personnel-related
costs, mainly sales and marketing activities for our existing
and new products. General and administrative expenses increased
$15.3 million during the year ended December 31, 2006,
compared to the year ended January 1, 2006, due to
increases of $5.5 million of stock-based compensation
expense, $5.3 million in outside legal costs related to the
Affymetrix litigation, $3.1 million in personnel-related
expenses associated with the growth of our business and
$1.4 million in outside consulting costs. Outside
consulting costs primarily include tax and audit fees and
general legal expenses not associated with the Affymetrix
litigation.
We expect our selling, general and administrative expenses to
increase in absolute dollars as we expand our staff, add sales
and marketing infrastructure, incur increased litigation costs
and incur additional costs to support the growth in our business.
Interest
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
January 1,
|
|
|
Percentage
|
|
|
|
2006
|
|
|
2006
|
|
|
Change
|
|
|
|
(In
thousands)
|
|
|
|
|
|
Interest income
|
|
$
|
5,368
|
|
|
$
|
1,404
|
|
|
|
282
|
%
|
Interest income on our cash and cash equivalents and investments
was $5.4 million and $1.4 million for the years ended
December 31, 2006 and January 1, 2006, respectively.
The increase was due to higher average cash balances and higher
effective interest rates compared to the prior year.
Interest and
Other Expense, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
January 1,
|
|
|
Percentage
|
|
|
|
2006
|
|
|
2006
|
|
|
Change
|
|
|
|
(In
thousands)
|
|
|
|
|
|
Interest and other expense, net
|
|
$
|
(560
|
)
|
|
$
|
(668
|
)
|
|
|
(16
|
%)
|
Interest and other expense, net, consists of interest expense,
other income and expenses related to foreign exchange
transaction costs and gains and losses on disposals of assets.
Interest and other expense, net, decreased to $0.6 million
for the year ended January 1, 2006, compared to
$0.7 million for the year ended January 2, 2005.
Interest expense was $11,000 for the year ended
December 31, 2006, compared to $7,000 for the year ended
January 1, 2006. For the years ended December 31, 2006
and January 1, 2006, we recorded approximately
$0.4 million in losses due to foreign currency
transactions. In addition in 2006, we recorded $0.1 million
related to losses on disposal of assets, compared to
$0.3 million of losses in 2005.
Provision for
Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
January 1,
|
|
|
Percentage
|
|
|
|
2006
|
|
|
2006
|
|
|
Change
|
|
|
|
(In
thousands)
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
2,652
|
|
|
$
|
163
|
|
|
|
1,527
|
%
|
The provision for income taxes was approximately
$2.7 million in 2006, up from $0.2 million in 2005. In
2006, the provision principally consists of federal and state
alternative minimum tax and income tax expense related to
foreign operations. In 2005, the provision for income taxes
consisted of income tax expense related to foreign operations.
38
During the year ended December 31, 2006, we utilized
approximately $25.9 million and $16.6 million of our
federal and state net operating loss carryforwards,
respectively, to reduce our federal and state income taxes. As
of December 31, 2006, we had net operating loss
carryforwards for federal and state tax purposes of
approximately $76.4 million and $39.1 million,
respectively; which begin to expire in 2022 and 2013,
respectively, unless previously utilized. In addition, we also
had U.S. federal and state research and development tax
credit carryforwards of approximately $6.4 million and
$6.3 million respectively; which begin to expire in 2018
and 2019 respectively, unless previously utilized.
Pursuant to Section 382 and 383 of the Internal Revenue
Code, utilization of our net operating losses and credits may be
subject to annual limitations in the event of any significant
future changes in our ownership structure. These annual
limitations may result in the expiration of net operating losses
and credits prior to utilization. Previous limitations due to
Section 382 and 383 have been reflected in the deferred tax
assets as of December 31, 2006.
Based upon the available evidence as of December 31, 2006,
we are not able to conclude it is more likely than not the
remaining deferred tax assets in the U.S. will be realized.
Therefore, we have recorded a full valuation allowance against
the U.S. deferred tax assets of approximately
$36.5 million.
Comparison of
Years Ended January 1, 2006 and January 2,
2005
Our fiscal year is 52 or 53 weeks ending the Sunday closest
to December 31, with quarters of 13 or 14 weeks ending
the Sunday closest to March 31, June 30, and
September 30. The years ended January 1, 2006 and
January 2, 2005 were 52 and 53 weeks, respectively.
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
|
|
January 1,
|
|
|
January 2,
|
|
|
Percentage
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
|
(In
thousands)
|
|
|
|
|
|
Product revenue
|
|
$
|
57,752
|
|
|
$
|
40,497
|
|
|
|
43
|
%
|
Service and other revenue
|
|
|
13,935
|
|
|
|
8,075
|
|
|
|
73
|
|
Research revenue
|
|
|
1,814
|
|
|
|
2,011
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
73,501
|
|
|
$
|
50,583
|
|
|
|
45
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue for the years ended January 1, 2006 and
January 2, 2005 was $73.5 million and
$50.6 million, respectively. This represents an increase of
$22.9 million for 2005, or 45%, compared to 2004.
Product revenue increased to $57.8 million for the year
ended January 1, 2006 from $40.5 million for the year
ended January 2, 2005. The increase in 2005 was primarily
due to higher BeadStation, consumable and, to a lesser extent,
oligo sales. Growth in consumable sales was due to the launch of
several new products, as well as the growth in our installed
base of BeadStations. As of January 1, 2006, we had shipped
a total of 126 BeadArray Readers.
Service and other revenue increased to $13.9 million in
2005 from $8.1 million in 2004. The increase in service and
other revenue was primarily due to higher demand for third-party
SNP genotyping service contracts during the 2005 period. In
addition, due to the achievement of a milestone associated with
our collaboration agreement with Invitrogen, we recognized
revenue of $1.1 million in the fourth quarter of 2005.
These increases were partially offset by decreased revenue
related to the International HapMap Project. We completed all
revenue-generating genotyping services for the International
HapMap project early in the first quarter of 2005. We expect
sales from third-party SNP genotyping services contracts to
fluctuate on a yearly and quarterly basis, depending on the mix
and number of contracts that are completed. The timing of
completion of a SNP genotyping services contract is highly
dependent on the customers schedule for delivering the
SNPs and samples to us.
39
Government grants and other research funding decreased to
$1.8 million for the year ended January 1, 2006 from
$2.0 million for the year ended January 2, 2005, due
primarily to a decrease in internal research spending for our
grants from the National Institutes of Health.
Cost of Product
and Service and Other Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
|
|
January 1,
|
|
|
January 2,
|
|
|
Percentage
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
|
(In
thousands)
|
|
|
|
|
|
Cost of product revenue
|
|
$
|
19,920
|
|
|
$
|
11,572
|
|
|
|
72
|
%
|
Cost of service and other revenue
|
|
|
3,261
|
|
|
|
1,687
|
|
|
|
93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of product and service
and other revenue
|
|
$
|
23,181
|
|
|
$
|
13,259
|
|
|
|
75
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product and service and other revenue represents
manufacturing costs incurred in the production process,
including component materials, assembly labor and overhead,
installation, warranty, packaging and delivery costs, as well as
costs associated with performing genotyping services on behalf
of our customers. Costs related to research revenue are included
in research and development expense. Cost of product and service
and other revenue increased to $23.2 million for the year
ended January 1, 2006, compared to $13.3 million for
the year ended January 2, 2005 due primarily to the
significant increase in product revenue. Gross margin on product
and service and other revenue was 68% for 2005, compared to 73%
for 2004.
Cost of product revenue increased to $19.9 million for the
year ended January 1, 2006, compared to $11.6 million
for the year ended January 2, 2005, due to the significant
increase in product revenue. Gross margin on product revenue
decreased to 66% for the year ended January 1, 2006,
compared to 71% for the year ended January 2, 2005. The
decrease in gross margin percentage is primarily due to the
impact of product mix. A higher percentage of our revenue in
2005 was generated from the sale of instrumentation, which
generally has a lower gross margin than other products. Other
factors contributing to the decrease include decreased gross
margins related to our consumable and oligo sales. Lower
consumable margins can be primarily attributed to lower average
selling prices on consumable sales in 2005, compared to 2004,
which were partially offset by decreased manufacturing costs. In
addition, the gross margin associated with oligo products sold
as a part of the Invitrogen collaboration was lower when
compared to the prior year. The change in oligo gross margin was
due to the fact that, under the Invitrogen collaboration, we no
longer sell oligos directly. As a result, the gross margin
related to this product line decreased; however, the net margin
has increased due to the fact that most of the sales and
marketing expenses surrounding the oligo business have shifted
to our collaboration partner, Invitrogen.
Cost of service and other revenue increased to $3.3 million
for the year ended January 1, 2006, compared to
$1.7 million for the year ended January 2, 2005. Gross
margin on service and other revenue decreased to 77% for the
year ended January 1, 2006 from 79% in the year ended
January 2, 2005. The decrease is due primarily to a change
in the mix of projects and decreased average selling prices.
We expect product mix to continue to affect our future gross
margins. However, we expect our market to become increasingly
price competitive and our margins may fluctuate from year to
year and quarter to quarter.
Research and
Development Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
|
|
January 1,
|
|
|
January 2,
|
|
|
Percentage
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
|
(In
thousands)
|
|
|
|
|
|
Research and development
|
|
$
|
27,809
|
|
|
$
|
21,462
|
|
|
|
30
|
%
|
40
Our research and development expenses consist primarily of
salaries and other personnel-related expenses, laboratory
supplies and other expenses related to the design, development,
testing and enhancement of our products. We expense our research
and development expenses as they are incurred.
Research and development expenses increased to
$27.8 million for the year ended January 1, 2006,
compared to $21.5 million for the year ended
January 2, 2005. Research and development expenses for the
years ended January 1, 2006 and January 2, 2005
included stock-based compensation expense of approximately
$0.1 million and $0.3 million, respectively. Exclusive
of these stock-based compensation charges, the increase in
research and development expenses is primarily due to the
development expenses incurred to develop our newly-acquired
Microbead technology purchased in conjunction with our
acquisition of CyVera in April 2005. Research and development
expenses related to the VeraCode technology totaled
approximately $3.2 million in 2005. Additional factors
contributing to the increased research and development expenses
during 2005 relate to increased costs of $2.1 million
associated with the cost of BeadArray research activities and
$1.3 million related to research costs to support our
Oligator technology platform. We believe a substantial
investment in research and development is essential to remaining
competitive and expanding into additional markets. Accordingly,
we expect our research and development expenses to increase as
we expand our product base and integrate the operations of
Solexa into our business.
Selling, General
and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
|
|
January 1,
|
|
|
January 2,
|
|
|
Percentage
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
|
(In
thousands)
|
|
|
|
|
|
Selling, general and administrative
|
|
$
|
28,158
|
|
|
$
|
25,576
|
|
|
|
10
|
%
|
Our selling, general and administrative expenses consist
primarily of personnel costs for sales and marketing, finance,
human resources, business development, legal and general
management, as well as professional fees, such as expenses for
legal and accounting services.
Selling, general and administrative expenses increased to
$28.2 million for the year ended January 1, 2006,
compared to $25.6 million for the year ended
January 2, 2005. Selling, general and administrative
expenses for the years ended January 1, 2006 and
January 2, 2005 included stock-based compensation expense
of approximately $0.2 million and $0.5 million,
respectively. Sales and marketing expenses increased
$3.6 million, of which $2.7 million was attributable
to personnel related expenses for the build-out of our sales
force and customer support staff, and $0.9 million is
attributable to other non-personnel-related costs, including
sales and marketing activities for our existing and new
products. General and administrative expenses decreased by
$1.0 million in 2005, compared to 2004, due primarily to a
$2.5 million decrease in litigation expenses and a
$0.3 million decrease in stock-based compensation expense,
partially offset by a $1.5 million increase in
personnel-related expenses.
We expect our selling, general and administrative expenses to
accelerate as we expand our staff, add sales and marketing
infrastructure and incur increased litigation costs and
additional costs to support the growth in our business.
During 2005, we recorded non-cash compensation expense for
accelerated vesting of options for certain employees totaling
approximately $0.1 million. This compensation was provided
as incentive to continue to work as key members of the sales
team associated with the Invitrogen collaboration.
Acquired
In-Process Research and Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
|
|
January 1,
|
|
|
January 2,
|
|
|
Percentage
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
|
(In
thousands)
|
|
|
|
|
|
Acquired in-process research and
development
|
|
$
|
15,800
|
|
|
$
|
|
|
|
|
N/A
|
|
41
During the year ended January 1, 2006, we recorded
$15.8 million of acquired in-process research and
development (IPR&D) resulting from the CyVera acquisition.
These amounts were expensed on the acquisition dates because the
acquired technology had not yet reached technological
feasibility and had no alternative future uses. At the
acquisition date, CyVeras ongoing research and development
initiatives were primarily the development of its VeraCode
technology and the BeadXpress Reader. The IPR&D charge
related to the CyVera acquisition was made up of two projects
that were approximately 50% and 25% complete at the date of
acquisition. The discount rate applied to calculate the
IPR&D charge was 30%. Acquisitions of businesses, products
or technologies by us in the future may result in substantial
charges for acquired IPR&D that may cause fluctuations in
our interim or annual operating results. There were no charges
resulting from any acquisitions during the same period in 2006
or 2004.
Litigation
Judgment (Settlement), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
|
|
January 1,
|
|
|
January 2,
|
|
|
Percentage
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
|
(In
thousands)
|
|
|
|
|
|
Litigation judgment (settlement),
net
|
|
$
|
|
|
|
$
|
(4,201
|
)
|
|
|
(100
|
%)
|
We recorded a $7.7 million charge in June 2002 to cover
total damages and estimated expenses related to a jury verdict
in a
termination-of-employment
lawsuit. We appealed the decision, and in December 2004, the
Fourth Appellate District Court of Appeal, in San Diego,
California, reduced the amount of the award. During the appeal
process, the court required us to incur interest charges on the
judgment amount at statutory rates until the case was resolved.
During the years ended January 2, 2005 and
December 28, 2003, we recorded $0.6 million and
$0.8 million, respectively, of such interest charges as
litigation expense. As a result of the revised judgment, we
reduced the $9.2 million liability on our balance sheet to
$5.9 million and recorded a gain of $3.3 million as a
litigation judgment in the fourth quarter of 2004. In addition,
in August 2004, we recorded a $1.5 million gain as a result
of a settlement with Applera.
Interest
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
|
|
January 1,
|
|
|
January 2,
|
|
|
Percentage
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
|
(In
thousands)
|
|
|
|
|
|
Interest income
|
|
$
|
1,404
|
|
|
$
|
941
|
|
|
|
49
|
%
|
Interest income on our cash and cash equivalents and investments
was $1.4 million and $0.9 million for the years ended
January 1, 2006 and January 2, 2005, respectively. The
increase was due to higher average cash balances and higher
effective interest rates compared to the prior year.
Interest and
Other Expense, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
|
|
January 1,
|
|
|
January 2,
|
|
|
Percentage
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
|
(In
thousands)
|
|
|
|
|
|
Interest and other expense, net
|
|
$
|
(668
|
)
|
|
$
|
(1,518
|
)
|
|
|
(56
|
%)
|
Interest and other expense, net consists of interest expense,
expenses related to foreign exchange transaction costs and gains
and losses on disposals of assets. Interest and other expense,
net, decreased to $0.7 million for the year ended
January 1, 2006, compared to $1.5 million for the year
ended January 2, 2005.
Interest expense was $7,000 for the year ended January 1,
2006, compared to $1.4 million for the year ended
January 2, 2005. Interest expense in the 2004 period
relates primarily to a $26.0 million fixed rate loan that
was paid off in August 2004 in connection with the
sale/lease-back of our San Diego facilities.
42
In the year ended January 1, 2006, we recorded
approximately $0.4 million in losses due to foreign
currency transactions compared to $0.2 million in foreign
currency transaction losses for the year ended January 2,
2005. In addition in 2005, we recorded $0.3 million related
to losses on disposal of assets. There were no gains or losses
on disposals in 2004.
Provision for
Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
|
|
January 1,
|
|
|
January 2,
|
|
|
Percentage
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
|
(In
thousands)
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
163
|
|
|
$
|
135
|
|
|
|
21
|
%
|
The Companys provision for income taxes for the years
ended January 1, 2006 and January 2, 2005 consisted of
$163,000 and $135,000, respectively, for income tax expense
related to its foreign operations.
We incurred net operating losses for the years ended
January 1, 2006 and January 2, 2005 and, accordingly,
we did not pay any U.S. federal or state income taxes. We
have recorded a valuation allowance for the full amount of the
resulting net deferred tax asset, as the future realization of
the tax benefit is uncertain. As of January 1, 2006, we had
net operating loss carryforwards for federal and California tax
purposes of approximately $103.7 million and
$40.1 million, respectively, which begin to expire in 2018
and 2006, respectively, unless previously utilized.
As of January 1, 2006, we also had U.S. federal and
California research and development tax credit carryforwards of
approximately $4.1 million and $3.8 million,
respectively. The federal tax credit carryforwards will begin to
expire in 2018 and the California carryforwards have no
expiration.
Our utilization of the net operating losses and credits may be
subject to substantial annual limitations pursuant to
Section 382 and 383 of the Internal Revenue Code, and
similar state provisions, as a result of changes in our
ownership structure. CyVera Corporation had an ownership change
upon our acquisition during 2005 and, accordingly, its net
operating loss and tax credit carryforwards are subject to
annual limitation. These annual limitations may result in the
expiration of net operating losses and credits prior to
utilization.
Liquidity and
Capital Resources
Cashflow
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
January 1,
|
|
|
January 2,
|
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands)
|
|
|
Net cash provided (used in)
operating activities
|
|
$
|
39,000
|
|
|
$
|
(9,008
|
)
|
|
$
|
(19,574
|
)
|
Net cash provided by (used in)
investing activities
|
|
|
(160,735
|
)
|
|
|
(1,535
|
)
|
|
|
57,022
|
|
Net cash provided by financing
activities
|
|
|
109,296
|
|
|
|
5,963
|
|
|
|
4,875
|
|
Effect of foreign currency
translation
|
|
|
3
|
|
|
|
613
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
and cash equivalents
|
|
$
|
(12,436
|
)
|
|
$
|
(3,967
|
)
|
|
$
|
42,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006, we had cash, cash equivalents and
short-term investments of approximately $130.8 million. We
currently invest our funds in U.S. dollar-based, short-term
money market mutual funds, corporate bonds, commercial paper,
auction rate certificates and treasury notes.
