UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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| þ | | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | | For the fiscal year ended December 31, 2006January 3, 2010 |
or |
| o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | | For the transition period from to . |
Commission file number:000-30361
Illumina, Inc.
(Exact name of Registrant as Specified in Its Charter)
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Delaware | | 33-0804655 |
(State or other Jurisdiction of
| | (I.R.S. Employer |
| Incorporation or Organization) | | (I.R.S. Employer
Identification No.) |
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9885 Towne Centre Drive, | | |
San Diego, California
| | 92121
92121(zip code) |
| (Address of Principal Executive Offices) | | (zip code) |
Registrant’s telephone number, including area code:
(858) 202-4500
Securities registered pursuant to Section 12(b) of the Act:
None
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| Title of Each Class | | Name of Exchange on Which Registered |
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| Common Stock, $0.01 par value (including associated Preferred Stock Purchase Rights) | | The NASDAQ Global Select Market |
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par valueNone
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities ActAct. 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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to thisForm 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a non-accelerated filer.smaller reporting company. See definitionthe definitions of “large accelerated filer,” “accelerated filerfiler” and large accelerated filer”“smaller reporting company” inRule 12b-2 of the Exchange Act. (Check one):
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| Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o |
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act). Yes o No þ
As of February 1, 2007,5, 2010, there were 60,049,268120,298,934 shares (excluding 24,068,450 shares held in treasury) of the Registrant’s Common Stock outstanding. The aggregate market value of the Common Stock held by non-affiliates of the Registrant as of June 30, 200628, 2009 (the last business day of the Registrant’s most recently completed second fiscal quarter), based on the closing price for the Common Stock on theThe NASDAQ Global Select Market on that date, was $1,289,642,486.$4,649,494,956. This amount excludes an aggregate of 2,471,6512,197,137 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 Registrant’s definitive proxy statement for the annual meeting of stockholders expected to be held on June 7, 2007May 12, 2010 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, 2006JANUARY 3, 2010
TABLE OF CONTENTS
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PART ISpecial Note Regarding Forward-Looking Statements
This Annual Reportannual report onForm 10-K may contain forward-looking statementscontains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934.1934, as amended. These statements relate todiscuss our current expectations concerning future results or events, orincluding our future financial performance. We have attempted to identifymake these forward-looking statements in reliance on the safe harbor protections provided under the Private Securities Litigation Reform Act of 1995. These statements include, among others:
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| • | statements concerning our expectations as to our future financial performance, results of operations, or other operational results or metrics; |
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| • | statements concerning the benefits that we expect will result from our business activities and certain transactions we have completed, such as increased revenue, decreased expenses, and avoided expenses and expenditures; and |
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| • | statements of our expectations, beliefs, future plans and strategies, anticipated developments (including new products), and other matters that are not historical facts. |
These statements may be made expressly in this document or may be incorporated by terminology includingreference to other documents we have filed or will file with the Securities and Exchange Commission, or SEC. You can identify many of these statements by looking for words such as “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should”“should,” or “will” or the negative of these terms or other comparable terminology.terminology and similar references to future periods. These forward-looking statements are only predictionssubject to numerous assumptions, risks, 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 achievementsevents to be materially different from any future results levels or activity, performance or achievementsevents expressed or implied by us in those statements. Many of the factors that will determine or effect these forward-looking statements. Although we believeresults or events are beyond our ability to control or project. Specific factors that the expectations reflectedcould cause actual results or events to differ from those 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 theseinclude:
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| • | our ability to develop and commercialize further our Solexa®, BeadArraytm, and VeraCode® technologies and to deploy new sequencing, genotyping, and gene expression products and applications for our technology platforms; |
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| • | our ability to manufacture robust instrumentation, consumables, and reagents; |
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| • | reductions in the funding levels to our primary customers, including as the result of timing and amount of funding provided by the American Recovery and Reinvestment Act of 2009; and |
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| • | other factors detailed in our filings with the SEC, including the risks, uncertainties, and assumptions described in Item 1A “Risk Factors” below, or in information disclosed in public conference calls, the date and time of which are released beforehand. |
Our forward-looking statements which speak only as of the date of this Annual Report.annual report. We areundertake no obligation, and do not under any dutyintend, to publicly update any of theor revise forward-looking statements, after the date we file this Annual Report onForm 10-Kto review or confirm analysts’ expectations, or to conformprovide interim reports or updates on the progress of any current financial quarter, whether as a result of new information, future events, or otherwise. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained in this annual report. Given these statementsuncertainties, we caution investors not 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.unduly rely on our forward-looking statements.
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 onForm 10-K, quarterly reports onForm 10-Q, current reports onForm 8-K, and all amendments to those reports are available free of charge on our website, www.illumina.com.www.illumina.com. The information on our website is not incorporated by reference into this report. Such reports are made available as soon as
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reasonably practicable after filing with, or furnishing to, the Securities and Exchange Commission.SEC. The SEC also maintains an Internet site atwww.sec.govthat contains reports, proxy and information statements, and other information regarding issuers that electronically file with the SEC. Copies of our annual report onForm 10-K will be made available, free of charge, upon written request.
Illumina®, Array of Arraystm, BeadArraytm, BeadXpress®, CSPro®, DASL®, Genetic Energytm, GoldenGate®, GoldenGate Indexingtm, GenomeStudio®, illuminaDxtm, HiSeqtm, Infinium®, IntelliHyb®, iSelect®, Making Sense Out of Life®, Oligator®, Sentrix®, Solexa®, and VeraCode® 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.
Unless the context requires otherwise, references in this annual report onForm 10-K to “Illumina,” the “Company,” “we,” “us,” and “our” refer to Illumina, Inc. and its subsidiaries.
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PART I
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. We were incorporated in California in April 1998 and 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.
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.
We develop and commercialize sequencing technologies used to perform a range of analyses, including de novo sequencing, whole genome re-sequencing, gene expression analysis, and small RNA analysis. Our product and service offerings also include leading-edge solutions for single-nucleotide polymorphism (SNP) genotyping, copy number variation (CNV), DNA methylation studies, gene expression profiling, and low-multiplex analysis of DNA, RNA, and protein. We believe we are the only company with genome-scale technology for sequencing, genotyping, and gene expression — the three cornerstones of modern genetic analysis.
Our tools provide researchers around the world with the performance, throughput, cost effectiveness, and flexibility necessary to performdetermine and analyze the billions of bits of genetic testsinformation 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.
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On January 26,In 2007 we completed the acquisition ofacquired Solexa, Inc. (Solexa) for approximately 13.1 million sharesAs a result of that transaction, we acquired the sequencing technology utilized in our common stock. Solexa developsHiSeq 2000 and commercializes genetic analysis technologies used toGenome Analyzer instrument platforms. These products perform DNA sequencing based on 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.proprietary reversible terminatorsequencing-by-synthesis (SBS) chemistry.
We were incorporated in California in April 1998. We reincorporated in Delaware in July 2000. Our principal executive officesDuring the first quarter of 2008, we reorganized our operating structure into two newly-created business segments, the Life Sciences Business Unit and the Diagnostics Business Unit. During 2009, the Diagnostics Business Unit had limited business activity and, accordingly, operating results are locatedreported on an aggregate basis as one operating segment. In the future, at 9885 Towne Centre Drive, San Diego, California 92121. Our telephone number is(858) 202-4500.each reporting period end, we will reassess our reportable operating segments, particularly as we enter the market for molecular diagnostics.
Industry Background
DNA, RNA, and Protein
The genetic content that controls an organism’s living cells is encoded in deoxyribonucleic acid, or DNA. The human body, for instance, is composed of billions of cells, each containing DNA, which encodes the basic instructions for cellular function. The complete set of an organism’s DNA is called its genome. The human genome is organized into 23 pairs of chromosomes that are further divided into over 30,000 smaller regions called genes. Each gene is comprised of a string of nucleotide bases labeled A, C, G, and T, representing adenine, cytosine, guanine, and thymine, respectively. Human DNA has approximately 3 billion nucleotide bases and their precise order is known as the DNA sequence. When a gene is “expressed,” a partial copy of its DNA sequence — called messenger RNA or mRNA — is used as a template to direct the synthesis of a protein. Proteins, in turn, direct all cellular function.
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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 Alzheimer’s 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 of a nucleotide base in a DNA sequence. It is estimated that the human genome contains over nine30 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 majorcommon 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 organism’s 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,Historically, this problem was addressed by investigating effects on agene-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.
There are multiple methods of studying genetic variation and biological function, including sequencing, SNP genotyping, and gene expression profiling, each of which is uniquely addressed in our breadth of products and services. Our broad portfolio of current products and services supports a range of applications, from highest multiplexing (for whole-genome discovery and profiling) to mid-and low-multiplexing options (for high-throughput targeted screening). Furthermore, our products and services support both the upstream discovery process and the downstream test development process in order to understand genetic variation at the DNA, RNA, and protein levels.
Sequencing
DNA sequencing is the process of determining the order of nucleotide 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 sample from a species never before sequenced. Understanding the similarities and differences in DNA sequence between many species can help our understanding of the function of the protein structures encoded in the DNA.
In re-sequencing, the sequence of nucleotide bases is compared to a standard or reference sequence from a given species to identify changes that reflect genetic variation. Re-sequencing studies can be performed on a genome-wide basis, which is referred to as whole-genome re-sequencing, or on targeted areas of the genome (for example, regions identified by genome-wide association studies), which is known as targeted re-sequencing. This is an extremely comprehensive form of genetic analysis, in which every base is characterized for possible mutations. We believe that these underlying discoveries will likely feed the development of new array products for broader testing and biomarker validation.
In tag sequencing, short sequences, often 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 or more tag sequences may be analyzed for each expressed gene, and the number of copies of these tags that are detected in an experiment is a measure of how actively that gene is being expressed in the tissue sample being analyzed. Similarly, a tag sequencing approach known as ChIP sequencing is used to determine the locations and extent of protein and DNA interactions throughout the genome.
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SNP Genotyping
SNP genotyping is the process of determining which nucleotide base (A, C, G, or T) is present at a particular site in the genome within any organism. The most common use of SNP genotyping is for genome-wide association studies (GWAS) to look for an individualassociation between DNA sequence variants and a specific phenotype of interest. This is commonly done by studying the DNA of individuals that are affected by a common disease or other organism.that exhibit a specific trait against the DNA of control individuals who do not have this disease or trait. 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 trialstudy could involve genotyping 300,000more than 1,000,000 SNPs per patientsample in more than 1,000 patients,samples, thus requiring 300 millionone billion 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-basedgenomics based drug development, clinical trial analysis (responders and non-responders, and adverse event profiles), 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 commercially desirable commercial characteristics. These markets will require billions of SNP genotyping assays annually.
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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.
SequencingMolecular Diagnostics
DNA sequencingMolecular diagnostics is the process of determiningexamining nucleic acids, including DNA and RNA, and protein biomarkers to detect or identify infectious diseases, genetic diseases and disorders, human cancers, and to help understandsubject-to-subject, gene-based variation in the orderefficacy or safety of bases (A, C, G or T) in a DNA sample, whichdrug substances (pharmacogenics). As knowledge of the genome and its function continues to expand, new medical and diagnostic applications are being developed. Molecular diagnostic tests 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 differencesused as diagnostic tools as well as in DNA sequence between many speciesgenetic disease susceptibility testing. Molecular diagnostic tests 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 subsequentlyalso be used to characterizeidentify a disease, monitor its progression and response to treatment, or predict individual predisposition to a disease and individual response to treatment. By identifying small, individual genetic differences — or variants — that lie at the former, but re-sequencing isroot of differing drug responses, molecular diagnostic tests can be used to assay the latter. With the merger of Illuminaselect appropriate medication and Solexa, we will havestate-of-the-art technologies for both.dosage.
In tag sequencing, short sequences, each representativeOur Principal Markets
From our inception, we have believed that the analysis of a larger molecule or genomic location, are detectedgenetic variation and counted. In these applications, the number of timesfunction will play an increasingly important role in molecular biology and 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,by empowering genetic analysis, our tools will further disease research, drug development, and the numberdevelopment 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.molecular tests. Our customers include leading genomic research centers, academic institutions, clinical research organizations, and pharmaceutical
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and biotechnology companies. In addition, fundamental developments in recent years have created significant new opportunities for us in the emerging market of molecular diagnostics.
Life Sciences Research Market
The life sciences research market consists of laboratories generally associated with universities, medical research centers, government institutions such as the United States National Institutes of Health, and other research institutions as well as biotechnology and pharmaceutical companies. Researchers at these institutions are using our products and services in a broad spectrum of scientific activities, such as: next-generation sequencing,mid-to-high-complexity genotyping and gene expression (for whole-genome discovery and profiling), and low complexity genotyping and gene expression (for high-throughput targeted screening). Next-generation sequencing is the most rapidly growing of these three areas. It is fueled by private and public funding, new global initiatives to broadly characterize genetic variation, and the migration of legacy genetic applications to sequencing based technologies.
Applied Markets
We provide products and services to enable or improve activities in particular markets, which we refer to as applied markets. A current focus of our products for these markets is in the area of agricultural research, including microarrays that contain SNPs for custom and focused genotyping of seeds and crops (such as maize) and livestock (such as cattle, horses, pigs, and sheep). The applied markets may also include opportunities for our products and services in the fields of forensic analysis, veterinary diagnostics, cytogenics, retail pet genomics, and consumer genotyping and sequencing. In July 2009, we launched a service program to provide high-quality personal genome sequencing for consumers. In connection with our personal sequencing service, we collaborate with a number of partners, including 23andMe, Inc.; deCODE genetics ehf; Knome, Inc.; National Center for Genome Resources; Navigenics, Inc.; and Pathway Genomics, to encourage secondary data analysis of a personal genome, such as calculation of disease risk, ancestry, and information on traits of interest. Although we do not perform personal genotyping directly as a service, several companies use our technology and products to provide personal genotyping services.
Molecular Diagnostics Market
The primary growth drivers in the molecular diagnostics market are the continued discovery of genetic markers with proven clinical utility, the increasing adoption of genetic based diagnostic tests, and the expansion of reimbursement programs to include a greater number of approved diagnostic tests. We believe that molecular diagnostic tests will create a fundamental shift in both the practice of medicine and the economics of the pharmaceutical industry by creating an increased emphasis on preventative and predictive molecular medicine. Physicians will be able to use these tests for the early detection of disease and to treat patients on a personalized basis, allowing them to select the most effective therapy with the fewest side effects. We believe our BeadXpress instrument platform, using our VeraCode technology, is ideally suited to provide a cost-effective, high-throughput, mid- to low-multiplex solution to the molecular diagnostic market. During the third quarter of 2009, we submitted our BeadXpress instrument platform for review by the U.S. Food and Drug Administration (FDA). Assuming FDA approval of this instrument platform, we plan to develop clinical diagnostic testing panels for use on the BeadXpress instrument platform, including possible panels for multi-drug resistant organisms, herpes, and respiratory viruses, and we expect to continue research into the potential development of cancer diagnostic panels, initially focusing on ovarian cancer and gastric cancer. In addition, during the fourth quarter of 2009 we made a pre-IDE (investigational device exemption) submission with the FDA for a cytogenetics test intended to be used as an aid in the postnatal diagnosis of chromosomal abnormalities known to be associated with developmental delay and mental retardation. The pre-IDE package included our iScan instrument platform together with associated microarrays, reagents, and software. Following completion of the IDE process, we intend to seek FDA clearance for the iScan instrument platform and related reagents.
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Our Principal Technologies
Sequencing Technology
Our DNA sequencing technology is based on the use of our proprietary 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 that 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 that is added includes a fluorescent label that is specific to the particular base (A, C, G, or T). 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 blocking group that had prevented further extension of the second strand. This allows another base to be added, and the cycle can then be repeated. Our technology is capable of generating over 100 billion bases of DNA sequence from a single experiment with a single sample preparation. The reversible terminator bases that we use are novel synthetic molecules that we manufacture. They are not well incorporated by naturally occurring polymerases, so we have also developed proprietary polymerase enzymes for this purpose. Both the nucleotides and enzymes are the subject of significant intellectual property owned by us.
In our DNA sequencing systems, we apply the SBS biochemistry on microscopic islands of DNA, referred to as DNA clusters. Each cluster starts as a single DNA molecule fragment, 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 approximately 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, hundreds 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 fluorescent imaging. Sequence reads are aligned against a reference genome and genetic differences are called using specially developed data analysis software.
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 providessimultaneously, enabling large-scale analysis of genetic variation and biological function in a unique combination of high throughput,high-throughput, cost effectiveness,effective, and flexibility.flexible manner. We achieve high throughputhigh-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 enablehave allowed us to becomebe a key player in the gene expression market.
Our proprietary BeadArray technology combines microwells etched into a substrate and specially preparedconsists of 2-micron silica beads that self-assemble into microwells etched into an array.array substrate. We have deployed our BeadArray technology in two different array formats, the Array Matrix and the BeadChip. Our first bead-basedbead 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, andwith 96 of these bundles are placed into an aluminum plate which formsto form an Array Matrix. In late 2009, we announced that during 2010 we would no longer sell Array Matrix products and would instead deploy our BeadArray technology only on BeadChips. BeadChips are fabricated in microscope slide-shaped sizesslide-size silicon wafers with varying numbers of sample sites per slide. Both formatsBeadChips are chemically etched to create tens to hundreds of thousandsmillions of wells for each sample site.
In a separate process, we create sensors by affixing hundreds of thousands of copies of a specific type of oligonucleotide molecule to each of the billions of microscopic beads in a batch. We make different batches of
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beads, with the beads in a given batch coated with one particular type of molecule. The particular molecules on a bead define that bead’s 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’“decoding” in order to determine which bead type occupies which well in the array. We employ several proprietary methods for decoding, which is 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 functional 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.
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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. Thesebeads. The 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 dyebinding, which can be detected 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- tolow-multiplex range. To address this market, we acquired theOur proprietary VeraCode technology through our acquisitionplatform leverages the power of CyVera Corporation in April 2005. Based on digitally encoded microbeads,digital holographic codes to provide a robust detection method for multiplex assays requiring high precision, accuracy, and speed. VeraCode enables low-cost multiplexing from 1 to 384-plex in a single well. We plan to implementAt the heart of the VeraCode technology using our newly designedare cylindrical glass beads measuring 240 microns in length by 28 microns in diameter. Each VeraCode bead type is inscribed with a unique digital holographic code to designate and track the specific analyte or genotype of interest throughout the multiplex reaction. When excited by a laser, each VeraCode bead emits a unique code image, allowing for quick and specific detection by Illumina’s BeadXpress system and our existing assays. We believe that this system will enable lowerReader System. Depending on desired multiplex genotyping, gene expression and protein based assays. Inlevels, assays are created by pooling microbeads with code diversities from one to several hundred. Unlike traditional microarrays, 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 machinesmicrobeads are computer controlled and utilize many robotic processes to minimize the amount of labor used in solution, which takes advantage of solution-phase kinetics for more rapid hybridization times, dramatically reducing the manufacturing process. In 2005, we implemented our fourth-generation Oligatortime to achieve results. This 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 enableenables 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.
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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 oursequencing-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. Afterserve 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 biochemistrymarkets including research, agriculture, forensics, pharmaceuticals, 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.
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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 tomolecular 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 StrategyProducts
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. |
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 standard96-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 usingUsing our proprietary BeadArray technology since 2001. In addition, we have developedtechnologies, 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.
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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,give 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 genotypingand/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 adifficult-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 regionsanalyze the genome at any level of the human genome. Also, in the fourth quarter of 2005, we began shipping the new Sentrix HumanHap300 Genotyping BeadChipcomplexity from whole genome sequencing to customers around the world. Using the Infinium assay, whichlow multiplex assays. This enables us to select virtually any SNP inserve a number of markets, including research, agriculture, forensics, pharmaceuticals, and molecular diagnostics. The majority of our product sales consist of instruments and consumables based on these various technologies. For the genome, the HumanHap300 BeadChip allows analysisfiscal years ended January 3, 2010, December 28, 2008, and December 30, 2007, instrument sales comprised 34%, 32%, and 33%, respectively, of more than 317,000 SNPs. We selected the SNPs for inclusion on the chip in collaboration with a consortiumtotal revenues, and consumable sales represented 59%, 58%, and 53%, respectively, of scientists that are leaders in the genotyping field. We believe this product’s 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.total revenues.
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,Our major products, 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. TheHumanHap300-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. |
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 inexpect to be available for shipment during the first quarter of 2006, including mouse linkage and cancer panels.2010, include the following:
Gene Expression ProfilingInstrumentation Platforms
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| Product | | | Product Description | | | Applications | | | Launch Date |
| HiSeq 2000 | | | Instrument for high-throughput (up to 200 Gb per run and up to 25 GB per day) sequencing using our SBS sequencing technology | | | DNA sequencing, gene regulation analysis, sequencing-based transcriptome analysis, SNP discovery and structural variation analysis, cytogenetic analysis, DNA-protein interaction analysis (ChIP-seq), sequencing-based methylation analysis, and small RNA discovery and analysis | | | Q1 2010 |
| Genome Analyzer IIx | | | Instrument for medium to high-throughput (up to 95 Gb per run) sequencing using our SBS sequencing technology | | | DNA sequencing, gene regulation analysis, sequencing-based transcriptome analysis, SNP discovery and structural variation analysis, cytogenetic analysis, DNA-protein interaction analysis (ChIP-seq), sequencing-based methylation analysis, and small RNA discovery and analysis | | | Q2 2009 |
| Genome Analyzer IIe | | | Instrument for low to medium throughput (up to 40 Gb per run) sequencing using our SBS sequencing technology | | | DNA sequencing, gene regulation analysis, sequencing-based transcriptome analysis, SNP discovery and structural variation analysis, cytogenetic analysis, DNA-protein interaction analysis (ChIP-seq), sequencing-based methylation analysis, and small RNA discovery and analysis | | | Q1 2010 |
| iScan System | | | High-resolution imaging instrument to rapidly scan our BeadArray based assays | | | SNP genotyping and CNV analysis, custom genotyping, cytogenetic analysis, focused genotyping, linkage analysis, whole-genome genotyping and copy number analysis, gene regulation and epigenetic analysis, array-based methylation analysis, gene expression analysis, array-based transcriptome analysis, FFPE sample analysis, and whole-genome gene expression analysis | | | Q1 2008 |
| BeadXpress Reader | | | Low- to mid-multiplex, high-throughput instrument for readout of assays (e.g., biomarker validation and development of molecular diagnostics) deployed on VeraCode bead technology | | | Custom low- to mid-plex genotyping, custom low- to mid-plex methylation analysis, SNP screening, and protein screening | | | Q1 2007 |
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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.
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Scanning InstrumentationConsumables
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| Product | | | Product Description | | | Applications | | | Launch Date |
| InfiniumHD Whole-Genome BeadChips | | | Multi-sample DNA Analysis microarrays that interrogate up to 1.2 million markers per sample, depending on the BeadChip. Product line includes the following BeadChips with human and agriculturally relevant genome panels: HumanOmniExpress, HumanOmni1-Quad, Human1M-Duo, and BovineHD | | | Array based whole-genome genotyping | | | Q1 2008 through Q1 2010 |
| iSelect Custom Genotyping BeadChips | | | Customer designable SNP genotyping arrays for 3,000 to 200,000 markers for use with any species | | | Array based custom genotyping | | | Q2 2006 through Q1 2010 |
| GoldenGate Assay Method | | | High throughput assay and genotyping system | | | High throughput, array based genotyping | | | Q3 2009 |
| GoldenGate Universal-32 Sample BeadChip | | | 32 sample GoldenGate genotyping arrays | | | Array based genotyping | | | Q4 2008 |
| Paired-End Genomic DNA Sample Prep Kit | | | Streamlined library preparation kit to generate 200 — 500 kb insert paired-end reads | | | Whole-genome sequencing, targeted sequencing, gene expression discovery and profiling, and epigenomics analysis | | | Q2 2008 |
| VeraCode GoldenGate | | | Flexible low plex GoldenGate genotyping arrays compatible with the BeadXpress System | | | High throughput, array based genotyping | | | FY 2007 |
| Standard Sequencing Kit | | | Reagents used for SBS chemistry on our sequencing platforms | | | Whole-genome sequencing, targeted sequencing, gene expression discovery and profiling, and epigenomics analysis | | | Q1 2007 |
| Infinium Assay Kit | | | Reagents used to perform Infinium assays on the iScan platform | | | Array-based genotyping | | | Q1 2008 through Q1 2010 |
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The BeadArray Reader, an instrument we developed, is a key component of both our
production-scaleOur Services 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 SynthesisSequencing
We have putbeen offering sequencing services since 2007. Our services range from small sets of samples requiring as little as one run to finish, to large-scale projects, like whole-genome sequencing, necessitating multiple instruments running in place astate-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 componentsparallel for extended periods of the reagent kits for our BeadArray products and are used for assay development. We manufacture oligos in a wide rangetime. The breadth 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-andtube-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.applications offered
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includes novel custom products as well as all released products. These applications include but are not limited to human whole exome and custom targeted re-sequencing, de novo sequencing, small RNA discovery and profiling, gene expression using random primed RNA sampling technology, ChIP SEQ, and methylome interrogation.
deCODE geneticsGenotyping
In May 2006, we executedWe have been offering genotyping services since 2002. Our genotyping services offer all of our genotyping products, including standard and custom GoldenGate, standard Infinium and Infinium HD, as well as iSelect Infinium. Our projects range in size from a Joint Developmentfew hundred samples to over 10,000 samples. Our customer base includes academic institutions, and Licensing Agreement (the Development Agreement) with deCODE genetics, ehf. (deCODE). Pursuant to the Development Agreement, the parties agreed to collaborate exclusively to develop, validatebiotech 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.pharmaceutical companies.
Intellectual Property
We have an extensive patentintellectual property portfolio, including, as of February 1, 2007,2010, ownership of, or exclusive licenses to, 106159 issued U.S. patents and 149171 pending U.S. patent applications, including fiveeight 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.patents. Our issued patents which areinclude those directed atto various aspects of our array, assay,arrays, assays, oligo synthesis, instrumentsequencing technology, instruments, and chemical detection technologies, and have terms that expire between 20112010 and 2024.2027. We are seekingcontinue to extend the patents directed atfile new patent applications to protect the full range of our technologies. We have receivedfiled or filedhave been granted 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 trade secrets, to enforce our patents, copyrights and trade secrets,trademarks, 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 and other arrangements with third parties whichthat 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 atto our use of BeadArray technology. These patents were filed by Dr. David Walt, who is 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 fromlicense agreements with various third parties for other components of our products. In allmost 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 sequencing, BeadArray, VeraCode, and Oligatoroligo synthesis 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.
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Our research and development expenses for 2006, 20052009, 2008, and 2004 (inclusive of charges relating to stock-based compensation of $3.92007 were $140.6 million, $0.1$100.0 million, and $0.3 million, respectively) were $33.4 million, $27.8 million and $21.5$73.9 million, respectively. Compared to 2006, weWe expect research and development expense to increase in absolute dollars and as a percentage of overall revenue during 20072010 as we continue to expand our research and product development efforts, including research and development projects associated with our acquisition of Solexa.efforts.
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
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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 ultimately 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. |
We market and distribute our products directly to customers in North America, major European markets, JapanEurope, and Singapore.the Asia-Pacific region. In each of these areas, we have dedicated sales, service, and application support personnel responsible for expanding and managing their respective customer bases. In smalleraddition, in certain markets inwithin Europe, the Pacific Rim countriesAsia-Pacific region, the Middle East, and Europe,South Africa we sell our products and provide services to customers through distributors that specialize in life science products. We expect to significantlycontinue to increase our sales and distribution resources during 20072010 and beyond as we launch a number of new products and expand the number of customers that can use our products.
Manufacturing
We manufacture oursequencing and array instrument platforms, reagent kits, scanning equipment, and oligos in-house.oligos. Our manufacturing capacity for BeadChipsconsumables and instruments has grown during 2009 to support our 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.customer demand. We are also focused on continuing to enhance the quality and manufacturing yield of our Array MatricesBeadChips and BeadChipsflow cells. To continue to increase throughput and improve the quality and manufacturing yield as we increase the complexity of our products, we 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.
Raw Materials
Our manufacturing operations require a wide variety of raw materials, electronic and mechanical components, chemical and biochemical materials, and other supplies. We intend to add capacity to manufacture Array Matrices and BeadChips throughout 2007. We currently depend upon outside suppliershave multiple commercial sources for materials used in the manufacturemany of our products. We intendcomponents and supplies; however, there are some raw materials we obtain from single source suppliers. To mitigate potential risks arising from single source suppliers, we believe that we can redesign our products for alternative components or use alternative reagents. In addition, while we generally attempt to continue, and may extend, the outsourcing of portions ofkeep our manufacturing processinventory at minimal levels, we purchase incremental inventory as circumstances warrant to subcontractors where we determine it is inprotect our best commercial interests.supply chain.
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Competition
Although we expect that our BeadArray products and services will provide significant advantages over currently available products and services currently available from other sources, we expect to encounter intense competition from other companies that offer products and services for the sequencing, SNP genotyping, gene expression, and sequencingmolecular diagnostics markets. These include companies such as Affymetrix, Inc.; Agilent Amersham Biosciences (acquired by GE Corp. and now named GE Healthcare), Applera Corporation, Applied Biosystems,Technologies, Inc.; Beckman Coulter, CaliperInc.; Complete Genomics, Inc.; General Electric Company; Helicos BioSciences Corporation; Life Technologies Corporation; Luminex MonogramCorporation; Pacific Biosciences, NimbleGen, Perlegen Sciences,Inc.; Roche Diagnostics in partnership with 454 Life Sciences,Corp.; Sequenom, Inc.; and Third Wave Technologies.Qiagen N.V. 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 largelarger 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.increase. In
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order to effectively compete with these companies, we will need to demonstrate that our products have superior throughput, cost, and accuracy advantages over the existingcompeting 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 operateDuring the first quarter of 2008, we reorganized our operating structure into two newly created business segments, Life Sciences and Diagnostics. Our Life Sciences Business Unit includes all products and services that are primarily related to the research market, namely the product lines based on our sequencing, BeadArray, and VeraCode technologies, and our Diagnostics Business Unit focuses on the emerging opportunity in one business segment, formolecular diagnostics. During 2009, we had limited activity related to the development, manufactureDiagnostics Business Unit and commercialization of tools for genetic analysis. Our operations are treated as one segment as we only report operating results were reported on an aggregate basis to our chief operating decision maker, our Chief Executive Officer.the chief executive officer. Accordingly, we operated in one reportable segment during 2009.
During 2006, $81.5 million, or 44%,We currently sell our products to a number of our total revenue came from shipmentscustomers outside the United States, including customers in other areas of North America, Europe, and the Asia-Pacific region. Shipments to customers outside the United States totaled $319.1 million, or 48% of our total revenue, during 2009, compared to $28.0$293.2 million, or 38%51%, and $159.1 million, or 43%, in 2005.2008 and 2007, respectively. Sales to territoriescustomers outside of the United States arewere generally denominated in U.S. dollars. In 2008, we reorganized our international structure to establish more efficient channels among product development, product manufacturing, and sales. The reorganization increased our foreign subsidiaries’ anticipated dependence on the U.S. entity for management decisions, financial support, production assets, and inventory thereby making the foreign subsidiaries more of a direct and integral component of the U.S. entity’s operations. As a result, we reassessed the primary economic environment of our foreign subsidiaries and determined the subsidiaries are more U.S. dollar based, resulting in a U.S. dollar functional currency determination. We expect that sales to international customers will continue to be an important and growing source of revenue. See Note 13 of the Notes to Consolidated Financial Statements for further information concerning our foreign and domestic operations.
Backlog
Our backlog was $227.6 million and $113.0 million at January 3, 2010 and December 28, 2008, respectively. Generally, our backlog consists of orders believed to be firm as of the balance sheet date; however, we may allow customers to make product substitutions as we launch new products. The timing of shipments depends on several factors including, agreed upon shipping schedules, which may span multiple quarters, and whether the product is catalog or custom. We have sales support resourcesreasonably expect an estimated 90% of the backlog as of January 3, 2010 to be shipped within the fiscal year ending January 2, 2011. Although we generally recognize revenue at the time of shipment and transfer of title to a customer, we may be required to defer the recognition of revenue even after shipment depending on the specific arrangement with a customer and the applicable accounting treatment. A material portion of our backlog at January 3, 2010 is associated with a large order we received from one customer for which we anticipate using operating lease accounting that will require us to recognize revenue over a period of three years with the majority of that revenue recognized in Western Europe2011 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.2012.
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 a result, in part, of U.S. academic customers spendspending unused budget allocations before the end of the U.S. government’s fiscal year.
Environmental Matters
We are dedicatedcommitted to the protection of our employees and the environment. Our operations require the use of hazardous materials whichthat subject us to a variety of federal, state, and local environmental and safety laws and regulations. We believe we are in material compliance, in all material respects, with current applicable laws and regulations; however, we could be held liable for damages and fines should contamination
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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.
Government Regulation
Our products are not currently subject to FDA clearance or approval if they are not intended to be used for the diagnosis of disease. However, as we expand our product line to encompass products that are intended to be used for the diagnosis of disease, such as molecular diagnostic products, regulation by governmental authorities in the United States and other countries will be a significant factor in the development, testing, production, and marketing of such products. Products that we develop in the molecular diagnostic markets, depending on their intended use, will be regulated as medical devices by the FDA and comparable agencies of other countries and may require either receiving clearance following a pre-market notification process, also known as a 510(k) clearance, or premarket approval (PMA), from the FDA prior to marketing. Obtaining the requisite regulatory approvals can be expensive and may involve considerable delay.
The shorter 510(k) clearance process, which generally takes from three to six months after submission, but can take significantly longer, may be utilized if it is demonstrated that the new product is “substantially equivalent” to a similar product that has already been cleared by the FDA. The longer PMA process is much more costly, uncertain, and generally takes from nine months to two years after filing. Because we cannot assure you that any molecular diagnostic products that we develop will be subject to the shorter 510(k) clearance process, or will ultimately be approved at all, the regulatory approval process for such products may be significantly delayed and may be significantly more expensive than anticipated. If we fail to obtain, or experience significant delays in obtaining, regulatory approvals for molecular diagnostic products that we develop, we may not be able to launch or successfully commercialize such products in a timely manner, or at all.
Changes to the current regulatory framework, including the imposition of additional or new regulations, could arise at any time during the development or marketing of our products, which may negatively affect our ability to obtain or maintain FDA or comparable regulatory approval of our products, if required.
In addition, the regulatory approval or clearance process required to manufacture, market, and sell our existing and future products that are intended for, and marketed and labeled as, “Research Use Only,” or RUO, is uncertain if such products are used or could be used, even without our consent, for the diagnosis of disease. If the FDA or other regulatory authorities assert that any of our RUO products are subject to regulatory clearance or approval, our business, financial condition, or results of operations could be adversely affected.
Employees
As of December 31, 2006,January 3, 2010, 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.1,781 employees. None of our employees are represented by a labor union. We consider our employee relations to be positive.
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Executive Officers
Our executive officers as of February 1, 2007, are as follows:
| | | | | | |
Name
| | Age
| | Position
|
|
Jay T. Flatley | | | 54 | | | President, Chief Executive Officer and Director |
Christian O. Henry | | | 38 | | | Senior Vice President and Chief Financial Officer |
Christian G. Cabou | | | 58 | | | Senior Vice President, General Counsel and Secretary |
Arthur L. Holden | | | 54 | | | Senior Vice President of Corporate and Market Development |
Tristan B. Orpin | | | 40 | | | Senior Vice President of Commercial Operations |
John R. Stuelpnagel, DVM | | | 49 | | | Co-Founder, Senior Vice President and General Manager, Microarray Business, Chief Operating Officer and Director |
John West | | | 50 | | | Senior Vice President and General Manager of DNA Sequencing |
Jay Flatleyis Presidentsuccess will depend in large part upon our ability to attract 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, inretain employees. In addition, to helping the company develop and launch over 15 major instrumentation systems, including the world’s 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 Henryis 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.
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Christian Cabouis 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 Company’s human resources function. Mr. Cabou is also Illumina’s 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 University’s 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 d’Etat (Armentières, France).
Arthur Holdenis 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 onwe employ a number of commercialtemporary and non-profit boards. He is chairman of the Pharmaceutical Biomedical Researchcontract employees. We face competition in this regard from other companies, 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 iBIOacademic institutions, government entities, and the Illinois Technology Development Alliance. Mr. Holden earned a master of business administration degree from Northwestern University’s Kellogg School of Management (Chicago, IL) and a bachelor of science degree from Union College (Schenectady, NY).other organizations.
Tristan Orpinjoined 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 Illumina’s co-founders, is General Manager for Illumina’s Microarray business and Chief Operating Officer. He has served as the Company’s 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.
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John Westis Senior Vice President and General Manager for Illumina’s 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 company’s 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 AB’s 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. West’s 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.
| |
| ITEM 1A. | Risk Factors.Factors |
Our business is subject to various risks, including those described below. In addition to the other information included in thisForm 10-K, the following issues could adversely affect our operating results or our stock price.
We face intense competition, which could render our products obsolete, result in significant price reductions, or substantially limit the volume of products that we sell.
We compete with life sciences companies that design, manufacture, and market products for analysis of genetic variation and biological function and other applications using a wide-range of competing technologies. We anticipate that we will continue to face increased competition as existing companies develop new or
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improved products and as new companies enter the market with new technologies. 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 also develop competing products. We believe that customers in our markets display a significant amount of loyalty to their initial supplier of a particular product; therefore, it may be difficult to generate sales to potential customers who have purchased products from competitors. To the extent we are unable to be the first to develop or supply new products, our competitive position may suffer.
The market for molecular diagnostics products is currently limited and highly competitive, with several large companies already having significant market share, intellectual property portfolios, and regulatory expertise. Established diagnostic companies also have an installed base of instruments in several markets, including clinical and reference laboratories, which could deter acceptance of our products. In addition, some of these companies have formed alliances with genomics companies that provide them access to genetic information that may be incorporated into their diagnostic tests.
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, agricultural, and pharmaceutical industries. The usefulness of our technologies depends in part upon the availability of genetic data and its usefulness in identifying or treating disease. We are focusing on markets for analysis of genetic variation and biological function, namely sequencing, genotyping, and gene expression profiling. 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. For instance, demand for our microarray products may be adversely affected if researchers fail to find meaningful correlations between genetic variation, such as SNPs, and disease susceptibility through genome wide association studies. 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 sustain profitability.
If the quality of our products does not meet our customers’ expectations, then our sales and operating earnings, and ultimately our reputation, could be negatively impacted.
In the course of conducting our business, we must adequately address quality issues associated with our products and services, including defects in our engineering, design, and manufacturing processes, as well as defects in third-party components included in our products. Because our instruments and reagents are highly complex, the occurrence of defects may increase as we continue to introduce new products and services. Although we have established internal procedures to minimize risks that may arise from product quality issues, there can be no assurance that we will be able to eliminate or mitigate occurrences of these issues and associated liabilities. In addition, identifying the root cause of quality issues, particularly those affecting reagents, may be difficult, which increases the time needed to address quality issues as they arise and increases the risk that similar problems could recur. Finding solutions to quality issues can be expensive and we may incur significant costs or lost revenue in connection with, for example, shipment holds, product recalls, and warranty or other service obligations. In addition, quality issues can impair our relationships with new or existing customers and adversely affect our brand image, and our reputation as a producer of high quality products could suffer, which could adversely affect our business as well as our financial results.
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If we do not successfully manage the development and launch of new products or services, including product transitions, our financial results could be adversely affected.
We face risks associated with launching new products and pre-announcing products and services when the products or services have not been fully developed or tested. If our products and services are not able to deliver the performance or results expected by our target markets or are not delivered on a timely basis, our reputation and credibility may suffer. If we encounter development challenges or discover errors in our products late in our development cycle it may cause us to delay our product launch date. In addition, we may experience difficulty in managing or forecasting customer reactions, purchasing decisions, or transition requirements or programs (such as trade-in programs) with respect to newly launched products (or products in development) relative to our existing products, which could adversely affect sales of our existing products. The expenses or losses associated with unsuccessful product development or launch activities or lack of market acceptance of our new products could adversely affect our business, financial condition, or results of operations.
If we are unable to increase our manufacturing capacity and 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 continue to increase our capacity to meet the anticipated demand for our products. Although we have significantly increased our manufacturing capacity and we believe we have plans in place sufficient to ensure we have adequate capacity to meet our business plan for 2010, there are uncertainties inherent in expanding our manufacturing capabilities and we may not be able to sufficiently increase our capacity in a timely manner. For example, manufacturing and product quality issues may arise as we increase production rates at our manufacturing facilities and launch new products. Also, we may not manufacture the right product mix to meet customer demand, especially as we introduce 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 and quality control issues that have temporarily reduced or suspended production of certain products. 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.
Additionally, we currently manufacture in a limited number of locations. Our manufacturing facilities are located in San Diego and Hayward, California; Singapore; and Little Chesterford, United Kingdom. These areas are subject to natural disasters such as earthquakes, wildfires, or floods. If a natural disaster were to damage one of our facilities significantly or if other events were to cause our operations to fail, we may be unable to manufacture our products, provide our services or develop new products.
Also, many of our manufacturing processes are automated and are controlled by our custom-designed Laboratory Information Management System (LIMS). Additionally, the decoding process in our array manufacturing 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 may adversely impact our ability to manufacture our products on a timely basis and could prevent us from achieving our expected shipments in any given period.
Our acquisitions expose us to risks that could adversely affect our business, and we may not achieve the anticipated benefits of acquisitions of businesses or technologies.
As part of our strategy to develop and identify new products, services, and technologies, we have made, and may continue to make, acquisitions of technologies, products, or businesses. Acquisitions involve
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numerous risks and operational, financial, and managerial challenges, including the following, any of which could adversely affect our business, financial condition, or results of operations:
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| • | difficulties in integrating new operations, technologies, products, and personnel; |
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| • | lack of synergies or the inability to realize expected synergies and cost-savings; |
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| • | difficulties in managing geographically dispersed operations; |
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| • | underperformance of any acquired technology, product, or business relative to our expectations and the price we paid; |
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| • | negative near-term impacts on financial results after an acquisition, including acquisition-related earnings charges; |
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| • | the potential loss of key employees, customers, and strategic partners of acquired companies; |
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| • | claims by terminated employees and shareholders of acquired companies or other third parties related to the transaction; |
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| • | the issuance of dilutive securities, assumption or incurrence of additional debt obligations or expenses, or use of substantial portions of our cash; |
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| • | diversion of management’s attention and company resources from existing operations of the business; |
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| • | inconsistencies in standards, controls, procedures, and policies; |
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| • | the impairment of intangible assets as a result of technological advancements, orworse-than-expected performance of acquired companies; and |
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| • | assumption of, or exposure to, unknown contingent liabilities or liabilities that are difficult to identify or accurately quantify. |
In addition, the successful integration of acquired businesses requires significant efforts and expense across all operational areas, including sales and marketing, research and development, manufacturing, finance, legal, and information technologies. We cannot assure you that any of the acquisitions we make will be successful or will be, or will remain, profitable. Our failure to successfully address the above risks may prevent us from achieving the anticipated benefits from any acquisition in a reasonable time frame, or at all.
The timing and extent of funding provided by the American Recovery and Reinvestment Act of 2009 (the Recovery Act) could adversely affect our business, financial condition, or results of operations.
The Recovery Act was enacted in February 2009 to provide stimulus to the U.S. economy in the wake of the economic downturn. As part of the Recovery Act legislation, over $10 billion in funding was provided to the National Institute of Health through September 2010 to support the advancement of scientific research. A portion of the stimulus funding may support the analysis of genetic variation and biological function and have a significant positive impact on our business. In the short-term, however, our customers may delay or reduce their purchases of our products as they wait to learn whether, and to what extent, they will receive stimulus funding. If our customers are unable to obtain stimulus money they may reduce their research and development budgets resulting in a decrease in demand for our products. In addition, it is unclear what will happen to demand for our products after the stimulus funds from the Recovery Act have been allocated and spent. A decline in demand will reduce our revenues, which would adversely affect our business, financial condition, or results of operations.
Unfavorable global economic conditions could adversely affect our business, financial condition, or results of operations.
Our results of operations could be adversely affected by general conditions in the global economy and in the global financial markets. The recent global financial crisis caused extreme volatility and disruptions in the capital and credit markets. A severe or prolonged economic downturn, such as the recent global financial
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crisis, could result in a variety of risks to our business, including, in particular, reductions or delays in planned improvements to healthcare systems, research and development funding, and purchases of our products and services, or cost-containment efforts by governments and private organizations that could adversely affect our business, financial condition, or results of operations. In addition, the liquidity of our investment portfolio could be impaired such as when more than $50 million of auction rate securities that we held for investment became illiquid in February 2008 because their scheduled auctions failed. Furthermore, as is the case for almost any other business, we face the following risks from a severe or prolonged economic downturn:
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| • | severely limited access to financing over an extended period of time, which may limit our ability to fund our growth strategy, could result in a need to delay capital expenditures, acquisitions, or research and development projects; |
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| • | losses from our investment portfolio or to a counterparty’s inability to fulfill its payment obligations; |
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| • | inability to refinance existing debt at competitive rates, reasonable terms, or sufficient amounts; and |
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| • | increased volatility or adverse movements in foreign currency exchange rates. |
In addition, certain of our customers may face challenges gaining timely access to sufficient credit, which could result in an impairment of their ability to make timely payments to us. If that were to occur, our allowance for doubtful accounts and our days sales outstanding could increase. Additionally, these economic conditions may cause our smaller suppliers to be unable to supply in a timely manner sufficient quantities of customized components, which would impair our ability to manufacture on schedule and at commercially reasonable costs. Suppliers may also extend lead times, limit supplies, or increase prices due to capacity constraints or other factors.
Our continued growth is dependent on continuously developing and commercializing new products.
Our target markets are characterized by rapid technological change, evolving industry standards, changes in customer needs, existing and emerging competition, strong price competition, and frequent new product introductions. Accordingly, our continued growth depends on continuously developing and commercializing new products and services, including improving our existing products and services, in order to address evolving market requirements on a timely basis. If we fail to innovate or adequately invest in new technologies, our products and services will become dated and we could lose our competitive position in the markets that we serve as customers purchase new products offered by our competitors. We believe that successfully introducing new products and technologies in our target markets on a timely basis provides a significant competitive advantage because customers make an investment of time in selecting and learning to use a new product and may be reluctant to switch once that selection is made.
To the extent that we fail to introduce new and innovative products, or such products are not accepted in the market or suffer significant delays in development, we may lose market share to our competitors, which will be difficult or impossible to regain. An inability, for technological or other reasons, to successfully develop and introduce new products could reduce our growth rate or otherwise have an adverse effect on our business. In the past, we have experienced, and are likely to experience in the future, delays in the development and introduction of new products. We cannot assure you that we will keep pace with the rapid rate of change in our markets or that our new products will adequately meet the requirements of the marketplace, achieve market acceptance, or compete successfully with competing technologies. Some of the factors affecting market acceptance of new products and services include:
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| • | availability, quality, and price relative to competing products and services; |
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| • | the functionality of new and existing products and services; |
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| • | the timing of introduction of the new product or service relative to competing products and services; |
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| • | scientists’ and customers’ opinions of the utility of the new product or service; |
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| • | citation of the new product or service in published research; |
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| • | regulatory trends and approvals; and |
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| • | general trends in life sciences research and applied markets. |
We depend on third-party manufacturers and suppliers for components and materials used in our products, and if shipments from these manufacturers or suppliers are delayed or interrupted, or if the quality of the components or materials supplied do not meet our requirements, we may not be able to launch, manufacture, or ship our products in a timely manner, or at all.
The nature of our products requires customized components and materials that currently are available from a limited number of sources, and, in the case of some components and materials, from only a single source. If deliveries from these vendors are delayed or interrupted for any reason, or if we are otherwise unable to secure a sufficient supply, we may not be able to obtain these components or materials timely or in sufficient quantities or qualities, or at all, in order 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, in 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. In addition, the manufacture or shipment of our products may be delayed or interrupted if the quality of the components or materials supplied by our vendors does not meet our requirements. Any delay or interruption to our manufacturing process or in shipping our products could result in lost revenue, which would adversely affect our business, financial condition, or results of operations.
An inability to manage our growth or the expansion of our operations could adversely affect our business, financial condition, or results of operations.
Our business has grown rapidly, with total revenues increasing from $73.5 million for the year ended January 1, 2006 to $666.3 million for the year ended January 3, 2010 and with the number of employees increasing from 375 to 1,781 during the same period. We expect to continue to experience rapid and substantial growth in order to achieve our operating plans. The rapid expansion of our business and addition of new personnel may place a strain on our management and operational systems. Our ability to effectively manage our operations and growth 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 on a global basis. 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. Our future operating results will depend on the ability of our management to continue to implement and improve our research, product development, manufacturing, sales and marketing, and customer support programs, enhance our operational and financial control systems, expand, train, and manage our employee base, integrate acquired businesses, and effectively address new issues related to our growth as they arise. There can be no assurance that we will be able to manage our recent or any future expansion or acquisition successfully, and any inability to do so could adversely affect our business, financial condition, or results of operations.
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. The loss of their services could adversely impact our ability to achieve our business objectives. In addition, 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 and San Francisco 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
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products or technologies. Additionally, integration of acquired companies and businesses can be disruptive, causing key employees of the acquired business to leave. Further, we use stock options and restricted stock to provide incentives for our key personnel to remain with us and to align their interests with those of the Company by building long-term stockholder value. If our stock price decreases, the value of these equity awards decreases and therefore reduces a key employee’s incentive to stay.
Doing business internationally creates operational and financial risks for our business.
Conducting and launching operations on an international scale requires close coordination of activities across multiple jurisdictions and time zones and consumes significant management resources. If we fail to coordinate and manage these activities effectively, including the risks noted below, our business, financial condition, or results of operations could be adversely affected. We are focused on expanding our international operations in key markets. We have sales offices located internationally throughout Europe and the Asia-Pacific region, as well as manufacturing facilities in the United Kingdom and Singapore. During 2009, the majority of our sales to international customers and purchases of raw materials from international suppliers were denominated in U.S. dollars. Shipments to customers outside the United States comprised 48%, 51%, and 43% of our total revenue for the years ended January 3, 2010, December 28, 2008, and December 30, 2007, respectively. We intend to continue to expand our international presence by selling to customers located outside of the United States and we expect the total amount ofnon-U.S. sales to continue to grow.
International sales entail a variety of risks, including:
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| • | longer payment cycles and difficulties in collecting accounts receivable outside of the United States; |
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| • | currency exchange fluctuations; |
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| • | challenges in staffing and managing foreign operations; |
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| • | tariffs and other trade barriers; |
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| • | unexpected changes in legislative or regulatory requirements of foreign countries into which we sell 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. |
Changes in the value of the relevant currencies may affect the cost of certain items required in our operations. Changes in currency exchange rates may also affect the relative prices at which we are able sell products in the same market. Our revenues from international customers may be negatively impacted as increases in the U.S. dollar relative to our international customers local currency could make our products more expensive, impacting our ability to compete. Our costs of materials from international suppliers may increase if in order to continue doing business with us they raise their prices as the value of the U.S. dollar decreases relative to their local currency. Foreign policies and actions regarding currency valuation could result in actions by the United States and other countries to offset the effects of such fluctuations. The recent global financial downturn has led to a high level of volatility in foreign currency exchange rates and that level of volatility may continue, which could adversely affect our business, financial condition, or results of operations.
We are subject to risks related to taxation in multiple jurisdictions and the possible loss of the tax deduction on our outstanding convertible notes.
We are subject to income taxes in both the United States and numerous foreign jurisdictions. Significant judgments based on interpretations of existing tax laws or regulations are required in determining the provision for income taxes. Our effective income tax rate could be adversely affected by various factors, including, but not limited to, changes in the mix of earnings in tax jurisdictions with different statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in existing tax laws or tax rates,
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changes in the level of non-deductible expenses (including share-based compensation), changes in our future levels of research and development spending, mergers and acquisitions, or the result of examinations by various tax authorities.
In addition, we could lose some or all of the tax deduction for interest expense associated with our $400 million aggregate principal amount of convertible notes due in 2014 if these notes are not subject to the special Treasury Regulations governing contingent payment debt instruments, the notes are converted, or we invest in non-taxable investments.
Any inability to effectively protect our proprietary technologies could harm our competitive position.
Our success depends to a large extent on our ability to develop proprietary products and technologies and 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 establishing and enforcing their proprietary rights outside of the United States. These challenges can be caused by the absence of rules and methods for the establishment and enforcement of intellectual property rights outside of the United States.
The patent positions of companies developing tools for the life sciences, agricultural, 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. In addition, patent applications in the United States may be maintained in secrecy until patents issue, and publication of discoveries in the scientific or patent literature tend to lag behind actual discoveries by several months. 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 or ownership may also arise. Any finding that our patents or applications are unenforceable could harm our ability to prevent others from practicing the related technology, and a finding that others have inventorship or ownership 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. Furthermore, as issued patents expire, we may lose some competitive advantage as others develop competing products, and, as a result, we may lose revenue.
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 is also the 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 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 secrets and proprietary know-how protection for our confidential and proprietary information, and we have taken security measures to protect this information. These measures, however, may not provide adequate protection for our trade secrets, know-how, 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. There can be no assurance that any confidentiality agreements that we have with our employees, collaborators, and consultants will provide meaningful protection for our trade secrets and confidential information or will provide adequate remedies in the event of unauthorized use or disclosure of such information. Accordingly, there also can be no assurance that our trade secrets will not otherwise become known or be independently developed by competitors.
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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.services.
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 court’s 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.
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parties. Third parties including Affymetrix, have asserted orand may in the future assert that we are employing their proprietary technology without authorization. As we enter new markets, we expect that competitors will likely assertclaim 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. Any adverse ruling or perception of an adverse ruling in defending ourselves against these claims could have an adverse impact on our stock price, which may be disproportionate to the actual import of the ruling itself. Furthermore, parties making claims against us may be able to obtain injunctive or other relief, which effectively could block our ability to develop further, commercialize, andor sell products, and could result in the award of substantial damages against us. In the event of a successful infringement 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. WeIn addition, we may not be ableunable 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 materiallyadversely affect our ability to grow andor maintain profitability.
We expect intense competitionOur products, if used for the diagnosis of disease, could be subject to government regulation, and the regulatory approval and maintenance process for such products may be expensive, time-consuming, and uncertain both in our target markets, which could render our products obsolete, resulttiming and 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.outcome.
Our success will depend in partproducts are not currently subject to FDA clearance or approval if they are not intended to be used for the diagnosis of disease. However, as we expand our product line to encompass products that are intended to be used for the diagnosis of disease, certain of our products are likely to become subject to regulation by the FDA, or comparable agencies of other countries, including requirements for regulatory approval of such products before they can be marketed. Such regulatory approval processes or clearances may be expensive, time-consuming, and uncertain, and our failure to obtain or comply with such approvals and clearances could have an adverse effect on our business, financial condition, or operating results. In addition, changes to the current regulatory framework, including the imposition of additional or new regulations, could arise at any time during the development or marketing of our products, which may negatively affect our ability to obtain patents andor maintain adequate protectionFDA or comparable regulatory approval of our intellectual propertyproducts, if required.
Molecular diagnostic products, in the United States and other countries. If we do not protect our intellectual property adequately, competitorsparticular, depending on their intended use, 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 extentregulated as the laws of the United States, and many companies have encountered significant challenges in protecting their proprietary rights abroad. These challenges can be causedmedical devices by the absenceFDA and comparable agencies of rules and methods for the establishment and enforcement of intellectual property rights abroad.
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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 challengedother countries and may not resultrequire either receiving clearance from the FDA following a pre-market notification process or premarket approval from the FDA, in issued patents or may be invalidated or narrowed in scope after they are issued. Questions aseach case prior 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 thatmarketing. Obtaining 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 wouldrequisite regulatory approvals can 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.
involve considerable delay. If we are unablefail to obtain, or experience significant delays in obtaining, regulatory approvals for molecular diagnostic products that we develop, and maintain operation of our manufacturing capability, we may not be able to launch or support oursuccessfully commercialize such products in a timely manner, or at all.
We currently possess limited facilities capableIn addition, the regulatory approval or clearance process required to manufacture, market, and sell our existing and future products that are intended for, and marketed and labeled as, “Research Use Only,” or RUO, is uncertain if such products are used or could be used, even without our consent, for the diagnosis of manufacturing our principle products and services for both sale to our customers and internal use.disease. If a natural disaster were to significantly damage our facilitythe FDA 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, manyregulatory authorities assert that any of our manufacturing processesRUO products are automated and are controlled bysubject to regulatory clearance or approval, 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.
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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 company’s 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 management’s 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 Solexa’s 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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| • | 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 management’s attention to the merger. |
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 company’s management’s attention, the disruption or interruption of, or the loss of momentum in, each company’s 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.
Solexa’s business faces significant risks. These risks include the fact that Solexa’s 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 Solexa’s Quarterly Report onForm 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, Solexa’s 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 Illumina’s 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.affected.
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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, currentOur operating results may vary significantly from period to period, 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 Solexa’s financial statements into compliance with GAAP. Additionally, this deficiency could have resulted in material misstatement of the annual or interim consolidated financial statements that wouldwe may not be prevented or detected. Accordingly, Solexa’s management determined that this control deficiency constituted a material weakness. Because of this material weakness, Solexa’s 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 priceable to decline.sustain operating profitability.
Our revenue is subject to fluctuations due to the timing of sales of high-value products and services, projects,the effects of new product launches and related promotions, the impact of seasonal spending patterns, the timing and size of research projects our customers perform, the timing of our customers’ funding, 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 experiencequarter-to-quarter fluctuations in revenue resulting in the potential for a sequential decline in quarterly revenue. While we anticipate future growth, there is some uncertainty as to the timing of revenue recognition on a quarterly basis. This is because a substantial portion of our quarterly revenue is typically recognized in the last month of a quarter and because the pattern for revenue generation during that month is normally not linear, with a concentration of orders in the final week of the quarter. In light of that, our revenue cut-off and recognition procedures, together with our manufacturing and shipping operations, may experience increased pressure and demand during the time period shortly before the end of a fiscal quarter.
A large portion of our expenses areis relatively fixed, including expenses for facilities, equipment, and personnel. In addition, we expect operating expenses to continue to increase significantly.significantly in absolute dollars, and 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. Accordingly, our ability to sustain profitability will depend, in part, on the rate of growth, if any, of our revenue and on the level of our expenses, and if revenue does not grow as anticipated, we may not be able to maintain annual or quarterly 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. In addition, non-cash stock-based compensation expense and expenses related to prior and future acquisitions are also likely to continue to adversely affect our future profitability. Due to the possibility of significant fluctuations in our revenue and expenses, particularly from quarter to quarter, 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.
WeFrom time to time, we receive large orders that have a limited history of commercial sales of systems and consumable products, and our success dependssignificant effect on our abilityoperating results in the period in which the order is recognized as revenue. The timing of such orders is difficult to develop commercially successful productspredict, and the timing of revenue recognition from such orders may affect period to period changes in net sales. As a result, our operating results could vary materially from quarter to quarter based on market acceptancethe receipt of such orders and their ultimate recognition as revenue.
Changes in accounting standards and subjective assumptions, estimates, and judgments by management related to complex accounting matters could significantly affect our new and relatively unproven technologies.financial results or financial condition.
We may not possess allGenerally accepted accounting principles and related accounting pronouncements, implementation guidelines, and interpretations with regard to a wide range of the resources, capabilitymatters that are relevant to our business, such as revenue recognition, asset impairment and intellectual property necessary to developfair value determinations, inventories, business combinations and commercialize all the productsintangible asset valuations, and litigation, are highly complex and involve many subjective assumptions, estimates, and judgments. Changes in these rules or services that may result fromtheir interpretation or changes in underlying assumptions, estimates, or judgments could significantly change 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 commercializationreported 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 developexpected financial performance 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.financial condition. In addition, we may needthe timing of large orders can have a significant effect on our business and operating results from quarter to enter into agreementsquarter.
Ethical, legal, and social concerns related to obtain intellectual property necessary to commercialize somethe use of genetic information could reduce demand for our products or services, which may not be availableservices.
Genetic testing has raised ethical, legal, and social issues regarding privacy and the appropriate uses of the resulting information. Governmental authorities could, for social or other purposes, call for limits on favorable terms, or at all.
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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 requirementsregulation of the life sciences and pharmaceutical industries as tools for the large-scale analysisuse 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. |
Our sales, marketing and technical support organizationtesting or prohibit testing for genetic predisposition to certain conditions, particularly for those that have no known cure. Similarly, such concerns may limit our abilitylead individuals to sell our products.
We currently have fewer resources available for sales and marketing and technical support services comparedrefuse to some of our primary competitors. In order to effectively commercialize our sequencing, genotyping and gene expression systemsuse genetics tests even if permissible. These and other products to follow, we will need to expand our sales, marketingethical, legal, and technical support staff both domestically and internationally. Wesocial concerns about genetic testing 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 thelimit market acceptance of our products required to support continued growthtechnology for certain applications or reduce the potential markets for our technology, either 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.
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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 ofnon-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. |
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 materialan adverse effect on our business, financial condition, and operating results.
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Our success depends upon the continued emergence and growthor results of markets for analysis of genetic variation and biological function.operations.
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. | Unresolved Staff Comments. |
None.
The following chart indicates the facilities that we lease as of January 3, 2010, the location and size of each such facility, and their designated use. We anticipate needing to expandbelieve our facilities over the next several yearsare adequate for our current and near-term needs, and that we will be able to locate additional facilities as we continue to expand our worldwide commercial operations and our manufacturing capabilities.needed.
| | | | | | | | | | |
| | Approximate
| | | | Lease
|
Location
| | Square Feet | | Operation
| | Expiration |
|
San Diego, CA | | | 116,000 sq. ft. | | | R&D, Manufacturing, | | | 2023 | |
| | | | | | Administrative | | | | |
| | | 17,300 sq. ft. | | | Administrative | | | 2009 | |
| | | 9,000 sq. ft. | | | Storage and Distribution | | | 2011 | |
Wallingford, CT | | | 14,500 sq. ft. | | | R&D | | | 2008 | |
Netherlands | | | 4,100 sq. ft. | | | Administrative and | | | 2011 | |
| | | | | | Distribution | | | | |
Tokyo, Japan | | | 3,300 sq. ft. | | | Administrative | | | 2009 | |
Singapore | | | 1,600 sq. ft. | | | Administrative | | | 2009 | |
Beijing, China | | | 200 sq. ft. | | | Administrative | | | 2007 | |
| | | | | | | | | | | |
| | | Approximate
| | | | | Lease
| |
Location | | Square Feet | | | Operation | | Expiration Dates | |
| |
| San Diego, CA | | | 272,000 | | | R&D, Manufacturing, Storage, | | | 2012 – 2023 | |
| | | | | | | Distribution and Administrative | | | | |
| Hayward, CA | | | 105,000 | | | R&D, Manufacturing and Administrative | | | 2010 – 2014 | |
| Little Chesterford, United Kingdom | | | 49,000 | | | R&D, Manufacturing and Administrative | | | 2010 – 2024 | |
| Singapore | | | 36,000 | | | Manufacturing and Administrative | | | 2010 – 2013 | |
| Eindhoven, the Netherlands | | | 11,500 | | | Distribution and Administrative | | | 2011 | |
| Tokyo, Japan | | | 6,500 | | | Sales and Administrative | | | 2014 | |
| Melbourne, Australia | | | 4,000 | | | Sales and Administrative | | | 2013 | |
| China | | | 3,000 | | | Sales and Administrative | | | 2010 – 2012 | |
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.
| |
| Item 3. | Legal Proceedings. |
We have incurred substantial costs in defending ourselves against patent infringement claims,From time to time, we are party to litigation 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 complaintother legal proceedings in the U.S. District Court forordinary course, and incidental to the District of Delaware alleging that the use, manufacture and saleconduct, of our BeadArray products and services, including our Array Matrix and BeadChip products, infringe six Affymetrix patents. Affymetrix seeks an injunction againstbusiness. While the saleresults of products, if any thatlitigation or other legal proceedings 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 douncertain, management does 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 court’s opinion construed several key claim terms in our favor, and did not adversely impact our defenses andultimate resolution of any pending counterclaims in any material respect. Trial has been rescheduledlegal matters is likely 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 andposition or 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 attorney’s 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. Czarnik’s 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 astock-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 coveringSequencing-by-Ligation technologies. We filed our answer to the complaint by the required deadline. The patents at issue were assigned in 1995 to Solexa’s 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, DNASequencing-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 theSequencing-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 employee’s 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.fiscal 2009.