43
Our operating activities generated cash of $39.0 million in
the year ended December 31, 2006, compared to using cash of
$9.0 million in the year ended January 1, 2006. Net
cash provided by operating activities in the year ended
December 31, 2006 was primarily the result of the
following: net income of $40.0 million; $14.3 million
related to non-cash stock compensation expense resulting from
the adoption of SFAS No. 123R; an $11.5 million
increase in accounts payable and accrued liabilities driven by
increases in general business activity associated with our sales
growth, as well as expenses associated with the expansion of our
corporate infrastructure to accommodate this growth; non-cash
charges of $6.1 million for depreciation and amortization;
a $5.9 million increase in other long-term liabilities
primarily due to deferred revenue associated with the agreement
with Genizon Biosciences and the deCODE genetics collaboration;
and a $1.8 million increase in income taxes payable. These
sources were partially offset by a $21.7 million increase
in accounts receivable and a $9.7 million increase in
inventory primarily due to our significant sales growth of 151%
during the year ended December 31, 2006, compared to the
year ended January 1, 2006, which resulted from increased
customer demand and introduction of our new products and
services into the market; a $5.3 million increase in other
assets primarily due to increased long-term cost of sales
associated with Genizon and deCODE and capitalized costs
associated with the Solexa acquisition; a $1.6 million
increase in prepaid expenses and other current assets primarily
associated with increased prepaid software licenses and
insurance, as well as an increase in interest receivable,
$1.4 million for an incremental tax benefit related to
stock option exercises and an increase of $0.6 million in
deferred income taxes. Net cash used in operating activities in
the year ended January 1, 2006 was primarily the result of
a net loss from operations of $20.9 million, a
$6.0 million payment for a litigation judgment, a
$7.0 million increase in accounts receivable and a
$6.5 million increase in inventory, reduced by a
$7.4 million increase in accounts payable and accrued
liabilities, a $3.2 million increase in long-term
liabilities primarily related to payments received from
Invitrogen recorded as deferred revenue, non-cash charges of
$4.1 million for depreciation and amortization and a
non-cash acquired IPR&D charge of $15.8 million related
to the CyVera acquisition.
Our investing activities used cash of $160.7 million in the
year ended December 31, 2006, compared to using cash of
$1.5 million in the year ended January 1, 2006. Cash
used in investing activities in the year ended December 31,
2006 was primarily due to the purchase of
available-for-sale
securities totaling $236.3 million, a $50.0 million
investment in Solexa, and the purchase of a $3.0 million
secured convertible debenture in Genizon. Further,
$15.1 million was used for the purchase of property and
equipment primarily related to the expansion of our
manufacturing capacity. Our manufacturing capacity for BeadChips
has increased approximately fourfold over the level as of
January 1, 2006. These uses of cash were partially offset
by $143.8 million provided by sales and maturities of
available-for-sale
securities. Cash used by investing activities in the year ended
January 1, 2006 was due to $11.4 million used for the
purchase of property and equipment and $2.4 million paid
for the acquisition of CyVera, reduced by $12.2 million
from the sale or maturity of investment securities used to
provide operating funds for our business.
Our financing activities provided $109.3 million in the in
the year ended December 31, 2006, compared to
$6.0 million in the year ended January 1, 2006. Cash
provided by financing activities in the year ended
December 31, 2006 was primarily due to $96.5 million
in net proceeds from a public stock offering completed in May
2006, as well as proceeds from the issuance of common stock from
option exercises and employee stock purchase plan purchases
totaling $11.4 million. Cash provided from financing
activities in the year ended January 1, 2006 was primarily
proceeds from the issuance of common stock from option exercises.
44
In February 2007, we issued $400 million principal amount
of 0.625% Convertible Senior Notes due 2014. The net proceeds
from the offering, after deducting the initial purchasers
discount and offering expenses, were approximately
$390.3 million. We used approximately $202 million of
the net proceeds to purchase shares of our common stock in
privately negotiated transactions concurrently with the
offering. We used $46.6 million of the net proceeds of this
offering to pay the cost of convertible note hedge and warrant
transactions, which are designed to reduce the potential
dilution upon conversion of the notes. We intend to use the
balance of the net proceeds for other general corporate
purposes, which may include acquisitions and additional
purchases of our common stock. The notes mature on
February 15, 2014 and bear interest semi-annually at a rate
of 0.625% per year, payable on February 15 and August
15 of each year, beginning on August 15, 2007. In addition,
we may in certain circumstances be obligated to pay additional
interest. If a designated event, as defined in the
indenture for the notes, occurs, holders of the notes may
require us to repurchase all or a portion of their notes for
cash at a repurchase price equal to the principal amount of the
notes to be repurchased, plus accrued and unpaid interest. In
addition, upon conversion of the notes, we must pay the
principal portion in cash. The notes will become convertible
only in certain circumstances based on conditions relating to
the trading price of the notes and our common stock or upon the
occurrence of specified corporate events. However, the notes
will be convertible at any time from, and including,
November 15, 2013 through the third scheduled trading day
immediately preceding February 15, 2014.
We anticipate that our current cash and cash equivalents and
income from operations will be sufficient to fund our operating
needs for at least the next twelve months. Operating needs
include the planned costs to operate our business, including
amounts required to fund working capital and capital
expenditures. At the present time, we have no material
commitments for capital expenditures. However, our future
capital requirements and the adequacy of our available funds
will depend on many factors, including the successful resolution
of our legal proceedings with Affymetrix, our ability to
successfully commercialize our sequencing systems and to expand
our SNP genotyping services product lines, scientific progress
in our research and development programs, the magnitude of those
programs, competing technological and market developments and
the need to enter into collaborations with other companies or
acquire other companies or technologies to enhance or complement
our product and service offerings. Therefore, we may require
additional funding in the future.
Off-Balance
Sheet Arrangements and Contractual Obligations
We do not participate in any transactions that generate
relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured
finance or special purpose entities (SPEs), which would have
been established for the purpose of facilitating off-balance
sheet arrangements or other contractually narrow or limited
purposes. As of December 31, 2006, we were not involved in
any SPE transactions.
In January 2002, we purchased two newly constructed buildings
and assumed a $26.0 million,
ten-year
mortgage on the property at a fixed interest rate of 8.36%. In
June 2004, we entered into a conditional agreement to sell our
land and buildings for $42.0 million and to lease back such
property for an initial term of ten years. The sale was
completed in August 2004 at which time the lease was signed.
After the repayment of the remaining $25.2 million debt and
other related transaction expenses, we received
$15.5 million in net cash proceeds. We removed the land and
net book value of the buildings of $36.9 million from our
balance sheet and are recording the resulting $3.7 million
gain on the sale of the property over the lease term in
accordance with SFAS No. 13, Accounting for
Leases. Under the terms of the lease, we made a
$1.9 million security deposit, with monthly rental payments
of $318,643 for the first year with an annual increase of 3% in
each subsequent year through 2014. The current monthly rent
under this lease is $338,048. On February 14, 2007, we
extended this lease. The terms of the new lease provide for
monthly rent increases each year to a maximum of
$504,710 per month during the last year of the lease, which
is now 2023. We have the option to extend the term of the lease
for three additional five-year periods.
45
As of December 31, 2006, we also leased an office and
laboratory facility in Connecticut, additional office,
distribution and storage facilities in San Diego, and four
foreign facilities located in Japan, Singapore, China and the
Netherlands under non-cancelable operating leases that expire at
various times through July 2011. These leases contain renewal
options ranging from one to five years.
As of December 31, 2006, our contractual obligations were
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by
Period
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
More Than
|
|
Contractual
Obligation
|
|
Total
|
|
|
1 Year
|
|
|
1 3 Years
|
|
|
1 5 Years
|
|
|
5 Years
|
|
|
Operating leases
|
|
$
|
37,899
|
|
|
$
|
5,320
|
|
|
$
|
10,410
|
|
|
$
|
9,371
|
|
|
$
|
12,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
37,899
|
|
|
$
|
5,320
|
|
|
$
|
10,410
|
|
|
$
|
9,371
|
|
|
$
|
12,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The above table does not include orders for goods and services
entered into in the normal course of business that are not
enforceable or legally binding.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk.
|
Interest Rate
Sensitivity
Our exposure to market risk for changes in interest rates
relates primarily to our investment portfolio. The fair market
value of fixed rate securities may be adversely impacted by
fluctuations in interest rates while income earned on floating
rate securities may decline as a result of decreases in interest
rates. Under our current policies, we do not use interest rate
derivative instruments to manage exposure to interest rate
changes. We attempt to ensure the safety and preservation of our
invested principal funds by limiting default risk, market risk
and reinvestment risk. We mitigate default risk by investing in
investment grade securities. We have historically maintained a
relatively short average maturity for our investment portfolio,
and we believe a hypothetical 100 basis point adverse move
in interest rates along the entire interest rate yield curve
would not materially affect the fair value of our interest
sensitive financial instruments.
Foreign
Currency Exchange Risk
Although most of our revenue is realized in U.S. dollars,
some portions of our revenue are realized in foreign currencies.
As a result, our financial results could be affected by factors
such as changes in foreign currency exchange rates or weak
economic conditions in foreign markets. The functional
currencies of our subsidiaries are their respective local
currencies. Accordingly, the accounts of these operations are
translated from the local currency to the U.S. dollar using
the current exchange rate in effect at the balance sheet date
for the balance sheet accounts, and using the average exchange
rate during the period for revenue and expense accounts. The
effects of translation are recorded in accumulated other
comprehensive income as a separate component of
stockholders equity.
46
Periodically, we hedge significant foreign currency firm sales
commitments and accounts receivable with forward contracts. We
only use derivative financial instruments to reduce foreign
currency exchange rate risks; we do not hold any derivative
financial instruments for trading or speculative purposes. We
primarily use forward exchange contracts to hedge foreign
currency exposures and they generally have terms of one year or
less. These contracts have been designated as cash flow hedges
and accordingly, to the extent effective, any unrealized gains
or losses on these foreign currency forward contracts are
reported in other comprehensive income. Realized gains and
losses for the effective portion are recognized with the
underlying hedge transaction. As of December 31, 2006, we
had no foreign currency forward contracts outstanding. The
notional settlement amount of the foreign currency forward
contracts outstanding at December 31, 2006 and
January 1, 2006 were $0 and $0.1 million,
respectively. As of January 1, 2006, we had one outstanding
contract with an immaterial fair value, representing an
unrealized gain, which was included in other current assets at
January 1, 2006. We settled foreign exchange contracts of
$0.1 million and $5.2 million for the years ended
December 31, 2006 and January 1, 2006, respectively.
We did not hold any derivative financial instruments prior to
fiscal 2004.
|
|
Item 8.
|
Financial
Statements and Supplementary Data.
|
The Report of Independent Registered Public Accounting Firm,
Financial Statements and Notes to Financial Statements begin on
page F-1
immediately following the signature page and are incorporated
herein by reference.
Our fiscal year is 52 or 53 weeks ending on the Sunday
closest to December 31, with quarters of 13 or
14 weeks ending on the Sunday closest to March 31,
June 30 and September 30. The years ended
December 31, 2006 and January 1, 2006 were both
52 weeks. The year ended January 2, 2005 was
53 weeks.
|
|
Item 9.
|
Changes In and
Disagreements With Accountants on Accounting and Financial
Disclosure.
|
None.
|
|
Item 9A.
|
Controls and
Procedures.
|
We design our internal controls to provide reasonable assurance
that (1) our transactions are properly authorized;
(2) our assets are safeguarded against unauthorized or
improper use; and (3) our transactions are properly
recorded and reported in conformity with U.S. generally
accepted accounting principles. We also maintain internal
controls and procedures to ensure that we comply with applicable
laws and our established financial policies.
47
We have carried out an evaluation, under the supervision and
with the participation of our management, including our
principal executive officer and principal financial officer, of
the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended, or the
Securities Exchange Act), as of December 31, 2006. Based
upon that evaluation, our principal executive officer and
principal financial officer concluded that, as of
December 31, 2006, our disclosure controls and procedures
are effective to ensure that (a) the information required
to be disclosed by us in the reports that we file or submit
under the Securities Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the
SECs rules and forms, and (b) such information is
accumulated and communicated to our management, including our
principal executive officer and principal financial officers, or
persons performing similar functons, as appropriate to allow
timely decisions regarding required disclosure. In designing and
evaluating our disclosure controls and procedures, our
management recognized that any controls and procedures, no
matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control
objectives, and our management have concluded that the
disclosure controls and procedures are effective at the
reasonable assurance level. Because of inherent limitations in
all control systems, no evaluation of controls can provide
absolute assurance that all control issues, if any, within a
company have been detected.
An evaluation was also performed under the supervision and with
the participation of our management, including our chief
executive officer and chief financial officer, of any change in
our internal control over financial reporting that occurred
during the fourth quarter of 2006 and that has materially
affected, or is reasonably likely to materially affect, our
internal control over financial reporting. That evaluation did
not identify any such change.
MANAGEMENTS
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term
is defined in Exchange Act
Rules 13a-15(f)
and
15d-15(f).
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect all misstatements.
Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial
statement preparation and presentation.
We conducted an evaluation of the effectiveness of our internal
control over financial reporting based on the framework in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. Based on our evaluation under the framework in
Internal Control Integrated Framework, our
management concluded that our internal control over financial
reporting was effective as of December 31, 2006.
Ernst & Young LLP, the independent registered public
accounting firm that audited the consolidated financial
statements included in this Annual Report on
Form 10-K,
has issued an attestation report on managements assessment
of the effectiveness of our internal control over financial
reporting as of December 31, 2006. This report, which
expresses an unqualified opinion on managements assessment
of and the effectiveness of our internal controls over financial
reporting as of December 31, 2006, is included herein.
48
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL
CONTROL OVER FINANCIAL REPORTING
To The Board of Directors and Stockholders of
Illumina, Inc.
We have audited managements assessment, included in the
accompanying Managements Report on Internal Control Over
Financial Reporting, that Illumina, Inc. maintained effective
internal control over financial reporting as of
December 31, 2006, based on criteria established in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). Illumina, Inc.s management is
responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting. Our responsibility
is to express an opinion on managements assessment and an
opinion on the effectiveness of the companys internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that Illumina, Inc.
maintained effective internal control over financial reporting
as of December 31, 2006, is fairly stated, in all material
respects, based on the COSO criteria. Also, in our opinion,
Illumina, Inc., maintained, in all material respects, effective
internal control over financial reporting as of
December 31, 2006, based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets as of December 31, 2006 and
January 1, 2006, and the related consolidated statements of
operations, shareholders equity, and cash flows for each
of the three years in the period ended December 31, 2006 of
Illumina, Inc. and our report dated February 23, 2007
expressed an unqualified opinion thereon.
San Diego, California
February 23, 2007
49
|
|
Item 9B.
|
Other
Information.
|
None.
PART III
|
|
Item 10.
|
Directors and
Executive Officers of the Registrant.
|
(a) Identification of Directors. Information concerning our
directors is incorporated by reference from the section entitled
Proposal One: Election of Directors contained
in our definitive Proxy Statement with respect to our 2007
Annual Meeting of Stockholders to be filed with the SEC no later
than April 30, 2007.
(b) Identification of Executive Officers. Information
concerning our executive officers is set forth under
Executive Officers in Part I of this Annual
Report on
Form 10-K
and is incorporated herein by reference.
(c) Compliance with Section 16(a) of the Exchange Act.
Information concerning compliance with Section 16(a) of the
Securities Exchange Act of 1934 is incorporated by reference
from the section entitled Compliance with
Section 16(a) of the Securities Exchange Act
contained in our definitive Proxy Statement with respect to our
2007 Annual Meeting of Stockholders to be filed with the SEC no
later than April 30, 2007.
(d) Information concerning the audit committee financial
expert as defined by the SEC rules adopted pursuant to the
Sarbanes-Oxley Act of 2002 is incorporated by reference from our
definitive Proxy Statement with respect to our 2007 Annual
Meeting of Stockholders to be filed with the SEC no later than
April 30, 2007.
Code of
Ethics
We have adopted a code of ethics for our directors, officers and
employees, which is available on our website at www.illumina.com
in the Investor Information section under Corporate.
The information on our website is not incorporated by reference
into this report.
|
|
Item 11.
|
Executive
Compensation.
|
Information concerning executive compensation is incorporated by
reference from the sections entitled Executive
Compensation and Other Information contained in our
definitive Proxy Statement with respect to our 2007 Annual
Meeting of Stockholders to be filed with the SEC no later than
April 30, 2007.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
|
Information concerning the security ownership of certain
beneficial owners and management is incorporated by reference
from the section entitled Ownership of Securities
contained in our definitive Proxy Statement with respect to our
2007 Annual Meeting of Stockholders to be filed with the SEC no
later than April 30, 2007.
50
Equity
Compensation Plan Information
The following table presents information about our common stock
that may be issued upon the exercise of options, warrants and
rights under all our existing equity compensation plans as of
December 31, 2006. We currently have two active equity
compensation plans, the 2000 employee stock purchase plan and
the 2005 stock incentive plan, which replaced the 2000 stock
plan. Prior to our initial public offering, we granted options
under our 1998 stock incentive plan. All of these plans have
been approved by our stockholders. Options outstanding include
options granted under the 1998 stock incentive plan, the 2000
stock plan and the 2005 stock incentive plan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c) Number of
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
Available for
|
|
|
|
|
|
|
|
|
|
Future
Issuance
|
|
|
|
(a) Number of
|
|
|
|
|
|
Under Equity
|
|
|
|
Securities to
be
|
|
|
(b) Weighted-
|
|
|
Compensation
|
|
|
|
Issued Upon
|
|
|
Average
|
|
|
Plans
(Excluding
|
|
|
|
Exercise of
|
|
|
Exercise Price
|
|
|
Securities
|
|
|
|
Outstanding
|
|
|
of Outstanding
|
|
|
Reflected in
|
|
Plan
Category
|
|
Options
|
|
|
Options
|
|
|
Column
(a))
|
|
|
Equity compensation plans approved
by security holders
|
|
|
8,359,120
|
|
|
$
|
13.94
|
|
|
|
5,527,502
|
(1)(2)
|
Equity compensation plans not
approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
8,359,120
|
|
|
$
|
13.94
|
|
|
|
5,527,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Please refer to Note 6 to the consolidated financial
statements included in this Annual Report on
Form 10-K
for a description of our equity compensation plans.
|
|
|
(1) |
|
Includes 2,764,566 available for grant under our 2005 stock
incentive plan. The 2005 stock incentive plan provides for an
automatic annual increase in the shares reserved for issuance by
the lesser of (1) five percent of outstanding shares of our
common stock on the last day of the immediately preceding fiscal
year, (2) 1,200,000 shares or (3) a lesser amount
as determined by our Board of Directors. |
|
(2) |
|
Includes 2,762,936 shares available for grant under our
2000 employee stock purchase plan. The 2000 employee stock
purchase plan provides for an automatic annual increase in the
shares reserved for issuance by the lesser of (1) three
percent of outstanding shares of our common stock on the last
day of the immediately preceding fiscal year or
(2) 1,500,000 shares. |
|
|
Item 13.
|
Certain
Relationships and Related Transactions.
|
Information concerning certain relationships and related
transactions is incorporated by reference from the sections
entitled Proposal One: Election of Directors,
Executive Compensation and Other Information and
Certain Transactions contained in our definitive
Proxy Statement with respect to our 2007 Annual Meeting of
Stockholders to be filed with the SEC no later than
April 30, 2007.
|
|
Item 14.
|
Principal
Accounting Fees and Services.
|
Information concerning principal accounting fees and services is
incorporated by reference from the sections entitled
Proposal Two: Ratification of Independent
Auditors contained in our definitive Proxy Statement with
respect to our 2007 Annual Meeting of Stockholders to be filed
with the SEC no later than April 30, 2007.
51
PART IV
|
|
Item 15.
|
Exhibits,
Financial Statement Schedules.
|
(a) The following documents are filed as a part of this
report:
(1) Consolidated Financial Statements:
|
|
|
|
|
|
|
Page
|
|
|
Index to Consolidated Financial
Statements
|
|
|
F-1
|
|
Report of Independent Registered
Public Accounting Firm
|
|
|
F-2
|
|
Consolidated Balance Sheets as of
December 31, 2006 and January 1, 2006
|
|
|
F-3
|
|
Consolidated Statements of
Operations for the years ended December 31, 2006,
January 1, 2006, and January 2, 2005
|
|
|
F-4
|
|
Consolidated Statements of
Stockholders Equity for the period from December 28,
2003 to December 31, 2006
|
|
|
F-5
|
|
Consolidated Statements of Cash
Flows for the years ended December 31, 2006,
January 1, 2006 and January 2, 2005
|
|
|
F-6
|
|
Notes to Consolidated Financial
Statements
|
|
|
F-7
|
|
|
|
|
|
|
(2) Financial Statement
Schedule:
|
|
|
|
|
Valuation and Qualifying Account
and Reserves for the three years ended December 31, 2006
|
|
|
F-37
|
|
(3) Exhibits:
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of
Document
|
|
|
2
|
.1(16)
|
|
Agreement and Plan of Merger,
dated as of November 12, 2006, among Solexa, Inc., Callisto
Acquisition Corp. and the Registrant.
|
|
3
|
.1(2)
|
|
Corrected Amended and Restated
Certificate of Incorporation.
|
|
3
|
.2(30)
|
|
Amended Bylaws.
|
|
3
|
.3(5)
|
|
Certificate of Designation for
Series A Junior Participating Preferred Stock (included as
an exhibit to exhibit 4.3).
|
|
4
|
.1(1)
|
|
Specimen Common Stock Certificate.
|
|
4
|
.2(1)
|
|
Second Amended and Restated
Stockholders Rights Agreement, dated November 5, 1999, by
and among the Registrant and certain stockholders of the
Registrant.
|
|
4
|
.3(5)
|
|
Rights Agreement, dated as of
May 3, 2001, between the Registrant and Equiserve Trust
Company, N.A.
|
|
4
|
.4(35)
|
|
Indenture related to the
0.625% Convertible Senior Notes due 2014, dated as of
February 16, 2007, between the Registrant and the Bank of
New York, as trustee.
|
|
4
|
.5(36)
|
|
Registration Rights Agreement,
dated as of February 16, 2007, between the Registrant and
the Purchasers named therein.
|
|
+10
|
.1(1)
|
|
Form of Indemnification Agreement
between the Registrant and each of its directors and officers.
|
|
+10
|
.2(1)
|
|
1998 Incentive Stock Plan.
|
|
+10
|
.3(33)
|
|
Amended 2000 Employee Stock
Purchase Plan.
|
|
10
|
.4(1)
|
|
Sublease Agreement dated August
1998 between Registrant and Gensia Sicor Inc. for the
Registrants principal offices.
|
|
10
|
.5(1)
|
|
License Agreement dated May 1998
between Tufts and Registrant (with certain confidential portions
omitted).
|
|
10
|
.6(1)
|
|
Master Loan and Security
Agreement, dated March 6, 2000, by and between Registrant
and FINOVA Capital Corporation.
|
|
+10
|
.7(1)
|
|
2000 Stock Plan.
|
|
10
|
.8(1)
|
|
Eastgate Pointe Lease, dated
July 6, 2000, between Diversified Eastgate Venture and
Registrant.
|
52
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of
Document
|
|
|
10
|
.9(1)
|
|
Option Agreement and Joint Escrow
Instructions, dated July 6, 2000, between Diversified
Eastgate Venture and Registrant.
|
|
10
|
.10(4)
|
|
First Amendment to Joint
Development Agreement dated March 27, 2001 between
Registrant and PE Corporation, now known as Applied Biosystems
Group (with certain confidential portions omitted).
|
|
10
|
.11(6)
|
|
First Amendment to Option
Agreement and Escrow Instructions dated May 25, 2001
between Diversified Eastgate Venture and Registrant.
|
|
10
|
.12(13)
|
|
Second Amendment to Option
Agreement and Escrow Instructions dated July 18, 2001
between Diversified Eastgate Venture and Registrant.
|
|
10
|
.13(14)
|
|
Third Amendment to Option
Agreement and Escrow Instructions dated September 27, 2001
between Diversified Eastgate Venture and Registrant.
|
|
10
|
.14(15)
|
|
First Amendment to Eastgate Pointe
Lease dated September 27, 2001 between Diversified Eastgate
Venture and Registrant.
|
|
10
|
.15(8)
|
|
Replacement Reserve Agreement,
dated as of January 10, 2002, between the Registrant and
BNY Western Trust Company as Trustee for Washington Capital
Joint Master Trust Mortgage Income Fund.
|
|
10
|
.16(17)
|
|
Loan Assumption and
Modification Agreement, dated as of January 10, 2002,
between the Registrant, Diversified Eastgate Venture and BNY
Western Trust Company as Trustee for Washington Capital Joint
Master Trust Mortgage Income Fund.
|
|
10
|
.17(18)
|
|
Tenant Improvement and Leasing
Commission Reserve Agreement, dated as of January 10, 2002,
between the Registrant and BNY Western Trust Company as Trustee
for Washington Capital Joint Master Trust Mortgage Income
Fund.
|
|
+10
|
.18(32)
|
|
2000 Employee Stock Purchase Plan
as amended and restated through July 20, 2006.
|
|
+10
|
.19(20)
|
|
2000 Stock Plan as amended and
restated through March 21, 2002.
|
|
10
|
.20(21)
|
|
Non-exclusive License Agreement
dated January 2002 between Amersham Biosciences Corp. and
Registrant (with certain confidential portions omitted).
|
|
10
|
.21(22)
|
|
License Agreement dated June 2002
between Dade Behring Marburg GmbH and Registrant (with certain
confidential portions omitted).
|
|
10
|
.22(23)
|
|
Purchase and Sale Agreement and
Escrow Instructions dated June 18, 2004 between Bernardo
Property Advisors, Inc. and Registrant.
|
|
10
|
.23(24)
|
|
Single Tenant Lease dated
August 18, 2004 between BioMed Realty Trust Inc. and
Registrant.
|
|
10
|
.24(25)
|
|
Settlement and Cross License
Agreement dated August 18, 2004 between Applera Corporation
and Registrant (with certain confidential portions omitted).
|
|
10
|
.28(26)
|
|
Collaboration Agreement dated
December 17, 2004 between Invitrogen Incorporated and
Registrant (with certain confidential portions omitted).
|
|
10
|
.29(27)
|
|
Offer letter for Christian O.
Henry dated April 26, 2005.
|
|
10
|
.30(28)
|
|
Forms of Stock Option Agreement
under 2000 Stock Plan.
|
|
10
|
.31(29)
|
|
Secured Convertible Debenture
Indenture between Genizon BioSciences Inc., Computershare Trust
Company of Canada and the Registrant, dated March 24, 2006.
|
|
10
|
.32(30)
|
|
Joint Development and Licensing
Agreement dated May 15, 2006 between deCODE genetics, ehf.
and Registrant (with certain confidential portions omitted).
|
|
10
|
.33(31)
|
|
Form of Change in Control
Severance Agreement between the Registrant and Jay T. Flatley.
|
|
10
|
.34(31)
|
|
Form of Change in Control
Severance Agreement between the Registrant and Christian O.
Henry.
|
|
10
|
.35(31)
|
|
Form of Change in Control
Severance Agreement between the Registrant and Tristan B. Orpin.
|
|
10
|
.36(31)
|
|
Form of Change in Control
Severance Agreement between the Registrant and John R.
Stuelpnagel.
|
|
10
|
.37(31)
|
|
Form of Change in Control
Severance Agreement between the Registrant and Arthur L. Holden.
|
|
10
|
.38(31)
|
|
Form of Change in Control
Severance Agreement between the Registrant and Christian G.
Cabou.
|
53
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of
Document
|
|
|
10
|
.39(34)
|
|
Securities Purchase Agreement,
dated as of November 12, 2006, between Solexa, Inc. and the
Registrant.
|
|
10
|
.40
|
|
Lease between The Irvine Company
LLC and the Registrant, dated September 29, 2006.
|
|
14
|
(10)
|
|
Code of Ethics.
|
|
21
|
.1
|
|
Subsidiaries of the Registrant.
|
|
23
|
.1
|
|
Consent of Independent Registered
Public Accounting Firm.
|
|
24
|
.1
|
|
Power of Attorney (included on the
signature page).
|
|
31
|
.1
|
|
Certification of Jay T. Flatley
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
31
|
.2
|
|
Certification of Christian O.
Henry pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
32
|
.1
|
|
Certification of Jay T. Flatley
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
32
|
.2
|
|
Certification of Christian O.
Henry pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
+ |
|
Management contract or corporate plan or arrangement |
|
(1) |
|
Incorporated by reference to the same numbered exhibit filed
with our Registration Statement on
Form S-1
(333-33922)
filed April 3, 2000, as amended. |
|
(2) |
|
Incorporated by reference to the same numbered exhibit filed
with our Annual Report on
Form 10-K
(File
No. 000-30361)
for the year ended December 31, 2000 filed March 29,
2001. |
|
(3) |
|
[reserved] |
|
(4) |
|
Incorporated by reference to exhibit 10.13 filed with our
Form 10-Q
(File
No. 000-30361)
for the quarterly period ended March 31, 2001 filed
May 8, 2001. |
|
(5) |
|
Incorporated by reference to the same numbered exhibit filed
with our Registration Statement on
Form 8-A
(File
No. 000-30361)
filed May 14, 2001. |
|
(6) |
|
Incorporated by reference to exhibit 10.15 filed with our
Form 10-Q
(File
No. 000-30361)
for the quarterly period ended June 30, 2001 filed
August 13, 2001. |
|
(7) |
|
Incorporated by reference to the same numbered exhibit filed
with our
Form 10-Q
(File
No. 000-30361)
for the quarterly period ended September 30, 2001 filed
November 14, 2001. |
|
(8) |
|
Incorporated by reference to exhibit 10.18 filed with our
Form 10-Q
(File
No. 000-30361)
for the quarterly period ended March 31, 2002 filed
May 13, 2002. |
|
(9) |
|
Incorporated by reference to the same numbered exhibit filed
with Amendment No. 1 to our Registration Statement on
Form S-3
(File No.
333-111496)
filed March 2, 2004. |
|
(10) |
|
Incorporated by reference to the same numbered exhibit filed
with our Annual Report on
Form 10-K
(File
No. 000-30361)
for the year ended December 28, 2003 filed March 12,
2004. |
|
(11) |
|
Incorporated by reference to the same numbered exhibit filed
with our
Form 10-Q
(File
No. 000-30361)
for the quarterly period ended June 27, 2004 filed
August 6, 2004. |
|
(12) |
|
Incorporated by reference to the same numbered exhibit filed
with our
Form 10-Q
(File
No. 000-30361)
for the quarterly period ended October 3, 2004 filed
November 12, 2004. |
|
(13) |
|
Incorporated by reference to exhibit 10.16 filed with our
Form 10-Q
(File
No. 000-30361)
for the quarterly period ended September 30, 2001 filed
November 14, 2001. |
|
(14) |
|
Incorporated by reference to exhibit 10.17 filed with our
Form 10-Q
(File
No. 000-30361)
for the quarterly period ended September 30, 2001 filed
November 14, 2001. |
|
(15) |
|
Incorporated by reference to exhibit 10.18 filed with our
Form 10-Q
(File
No. 000-30361)
for the quarterly period ended September 30, 2001 filed
November 14, 2001. |
|
(16) |
|
Incorporated by reference to exhibit 2.1 filed with our
Form 8-K
(File
No. 000-30361)
filed November 13, 2006. |
54
|
|
|
(17) |
|
Incorporated by reference to exhibit 10.19 filed with our
Form 10-Q
(File
No. 000-30361)
for the quarterly period ended March 31, 2002 filed
May 13, 2002. |
|
(18) |
|
Incorporated by reference to the exhibit 10.20 filed with
our
Form 10-Q
(File
No. 000-30361)
for the quarterly period ended March 31, 2002 filed
May 13, 2002. |
|
(19) |
|
Incorporated by reference to the exhibit 10.21 filed with
our
Form 10-Q
(File
No. 000-30361)
for the quarterly period ended March 31, 2002 filed
May 13, 2002. |
|
(20) |
|
Incorporated by reference to the exhibit 10.22 filed with
our
Form 10-Q
(File
No. 000-30361)
for the quarterly period ended March 31, 2002 filed
May 13, 2002. |
|
(21) |
|
Incorporated by reference to exhibit 10.24 filed with
Amendment No. 1 to our Registration Statement on
Form S-3
(File
No. 333-111496)
filed March 2, 2004. |
|
(22) |
|
Incorporated by reference to exhibit 10.23 filed with our
Amendment No. 1 to our Registration Statement on
Form S-3
(File
No. 333-111496)
filed March 2, 2004. |
|
(23) |
|
Incorporated by reference to exhibit 10.25 filed with our
Form 10-Q
(File
No. 000-30361)
for the quarterly period ended June 27, 2004 filed
August 6, 2004. |
|
(24) |
|
Incorporated by reference to exhibit 10.26 filed with our
Form 10-Q
(File
No. 000-30361)
for the quarterly period ended October 3, 2004 filed
November 12, 2004. |
|
(25) |
|
Incorporated by reference to exhibit 10.27 filed with our
Form 10-Q
(File
No. 000-30361)
for the quarterly period ended October 3, 2004 filed
November 12, 2004. |
|
(26) |
|
Incorporated by reference to exhibit 10.28 filed with our
Form 10-K
(File
No. 000-30361)
for the year ended January 2, 2005 filed March 8, 2005. |
|
(27) |
|
Incorporated by reference to exhibit 10.33 filed with our
Form 10-Q
(File
No. 000-30361)
for the quarterly period ended July 3, 2005 filed
August 8, 2005. |
|
(28) |
|
Incorporated by reference to exhibit 10.29 filed with our
Form 10-K
(File
No. 000-30361)
for the year ended January 2, 2005 filed March 8, 2005. |
|
(29) |
|
Incorporated by reference to the same numbered exhibit filed
with our
Form 10-Q
(File
No. 000-30361)
for the quarterly period ended April 2, 2006 filed
May 8, 2006. |
|
(30) |
|
Incorporated by reference to the same numbered exhibit filed
with our
Form 10-Q
(File
No. 000-30361)
for the quarterly period ended July 2, 2006 filed
August 2, 2006. |
|
(31) |
|
Incorporated by reference to the same numbered exhibit filed
with our
Form 8-K
(File
No. 000-30361)
filed August 23, 2006. |
|
(32) |
|
Incorporated by reference to exhibit 10.13 filed with our
Form 10-Q
(File
No. 000-30361)
for the quarterly period ended October 1, 2006 filed
October 30, 2006. |
|
(33) |
|
Incorporated by reference to the same numbered exhibit filed
with our
Form 10-Q
(File
No. 000-30361)
for the quarterly period ended October 1, 2006, filed
October 30, 2006. |
|
(34) |
|
Incorporated by reference to exhibit 10.1 filed with our
Form 8-K
(File
No. 000-30361)
filed November 13, 2006. |
|
(35) |
|
Incorporated by reference to exhibit 4.1 filed with our
Form 8-K
(File
No. 000-30361)
filed February 16,2007. |
|
(36) |
|
Incorporated by reference to exhibit 4.2 filed with our
Form 8-K
(File
No. 000-30361)
filed February 16, 2007. |
Supplemental
Information
No Annual Report to stockholders or proxy materials has been
sent to stockholders as of the date of this report. The Annual
Report to stockholders and proxy material will be furnished to
our stockholders subsequent to the filing of this Annual Report
on
Form 10-K
and we will furnish such material to the SEC at that time.
55
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of
the Securities Exchange Act of 1934, the Registrant has duly
caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, on February 28,
2007.
Illumina, Inc.
Jay T. Flatley
President and Chief Executive Officer
February 28, 2007
POWER OF
ATTORNEY
KNOW ALL PERSONS BY THESE PRESENT, that each person whose
signature appears below constitutes and appoints Jay T. Flatley
and Christian O. Henry, and each or any one of them, his true
and lawful
attorney-in-fact
and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this Annual Report
on
Form 10-K,
and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and
Exchange Commission, granting unto said
attorneys-in-fact
and agents, and each of them, full power and authority to do and
perform each and every act and thing requisite and necessary to
be done in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and
confirming all that said
attorneys-in-fact
and agents, or any of them, or their or his substitutes or
substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, this Annual Report on
Form 10-K
has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
|
|
|
|
|
|
|
/s/ Jay
T. Flatley
Jay
T. Flatley
|
|
President, Chief Executive
Officer
and Director (Principal
Executive Officer)
|
|
February 28, 2007
|
|
|
|
|
|
/s/ Christian
O. Henry
Christian
O. Henry
|
|
Senior Vice President and Chief
Financial Officer (Principal Financial and Accounting Officer)
|
|
February 28, 2007
|
|
|
|
|
|
/s/ John
R.