2725
PART II
| |
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
Market Information
Our common stock has been quoted on theThe NASDAQ Global Select 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 Select Market.
| | | | | | | | | | | | | | | | | |
| | | 2009 | | 2008 |
| | | High | | Low | | High | | Low |
| |
| First Quarter | | $ | 38.87 | | | $ | 23.43 | | | $ | 38.30 | | | $ | 27.89 | |
| Second Quarter | | | 39.53 | | | | 34.27 | | | | 43.50 | | | | 34.90 | |
| Third Quarter | | | 41.23 | | | | 31.10 | | | | 47.88 | | | | 36.97 | |
| Fourth Quarter | | | 43.74 | | | | 26.50 | | | | 42.32 | | | | 18.82 | |
Stock Performance Graph
The graph below compares the cumulative total stockholder returns on our common stock for the last five fiscal years with the cumulative total stockholder returns on the NASDAQ Global Market. Our present policy is to retain earnings, if any, to financeComposite Index and the NASDAQ Biotechnology Index for the same period. The graph assumes that $100 was invested on December 31, 2004 in our common stock and in each index and that all dividends were reinvested. No cash dividends have been declared on our common stock. Stockholder returns over the indicated period should not be considered indicative of future growth. stockholder returns.
Holders
As of February 5, 2010 we had 400 record holders of our common stock.
Dividends
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
26
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 | |
Purchases of Equity Securities by the Issuer
| | | | | | | | | |
| | | 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 | |
In July 2009, our board of directors authorized a $75 million stock repurchase program and concurrently terminated a $120 million stock repurchase program authorized by our board of directors in October 2008, under which we had purchased stock totaling $70.8 million in 2008. In November 2009, upon the completion of the repurchase plan authorized in July 2009, our board of directors authorized an additional $100 million stock repurchase program, which was completed in December 2009. The following table summarizes shares repurchased pursuant to these programs during the quarter ended January 3, 2010:
| | | | | | | | | | | | | | | | | |
| | | | | | | | | Total Number of
| | | Approximate Dollar
| |
| | | | | | | | | Shares Purchased as
| | | Value of Shares
| |
| | | Total Number of
| | | | | | Part of Publicly
| | | that May Yet Be
| |
| | | Shares
| | | Average Price
| | | Announced
| | | Purchased Under
| |
Period | | Purchased(1) | | | Paid per Share(1) | | | Programs(1) | | | the Programs(1) | |
| |
| September 28 – October 25, 2009 | | | — | | | $ | — | | | | — | | | $ | 75,000,000 | |
| October 26 – November 22, 2009 | | | 1,289,331 | | | | 30.87 | | | | 1,289,331 | | | | 35,197,269 | |
| November 23, 2009 – January 3, 2010 | | | 4,766,696 | | | | 28.36 | | | | 4,766,696 | | | | — | |
| | | | | | | | | | | | | | | | | |
| Total | | | 6,056,027 | | | $ | 28.90 | | | | 6,056,027 | | | $ | — | |
| | | | | | | | | | | | | | | | | |
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.
| | |
| (1) | | All shares purchased during the quarter ended January 3, 2010 were in connection with our stock repurchase programs authorized by our board of directors in July 2009 and November 2009. All stock repurchases were made in open-market transactions or under a 10b5-1 trading program. |
Sales of Unregistered Securities
None during the fourth quarter of fiscal 2006.2009.
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 table sets forth 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 threeour last five fiscal years induring the period ended December 31, 2006 are derived from audited consolidated financial statements included in this Annual Report onForm 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 onForm 10-K. The Company’s 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, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Item 8, “Financial Statements and Supplementary Data.”3, 2010.
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 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended_ |
| | | January 3,
| | December 28,
| | December 30,
| | December 31
| | January 1,
|
| | | 2010
| | 2008
| | 2007
| | 2006
| | 2006
|
| | | (53 weeks) | | (52 weeks)(1) | | (52 weeks)(1) | | (52 weeks) | | (52 weeks) |
| | | (In thousands, except per share data) |
| |
| Total revenue | | $ | 666,324 | | | $ | 573,225 | | | $ | 366,799 | | | $ | 184,586 | | | $ | 73,501 | |
| Income (loss) from operations(2),(3),(4) | | | 125,597 | | | | 80,457 | | | | (301,201 | ) | | | 37,812 | | | | (21,447 | ) |
| Net income (loss) | | | 72,281 | | | | 39,416 | | | | (287,305 | ) | | | 39,968 | | | | (20,874 | ) |
| Net income (loss) per share: | | | | | | | | | | | | | | | | | | | | |
| Basic | | | 0.59 | | | | 0.34 | | | | (2.65 | ) | | | 0.45 | | | | (0.26 | ) |
| Diluted | | | 0.53 | | | | 0.30 | | | | (2.65 | ) | | | 0.41 | | | | (0.26 | ) |
| Shares used in calculating net income (loss) per share: | | | | | | | | | | | | | | | | | | | | |
| Basic | | | 123,154 | | | | 116,855 | | | | 108,308 | | | | 89,002 | | | | 80,294 | |
| Diluted | | | 137,096 | | | | 133,607 | | | | 108,308 | | | | 97,508 | | | | 80,294 | |
2927
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 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | January 3,
| | December 28,
| | December 30,
| | December 31,
| | January 1,
|
| | | 2010 | | 2008(1) | | 2007(1) | | 2006 | | 2006 |
| | | (In thousands) |
| |
| Cash, cash equivalents and short-term investments(4),(5),(6),(7) | | $ | 693,527 | | | $ | 640,075 | | | $ | 386,082 | | | $ | 130,804 | | | $ | 50,822 | |
| Working capital | | | 540,354 | | | | 483,113 | | | | 397,040 | | | | 159,950 | | | | 57,992 | |
| Total assets | | | 1,429,937 | | | | 1,327,171 | | | | 929,981 | | | | 300,584 | | | | 100,610 | |
| Long-term debt, current portion(7) | | | 290,202 | | | | 276,889 | | | | 16 | | | | — | | | | — | |
| Long-term debt, less current portion(7) | | | — | | | | — | | | | 258,007 | | | | — | | | | 54 | |
| Total stockholders’ equity(2),(3),(4),(5),(6) | | | 864,248 | | | | 798,667 | | | | 353,927 | | | | 247,342 | | | | 72,497 | |
In addition to the following notes, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 8, “Financial Statements and Supplementary Data” for further information regarding our consolidated results of operations and financial position for periods reported therein and for known factors that will impact comparability of future results.
| | |
| (1) | | Adjusted for required retroactive adoption of authoritative accounting guidance for convertible debt instruments that may be settled in cash upon conversion effective December 29, 2008. See Note 7 of Notes to Consolidated Financial Statements for further information. |
|
| (2) | | The consolidated financial statements include results of operations of acquired companies commencing on their respective acquisition dates. We completed acquisitions of Avantome, Inc., Solexa, Inc., and Cyvera Corporation in August 2008, January 2007 and April 2005, respectively. As part of the accounting for these acquisitions, we recorded charges to write-off acquired in-process research and development, or IPR&D, of $11.3 million, $24.7 million, $303.4 million and $15.8 million during the fiscal years ended January 3, 2010, December 28, 2008, December 30, 2007 and January 1, 2006, respectively. See Note 1 of Notes to Consolidated Financial Statements for further information. |
|
| (3) | | On January 2, 2006 we adopted authoritative guidance related to share-based payments using the modified prospective transition method. Because we elected to use the modified prospective transition method, results for prior periods have not been restated to include share-based compensation expense. See Note 1 and Note 9 of Notes to Consolidated Financial Statements for further information. |
|
| (4) | | For the year ended December 30, 2007, we recorded a $54.0 million charge for the settlement of our litigation with Affymetrix. In January 2008, we paid $90.0 million related to the Affymetrix settlement. See Note 4 of Notes to Consolidated Financial Statements. |
|
| (5) | | In August 2008, a total of 8,050,000 shares were sold to the public at a public offering price of $43.75 per share, raising net proceeds to us of $342.7 million. See Note 9 of Notes to Consolidated Financial Statements. |
|
| (6) | | For the years ended January 3, 2010, December 28, 2008 and December 30, 2007, we repurchased 6.1 million, 3.1 million and 14.8 million shares, respectively, of common stock for $175.1 million, $70.8 million and $251.6 million, respectively. See Note 9 of Notes to Consolidated Financial Statements. |
|
| (7) | | In February 2007, we issued $400.0 million principal amount of 0.625% Convertible Senior Notes due 2014. During the third quarter of 2008, the conditions to convertibility were satisfied resulting in a change in the classification of the principal amount of the notes from long-term to current. See Note 7 of Notes to Consolidated Financial Statements for further information. |
| |
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operation.Operations. |
The following discussion and analysis should be read with “Item 6. Selected Financial Data” and our consolidated financialCertain statements set forth below constitute forward-looking statements. See “Special Note Regarding Forward-Looking Statements” for additional factors relating to such statements, and notes thereto included elsewheresee “Risk Factors” in
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Item 1A of this Annual Report onForm 10-K. Thereport for a discussion and analysis in this Annual Report onForm 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 Solexa’s and CyVera’s technology with our existing technology, the commercial launch of new products, including products based on Solexa’s and CyVera’s 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. Thecertain risk factors applicable to our business, financial condition and other cautionary statements made in this Annual Report onForm 10-K should be read as applying to all related forward-looking statements wherever they appear in this Annual Report onForm 10-K.results of operations.
Business 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.
We develop and commercialize sequencing technologies used to perform a range of analyses, including de novo sequencing, whole genome re-sequencing, gene expression analysis, and small RNA analysis. Our product and service offerings also include leading-edge solutions for single-nucleotide polymorphism (SNP) genotyping, copy number variation (CNV), DNA methylation studies, gene expression profiling, and low-multiplex analysis of DNA, RNA, and protein. We believe we are the only company with genome-scale technology for sequencing, genotyping, and gene expression — the three cornerstones of modern genetic analysis.
Our tools provide researchers around the world with the performance, throughput, cost effectiveness, and flexibility necessary to performdetermine and analyze the billions of bits of genetic testsinformation 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.
During the first quarter of 2008, we reorganized our operating structure into a newly created Life Sciences Business Unit, which includes all products and services that are primarily related to the research market, namely those based on our sequencing, BeadArray and Veracode technologies. We also created a Diagnostics Business Unit to focus on the emerging opportunity in molecular diagnostics. For the year ended January 3, 2010, we had limited activity related to the Diagnostics Business Unit and operating results were reported on an aggregate basis to the chief operating decision maker, the chief executive officer. Accordingly, we operated in one segment for the year ended January 3, 2010. We will begin reporting in two segments once revenues, operating profit or loss, or assets of the Diagnostics Business Unit exceed 10% of the consolidated amounts.
Our analysis presented below is organized to provide the information we believe will be useful for understanding the relevant trends going forward. However, this discussion should be read in conjunction with our consolidated financial statements and the notes thereto in Item 15 of this report.
Business Trends and Outlook
Our financial results have been, and will continue to be, impacted by several significant trends, which are described below:
Next Generation Sequencing
Strong demand for next generation sequencing applications continues to drive both sequencing instrument and consumable sales. In 2009 we made advances to our sequencing technology, including enhanced chemistry, algorithms, and hardware which substantially improved accuracy, read length, data density, and ease of use. The combination of these advances increased the output and decreased the cost of sequencing and expanded the number of applications that researchers can perform on our sequencing systems. In early 2010 we expect to begin customer shipments of our recently announced HiSeq 2000 next generation sequencing instrument, which we believe will allow customers to sequence whole human genomes for less than $10,000 in reagent costs. We anticipate our revenue for 2010 will have higher growth in the second half of the year
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compared to the first half due to the timing of the manufacturingscale-up of the HiSeq 2000 and other significant product launches scheduled for later in the year. We believe that as the cost of next generation sequencing continues to decline, the number of samples available for sequencing will significantly increase.
Genome Wide Association Studies (GWAS)
We experienced a slowdown in the sales of our microarray products during 2009 that was largely attributable to researchers reducing or suspending the initiation of new studies as they waited for rare variant content emerging from the 1000 Genomes Project, an international research effort launched in 2008 to establish the most detailed catalog of human genetic variation. Despite advances in sequencing technology, we believe microarrays remain a cheaper, faster and materially more accurate technology for use when genetic content is known. The information content of specific microarrays is fixed and reproducible; as such, specific microarrays provide repeatable, standardized assays for certain subsets of bases within the overall genome. During 2010, as part of our previously announced GWAS roadmap, we plan to launch arrays that will feature millions of more markers per BeadChip and new rare variant content from the 1000 Genomes Project. As these arrays become available, we believe activity in the microarray market will increase relative to 2009.
American Recovery and Reinvestment Act of 2009 (the Recovery Act)
The Recovery Act was enacted in February 2009 to provide stimulus to the U.S. economy in the wake of the economic downturn. As part of the Recovery Act legislation, over $10 billion in funding was provided to the National Institute of Health (NIH) through September 2010 to support the advancement of scientific research. In the second and third quarters of 2009 we experienced negative unintended consequences of the Recovery Act as customers delayed orders while they waited to receive stimulus funds. During the fourth quarter of 2009, we believe we saw an increase in the distribution of Recovery Act funds and received an estimated $16 million in orders directly related to Recovery Act grants. We believe a significant portion of Recovery Act awards may be distributed in 2010, which may create a pipeline of opportunity in the upcoming year.
Life Science Research Funding Across Regional Markets
We have developed a broad sales and distribution network with a sales presence in more than 40 countries. Our financial results will continue to be impacted by significant regional trends in life science research funding as described below:
| | |
| • | United States. A significant increase to the NIH budget in addition to Recovery Act stimulus funds has made for a strong funding environment in the United States that we expect to continue into 2010. |
|
| • | Asia-Pacific. Strong funding in China was partially offset by a funding decrease in Japan due to a change in government that resulted in the suspension of supplemental life science research funding during the second and third quarters of 2009. During the fourth quarter of 2009, we saw an increase in activity in the Japanese market as funds began to be released, which we expect to continue into 2010. |
|
| • | Europe. Central and southern European markets had a strong year driven by the establishment and expansion of genome centers. However, there was a decrease in funding in northern European countries, primarily due to reduced institutional funding in areas like the United Kingdom and the financial crisis in Iceland. We saw some positive signs during the fourth quarter of 2009 in Northern Europe, and, although we expect funding to stabilize, we do not expect a material increase in activity in this region in 2010. |
Cost of Revenue
Our cost of revenue as a percentage of revenue declined during 2009 due to cost efficiencies in our manufacturing process and an improved mix of sequencing consumables driven by growth in the installed base of our sequencing systems. We expect changes in our product mix to continue to affect our cost of revenue as a percentage of revenue, particularly in the latter half of the year. We anticipate cost of revenue as a
30
percentage of revenue to be lower in the first half of the year and then increase as the mix shifts to newer products and the effects of our trade-in promotions associated with the launch of the HiSeq 2000 are realized. Additionally, we expect price competition to continue in our market causing added variability in our cost of revenue as a percentage of revenue on a quarterly and annual basis.
On
Operating Expense
We expect to incur additional operating costs to support the expected growth in our business. As a result of revenues growing faster in the second half of 2010, we expect operating expenses as a percentage of revenue to be higher in the first half of the year compared with the second half. 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. Selling, general and administrative expenses are also expected to increase in absolute dollars as we continue to expand our staff and add sales and marketing infrastructure.
While these trends are important to understanding and evaluating our financial results, the other transactions, events and trends discussed in “Risk Factors” in Item 1A of this report may also materially impact our business operations and financial results.
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Results of Operations
To enhance comparability, the following table sets forth audited consolidated statement of operations data for the years ended January 26,3, 2010, December 28, 2008 and December 30, 2007 stated as a percentage of total revenue.
| | | | | | | | | | | | | |
| | | Year Ended | |
| | | January 3,
| | | December 28,
| | | December 30,
| |
| | | 2010 | | | 2008 | | | 2007 | |
| |
| Revenue: | | | | | | | | | | | | |
| Product revenue | | | 94 | % | | | 93 | % | | | 89 | % |
| Service and other revenue | | | 6 | | | | 7 | | | | 11 | |
| | | | | | | | | | | | | |
| Total revenue | | | 100 | | | | 100 | | | | 100 | |
| | | | | | | | | | | | | |
| Costs and expenses: | | | | | | | | | | | | |
| Cost of product revenue (excluding impairment of manufacturing equipment and amortization of intangible assets) | | | 29 | | | | 34 | | | | 33 | |
| Cost of service and other revenue | | | 2 | | | | 2 | | | | 3 | |
| Research and development | | | 21 | | | | 17 | | | | 20 | |
| Selling, general and administrative | | | 26 | | | | 26 | | | | 27 | |
| Impairment of manufacturing equipment | | | — | | | | 1 | | | | — | |
| Amortization of intangible assets | | | 1 | | | | 2 | | | | 1 | |
| Acquired in-process research and development | | | 2 | | | | 4 | | | | 83 | |
| Litigation settlements | | | — | | | | — | | | | 15 | |
| | | | | | | | | | | | | |
| Total costs and expenses | | | 81 | | | | 86 | | | | 182 | |
| | | | | | | | | | | | | |
| Income (loss) from operations | | | 19 | | | | 14 | | | | (82 | ) |
| Other income (expense): | | | | | | | | | | | | |
| Interest income | | | 2 | | | | 2 | | | | 4 | |
| Interest expense | | | (4 | ) | | | (4 | ) | | | (5 | ) |
| Other income (expense), net | | | — | | | | 1 | | | | — | |
| | | | | | | | | | | | | |
| Total other expense, net | | | (2 | ) | | | (1 | ) | | | (1 | ) |
| | | | | | | | | | | | | |
| Income (loss) before income taxes | | | 17 | | | | 13 | | | | (83 | ) |
| Provision (benefit) for income taxes | | | 6 | | | | 6 | | | | (4 | ) |
| | | | | | | | | | | | | |
| Net income (loss) | | | 11 | % | | | 7 | % | | | (79 | )% |
| | | | | | | | | | | | | |
Comparison of Years Ended January 3, 2010 and December 28, 2008
Our fiscal year is the 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 year ended January 3, 2010 was 53 weeks and the year end December 28, 2008 was 52 weeks.
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Revenue
| | | | | | | | | | | | | | | | | |
| | | Year Ended | | | | | | | |
| | | January 3,
| | | December 28,
| | | | | | Percentage
| |
| | | 2010 | | | 2008 | | | Change | | | Change | |
| | | (In thousands) | | | | | | | |
| |
| Product revenue | | $ | 627,240 | | | $ | 532,390 | | | $ | 94,850 | | | | 18 | % |
| Service and other revenue | | | 39,084 | | | | 40,835 | | | | (1,751 | ) | | | (4 | ) |
| | | | | | | | | | | | | | | | | |
| Total revenue | | $ | 666,324 | | | $ | 573,225 | | | $ | 93,099 | | | | 16 | % |
| | | | | | | | | | | | | | | | | |
Product revenue consists primarily of revenue from the sale of consumables and instruments.
Consumable revenue increased $57.6 million, or 17%, to $391.3 million for the year ended January 3, 2010 compared to $333.7 million for the year ended December 28, 2008. Microarray consumable revenue, which constituted more than half of our consumable revenue, declined $11.4 million, or 4%, primarily attributable to lower sales of whole-genome genotyping arrays partially offset by growth in focused content arrays. The decline was driven by customers delaying the start of new GWAS in anticipation of new and rare variant content from the 1000 Genome Project, order delays directly related to stimulus funding under the Recovery Act and the impact of reduced foundation funding at a few key customers. Sales volume for our Infinium BeadChip product lines, which constitute a majority of our microarray consumable sales, was relatively flat on a sample basis during 2009 compared to 2008. The average selling price per sample, however, declined due to a change in product mix attributable to growth in the sales of our focused content arrays coupled with lower sales of whole-genome genotyping arrays and an increase in the average number of samples per BeadChip.
Revenue from sequencing consumables increased $68.9 million, or 144%, driven by growth in the installed base of our Genome Analyzer systems and the progression of customer labs ramping to production scale. The increase was partially offset by a loss of sales related to a quality issue affecting our paired-end cluster kits that arose in September 2009 when some of our larger sequencing customers began experiencing higher than average error rates on the second read of their paired-end analysis. During the fourth quarter, we began shipping reformulated paired-end cluster kits at full capacity and cleared the related shipping backlog.
Revenue from the sale of instruments increased $40.0 million, or 22%, to $225.7 million for the year ended January 3, 2010 compared to $185.7 million for the year ended December 28, 2008 primarily due to a $56.4 million, or 43%, increase in sales of our sequencing systems. During 2009 as compared to 2008 both units sold and average selling prices increased for our Genome Analyzer systems, which constitute a majority of sequencing instrument revenue. The increase in units sold was driven by increased demand for next generation sequencing and oursequencing-by-synthesis technology. The increase in average selling prices was attributable to the product transition from the Genome Analyzer I to the Genome Analyzer II in the second quarter of 2008 and technological improvements leading to the launch of the Genome Analyzer IIx in the second quarter of 2009. The increase in sequencing instrument revenue was partially offset by a $16.4 million, or 30%, decrease in the sales of our microarray systems, which declined primarily due to customers delaying the start of new GWAS in anticipation of new and rare variant content from the 1000 Genomes Project, order delays directly related to stimulus funding under the Recovery Act and the impact of reduced foundation funding at a few key customers.
Cost of Product and Service and Other Revenue
| | | | | | | | | | | | | | | | | |
| | | Year Ended | | | | | | | |
| | | January 3,
| | | December 28,
| | | | | | Percentage
| |
| | | 2010 | | | 2008 | | | Change | | | Change | |
| | | (In thousands) | | | | | | | |
| |
| Cost of product revenue | | $ | 190,714 | | | $ | 192,868 | | | $ | (2,154 | ) | | | (1 | )% |
| Cost of service and other revenue | | | 15,055 | | | | 12,756 | | | | 2,299 | | | | 18 | |
| | | | | | | | | | | | | | | | | |
| Total cost of revenue | | $ | 205,769 | | | $ | 205,624 | | | $ | 145 | | | | — | % |
| | | | | | | | | | | | | | | | | |
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Total cost of revenue, which excludes the impairment of manufacturing equipment and the amortization of intangible assets, remained flat despite higher sales, primarily due to a decrease in manufacturing costs and improved efficiencies.
Cost of product revenue as a percentage of related revenue was 30% for the year ended January 3, 2010, compared to 36% for the year ended December 28, 2008. The decrease was primarily due to lower costs for our sequencing consumables and instrumentation. The cost of sequencing consumables decreased as a percentage of related revenue due to improved overhead absorption from increased volumes and the benefit of decreased costs associated with the reformulation of our sequencing kits launched at the end of the third quarter of 2008. The cost of sequencing instruments decreased as a percentage of related revenue due to production efficiencies and reduced material costs coupled with higher average selling prices.
Operating Expenses
| | | | | | | | | | | | | | | | | |
| | | Year Ended | | | | | | | |
| | | January 3,
| | | December 28,
| | | | | | Percentage
| |
| | | 2010 | | | 2008 | | | Change | | | Change | |
| | | (In thousands) | | | | | | | |
| |
| Research and development | | $ | 140,616 | | | $ | 99,963 | | | $ | 40,653 | | | | 41 | % |
| Selling, general and administrative | | | 176,337 | | | | 148,014 | | | | 28,323 | | | | 19 | |
| | | | | | | | | | | | | | | | | |
| Total operating expenses | | $ | 316,953 | | | $ | 247,977 | | | $ | 68,976 | | | | 28 | % |
| | | | | | | | | | | | | | | | | |
The increase in research and development was driven primarily by a $22.9 million increase in personnel-related expenses, including salaries, non-cash stock-based compensation and benefits, a $10.4 million increase to non-personnel related expenses and an increase in outside services of $3.2 million attributable to consulting fees. These increases are primarily related to the growth in our efforts to optimize and commercialize our sequencing and BeadArray technologies.
The increase in selling, general and administrative expenses was driven by an increase of $26.6 million in personnel-related expenses associated with the growth of our business, including salaries, non-cash stock-based compensation and benefits.
Acquired In-Process Research and Development (IPR&D)
| | | | | | | | | | | | | | | | | |
| | | Year Ended | | | | |
| | | January 3,
| | December 28,
| | | | Percentage
|
| | | 2010 | | 2008 | | Change | | Change |
| | | (In thousands) | | | | |
| |
| Acquired in-process research and development | | $ | 11,325 | | | $ | 24,660 | | | $ | (13,335 | ) | | | (54 | )% |
During the year ended December 28, 2008, we recorded acquired IPR&D charges of $24.7 million as a result of the Avantome, Inc. acquisition in August 2008. During the year ended January 3, 2010, we recorded additional IPR&D charges of $11.3 million related to milestone payments made to Avantome Inc.’s former shareholders.
Other Income (Expense), Net
| | | | | | | | | | | | | | | | | |
| | | Year Ended | | | | | | | |
| | | January 3,
| | | December 28,
| | | | | | Percentage
| |
| | | 2010 | | | 2008 | | | Change | | | Change | |
| | | (In thousands) | | | | | | | |
| |
| Interest income | | $ | 11,029 | | | $ | 12,519 | | | $ | (1,490 | ) | | | (12 | )% |
| Interest expense | | | (23,718 | ) | | | (22,210 | ) | | | (1,508 | ) | | | 7 | |
| Other income, net | | | 1,217 | | | | 1,921 | | | | (704 | ) | | | (37 | ) |
| | | | | | | | | | | | | | | | | |
| Total other expense, net | | $ | (11,472 | ) | | $ | (7,770 | ) | | $ | (3,702 | ) | | | 48 | % |
| | | | | | | | | | | | | | | | | |
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Interest income decreased despite an increase in our average cash and investment balance due to an overall decline in interest rates during 2009. Interest expense increased due to the amortization of the discount on our convertible senior notes. Other income, net decreased due to a decrease of $1.5 million in gains on net foreign currency transactions, which was partially offset by a gain of $0.8 million on the conversion of a portion of our debt during the first quarter of 2009.
Provision for Income Taxes
| | | | | | | | | | | | | | | | | |
| | | Year Ended | | | | |
| | | January 3,
| | December 28,
| | | | Percentage
|
| | | 2010 | | 2008 | | Change | | Change |
| | | (In thousands) | | | | |
| |
| Provision for income taxes | | $ | 41,844 | | | $ | 33,271 | | | $ | 8,573 | | | | 26 | % |
The increase in the provision for income taxes was attributable to the increase in the consolidated income before income taxes. The effective tax rate decreased from 45.8% in 2008 to 36.7% in 2009 predominately because the amount of nondeductible acquired IPR&D recognized for financial reporting purposes was lower by $13.3 million. Additionally, the percentage of consolidated income before income taxes earned in foreign jurisdictions, which primarily have lower statutory tax rates than the U.S. statutory tax rate, increased from 36% in 2008 to 43% in 2009.
Comparison of Years Ended December 28, 2008 and December 30, 2007
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 28, 2008 and December 30, 2007 were both 52 weeks.
Revenue
| | | | | | | | | | | | | | | | | |
| | | Year Ended | | | | | | | |
| | | December 28,
| | | December 30,
| | | | | | Percentage
| |
| | | 2008 | | | 2007 | | | Change | | | Change | |
| | | (In thousands) | | | | | | | |
| |
| Product revenue | | $ | 532,390 | | | $ | 326,699 | | | $ | 205,691 | | | | 63 | % |
| Service and other revenue | | | 40,835 | | | | 40,100 | | | | 735 | | | | 2 | |
| | | | | | | | | | | | | | | | | |
| Total revenue | | $ | 573,225 | | | $ | 366,799 | | | $ | 206,426 | | | | 56 | % |
| | | | | | | | | | | | | | | | | |
Product revenue consists primarily of revenue from the sale of consumables and instruments.
Revenue from the sale of consumables increased $140.2 million, or 72%, to $333.7 million for the year ended December 28, 2008 compared to $193.5 million for the year ended December 30, 2007. Growth in consumable revenue was primarily attributable to strong demand for our Infinium and sequencing products, which led to increased sales of $104.8 million and $35.4 million, respectively. The increase in revenue associated with our Infinium products was attributable to the strong demand for our Infinium High-Density BeadChips, particularly the Human610-Quad, which we began shipping during the first quarter of 2008. Of the overall increase in Infinium BeadChip sales, approximately 79% was due to new product introductions with higher average selling prices, while the remaining 21% can be attributed to increased volume. The increase in sequencing consumables was primarily attributable to the growth of our installed base of instruments and the progression of customer labs ramping to production scale.
Revenue from the sale of instruments increased $64.8 million, or 54%, to $185.7 million for the year ended December 28, 2008 compared to $120.9 million for the year ended December 30, 2007. The increase was primarily attributable to a $63.0 million increase in sales of our Genome Analyzer driven by both an increase in sales volume and average selling prices. Additionally, during the second quarter of 2008, we launched the iScan System, our next-generation BeadChip scanner to replace the BeadArray Reader. Any increase in revenue resulting from shipments of this new system was offset by a reduction in sales of our BeadArray Reader as we stopped manufacturing this product upon the launch of our iScan System.
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Cost of Product and Service and Other Revenue
| | | | | | | | | | | | | | | | | |
| | | Year Ended | | | | | | | |
| | | December 28,
| | | December 30,
| | | | | | Percentage
| |
| | | 2008 | | | 2007 | | | Change | | | Change | |
| | | (In thousands) | | | | | | | |
| |
| Cost of product revenue | | $ | 192,868 | | | $ | 119,991 | | | $ | 72,877 | | | | 61 | % |
| Cost of service and other revenue | | | 12,756 | | | | 12,445 | | | | 311 | | | | 2 | |
| | | | | | | | | | | | | | | | | |
| Total cost of product and service and other revenue | | $ | 205,624 | | | $ | 132,436 | | | $ | 73,188 | | | | 55 | % |
| | | | | | | | | | | | | | | | | |
Total cost of revenue, which excludes the impairment of manufacturing equipment and the amortization of intangible assets, increased primarily due to higher instrument and consumable sales.
Cost of product revenue as a percentage of related revenue was 36% for the year ended December 28, 2008 compared to 37% for the year ended December 30, 2007. The decrease was primarily due to favorable product mix driven by increased sales of our new High-Density Infinium Beadchips, with higher average selling prices as compared to the Infinium Beadchips sold in the prior year. This was partially offset by increased provisions for inventory obsolescence of $7.2 million for the year ended December 28, 2008 compared to $1.9 million for the year ended December 30, 2007. The increase in the inventory reserve was primarily associated with product transitions. During the year, we recorded reserves for product obsolescence associated with the launch of our new Infinium Beadchips and the launch of a new sequencing kit. Instrument cost of sales as a percentage of related revenue increased slightly over the prior year due to lower average selling prices mainly associated with promotional campaigns as we launched our next generation Beadarray Reader, the iScan in the first half of 2008.
Operating Expenses
| | | | | | | | | | | | | | | | | |
| | | Year Ended | | | | | | | |
| | | December 28,
| | | December 30,
| | | | | | Percentage
| |
| | | 2008 | | | 2007 | | | Change | | | Change | |
| | | (In thousands) | | | | | | | |
| |
| Research and development | | $ | 99,963 | | | $ | 73,943 | | | $ | 26,020 | | | | 35 | % |
| Selling, general and administrative | | | 148,014 | | | | 101,256 | | | | 46,758 | | | | 46 | |
| | | | | | | | | | | | | | | | | |
| Total operating expenses | | $ | 247,977 | | | $ | 175,199 | | | $ | 72,778 | | | | 42 | % |
| | | | | | | | | | | | | | | | | |
The increase in research and development was driven by a $17.4 million increase in personnel-related expenses associated with increased headcount, including salaries, non-cash stock-based compensation and benefits, an $11.6 million increase to non-personnel related expenses associated with the growth of our business and a $1.5 million increase to accrued compensation expense associated with contingent consideration for the Avantome acquisition completed on August 1, 2008. These increases were partially offset by a decrease in outside services of $4.5 million primarily related to a decrease in consulting fees.
The increase in selling, general and administrative expenses was driven primarily by an increase of $42.8 million in personnel-related expenses, including salaries, non-cash stock-based compensation and benefits and a $4.0 million increase to non-personnel related expenses. These increases were primarily associated with the growth of our business.
Acquired In-Process Research and Development (IPR&D)
| | | | | | | | | | | | | | | | | |
| | | Year Ended | | | | |
| | | December 28,
| | December 30,
| | | | Percentage
|
| | | 2008 | | 2007 | | Change | | Change |
| | | (In thousands) | | | | |
| |
| Acquired in-process research and development | | $ | 24,660 | | | $ | 303,400 | | | $ | (278,740 | ) | | | (92 | )% |
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As a result of the Avantome, Inc. acquisition in August 2008 and the Solexa Inc. acquisition in January 2007, we recorded acquired IPR&D charges of $24.7 million and $303.4 million, respectively.
Litigation Settlements
| | | | | | | | | | | | | | | | | |
| | | Year Ended | | | | |
| | | December 28,
| | December 30,
| | | | Percentage
|
| | | 2008 | | 2007 | | Change | | Change |
| | | (In thousands) | | | | |
| |
| Litigation settlements | | $ | — | | | $ | 54,536 | | | $ | (54,536 | ) | | | (100 | )% |
During the year ended December 30, 2007, we recorded a charge of $54.5 million associated with two settlement agreements. The total charge is comprised primarily of $54.0 million related to a $90.0 million settlement with Affymetrix entered into on January 9, 2008 for certain patent litigation between the parties. See Note 4 of Notes to Consolidated Financial Statements for further information regarding the Affymetrix settlement.
Other Income (Expense), Net
| | | | | | | | | | | | | | | | | |
| | | Year Ended | | | | | | | |
| | | December 28,
| | | December 30,
| | | | | | Percentage
| |
| | | 2008 | | | 2007 | | | Change | | | Change | |
| | | (In thousands) | | | | | | | |
| |
| Interest income | | $ | 12,519 | | | $ | 16,025 | | | $ | (3,506 | ) | | | (22 | )% |
| Interest expense | | | (22,210 | ) | | | (18,297 | ) | | | (3,913 | ) | | | 21 | |
| Other income (expense), net | | | 1,921 | | | | (47 | ) | | | 1,968 | | | | (4,187 | ) |
| | | | | | | | | | | | | | | | | |
| Total other expense, net | | $ | (7,770 | ) | | $ | (2,319 | ) | | $ | (5,451 | ) | | | (235 | )% |
| | | | | | | | | | | | | | | | | |
Interest income decreased due to a change in our cash and investment portfolio to a mix of shorter duration maturities and an increased number of agency-rated investments coupled with the overall decline in interest rates due to market conditions. Interest expense increased due to the amortization of the discount on our convertible senior notes and an additional month and a half of interest expense recorded in the year ended December 28, 2008 compared to the year ended December 30, 2007. Other income (expense), net increased primarily due to $1.9 million in net foreign currency transaction gains for the year ended December 28, 2008 compared to immaterial losses recorded in the year ended December 30, 2007.
Provision (benefit) for Income Taxes
| | | | | | | | | | | | | | | | | |
| | | Year Ended | | | | |
| | | December 28,
| | December 30,
| | | | Percentage
|
| | | 2008 | | 2007 | | Change | | Change |
| | | (In thousands) | | | | |
| |
| Provision (benefit) for income taxes | | $ | 33,271 | | | $ | (16,215 | ) | | $ | 49,486 | | | | (305 | )% |
The provision (benefit) for income taxes in 2008 was different than in 2007 primarily because the amount of nondeductible acquired IPR&D recognized for financial reporting purposes was lower by $278.7 million. In addition, for the year ended December 30, 2007, the provision for income taxes was reduced by $17.1 million as a result of the release of the valuation allowance against a significant portion of our U.S. deferred tax assets.
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Liquidity and Capital Resources
Cash flow summary
| | | | | | | | | | | | | |
| | | Year Ended
| | | Year Ended
| | | Year Ended
| |
| | | January 3,
| | | December 28,
| | | December 30,
| |
| | | 2010 | | | 2008 | | | 2007 | |
| | | (In thousands) | |
| |
| Net cash provided by operating activities | | $ | 174,496 | | | $ | 87,882 | | | $ | 56,294 | |
| Net cash used in investing activities | | | (255,718 | ) | | | (277,249 | ) | | | (67,686 | ) |
| Net cash (used in) provided by financing activities | | | (98,862 | ) | | | 337,672 | | | | 148,292 | |
| Effect of foreign currency translation | | | (2,307 | ) | | | 3,778 | | | | (345 | ) |
| | | | | | | | | | | | | |
| Net (decrease) increase in cash and cash equivalents | | $ | (182,391 | ) | | $ | 152,083 | | | $ | 136,555 | |
| | | | | | | | | | | | | |
Operating Activities
Cash provided by operating activities for the year ended January 3, 2010 consists of net income of $72.3 million plus net non-cash adjustments of $113.5 million and an $11.3 million increase in net operating assets. The primary non-cash expenses added back to net income included share based compensation of $60.8 million and depreciation and amortization expense related to property and equipment, intangibles and the debt discount on our convertible notes totaling $51.5 million. The main drivers in the change in net operating assets included increases in accounts receivable, inventory, accounts payable and accrued liabilities. These increases were primarily related to the growth of our business.
Investing Activities
Cash used in investing activities totaled $255.7 million for the year ended January 3, 2010. We purchased and soldavailable-for-sale securities totaling $694.5 million and $515.2 million, respectively. We incurred $51.8 million in capital expenditures primarily associated with the expansion of our facilities and infrastructure at our San Diego, Hayward and UK locations. Additionally, in January 2009, we executed a strategic alliance with Oxford Nanopore Technologies, which consisted of a commercialization agreement and an $18.0 million equity investment. We also agreed to make an additional equity investment upon the achievement of a specific technical milestone.
In August 2008, we completed our acquisition of Avantome, Inc. As consideration for the acquisition, we paid $25.8 million in cash, including transaction costs, at the closing of the acquisition, and have subsequently paid $15.0 million as of February 1, 2010 based on the achievement of, or amendments relating to, certain milestones. We may pay up to an additional $20.0 million in contingent cash consideration to Avantome’s former shareholders based on the achievement of certain remaining milestones.
In January 2008, as part of our Affymetrix settlement, we recorded a $36.0 million intangible asset for licensed technology obtained in the settlement. See Note 4 of Notes to Consolidated Financial Statements for further information regarding intangible assets.
In January of 2007, we completed theour acquisition of Solexa, Inc. in astock-for-stock merger transaction. The Company issued approximately 26.2 million shares of its common stock as consideration for this merger. The acquisition resulted in net cash acquired of $72.1 million.
Financing Activities
Cash used in financing activities totaled $98.9 million for the year ended January 3, 2010. During the year we repurchased approximately 13.16.1 million shares of our common stock. Solexa developsstock for $175.1 million, which was partially offset by $39.4 million in proceeds received from the exercise of stock options and commercializes genetic analysis technologiesthe sale of shares under our Employee Stock Purchase Plan and $39.3 million of incremental tax benefits related to stock options exercised.
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In August 2008, we issued a total of 8.1 million shares at a public offering price of $43.75 per share, raising net proceeds to the Company of $342.7 million, after deducting underwriting discounts and commissions and offering expenses. During the year ended December 28, 2008, we also repurchased approximately 3.1 million shares of our common stock for $70.8 million.
In February 2007, we issued $400.0 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 $201.6 million of the net proceeds to performpurchase approximately 11.6 million 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 net cost of convertible note hedge and warrant transactions, which are designed to reduce the potential dilution upon conversion of the notes. See Note 7 of Notes to Consolidated Financial Statements for further information regarding our convertible senior notes.
Liquidity
We manage our business to maximize operating cash flows as the primary source of our liquidity. Our ability to generate cash from operations provides us with the financial flexibility we need to meet operating, investing and financing needs. Historically, we have issued debt and equity securities to finance our requirements to the extent that cash provided by operating activities was not sufficient to fund our needs. We may require additional funding in the future and our failure to raise capital on acceptable terms, when needed, could have a rangematerial adverse effect on our business.
At January 3, 2010, we had approximately $693.5 million in cash and short-term investments. Short-term investments include marketable securities and auction rate securities totaling $494.0 million and $54.9 million, respectively. Our marketable securities consist of analyses including whole genome resequencing, gene expressing analysisdebt securities in government sponsored entities, corporate debt securities and small RNA analysis.U.S treasury notes. We believedo not hold securities backed by mortgages. Our auction rate securities were issued primarily by municipalities and universities. The markets for auction rate securities effectively ceased when the vast majority of auctions failed in February 2008, preventing investors from selling their auction rate securities. As of January 3, 2010, the securities continued to fail auction and remained illiquid. In November 2008, we signed a settlement agreement allowing us to sell our combined company isauction rate securities at par value to UBS AG (UBS) at our discretion during the only company with genome-scale technologyperiod of June 30, 2010 through July 2, 2012. Because we intend to exercise this right when it becomes available, we have classified our auction rate securities as short-term on the balance sheet. See Note 3 of Notes to Consolidated Financial Statements for genotyping, gene expression and sequencing, the three cornerstones of modern genetic analysis.further information regarding our auction rate securities.
Our revenue isoutstanding convertible senior notes were convertible into cash and, if applicable, shares of our common stock for the period from April 1, 2008 through December 31, 2008 and became convertible again beginning April 1, 2009 through December 31, 2009. On December 29, 2008, a noteholder converted notes in an aggregate principal amount of $10.0 million. On February 4, 2009, the settlement date, we paid the noteholder the conversion value of the notes in cash, up to the principal amount of the notes. The excess of the conversion value over the principal amount, totaling $2.9 million, was paid in shares of common stock. This equity dilution upon conversion of the notes was offset by the reacquisition of the shares under the convertible note hedge transactions entered into in connection with the offering of the notes. See Note 7 of Notes to Consolidated Financial Statements for further discussion of the terms of the convertible senior notes.
Our primary short-term needs for capital, which are subject to fluctuations duechange, include expenditures related to:
| | |
| • | potential strategic acquisitions and investments; |
|
| • | support of our commercialization efforts related to our current and future products, including expansion of our direct sales force and field support resources both in the United States and abroad; |
|
| • | the continued advancement of research and development efforts; |
|
| • | the acquisition of equipment and other fixed assets for use in our current and future manufacturing and research and development facilities; |
39
| | |
| • | improvements in our manufacturing capacity and efficiency; and |
|
| • | the expansion needs of our facilities, including costs of leasing additional facilities. |
We expect that our product revenue and the resulting operating income, as well as the status of each of our new product development programs, will significantly impact our cash management decisions.
We anticipate that our current cash and cash equivalents and income from operations will be sufficient to fund our operating needs in 2010, barring unforeseen circumstances. Operating needs include the timingplanned 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. Our future capital requirements and the adequacy of salesour available funds will depend on many factors, including:
| | |
| • | our ability to successfully commercialize and further develop our technologies and create innovative products in our markets; |
|
| • | scientific progress in our research and development programs and 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. |
Off-Balance Sheet Arrangements
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, which would have been established for the purpose of high-value productsfacilitating off-balance sheet arrangements or other contractually narrow or limited purposes. During the fiscal year ended January 3, 2010, we were not involved in any “off balance sheet arrangements” within the meaning of the rules of the Securities and service projects, the impact of seasonal spending patterns, the timingExchange Commission.
Contractual Obligations
Contractual obligations represent future cash commitments and size of research projects our customers perform, changes in overall spending levelsliabilities under agreements with third parties, and exclude orders for goods and services entered into in the life science industry and other unpredictable factorsnormal course of business 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 indicationenforceable or legally binding. The following table represents our contractual obligations as of our future performance.January 3, 2010, aggregated by type (amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| | | Payments Due by Period(1) | |
| | | | | | Less Than
| | | | | | | | | More Than
| |
Contractual Obligation | | Total | | | 1 Year | | | 1 – 3 Years | | | 3 – 5 Years | | | 5 Years | |
| |
| Debt obligations(2) | | $ | 400,968 | | | $ | 2,437 | | | $ | 4,875 | | | $ | 393,656 | | | $ | — | |
| Operating leases | | | 148,415 | | | | 11,668 | | | | 24,870 | | | | 22,310 | | | | 89,567 | |
| Contingent consideration(3) | | | 10,000 | | | | 10,000 | | | | — | | | | — | | | | — | |
| Amounts due under executive deferred compensation plan | | | 4,007 | | | | 4,007 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | |
| Total | | $ | 563,390 | | | $ | 28,112 | | | $ | 29,745 | | | $ | 415,966 | | | $ | 89,567 | |
| | | | | | | | | | | | | | | | | | | | | |
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 manufacturingscale-up effort required to commercialize our products and services, an acquiredin-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 atermination-of-employment lawsuit. We expect to continue to incur substantial costs for research, development and manufacturingscale-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.
| | |
| (1) | | Excludes $11.8 million of uncertain tax benefits. We have not included this amount in the table because we cannot make a reasonably reliable estimate regarding the timing of settlements with taxing authorities, if any. See Note 11 of Notes to the Consolidated Financial Statements for further discussion of our uncertain tax positions. |
|
| (2) | | Debt obligations include the principal amount of our convertible senior notes and interest payments totaling 0.625% per annum. Although these notes mature in 2014, we classify the notes as current liabilities because the conditions to convertibility were satisfied during the last three fiscal quarters of |
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| | |
| | 2009 and may be satisfied during certain quarters in 2010. See Note 7 of Notes to Consolidated Financial Statements for further discussion of the terms of the convertible senior notes. |
|
| (3) | | The $10.0 million included within contingent consideration is the amount owed to the former shareholders of Avantome, Inc. for the achievement of a certain date-specific milestones. The table excludes $20.0 million in additional contingent cash consideration we may be required to pay based on the achievement of certain additional milestones that do not have a fixed funding date and are subject to certain conditions that may or may not occur. |
Critical Accounting Policies and EstimatesResults of Operations
To enhance comparability, the following table sets forth audited consolidated statement of operations data for the years ended January 3, 2010, December 28, 2008 and December 30, 2007 stated as a percentage of total revenue.
| | | | | | | | | | | | | |
| | | Year Ended | |
| | | January 3,
| | | December 28,
| | | December 30,
| |
| | | 2010 | | | 2008 | | | 2007 | |
| |
| Revenue: | | | | | | | | | | | | |
| Product revenue | | | 94 | % | | | 93 | % | | | 89 | % |
| Service and other revenue | | | 6 | | | | 7 | | | | 11 | |
| | | | | | | | | | | | | |
| Total revenue | | | 100 | | | | 100 | | | | 100 | |
| | | | | | | | | | | | | |
| Costs and expenses: | | | | | | | | | | | | |
| Cost of product revenue (excluding impairment of manufacturing equipment and amortization of intangible assets) | | | 29 | | | | 34 | | | | 33 | |
| Cost of service and other revenue | | | 2 | | | | 2 | | | | 3 | |
| Research and development | | | 21 | | | | 17 | | | | 20 | |
| Selling, general and administrative | | | 26 | | | | 26 | | | | 27 | |
| Impairment of manufacturing equipment | | | — | | | | 1 | | | | — | |
| Amortization of intangible assets | | | 1 | | | | 2 | | | | 1 | |
| Acquired in-process research and development | | | 2 | | | | 4 | | | | 83 | |
| Litigation settlements | | | — | | | | — | | | | 15 | |
| | | | | | | | | | | | | |
| Total costs and expenses | | | 81 | | | | 86 | | | | 182 | |
| | | | | | | | | | | | | |
| Income (loss) from operations | | | 19 | | | | 14 | | | | (82 | ) |
| Other income (expense): | | | | | | | | | | | | |
| Interest income | | | 2 | | | | 2 | | | | 4 | |
| Interest expense | | | (4 | ) | | | (4 | ) | | | (5 | ) |
| Other income (expense), net | | | — | | | | 1 | | | | — | |
| | | | | | | | | | | | | |
| Total other expense, net | | | (2 | ) | | | (1 | ) | | | (1 | ) |
| | | | | | | | | | | | | |
| Income (loss) before income taxes | | | 17 | | | | 13 | | | | (83 | ) |
| Provision (benefit) for income taxes | | | 6 | | | | 6 | | | | (4 | ) |
| | | | | | | | | | | | | |
| Net income (loss) | | | 11 | % | | | 7 | % | | | (79 | )% |
| | | | | | | | | | | | | |
GeneralComparison of Years Ended January 3, 2010 and December 28, 2008
Our discussionfiscal year is the 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 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.September 30. 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,year ended January 3, 2010 was 53 weeks 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 estimateyear end December 28, 2008 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.
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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 seller’s 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.52 weeks.
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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 AccountsRevenue
| | | | | | | | | | | | | | | | | |
| | | Year Ended | | | | | | | |
| | | January 3,
| | | December 28,
| | | | | | Percentage
| |
| | | 2010 | | | 2008 | | | Change | | | Change | |
| | | (In thousands) | | | | | | | |
| |
| Product revenue | | $ | 627,240 | | | $ | 532,390 | | | $ | 94,850 | | | | 18 | % |
| Service and other revenue | | | 39,084 | | | | 40,835 | | | | (1,751 | ) | | | (4 | ) |
| | | | | | | | | | | | | | | | | |
| Total revenue | | $ | 666,324 | | | $ | 573,225 | | | $ | 93,099 | | | | 16 | % |
| | | | | | | | | | | | | | | | | |
We maintain an allowance for doubtful accounts for estimated losses resulting
Product revenue consists primarily of revenue from the inabilitysale of consumables and instruments.
Consumable revenue increased $57.6 million, or 17%, to $391.3 million for the year ended January 3, 2010 compared to $333.7 million for the year ended December 28, 2008. Microarray consumable revenue, which constituted more than half of our consumable revenue, declined $11.4 million, or 4%, primarily attributable to lower sales of whole-genome genotyping arrays partially offset by growth in focused content arrays. The decline was driven by customers delaying the start of new GWAS in anticipation of new and rare variant content from the 1000 Genome Project, order delays directly related to make required payments. We evaluatestimulus funding under the collectibilityRecovery Act and the impact of reduced foundation funding at a few key customers. Sales volume for our Infinium BeadChip product lines, which constitute a majority of our accounts receivable basedmicroarray consumable sales, was relatively flat on a combination of factors. We regularly analyze customer accounts, reviewsample basis during 2009 compared to 2008. The average selling price per sample, however, declined due to a change in product mix attributable to growth in the length of time receivables are outstanding and review historical loss rates. If the financial conditionsales of our customers were to deteriorate, additional allowances could be required.focused content arrays coupled with lower sales of whole-genome genotyping arrays and an increase in the average number of samples per BeadChip.
Inventory ValuationRevenue from sequencing consumables increased $68.9 million, or 144%, driven by growth in the installed base of our Genome Analyzer systems and the progression of customer labs ramping to production scale. The increase was partially offset by a loss of sales related to a quality issue affecting our paired-end cluster kits that arose in September 2009 when some of our larger sequencing customers began experiencing higher than average error rates on the second read of their paired-end analysis. During the fourth quarter, we began shipping reformulated paired-end cluster kits at full capacity and cleared the related shipping backlog.
We record adjustmentsRevenue from the sale of instruments increased $40.0 million, or 22%, to inventory$225.7 million for potentially excess, obsoletethe year ended January 3, 2010 compared to $185.7 million for the year ended December 28, 2008 primarily due to a $56.4 million, or impaired goods43%, increase in sales of our sequencing systems. During 2009 as compared to 2008 both units sold and average selling prices increased for our Genome Analyzer systems, which constitute a majority of sequencing instrument revenue. The increase in units sold was driven by increased demand for next generation sequencing and oursequencing-by-synthesis technology. The increase in average selling prices was attributable to the product transition from the Genome Analyzer I to the Genome Analyzer II in the second quarter of 2008 and technological improvements leading to the launch of the Genome Analyzer IIx in the second quarter of 2009. The increase in sequencing instrument revenue was partially offset by a $16.4 million, or 30%, decrease in the sales of our microarray systems, which declined primarily due to customers delaying the start of new GWAS in anticipation of new and rare variant content from the 1000 Genomes Project, order delays directly related to state inventory at net realizable value. We must make assumptions about future demand, market conditionsstimulus funding under the Recovery Act and the releaseimpact 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.reduced foundation funding at a few key customers.
ContingenciesCost of Product and Service and Other Revenue
| | | | | | | | | | | | | | | | | |
| | | Year Ended | | | | | | | |
| | | January 3,
| | | December 28,
| | | | | | Percentage
| |
| | | 2010 | | | 2008 | | | Change | | | Change | |
| | | (In thousands) | | | | | | | |
| |
| Cost of product revenue | | $ | 190,714 | | | $ | 192,868 | | | $ | (2,154 | ) | | | (1 | )% |
| Cost of service and other revenue | | | 15,055 | | | | 12,756 | | | | 2,299 | | | | 18 | |
| | | | | | | | | | | | | | | | | |
| Total cost of revenue | | $ | 205,769 | | | $ | 205,624 | | | $ | 145 | | | | — | % |
| | | | | | | | | | | | | | | | | |
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.
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Total cost of revenue, which excludes the impairment of manufacturing equipment and the amortization of intangible assets, remained flat despite higher sales, primarily due to a decrease in manufacturing costs and improved efficiencies.
Due
Cost of product revenue as a percentage of related revenue was 30% for the year ended January 3, 2010, compared to 36% for the adoptionyear ended December 28, 2008. The decrease was primarily due to lower costs for our sequencing consumables and instrumentation. The cost of SFAS No. 123 (revised 2004), Share-Based Payment, we recognize excess tax benefitssequencing consumables decreased as a percentage of related revenue due to improved overhead absorption from increased volumes and the benefit of decreased costs 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 thewith-and-without approach excluding any indirect effects reformulation of our sequencing kits launched at the end of the excess tax deductions. Under this approach, excess tax benefitsthird quarter of 2008. The cost of sequencing instruments decreased as a percentage of related revenue due to share-based compensation are not deemed to be realized until after the utilization of all other tax benefits available to us.production efficiencies and reduced material costs coupled with higher average selling prices.
Goodwill and Intangible Asset ValuationOperating Expenses
| | | | | | | | | | | | | | | | | |
| | | Year Ended | | | | | | | |
| | | January 3,
| | | December 28,
| | | | | | Percentage
| |
| | | 2010 | | | 2008 | | | Change | | | Change | |
| | | (In thousands) | | | | | | | |
| |
| Research and development | | $ | 140,616 | | | $ | 99,963 | | | $ | 40,653 | | | | 41 | % |
| Selling, general and administrative | | | 176,337 | | | | 148,014 | | | | 28,323 | | | | 19 | |
| | | | | | | | | | | | | | | | | |
| Total operating expenses | | $ | 316,953 | | | $ | 247,977 | | | $ | 68,976 | | | | 28 | % |
| | | | | | | | | | | | | | | | | |
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-processincrease in research and development (IPR&D). Goodwillwas driven primarily by a $22.9 million increase in personnel-related expenses, including salaries, non-cash stock-based compensation and intangible assets deemedbenefits, a $10.4 million increase to have indefinite livesnon-personnel related expenses and an increase in outside services of $3.2 million attributable to consulting fees. These increases are not amortized, but are subjectprimarily related to at least annual impairment tests. The amountsthe growth in our efforts to optimize and useful lives assigned to other acquired intangible assets impact future amortization,commercialize our sequencing 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.BeadArray technologies.
SFAS No. 142,GoodwillThe increase in selling, general and Other Intangible Assets. SFAS No. 142 requires that goodwilladministrative expenses was driven by an increase of $26.6 million in personnel-related expenses associated with the growth of our business, including salaries, non-cash stock-based compensation and certain intangible assets be assessed for impairment using fair value measurement techniques. Ifbenefits.
Acquired In-Process Research and Development (IPR&D)
| | | | | | | | | | | | | | | | | |
| | | Year Ended | | | | |
| | | January 3,
| | December 28,
| | | | Percentage
|
| | | 2010 | | 2008 | | Change | | Change |
| | | (In thousands) | | | | |
| |
| Acquired in-process research and development | | $ | 11,325 | | | $ | 24,660 | | | $ | (13,335 | ) | | | (54 | )% |
During the carrying amountyear ended December 28, 2008, we recorded acquired IPR&D charges of $24.7 million as a reporting unit exceeds its fair value, then a goodwill impairment test is performed to measure the amountresult of the impairment loss, if any. The goodwill impairment test comparesAvantome, Inc. acquisition in August 2008. During the implied fair valueyear ended January 3, 2010, we recorded additional IPR&D charges of the reporting unit’s 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$11.3 million related to comparables. It is reasonably possible that the plans and estimates usedmilestone payments made 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.Avantome Inc.’s former shareholders.
Stock-Based CompensationOther Income (Expense), Net
| | | | | | | | | | | | | | | | | |
| | | Year Ended | | | | | | | |
| | | January 3,
| | | December 28,
| | | | | | Percentage
| |
| | | 2010 | | | 2008 | | | Change | | | Change | |
| | | (In thousands) | | | | | | | |
| |
| Interest income | | $ | 11,029 | | | $ | 12,519 | | | $ | (1,490 | ) | | | (12 | )% |
| Interest expense | | | (23,718 | ) | | | (22,210 | ) | | | (1,508 | ) | | | 7 | |
| Other income, net | | | 1,217 | | | | 1,921 | | | | (704 | ) | | | (37 | ) |
| | | | | | | | | | | | | | | | | |
| Total other expense, net | | $ | (11,472 | ) | | $ | (7,770 | ) | | $ | (3,702 | ) | | | 48 | % |
| | | | | | | | | | | | | | | | | |
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 award’s 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
Interest income decreased despite an increase in our average cash and investment balance due to an overall decline in interest rates during 2009. Interest expense increased due to the amortization of the discount on our convertible senior notes. Other income, net decreased due to a decrease of $1.5 million in gains on net foreign currency transactions, which was partially offset by a gain of $0.8 million on the conversion of a portion of our debt during the first quarter of 2009.
Provision for Income Taxes
| | | | | | | | | | | | | | | | | |
| | | Year Ended | | | | |
| | | January 3,
| | December 28,
| | | | Percentage
|
| | | 2010 | | 2008 | | Change | | Change |
| | | (In thousands) | | | | |
| |
| Provision for income taxes | | $ | 41,844 | | | $ | 33,271 | | | $ | 8,573 | | | | 26 | % |
The increase in the provision for income taxes was attributable to the increase in the consolidated income before income taxes. The effective tax rate decreased from 45.8% in 2008 to 36.7% in 2009 predominately because the amount of nondeductible acquired IPR&D recognized for financial reporting purposes was lower by $13.3 million. Additionally, the percentage of consolidated income before income taxes earned in foreign jurisdictions, which primarily have lower statutory tax rates than the U.S. statutory tax rate, increased from 36% in 2008 to 43% in 2009.
Comparison of Years Ended December 28, 2008 and December 30, 2007
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 28, 2008 and December 30, 2007 were both 52 weeks.
Revenue
| | | | | | | | | | | | | | | | | |
| | | Year Ended | | | | | | | |
| | | December 28,
| | | December 30,
| | | | | | Percentage
| |
| | | 2008 | | | 2007 | | | Change | | | Change | |
| | | (In thousands) | | | | | | | |
| |
| Product revenue | | $ | 532,390 | | | $ | 326,699 | | | $ | 205,691 | | | | 63 | % |
| Service and other revenue | | | 40,835 | | | | 40,100 | | | | 735 | | | | 2 | |
| | | | | | | | | | | | | | | | | |
| Total revenue | | $ | 573,225 | | | $ | 366,799 | | | $ | 206,426 | | | | 56 | % |
| | | | | | | | | | | | | | | | | |
Product revenue consists primarily of revenue from the sale of consumables and instruments.
Revenue from the sale of consumables increased $140.2 million, or 72%, to $333.7 million for the year ended December 28, 2008 compared to $193.5 million for the year ended December 30, 2007. Growth in consumable revenue was primarily attributable to strong demand for our Infinium and sequencing products, which led to increased sales of $104.8 million and $35.4 million, respectively. The increase in revenue associated with our Infinium products was attributable to the strong demand for our Infinium High-Density BeadChips, particularly the Human610-Quad, which we began shipping during the first quarter of 2008. Of the overall increase in Infinium BeadChip sales, approximately 79% was due to new product introductions with higher average selling prices, while the remaining 21% can be attributed to increased volume. The increase in sequencing consumables was primarily attributable to the growth of our installed base of instruments and the progression of customer labs ramping to production scale.
Revenue from the sale of instruments increased $64.8 million, or 54%, to $185.7 million for the year ended December 28, 2008 compared to $120.9 million for the year ended December 30, 2007. The increase was primarily attributable to a $63.0 million increase in sales of our Genome Analyzer driven by both an increase in sales volume and average selling prices. Additionally, during the second quarter of 2008, we launched the iScan System, our next-generation BeadChip scanner to replace the BeadArray Reader. Any increase in revenue resulting from shipments of this new system was offset by a reduction in sales of our BeadArray Reader as we stopped manufacturing this product upon the launch of our iScan System.
35
Cost of Product and Service and Other Revenue
| | | | | | | | | | | | | | | | | |
| | | Year Ended | | | | | | | |
| | | December 28,
| | | December 30,
| | | | | | Percentage
| |
| | | 2008 | | | 2007 | | | Change | | | Change | |
| | | (In thousands) | | | | | | | |
| |
| Cost of product revenue | | $ | 192,868 | | | $ | 119,991 | | | $ | 72,877 | | | | 61 | % |
| Cost of service and other revenue | | | 12,756 | | | | 12,445 | | | | 311 | | | | 2 | |
| | | | | | | | | | | | | | | | | |
| Total cost of product and service and other revenue | | $ | 205,624 | | | $ | 132,436 | | | $ | 73,188 | | | | 55 | % |
| | | | | | | | | | | | | | | | | |
Total cost of revenue, which excludes the impairment of manufacturing equipment and the amortization of intangible assets, increased primarily due to higher instrument and consumable sales.
Cost of product revenue as a percentage of related revenue was 36% for the year ended December 28, 2008 compared to 37% for the year ended December 30, 2007. The decrease was primarily due to favorable product mix driven by increased sales of our new High-Density Infinium Beadchips, with higher average selling prices as compared to the Infinium Beadchips sold in the prior year. This was partially offset by increased provisions for inventory obsolescence of $7.2 million for the year ended December 28, 2008 compared to $1.9 million for the year ended December 30, 2007. The increase in the inventory reserve was primarily associated with product transitions. During the year, we recorded reserves for product obsolescence associated with the launch of our new Infinium Beadchips and the launch of a new sequencing kit. Instrument cost of sales as a percentage of related revenue increased slightly over the prior year due to lower average selling prices mainly associated with promotional campaigns as we launched our next generation Beadarray Reader, the iScan in the first half of 2008.
Operating Expenses
| | | | | | | | | | | | | | | | | |
| | | Year Ended | | | | | | | |
| | | December 28,
| | | December 30,
| | | | | | Percentage
| |
| | | 2008 | | | 2007 | | | Change | | | Change | |
| | | (In thousands) | | | | | | | |
| |
| Research and development | | $ | 99,963 | | | $ | 73,943 | | | $ | 26,020 | | | | 35 | % |
| Selling, general and administrative | | | 148,014 | | | | 101,256 | | | | 46,758 | | | | 46 | |
| | | | | | | | | | | | | | | | | |
| Total operating expenses | | $ | 247,977 | | | $ | 175,199 | | | $ | 72,778 | | | | 42 | % |
| | | | | | | | | | | | | | | | | |
The increase in research and development was driven by a $17.4 million increase in personnel-related expenses associated with increased headcount, including salaries, non-cash stock-based compensation and benefits, an $11.6 million increase to non-personnel related expenses associated with the growth of our business and a $1.5 million increase to accrued compensation expense associated with contingent consideration for the Avantome acquisition completed on August 1, 2008. These increases were partially offset by a decrease in outside services of $4.5 million primarily related to a decrease in consulting fees.