Stuelpnagel
John
R. Stuelpnagel
|
|
Senior Vice President, Chief
Operating Officer and Director
|
|
February 28, 2007
|
|
|
|
|
|
/s/ William
H.
Rastetter
William
H. Rastetter
|
|
Chairman of the Board of Directors
|
|
February 28, 2007
|
|
|
|
|
|
/s/ Daniel
M. Bradbury
Daniel
M. Bradbury
|
|
Director
|
|
February 28, 2007
|
|
|
|
|
|
/s/ Karin
Eastham
Karin
Eastham
|
|
Director
|
|
February 28, 2007
|
56
|
|
|
|
|
|
|
/s/ Paul
Grint
Paul
Grint
|
|
Director
|
|
February 28, 2007
|
|
|
|
|
|
/s/ David
R. Walt
David
R. Walt
|
|
Director
|
|
February 28, 2007
|
|
|
|
|
|
/s/ Jack
Goldstein
Jack
Goldstein
|
|
Director
|
|
February 28, 2007
|
|
|
|
|
|
/s/ A.
Blaine
Bowman
A.
Blaine Bowman
|
|
Director
|
|
February 28, 2007
|
|
|
|
|
|
Roy
Whitfield
|
|
Director
|
|
February 28, 2007
|
57
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
Illumina, Inc.
We have audited the accompanying consolidated balance sheets of
Illumina, Inc. as of December 31, 2006 and January 1,
2006, and the related consolidated statements of operations,
stockholders equity, and cash flows for each of the three
years in the period ended December 31, 2006. Our audits
also included the financial statement schedule listed in the
Index at Item 15(a)(2). These financial statements and
schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Illumina, Inc., at December 31, 2006
and January 1, 2006, and the consolidated results of its
operations and its cash flows for each of the three years in the
period ended December 31, 2006, in conformity with
U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken
as a whole, presents fairly, in all material respects, the
information set forth therein.
As discussed in Note 1 to the consolidated financial
statements, effective January 1, 2006, Illumina, Inc.
changed its method of accounting for share-based payments in
accordance with Statement of Financial Accounting Standards
No. 123R, Share-Based Payment.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of Illumina, Inc.s internal control over
financial reporting as of December 31, 2006, based on
criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated February 23, 2007
expressed an unqualified opinion thereon.
San Diego, California
February 23, 2007
F-2
ILLUMINA,
INC.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
January 1,
|
|
|
|
2006
|
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
38,386
|
|
|
$
|
50,822
|
|
Short-term investments
|
|
|
92,418
|
|
|
|
|
|
Accounts receivable, net
|
|
|
39,984
|
|
|
|
17,620
|
|
Inventory, net
|
|
|
20,169
|
|
|
|
10,309
|
|
Prepaid expenses and other current
assets
|
|
|
2,769
|
|
|
|
959
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
193,726
|
|
|
|
79,710
|
|
Property and equipment, net
|
|
|
25,634
|
|
|
|
16,131
|
|
Investment in Solexa
|
|
|
67,784
|
|
|
|
|
|
Goodwill
|
|
|
2,125
|
|
|
|
2,125
|
|
Intangible and other assets, net
|
|
|
11,315
|
|
|
|
2,644
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
300,584
|
|
|
$
|
100,610
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
9,853
|
|
|
$
|
7,390
|
|
Accrued liabilities
|
|
|
23,860
|
|
|
|
14,210
|
|
Current portion of long-term debt
|
|
|
63
|
|
|
|
118
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
33,776
|
|
|
|
21,718
|
|
Long-term debt, less current
portion
|
|
|
|
|
|
|
54
|
|
Deferred gain on sale of land and
building
|
|
|
2,468
|
|
|
|
2,843
|
|
Deferred income tax liabilities
|
|
|
6,987
|
|
|
|
|
|
Other long-term liabilities
|
|
|
10,011
|
|
|
|
3,498
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par
value, 10,000,000 shares authorized, no shares issued and
outstanding at December 31, 2006 and January 1, 2006
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par
value, 120,000,000 shares authorized,
46,857,512 shares issued and outstanding at
December 31, 2006, 41,294,003 shares issued and
outstanding at January 1, 2006
|
|
|
469
|
|
|
|
413
|
|
Additional paid-in capital
|
|
|
340,197
|
|
|
|
216,766
|
|
Deferred compensation
|
|
|
|
|
|
|
(354
|
)
|
Accumulated other comprehensive
income
|
|
|
11,294
|
|
|
|
258
|
|
Accumulated deficit
|
|
|
(104,618
|
)
|
|
|
(144,586
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
247,342
|
|
|
|
72,497
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
300,584
|
|
|
$
|
100,610
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements
F-3
ILLUMINA,
INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
January 1,
|
|
|
January 2,
|
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands,
except per share amounts)
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue
|
|
$
|
155,811
|
|
|
$
|
57,752
|
|
|
$
|
40,497
|
|
Service and other revenue
|
|
|
27,486
|
|
|
|
13,935
|
|
|
|
8,075
|
|
Research revenue
|
|
|
1,289
|
|
|
|
1,814
|
|
|
|
2,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
184,586
|
|
|
|
73,501
|
|
|
|
50,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenue (including
non-cash stock compensation expense of $1,289, $0, and $0,
respectively)
|
|
|
51,271
|
|
|
|
19,920
|
|
|
|
11,572
|
|
Cost of service and other revenue
(including non-cash stock compensation expense of $235, $0, and
$0, respectively)
|
|
|
8,073
|
|
|
|
3,261
|
|
|
|
1,687
|
|
Research and development
(including non-cash stock compensation expense of $3,891, $84,
and $348, respectively)
|
|
|
33,373
|
|
|
|
27,809
|
|
|
|
21,462
|
|
Selling, general and
administrative (including non-cash stock compensation expense of
$8,889, $186, and $496, respectively)
|
|
|
54,057
|
|
|
|
28,158
|
|
|
|
25,576
|
|
Acquired in-process research and
development
|
|
|
|
|
|
|
15,800
|
|
|
|
|
|
Litigation judgment (settlement),
net
|
|
|
|
|
|
|
|
|
|
|
(4,201
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
146,774
|
|
|
|
94,948
|
|
|
|
56,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
37,812
|
|
|
|
(21,447
|
)
|
|
|
(5,513
|
)
|
Interest income
|
|
|
5,368
|
|
|
|
1,404
|
|
|
|
941
|
|
Interest and other expense, net
|
|
|
(560
|
)
|
|
|
(668
|
)
|
|
|
(1,518
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
42,620
|
|
|
|
(20,711
|
)
|
|
|
(6,090
|
)
|
Provision for income taxes
|
|
|
2,652
|
|
|
|
163
|
|
|
|
135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
39,968
|
|
|
$
|
(20,874
|
)
|
|
$
|
(6,225
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per basic share
|
|
$
|
0.90
|
|
|
$
|
(0.52
|
)
|
|
$
|
(0.17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per diluted share
|
|
$
|
0.82
|
|
|
$
|
(0.52
|
)
|
|
$
|
(0.17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in calculating basic
net income (loss) per share
|
|
|
44,501
|
|
|
|
40,147
|
|
|
|
35,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in calculating diluted
net income (loss) per share
|
|
|
48,754
|
|
|
|
40,147
|
|
|
|
35,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements
F-4
ILLUMINA,
INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Common
Stock
|
|
|
Paid-In
|
|
|
Deferred
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
Income
(Loss)
|
|
|
Deficit
|
|
|
Equity
|
|
|
|
(In
thousands)
|
|
|
Balance as of December 28, 2003
|
|
|
32,887
|
|
|
$
|
329
|
|
|
$
|
165,314
|
|
|
$
|
(1,103
|
)
|
|
$
|
335
|
|
|
$
|
(117,487
|
)
|
|
$
|
47,388
|
|
Issuance of common stock for cash
|
|
|
5,278
|
|
|
|
53
|
|
|
|
30,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,507
|
|
Repurchase of restricted common
stock
|
|
|
(44
|
)
|
|
|
(1
|
)
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13
|
)
|
Amortization of deferred
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
844
|
|
|
|
|
|
|
|
|
|
|
|
844
|
|
Reversal of deferred compensation
related to unvested stock options and restricted stock of
terminated employees
|
|
|
|
|
|
|
|
|
|
|
(103
|
)
|
|
|
103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on available-for
sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(305
|
)
|
|
|
|
|
|
|
(305
|
)
|
Unrealized loss on hedging contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(46
|
)
|
|
|
|
|
|
|
(46
|
)
|
Foreign currency translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112
|
|
|
|
|
|
|
|
112
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,225
|
)
|
|
|
(6,225
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,464
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 2, 2005
|
|
|
38,121
|
|
|
|
381
|
|
|
|
195,653
|
|
|
|
(156
|
)
|
|
|
96
|
|
|
|
(123,712
|
)
|
|
|
72,262
|
|
Issuance of common stock for cash
|
|
|
1,592
|
|
|
|
16
|
|
|
|
6,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,046
|
|
Issuance of common stock in
conjunction with an acquisition
|
|
|
1,580
|
|
|
|
16
|
|
|
|
14,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,828
|
|
Deferred compensation related to
unvested CyVera stock options assumed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(197
|
)
|
|
|
|
|
|
|
|
|
|
|
(197
|
)
|
Compensation expense related to
acceleration of options for terminated employees
|
|
|
|
|
|
|
|
|
|
|
79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79
|
|
Deferred compensation related to a
restricted stock award
|
|
|
1
|
|
|
|
|
|
|
|
192
|
|
|
|
(192
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
191
|
|
|
|
|
|
|
|
|
|
|
|
191
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on
available-for-sale
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
|
|
|
|
|
|
|
|
29
|
|
Unrealized gain on hedging contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
|
|
|
|
|
|
|
|
56
|
|
Foreign currency translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77
|
|
|
|
|
|
|
|
77
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,874
|
)
|
|
|
(20,874
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,712
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2006
|
|
|
41,294
|
|
|
|
413
|
|
|
|
216,766
|
|
|
|
(354
|
)
|
|
|
258
|
|
|
|
(144,586
|
)
|
|
|
72,497
|
|
Issuance of common stock for cash
|
|
|
5,559
|
|
|
|
56
|
|
|
|
114,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
114,496
|
|
May 2006 offering costs
|
|
|
|
|
|
|
|
|
|
|
(6,530
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,530
|
)
|
Deferred compensation related to a
restricted stock award
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
14,082
|
|
|
|
354
|
|
|
|
|
|
|
|
|
|
|
|
14,436
|
|
Incremental tax benefit related to
stock options exercised
|
|
|
|
|
|
|
|
|
|
|
1,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,439
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on
available-for-sale
securities, net of deferred tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,693
|
|
|
|
|
|
|
|
10,693
|
|
Unrealized gain on hedging contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
(10
|
)
|
Foreign currency translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
353
|
|
|
|
|
|
|
|
353
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,968
|
|
|
|
39,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2006
|
|
|
46,857
|
|
|
$
|
469
|
|
|
$
|
340,197
|
|
|
$
|
|
|
|
$
|
11,294
|
|
|
$
|
(104,618
|
)
|
|
$
|
247,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements
F-5
ILLUMINA,
INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
January 1,
|
|
|
January 2,
|
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands)
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
39,968
|
|
|
$
|
(20,874
|
)
|
|
$
|
(6,225
|
)
|
Adjustments to reconcile net income
(loss) to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired in-process research and
development
|
|
|
|
|
|
|
15,800
|
|
|
|
|
|
Depreciation and amortization
|
|
|
6,083
|
|
|
|
4,116
|
|
|
|
3,956
|
|
Loss on disposal of property and
equipment
|
|
|
116
|
|
|
|
293
|
|
|
|
|
|
Amortization of premium on
investments
|
|
|
|
|
|
|
(14
|
)
|
|
|
354
|
|
Non-cash stock-based compensation
expense
|
|
|
14,304
|
|
|
|
270
|
|
|
|
844
|
|
Incremental tax benefit related to
stock options exercised
|
|
|
(1,439
|
)
|
|
|
|
|
|
|
|
|
Amortization of gain on sale of
land and building
|
|
|
(375
|
)
|
|
|
(375
|
)
|
|
|
(156
|
)
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(21,733
|
)
|
|
|
(7,039
|
)
|
|
|
(7,202
|
)
|
Inventory
|
|
|
(9,728
|
)
|
|
|
(6,502
|
)
|
|
|
(1,785
|
)
|
Prepaid expenses and other current
assets
|
|
|
(1,591
|
)
|
|
|
290
|
|
|
|
(29
|
)
|
Deferred income taxes
|
|
|
(548
|
)
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
(5,263
|
)
|
|
|
395
|
|
|
|
(2,041
|
)
|
Accounts payable
|
|
|
2,438
|
|
|
|
3,193
|
|
|
|
697
|
|
Accrued income taxes
|
|
|
1,809
|
|
|
|
144
|
|
|
|
84
|
|
Accrued liabilities
|
|
|
9,066
|
|
|
|
4,070
|
|
|
|
1,874
|
|
Litigation judgment
|
|
|
|
|
|
|
(5,957
|
)
|
|
|
567
|
|
Other long-term liabilities
|
|
|
5,893
|
|
|
|
3,182
|
|
|
|
(512
|
)
|
Advance payment from former
collaborator
|
|
|
|
|
|
|
|
|
|
|
(10,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
operating activities
|
|
|
39,000
|
|
|
|
(9,008
|
)
|
|
|
(19,574
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for acquisition, net of
cash acquired
|
|
|
|
|
|
|
(2,388
|
)
|
|
|
|
|
Investment in secured convertible
debentures
|
|
|
(3,036
|
)
|
|
|
|
|
|
|
|
|
Investment in Solexa
|
|
|
(50,000
|
)
|
|
|
|
|
|
|
|
|
Purchases of
available-for-sale
securities
|
|
|
(236,331
|
)
|
|
|
|
|
|
|
(6,603
|
)
|
Sales and maturities of
available-for-sale
securities
|
|
|
143,846
|
|
|
|
12,248
|
|
|
|
26,348
|
|
Proceeds from sale of land and
building, net of fees
|
|
|
|
|
|
|
|
|
|
|
40,667
|
|
Purchase of property and equipment
|
|
|
(15,114
|
)
|
|
|
(11,395
|
)
|
|
|
(3,355
|
)
|
Acquisition of intangible assets
|
|
|
(100
|
)
|
|
|
|
|
|
|
(35
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
investing activities
|
|
|
(160,735
|
)
|
|
|
(1,535
|
)
|
|
|
57,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments on long-term debt
|
|
|
(109
|
)
|
|
|
(83
|
)
|
|
|
(25,387
|
)
|
Payments on equipment financing
|
|
|
|
|
|
|
|
|
|
|
(232
|
)
|
Proceeds from issuance of common
stock
|
|
|
107,966
|
|
|
|
6,046
|
|
|
|
30,507
|
|
Incremental tax benefit related to
stock options exercised
|
|
|
1,439
|
|
|
|
|
|
|
|
|
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
109,296
|
|
|
|
5,963
|
|
|
|
4,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency
translation on cash and cash equivalents
|
|
|
3
|
|
|
|
613
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and
cash equivalents
|
|
|
(12,436
|
)
|
|
|
(3,967
|
)
|
|
|
42,324
|
|
Cash and cash equivalents at
beginning of the year
|
|
|
50,822
|
|
|
|
54,789
|
|
|
|
12,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of
the year
|
|
$
|
38,386
|
|
|
$
|
50,822
|
|
|
$
|
54,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash
flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for
interest
|
|
$
|
11
|
|
|
$
|
15
|
|
|
$
|
1,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements
F-6
ILLUMINA,
INC.
|
|
1.
|
Organization and
Summary of Significant Accounting Policies
|
Organization
and Business
Illumina, Inc. (the Company) was incorporated on April 28,
1998. The Company is a leading developer, manufacturer and
marketer of next-generation life-science tools and integrated
systems for the large-scale analysis of genetic variation and
biological function. Using the Companys proprietary
technologies, the Company provides a comprehensive line of
products and services that currently serve the sequencing,
genotyping and gene expression markets, and the Company expects
to enter the market for molecular diagnostics. The
Companys tools provide researchers around the world with
the performance, throughput, cost effectiveness and flexibility
necessary to perform the billions of genetic tests needed to
extract valuable medical information from advances in genomics
and proteomics. The Company believes this information will
enable researchers to correlate genetic variation and biological
function, which will enhance drug discovery and clinical
research, allow diseases to be detected earlier and permit
better choices of drugs for individual patients.
Basis of
Presentation
The consolidated financial statements of the Company have been
prepared in conformity with U.S. generally accepted
accounting principles and include the accounts of the Company
and its wholly-owned subsidiaries. All intercompany transactions
and balances have been eliminated in consolidation.
Fiscal
Year
The Companys fiscal year is 52 or 53 weeks ending the
Sunday closest to December 31, with quarters of 13 or
14 weeks ending the Sunday closest to March 31,
June 30, and September 30. The years ended
December 31, 2006 and January 1, 2006 were both
52 weeks.
Reclassifications
Certain prior year amounts have been reclassified to conform to
current year presentation.
Use of
Estimates
The preparation of financial statements requires that management
make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenue and expenses, goodwill and
related disclosure of contingent assets and liabilities. Actual
results could differ from those estimates.
Cash and Cash
Equivalents
Cash and cash equivalents are comprised of short-term, highly
liquid investments primarily in money market-type funds.
F-7
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Investments
The Company applies Statement of Financial Accounting Standards
(SFAS) No. 115, Accounting for Certain Investments in
Debt and Equity Securities, to its investments. Under
SFAS No. 115, the Company classifies its investments
as
available-for-sale
and records such assets at estimated fair value in the balance
sheet, with unrealized gains and losses, if any, reported in
stockholders equity. As of December 31, 2006, the
Companys excess cash balances were primarily invested in
marketable debt securities, including commercial paper, auction
rate certificates and corporate bonds and notes, with strong
credit ratings or short maturity mutual funds providing similar
financial returns. The Company limits the amount of investment
exposure as to institutions, maturity and investment type. The
cost of securities sold is determined based on the specific
identification method. The Company did not record any gross
realized gains for the years ended December 31, 2006 or
January 1, 2006. For the year ended January 2, 2005,
gross realized gains totaled $453,750. Gross realized losses
totaled approximately $35,000, $0, and $0 for the years ended
December 31, 2006, January 1, 2006 and January 2, 2005,
respectively. Further, there were no investments that have been
in a continuous unrealized loss position for greater than twelve
months as of December 31, 2006.
Restricted
Cash
As of December 31, 2006, restricted cash, included in cash
and cash equivalents, consisted of bank guarantees totaling
approximately $250,000 associated with two sales contracts
during 2006. Both guarantees are scheduled to be released during
2007. There was no restricted cash as of January 1, 2006.
Fair Value of
Financial Instruments
The carrying amounts of certain of the Companys financial
instruments, including cash and cash equivalents, accounts and
notes receivable, accounts payable and accrued liabilities,
approximate fair value.
Accounts and
Notes Receivable
Trade accounts receivable are recorded at net invoice value and
notes receivable are recorded at contractual value plus earned
interest. Interest income on notes receivable is recognized
according to the terms of each related agreement. The Company
considers receivables past due based on the contractual payment
terms. The Company reviews its exposure to amounts receivable
and reserves specific amounts if collectibility is no longer
reasonably assured. The Company also reserves a percentage of
its trade receivable balance based on collection history. The
Company re-evaluates such reserves on a regular basis and
adjusts its reserves as needed.
Concentrations
of Risk
Cash equivalents, investments and accounts receivable are
financial instruments that potentially subject the Company to
concentrations of credit risk. Most of the Companys cash
and cash equivalents as of December 31, 2006 were deposited
with financial institutions in the United States and the
Companys investment policy restricts the amount of credit
exposure to any one issuer and to any one type of investment,
other than securities issued by the U.S. Government. The
Company has historically not experienced significant credit
losses from accounts receivable. The Company performs a regular
review of customer activity and associated credit risks and
generally does not require collateral. The Company maintains an
allowance for doubtful accounts based upon a percentage of its
trade receivable balance based on collection history and
re-evaluates such reserves on a regular basis.
F-8
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Companys products require customized components that
currently are available from a limited number of sources. The
Company obtains certain key components included in its products
from single vendors. No assurance can be given that these or
other product components will be available in sufficient
quantities at acceptable costs in the future.
Approximately 44%, 38% and 52% of the Companys revenue for
the years ended December 31, 2006, January 1, 2006 and
January 2, 2005 was derived from shipments to customers
outside the United States. Approximately 39% and 48% of the
Companys net accounts receivable balance as of
December 31, 2006 and January 1, 2006, respectively,
was related to customers outside the United States. Sales
to territories outside of the United States are generally
denominated in U.S. dollars. International sales entail a
variety of risks, including currency exchange fluctuations,
longer payment cycles and greater difficulty in accounts
receivable collection. The Company is also subject to general
geopolitical risks, such as political, social and economic
instability and changes in diplomatic and trade relations. The
risks of international sales are mitigated in part by the extent
to which sales are geographically distributed.
Inventories
Inventories are stated at the lower of standard cost (which
approximates actual cost) or market. Inventory includes raw
materials and finished goods that may be used in the research
and development process and such items are expensed as consumed.
Provisions for slow moving, excess and obsolete inventories are
provided based on product life cycle and development plans,
product expiration and quality issues, historical experience and
inventory levels.
Property and
Equipment
Property and equipment are stated at cost, subject to review of
impairment, and depreciated over the estimated useful lives of
the assets (generally three to seven years) using the
straight-line method. Amortization of leasehold improvements is
computed over the shorter of the lease term or the estimated
useful life of the related assets.
Intangible
Assets
Intangible assets consist of license agreements and acquired
technology. The cost of the Companys license agreements
was $944,450 and the Company has amortized $836,450 through
December 31, 2006. Amortization expense related to license
agreements for the years ending December 31, 2006,
January 1, 2006 and January 2, 2005 was $51,083,
$292,033 and $300,000, respectively. The licenses will be fully
amortized by 2010.
Long-Lived
Assets
In accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, if indicators
of impairment exist, the Company assesses the recoverability of
the affected long-lived assets by determining whether the
carrying value of such assets can be recovered through
undiscounted future operating cash flows. If impairment is
indicated, the Company measures the future discounted cash flows
associated with the use of the asset and adjusts the value of
the asset accordingly. While the Companys historical
operating and cash flow losses are indicators of impairment, the
Company believes the current and future cash flows to be
received from the long-lived assets recorded at
December 31, 2006 will exceed the assets carrying
value, and accordingly the Company has not recognized any
impairment losses through December 31, 2006.
F-9
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Reserve for
Product Warranties
The Company generally provides a one-year warranty on
instrumentation. At the time revenue is recognized, the Company
establishes an accrual for estimated warranty expenses
associated with system sales. This expense is recorded as a
component of cost of revenue.
Revenue
Recognition
The Companys revenue is generated primarily from the sale
of products and services. Product revenue consists of sales of
arrays, reagents, instrumentation, and oligos. Service and other
revenue consists of revenue received for performing genotyping
services, extended warranty sales and revenue earned from
milestone payments.
The Company recognizes revenue when persuasive evidence of an
arrangement exists, delivery has occurred or services have been
rendered, the sellers price to the buyer is fixed or
determinable and collectibility 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. All revenue is recorded net of any applicable
allowances for returns or discounts.
Revenue for product sales is recognized generally upon shipment
and transfer of title to the customer, provided no significant
obligations remain and collection of the receivables is
reasonably assured. Revenue from the sale of instrumentation is
recognized when earned, which is generally upon shipment.
However, in the case of BeadLabs, revenue is recognized upon the
completion of installation, training and the receipt of customer
acceptance. Revenue for genotyping services is recognized when
earned, which is generally at the time the genotyping analysis
data is delivered to the customer or as specific milestones are
achieved.
In order to assess whether the price is fixed and determinable,
the Company ensures there are no refund rights. If payment terms
are based on future performance, the Company defers revenue
recognition until the price becomes fixed and determinable. The
Company assesses collectibility based on a number of factors,
including past transaction history with the customer and the
creditworthiness of the customer. If the Company determines that
collection of a payment is not reasonably assured, revenue
recognition is deferred until the time collection becomes
reasonably assured, which is generally upon receipt of payment.
Sales of instrumentation generally include a standard one-year
warranty. The Company also sells separately priced maintenance
(extended warranty) contracts, which are generally for one or
two years, upon the expiration of the initial warranty. Revenue
for extended warranty sales is recognized ratably over the term
of the extended warranty period. Reserves are provided for
estimated product warranty expenses at the time the associated
revenue is recognized. If the Company were to experience an
increase in warranty claims or if costs of servicing its
warrantied products were greater than its estimates, gross
margins could be adversely affected.
F-10
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
While the majority of its sales agreements contain standard
terms and conditions, the Company does enter into agreements
that contain multiple elements or non-standard terms and
conditions. Emerging Issues Task Force (EITF)
No. 00-21,
Revenue Arrangements with Multiple Deliverables, provides
guidance on accounting for arrangements that involve the
delivery or performance of multiple products, services, or
rights to use assets within contractually binding arrangements.
Significant contract interpretation is sometimes required to
determine the appropriate accounting, including whether the
deliverables specified in a multiple element arrangement should
be treated as separate units of accounting for revenue
recognition purposes, and if so, how the price should be
allocated among the deliverable elements, when to recognize
revenue for each element, and the period over which revenue
should be recognized. The Company recognizes revenue for
delivered elements only when it determines that the fair values
of undelivered elements are known and there are no uncertainties
regarding customer acceptance.
Some of the Companys agreements contain multiple elements
that include milestone payments. Revenue from a milestone
achievement is recognized when earned, as evidenced by
acknowledgement from the Companys collaborator, provided
that (i) the milestone event is substantive and its
achievability was not reasonably assured at the inception of the
agreement, (ii) the milestone represents the culmination of
an earnings process, (iii) the milestone payment is
non-refundable and (iv) the performance obligations for
both the Company and its collaborators after the milestone
achievement will continue at a level comparable to the level
before the milestone achievement. If all of these criteria are
not met, the milestone achievement is recognized over the
remaining minimum period of the Companys performance
obligations under the agreement. The Company defers
non-refundable upfront fees received under its collaborations
and recognizes them over the period the related services are
provided or over the estimated collaboration term using various
factors specific to the collaboration. Advance payments received
in excess of amounts earned are classified as deferred revenue
until earned.
A third source of revenue, research revenue, consists of amounts
earned under research agreements with government grants, which
is recognized in the period during which the related costs are
incurred. All revenue is recorded net of any applicable
allowances for returns or discounts.
Shipping and
Handling Expenses
Shipping and handling expenses are included in cost of product
revenue and totaled $1.8 million, $1.3 million and
$0.5 million for the years ended December 31, 2006,
January 1, 2006 and January 2, 2005, respectively.
Research and
Development
Research and development expenses consist of costs incurred for
internal and grant-sponsored research and development. Research
and development expenses include salaries, contractor fees,
facilities costs, utilities and allocations of benefits.
Expenditures relating to research and development are expensed
in the period incurred.
Advertising
Costs
The Company expenses advertising costs as incurred. Advertising
costs were $1.9 million, $1.2 million and
$0.8 million for the years ended December 31, 2006,
January 1, 2006 and January 2, 2005, respectively.
F-11
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Income
Taxes
In accordance with SFAS No. 109, Accounting for
Income Taxes, the provision for income taxes is computed
using the asset and liability method, under which deferred tax
assets and liabilities are recognized for the expected future
tax consequences of temporary differences between the financial
reporting and tax bases of assets and liabilities, and for the
expected future tax benefit to be derived from tax loss and
credit carryforwards. Deferred tax assets and liabilities are
determined using the enacted tax rates in effect for the years
in which those tax assets are expected to be realized. A
valuation allowance is established when it is more likely than
not the future realization of all or some of the deferred tax
assets will not be achieved. The evaluation of the need for a
valuation allowance is performed on a jurisdiction by
jurisdiction basis, and includes a review of all available
positive and negative evidence.
Due to the adoption of SFAS No. 123 (revised 2004),
Share-Based Payment, the Company recognizes excess tax benefits
associated with share-based compensation to stockholders
equity only when realized. When assessing whether excess tax
benefits relating to share-based compensation have been
realized, the Company follows the
with-and-without
approach excluding any indirect effects of the excess tax
deductions. Under this approach, excess tax benefits related to
share-based compensation are not deemed to be realized until
after the utilization of all other tax benefits available to the
Company.
Foreign
Currency Translation
The functional currencies of the Companys wholly-owned
subsidiaries are their respective local currencies. Accordingly,
all balance sheet accounts of these operations are translated to
U.S. dollars using the exchange rates in effect at the
balance sheet date, and revenues and expenses are translated
using the average exchange rates in effect during the period.
The gains and losses from foreign currency translation of these
subsidiaries financial statements are recorded as a
separate component of stockholders equity under the
caption accumulated other comprehensive income
(loss).
F-12
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Stock-Based
Compensation
On January 2, 2006, the Company adopted
SFAS No. 123 (revised 2004), Share-Based
Payment, which addresses the accounting for stock-based
payment transactions in which an enterprise receives employee
services in exchange for (a) equity instruments of the
enterprise or (b) liabilities that are based on the fair
value of the enterprises equity instruments or that may be
settled by the issuance of such equity instruments. In January
2005, the SEC issued SAB No. 107, which provides
supplemental implementation guidance for
SFAS No. 123R. SFAS No. 123R eliminates the
ability to account for stock-based compensation transactions
using the intrinsic value method under Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued
to Employees, and instead generally requires that such
transactions be accounted for using a fair-value-based method.
The Company uses the Black-Scholes-Merton option-pricing model
to determine the fair-value of stock-based awards under
SFAS No. 123R, consistent with that used for pro forma
disclosures under SFAS No. 123, Accounting for
Stock-Based Compensation, in prior periods. The Company has
elected to use the modified prospective transition method as
permitted by SFAS No. 123R and, accordingly, prior
periods have not been restated to reflect the impact of
SFAS No. 123R. The modified prospective transition
method requires that stock-based compensation expense be
recorded for all new and unvested stock options, restricted
stock and employee stock purchase plan (ESPP) shares that are
ultimately expected to vest as the requisite service is
rendered. Stock-based compensation expense for awards granted
prior to January 2, 2006 is based on the grant date
fair-value as determined under APB No. 25. For the year
ended December 31, 2006, the Company has recorded an
incremental $14.3 million, respectively, of stock-based
compensation expense as a result of the adoption of
SFAS No. 123R. Net income per diluted share was
reduced by $0.29 for the year ended December 31, 2006 as a
result of the adoption of SFAS No. 123R. Stock-based
compensation expense capitalized as part of inventory as of
December 31, 2006 was approximately $0.1 million. As
of December 31, 2006, approximately $46.8 million of
total unrecognized compensation cost related to stock options,
restricted stock and ESPP shares are expected to be recognized
over a weighted-average period of approximately two years.
Prior to the adoption of SFAS No. 123R, the Company
measured compensation expense for its employee stock-based
compensation plans using the intrinsic value method prescribed
by APB Opinion No. 25. The Company applied the disclosure
provisions of SFAS No. 123, as amended by
SFAS No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure, as if
the fair-value-based method had been applied in measuring
stock-based compensation expense. Under APB Opinion No. 25,
when the exercise price of the Companys employee stock
options was not less than the market price of the underlying
stock on the date of the grant, no compensation expense was
recognized.
F-13
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following table illustrates the effect on net loss and basic
and diluted net loss per share as if the Company had applied the
fair value recognition provisions of SFAS No. 123 to
stock-based compensation during the specified reporting periods
(in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
January 1,
|
|
|
January 2,
|
|
|
|
2006
|
|
|
2005
|
|
|
Net loss as reported
|
|
$
|
(20,874
|
)
|
|
$
|
(6,225
|
)
|
Add: Stock-based compensation
expense recorded
|
|
|
270
|
|
|
|
844
|
|
Less: Assumed stock-based
compensation expense
|
|
|
(8,393
|
)
|
|
|
(10,302
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma net loss
|
|
$
|
(28,997
|
)
|
|
$
|
(15,683
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per
share:
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
(0.52
|
)
|
|
$
|
(0.17
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
$
|
(0.72
|
)
|
|
$
|
(0.44
|
)
|
|
|
|
|
|
|
|
|
|
SFAS No. 123R requires the use of a valuation model to
calculate the fair-value of stock-based awards. The Company has
elected to use the Black-Scholes-Merton option-pricing model,
which incorporates various assumptions including volatility,
expected life, and interest rates. The expected volatility is
based on the historical volatility of the Companys common
stock over the most recent period generally commensurate with
the estimated expected life of the Companys stock options,
adjusted for the impact of unusual fluctuations not reasonably
expected to recur and other relevant factors. The expected life
of an award is based on historical experience and on the terms
and conditions of the stock awards granted to employees.
The assumptions used for the specified reporting periods and the
resulting estimates of weighted-average fair value per share of
options granted and for stock purchases under the ESPP during
those periods are as follows:
|
|
|
|
|
|
|
|
|
Year Ended
|
|
Year Ended
|
|
Year Ended
|
|
|
December 31,
|
|
January 1,
|
|
January 2,
|
|
|
2006
|
|
2006
|
|
2005
|
|
Interest rate stock
options
|
|
4.73%
|
|
4.08%
|
|
3.25%
|
Interest rate stock
purchases
|
|
4.08 - 4.85%
|
|
3.25 - 4.08%
|
|
3.25 - 3.31%
|
Volatility stock
options
|
|
76%
|
|
90%
|
|
97%
|
Volatility stock
purchases
|
|
76 - 90%
|
|
90 - 103%
|
|
97 - 103%
|
Expected life stock
options
|
|
6 years
|
|
5 years
|
|
5 years
|
Expected life stock
purchases
|
|
6 - 12 months
|
|
6 - 24 months
|
|
6 - 12 months
|
Expected dividend yield
|
|
0%
|
|
0%
|
|
0%
|
Weighted average fair value per
share of options granted
|
|
$18.88
|
|
$7.38
|
|
$5.25
|
Weighted average fair value per
share of employee stock purchases
|
|
$4.76
|
|
$1.81
|
|
$1.36
|
F-14
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Net Income (
Loss) per Share
Basic and diluted net income (loss) per common share is
presented in conformity with SFAS No. 128, Earnings
per Share, for all periods presented. In accordance with
SFAS No. 128, basic net income (loss) per share is
computed using the weighted-average number of shares of common
stock outstanding during the period, less shares subject to
repurchase. Diluted net income (loss) per share is typically
computed using the weighted average number of common and
dilutive common equivalent shares from stock options using the
treasury stock method. The following table presents the
calculation of weighted-average shares used to calculate basic
and diluted net income (loss) per share (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
January 1,
|
|
|
January 2,
|
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
Weighted-average shares outstanding
|
|
|
44,537
|
|
|
|
40,199
|
|
|
|
36,165
|
|
Less: Weighted-average shares of
common stock subject to repurchase
|
|
|
(36
|
)
|
|
|
(52
|
)
|
|
|
(320
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used in
calculating basic net income (loss) per share
|
|
|
44,501
|
|
|
|
40,147
|
|
|
|
35,845
|
|
Plus: Effect of dilutive potential
common shares
|
|
|
4,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used in
calculating diluted net income (loss) per share
|
|
|
48,754
|
|
|
|
40,147
|
|
|
|
35,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total number of shares excluded from the calculation of
diluted net loss per share, prior to application of the treasury
stock method for options and shares of restricted stock, was
7,368,181 and 6,360,023 for the years ended January 1,
2006, and January 2, 2005, respectively, as their effect
was antidilutive.
Comprehensive
Income
Comprehensive income is comprised of net income and other
comprehensive income. Other comprehensive income includes
unrealized gains and losses on the Companys
available-for-sale
securities that are excluded from net income, changes in the
fair value of derivatives designated as effective as cash flow
hedges, and foreign currency translation adjustments. The
Company has disclosed comprehensive income as a component of
stockholders equity.