The increase in selling, general and administrative expenses was driven primarily by an increase of $42.8 million in personnel-related expenses, including salaries, non-cash stock-based compensation and benefits and a $4.0 million increase to non-personnel related expenses. These increases were primarily associated with the growth of our business.
Acquired In-Process Research and Development (IPR&D)
| | | | | | | | | | | | | | | | | |
| | | Year Ended | | | | |
| | | December 28,
| | December 30,
| | | | Percentage
|
| | | 2008 | | 2007 | | Change | | Change |
| | | (In thousands) | | | | |
| |
| Acquired in-process research and development | | $ | 24,660 | | | $ | 303,400 | | | $ | (278,740 | ) | | | (92 | )% |
36
As a result of the Avantome, Inc. acquisition in August 2008 and the Solexa Inc. acquisition in January 2007, we recorded acquired IPR&D charges of $24.7 million and $303.4 million, respectively.
Litigation Settlements
| | | | | | | | | | | | | | | | | |
| | | Year Ended | | | | |
| | | December 28,
| | December 30,
| | | | Percentage
|
| | | 2008 | | 2007 | | Change | | Change |
| | | (In thousands) | | | | |
| |
| Litigation settlements | | $ | — | | | $ | 54,536 | | | $ | (54,536 | ) | | | (100 | )% |
During the year ended December 30, 2007, we recorded a charge of $54.5 million associated with two settlement agreements. The total charge is comprised primarily of $54.0 million related to a $90.0 million settlement with Affymetrix entered into on January 9, 2008 for certain patent litigation between the parties. See Note 4 of Notes to Consolidated Financial Statements for further information regarding the Affymetrix settlement.
Other Income (Expense), Net
| | | | | | | | | | | | | | | | | |
| | | Year Ended | | | | | | | |
| | | December 28,
| | | December 30,
| | | | | | Percentage
| |
| | | 2008 | | | 2007 | | | Change | | | Change | |
| | | (In thousands) | | | | | | | |
| |
| Interest income | | $ | 12,519 | | | $ | 16,025 | | | $ | (3,506 | ) | | | (22 | )% |
| Interest expense | | | (22,210 | ) | | | (18,297 | ) | | | (3,913 | ) | | | 21 | |
| Other income (expense), net | | | 1,921 | | | | (47 | ) | | | 1,968 | | | | (4,187 | ) |
| | | | | | | | | | | | | | | | | |
| Total other expense, net | | $ | (7,770 | ) | | $ | (2,319 | ) | | $ | (5,451 | ) | | | (235 | )% |
| | | | | | | | | | | | | | | | | |
Interest income decreased due to a change in our cash and investment portfolio to a mix of shorter duration maturities and an increased number of agency-rated investments coupled with the overall decline in interest rates due to market conditions. Interest expense increased due to the amortization of the discount on our convertible senior notes and an additional month and a half of interest expense recorded in the year ended December 28, 2008 compared to the year ended December 30, 2007. Other income (expense), net increased primarily due to $1.9 million in net foreign currency transaction gains for the year ended December 28, 2008 compared to immaterial losses recorded in the year ended December 30, 2007.
Provision (benefit) for Income Taxes
| | | | | | | | | | | | | | | | | |
| | | Year Ended | | | | |
| | | December 28,
| | December 30,
| | | | Percentage
|
| | | 2008 | | 2007 | | Change | | Change |
| | | (In thousands) | | | | |
| |
| Provision (benefit) for income taxes | | $ | 33,271 | | | $ | (16,215 | ) | | $ | 49,486 | | | | (305 | )% |
The provision (benefit) for income taxes in 2008 was different than in 2007 primarily because the amount of nondeductible acquired IPR&D recognized for financial reporting purposes was lower by $278.7 million. In addition, for the year ended December 30, 2007, the provision for income taxes was reduced by $17.1 million as a result of the release of the valuation allowance against a significant portion of our U.S. deferred tax assets.
37
Liquidity and Capital Resources
Cash flow summary
| | | | | | | | | | | | | |
| | | Year Ended
| | | Year Ended
| | | Year Ended
| |
| | | January 3,
| | | December 28,
| | | December 30,
| |
| | | 2010 | | | 2008 | | | 2007 | |
| | | (In thousands) | |
| |
| Net cash provided by operating activities | | $ | 174,496 | | | $ | 87,882 | | | $ | 56,294 | |
| Net cash used in investing activities | | | (255,718 | ) | | | (277,249 | ) | | | (67,686 | ) |
| Net cash (used in) provided by financing activities | | | (98,862 | ) | | | 337,672 | | | | 148,292 | |
| Effect of foreign currency translation | | | (2,307 | ) | | | 3,778 | | | | (345 | ) |
| | | | | | | | | | | | | |
| Net (decrease) increase in cash and cash equivalents | | $ | (182,391 | ) | | $ | 152,083 | | | $ | 136,555 | |
| | | | | | | | | | | | | |
Operating Activities
Cash provided by operating activities for the year ended January 3, 2010 consists of net income of $72.3 million plus net non-cash adjustments of $113.5 million and an $11.3 million increase in net operating assets. The primary non-cash expenses added back to net income included share based compensation of $60.8 million and depreciation and amortization expense related to property and equipment, intangibles and the debt discount on our convertible notes totaling $51.5 million. The main drivers in the change in net operating assets included increases in accounts receivable, inventory, accounts payable and accrued liabilities. These increases were primarily related to the growth of our business.
Investing Activities
Cash used in investing activities totaled $255.7 million for the year ended January 3, 2010. We purchased and soldavailable-for-sale securities totaling $694.5 million and $515.2 million, respectively. We incurred $51.8 million in capital expenditures primarily associated with the expansion of our facilities and infrastructure at our San Diego, Hayward and UK locations. Additionally, in January 2009, we executed a strategic alliance with Oxford Nanopore Technologies, which consisted of a commercialization agreement and an $18.0 million equity investment. We also agreed to make an additional equity investment upon the achievement of a specific technical milestone.
In August 2008, we completed our acquisition of Avantome, Inc. As consideration for the acquisition, we paid $25.8 million in cash, including transaction costs, at the closing of the acquisition, and have subsequently paid $15.0 million as of February 1, 2010 based on the achievement of, or amendments relating to, certain milestones. We may pay up to an additional $20.0 million in contingent cash consideration to Avantome’s former shareholders based on the achievement of certain remaining milestones.
In January 2008, as part of our Affymetrix settlement, we recorded a $36.0 million intangible asset for licensed technology obtained in the settlement. See Note 4 of Notes to Consolidated Financial Statements for further information regarding intangible assets.
In January of 2007, we completed our acquisition of Solexa, Inc. in astock-for-stock merger transaction. The Company issued approximately 26.2 million shares of its common stock as consideration for this merger. The acquisition resulted in net cash acquired of $72.1 million.
Financing Activities
Cash used in financing activities totaled $98.9 million for the year ended January 3, 2010. During the year we repurchased approximately 6.1 million shares of our common stock for $175.1 million, which was partially offset by $39.4 million in proceeds received from the exercise of stock options and the sale of shares under our Employee Stock Purchase Plan and $39.3 million of incremental tax benefits related to stock options exercised.
38
In August 2008, we issued a total of 8.1 million shares at a public offering price of $43.75 per share, raising net proceeds to the Company of $342.7 million, after deducting underwriting discounts and commissions and offering expenses. During the year ended December 28, 2008, we also repurchased approximately 3.1 million shares of our common stock for $70.8 million.
In February 2007, we issued $400.0 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 $201.6 million of the net proceeds to purchase approximately 11.6 million 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 net cost of convertible note hedge and warrant transactions, which are designed to reduce the potential dilution upon conversion of the notes. See Note 7 of Notes to Consolidated Financial Statements for further information regarding our convertible senior notes.
Liquidity
We manage our business to maximize operating cash flows as the primary source of our liquidity. Our ability to generate cash from operations provides us with the financial flexibility we need to meet operating, investing and financing needs. Historically, we have issued debt and equity securities to finance our requirements to the extent that cash provided by operating activities was not sufficient to fund our needs. We may require additional funding in the future and our failure to raise capital on acceptable terms, when needed, could have a material adverse effect on our business.
At January 3, 2010, we had approximately $693.5 million in cash and short-term investments. Short-term investments include marketable securities and auction rate securities totaling $494.0 million and $54.9 million, respectively. Our marketable securities consist of debt securities in government sponsored entities, corporate debt securities and U.S treasury notes. We do not hold securities backed by mortgages. Our auction rate securities were issued primarily by municipalities and universities. The markets for auction rate securities effectively ceased when the vast majority of auctions failed in February 2008, preventing investors from selling their auction rate securities. As of January 3, 2010, the securities continued to fail auction and remained illiquid. In November 2008, we signed a settlement agreement allowing us to sell our auction rate securities at par value to UBS AG (UBS) at our discretion during the period of June 30, 2010 through July 2, 2012. Because we intend to exercise this right when it becomes available, we have classified our auction rate securities as short-term on the balance sheet. See Note 3 of Notes to Consolidated Financial Statements for further information regarding our auction rate securities.
Our outstanding convertible senior notes were convertible into cash and, if applicable, shares of our common stock for the period from April 1, 2008 through December 31, 2008 and became convertible again beginning April 1, 2009 through December 31, 2009. On December 29, 2008, a noteholder converted notes in an aggregate principal amount of $10.0 million. On February 4, 2009, the settlement date, we paid the noteholder the conversion value of the notes in cash, up to the principal amount of the notes. The excess of the conversion value over the principal amount, totaling $2.9 million, was paid in shares of common stock. This equity dilution upon conversion of the notes was offset by the reacquisition of the shares under the convertible note hedge transactions entered into in connection with the offering of the notes. See Note 7 of Notes to Consolidated Financial Statements for further discussion of the terms of the convertible senior notes.
Our primary short-term needs for capital, which are subject to change, include expenditures related to:
| | |
| • | potential strategic acquisitions and investments; |
|
| • | support of our commercialization efforts related to our current and future products, including expansion of our direct sales force and field support resources both in the United States and abroad; |
|
| • | the continued advancement of research and development efforts; |
|
| • | the acquisition of equipment and other fixed assets for use in our current and future manufacturing and research and development facilities; |
39
| | |
| • | improvements in our manufacturing capacity and efficiency; and |
|
| • | the expansion needs of our facilities, including costs of leasing additional facilities. |
We expect that our product revenue and the resulting operating income, as well as the status of each of our new product development programs, will significantly impact our cash management decisions.
We anticipate that our current cash and cash equivalents and income from operations will be sufficient to fund our operating needs in 2010, barring unforeseen circumstances. 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. Our future capital requirements and the adequacy of our available funds will depend on many factors, including:
| | |
| • | our ability to successfully commercialize and further develop our technologies and create innovative products in our markets; |
|
| • | scientific progress in our research and development programs and 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. |
Off-Balance Sheet Arrangements
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, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. During the fiscal year ended January 3, 2010, we were not involved in any “off balance sheet arrangements” within the meaning of the rules of the Securities and Exchange Commission.
Contractual Obligations
Contractual obligations represent future cash commitments and liabilities under agreements with third parties, and exclude orders for goods and services entered into in the normal course of business that are not enforceable or legally binding. The following table represents our contractual obligations as of January 3, 2010, aggregated by type (amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| | | Payments Due by Period(1) | |
| | | | | | Less Than
| | | | | | | | | More Than
| |
Contractual Obligation | | Total | | | 1 Year | | | 1 – 3 Years | | | 3 – 5 Years | | | 5 Years | |
| |
| Debt obligations(2) | | $ | 400,968 | | | $ | 2,437 | | | $ | 4,875 | | | $ | 393,656 | | | $ | — | |
| Operating leases | | | 148,415 | | | | 11,668 | | | | 24,870 | | | | 22,310 | | | | 89,567 | |
| Contingent consideration(3) | | | 10,000 | | | | 10,000 | | | | — | | | | — | | | | — | |
| Amounts due under executive deferred compensation plan | | | 4,007 | | | | 4,007 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | |
| Total | | $ | 563,390 | | | $ | 28,112 | | | $ | 29,745 | | | $ | 415,966 | | | $ | 89,567 | |
| | | | | | | | | | | | | | | | | | | | | |
| | |
| (1) | | Excludes $11.8 million of uncertain tax benefits. We have not included this amount in the table because we cannot make a reasonably reliable estimate regarding the timing of settlements with taxing authorities, if any. See Note 11 of Notes to the Consolidated Financial Statements for further discussion of our uncertain tax positions. |
|
| (2) | | Debt obligations include the principal amount of our convertible senior notes and interest payments totaling 0.625% per annum. Although these notes mature in 2014, we classify the notes as current liabilities because the conditions to convertibility were satisfied during the last three fiscal quarters of |
40
| | |
| | 2009 and may be satisfied during certain quarters in 2010. See Note 7 of Notes to Consolidated Financial Statements for further discussion of the terms of the convertible senior notes. |
|
| (3) | | The $10.0 million included within contingent consideration is the amount owed to the former shareholders of Avantome, Inc. for the achievement of a certain date-specific milestones. The table excludes $20.0 million in additional contingent cash consideration we may be required to pay based on the achievement of certain additional milestones that do not have a fixed funding date and are subject to certain conditions that may or may not occur. |
Results of Operations
To enhance comparability, the following table sets forth audited consolidated statement of operations data for the years ended January 3, 2010, December 31, 2006, January 1, 2006,28, 2008 and January 2, 2005December 30, 2007 stated as a percentage of total revenue.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended
| | Year Ended
| | Year Ended
| | | Year Ended | |
| | | December 31,
| | January 1,
| | January 2
| | | January 3,
| | December 28,
| | December 30,
| |
| | | 2006 | | 2006 | | 2005 | | | 2010 | | 2008 | | 2007 | |
| |
| Revenue | | | | | | | | | | | | | |
| Revenue: | | | | | | | | | | | | | |
| Product revenue | | | 84 | % | | | 79 | % | | | 80 | % | | | 94 | % | | | 93 | % | | | 89 | % |
| Service and other revenue | | | 15 | | | | 19 | | | | 16 | | | | 6 | | | | 7 | | | | 11 | |
| Research revenue | | | 1 | | | | 2 | | | | 4 | | |
| | | | | | | | | | | | | | | |
| Total revenue | | | 100 | | | | 100 | | | | 100 | | | | 100 | | | | 100 | | | | 100 | |
| | | | | | | | | | | | | | | |
| Costs and expenses: | | | | | | | | | | | | | | | | | | | | | | | | |
| Cost of product revenue | | | 28 | | | | 27 | | | | 23 | | |
| Cost of product revenue (excluding impairment of manufacturing equipment and amortization of intangible assets) | | | | 29 | | | | 34 | | | | 33 | |
| Cost of service and other revenue | | | 5 | | | | 4 | | | | 3 | | | | 2 | | | | 2 | | | | 3 | |
| Research and development | | | 18 | | | | 38 | | | | 42 | | | | 21 | | | | 17 | | | | 20 | |
| Selling, general and administrative | | | 29 | | | | 38 | | | | 51 | | | | 26 | | | | 26 | | | | 27 | |
| Impairment of manufacturing equipment | | | | — | | | | 1 | | | | — | |
| Amortization of intangible assets | | | | 1 | | | | 2 | | | | 1 | |
| Acquired in-process research and development | | | — | | | | 22 | | | | — | | | | 2 | | | | 4 | | | | 83 | |
| Litigation judgment (settlement), net | | | — | | | | — | | | | (8 | ) | |
| Litigation settlements | | | | — | | | | — | | | | 15 | |
| | | | | | | | | | | | | | | |
| Total costs and expenses | | | 80 | | | | 129 | | | | 111 | | | | 81 | | | | 86 | | | | 182 | |
| | | | | | | | | | | | | | | |
| Income (loss) from operations | | | 20 | | | | (29 | ) | | | (11 | ) | | | 19 | | | | 14 | | | | (82 | ) |
| Other income (expense): | | | | | | | | | | | | | |
| Interest income | | | 3 | | | | 2 | | | | 2 | | | | 2 | | | | 2 | | | | 4 | |
| Interest and other expense, net | | | — | | | | (1 | ) | | | (3 | ) | |
| Interest expense | | | | (4 | ) | | | (4 | ) | | | (5 | ) |
| Other income (expense), net | | | | — | | | | 1 | | | | — | |
| | | | | | | | | |
| Total other expense, net | | | | (2 | ) | | | (1 | ) | | | (1 | ) |
| | | | | | | | | | | | | | | |
| Income (loss) before income taxes | | | 23 | | | | (28 | ) | | | (12 | ) | | | 17 | | | | 13 | | | | (83 | ) |
| Provision for income taxes | | | 1 | | | | — | | | | — | | |
| Provision (benefit) for income taxes | | | | 6 | | | | 6 | | | | (4 | ) |
| | | | | | | | | | | | | | | |
| Net income (loss) | | | 22 | % | | | (28 | %) | | | (12 | %) | | | 11 | % | | | 7 | % | | | (79 | )% |
| | | | | | | | | | | | | | | |
Comparison of Years Ended January 3, 2010 and December 28, 2008
Our fiscal year is the 52 or 53 weeks ending the Sunday closest to December 31, 2006with quarters of 13 or 14 weeks ending the Sunday closest to March 31, June 30, and September 30. The year ended January 1, 20063, 2010 was 53 weeks and the year end December 28, 2008 was 52 weeks.
32
Revenue
| | | | | | | | | | | | | | | | | |
| | | Year Ended | | | | | | | |
| | | January 3,
| | | December 28,
| | | | | | Percentage
| |
| | | 2010 | | | 2008 | | | Change | | | Change | |
| | | (In thousands) | | | | | | | |
| |
| Product revenue | | $ | 627,240 | | | $ | 532,390 | | | $ | 94,850 | | | | 18 | % |
| Service and other revenue | | | 39,084 | | | | 40,835 | | | | (1,751 | ) | | | (4 | ) |
| | | | | | | | | | | | | | | | | |
| Total revenue | | $ | 666,324 | | | $ | 573,225 | | | $ | 93,099 | | | | 16 | % |
| | | | | | | | | | | | | | | | | |
Product revenue consists primarily of revenue from the sale of consumables and instruments.
Consumable revenue increased $57.6 million, or 17%, to $391.3 million for the year ended January 3, 2010 compared to $333.7 million for the year ended December 28, 2008. Microarray consumable revenue, which constituted more than half of our consumable revenue, declined $11.4 million, or 4%, primarily attributable to lower sales of whole-genome genotyping arrays partially offset by growth in focused content arrays. The decline was driven by customers delaying the start of new GWAS in anticipation of new and rare variant content from the 1000 Genome Project, order delays directly related to stimulus funding under the Recovery Act and the impact of reduced foundation funding at a few key customers. Sales volume for our Infinium BeadChip product lines, which constitute a majority of our microarray consumable sales, was relatively flat on a sample basis during 2009 compared to 2008. The average selling price per sample, however, declined due to a change in product mix attributable to growth in the sales of our focused content arrays coupled with lower sales of whole-genome genotyping arrays and an increase in the average number of samples per BeadChip.
Revenue from sequencing consumables increased $68.9 million, or 144%, driven by growth in the installed base of our Genome Analyzer systems and the progression of customer labs ramping to production scale. The increase was partially offset by a loss of sales related to a quality issue affecting our paired-end cluster kits that arose in September 2009 when some of our larger sequencing customers began experiencing higher than average error rates on the second read of their paired-end analysis. During the fourth quarter, we began shipping reformulated paired-end cluster kits at full capacity and cleared the related shipping backlog.
Revenue from the sale of instruments increased $40.0 million, or 22%, to $225.7 million for the year ended January 3, 2010 compared to $185.7 million for the year ended December 28, 2008 primarily due to a $56.4 million, or 43%, increase in sales of our sequencing systems. During 2009 as compared to 2008 both units sold and average selling prices increased for our Genome Analyzer systems, which constitute a majority of sequencing instrument revenue. The increase in units sold was driven by increased demand for next generation sequencing and oursequencing-by-synthesis technology. The increase in average selling prices was attributable to the product transition from the Genome Analyzer I to the Genome Analyzer II in the second quarter of 2008 and technological improvements leading to the launch of the Genome Analyzer IIx in the second quarter of 2009. The increase in sequencing instrument revenue was partially offset by a $16.4 million, or 30%, decrease in the sales of our microarray systems, which declined primarily due to customers delaying the start of new GWAS in anticipation of new and rare variant content from the 1000 Genomes Project, order delays directly related to stimulus funding under the Recovery Act and the impact of reduced foundation funding at a few key customers.
Cost of Product and Service and Other Revenue
| | | | | | | | | | | | | | | | | |
| | | Year Ended | | | | | | | |
| | | January 3,
| | | December 28,
| | | | | | Percentage
| |
| | | 2010 | | | 2008 | | | Change | | | Change | |
| | | (In thousands) | | | | | | | |
| |
| Cost of product revenue | | $ | 190,714 | | | $ | 192,868 | | | $ | (2,154 | ) | | | (1 | )% |
| Cost of service and other revenue | | | 15,055 | | | | 12,756 | | | | 2,299 | | | | 18 | |
| | | | | | | | | | | | | | | | | |
| Total cost of revenue | | $ | 205,769 | | | $ | 205,624 | | | $ | 145 | | | | — | % |
| | | | | | | | | | | | | | | | | |
33
Total cost of revenue, which excludes the impairment of manufacturing equipment and the amortization of intangible assets, remained flat despite higher sales, primarily due to a decrease in manufacturing costs and improved efficiencies.
Cost of product revenue as a percentage of related revenue was 30% for the year ended January 3, 2010, compared to 36% for the year ended December 28, 2008. The decrease was primarily due to lower costs for our sequencing consumables and instrumentation. The cost of sequencing consumables decreased as a percentage of related revenue due to improved overhead absorption from increased volumes and the benefit of decreased costs associated with the reformulation of our sequencing kits launched at the end of the third quarter of 2008. The cost of sequencing instruments decreased as a percentage of related revenue due to production efficiencies and reduced material costs coupled with higher average selling prices.
Operating Expenses
| | | | | | | | | | | | | | | | | |
| | | Year Ended | | | | | | | |
| | | January 3,
| | | December 28,
| | | | | | Percentage
| |
| | | 2010 | | | 2008 | | | Change | | | Change | |
| | | (In thousands) | | | | | | | |
| |
| Research and development | | $ | 140,616 | | | $ | 99,963 | | | $ | 40,653 | | | | 41 | % |
| Selling, general and administrative | | | 176,337 | | | | 148,014 | | | | 28,323 | | | | 19 | |
| | | | | | | | | | | | | | | | | |
| Total operating expenses | | $ | 316,953 | | | $ | 247,977 | | | $ | 68,976 | | | | 28 | % |
| | | | | | | | | | | | | | | | | |
The increase in research and development was driven primarily by a $22.9 million increase in personnel-related expenses, including salaries, non-cash stock-based compensation and benefits, a $10.4 million increase to non-personnel related expenses and an increase in outside services of $3.2 million attributable to consulting fees. These increases are primarily related to the growth in our efforts to optimize and commercialize our sequencing and BeadArray technologies.
The increase in selling, general and administrative expenses was driven by an increase of $26.6 million in personnel-related expenses associated with the growth of our business, including salaries, non-cash stock-based compensation and benefits.
Acquired In-Process Research and Development (IPR&D)
| | | | | | | | | | | | | | | | | |
| | | Year Ended | | | | |
| | | January 3,
| | December 28,
| | | | Percentage
|
| | | 2010 | | 2008 | | Change | | Change |
| | | (In thousands) | | | | |
| |
| Acquired in-process research and development | | $ | 11,325 | | | $ | 24,660 | | | $ | (13,335 | ) | | | (54 | )% |
During the year ended December 28, 2008, we recorded acquired IPR&D charges of $24.7 million as a result of the Avantome, Inc. acquisition in August 2008. During the year ended January 3, 2010, we recorded additional IPR&D charges of $11.3 million related to milestone payments made to Avantome Inc.’s former shareholders.
Other Income (Expense), Net
| | | | | | | | | | | | | | | | | |
| | | Year Ended | | | | | | | |
| | | January 3,
| | | December 28,
| | | | | | Percentage
| |
| | | 2010 | | | 2008 | | | Change | | | Change | |
| | | (In thousands) | | | | | | | |
| |
| Interest income | | $ | 11,029 | | | $ | 12,519 | | | $ | (1,490 | ) | | | (12 | )% |
| Interest expense | | | (23,718 | ) | | | (22,210 | ) | | | (1,508 | ) | | | 7 | |
| Other income, net | | | 1,217 | | | | 1,921 | | | | (704 | ) | | | (37 | ) |
| | | | | | | | | | | | | | | | | |
| Total other expense, net | | $ | (11,472 | ) | | $ | (7,770 | ) | | $ | (3,702 | ) | | | 48 | % |
| | | | | | | | | | | | | | | | | |
34
Interest income decreased despite an increase in our average cash and investment balance due to an overall decline in interest rates during 2009. Interest expense increased due to the amortization of the discount on our convertible senior notes. Other income, net decreased due to a decrease of $1.5 million in gains on net foreign currency transactions, which was partially offset by a gain of $0.8 million on the conversion of a portion of our debt during the first quarter of 2009.
Provision for Income Taxes
| | | | | | | | | | | | | | | | | |
| | | Year Ended | | | | |
| | | January 3,
| | December 28,
| | | | Percentage
|
| | | 2010 | | 2008 | | Change | | Change |
| | | (In thousands) | | | | |
| |
| Provision for income taxes | | $ | 41,844 | | | $ | 33,271 | | | $ | 8,573 | | | | 26 | % |
The increase in the provision for income taxes was attributable to the increase in the consolidated income before income taxes. The effective tax rate decreased from 45.8% in 2008 to 36.7% in 2009 predominately because the amount of nondeductible acquired IPR&D recognized for financial reporting purposes was lower by $13.3 million. Additionally, the percentage of consolidated income before income taxes earned in foreign jurisdictions, which primarily have lower statutory tax rates than the U.S. statutory tax rate, increased from 36% in 2008 to 43% in 2009.
Comparison of Years Ended December 28, 2008 and December 30, 2007
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, 200628, 2008 and January 1, 2006December 30, 2007 were both 52 weeks.
Revenue
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended
| | Year Ended
| | | | | Year Ended | | | | | |
| | | December 31,
| | January 1,
| | Percentage
| | | December 28,
| | December 30,
| | | | Percentage
| |
| | | 2006 | | 2006 | | Change | | | 2008 | | 2007 | | Change | | Change | |
| | | (In thousands) | | | | | (In thousands) | | | | | |
| |
| Product revenue | | $ | 155,811 | | | $ | 57,752 | | | | 170 | % | | $ | 532,390 | | | $ | 326,699 | | | $ | 205,691 | | | | 63 | % |
| Service and other revenue | | | 27,486 | | | | 13,935 | | | | 97 | | | | 40,835 | | | | 40,100 | | | | 735 | | | | 2 | |
| Research revenue | | | 1,289 | | | | 1,814 | | | | (29 | ) | |
| | | | | | | | | | | | | |
| Total revenue | | $ | 184,586 | | | $ | 73,501 | | | | 151 | % | | $ | 573,225 | | | $ | 366,799 | | | $ | 206,426 | | | | 56 | % |
| | | | | | | | | | | | | |
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 consists primarily of revenue from the sale of consumables and instruments.
Revenue from the sale of consumables increased $140.2 million, or 72%, to $155.8$333.7 million for the year ended December 31, 2006 from $57.828, 2008 compared to $193.5 million for the year ended January 1, 2006. The increase in 2006 resulted primarily from higher consumable and BeadStation sales.December 30, 2007. Growth in consumable revenue was primarily attributable to strong demand for our Infinium and sequencing products, which led to increased sales of $104.8 million and $35.4 million, respectively. The increase in revenue associated with our Infinium products was attributable to the launch and shipmentstrong demand for our Infinium High-Density BeadChips, particularly the Human610-Quad, which we began shipping during the first quarter of our whole genome genotyping products,2008. Of the HumanHap300 and HumanHap550 BeadChips. In addition, growthoverall increase in consumable revenueInfinium BeadChip sales, approximately 79% was due to new product introductions with higher average selling prices, while the remaining 21% can be attributed to the growthincreased volume. The increase 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, comparedsequencing consumables was primarily attributable 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.instruments and the progression of customer labs ramping to production scale.
Service and other revenueRevenue from the sale of instruments increased $64.8 million, or 54%, to $27.5$185.7 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 due28, 2008 compared 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 customer’s schedule for delivering the SNPs and samples to us.
Government grants and other research funding decreased to $1.3$120.9 million for the year ended December 31, 2006 from $1.830, 2007. The increase was primarily attributable to a $63.0 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 componentincrease in sales of our Genome Analyzer driven by both an increase in sales volume and average selling prices. Additionally, during the second quarter of 2008, we launched the iScan System, our next-generation BeadChip scanner to replace the BeadArray Reader. Any increase in revenue going forward.resulting from shipments of this new system was offset by a reduction in sales of our BeadArray Reader as we stopped manufacturing this product upon the launch of our iScan System.
35
Cost of Product and Service and Other Revenue
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended
| | Year Ended
| | | | | Year Ended | | | | | |
| | | December 31,
| | January 1,
| | Percentage
| | | December 28,
| | December 30,
| | | | Percentage
| |
| | | 2006 | | 2006 | | Change | | | 2008 | | 2007 | | Change | | Change | |
| | | (In thousands) | | | | | (In thousands) | | | | | |
| |
| Cost of product revenue | | $ | 51,271 | | | $ | 19,920 | | | | 157 | % | | $ | 192,868 | | | $ | 119,991 | | | $ | 72,877 | | | | 61 | % |
| Cost of service and other revenue | | | 8,073 | | | | 3,261 | | | | 148 | | | | 12,756 | | | | 12,445 | | | | 311 | | | | 2 | |
| | | | | | | | | | | | | |
| Total cost of product and service and other revenue | | $ | 59,344 | | | $ | 23,181 | | | | 156 | % | | $ | 205,624 | | | $ | 132,436 | | | $ | 73,188 | | | | 55 | % |
| | | | | | | | | | | | | |
Total cost of revenue, which excludes the impairment of manufacturing equipment and the amortization of intangible assets, increased primarily due to higher instrument and consumable sales.
Cost of product and service and other revenue represents manufacturing costs incurredas a percentage of related revenue was 36% for the year ended December 28, 2008 compared to 37% for the year ended December 30, 2007. The decrease was primarily due to favorable product mix driven by increased sales of our new High-Density Infinium Beadchips, with higher average selling prices as compared to the Infinium Beadchips sold 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 behalfprior year. This was partially offset by increased provisions for inventory obsolescence of our customers. Costs related to research revenue are included in research and development expense. Cost of product revenue increased to $51.3$7.2 million for the year ended December 31, 2006,28, 2008 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$1.9 million for the year ended December 31, 2006, compared to $3.3 million for30, 2007. The increase in the inventory reserve was primarily associated with product transitions. During the year, ended January 1, 2006, primarilywe recorded reserves for product obsolescence associated with the launch of our new Infinium Beadchips and the launch of a new sequencing kit. Instrument cost of sales as a percentage of related revenue increased slightly over the prior year due to higher service revenue. Cost of service and other revenue forlower average selling prices mainly associated with promotional campaigns as we launched our next generation Beadarray Reader, 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 changeiScan in the mixfirst half 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.2008.