The components of accumulated other comprehensive income are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
January 1,
|
|
|
|
2006
|
|
|
2006
|
|
|
Foreign currency translation
adjustments
|
|
|
601
|
|
|
|
248
|
|
Unrealized gain on
available-for-sale
securities, net of deferred tax
|
|
|
10,693
|
|
|
|
|
|
Unrealized gain on cash flow hedges
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income
|
|
$
|
11,294
|
|
|
$
|
258
|
|
|
|
|
|
|
|
|
|
|
F-15
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Acquisition of
CyVera Corporation
On April 8, 2005, the Company completed its acquisition of
100% of the voting equity interests of CyVera Corporation
(CyVera). Pursuant to an Agreement and Plan of Merger, dated as
of February 22, 2005 (the Merger Agreement), by and among
Illumina, Semaphore Acquisition Sub, Inc., a Delaware
corporation and wholly owned subsidiary of Illumina (Merger
Sub), and CyVera, Merger Sub merged with and into CyVera, with
CyVera surviving as a wholly owned subsidiary of Illumina. The
results of CyVeras operations have been included in the
Companys consolidated financial statements since the
acquisition date of April 8, 2005.
CyVera was created in October 2003 to commercialize its
technology and optical instrumentation/reader concepts
(BeadXpress Reader). The Company believes that the CyVera
technology, branded VeraCode, is highly complementary to the
Companys own portfolio of products and services and will
enhance the Companys capabilities to service its existing
customers as well as accelerate the development of additional
technologies, products and services. The Company believes that
integrating CyVeras capabilities with the Companys
technologies will better position the Company to address the
emerging biomarker research and development and in-vitro and
molecular diagnostic markets. The Company plans to begin
shipments of its first products resulting from this acquisition
during the first quarter of 2007.
Pursuant to the Merger Agreement, the Company issued
1.6 million shares (the Shares) of Illumina common stock,
paid $2.3 million in cash and assumed the net liabilities
of CyVera. In addition, the Company assumed the outstanding
stock options of CyVera. Approximately 250,000 of the Shares
were deposited into an escrow account with a bank to satisfy any
claims for indemnification made by the Company or CyVera
pursuant to the Merger Agreement. No claims for indemnification
were made and the escrow agent released the shares from escrow
during the second quarter of 2006.
The results of CyVeras operations have been included in
the accompanying consolidated financial statements from the date
of the acquisition. The total cost of the acquisition is as
follows (in thousands):
|
|
|
|
|
Fair market value of securities
issued, net
|
|
$
|
14,433
|
|
Cash paid
|
|
|
2,291
|
|
Transaction costs
|
|
|
681
|
|
Fair market value of options
assumed
|
|
|
394
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
17,799
|
|
|
|
|
|
|
F-16
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The fair value of the Shares was determined based on the average
closing price of the Companys common stock for five
trading days preceding, and following, February 22, 2005
(the date the transaction was announced). The Company believes
that this time period gives proper consideration to matters such
as price fluctuations and quantities traded and represents a
reasonable period before and after the date on which the terms
of the acquisition were agreed. Based on these closing prices,
the Company estimated the fair value of its common stock to be
$9.167 per share, which equates to a total fair value of
$14.4 million.
The final purchase price allocation is shown below (in
thousands):
|
|
|
|
|
Cash
|
|
$
|
4
|
|
Prepaid expenses
|
|
|
12
|
|
Fixed assets
|
|
|
349
|
|
Deferred compensation on unvested
stock options assumed
|
|
|
196
|
|
Accounts payable and accrued
liabilities
|
|
|
(432
|
)
|
Debt assumed
|
|
|
(255
|
)
|
|
|
|
|
|
Net book value of net liabilities
assumed
|
|
|
(126
|
)
|
In-process research and development
|
|
|
15,800
|
|
Goodwill
|
|
|
2,125
|
|
|
|
|
|
|
|
|
$
|
17,799
|
|
|
|
|
|
|
F-17
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In accordance with SFAS No. 142, Goodwill and Other
Intangible Assets, the goodwill is not amortized, but will
be subject to a periodic assessment for impairment by applying a
fair-value-based test. None of this goodwill is expected to be
deductible for tax purposes. The Company performs its annual
test for impairment of goodwill in May of each year. The Company
is required to perform a periodic assessment between annual
tests in certain circumstances. The Company has performed its
annual test of goodwill as of May 1, 2006 and has
determined there was no impairment of goodwill during 2006.
The Company allocated $15.8 million of the purchase price
to in-process research and development projects. In-process
research and development (IPR&D) represents the valuation of
acquired, to-be-completed research projects. At the acquisition
date, CyVeras ongoing research and development initiatives
were primarily involved with the development of its VeraCode
technology and the BeadXpress Reader. These two projects were
approximately 50% and 25% complete at the date of acquisition,
respectively. As of December 31, 2006, these two projects
were approximately 90% and 80% complete, respectively.
The value assigned to purchased IPR&D was determined by
estimating the costs to develop the acquired technology into
commercially viable products, estimating the resulting net cash
flows from the projects, and discounting the net cash flows to
their present value. The revenue projections used to value the
IPR&D were, in some cases, reduced based on the probability
of developing a new technology, and considered the relevant
market sizes and growth factors, expected trends in technology,
and the nature and expected timing of new product introductions
by the Company and its competitors. The resulting net cash flows
from such projects are based on the Companys estimates of
cost of sales, operating expenses, and income taxes from such
projects. The rates utilized to discount the net cash flows to
their present value were based on estimated cost of capital
calculations. Due to the nature of the forecast and the risks
associated with the projected growth and profitability of the
developmental projects, discount rates of 30% were considered
appropriate for the IPR&D. The Company believes that these
discount rates were commensurate with the projects stage
of development and the uncertainties in the economic estimates
described above.
If these projects are not successfully developed, the sales and
profitability of the combined company may be adversely affected
in future periods. The Company believes that the foregoing
assumptions used in the IPR&D analysis were reasonable at
the time of the acquisition. No assurance can be given, however,
that the underlying assumptions used to estimate expected
project sales, development costs or profitability, or the events
associated with such projects, will transpire as estimated. At
the date of acquisition, the development of these projects had
not yet reached technological feasibility, and the research and
development in progress had no alternative future uses.
Accordingly, these costs were charged to expense in the second
quarter of 2005.
The following unaudited pro forma information shows the results
of the Companys operations for the years ended
January 1, 2006 and January 2, 2005 as though the
acquisition had occurred as of the beginning of the periods
presented (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
January 1,
|
|
|
January 2,
|
|
|
|
2006
|
|
|
2005
|
|
|
Revenue
|
|
$
|
73,501
|
|
|
$
|
50,583
|
|
Net loss
|
|
|
(6,234
|
)
|
|
|
(9,965
|
)
|
Net loss per share, basic and
diluted
|
|
|
(0.15
|
)
|
|
|
(0.27
|
)
|
F-18
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The pro forma results have been prepared for comparative
purposes only and are not necessarily indicative of the actual
results of operations had the acquisition taken place as of the
beginning of the periods presented, or the results that may
occur in the future. The pro forma results exclude the non- cash
acquired IPR&D charge recorded upon the closing of the
acquisition during the second quarter of 2005.
Recent Accounting
Pronouncements
In July 2006, the Financial Accounting Standards Board (FASB)
issued FASB Interpretation (FIN) No. 48, Accounting for
Uncertainty in Income Taxes an interpretation of
FASB Statement No. 109, which clarifies the accounting
for uncertainty in tax positions. FIN No. 48 requires
that the Company recognize the impact of a tax position in its
financial statements if that position is more likely than not of
being sustained on audit, based on the technical merits of the
position. The provisions of FIN No. 48 are effective
as of the beginning of the Companys 2007 fiscal year, with
the cumulative effect of the change in accounting principle
recorded as an adjustment to opening retained earnings. The
Company does not expect the adoption of FIN No. 48 to
have a material impact on its consolidated results of operations
and financial position, and the Company is continuing to
evaluate the impact, if any, the adoption of
FIN No. 48 will have on its disclosure requirements.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements. SFAS No. 157 defines
fair value, establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosures
about fair value measurements. This Statement applies only to
fair value measurements that are already required or permitted
by other accounting standards. Accordingly, this Statement does
not require any new fair value measurements.
SFAS No. 157 is effective for fiscal years beginning
after December 15, 2007. The Company is currently
evaluating the impact, if any, the adoption of
SFAS No. 157 will have on its consolidated results of
operations and financial position.
|
|
2.
|
Balance Sheet
Account Details
|
The following is a summary of short-term investments as of
December 31, 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair
Value
|
|
|
U.S. Treasury securities and
obligations of U.S. government agencies
|
|
$
|
9,498
|
|
|
$
|
5
|
|
|
$
|
(9
|
)
|
|
$
|
9,494
|
|
Debt securities issued by the
states of the United States and political subdivisions of the
states
|
|
|
17,200
|
|
|
|
|
|
|
|
|
|
|
|
17,200
|
|
Corporate debt securities
|
|
|
65,787
|
|
|
|
7
|
|
|
|
(70
|
)
|
|
|
65,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
92,485
|
|
|
$
|
12
|
|
|
$
|
(79
|
)
|
|
$
|
92,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-19
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Gross realized losses on sales of
available-for-sale
securities totaled approximately $35,000, $0 and $0 for the
years ended December 31, 2006, January 1, 2006 and
January 2, 2005, respectively. As of December 31,
2006, all of the Companys investments in a gross
unrealized loss position had been in such position for less than
12 months.
The Company also recorded an unrealized gain, net of tax, of
$10.8 million as of December 31, 2006, related to the
investment in common stock of Solexa (see Note 10). The net
unrealized gain is classified as a part of accumulated other
comprehensive income in the stockholders equity section of
the consolidated balance sheet.
Contractual maturities of short-term investments at
December 31, 2006 were as follows (in thousands):
|
|
|
|
|
|
|
Estimated
|
|
|
|
Fair
Value
|
|
|
Due within one year
|
|
$
|
20,250
|
|
After one but within five years
|
|
|
72,168
|
|
|
|
|
|
|
Total
|
|
$
|
92,418
|
|
|
|
|
|
|
Accounts receivable consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
January 1,
|
|
|
|
2006
|
|
|
2006
|
|
|
Accounts receivable from product
and service sales
|
|
$
|
39,627
|
|
|
$
|
17,055
|
|
Notes receivable from product sales
|
|
|
112
|
|
|
|
441
|
|
Accounts receivable from
government grants
|
|
|
167
|
|
|
|
180
|
|
Other receivables
|
|
|
416
|
|
|
|
257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,322
|
|
|
|
17,933
|
|
Allowance for doubtful accounts
|
|
|
(338
|
)
|
|
|
(313
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
39,984
|
|
|
$
|
17,620
|
|
|
|
|
|
|
|
|
|
|
Inventory, net, consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
January 1,
|
|
|
|
2006
|
|
|
2006
|
|
|
Raw materials
|
|
$
|
8,365
|
|
|
$
|
4,575
|
|
Work in process
|
|
|
8,907
|
|
|
|
4,546
|
|
Finished goods
|
|
|
2,897
|
|
|
|
1,188
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
20,169
|
|
|
$
|
10,309
|
|
|
|
|
|
|
|
|
|
|
F-20
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Property and equipment consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
January 1,
|
|
|
|
2006
|
|
|
2006
|
|
|
Leasehold improvements
|
|
$
|
1,760
|
|
|
$
|
819
|
|
Manufacturing and laboratory
equipment
|
|
|
30,523
|
|
|
|
19,430
|
|
Computer equipment and software
|
|
|
10,383
|
|
|
|
8,121
|
|
Furniture and fixtures
|
|
|
3,114
|
|
|
|
2,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,780
|
|
|
|
30,509
|
|
Accumulated depreciation and
amortization
|
|
|
(20,146
|
)
|
|
|
(14,378
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
25,634
|
|
|
$
|
16,131
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense was $6.1 million, $3.8 million
and $3.7 million for the years ended December 31,
2006, January 1, 2006 and January 2, 2005,
respectively.
Accrued liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
January 1,
|
|
|
|
2006
|
|
|
2006
|
|
|
Compensation
|
|
$
|
8,239
|
|
|
$
|
4,922
|
|
Legal and other professional fees
|
|
|
3,831
|
|
|
|
2,311
|
|
Taxes
|
|
|
1,804
|
|
|
|
939
|
|
Reserve for product warranties
|
|
|
996
|
|
|
|
751
|
|
Customer deposits
|
|
|
3,703
|
|
|
|
1,361
|
|
Short-term deferred revenue
|
|
|
3,382
|
|
|
|
1,937
|
|
Short-term deferred gain on sale
of building
|
|
|
375
|
|
|
|
375
|
|
Other
|
|
|
1,530
|
|
|
|
1,614
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
23,860
|
|
|
$
|
14,210
|
|
|
|
|
|
|
|
|
|
|
|
|
3.
|
Derivative
Financial Instruments
|
SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, requires that all derivatives be
recognized on the balance sheet at their fair value. Changes in
the fair value of derivatives are recorded each period in
current earnings or other comprehensive income, depending on
whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction. The
Company assesses, both at its inception and on an on-going
basis, whether the derivatives that are used in hedging
transactions are highly effective in offsetting the changes in
cash flows of hedged items. The Company also assesses hedge
ineffectiveness on a quarterly basis and records the gain or
loss related to the ineffective portion to current earnings to
the extent significant.
F-21
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Periodically, the Company hedges significant foreign currency
firm sales commitments and accounts receivable with forward
contracts. The Company only uses derivative financial
instruments to reduce foreign currency exchange rate risks; the
Company does not hold any derivative financial instruments for
trading or speculative purposes. The Company primarily uses
forward exchange contracts to hedge foreign currency exposures
and they generally have terms of one year or less. These
contracts have been designated as cash flow hedges and
accordingly, to the extent effective, any unrealized gains or
losses on these foreign currency forward contracts are reported
in other comprehensive income. Realized gains and losses for the
effective portion are recognized with the underlying hedge
transaction. As of December 31, 2006, the Company had no
foreign currency forward contracts outstanding. The notional
settlement amount of the foreign currency forward contracts
outstanding at December 31, 2006 and January 1, 2006
were $0 and $0.1 million, respectively. As of
January 1, 2006, the Company had one outstanding contract
with an immaterial fair value, representing an unrealized gain,
and was included in other current assets at January 1,
2006. The Company settled foreign exchange contracts of
$0.1 million and $5.2 million for the years ended
December 31, 2006 and January 1, 2006, respectively.
The Company did not hold any derivative financial instruments
prior to fiscal 2004.
On February 16, 2007, the Company issued $400 million
principal amount of 0.625% Convertible Senior Notes due
2014 (the Notes), which included the exercise of the initial
purchasers option to purchase up to an additional
$50 million aggregate principal amount of Notes. In
connection with the offering of the notes, the Company entered
into convertible note hedge transactions with the initial
purchasers
and/or their
affiliates (the counterparties) entitling the Company to
purchase shares of the Companys common stock at an initial
strike price of $43.66 per share, subject to adjustment. In
addition, the Company sold to these counterparties warrants to
acquire shares of the Companys common stock at an initial
strike price of $62.87 per share, subject to adjustment.
See Note 15 for further discussion of these transactions.
|
|
4.
|
Warranties and
Maintenance Contracts
|
The Company generally provides a one-year warranty on genotyping
and gene expression systems. At the time revenue is recognized,
the Company establishes an accrual for estimated warranty
expenses associated with system sales. This expense is recorded
as a component of cost of product revenue. Estimated warranty
expenses associated with extended maintenance contracts are
recorded as cost of revenue ratably over the term of the
maintenance contract.
Changes in the Companys warranty liability during the
three years ended December 31, 2006 are as follows (in
thousands):
|
|
|
|
|
Balance as of December 28,
2003
|
|
$
|
230
|
|
Additions charged to cost of
revenue
|
|
|
603
|
|
Repairs and replacements
|
|
|
(446
|
)
|
|
|
|
|
|
Balance as of January 2, 2005
|
|
|
387
|
|
Additions charged to cost of
revenue
|
|
|
1,094
|
|
Repairs and replacements
|
|
|
(730
|
)
|
|
|
|
|
|
Balance as of January 1, 2006
|
|
|
751
|
|
Additions charged to cost of
revenue
|
|
|
1,379
|
|
Repairs and replacements
|
|
|
(1,134
|
)
|
|
|
|
|
|
Balance as of December 31,
2006
|
|
$
|
996
|
|
|
|
|
|
|
F-22
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
5.
|
Commitments and
Long-term Debt
|
Building
Loan
In July 2000, the Company entered into a
10-year
lease to rent space in two newly constructed buildings in
San Diego that are now occupied by the Company. That lease
contained an option to purchase the buildings together with
certain adjacent land that has been approved for construction of
an additional building. The Company exercised that option and
purchased the properties in January 2002 and assumed a
$26.0 million,
10-year
mortgage on the property at a fixed interest rate of 8.36%. The
Company made monthly payments of $208,974, representing interest
and principal, through August 2004. The Company did not record
interest expense related to this loan for the years ended
December 31, 2006 or January 1, 2006. Interest expense
related to this loan was $1.4 million for the year ended
January 2, 2005.
In June 2004, the Company entered into a conditional agreement
to sell its land and buildings for $42.0 million and to
lease back such property for an initial term of ten years. The
sale was completed in August 2004 at which time the lease was
signed. After the repayment of the remaining $25.2 million
debt and other related transaction expenses, the Company
received $15.5 million in net cash proceeds. The Company
removed the land and net book value of the buildings of
$36.9 million from its balance sheet, deferred the
resulting $3.7 million gain on the sale of the property,
and is amortizing the deferred gain over the lease term in
accordance with SFAS No. 13, Accounting for
Leases.
The Company leased a portion of the space to a tenant under a
lease which expired in June 2004. Rental income was recorded as
an offset to the Companys facility costs. There was no
rental income for the years ended December 31, 2006 and
January 1, 2006. For the year ended January 2, 2005,
rental income was $409,517.
Capital
Leases
In April 2000, the Company entered into a $3,000,000 loan
arrangement to be used at its discretion to finance purchases of
capital equipment. The loan was secured by the capital equipment
financed. As of January 1, 2005, all loan payments were
made, the underlying equipment was purchased and the loan
arrangement was closed. Depreciation of equipment under capital
leases was included in depreciation expense. Interest expense
related to capital leases was $10,500 for the year ended
January 2, 2005. The Company did not have any capital
leases during the years ended December 31, 2006 and
January 1, 2006.