Research and DevelopmentOperating Expenses
| | | | | | | | | | | | | |
| | | Year Ended
| | | Year Ended
| | | | |
| | | December 31,
| | | January 1,
| | | Percentage
| |
| | | 2006 | | | 2006 | | | Change | |
| | | (In thousands) | | | | |
| |
| Research and development | | $ | 33,373 | | | $ | 27,809 | | | | 20 | % |
| | | | | | | | | | | | | | | | | |
| | | Year Ended | | | | | | | |
| | | December 28,
| | | December 30,
| | | | | | Percentage
| |
| | | 2008 | | | 2007 | | | Change | | | Change | |
| | | (In thousands) | | | | | | | |
| |
| Research and development | | $ | 99,963 | | | $ | 73,943 | | | $ | 26,020 | | | | 35 | % |
| Selling, general and administrative | | | 148,014 | | | | 101,256 | | | | 46,758 | | | | 46 | |
| | | | | | | | | | | | | | | | | |
| Total operating expenses | | $ | 247,977 | | | $ | 175,199 | | | $ | 72,778 | | | | 42 | % |
| | | | | | | | | | | | | | | | | |
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, theThe 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 $2.7was driven by a $17.4 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 administrativepersonnel-related 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 expensesassociated with 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 includedheadcount, including salaries, non-cash stock-based compensation expenses primarily resulting from the adoption of SFAS No. 123R totaling $8.9and benefits, an $11.6 million and $0.2 million, respectively.
Sales and marketing expenses increased $10.6 million during the year ended December 31, 2006, comparedincrease 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 costsnon-personnel related to the Affymetrix litigation, $3.1 million in personnel-related expenses associated with the growth of our business and $1.4a $1.5 million in outside consulting costs. Outside consulting costs primarily include tax and audit fees and general legal expenses notincrease to accrued compensation expense 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 millioncontingent consideration for the years ended December 31, 2006 and JanuaryAvantome acquisition completed on August 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 2005.2008. These increases were partially offset by decreased revenuea decrease in outside services of $4.5 million primarily 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 customer’s schedule for delivering the SNPs and samples to us.
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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.consulting fees.
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 significantThe 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 | % |
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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 consistwas driven primarily by an increase of personnel costs for sales and marketing, finance, human resources, business development, legal and general management, as well as professional fees, such as$42.8 million in personnel-related 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 includedincluding salaries, non-cash 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 expensesbenefits and a $0.3 million decrease in stock-based compensation expense, partially offset by a $1.5$4.0 million increase in personnel-relatedto non-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 These increases were primarily associated with the Invitrogen collaboration.growth of our business.
Acquired In-Process Research and Development (IPR&D)
| | | | | | | | | | | | | |
| | | Year Ended
| | | Year Ended
| | | | |
| | | January 1,
| | | January 2,
| | | Percentage
| |
| | | 2006 | | | 2005 | | | Change | |
| | | (In thousands) | | | | |
| |
| Acquired in-process research and development | | $ | 15,800 | | | $ | — | | | | N/A | |
| | | | | | | | | | | | | | | | | |
| | | Year Ended | | | | |
| | | December 28,
| | December 30,
| | | | Percentage
|
| | | 2008 | | 2007 | | Change | | Change |
| | | (In thousands) | | | | |
| |
| Acquired in-process research and development | | $ | 24,660 | | | $ | 303,400 | | | $ | (278,740 | ) | | | (92 | )% |
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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, CyVera’s 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 atermination-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,Avantome, Inc. acquisition in August 2008 and the Solexa Inc. acquisition in January 2007, we reduced the $9.2 million liability on our balance sheet to $5.9recorded acquired IPR&D charges of $24.7 million and recorded a gain of $3.3$303.4 million, as a litigation judgment inrespectively.
Litigation Settlements
| | | | | | | | | | | | | | | | | |
| | | Year Ended | | | | |
| | | December 28,
| | December 30,
| | | | Percentage
|
| | | 2008 | | 2007 | | Change | | Change |
| | | (In thousands) | | | | |
| |
| Litigation settlements | | $ | — | | | $ | 54,536 | | | $ | (54,536 | ) | | | (100 | )% |
During the fourth quarter of 2004. In addition, in August 2004,year ended December 30, 2007, we recorded a $1.5charge of $54.5 million gain asassociated with two settlement agreements. The total charge is comprised primarily of $54.0 million related to a result of a$90.0 million settlement with Applera.Affymetrix entered into on January 9, 2008 for certain patent litigation between the parties. See Note 4 of Notes to Consolidated Financial Statements for further information regarding the Affymetrix settlement.
InterestOther Income (Expense), Net
| | | | | | | | | | | | | |
| | | Year Ended
| | | Year Ended
| | | | |
| | | January 1,
| | | January 2,
| | | Percentage
| |
| | | 2006 | | | 2005 | | | Change | |
| | | (In thousands) | | | | |
| |
| Interest income | | $ | 1,404 | | | $ | 941 | | | | 49 | % |
| | | | | | | | | | | | | | | | | |
| | | Year Ended | | | | | | | |
| | | December 28,
| | | December 30,
| | | | | | Percentage
| |
| | | 2008 | | | 2007 | | | Change | | | Change | |
| | | (In thousands) | | | | | | | |
| |
| Interest income | | $ | 12,519 | | | $ | 16,025 | | | $ | (3,506 | ) | | | (22 | )% |
| Interest expense | | | (22,210 | ) | | | (18,297 | ) | | | (3,913 | ) | | | 21 | |
| Other income (expense), net | | | 1,921 | | | | (47 | ) | | | 1,968 | | | | (4,187 | ) |
| | | | | | | | | | | | | | | | | |
| Total other expense, net | | $ | (7,770 | ) | | $ | (2,319 | ) | | $ | (5,451 | ) | | | (235 | )% |
| | | | | | | | | | | | | | | | | |
Interest income ondecreased due to a change in our cash and cash equivalentsinvestment portfolio to a mix of shorter duration maturities and an increased number of agency-rated investments was $1.4 million and $0.9 million forcoupled with the years ended January 1, 2006 and January 2, 2005, respectively. The increase wasoverall decline in interest rates due to higher average cash balancesmarket conditions. Interest expense increased due to the amortization of the discount on our convertible senior notes and higher effectivean additional month and a half of interest ratesexpense recorded in the year ended December 28, 2008 compared to the prior year.
Interest andyear ended December 30, 2007. 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,income (expense), net consists of interest expense, expenses relatedincreased primarily due to $1.9 million in net foreign exchangecurrency 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,December 28, 2008 compared to $1.5 millionimmaterial losses recorded in the year ended December 30, 2007.
Provision (benefit) for Income Taxes
| | | | | | | | | | | | | | | | | |
| | | Year Ended | | | | |
| | | December 28,
| | December 30,
| | | | Percentage
|
| | | 2008 | | 2007 | | Change | | Change |
| | | (In thousands) | | | | |
| |
| Provision (benefit) for income taxes | | $ | 33,271 | | | $ | (16,215 | ) | | $ | 49,486 | | | | (305 | )% |
The provision (benefit) for income taxes in 2008 was different than in 2007 primarily because the amount of nondeductible acquired IPR&D recognized for financial reporting purposes was lower by $278.7 million. In addition, for the year ended January 2, 2005.
Interest expenseDecember 30, 2007, the provision for income taxes was $7,000 forreduced by $17.1 million as a result of the year ended January 1, 2006, compared to $1.4 million forrelease of the year ended January 2, 2005. Interest expense in the 2004 period relates primarily tovaluation allowance against a $26.0 million fixed rate loan that was paid off in August 2004 in connection with the sale/lease-backsignificant portion of our San Diego facilities.U.S. deferred tax assets.
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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 Company’s 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
CashflowCash flow summary
| | | | | | | | | | | | | |
| | | 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 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | Year Ended
| | | Year Ended
| | | Year Ended
| |
| | | January 3,
| | | December 28,
| | | December 30,
| |
| | | 2010 | | | 2008 | | | 2007 | |
| | | (In thousands) | |
| |
| Net cash provided by operating activities | | $ | 174,496 | | | $ | 87,882 | | | $ | 56,294 | |
| Net cash used in investing activities | | | (255,718 | ) | | | (277,249 | ) | | | (67,686 | ) |
| Net cash (used in) provided by financing activities | | | (98,862 | ) | | | 337,672 | | | | 148,292 | |
| Effect of foreign currency translation | | | (2,307 | ) | | | 3,778 | | | | (345 | ) |
| | | | | | | | | | | | | |
| Net (decrease) increase in cash and cash equivalents | | $ | (182,391 | ) | | $ | 152,083 | | | $ | 136,555 | |
| | | | | | | | | | | | | |
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.Operating Activities
43
OurCash provided by operating activities generated cash of $39.0 million in the year ended December 31, 2006, compared to using cash of $9.0 million infor the year ended January 1, 2006. Net cash provided by operating activities in the year ended December 31, 2006 was primarily the result3, 2010 consists of the following: net income of $40.0 million; $14.3$72.3 million plus net non-cash adjustments of $113.5 million and an $11.3 million increase in net operating assets. The primary non-cash expenses added back to net income included share based compensation of $60.8 million and depreciation and amortization expense related to non-cash stock compensation expense resulting fromproperty and equipment, intangibles and the adoption of SFAS No. 123R; an $11.5 million increasedebt discount on our convertible notes totaling $51.5 million. The main drivers in the change in net operating assets included increases in accounts receivable, inventory, accounts payable and accrued liabilities driven byliabilities. These increases were primarily related to the growth of our business.
Investing Activities
Cash used in general business activity associated with our sales growth, as well as expensesinvesting activities totaled $255.7 million for the year ended January 3, 2010. We purchased and soldavailable-for-sale securities totaling $694.5 million and $515.2 million, respectively. We incurred $51.8 million in capital expenditures primarily associated with the expansion of our corporatefacilities and infrastructure at our San Diego, Hayward and UK locations. Additionally, in January 2009, we executed a strategic alliance with Oxford Nanopore Technologies, which consisted of a commercialization agreement and an $18.0 million equity investment. We also agreed to accommodatemake an additional equity investment upon the achievement of a specific technical milestone.
In August 2008, we completed our acquisition of Avantome, Inc. As consideration for the acquisition, we paid $25.8 million in cash, including transaction costs, at the closing of the acquisition, and have subsequently paid $15.0 million as of February 1, 2010 based on the achievement of, or amendments relating to, certain milestones. We may pay up to an additional $20.0 million in contingent cash consideration to Avantome’s former shareholders based on the achievement of certain remaining milestones.
In January 2008, as part of our Affymetrix settlement, we recorded a $36.0 million intangible asset for licensed technology obtained in the settlement. See Note 4 of Notes to Consolidated Financial Statements for further information regarding intangible assets.
In January of 2007, we completed our acquisition of Solexa, Inc. in astock-for-stock merger transaction. The Company issued approximately 26.2 million shares of its common stock as consideration for this growth; non-cash chargesmerger. The acquisition resulted in net cash acquired of $6.1$72.1 million.
Financing Activities
Cash used in financing activities totaled $98.9 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 introduction3, 2010. During the year we repurchased approximately 6.1 million shares of our new productscommon stock for $175.1 million, which was partially offset by $39.4 million in proceeds received from the exercise of stock options and services into the market; a $5.3sale of shares under our Employee Stock Purchase Plan and $39.3 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 benefitbenefits 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 ofavailable-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 ofavailable-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.options exercised.
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In August 2008, we issued a total of 8.1 million shares at a public offering price of $43.75 per share, raising net proceeds to the Company of $342.7 million, after deducting underwriting discounts and commissions and offering expenses. During the year ended December 28, 2008, we also repurchased approximately 3.1 million shares of our common stock for $70.8 million.
In February 2007, we issued $400$400.0 million principal amount of 0.625% Convertible Senior Notesconvertible 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$201.6 million of the net proceeds to purchase approximately 11.6 million 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 net cost of convertible note hedge and warrant transactions, which are designed to reduce the potential dilution upon conversion of the notes. See Note 7 of Notes to Consolidated Financial Statements for further information regarding our convertible senior notes.
Liquidity
We manage our business to maximize operating cash flows as the primary source of our liquidity. Our ability to generate cash from operations provides us with the financial flexibility we need to meet operating, investing and financing needs. Historically, we have issued debt and equity securities to finance our requirements to the extent that cash provided by operating activities was not sufficient to fund our needs. We may require additional funding in the future and our failure to raise capital on acceptable terms, when needed, could have a material adverse effect on our business.
At January 3, 2010, we had approximately $693.5 million in cash and short-term investments. Short-term investments include marketable securities and auction rate securities totaling $494.0 million and $54.9 million, respectively. Our marketable securities consist of debt securities in government sponsored entities, corporate debt securities and U.S treasury notes. We do not hold securities backed by mortgages. Our auction rate securities were issued primarily by municipalities and universities. The markets for auction rate securities effectively ceased when the vast majority of auctions failed in February 2008, preventing investors from selling their auction rate securities. As of January 3, 2010, the securities continued to fail auction and remained illiquid. In November 2008, we signed a settlement agreement allowing us to sell our auction rate securities at par value to UBS AG (UBS) at our discretion during the period of June 30, 2010 through July 2, 2012. Because we intend to useexercise this right when it becomes available, we have classified our auction rate securities as short-term on the balance sheet. See Note 3 of the net proceedsNotes to Consolidated Financial Statements for other general corporate purposes, which may include acquisitionsfurther information regarding our auction rate securities.
Our outstanding convertible senior notes were convertible into cash and, additional purchasesif applicable, shares 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 indenturestock for the period from April 1, 2008 through December 31, 2008 and became convertible again beginning April 1, 2009 through December 31, 2009. On December 29, 2008, a noteholder converted notes occurs, holdersin an aggregate principal amount of $10.0 million. On February 4, 2009, the settlement date, we paid the noteholder the conversion value of the notes may require us to repurchase all or a portion of their notes forin cash, at a repurchase price equalup to the principal amount of the notes to be repurchased, plus accrued and unpaid interest. In addition,notes. The excess of the conversion value over the principal amount, totaling $2.9 million, was paid in shares of common stock. This equity dilution upon conversion of the notes we must paywas offset by the principal portion in cash. The notes will become convertible only in certain circumstances based on conditions relating to the trading pricereacquisition of the notesshares under the convertible note hedge transactions entered into in connection with the offering of the notes. See Note 7 of Notes to Consolidated Financial Statements for further discussion of the terms of the convertible senior notes.
Our primary short-term needs for capital, which are subject to change, include expenditures related to:
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| • | potential strategic acquisitions and investments; |
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| • | support of our commercialization efforts related to our current and future products, including expansion of our direct sales force and field support resources both in the United States and abroad; |
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| • | the continued advancement of research and development efforts; |
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| • | the acquisition of equipment and other fixed assets for use in our current and future manufacturing and research and development facilities; |
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| • | improvements in our manufacturing capacity and efficiency; and |
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| • | the expansion needs of our facilities, including costs of leasing additional facilities. |
We expect that our product revenue and the resulting operating income, as well as the status of each of our common stock or upon the occurrence of specified corporate events. However, the notesnew product development programs, will be convertible at any time from, and including, November 15, 2013 through the third scheduled trading day immediately preceding February 15, 2014.significantly impact our cash management decisions.
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.in 2010, barring unforeseen circumstances. 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, ourOur 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.including:
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| • | our ability to successfully commercialize and further develop our technologies and create innovative products in our markets; |
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| • | scientific progress in our research and development programs and the magnitude of those programs; |
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| • | competing technological and market developments; and |
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| • | the need to enter into collaborations with other companies or acquire other companies or technologies to enhance or complement our product and service offerings. |
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,During the fiscal year ended January 3, 2010, we were not involved in any SPE transactions.“off balance sheet arrangements” within the meaning of the rules of the Securities and Exchange Commission.
In January 2002, we purchased two newly constructed buildings and assumed a $26.0 million,ten-yearContractual Obligations 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.
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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 contractualContractual obligations were (in thousands):
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| | | Payments Due by Period | |
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Contractual Obligation | | Total | | | 1 Year | | | 1 – 3 Years | | | 1 – 5 Years | | | 5 Years | |
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| Operating leases | | $ | 37,899 | | | $ | 5,320 | | | $ | 10,410 | | | $ | 9,371 | | | $ | 12,798 | |
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| Total | | $ | 37,899 | | | $ | 5,320 | | | $ | 10,410 | | | $ | 9,371 | | | $ | 12,798 | |
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The above table does not includerepresent future cash commitments and liabilities under agreements with third parties, and exclude orders for goods and services entered into in the normal course of business that are not enforceable or legally binding. The following table represents our contractual obligations as of January 3, 2010, aggregated by type (amounts in thousands):
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| | | Payments Due by Period(1) | |
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Contractual Obligation | | Total | | | 1 Year | | | 1 – 3 Years | | | 3 – 5 Years | | | 5 Years | |
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| Debt obligations(2) | | $ | 400,968 | | | $ | 2,437 | | | $ | 4,875 | | | $ | 393,656 | | | $ | — | |
| Operating leases | | | 148,415 | | | | 11,668 | | | | 24,870 | | | | 22,310 | | | | 89,567 | |
| Contingent consideration(3) | | | 10,000 | | | | 10,000 | | | | — | | | | — | | | | — | |
| Amounts due under executive deferred compensation plan | | | 4,007 | | | | 4,007 | | | | — | | | | — | | | | — | |
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| Total | | $ | 563,390 | | | $ | 28,112 | | | $ | 29,745 | | | $ | 415,966 | | | $ | 89,567 | |
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| (1) | | Excludes $11.8 million of uncertain tax benefits. We have not included this amount in the table because we cannot make a reasonably reliable estimate regarding the timing of settlements with taxing authorities, if any. See Note 11 of Notes to the Consolidated Financial Statements for further discussion of our uncertain tax positions. |
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| (2) | | Debt obligations include the principal amount of our convertible senior notes and interest payments totaling 0.625% per annum. Although these notes mature in 2014, we classify the notes as current liabilities because the conditions to convertibility were satisfied during the last three fiscal quarters of |
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| | 2009 and may be satisfied during certain quarters in 2010. See Note 7 of Notes to Consolidated Financial Statements for further discussion of the terms of the convertible senior notes. |
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| (3) | | The $10.0 million included within contingent consideration is the amount owed to the former shareholders of Avantome, Inc. for the achievement of a certain date-specific milestones. The table excludes $20.0 million in additional contingent cash consideration we may be required to pay based on the achievement of certain additional milestones that do not have a fixed funding date and are subject to certain conditions that may or may not occur. |
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. Management bases its estimates on historical experience, market and other conditions and various other assumptions it believes to be reasonable. Although these estimates are based on management’s best knowledge of current events and actions that may impact us in the future, the estimation process is by its nature uncertain given that estimates depend on events over which we may not have control. If market and other conditions change from those that we anticipate, our consolidated financial statements may be materially affected. In addition, if our assumptions change, we may need to revise our estimates, or take other corrective actions, either of which may also have a material effect on our consolidated financial statements.
We believe that the following critical accounting policies and estimates have a higher degree of inherent uncertainty and require our most significant judgments. In addition, had we used estimates different from any of these, our consolidated financial statements could have been materially different from those presented. Members of our senior management have discussed the development and selection of our critical accounting policies and estimates, and our disclosure regarding them, with the audit committee of our board of directors. Our accounting policies are more fully described in Note 1 of the Consolidated Financial Statements.
Revenue Recognition
Our revenue is generated primarily from the sale of products and services. Product revenue primarily consists of sales of arrays, reagents, flow cells and instrumentation. Service and other revenue consists of revenue received for performing genotyping and sequencing services, extended warranty sales and amounts earned under research agreements with government grants, which are recognized in the period during which the related costs are incurred. The timing of revenue recognition and the amount of revenue actually recognized in each case depends upon a variety of factors, including the specific terms of each arrangement and the nature of our deliverables and obligations. Determination of the appropriate amount of revenue recognized involves significant judgments and estimates and actual results may differ from our estimates.
We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller’s 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 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 receivable is reasonably assured. Revenue for genotyping and sequencing services is recognized when earned, which is generally at the time the genotyping or sequencing analysis data is delivered to the customer or agreed-to milestones are reached.
In order to assess whether the price is fixed or determinable, we ensure there are no refund rights. If payment terms are based on future performance, we defer revenue recognition until the price becomes fixed or 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.
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Sales of instrumentation generally include a standard one-year warranty. We also sell separately priced maintenance (extended warranty) contracts, which are generally for one year, starting 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 its products under warranty were greater than its estimates, gross margins could be adversely affected.
We regularly enter into contracts where revenue is derived from multiple deliverables including any mix of productsand/or services. These productsand/or services are generally delivered within a short time frame, approximately three to six months, of the contract execution date. Revenue recognition for contracts with multiple deliverables is based on the individual units of accounting determined to exist in the contract. A delivered item is considered a separate unit of accounting when the delivered item has value to the customer on a stand-alone basis. Items are considered to have stand-alone value when they are sold separately by any vendor or when the customer could resell the item on a stand-alone basis.
For transactions entered into in 2009, consideration is allocated at the inception of the contract to all deliverables based on their relative selling price. The relative selling price for each deliverable is determined using vendor specific objective evidence (VSOE) of selling price or third-party evidence of selling price if VSOE does not exist. If neither VSOE nor third-party evidence exists, we use best estimate of the selling price for the deliverable. SeeRecent Accounting Pronouncementsin Note 1 of Notes to Consolidated Financial Statements for further information related to our change in authoritative accounting guidance for revenue recognition.
For transactions entered into prior to 2009, consideration was generally allocated to each unit of accounting based upon its relative fair value when objective and reliable evidence of fair value existed for all units of accounting in an arrangement. The fair value of an item was generally the price charged for the product, if the item was regularly sold on a stand-alone basis. In those instances when objective and reliable evidence of fair value existed for the undelivered items but not for the delivered items, the residual method was used to allocate the arrangement consideration. Under the residual method, the amount of arrangement consideration allocated to the delivered items equaled the total arrangement consideration less the aggregate fair value of the undelivered items. When we were unable to establish stand-alone value for delivered items or when fair value of undelivered items had not been established, revenue was deferred until all elements were delivered and services had been performed, or until fair value could objectively be determined for any remaining undelivered elements.
In order to establish VSOE of selling price, we must regularly sell the productand/or service on a standalone basis with a substantial majority priced within a relatively narrow range. VSOE of selling price is usually the midpoint of that range. If there is not a sufficient number of standalone sales and VSOE of selling price cannot be determined, then we consider whether third party evidence can be used to establish selling price. Due to the lack of similar products and services sold by other companies within the industry, we have rarely established selling price using third-party evidence. If neither VSOE nor third party evidence of selling price exists, we determine its best estimate of selling price using average selling prices over a rolling 12 month period as well as market conditions. If the product or service has no history of sales, we rely upon prices set by our pricing committee adjusted for applicable discounts.
We recognize revenue for delivered elements only when we determine there are no uncertainties regarding customer acceptance.
Investments
We determine the fair value of our assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use
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of unobservable inputs. We use a fair value hierarchy with three levels of inputs, of which the first two are considered observable and the last unobservable, to measure fair value:
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| • | Level 1 — Quoted prices in active markets for identical assets or liabilities. |
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| • | Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
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| • | Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
In using this fair value hierarchy, management may be required to make assumptions of pricing by market participants and assumptions about risk, specifically when using unobservable inputs to determine fair value. These assumptions are judgmental in nature and may significantly affect our results of operations.
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, review historical loss rates and assess current economic trends that may impact the level of credit losses in the future. Our allowance for doubtful accounts has generally been adequate to cover our actual credit losses. However, since we cannot reliably predict future changes in the financial stability of our customers, we cannot guarantee that our reserves will continue to be adequate.
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 supersede 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. We routinely assess the likelihood of adverse judgments or outcomes to these matters, as well as ranges of probable losses, to the extent losses are reasonably estimable. If losses are probable and reasonably estimable, we will record a liability and an expense for the estimated loss. Disclosure for specific legal contingencies is provided if the likelihood of occurrence is probable and the exposure is considered material to the consolidated financial statements. In making determinations of likely outcomes of litigation matters, management considers many factors. These factors include, but are not limited to, past history, scientific and other evidence, and the specifics and status of each matter. We may change our estimates if our assessment of the various factors changes, which may result in the recording of an accrual or a change in a previously recorded accrual. Predicting the outcome of claims and litigation, and estimating related costs and exposure involves substantial uncertainties that could cause actual costs to vary materially from estimates and accruals.
Business Combinations and Intangible Asset Valuation
Under the purchase method of accounting, we allocate the purchase price of acquired companies to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values. We record the excess of purchase price over the aggregate fair values as goodwill. We engage third-party appraisal firms to assist us in determining the fair values of assets acquired and liabilities assumed. These
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valuations require us to make significant estimates and assumptions, especially with respect to intangible assets.
The Company’s intangible assets are comprised primarily of licensed technology from the Affymetrix settlement entered into on January 9, 2008 and acquired core technology and customer relationships from the Solexa acquisition. Management uses a discounted cash flow method to value our intangible assets. This method requires significant management judgment to forecast future operating results and establish 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. If the subsequent actual results and updated projections of the underlying business activity change compared with the assumptions and projections used to develop these values, we could experience impairment charges. In addition, we have estimated the economic lives of certain acquired assets and these lives are used to calculate depreciation and amortization expense. If our estimates of the economic lives change, depreciation or amortization expenses could be accelerated or slowed.
Goodwill, Intangible Assets and Other Long-Lived Assets — Impairment Assessments
We estimate the fair value of intangible assets and other long-lived assets that have finite useful lives whenever an event or change in circumstances indicates that the carrying value of the asset may not be recovered through undiscounted future operating cash flows. We test for potential impairment of goodwill annually in our second fiscal quarter or whenever indicators of impairment arise.
In order to estimate the fair value of purchased intangible assets and other long-lived assets that have finite useful lives, we estimate the present value of future cash flows from those assets. The key assumptions that we use in our discounted cash flow model are the amount and timing of estimated future cash flows to be generated by the asset over an extended period of time and a rate of return that considers the relative risk of achieving the cash flows and the time value of money. Significant judgment is required to estimate the amount and timing of future cash flows and the relative risk of achieving those cash flows. We had a total of $213.4 million in goodwill, $117.2 million in net property and equipment and $43.8 million in net intangible assets on our balance sheet at January 3, 2010.
In order to estimate the fair value of goodwill, we use a weighted combination of a discounted cash flow model (known as the income approach) and comparisons to publicly traded companies engaged in similar businesses (known as the market approach). The income approach requires us to use a number of assumptions, including market factors specific to the business, the amount and timing of estimated future cash flows to be generated by the business over an extended period of time, long-term growth rates for the business, and a rate of return that considers the relative risk of achieving the cash flows and the time value of money. Although the assumptions we use in our discounted cash flow model are consistent with the assumptions we use to generate our internal strategic plans and forecasts, significant judgment is required to estimate the amount and timing of future cash flows and the relative risk of achieving those cash flows. When using the market approach, we make judgments about the comparability of publicly traded companies engaged in similar businesses. We base our judgments on factors such as size, growth rates, profitability, risk, and return on investment. We also make judgments when adjusting market multiples of revenue, operating income, and earnings for these companies to reflect their relative similarity to our own businesses.
Assumptions and estimates about future values and remaining useful lives are complex and often subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our internal forecasts. For example, if our future operating results do not meet current forecasts or if we experience a sustained decline in our market capitalization that is determined to be indicative of a reduction in fair value of one or more of our reporting units, we may be required to record future impairment charges for purchased intangible assets and goodwill. Impairment charges could materially decrease our future net income and result in lower asset values on our balance sheet.
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Convertible Senior Notes
During the first quarter of 2009, we adopted new authoritative guidance that significantly impacts the accounting for our convertible senior notes by requiring us to account separately for the liability and equity components of the notes. The liability component is measured so the effective interest expense associated with the notes reflects the issuer’s borrowing rate at the date of issuance for similar debt instruments without the conversion feature. The difference between the cash proceeds associated with the notes and this estimated fair value is recorded as a debt discount and amortized to interest expense over the life of the notes.
Determining the fair value of the liability component requires the use of accounting estimates and assumptions. These estimates and assumptions are judgmental in nature and could have a significant impact on the determination of the liability component and, in effect, the associated interest expense. According to the guidance, the carrying amount of the liability component is determined by measuring the fair value of a similar liability that does not have an associated equity component. If no similar liabilities exist, estimates of fair value are primarily determined using assumptions that market participants would use in pricing the liability component, including market interest rates, credit standing, yield curves and volatilities.
Stock-Based Compensation
We are required to measure and recognize compensation expense for all stock-based payment awards made to employees and directors based on estimated fair value. We estimate the fair value of stock options granted and stock purchases under our employee stock purchase plan using the Black-Scholes-Merton (BSM) option-pricing model. The fair value of our restricted stock units is based on the market price of our common stock on the date of grant.
The determination of fair value of stock-based awards using the BSM model requires the use of certain estimates and highly judgmental assumptions that affect the amount of stock-based compensation expense recognized in our Consolidated Statements of Operations. These include estimates of the expected volatility of our stock price, expected option life, expected dividends and the risk-free interest rate. We determine the volatility of our stock price by equally weighing the historical and implied volatility of our common stock. The historical volatility of our common stock over the most recent period is generally commensurate with the estimated expected life of our stock options, adjusted for the impact of unusual fluctuations not reasonably expected to recur and other relevant factors. Implied volatility is calculated from the implied market volatility of exchange-traded call options on our common stock. The expected option life of an award is based on historical forfeiture experience, exercise activity and on the terms and conditions of the stock awards granted to employees. We determined expected dividend yield to be 0% given we have never declared or paid any cash dividends on our common stock and we currently do not anticipate paying such cash dividends. The risk-free interest rate is based upon U.S. Treasury securities with remaining terms similar to the expected term of the share-based awards. If any of the assumptions used in the BSM model change significantly, stock-based compensation expense may differ materially from what we have recorded in the current period.
Income Taxes
Our provision for income taxes, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect our best assessment of estimated future taxes to be paid. Significant judgments and estimates based on interpretations of existing tax laws or regulations in the U.S. and the numerous foreign jurisdictions where we are subject to income tax are required in determining our provision for income taxes. Changes in tax laws, statutory tax rates and estimates of the company’s future taxable income could impact the deferred tax assets and liabilities provided for in the consolidated financial statements and would require an adjustment to the provision for income taxes.
Deferred tax assets are regularly assessed to determine the likelihood they will be recovered from future taxable income. A valuation allowance is established when we believe it is more likely than not the future realization of all or some of a deferred tax asset will not be achieved. In evaluating our ability to recover deferred tax assets within the jurisdiction which they arise we consider all available positive and negative evidence. Factors reviewed include the cumulative pre-tax book income for the past three years, scheduled
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reversals of deferred tax liabilities, our history of earnings and reliable forecasting, projections of pre-tax book income over the foreseeable future, and the impact of any feasible and prudent tax planning strategies. Based on the available evidence as of January 3, 2010, we were not able to conclude it is more likely than not certain U.S. and foreign deferred tax assets will be realized. Therefore, we recorded a valuation allowance of $2.8 million and $12.1 million against certain U.S. and foreign deferred tax assets, respectively.
We recognize the impact of a tax position in our financial statements only if that position is more likely than not of being sustained upon examination by taxing authorities, based on the technical merits of the position. Tax authorities regularly examine our returns in the jurisdictions in which we do business and we regularly assess the tax risk of the company’s return filing positions. Due to the complexity of some of the uncertainties, the ultimate resolution may result in payments that are materially different from our current estimate of the tax liability. These differences, as well as any interest and penalties, will be reflected in the provision for income taxes in the period in which they are determined.
Recent Accounting Pronouncements
Information with respect to recent accounting pronouncements is included in Note 1 of Notes to Consolidated Financial Statements.
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| Item 7A. | Quantitative and Qualitative Disclosures Aboutabout 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. For example, if a 100 basis point change in overall interest rates were to occur in 2010, our interest income would change by approximately $6.9 million in relation to amounts we would expect to earn, based on our cash, cash equivalents, and short-term investments as of January 3, 2010.
Market Price Sensitive Instruments
In order to reduce potential equity dilution, in connection with the issuance (and potential conversion) of our convertible notes, we entered into convertible note hedge transactions, entitling us to purchase up to 18,322,320 shares of our common stock at a strike price of $21.83 per share, subject to adjustment. In addition, we sold to the hedge transaction counterparties warrants exercisable on a net-share basis, for up to 18,322,320 shares of our common stock at a strike price of $31.435 per share, subject to adjustment. The anti-dilutive effect of the note hedge transactions, if any, could be partially or fully offset to the extent the trading price of our common stock exceeds the strike price of the warrants on the exercise dates of the warrants, which occur during 2014, assuming the warrants are exercised.
Foreign Currency Exchange Risk
Although mostMany of our revenue is realizedreporting entities conduct a portion of their business in currencies other than the entity’s U.S. dollars, some portionsdollar functional currency. These transactions give rise to monetary assets and liabilities that are denominated in currencies other than the entity’s functional currency. The value of our revenuethese monetary assets and liabilities are realized in foreign currencies. As a result, our financial results could be affected by factors such assubject to changes in foreign currency exchange rates from the time the transactions are originated until settlement in cash. Our foreign currency exposures are primarily concentrated in the Euro, Yen, British pound sterling, Australian dollar and Singapore dollar. Both realized and unrealized gains or weak economic conditions in foreign markets. The functional currencies of our subsidiaries are their respective local currencies. Accordingly,losses on the accountsvalue of these operationsmonetary assets and liabilities are translated fromincluded in 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 effectsdetermination of translation are recorded in accumulated other comprehensivenet income as(loss). We recognized a separate component of stockholders’ equity.
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net currency exchange gain on business transactions, net of hedging transactions, of $0.4 million and $1.9 million for the years ended January 3, 2010 and December 28, 2008, respectively, which are included in other income (expense), net, in the consolidated statements of operations.
Periodically,
During 2009, we hedge significantbegan using forward exchange contracts to manage a portion of the foreign currency firm sales commitmentsexposure risk for foreign subsidiaries with monetary assets and accounts receivable with forward contracts.liabilities denominated in currencies other than the entity’s functional currency. 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 yearmonth or less. These contracts have been designated as cash flow hedgesRealized and accordingly, to the extent effective, any unrealized gains or losses on the value of financial contracts entered into to hedge the exchange rate exposure of these foreign currencymonetary assets and liabilities are also included in the determination of net income (loss), as they have not been designated for hedge accounting. These contracts, which settle monthly, effectively fix the exchange rate at which these specific monetary assets and liabilities will be settled, so that gains or losses on the forward contracts are reportedoffset the losses or gains from changes in other comprehensive income. Realized gains and losses for the effective portion are recognized withvalue of the underlying hedge transaction. As of December 31, 2006,monetary assets and liabilities. At January 3, 2010, we had no foreign currency forward contracts outstanding. The notional settlementan immaterial 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 settledto hedge 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.currency risk.
| |
| Item 8. | Financial Statements and Supplementary Data. |
The Report of Independent Registered Public Accounting Firm, Financial Statements and Notes to Financial Statements begin onpage 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 Withwith 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 inRules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Securities Exchange Act), as of December 31, 2006.January 3, 2010. Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of December 31, 2006,January 3, 2010, our disclosure controls and procedures arewere 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 SEC’s 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,functions, 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 20062009 and that has materially affected, or is
47
reasonably likely to materially affect, our internal control over financial reporting. ThatThe evaluation did not identify any such change.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange ActRules 13a-15(f) and15d-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 onForm 10-K, has issued an attestation report on management’s assessment of theJanuary 3, 2010. The effectiveness of our internal control over financial reporting as of December 31, 2006. ThisJanuary 3, 2010 has been audited by Ernst & Young LLP, an independent registered accounting firm, as stated in their report which expresses an unqualified opinion on management’s 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 management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Illumina, Inc. maintained effective’s internal control over financial reporting as of December 31, 2006,January 3, 2010, 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.reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment,assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s 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,January 3, 2010, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the accompanying consolidated balance sheets of Illumina, Inc. as of January 3, 2010 and December 31, 2006 and January 1, 2006,28, 2008, and the related consolidated statements of operations, shareholders’stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2006January 3, 2010 of Illumina, Inc. and our report dated February 23, 200726, 2010 expressed an unqualified opinion thereon.
San Diego, California
February 23, 200726, 2010
49
| |
| Item 9B. | Other Information. |
None.
PART III
| |
| Item 10. | Directors, and Executive Officers of the Registrant.and Corporate Governance. |
(a) Identification of Directors. Information concerning our directors is incorporated by reference from the section entitled “Proposal One: Election of Directors”Directors,” “Information About Directors,” “Director Compensation” and “Board of Directors and Corporate Governance” to be contained in our definitive Proxy Statement with respect to our 20072010 Annual Meeting of Stockholders to be filed with the SEC no later than April 30, 2007.7, 2010.
(b) Identification of Executive Officers. Information concerning our executive officers is set forth underincorporated by reference from the section entitled “Executive Officers” to be contained in Part Iour definitive Proxy Statement with respect to our 2010 Annual Meeting of this Annual Report onForm 10-K and is incorporated herein by reference.Stockholders to be filed with the SEC no later than April 7, 2010.
(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” to be contained in our definitive Proxy Statement with respect to our 20072010 Annual Meeting of Stockholders to be filed with the SEC no later than April 30, 2007.7, 2010.
(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 the section entitled “Board of Directors and Corporate Governance” to be contained in our definitive Proxy Statement with respect to our 20072010 Annual Meeting of Stockholders to be filed with the SEC no later than April 30, 2007.7, 2010.
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 Corporate Governance portal of the Investor InformationRelations section under “Corporate.“Company.” A copy of the Code of Ethics is available in print free of charge to any stockholder who requests a copy. Interested parties may address a written request for a printed copy of the Code of Ethics to: Corporate Secretary, Illumina, Inc., 9885 Towne Centre Dr., San Diego, California 92121. We intend to satisfy the disclosure requirement regarding any amendment to, or a waiver from, a provision of the Code of Ethics for our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, by posting such information on our website. The information on, or that can be accessed from, 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 “Compensation Discussion and Analysis,” “Director Compensation” and “Executive Compensation and Other Information”Compensation” to be contained in our definitive Proxy Statement with respect to our 20072010 Annual Meeting of Stockholders to be filed with the SEC no later than April 30, 2007.7, 2010.
| |
| 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 and information covering securities authorized for issuance under equity compensation plans is incorporated by reference from the sectionsections entitled “Ownership“Stock Ownership of Securities”Principal Stockholders and Management,” “Executive Compensation” and “Equity Compensation Plan Information” to be contained in our definitive Proxy
50
Statement with respect to our 20072010 Annual Meeting of Stockholders to be filed with the SEC no later than April 30, 2007.7, 2010.
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 onForm 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.Transactions, and Director Independence. |
Information concerning certain relationships and related transactions, and director independence is incorporated by reference from the sections entitled “Proposal One: Election of Directors,” “Information About Directors,” “Director Compensation,” “Executive Compensation and Other Information”Compensation” and “Certain Relationships and Related Party Transactions” to be contained in our definitive Proxy Statement with respect to our 20072010 Annual Meeting of Stockholders to be filed with the SEC no later than April 30, 2007.7, 2010.
| |
| Item 14. | Principal AccountingAccountant Fees and Services. |
Information concerning principal accountingaccountant fees and services is incorporated by reference from the sections entitled “Proposal Two: Ratification of Independent Auditors”Registered Public Accounting Firm” and “Independent Registered Public Accountants” to be contained in our definitive Proxy Statement with respect to our 20072010 Annual Meeting of Stockholders to be filed with the SEC no later than April 30, 2007.7, 2010.
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:
(3) Exhibits:
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Incorporated by Reference | | |
Exhibit
| Exhibit
| | | Exhibit
| | | | | | | | | | Filing
| | Filed
|
Number | Number | | Description of Document | Number | | Exhibit Description | | Form | | File Number | | Exhibit | | Date | | Herewith |
| |
| | 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 | | Amended and Restated Certificate of Incorporation | | 8-K | | 000-30361 | | | 3 | .1 | | 09/23/08 | | |
| | 3 | .1(2) | | Corrected Amended and Restated Certificate of Incorporation. | 3 | .2 | | Amended and Restated Bylaws | | 8-K | | 000-30361 | | | 3 | .2 | | 04/29/09 | | |
| | 3 | .2(30) | | Amended Bylaws. | 3 | .3 | | Certificate of Designation for Series A Junior Participating Preferred Stock (included as Exhibit A to exhibit 4.3) | | 8-A | | 000-30361 | | | 4 | .3 | | 05/14/01 | | |
| | 3 | .3(5) | | Certificate of Designation for Series A Junior Participating Preferred Stock (included as an exhibit to exhibit 4.3). | 4 | .1 | | Specimen Common Stock Certificate | | S-1/A | | 333-33922 | | | 4 | .1 | | 07/03/00 | | |
| | 4 | .1(1) | | Specimen Common Stock Certificate. | 4 | .2 | | Rights Agreement, dated as of May 3, 2001, between Illumina and Equiserve Trust Company, N.A. | | 8-A | | 000-30361 | | | 4 | .3 | | 05/14/01 | | |
| | 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 Registrant’s 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. | |
51
| | | | | | | | | | | | | | | | | |
| | | | | Incorporated by Reference | | |
Exhibit
| | | | | | | | | | Filing
| | Filed
|
Number | | Exhibit Description | | Form | | File Number | | Exhibit | | Date | | Herewith |
| |
| | 4 | .3 | | Indenture related to the 0.625% Convertible Senior Notes due 2014, dated as of February 16, 2007, between Illumina and The Bank of New York, as trustee | | 8-K | | 000-30361 | | | 4 | .1 | | 02/16/07 | | |
| | +10 | .1 | | Form of Indemnification Agreement between Illumina and each of its directors and officers | | S-1/A | | 333-33922 | | | 10 | .1 | | 07/03/00 | | |
| | +10 | .2 | | 1998 Incentive Stock Plan | | S-1/A | | 333-33922 | | | 10 | .2 | | 07/03/00 | | |
| | +10 | .3 | | 2000 Employee Stock Purchase Plan, as amended and restated through October 28, 2009 | | | | | | | | | | | | X |
| | +10 | .4 | | 2000 Stock Plan, as amended and restated through March 21, 2002 | | 10-Q | | 000-30361 | | | 10 | .22 | | 05/13/02 | | |
| | +10 | .5 | | 2005 Stock and Incentive Plan, as amended and restated through October 28, 2009 | | | | | | | | | | | | X |
| | +10 | .6 | | Form of Restricted Stock Unit Agreement for Non-Employee Directors under 2005 Stock and Incentive Plan | | 10-K | | 000-30361 | | | 10 | .35 | | 02/26/09 | | |
| | +10 | .7 | | New Hire Stock and Incentive Plan, as amended and restated through October 28, 2009 | | | | | | | | | | | | X |
| | 10 | .8 | | License Agreement, effective as of May 6, 1998, between Tufts University and Illumina | | 10-Q | | 000-30361 | | | 10 | .5 | | 05/03/07 | | |
| | +10 | .9 | | The Solexa Unapproved Company Share Option Plan | | 8-K | | 000-30361 | | | 99 | .3 | | 11/26/07 | | |
| | +10 | .10 | | The Solexa Share Option Plan for Consultants | | 8-K | | 000-30361 | | | 99 | .4 | | 11/26/07 | | |
| | +10 | .11 | | Solexa Limited Enterprise Management Incentive Plan | | 8-K | | 000-30361 | | | 99 | .5 | | 11/26/07 | | |
| | +10 | .12 | | Amended and Restated Solexa 2005 Equity Incentive Plan | | 10-K | | 000-30361 | | | 10 | .25 | | 02/26/09 | | |
| | +10 | .13 | | Amended and Restated Solexa 1992 Stock Option Plan | | 10-K | | 000-30361 | | | 10 | .26 | | 02/26/09 | | |
| | 10 | .14 | | License Agreement, dated June 24, 2002, between Dade Behring Marburg GmbH and Illumina (with certain confidential portions omitted) | | S-3/A | | 333-111496 | | | 10 | .23 | | 03/02/04 | | |
| | 10 | .15 | | Non-exclusive License Agreement, dated January 24, 2002, between Amersham Biosciences Corp. and Illumina (with certain confidential portions omitted) | | S-3/A | | 333-111496 | | | 10 | .24 | | 03/02/04 | | |
| | 10 | .16 | | Amended and Restated Lease between BMR-9885 Towne Centre Drive LLC and Illumina for the 9885 Towne Centre Drive property, dated January 26, 2007 | | 10-Q | | 000-30361 | | | 10 | .41 | | 05/03/07 | | |
| | 10 | .17 | | Settlement and Cross License Agreement dated August 18, 2004 between Applera Corporation and Illumina (with certain confidential portions omitted) | | 10-Q | | 000-30361 | | | 10 | .27 | | 11/12/04 | | |
| | 10 | .18 | | Collaboration Agreement, dated December 17, 2004, between Invitrogen Corporation and Illumina (with certain confidential portions omitted) | | 10-K | | 000-30361 | | | 10 | .28 | | 03/08/05 | | |
52
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Incorporated by Reference | | |
Exhibit
| Exhibit
| | | Exhibit
| | | | | | | | | | Filing
| | Filed
|
Number | Number | | Description of Document | Number | | Exhibit Description | | Form | | File Number | | Exhibit | | Date | | Herewith |
| |
| | 10 | .9(1) | | Option Agreement and Joint Escrow Instructions, dated July 6, 2000, between Diversified Eastgate Venture and Registrant. | +10 | .19 | | Offer letter for Christian O. Henry dated April 26, 2005 | | 10-Q | | 000-30361 | | | 10 | .33 | | 08/08/05 | | |
| | 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 | .20 | | Joint Development and Licensing Agreement, dated May 15, 2006, between deCODE genetics, ehf. and Illumina (with certain confidential portions omitted) | | 10-Q | | 000-30361 | | | 10 | .32 | | 08/02/06 | | |
| | 10 | .11(6) | | First Amendment to Option Agreement and Escrow Instructions dated May 25, 2001 between Diversified Eastgate Venture and Registrant. | +10 | .21 | | Amended and Restated Change in Control Severance Agreement between Illumina and Jay T Flatley, dated October 22, 2008 | | 10-K | | 000-30361 | | | 10 | .33 | | 02/26/09 | | |
| | 10 | .12(13) | | Second Amendment to Option Agreement and Escrow Instructions dated July 18, 2001 between Diversified Eastgate Venture and Registrant. | +10 | .22 | | Form of Amended and Restated Change in Control Severance Agreement between Illumina and its executive officers | | 10-K | | 000-30361 | | | 10 | .34 | | 02/26/09 | | |
| | 10 | .13(14) | | Third Amendment to Option Agreement and Escrow Instructions dated September 27, 2001 between Diversified Eastgate Venture and Registrant. | +10 | .23 | | Form of Restricted Stock Unit Agreement for Non-Employee Directors under Illumina’s 2005 Stock and Incentive Plan | | 10-K | | 000-30361 | | | 10 | .35 | | 02/26/09 | | |
| | 10 | .14(15) | | First Amendment to Eastgate Pointe Lease dated September 27, 2001 between Diversified Eastgate Venture and Registrant. | 10 | .24 | | Lease between BMR-9885 Towne Centre Drive LLC and Illumina for the 9865 Towne Centre Drive property, dated January 26, 2007 | | 10-Q | | 000-30361 | | | 10 | .42 | | 05/03/07 | | |
| | 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 | .25 | | Settlement and Release Agreement between Affymetrix, Inc. and Illumina, dated January 9, 2008 | | 10-K | | 000-30361 | | | 10 | .44 | | 02/26/08 | | |
| | 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 | .26 | | Confirmation of Convertible Bond Hedge Transaction, dated February 12, 2007, by and between Illumina and Goldman, Sachs & Co. | | 8-K | | 000-30361 | | | 10 | .1 | | 02/16/07 | | |
| | 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 | .27 | | Confirmation of Convertible Bond Hedge Transaction, dated February 12, 2007, by and between Illumina and Deutsche Bank AG London | | 8-K | | 000-30361 | | | 10 | .2 | | 02/16/07 | | |
| | +10 | .18(32) | | 2000 Employee Stock Purchase Plan as amended and restated through July 20, 2006. | 10 | .28 | | Confirmation Issuer Warrant Transaction, dated February 12, 2007, by and between Illumina and Goldman, Sachs & Co. | | 8-K | | 000-30361 | | | 10 | .3 | | 02/16/07 | | |
| | +10 | .19(20) | | 2000 Stock Plan as amended and restated through March 21, 2002. | 10 | .29 | | Confirmation Issuer Warrant Transaction, dated February 12, 2007, by and between Illumina and Deutsche Bank AG London | | 8-K | | 000-30361 | | | 10 | .4 | | 02/16/07 | | |
| | 10 | .20(21) | | Non-exclusive License Agreement dated January 2002 between Amersham Biosciences Corp. and Registrant (with certain confidential portions omitted). | 10 | .30 | | Amendment to the Confirmation of Issuer Warrant Transaction, dated February 13, 2007, by and between Illumina and Goldman, Sachs & Co. | | 8-K | | 000-30361 | | | 10 | .5 | | 02/16/07 | | |
| | 10 | .21(22) | | License Agreement dated June 2002 between Dade Behring Marburg GmbH and Registrant (with certain confidential portions omitted). | 10 | .31 | | Amendment to the Confirmation of Issuer Warrant Transaction, dated February 13, 2007, by and between Illumina and Deutsche Bank AG London | | 8-K | | 000-30361 | | | 10 | .6 | | 02/16/07 | | |
| | 10 | .22(23) | | Purchase and Sale Agreement and Escrow Instructions dated June 18, 2004 between Bernardo Property Advisors, Inc. and Registrant. | +10 | .32 | | Indemnification Agreement between Illumina and Gregory F. Heath | | 10-Q | | 000-30361 | | | 10 | .55 | | 07/25/08 | | |
| | 10 | .23(24) | | Single Tenant Lease dated August 18, 2004 between BioMed Realty Trust Inc. and Registrant. | +10 | .33 | | Indemnification Agreement between Illumina and Joel McComb | | 10-Q | | 000-30361 | | | 10 | .56 | | 07/25/08 | | |
| | 10 | .24(25) | | Settlement and Cross License Agreement dated August 18, 2004 between Applera Corporation and Registrant (with certain confidential portions omitted). | +10 | .34 | | Severance and Release Agreement, dated February 22, 2010, between Joel McComb and Illumina | | | | | | | | | | | X |
| | 10 | .28(26) | | Collaboration Agreement dated December 17, 2004 between Invitrogen Incorporated and Registrant (with certain confidential portions omitted). | 21 | .1 | | Subsidiaries of Illumina | | | | | | | | | | | X |
| | 10 | .29(27) | | Offer letter for Christian O. Henry dated April 26, 2005. | 23 | .1 | | Consent of Independent Registered Public Accounting Firm | | | | | | | | | | | X |
| | 10 | .30(28) | | Forms of Stock Option Agreement under 2000 Stock Plan. | 24 | .1 | | Power of Attorney (included on the signature page) | | | | | | | | | | | X |
| | 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
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Incorporated by Reference | | |
Exhibit
| Exhibit
| | | Exhibit
| | | | | | | | | | Filing
| | Filed
|
Number | Number | | Description of Document | Number | | Exhibit Description | | Form | | File Number | | Exhibit | | Date | | Herewith |
| |
| | 10 | .39(34) | | Securities Purchase Agreement, dated as of November 12, 2006, between Solexa, Inc. and the Registrant. | 31 | .1 | | Certification of Jay T. Flatley pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | | | | | | | X |
| | 10 | .40 | | Lease between The Irvine Company LLC and the Registrant, dated September 29, 2006. | 31 | .2 | | Certification of Christian O. Henry pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | | | | | | | X |
| | 14 | (10) | | Code of Ethics. | 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 | | | | | | | | | | | X |
| | 21 | .1 | | Subsidiaries of the Registrant. | 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 | | | | | | | | | | | X |
| | 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 onForm S-1(333-33922) filed April 3, 2000, as amended. |
|
(2) | | Incorporated by reference to the same numbered exhibit filed with our Annual Report onForm 10-K (FileNo. 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 ourForm 10-Q (FileNo. 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 onForm 8-A (FileNo. 000-30361) filed May 14, 2001. |
|
(6) | | Incorporated by reference to exhibit 10.15 filed with ourForm 10-Q (FileNo. 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 ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended September 30, 2001 filed November 14, 2001. |
|
(8) | | Incorporated by reference to exhibit 10.18 filed with ourForm 10-Q (FileNo. 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 onForm S-3 (File No.333-111496) filed March 2, 2004. |
|
(10) | | Incorporated by reference to the same numbered exhibit filed with our Annual Report onForm 10-K (FileNo. 000-30361) for the year ended December 28, 2003 filed March 12, 2004. |
|
(11) | | Incorporated by reference to the same numbered exhibit filed with ourForm 10-Q (FileNo. 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 ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended October 3, 2004 filed November 12, 2004. |
|
(13) | | Incorporated by reference to exhibit 10.16 filed with ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended September 30, 2001 filed November 14, 2001. |
|
(14) | | Incorporated by reference to exhibit 10.17 filed with ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended September 30, 2001 filed November 14, 2001. |
|
(15) | | Incorporated by reference to exhibit 10.18 filed with ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended September 30, 2001 filed November 14, 2001. |
|
(16) | | Incorporated by reference to exhibit 2.1 filed with ourForm 8-K (FileNo. 000-30361) filed November 13, 2006. |
54
| | |
(17) | | Incorporated by reference to exhibit 10.19 filed with ourForm 10-Q (FileNo. 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 ourForm 10-Q (FileNo. 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 ourForm 10-Q (FileNo. 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 ourForm 10-Q (FileNo. 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 onForm S-3 (FileNo. 333-111496) filed March 2, 2004. |
|
(22) | | Incorporated by reference to exhibit 10.23 filed with our Amendment No. 1 to our Registration Statement onForm S-3 (FileNo. 333-111496) filed March 2, 2004. |
|
(23) | | Incorporated by reference to exhibit 10.25 filed with ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended June 27, 2004 filed August 6, 2004. |
|
(24) | | Incorporated by reference to exhibit 10.26 filed with ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended October 3, 2004 filed November 12, 2004. |
|
(25) | | Incorporated by reference to exhibit 10.27 filed with ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended October 3, 2004 filed November 12, 2004. |
|
(26) | | Incorporated by reference to exhibit 10.28 filed with ourForm 10-K (FileNo. 000-30361) for the year ended January 2, 2005 filed March 8, 2005. |
|
(27) | | Incorporated by reference to exhibit 10.33 filed with ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended July 3, 2005 filed August 8, 2005. |
|
(28) | | Incorporated by reference to exhibit 10.29 filed with ourForm 10-K (FileNo. 000-30361) for the year ended January 2, 2005 filed March 8, 2005. |
|
(29) | | Incorporated by reference to the same numbered exhibit filed with ourForm 10-Q (FileNo. 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 ourForm 10-Q (FileNo. 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 ourForm 8-K (FileNo. 000-30361) filed August 23, 2006. |
|
(32) | | Incorporated by reference to exhibit 10.13 filed with ourForm 10-Q (FileNo. 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 ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended October 1, 2006, filed October 30, 2006. |
|
(34) | | Incorporated by reference to exhibit 10.1 filed with ourForm 8-K (FileNo. 000-30361) filed November 13, 2006. |
|
(35) | | Incorporated by reference to exhibit 4.1 filed with ourForm 8-K (FileNo. 000-30361) filed February 16,2007. |
|
(36) | | Incorporated by reference to exhibit 4.2 filed with ourForm 8-K (FileNo. 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 onForm 10-K and we will furnish such material to the SEC at that time.
5554
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, 2007.26, 2010.
Illumina, Inc.Inc.
Jay T. Flatley
President and Chief Executive Officer
February 28, 200726, 2010
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 lawfulattorney-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 onForm 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 saidattorneys-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 saidattorneys-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 onForm 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, 200726, 2010 |
| | | | | |
/s/ Christian O. Henry
Christian O. Henry | | Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) | | February 28, 200726, 2010 |
| | | | | |
/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, 200726, 2010 |
| | | | | |
/s/ Daniel M. BradburyA. Blaine Bowman
Daniel M. BradburyA. Blaine Bowman | | Director | | February 28, 200726, 2010 |
| | | | | |
/s/ Daniel M. Bradbury
Daniel M. Bradbury | | Director | | February 26, 2010 |
| | | | |
/s/ Karin Eastham
Karin Eastham | | Director | | February 28, 200726, 2010 |
5655
| | | | | | | |
| | | | |
/s/ Paul GrintJack Goldstein
Paul GrintJack Goldstein | | Director | | February 28, 200726, 2010 |
| | | | | |
/s/ David R. WaltPaul Grint
David R. WaltPaul Grint | | Director | | February 28, 200726, 2010 |
| | | | | |
/s/ Jack GoldsteinDavid R. Walt
Jack GoldsteinDavid R. Walt | | Director | | February 28, 200726, 2010 |
| | | | | |
/s/ A. Blaine BowmanRoy Whitfield
A. Blaine BowmanRoy Whitfield | | Director | | February 28, 2007 |
| | | | |
Roy Whitfield | | Director | | February 28, 200726, 2010 |
5756
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
F-1
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 January 3, 2010 and December 31, 2006 and January 1, 2006,28, 2008, 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.January 3, 2010. 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 Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Illumina, Inc., at January 3, 2010 and December 31, 2006 and January 1, 2006,28, 2008, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2006,January 3, 2010, 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, the Company adopted Financial Accounting Standards Board Staff Position No. APB14-1,Accounting For Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement)(Codified in FASB ASC Topic 470,Debt Conversions and Other Options)effective Januaryas of December 29, 2008 and retroactively adjusted all periods presented in the consolidated financial statements for this change. Also described in Note 1 2006, Illumina, Inc. changedis the Company’s 2009 change in its method of accounting for share-based payments in accordancerevenue recognition with Statementthe adoption of amendments to the Financial Accounting Standards Board Accounting Standards Codification resulting from Accounting Standards Update No. 123R, Share-Based Payment.2009-13,Multiple-Deliverable Revenue Arrangements, and Accounting Standards UpdateNo. 2009-14,Certain Revenue Arrangements That Include Software Elements, both adopted effective December 29, 2008.
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,January 3, 2010, 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, 200726, 2010 expressed an unqualified opinion thereon.
San Diego, California
February 23, 200726, 2010
F-2
ILLUMINA, INC.