Operating
Leases
In August 2004, the Company entered into a ten-year lease for
its San Diego facility after the land and building were
sold (as discussed above). Under the terms of the lease, the
Company paid a $1.9 million security deposit and is paying
monthly rent of $318,643 for the first year with an annual
increase of 3% in each subsequent year through 2014. The current
monthly rent under this lease is $338,048. On February 14,
2007, the Company extended this lease. The terms of the new
lease provide for monthly rent increases each year to a maximum
of $504,710 per month during the last year of the lease,
which is now 2023. The Company has the option to extend the term
of the lease for three additional five-year periods. In
accordance with SFAS No. 13, the Company records rent
expense on a straight-line basis and the resulting deferred rent
is included in other long-term liabilities in the accompanying
consolidated balance sheet.
F-23
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
As of December 31, 2006, the Company also leased an office and
laboratory facility in Connecticut, additional office,
distribution and storage facilities in San Diego, and four
foreign facilities located in Japan, Singapore, China and the
Netherlands under non-cancelable operating leases that expire at
various times through June 2011. These leases contain renewal
options ranging from one to five years.
As of December 31, 2006, annual future minimum payments
under these operating leases were as follows (in thousands):
|
|
|
|
|
2007
|
|
|
5,320
|
|
2008
|
|
|
5,335
|
|
2009
|
|
|
5,075
|
|
2010
|
|
|
4,659
|
|
2011
|
|
|
4,712
|
|
2012 and thereafter
|
|
|
12,798
|
|
|
|
|
|
|
Total
|
|
$
|
37,899
|
|
|
|
|
|
|
Rent expense, net of amortization of the deferred gain on sale
of property, was $4,723,041, $4,737,218, and $1,794,234 for the
years ended December 31, 2006, January 1, 2006 and
January 2, 2005, respectively.
Common
stock
As of December 31, 2006, the Company had
46,857,512 shares of common stock outstanding, of which
4,814,744 shares were sold to employees and consultants
subject to restricted stock agreements. The restricted common
shares vest in accordance with the provisions of the agreements,
generally over five years. All unvested shares are subject to
repurchase by the Company at the original purchase price. As of
December 31, 2006, 36,000 shares of common stock were
subject to repurchase. In addition, the Company also issued
12,000 shares for a restricted stock award to an employee
under the Companys new 2005 Stock and Incentive Plan based
on service performance. These shares vest monthly over a
three-year period.
Stock
Options
2005 Stock and
Incentive Plan
In June 2005, the stockholders of the Company approved the 2005
Stock and Incentive Plan (the 2005 Stock Plan). Upon adoption of
the 2005 Stock Plan, issuance of options under the
Companys existing 2000 Stock Plan ceased. The 2005 Stock
Plan provides that an aggregate of up to 11,542,358 shares
of the Companys common stock be reserved and available to
be issued. In addition, the 2005 Stock Plan provides for an
automatic annual increase in the shares reserved for issuance by
the lesser of 5% of outstanding shares of the Companys
common stock on the last day of the immediately preceding fiscal
year, 1,200,000 shares or such lesser amount as determined
by the Companys board of directors.
F-24
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Companys stock option activity under all stock option
plans from December 28, 2003 through December 31, 2006
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
Options
|
|
|
Exercise
Price
|
|
|
Outstanding at December 28,
2003
|
|
|
5,228,874
|
|
|
$
|
6.95
|
|
Granted
|
|
|
1,453,400
|
|
|
$
|
7.08
|
|
Exercised
|
|
|
(139,768
|
)
|
|
$
|
1.98
|
|
Cancelled
|
|
|
(337,486
|
)
|
|
$
|
8.80
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 2, 2005
|
|
|
6,205,020
|
|
|
$
|
6.99
|
|
Granted
|
|
|
2,992,300
|
|
|
$
|
10.02
|
|
Exercised
|
|
|
(869,925
|
)
|
|
$
|
4.66
|
|
Cancelled
|
|
|
(1,001,964
|
)
|
|
$
|
11.00
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2006
|
|
|
7,325,431
|
|
|
$
|
7.96
|
|
Granted
|
|
|
2,621,050
|
|
|
$
|
27.24
|
|
Exercised
|
|
|
(1,273,119
|
)
|
|
$
|
7.28
|
|
Cancelled
|
|
|
(314,242
|
)
|
|
$
|
12.44
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2006
|
|
|
8,359,120
|
|
|
$
|
13.94
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2006, options to purchase approximately
2,901,704 shares were exercisable and 2,764,566 shares
remain available for future grant.
Following is a further breakdown of the options outstanding as
of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Exercise Price
|
|
Range of
|
|
Options
|
|
|
Remaining Life
|
|
|
Average
|
|
|
Options
|
|
|
of Options
|
|
Exercise
Prices
|
|
Outstanding
|
|
|
in
Years
|
|
|
Exercise
Price
|
|
|
Exercisable
|
|
|
Exercisable
|
|
|
$0.03 - 5.75
|
|
|
1,475,729
|
|
|
|
6.22
|
|
|
$
|
3.85
|
|
|
|
964,006
|
|
|
$
|
3.65
|
|
$5.99 - 8.30
|
|
|
1,455,333
|
|
|
|
6.04
|
|
|
$
|
7.00
|
|
|
|
686,164
|
|
|
$
|
7.32
|
|
$8.35 - 9.40
|
|
|
1,465,961
|
|
|
|
7.75
|
|
|
$
|
8.67
|
|
|
|
451,603
|
|
|
$
|
8.78
|
|
$9.44 - 20.03
|
|
|
1,408,012
|
|
|
|
7.55
|
|
|
$
|
12.67
|
|
|
|
589,545
|
|
|
$
|
12.23
|
|
$20.97 - 26.92
|
|
|
1,417,584
|
|
|
|
9.01
|
|
|
$
|
22.18
|
|
|
|
175,329
|
|
|
$
|
21.30
|
|
$26.94 - 45.69
|
|
|
1,136,501
|
|
|
|
9.58
|
|
|
$
|
34.00
|
|
|
|
35,057
|
|
|
$
|
35.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 0.03 - 45.69
|
|
|
8,359,120
|
|
|
|
7.61
|
|
|
$
|
13.94
|
|
|
|
2,901,704
|
|
|
$
|
8.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-25
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The aggregate intrinsic value of options outstanding and options
exercisable as of December 31, 2006 was $212.3 million
and $89.4 million, respectively. Aggregate intrinsic value
represents the difference between the Companys closing
stock price on the last trading day of the fiscal period, which
was $39.31 as of December 29, 2006, and the exercise price
multiplied by the number of options outstanding. Total intrinsic
value of options exercised was $34.0 million for the year
ended December 31, 2006.
2000 Employee
Stock Purchase Plan
In February 2000, the board of directors and stockholders
adopted the 2000 Employee Stock Purchase Plan (the Purchase
Plan). A total of 4,827,988 shares of the Companys
common stock have been reserved for issuance under the Purchase
Plan. The Purchase Plan permits eligible employees to purchase
common stock at a discount, but only through payroll deductions,
during defined offering periods.
The price at which stock is purchased under the Purchase Plan is
equal to 85% of the fair market value of the common stock on the
first or last day of the offering period, whichever is lower.
The initial offering period commenced in July 2000. In addition,
beginning with fiscal 2001, the Purchase Plan provides for
annual increases of shares available for issuance by the lesser
of 3% of the number of outstanding shares of the Companys
common stock on the last day of the immediately preceding fiscal
year, 1,500,000 shares or such lesser amount as determined
by the Companys board of directors. 266,394, 717,164 and
585,855 shares were issued under the 2000 Employee Stock
Purchase Plan during fiscal 2006, 2005 and 2004, respectively.
As of December 31, 2006, there were 2,762,936 shares
available for issuance under the Purchase Plan.
Stockholder
Rights Plan
On May 3, 2001, the Board of Directors of the Company
declared a dividend of one preferred share purchase right (a
Right) for each outstanding share of common stock of the
Company. The dividend was payable on May 14, 2001 (the
Record Date) to the stockholders of record on that date. Each
Right entitles the registered holder to purchase from the
Company one unit consisting of one-thousandth of a share of its
Series A Junior Participating Preferred Stock at a price of
$100 per unit. The Rights will be exercisable if a person
or group hereafter acquires beneficial ownership of 15% or more
of the outstanding common stock of the Company or announces an
offer for 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 exercise price of the right, a number of shares
of common stock having a market value of two times the exercise
price of the right. If the Company is acquired in a merger or
other business combination transaction after a person acquires
15% or more of the Companys common stock, each Right will
entitle its holder to purchase, at the Rights then-current
exercise price, a number of common shares of the acquiring
company which at the time of such transaction have a market
value of two times the exercise price of the right. The Board of
Directors will be entitled to redeem the Rights at a price of
$0.01 per Right at any time before any such person acquires
beneficial ownership of 15% or more of the outstanding common
stock. The rights expire on May 14, 2011 unless such date
is extended or the rights are earlier redeemed or exchanged by
the Company.
The Company has incurred substantial costs in defending itself
against patent infringement claims, and expects to devote
substantial financial and managerial resources to protect its
intellectual property and to defend against the claims described
below as well as any future claims asserted against it.
F-26
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Affymetrix
Litigation
On July 26, 2004, Affymetrix, Inc. (Affymetrix) filed a
complaint in the U.S. District Court for the District of
Delaware alleging that the use, manufacture and sale of the
Companys BeadArray products and services, including the
Companys Array Matrix and BeadChip products, infringe six
Affymetrix patents. Affymetrix seeks an injunction against the
sale of products, if any, that are determined to be infringing
these patents, unspecified monetary damages, interest and
attorneys fees. On September 15, 2004, the Company
filed its answer to Affymetrix complaint, seeking
declaratory judgments from the court that it does not infringe
the Affymetrix patents and that such patents are invalid, and
the Company filed counterclaims against Affymetrix for unfair
competition and interference with actual and prospective
economic advantage.
On February 15, 2006, the court allowed the Company to file
its first amended answer and counterclaims, adding allegations
of inequitable conduct with respect to all six asserted
Affymetrix patents, violation of Section 2 of the Sherman
Act, and unclean hands. In March 2006, Affymetrix notified the
Company of its decision to drop one of the six patents from the
suit, and of its intention to assert infringement of certain
additional claims of the remaining five patents. The Company has
filed a motion to preclude Affymetrix from asserting
infringement of those additional claims. That motion is still
pending at this time. On June 30, 2006, the court dismissed
the patent Affymetrix had sought to withdraw from the suit.
Affymetrix and the Company filed summary judgment motions by the
July 14, 2006 court-established deadline. On
August 16, 2006, the court issued a ruling on the Markman
(claim construction) hearing it had held on April 20, 2006.
The Company believes the courts Markman opinion construed
several key claim terms in favor of the Company and did not
adversely affect the Companys defenses and pending
counterclaims in any material respect. At the request of the
parties, trial has been rescheduled to March 5, 2007 from
October 16, 2006. A pre-trial conference was held on
February 8, 2007 during which the court established a
multi-phase trial structure with the first phase of the trial to
begin on March 5, 2007, and addressed related issues. The
Company believes it has meritorious defenses against each of the
infringement claims alleged by Affymetrix and intends to defend
vigorously against this suit. However, the Company cannot be
sure that it will prevail in this matter. Any unfavorable
determination, and in particular, any significant cash amounts
required to be paid by the Company or prohibition of the sale of
its products and services, could result in a material adverse
effect on its business, financial condition and results of
operations.
Dr. Anthony
W. Czarnik v. Illumina, Inc.
On June 15, 2005, Dr. Anthony Czarnik, a former
employee, filed suit against the Company in the
U.S. District Court for the District of Delaware seeking
correction of inventorship of certain of the Companys
patents and patent applications, and alleging that the Company
committed inequitable conduct and fraud in not naming him as an
inventor. Dr. Czarnik seeks an order requiring the Company
and the U.S. Patent and Trademark Office to correct the
inventorship of certain of the Companys patents and patent
applications by adding Dr. Czarnik as an inventor, a
judgment declaring certain of the Companys patents and
patent applications unenforceable, unspecified monetary damages
and attorneys fees. On August 4, 2005, the Company
filed a motion to dismiss the complaint for lack of standing and
failure to state a claim. While this motion was pending,
Dr. Czarnik filed an amended complaint on
September 23, 2005. On October 7, 2005, the Company
filed a motion to dismiss the amended complaint for lack of
standing and failure to state a claim. On July 13, 2006,
the court granted the Companys motion to dismiss the
counts of Dr. Czarniks complaint dealing with
correction of inventorship in pending applications and
inequitable conduct. On July 27, 2006, the Company filed
its answer to the two remaining counts of the amended complaint
(correction of inventorship in issued patents, and fraud). There
has been no trial date set for this case. The Company believes
it has meritorious defenses against these claims.
F-27
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Applied
Biosystems Litigation
On December 26, 2006, the Applied Biosystems Group of
Applera Corporation filed suit against Solexa, which the Company
acquired in a
stock-for-stock
merger on January 26, 2007. Applied Biosystems action
against Solexa, which was filed in California state court in
Santa Clara County, seeks ownership of patents covering
Sequencing-by-Ligation
technologies. Solexa filed its answer to the complaint by the
required deadline. The patents at issue were assigned in 1995 to
Solexas predecessor company (Lynx Therapeutics) by a
former employee, Dr. Stephen Macevicz, who is named as a
co-defendant in the suit. Lynx, which was originally a unit of
Applied Biosystems, was spun out of Applied Biosystems in 1992.
The patents at issue in the suit relate to methods for
sequencing DNA using successive rounds of oligonucleotide probe
ligation
(Sequencing-by-Ligation).
The Companys new Illumina Genome Analyzer system uses a
different technology, DNA
Sequencing-by-Synthesis
(SBS), which the Company believes is not covered by any of the
patents at issue in the suit. The Company also believes that the
MPSS technology used by Lynx did not use the methods covered by
these patents, and in any event Solexa no longer uses the MPSS
technologies. The Company believes the suit is not material to
its current or future business, and the Company has no plans to
use any of the
Sequencing-by-Ligation
technologies covered by the patents at issue in the suit.
Applied Biosystems does not assert any claim for patent
infringement in the suit.
Termination-of-Employment
Lawsuit
In March 2001, a complaint seeking damages of an unspecified
amount was filed against the Company by Dr. Anthony W.
Czarnik, a former employee, in the Superior Court of the State
of California in connection with the employees termination
of employment with the Company. In June 2002, a California
Superior Court judgment was rendered against the Company and the
Company recorded a $7.7 million charge in its financial
results for the second quarter of 2002 to cover total damages
and remaining expenses. The Company appealed the decision, and
in December 2004, the Fourth Appellate District Court of Appeal,
in San Diego, California, reduced the amount of the award.
The Company recorded interest expense on the $7.7 million
during the appeal based on the statutory rate. As a result of
the revised judgment, the Company reduced the $9.2 million
liability on its balance sheet to $5.9 million and recorded
a gain of $3.3 million as a litigation judgment in the
fourth quarter of 2004. In January 2005, the Company paid the
$5.9 million and removed the liability from its balance
sheet.
Litigation
with Applera Corporations Applied Biosystems
Group
In 1999, the Company entered into a joint development agreement
with Applied Biosystems Group, an operating group of Applera
Corporation, under which the companies agreed to jointly develop
a SNP genotyping system that would combine the Companys
BeadArray technology with Applied Biosystems assay
chemistry and scanner technology. In conjunction with the
agreement, Applied Biosystems agreed to provide the Company with
non-refundable research and development support of
$10.0 million, all of which was paid by December 2001 and
recorded as a liability on the Companys balance sheet as
of January 2, 2005. In December 2002, Applied Biosystems
initiated a patent infringement suit and sought to compel
arbitration of an alleged breach of the joint development
agreement. The Company initiated a suit in state court seeking
to enjoin the arbitration and alleged that Applied Biosystems
had breached the joint development agreement. In August 2004,
the Company entered into a settlement and cross-license
agreement with Applera. As a result of the settlement, the
Company removed the $10.0 million liability from its
balance sheet, made a payment of $8.5 million to Applera
and recorded a gain of $1.5 million as a litigation
settlement.
F-28
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
8.
|
Collaborative
Agreements
|
Invitrogen
Corporation
In December 2004, the Company entered into a strategic
collaboration with Invitrogen Corporation (Invitrogen). The goal
of the collaboration is to combine the Companys expertise
in oligonucleotide manufacturing with the sales, marketing and
distribution capabilities of Invitrogen. In connection with the
collaboration, the Company has developed the next generation
Oligator DNA synthesis technology. This technology includes both
plate- and tube-based capabilities. Under the terms of the
agreement, Invitrogen paid the Company an upfront non-refundable
collaboration payment of $2.3 million during the first
quarter of 2005. Additionally, Invitrogen made a milestone
payment of $1.1 million to the Company in November 2005
upon achievement of a milestone event under the terms of the
collaboration.
The Company began manufacturing and shipping the plate-based and
certain tube-based oligo products under the collaboration in the
third quarter of 2005 and, therefore, has begun to amortize the
upfront collaboration payment of $2.3 million as product
revenue over the life of the agreement on a straight-line basis.
The unamortized portion of the collaboration payment has been
recorded as short- and long-term deferred revenue. The Company
recorded the $1.1 million milestone payment in service and
other revenue upon achievement of the milestone during the
fourth quarter of 2005. The Company recorded revenue related to
this milestone payment upon its achievement, as evidenced by
acknowledgment from Invitrogen and due to the fact that
(i) the milestone event is substantive and its
achievability was not reasonably assured at the inception of the
agreement, (ii) the milestone represents the culmination of
an earnings process, (iii) the milestone payment is
non-refundable and (iv) the performance obligations for
both the Company and Invitrogen after the milestone achievement
will continue at a level comparable to the level before the
milestone achievement. In addition, the agreement provides for
the transfer of the Companys Oligator technology into two
Invitrogen facilities outside North America. The Company
recognizes product revenue upon shipment of collaboration
products based on the Companys actual manufacturing cost.
Collaboration profit, as defined in the collaboration agreement,
from the sale of collaboration products is divided equally
between the two companies and is recorded as product revenue.
deCODE
genetics
In May 2006, the Company and deCODE genetics, ehf. (deCODE)
executed a Joint Development and Licensing Agreement (the
Development Agreement). Pursuant to the Development Agreement,
the parties agreed to collaborate exclusively to develop,
validate and commercialize specific diagnostic tests for
variants in genes involved in three disease-related pathways:
the gene-encoding leukotriene A4 hydrolase, linked to heart
attack; the gene-encoding transcription factor 7-like 2
(TCF7L2), linked to type 2 diabetes; and the gene-encoding
BARD1, linked to breast cancer. The Company and deCODE are
developing diagnostic tests based on these variants for use on
the Companys BeadXpress system.
F-29
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Under the agreement, the Company will be responsible for the
manufacturing, marketing and selling of the diagnostic products.
The companies will share the development costs of these products
and split the profits from sales of the diagnostics tests. The
Development Agreement may be terminated as to a particular
product under development if one party decides to discontinue
funding the development of that product, and may be terminated
in whole by either party if the other party commits an uncured
material breach, files for bankruptcy or becomes insolvent.
Under a separate supply agreement, the Company installed
instrumentation at deCODE that will enable deCODE to perform
whole genome association studies on up to 100,000 samples using
the Companys Sentrix HumanHap300 BeadChips and associated
reagents. The Company has deferred approximately
$2.0 million of revenue for instruments installed during
the third quarter of 2006 under guidance provided by
SFAS No. 48, Revenue Recognition When Right of
Return Exists. This amount is classified as a long-term
liability as of December 31, 2006. The Company has also
deferred approximately $1.3 million of costs related to
product shipments to deCODE, which are classified as a long-term
asset as of December 31, 2006.
International
HapMap Project
The Company was the recipient of a grant from the National
Institutes of Health covering its participation in the first
phase of the International HapMap Project, which is a
$100 million, internationally funded successor project to
the Human Genome Project that will help identify a map of
genetic variations that may be used to perform disease-related
research. The Company was awarded a $9.1 million grant from
the National Institutes of Health in September 2002 to perform
genotyping services in connection with the first phase of the
International HapMap Project that covered basic research
activities, the development of SNP assays and the genotyping
performed on those assays. For the year ending December 31,
2006, the Company did not record any revenue related to this
project. For the years ending January 1, 2006 and
January 2, 2005, the Company recorded revenue related to
this project totaling $0.8 million and $4.6 million,
respectively.
F-30
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
9.
|
Investment in
Genizon BioSciences Inc.
|
In January 2006, Genizon BioSciences Inc. (Genizon), a Canadian
company focused on gene discovery, purchased from the Company
approximately $1.9 million in equipment and committed to
purchase an additional $4.3 million in consumables. The
Company understands that Genizon is using the Companys
HumanHap300 BeadChip along with the Infinium assay to perform
whole-genome association studies involving thousands of members
of the Quebec Founder Population. The goal of the studies is to
provide understanding of the genetic origins and mechanisms of
common diseases which may then lead to possible drug targets.
In March 2006, the Company entered into a Subscription Agreement
for Secured Convertible Debentures with Genizon. Pursuant to the
agreement, the Company purchased a secured convertible debenture
(the debenture) of Genizon and certain warrants for
CDN$3.5 million (approximately U.S. $3.0 million).
The debenture is convertible, automatically upon the occurrence
of a liquidity event, as defined in the debenture,
into Class H Preferred Shares of Genizon. Upon the
occurrence of certain events, Illumina may be entitled to
receive additional shares of Genizons Class H
Preferred Shares. The debenture matures two years from issuance
and bears interest, payable semiannually, at a rate of
5% per annum for the first year and 12.5% per annum
for the second year. Unless the debenture is converted before
maturity, 112.5% of the principal amount of the debenture is due
upon maturity. The Company also received warrants to purchase
226,721 shares of Genizon Class H Preferred Shares at
an exercise price of $1.5437 per share.
As of December 31, 2006, the debenture was recorded at face
value, which is the fair value, and is classified in accordance
with SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities, as an
available-for-sale
security.
The Company has concluded that the purchase of the debenture and
the concurrent purchase by Genizon of the Companys
products are linked transactions under guidance
contained in EITF
No. 00-21.
Since the transactions are considered linked, the
Company has deferred approximately $3.0 million of revenue
(the face value of the Debentures) as of December 31, 2006,
related to the Genizon product shipments. The deferred revenue
is classified as a long-term liability as of December 31,
2006. This amount is expected to remain in deferred revenue
until Genizon settles the Debenture in cash or when a liquidity
event occurs that generates cash or a security that is readily
convertible into cash. The Company has also deferred
approximately $1.1 million of costs related to product
shipments to Genizon as a long-term asset as of
December 31, 2006. All Genizon shipments that generate
revenue over the face value of the debenture will be evaluated
under the Companys revenue recognition policy, which is
outlined in Note 1.
On November 12, 2006, the Company entered into a definitive
securities purchase agreement with Solexa in which the Company
invested approximately $50 million in Solexa in exchange
for 5,154,639 newly issued shares of Solexa common stock in
conjunction with the merger of the two companies, completed on
January 26, 2007. This investment was valued at
$67.8 million as of December 31, 2006, which
represented a market value of $13.15 per share of Solexa
common stock.
F-31
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The provision for income taxes consists of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
January 1,
|
|
|
January 2,
|
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
1,125
|
|
|
$
|
|
|
|
$
|
|
|
State
|
|
|
1,177
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
903
|
|
|
|
105
|
|
|
|
135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current provision
|
|
|
3,205
|
|
|
|
105
|
|
|
|
135
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
|
|
|
|
|
|
|
|
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
(553
|
)
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred provision
|
|
|
(553
|
)
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tax provision
|
|
$
|
2,652
|
|
|
$
|
163
|
|
|
$
|
135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision for income taxes reconciles to the amount computed
by applying the federal statutory rate to income before taxes as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
January 1,
|
|
|
January 2,
|
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
Tax at federal statutory rate
|
|
$
|
14,945
|
|
|
$
|
(7,043
|
)
|
|
$
|
(2,179
|
)
|
State, net of federal benefit
|
|
|
767
|
|
|
|
633
|
|
|
|
(336
|
)
|
Alternative minimum tax
|
|
|
1,125
|
|
|
|
|
|
|
|
|
|
Research and other credits
|
|
|
(1,900
|
)
|
|
|
(1,239
|
)
|
|
|
34
|
|
Acquired in-process
research & development
|
|
|
|
|
|
|
5,372
|
|
|
|
|
|
Adjustments to deferred tax
balances
|
|
|
(3,509
|
)
|
|
|
2,952
|
|
|
|
|
|
Change in valuation allowance
|
|
|
(10,038
|
)
|
|
|
(1,138
|
)
|
|
|
2,330
|
|
Permanent differences
|
|
|
818
|
|
|
|
(226
|
)
|
|
|
(264
|
)
|
Other
|
|
|
444
|
|
|
|
852
|
|
|
|
550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tax provision
|
|
$
|
2,652
|
|
|
$
|
163
|
|
|
$
|
135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-32
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Significant components of the Companys deferred tax assets
and liabilities are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
January 1,
|
|
|
|
2006
|
|
|
2006
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating losses
|
|
$
|
13,728
|
|
|
$
|
37,801
|
|
Tax credits
|
|
|
10,831
|
|
|
|
6,634
|
|
Deferred revenue
|
|
|
2,859
|
|
|
|
1,037
|
|
Capitalized research and
development costs
|
|
|
1,290
|
|
|
|
1,523
|
|
Accruals and reserves
|
|
|
2,491
|
|
|
|
1,729
|
|
Stock compensation
|
|
|
4,736
|
|
|
|
|
|
Other
|
|
|
2,592
|
|
|
|
1,952
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
38,527
|
|
|
|
50,676
|
|
Valuation allowance on deferred
tax assets
|
|
|
(36,458
|
)
|
|
|
(49,542
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
2,069
|
|
|
|
1,134
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
(1,516
|
)
|
|
|
(1,134
|
)
|
Net unrealized gain on investments
|
|
|
(6,987
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(8,503
|
)
|
|
|
(1,134
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
(6,434
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
F-33
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
A valuation allowance is established when it is more likely than
not the future realization of all or some of the deferred tax
assets will not be achieved. The evaluation of the need for a
valuation allowance is performed on a jurisdiction by
jurisdiction basis, and includes a review of all available
positive and negative evidence. Based upon the available
evidence as of December 31, 2006, the Company is not able
to conclude it is more likely than not the remaining deferred
tax assets in the U.S. will be realized. Therefore, the
Company has recorded a full valuation allowance against the
U.S. deferred tax assets of approximately
$36.5 million.
A deferred tax liability of approximately $7.0 million has
been recorded against the unrealized gain on the investment in
Solexa, which is included in accumulated other comprehensive
income, as of December 31, 2006.
As of December 31, 2006, the Company had net operating loss
carryforwards for federal and state tax purposes of
approximately $76.4 million and $39.1 million
respectively; which begin to expire in 2022 and 2013
respectively, unless previously utilized. In addition, the
Company also had U.S. federal and state research and
development tax credit carryforwards of approximately
$6.4 million and $6.3 million respectively; which
begin to expire in 2018 and 2019 respectively, unless previously
utilized.
Pursuant to Section 382 and 383 of the Internal Revenue
Code, utilization of the Companys net operating losses and
credits may be subject to annual limitations in the event of any
significant future changes in its ownership structure.
These annual limitations may result in the expiration of net
operating losses and credits prior to utilization. Previous
limitations due to Section 382 and 383 have been reflected
in the deferred tax assets as of December 31, 2006.
Included in the deferred tax assets as of December 31, 2006
are approximately $2.7 million of pre-acquisition deferred
tax assets of CyVera Corporation. To the extent these assets are
recognized, the adjustment will be applied first to reduce to
zero any goodwill related to the acquisition, and then as a
reduction to the income tax provision.
Not included in the deferred tax assets as of December 31,
2006 is approximately $14.7 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.
Residual United States income taxes have not been provided on
approximately $0.8 million of undistributed earnings of
foreign subsidiaries as of December 31, 2006 since the
earnings are considered to be permanently invested in the
operations of such subsidiaries.
In July 2006, FASB issued FIN No. 48, Accounting
for Uncertainty in Income Taxes an interpretation of
FASB Statement No. 109, which clarifies the accounting
for uncertainty in tax positions. FIN No. 48 requires
that the Company recognize the impact of a tax position in its
financial statements if that position is more likely than not of
being sustained on audit, based on the technical merits of the
position. The provisions of FIN No. 48 are effective
as of the beginning of the Companys 2007 fiscal year, with
the cumulative effect of the change in accounting principle
recorded as an adjustment to opening retained earnings. The
Company does not expect the adoption of FIN No. 48 to
have a material impact on its consolidated results of operations
and financial position, and the Company is continuing to
evaluate the impact, if any, the adoption of
FIN No. 48 will have on its disclosure requirements.
The Company has a 401(k) savings plan covering substantially all
of its employees. Company contributions to the plan are
discretionary. During the year ended December 31, 2006, the
Company made matching contributions of $0.4 million. No
contributions were made during the years ended January 1,
2006 and January 2, 2005.
F-34
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
13. Segment
Information, Geographic Data 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 on an aggregate
basis to the chief operating decision maker of the Company, our
chief executive officer. The Company had revenue in the
following regions for the years ended December 31, 2006,
January 1, 2006 and January 2, 2005
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
January 1,
|
|
|
January 2,
|
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
United States
|
|
$
|
103,043
|
|
|
$
|
45,480
|
|
|
$
|
24,166
|
|
Europe
|
|
|
55,440
|
|
|
|
17,551
|
|
|
|
12,528
|
|
Asia
|
|
|
15,070
|
|
|
|
6,850
|
|
|
|
9,703
|
|
Other
|
|
|
11,033
|
|
|
|
3,620
|
|
|
|
4,186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
184,586
|
|
|
$
|
73,501
|
|
|
$
|
50,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company had no customer that provided more than 10% of total
revenue in the years ended December 31, 2006 and
January 1, 2006 and one customer that provided
approximately 14% of total revenue in the year ended
January 2, 2005 (exclusive of revenue recorded from the
National Institutes of Health). Revenue from the National
Institutes of Health accounted for approximately 1%, 1% and 13%
of total revenue for the years ended December 31, 2006,
January 1, 2006 and January 2, 2005, respectively.
|
|
14.
|
Quarterly
Financial Information (unaudited)
|
The following financial information reflects all normal
recurring adjustments, except as noted below, which are, in the
opinion of management, necessary for a fair statement of the
results of interim periods. Summarized quarterly data for fiscal
2006 and 2005 are as follows (in thousands except per share
data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
|
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
29,102
|
|
|
$
|
41,577
|
|
|
$
|
53,472
|
|
|
$
|
60,435
|
|
Total cost of revenue
|
|
|
9,293
|
|
|
|
13,576
|
|
|
|
16,356
|
|
|
|
20,119
|
|
Net income (loss)
|
|
|
(104
|
)
|
|
|
6,768
|
|
|
|
16,162
|
|
|
|
17,142
|
|
Historical net income (loss) per
share, basic
|
|
|
(0.00
|
)
|
|
|
0.16
|
|
|
|
0.35
|
|
|
|
0.37
|
|
Historical net income (loss) per
share, diluted
|
|
|
(0.00
|
)
|
|
|
0.14
|
|
|
|
0.32
|
|
|
|
0.34
|
|
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
15,148
|
|
|
$
|
15,824
|
|
|
$
|
19,516
|
|
|
$
|
23,013
|
|
Total cost of revenue
|
|
|
4,599
|
|
|
|
4,734
|
|
|
|
6,599
|
|
|
|
7,249
|
|
Net income (loss)
|
|
|
(1,235
|
)
|
|
|
(18,539
|
)(1)
|
|
|
(1,426
|
)
|
|
|
326
|
|
Historical net income (loss) per
share, basic
|
|
|
(0.03
|
)
|
|
|
(0.46
|
)
|
|
|
(0.03
|
)
|
|
|
0.01
|
|
Historical net income (loss) per
share, diluted
|
|
|
(0.03
|
)
|
|
|
(0.46
|
)
|
|
|
(0.03
|
)
|
|
|
0.01
|
|
The sum of the net income (loss) per share for each of the four
quarters within each fiscal year presented may not equate to the
net income (loss) per share reported for the full fiscal year
because different numbers of shares were outstanding during the
years presented.
|
|
|
(1) |
|
During the second quarter of 2005, the Company recorded a
$15.8 million charge related to acquired in-process
research and development from the CyVera acquisition. |
F-35
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Acquisition of
Solexa, Inc.
On January 26, 2007, the Company completed a merger with
Solexa, Inc. (Solexa), a Delaware corporation, in a
stock-for-stock
merger transaction. In connection with the merger, Solexa
shareholders received 0.344 of a share of the Companys
common stock in exchange for each share of Solexa common stock
held. The Company issued approximately 13.1 million shares
of its common stock as consideration for this merger. As a
result of the merger, Solexa became a direct, wholly-owned
subsidiary of the Company.
Convertible
Senior Notes
On February 16, 2007, the Company issued $400 million
principal amount of 0.625% Convertible Senior Notes due
2014 (the Notes), which included the exercise of the initial
purchasers option to purchase up to an additional
$50 million aggregate principal amount of Notes. The net
proceeds from the offering, after deducting the initial
purchasers discount and offering expenses, were
approximately $390.3 million. The Company will pay 0.625%
interest per annum on the principal amount of the Notes, payable
semi-annually in arrears in cash on February 15 and August 15 of
each year, starting on August 15, 2007. The Company used
approximately $202 million of the net proceeds to purchase
shares of its common stock in privately negotiated transactions
concurrently with the offering.
The Notes will be convertible into cash and, if applicable,
shares of the Companys common stock, $0.01 par value
per share, based on an initial conversion rate, subject to
adjustment, of 22.9029 shares per $1,000 principal amount
of Notes (which represents an initial conversion price of
approximately $43.66 per share), only in the following
circumstances and to the following extent: (1) during the
five
business-day
period after any five consecutive trading period (the
measurement period) in which the trading price per note for each
day of such measurement period was less than 97% of the product
of the last reported sale price of the Companys common
stock and the conversion rate on each such day; (2) during
any calendar quarter after the calendar quarter ending
March 31, 2007, if the last reported sale price of the
Companys common stock for 20 or more trading days in a
period of 30 consecutive trading days ending on the last trading
day of the immediately preceding calendar quarter exceeds 130%
of the applicable conversion price in effect on the last trading
day of the immediately preceding calendar quarter; (3) upon
the occurrence of specified events; and (4) the notes will
be convertible at any time on or after November 15, 2013
through the third scheduled trading day immediately preceding
the maturity date.
In connection with the offering of the notes, the Company
entered into convertible note hedge transactions with the
initial purchasers
and/or their
affiliates (the counterparties) entitling the Company to
purchase shares of the Companys common stock at an initial
strike price of $43.66 per share, subject to adjustment. In
addition, the Company sold to these counterparties warrants to
acquire shares of the Companys common stock at an initial
strike price of $62.87 per share, subject to adjustment.
The note hedge transactions and the warrants each cover a number
of shares that is generally equal to the maximum number of
shares that are issuable upon conversion of the notes. The cost
of the convertible note hedge transactions that was not covered
by the proceeds from the sale of the warrants was approximately
$46.6 million. These transactions are expected to reduce
the potential equity dilution upon conversion of the notes if
the daily volume-weighted average price per share of the
Companys common stock exceeds the strike price of the
convertible note hedge transactions. The warrant transactions
could have a dilutive effect on the Companys earnings per
share to the extent that the price of the Companys common
stock during the measurement period at maturity of the warrants
exceeds the strike price of the warrants.
F-36
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE THREE YEARS ENDED DECEMBER 31, 2006
|
|
|
|
|
|
|
|
|
|
|
Allowance
|
|
|
|
|
|
|
for Doubtful
|
|
|
Reserve for
|
|
|
|
Accounts
|
|
|
Inventory
|
|
|
|
(In
thousands)
|
|
|
Balance as of December 28,
2003
|
|
$
|
178
|
|
|
$
|
630
|
|
Charged to expense
|
|
|
49
|
|
|
|
946
|
|
Utilizations
|
|
|
(81
|
)
|
|
|
(538
|
)
|
|
|
|
|
|
|
|
|
|
Balance as of January 2, 2005
|
|
|
146
|
|
|
|
1,038
|
|
Charged to expense
|
|
|
167
|
|
|
|
304
|
|
Utilizations
|
|
|
|
|
|
|
(247
|
)
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2006
|
|
|
313
|
|
|
|
1,095
|
|
Charged to expense
|
|
|
179
|
|
|
|
127
|
|
Utilizations
|
|
|
(154
|
)
|
|
|
(372
|
)
|
|
|
|
|
|
|
|
|
|
Balance as of December 31,
2006
|
|
$
|
338
|
|
|
$
|
850
|
|
|
|
|
|
|
|
|
|
|
F-37