| | | | | | | | | | | | | | | | | |
| | | December 31,
| | January 1,
| | | January 3,
| | December 28,
| |
| | | 2006 | | 2006 | | | 2010 | | 2008(1) | |
| | | (In thousands) | | | (In thousands) | |
| |
ASSETS | ASSETS | ASSETS |
| Current assets: | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 38,386 | | | $ | 50,822 | | | $ | 144,633 | | | $ | 327,024 | |
| Short-term investments | | | 92,418 | | | | — | | | | 548,894 | | | | 313,051 | |
| Accounts receivable, net | | | 39,984 | | | | 17,620 | | | | 157,751 | | | | 133,266 | |
| Inventory, net | | | 20,169 | | | | 10,309 | | | | 92,776 | | | | 73,431 | |
| Deferred tax assets, current portion | | | | 20,021 | | | | 8,635 | |
| Prepaid expenses and other current assets | | | 2,769 | | | | 959 | | | | 17,515 | | | | 14,154 | |
| | | | | | | | | | | |
| Total current assets | | | 193,726 | | | | 79,710 | | | | 981,590 | | | | 869,561 | |
| Property and equipment, net | | | 25,634 | | | | 16,131 | | | | 117,188 | | | | 89,436 | |
| Investment in Solexa | | | 67,784 | | | | — | | |
| Long-term investments | | | | — | | | | 55,900 | |
| Goodwill | | | 2,125 | | | | 2,125 | | | | 213,452 | | | | 213,452 | |
| Intangible and other assets, net | | | 11,315 | | | | 2,644 | | |
| Intangible assets, net | | | | 43,788 | | | | 47,755 | |
| Deferred tax assets, long-term portion | | | | 47,371 | | | | 46,242 | |
| Other assets | | | | 26,548 | | | | 4,825 | |
| | | | | | | | | | | |
| Total assets | | $ | 300,584 | | | $ | 100,610 | | | $ | 1,429,937 | | | $ | 1,327,171 | |
| | | | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | LIABILITIES AND STOCKHOLDERS’ EQUITY | LIABILITIES AND STOCKHOLDERS’ EQUITY |
| Current liabilities: | | | | | | | | | | | | | | | | |
| Accounts payable | | $ | 9,853 | | | $ | 7,390 | | | $ | 52,781 | | | $ | 29,204 | |
| Accrued liabilities | | | 23,860 | | | | 14,210 | | | | 98,253 | | | | 80,355 | |
| Current portion of long-term debt | | | 63 | | | | 118 | | |
| Long-term debt, current portion | | | | 290,202 | | | | 276,889 | |
| | | | | | | | | | | |
| Total current liabilities | | | 33,776 | | | | 21,718 | | | | 441,236 | | | | 386,448 | |
| 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 | | | | 24,656 | | | | 18,946 | |
| Commitments and contingencies | | | | | | | | | | | | | | | | |
| Conversion option subject to cash settlement | | | | 99,797 | | | | 123,110 | |
| 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 | | |
| Preferred stock, $0.01 par value, 10,000,000 shares authorized, no shares issued at January 3, 2010 and December 28, 2008 | | | | — | | | | — | |
Common stock, $0.01 par value, 320,000,000 shares authorized, 143,544,265 shares issued at January 3, 2010,
138,936,582 shares issued at December 28, 2008 | | | | 1,436 | | | | 1,389 | |
| Additional paid-in capital | | | 340,197 | | | | 216,766 | | | | 1,637,751 | | | | 1,469,770 | |
| Deferred compensation | | | — | | | | (354 | ) | |
| Accumulated other comprehensive income | | | 11,294 | | | | 258 | | | | 2,830 | | | | 2,422 | |
| Accumulated deficit | | | (104,618 | ) | | | (144,586 | ) | | | (280,226 | ) | | | (352,507 | ) |
| Treasury stock, at cost (24,068,450 shares at January 3, 2010 and 17,927,983 shares at December 28, 2008) | | | | (497,543 | ) | | | (322,407 | ) |
| | | | | | | | | | | |
| Total stockholders’ equity | | | 247,342 | | | | 72,497 | | | | 864,248 | | | | 798,667 | |
| | | | | | | | | | | |
| Total liabilities and stockholders’ equity | | $ | 300,584 | | | $ | 100,610 | | | $ | 1,429,937 | | | $ | 1,327,171 | |
| | | | | | | | | | | |
| | |
| (1) | | Adjusted for required retroactive adoption of authoritative accounting guidance for convertible debt instruments that may be settled in cash upon conversion effective December 29, 2008. |
See accompanying notes to the consolidated financial statements
F-3
ILLUMINA, INC.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended
| | Year Ended
| | Year Ended
| | | Year Ended_ | |
| | | December 31,
| | January 1,
| | January 2,
| | | January 3,
| | December 28,
| | December 30,
| |
| | | 2006 | | 2006 | | 2005 | | | 2010 | | 2008(1) | | 2007(1) | |
| | | (In thousands, except per share amounts) | | | (In thousands, except per share amounts) | |
| |
| Revenue | | | | | | | | | | | | | |
| Revenue: | | | | | | | | | | | | | |
| Product revenue | | $ | 155,811 | | | $ | 57,752 | | | $ | 40,497 | | | $ | 627,240 | | | $ | 532,390 | | | $ | 326,699 | |
| Service and other revenue | | | 27,486 | | | | 13,935 | | | | 8,075 | | | | 39,084 | | | | 40,835 | | | | 40,100 | |
| Research revenue | | | 1,289 | | | | 1,814 | | | | 2,011 | | |
| | | | | | | | | | | | | | | |
| Total revenue | | | 184,586 | | | | 73,501 | | | | 50,583 | | | | 666,324 | | | | 573,225 | | | | 366,799 | |
| | | | | | | | | |
| 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 | | |
| Cost of product revenue (excluding impairment of manufacturing equipment and amortization of intangible assets) | | | | 190,714 | | | | 192,868 | | | | 119,991 | |
| Cost of service and other revenue | | | | 15,055 | | | | 12,756 | | | | 12,445 | |
| Research and development | | | | 140,616 | | | | 99,963 | | | | 73,943 | |
| Selling, general and administrative | | | | 176,337 | | | | 148,014 | | | | 101,256 | |
| Impairment of manufacturing equipment | | | | — | | | | 4,069 | | | | — | |
| Amortization of intangible assets | | | | 6,680 | | | | 10,438 | | | | 2,429 | |
| Acquired in-process research and development | | | — | | | | 15,800 | | | | — | | | | 11,325 | | | | 24,660 | | | | 303,400 | |
| Litigation judgment (settlement), net | | | — | | | | — | | | | (4,201 | ) | |
| Litigation settlements | | | | — | | | | — | | | | 54,536 | |
| | | | | | | | | | | | | | | |
| Total costs and expenses | | | 146,774 | | | | 94,948 | | | | 56,096 | | | | 540,727 | | | | 492,768 | | | | 668,000 | |
| | | | | | | | | | | | | | | |
| Income (loss) from operations | | | 37,812 | | | | (21,447 | ) | | | (5,513 | ) | | | 125,597 | | | | 80,457 | | | | (301,201 | ) |
| Other income (expense), net: | | | | | | | | | | | | | |
| Interest income | | | 5,368 | | | | 1,404 | | | | 941 | | | | 11,029 | | | | 12,519 | | | | 16,025 | |
| Interest and other expense, net | | | (560 | ) | | | (668 | ) | | | (1,518 | ) | |
| Interest expense | | | | (23,718 | ) | | | (22,210 | ) | | | (18,297 | ) |
| Other income (expense), net | | | | 1,217 | | | | 1,921 | | | | (47 | ) |
| | | | | | | | | |
| Total other expense, net | | | | (11,472 | ) | | | (7,770 | ) | | | (2,319 | ) |
| | | | | | | | | | | | | | | |
| Income (loss) before income taxes | | | 42,620 | | | | (20,711 | ) | | | (6,090 | ) | | | 114,125 | | | | 72,687 | | | | (303,520 | ) |
| Provision for income taxes | | | 2,652 | | | | 163 | | | | 135 | | |
| Provision (benefit) for income taxes | | | | 41,844 | | | | 33,271 | | | | (16,215 | ) |
| | | | | | | | | | | | | | | |
| Net income (loss) | | $ | 39,968 | | | $ | (20,874 | ) | | $ | (6,225 | ) | | $ | 72,281 | | | $ | 39,416 | | | $ | (287,305 | ) |
| | | | | | | | | | | | | | | |
| Net income (loss) per basic share | | $ | 0.90 | | | $ | (0.52 | ) | | $ | (0.17 | ) | | $ | 0.59 | | | $ | 0.34 | | | $ | (2.65 | ) |
| | | | | | | | | | | | | | | |
| Net income (loss) per diluted share | | $ | 0.82 | | | $ | (0.52 | ) | | $ | (0.17 | ) | | $ | 0.53 | | | $ | 0.30 | | | $ | (2.65 | ) |
| | | | | | | | | | | | | | | |
| Shares used in calculating basic net income (loss) per share | | | 44,501 | | | | 40,147 | | | | 35,845 | | | | 123,154 | | | | 116,855 | | | | 108,308 | |
| | | | | | | | | | | | | | | |
| Shares used in calculating diluted net income (loss) per share | | | 48,754 | | | | 40,147 | | | | 35,845 | | | | 137,096 | | | | 133,607 | | | | 108,308 | |
| | | | | | | | | | | | | | | |
| | |
| (1) | | Adjusted for required retroactive adoption of authoritative accounting guidance for convertible debt instruments that may be settled in cash upon conversion effective December 29, 2008. |
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 onavailable-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 onavailable-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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | Accumulated
| | | | | | | | | | | | | |
| | | | | | | | | Additional
| | | Other
| | | | | | | | | | | | Total
| |
| | | Common Stock | | | Paid-In
| | | Comprehensive
| | | Accumulated
| | | Treasury Stock | | | Stockholders’
| |
| | | Shares | | | Amount | | | Capital | | | Income | | | Deficit | | | Shares | | | Amount | | | Equity | |
| | | | | | | | | | | | (In thousands) | | | | | | | | | | |
| |
| Balance as of January 1, 2007 | | | 93,714 | | | $ | 938 | | | $ | 339,728 | | | $ | 11,294 | | | $ | (104,618 | ) | | | — | | | $ | — | | | $ | 247,342 | |
| Components of comprehensive loss: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss(1) | | | — | | | | — | | | | — | | | | — | | | | (287,305 | ) | | | — | | | | — | | | | (287,305 | ) |
Unrealized loss onavailable-for-sale securities, net of deferred tax | | | — | | | | — | | | | — | | | | (10,529 | ) | | | — | | | | — | | | | — | | | | (10,529 | ) |
| Foreign currency translation adjustment | | | — | | | | — | | | | — | | | | 582 | | | | — | | | | — | | | | — | | | | 582 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (297,252 | ) |
| Issuance of common stock | | | 4,654 | | | | 46 | | | | 30,044 | | | | — | | | | — | | | | — | | | | — | | | | 30,090 | |
| Issuance of common stock for the acquisition of Solexa, Inc. | | | 26,442 | | | | 264 | | | | 530,460 | | | | — | | | | — | | | | — | | | | — | | | | 530,724 | |
| Fair value of options assumed from Solexa, Inc. | | | — | | | | — | | | | 75,334 | | | | — | | | | — | | | | — | | | | — | | | | 75,334 | |
| Convertible note hedge | | | — | | | | — | | | | (139,040 | ) | | | — | | | | — | | | | — | | | | — | | | | (139,040 | ) |
| Warrants issued in connection with the convertible debt issuance | | | — | | | | — | | | | 92,440 | | | | — | | | | — | | | | — | | | | — | | | | 92,440 | |
| Warrants exercised | | | 798 | | | | 8 | | | | 6,067 | | | | — | | | | — | | | | — | | | | — | | | | 6,075 | |
| Stock-based compensation | | | — | | | | — | | | | 33,926 | | | | — | | | | — | | | | — | | | | — | | | | 33,926 | |
| Incremental tax benefit related to stock options exercised | | | — | | | | — | | | | 20,086 | | | | — | | | | — | | | | — | | | | — | | | | 20,086 | |
| Incremental tax benefit related to convertible debt issuance | | | — | | | | — | | | | 54,629 | | | | — | | | | — | | | | — | | | | — | | | | 54,629 | |
| Repurchases of common stock | | | — | | | | — | | | | — | | | | — | | | | — | | | | (14,819 | ) | | | (251,622 | ) | | | (251,622 | ) |
| Impact of convertible debt(1) | | | — | | | | — | | | | (48,805 | ) | | | — | | | | — | | | | — | | | | — | | | | (48,805 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance as of December 30, 2007(1) | | | 125,608 | | | | 1,256 | | | | 994,869 | | | | 1,347 | | | | (391,923 | ) | | | (14,819 | ) | | | (251,622 | ) | | | 353,927 | |
| Components of comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income(1) | | | — | | | | — | | | | — | | | | — | | | | 39,416 | | | | — | | | | — | | | | 39,416 | |
Unrealized gain onavailable-for-sale securities, net of deferred tax | | | — | | | | — | | | | — | | | | 920 | | | | — | | | | — | | | | — | | | | 920 | |
| Foreign currency translation adjustment | | | — | | | | — | | | | (16 | ) | | | 155 | | | | — | | | | — | | | | — | | | | 139 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 40,475 | |
| Issuance of common stock in conjunction with secondary offering, net of issuance costs | | | 8,050 | | | | 80 | | | | 342,570 | | | | — | | | | — | | | | — | | | | — | | | | 342,650 | |
| Issuance of common stock under employee stock plans | | | 4,923 | | | | 49 | | | | 44,281 | | | | — | | | | — | | | | — | | | | — | | | | 44,330 | |
| Warrants exercised | | | 356 | | | | 4 | | | | 2,987 | | | | — | | | | — | | | | — | | | | — | | | | 2,991 | |
| Stock-based compensation | | | — | | | | — | | | | 47,695 | | | | — | | | | — | | | | — | | | | — | | | | 47,695 | |
| Incremental tax benefit related to stock options exercised | | | — | | | | — | | | | 18,501 | | | | — | | | | — | | | | — | | | | — | | | | 18,501 | |
| Repurchases of common stock | | | — | | | | — | | | | — | | | | — | | | | — | | | | (3,109 | ) | | | (70,785 | ) | | | (70,785 | ) |
| Impact of convertible debt(1) | | | — | | | | — | | | | 18,883 | | | | — | | | | — | | | | — | | | | — | | | | 18,883 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance as of December 28, 2008(1) | | | 138,937 | | | | 1,389 | | | | 1,469,770 | | | | 2,422 | | | | (352,507 | ) | | | (17,928 | ) | | | (322,407 | ) | | | 798,667 | |
| Components of comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | — | | | | — | | | | — | | | | — | | | | 72,281 | | | | — | | | | — | | | | 72,281 | |
Unrealized gain onavailable-for-sale securities, net of deferred tax | | | — | | | | — | | | | | | | | 408 | | | | — | | | | — | | | | — | | | | 408 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 72,689 | |
| Issuance of common stock | | | 3,569 | | | | 36 | | | | 39,343 | | | | — | | | | — | | | | — | | | | — | | | | 39,379 | |
| Warrants exercised | | | 954 | | | | 10 | | | | 7,566 | | | | — | | | | — | | | | — | | | | — | | | | 7,576 | |
| Stock-based compensation | | | — | | | | — | | | | 60,813 | | | | — | | | | — | | | | — | | | | — | | | | 60,813 | |
| Incremental tax benefit related to stock options exercised | | | — | | | | — | | | | 39,319 | | | | — | | | | — | | | | — | | | | — | | | | 39,319 | |
| Repurchases of common stock | | | — | | | | — | | | | — | | | | — | | | | — | | | | (6,140 | ) | | | (175,136 | ) | | | (175,136 | ) |
| Impact of convertible debt | | | 84 | | | | 1 | | | | 20,940 | | | | — | | | | — | | | | — | | | | — | | | | 20,941 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance as of January 3, 2010 | | | 143,544 | | | $ | 1,436 | | | $ | 1,637,751 | | | $ | 2,830 | | | $ | (280,226 | ) | | | (24,068 | ) | | $ | (497,543 | ) | | $ | 864,248 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| (1) | | Adjusted for required retroactive adoption of authoritative accounting guidance for convertible debt instruments that may be settled in cash upon conversion effective December 29, 2008. |
See accompanying notes to the consolidated financial statements
F-5
ILLUMINA, INC.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended
| | Year Ended
| | Year Ended
| | | Year Ended | |
| | | December 31,
| | January 1,
| | January 2,
| | | January 3,
| | December 28,
| | December 30,
| |
| | | 2006 | | 2006 | | 2005 | | | 2010 | | 2008(1) | | 2007(1) | |
| | | (In thousands) | | | | | (In thousands) | | | |
| |
| Cash flows from operating activities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income (loss) | | $ | 39,968 | | | $ | (20,874 | ) | | $ | (6,225 | ) | | $ | 72,281 | | | $ | 39,416 | | | $ | (287,305 | ) |
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | | | | | | | | | | | | | |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | | | | | | | |
| Acquired in-process research and development | | | — | | | | 15,800 | | | | — | | | | 11,325 | | | | 24,660 | | | | 303,400 | |
| 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 | | |
| Amortization of intangible assets | | | | 6,680 | | | | 10,438 | | | | 2,429 | |
| Amortization of debt discount | | | | 20,286 | | | | 18,883 | | | | 15,335 | |
| Depreciation expense | | | | 24,504 | | | | 17,285 | | | | 11,464 | |
| Impairment of manufacturing equipment | | | | — | | | | 4,069 | | | | — | |
| Stock-based compensation expense | | | | 60,811 | | | | 47,688 | | | | 33,746 | |
| Incremental tax benefit related to stock options exercised | | | (1,439 | ) | | | — | | | | — | | | | (39,319 | ) | | | (18,501 | ) | | | (20,086 | ) |
| Amortization of gain on sale of land and building | | | (375 | ) | | | (375 | ) | | | (156 | ) | |
| Deferred income taxes | | | | 29,704 | | | | 31,533 | | | | (17,197 | ) |
| Other non-cash adjustments | | | | (487 | ) | | | 803 | | | | 1,347 | |
| Changes in operating assets and liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Accounts receivable | | | (21,733 | ) | | | (7,039 | ) | | | (7,202 | ) | | | (18,578 | ) | | | (57,672 | ) | | | (37,060 | ) |
| Inventory | | | (9,728 | ) | | | (6,502 | ) | | | (1,785 | ) | | | (19,201 | ) | | | (19,560 | ) | | | (27,130 | ) |
| Prepaid expenses and other current assets | | | (1,591 | ) | | | 290 | | | | (29 | ) | | | (3,429 | ) | | | 2,322 | | | | (6,128 | ) |
| Deferred income taxes | | | (548 | ) | | | — | | | | — | | |
| Other assets | | | (5,263 | ) | | | 395 | | | | (2,041 | ) | | | (2,670 | ) | | | (1,815 | ) | | | 2,612 | |
| Accounts payable | | | 2,438 | | | | 3,193 | | | | 697 | | | | 11,778 | | | | 4,840 | | | | 12,262 | |
| Litigation settlements payable | | | | — | | | | (54,536 | ) | | | 54,536 | |
| Accrued income taxes | | | 1,809 | | | | 144 | | | | 84 | | | | 2,378 | | | | 2,377 | | | | 1,586 | |
| Accrued liabilities | | | 9,066 | | | | 4,070 | | | | 1,874 | | | | 17,619 | | | | 29,339 | | | | 15,901 | |
| Litigation judgment | | | — | | | | (5,957 | ) | | | 567 | | |
| Other long-term liabilities | | | 5,893 | | | | 3,182 | | | | (512 | ) | | | 814 | | | | 6,313 | | | | (3,418 | ) |
| Advance payment from former collaborator | | | — | | | | — | | | | (10,000 | ) | |
| | | | | | | | | | | | | | | |
| Net cash provided by (used in) operating activities | | | 39,000 | | | | (9,008 | ) | | | (19,574 | ) | |
| Net cash provided by operating activities | | | | 174,496 | | | | 87,882 | | | | 56,294 | |
| | | | | | | | | | | | | | | |
| 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 | ) | | | — | | | | — | | |
| Cash (paid for) obtained in acquisition, including cash paid for transaction costs | | | | (1,325 | ) | | | (24,666 | ) | | | 72,075 | |
| Sale of secured convertible debentures | | | | — | | | | — | | | | 3,593 | |
Purchases ofavailable-for-sale securities | | | (236,331 | ) | | | — | | | | (6,603 | ) | | | (694,487 | ) | | | (568,707 | ) | | | (598,383 | ) |
Sales and maturities ofavailable-for-sale securities | | | 143,846 | | | | 12,248 | | | | 26,348 | | | | 515,216 | | | | 411,817 | | | | 479,415 | |
| Proceeds from sale of land and building, net of fees | | | — | | | | — | | | | 40,667 | | |
| Purchase of property and equipment | | | (15,114 | ) | | | (11,395 | ) | | | (3,355 | ) | | | (51,822 | ) | | | (59,693 | ) | | | (24,301 | ) |
| Acquisition of intangible assets | | | (100 | ) | | | — | | | | (35 | ) | |
| Investments in other entities | | | | (19,900 | ) | | | — | | | | — | |
| Cash paid for intangible assets | | | | (3,400 | ) | | | (36,000 | ) | | | (85 | ) |
| | | | | | | | | | | | | | | |
| Net cash provided by (used in) investing activities | | | (160,735 | ) | | | (1,535 | ) | | | 57,022 | | |
| Net cash used in investing activities | | | | (255,718 | ) | | | (277,249 | ) | | | (67,686 | ) |
| | | | | | | | | | | | | | | |
| Cash flows from financing activities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Payments on long-term debt | | | (109 | ) | | | (83 | ) | | | (25,387 | ) | |
| Payments on equipment financing | | | — | | | | — | | | | (232 | ) | |
| Payments on current portion of long-term debt | | | | (10,000 | ) | | | (15 | ) | | | (95 | ) |
| Proceeds from issuance of convertible debt, net of issuance costs | | | | — | | | | — | | | | 390,269 | |
| Purchase of convertible note hedges | | | | — | | | | — | | | | (139,040 | ) |
| Proceeds from the exercise of warrants | | | | 7,576 | | | | 2,991 | | | | 98,515 | |
| Common stock repurchases | | | | (175,136 | ) | | | (70,785 | ) | | | (251,622 | ) |
| Proceeds from secondary offering, net of issuance cost | | | | — | | | | 342,650 | | | | — | |
| Proceeds from issuance of common stock | | | 107,966 | | | | 6,046 | | | | 30,507 | | | | 39,379 | | | | 44,330 | | | | 30,179 | |
| Incremental tax benefit related to stock options exercised | | | 1,439 | | | | — | | | | — | | | | 39,319 | | | | 18,501 | | | | 20,086 | |
| Repurchase of common stock | | | — | | | | — | | | | (13 | ) | |
| | | | | | | | | | | | | | | |
| Net cash provided by financing activities | | | 109,296 | | | | 5,963 | | | | 4,875 | | |
| Net cash (used in) provided by financing activities | | | | (98,862 | ) | | | 337,672 | | | | 148,292 | |
| | | | | | | | | | | | | | | |
| Effect of foreign currency translation on cash and cash equivalents | | | 3 | | | | 613 | | | | 1 | | | | (2,307 | ) | | | 3,778 | | | | (345 | ) |
| | | | | | | | | | | | | | | |
| 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 | | |
| Net (decrease) increase in cash and cash equivalents | | | | (182,391 | ) | | | 152,083 | | | | 136,555 | |
| Cash and cash equivalents at beginning of period | | | | 327,024 | | | | 174,941 | | | | 38,386 | |
| | | | | | | | | | | | | | | |
| Cash and cash equivalents at end of the year | | $ | 38,386 | | | $ | 50,822 | | | $ | 54,789 | | |
| Cash and cash equivalents at end of period | | | $ | 144,633 | | | $ | 327,024 | | | $ | 174,941 | |
| | | | | | | | | | | | | | | |
| Supplemental disclosures of cash flow information: | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash paid during the year for interest | | $ | 11 | | | $ | 15 | | | $ | 1,368 | | |
| Cash paid for interest | | | $ | 2,437 | | | $ | 2,553 | | | $ | 1,378 | |
| | | | | | | | | | | | | | | |
| Cash paid (refunded) for income taxes | | | $ | 10,361 | | | $ | (1,653 | ) | | $ | 2,581 | |
| | | | | | | | | |
| | |
| (1) | | Adjusted for required retroactive adoption of authoritative accounting guidance for convertible debt instruments that may be settled in cash upon conversion effective December 29, 2008. |
See accompanying notes to the consolidated financial statements
F-6
ILLUMINA, INC.
Unless the context requires otherwise, references in this report to “Illumina,” “we,” “us,” the “Company,” and “our” refer to Illumina, Inc. and its consolidated subsidiaries.
| |
| 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 Company’s proprietary technologies, the CompanyIllumina 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 Company’s 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 andcustomers include leading genomic research centers, pharmaceutical companies, academic institutions, clinical research allow diseases to be detected earlierorganizations and permit better choices of drugs for individual patients.biotechnology companies.
Acquisitions
On August 1, 2008, the Company completed its acquisition of Avantome, Inc., a development-stage company creating a low cost, long-read sequencing technology. At the time of the acquisition, the Company paid $25.8 million in cash, including transaction costs, and recorded a charge of $24.7 million for purchased in-process research and development (IPR&D). As part of the acquisition agreement, Illumina agreed to pay Avantome’s former shareholders up to an additional $35.0 million in contingent cash consideration based on the achievement of certain milestones. For the year ended January 3, 2010, the Company recorded IPR&D of $11.3 million and compensation expense of $3.7 million associated with these milestones. For the year ended December 28, 2008, compensation expense of $1.5 million was recorded associated with these milestones. Compensation expense associated with the Avantome acquisition is included in research and development in the consolidated statements of operations.
On January 26, 2007, the Company completed its acquisition of Solexa, Inc., in astock-for-stock merger transaction. The Company issued 26.2 million shares of its common stock as consideration for this merger. Based on the estimated fair values at the acquisition date, the Company allocated $303.4 million to IPR&D, $62.2 million to tangible assets acquired and liabilities assumed and $24.4 million to intangible assets. The remaining excess of the purchase price over the fair value of net assets acquired of $213.4 million was allocated to goodwill.
Basis of Presentation
The consolidated financial statements of the Company have been prepared in conformity with U.S. generally accepted accounting principles (GAAP) 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 Company’s 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 year ended January 3, 2010 was 53 weeks; the years ended December 31, 200628, 2008 and January 1, 2006December 30, 2007 were both 52 weeks.
Reclassifications
Certain prior year amounts have been reclassified to conform to current year presentation. During the fourth quarter of 2009, the Company determined that pre-acquisition net operating loss carryforwards of Solexa that were included in goodwill could be utilized by the Company. Therefore, the Company has updated the Consolidated Financial Statements and related disclosures to reclassify $15.3 million from goodwill to
F-7
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
long-term deferred tax assets to correctly reflect the tax effect of Solexa’s pre-acquisition net operating losses that can be utilized by the Company.
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.
CashSegment Information
During the first quarter of 2008, the Company reorganized its operating structure into a newly created Life Sciences Business Unit, which includes all products and services that are primarily related to the research market, namely the sequencing, BeadArray, and VeraCode product lines. The Company also created a Diagnostics Business Unit to focus on the emerging opportunity in molecular diagnostics. For the year ended January 3, 2010, the Company had limited activity related to the Diagnostics Business Unit and operating results were reported on an aggregate basis to the chief operating decision maker of the Company, the chief executive officer. Accordingly, the Company operated in one segment for the year ended January 3, 2010. The Company will begin reporting in two segments once revenues, operating profit or loss, or assets of the Diagnostics Business Unit exceed 10% of the consolidated amounts.
Cash Equivalents and Investments
Cash and cash equivalents are comprised of short-term, highly liquid investments primarily in money market-type funds.
F-7
ILLUMINA, INC.with maturities of 90 days or less from the date of purchase.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Investments
The Company applies StatementShort-term investments consist of Financial Accounting Standards (SFAS) No. 115,Accounting for Certain Investments in DebtU.S. Treasury and Equity Securities, to its investments. Under SFAS No. 115, the CompanyU.S. government agency securities, municipal notes, corporate notes and bonds and commercial paper. Management classifies itsshort-term investments as“available-for-sale”available-for-sale or trading at the time of purchase and recordsreevaluates such assetsclassification as of each balance sheet date. All short-term investments are recorded at estimated fair value. Unrealized gains and losses foravailable-for-sale and trading securities are included in accumulated other comprehensive income, a component of stockholders’ equity, and other income, net, respectively. The Company evaluates its investments to assess whether those with unrealized loss positions are other than temporarily impaired. Impairments are considered to be other than temporary if it is likely that the Company will have to sell the securities before the recovery of their cost basis and it is the Company’s intent to do so. Realized gains and losses and declines in value judged to be other than temporary are determined based on the specific identification method and are reported in other income (expense), net in the balance sheet,consolidated statements of operations.
Included in short-term investments are the Company’s auction rate securities and a put option related to the Company’s settlement agreement with UBS that gives the Company the right to sell its auction rate securities to UBS AG (UBS) at par value during the period of June 30, 2010 through July 2, 2012 (the Settlement). These securities had previously been classified as long-term investments; however, they were reclassified to short-term investments in fiscal 2009 as the Company intends to exercise its right to sell the securities back to UBS during the Settlement period. The auction rate securities are classified as trading securities and both the put option and the auction rate securities are recorded at estimated fair value, with unrealized gains and losses, if any, reportedrecognized in stockholders’ equity. As of December 31, 2006, the Company’s 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 basedother income (expense), net on the specific identification method. The Company did not record any gross realized gainsconsolidated statements of operations. See Note 3 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.further detailed discussion.
F-8
ILLUMINA, INC.
Restricted CashNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 certainfinancial instruments such as cash equivalents, foreign cash accounts, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses and other current liabilities approximate the related fair values due to the short-term maturities of these instruments. The estimated fair value of the convertible senior notes is determined by using available market information as of the latest trading date prior to the Company’s fiscal year-end provided by a third party financial institution. The par value and fair value of the Company’s financial instruments, including cashconvertible notes was $390.0 million and cash equivalents, accounts$553.2 million, respectively, at January 3, 2010 and notes receivable, accounts payable$400.0 million and accrued liabilities, approximate fair value.$473.0 million, respectively, at December 28, 2008.
Accounts and Notes Receivable
Trade accounts receivable are recorded at the 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.not interest bearing. 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.history and current economic trends that might impact the level of future credit losses. The Company re-evaluates such reserves on a regular basis and adjusts its reserves as needed.
Concentrations of Risk
CashThe Company operates in markets that are highly competitive and rapidly changing. Significant technological changes, shifting customer needs, the emergence of competitive products or services with new capabilities and other factors could negatively impact the Company’s operating results.
The Company is also subject to risks related to its financial instruments including its cash and cash equivalents, investments and accounts receivable are financial instruments that potentially subject the Company to concentrations of credit risk.receivable. Most of the Company’s cash and cash equivalents as of December 31, 2006January 3, 2010 were deposited with financial institutions in the United States and theStates. The Company’s investment policy restricts the amount of credit exposure to any one issuer to 5% of the portfolio at the time of purchase and to any one typeindustry sector, as defined by Bloomberg classifications, to 25% of investment, other thanthe portfolio at the time of purchase. There is no limit to the percentage of the portfolio that may be maintained in securities issued by the U.S. Government.U.S government and money market funds. The Company has historically not experienced significant credit losses from investments and 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.risks.
F-8
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company’s 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%Shipments to customers outside the United States comprised 48%, 38%51% and 52%43% of the Company’s revenue for the years ended January 3, 2010, December 31, 2006, January 1, 200628, 2008 and January 2, 2005 was derived from shipments to customersDecember 30, 2007, respectively. Customers outside the United States. Approximately 39%States represented 46% and 48%61% of the Company’s net accounts receivable balance as of January 3, 2010 and December 31, 2006 and January 1, 2006, respectively, was related to customers outside the United States.28, 2008, respectively. 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.
Aggregated accounts receivable from one customer comprised more than 10% of gross customer receivable at January 3, 2010.
F-9
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Inventories
Inventories are stated at the lower of standard cost (which approximates actual cost)(on a first in, first out basis) 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.consumed or expired. 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. Maintenance and repairs are charged to operations as incurred. When assets are sold, or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is included in operating expense.
Goodwill, Intangible Assets
Intangible assets consist of license agreements and acquired technology. The cost of the Company’s 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.
Other Long-Lived Assets
In accordanceGoodwill represents the excess of cost over fair value of net assets acquired. Intangible assets include acquired technology, customer relationships, other license agreements and licensed technology (capitalized as part of the Affymetrix litigation). The cost of identified intangible assets is amortized on a straight-line basis over periods ranging from three to ten years unless the expected benefit pattern is declining, in which case an accelerated method is used.
The Company regularly performs reviews to determine if the carrying values of the long-lived assets are impaired. Goodwill and other intangible assets that have indefinite useful lives are reviewed for impairment at least annually during the second fiscal quarter, or more frequently if an event occurs indicating the potential for impairment. The Company performed its annual impairment test of goodwill in May of 2009, utilizing a test that begins with SFAS No. 144,Accountingan estimate of the fair value of the reporting unit or intangible asset, noting no impairment and has determined there have been no impairment indicators for goodwill through January 3, 2010. A review of intangible assets that have finite useful lives and other long-lived assets is performed when an event occurs indicating the Impairment or Disposal of Long-Lived Assets,ifpotential for impairment. If indicators of impairment exist, the Company assesses the recoverability of the affected long-lived assets by determining whether the carrying valueamount of such assets can be recovered through undiscounted future operating cash flows.exceeds its estimated fair value. If impairment is indicated, the Company measurescompares the future discounted cash flows associated withcarrying amount to the useestimated fair value of the asset and adjusts the value of the asset accordingly. WhileFactors that would necessitate an impairment assessment include a significant decline in the Company’s historical operatingstock price and cash flow losses are indicatorsmarket capitalization compared to its net book value, significant changes in the ability of impairment, the Company believes the current and futurea particular asset to generate positive cash flows to be received fromand significant changes in the long-lived assets recorded at December 31, 2006 will exceedCompany’s strategic business objectives and utilization of the assets’ carrying value, and accordingly the Company has not recognized any impairment losses through December 31, 2006.
F-9
ILLUMINA, INC.asset.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Reserve for Product Warranties
The Company generally provides a one-year warranty on instrumentation.genotyping, gene expression and sequencing systems. Additionally, the Company provides a warranty on its consumable sales through the expiry date, which generally ranges from six to twelve months after the manufacture date. At the time revenue is recognized, the Company establishes an accrual for estimated warranty expenses associated with system sales.based on historical experience as well as anticipated product performance. This expense is recorded as a component of cost of product revenue. Estimated warranty expenses associated with extended maintenance contracts for systems are recorded as a cost of service and other revenue ratably over the term of the maintenance contract. See Note 6 for further detailed discussion.
F-10
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Revenue Recognition
The Company’s revenue is generated primarily from the sale of products and services. Product revenue primarily consists of sales of arrays, reagents, instrumentation,flow cells and oligos.instrumentation. Service and other revenue consists of revenue received for performing genotyping and sequencing services, extended warranty sales and revenueamounts earned from milestone payments.under research agreements with government grants, which are recognized in the period during which the related costs are incurred.
The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller’s 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 receivablesreceivable 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, trainingfor genotyping and the receipt of customer acceptance. Revenue for genotypingsequencing services is recognized when earned, which is generally at the time the genotyping or sequencing analysis data is deliveredmade available to the customer or as specificagreed upon milestones are achieved.reached.
In order to assess whether the price is fixed andor 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 andor 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,year, 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 under warranty were greater than its estimates, gross margins could be adversely affected.
The Company regularly enters into contracts where revenue is derived from multiple deliverables including any mix of productsand/or services. These productsand/or services are generally delivered within a short time frame, approximately three to six months, of the contract execution date. Revenue recognition for contracts with multiple deliverables is based on the individual units of accounting determined to exist in the contract. A delivered item is considered a separate unit of accounting when the delivered item has value to the customer on a stand-alone basis. Items are considered to have stand-alone value when they are sold separately by any vendor or when the customer could resell the item on a stand-alone basis.
For transactions entered into during 2009, consideration is allocated at the inception of the contract to all deliverables based on their relative selling price. The relative selling price for each deliverable is determined using vendor specific objective evidence (VSOE) of selling price or third-party evidence of selling price if VSOE does not exist. If neither VSOE nor third-party evidence exists, the Company uses its best estimate of the selling price for the deliverable. SeeRecent Accounting Pronouncementsin Note 1 for further information related to the Company’s change in authoritative accounting guidance for revenue recognition.
For transactions entered into prior to 2009, consideration was generally allocated to each unit of accounting based upon its relative fair value when objective and reliable evidence of fair value existed for all units of accounting in an arrangement. The fair value of an item was generally the price charged for the product, if the item was regularly sold on a stand-alone basis. In those instances when objective and reliable
F-10F-11
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Whileevidence of fair value existed for the majorityundelivered items but not for the delivered items, the residual method was used to allocate the arrangement consideration. Under the residual method, the amount of its sales agreements contain standard terms and conditions,arrangement consideration allocated to the delivered items equaled the total arrangement consideration less the aggregate fair value of the undelivered items. When the Company does enter into agreementswas unable to establish stand-alone value for delivered items or when fair value of undelivered items had not been established, revenue was deferred until all elements were delivered and services had been performed, or until fair value could objectively be determined for any remaining undelivered elements.
In order to establish VSOE of selling price, the Company must regularly sell the productand/or service on a standalone basis with a substantial majority priced within a relatively narrow range. VSOE of selling price is usually the midpoint of that contain multiple elementsrange. If there is not a sufficient number of standalone sales and VSOE of selling price cannot be determined, then the Company considers whether third party evidence can be used to establish selling price. Due to the lack of similar products and services sold by other companies within the industry, the Company has rarely established selling price using third-party evidence. If neither VSOE nor third party evidence of selling price exists, the Company determines its best estimate of selling price using average selling prices over a rolling 12 month period as well as market conditions. If the product or non-standard terms and conditions. Emerging Issues Task Force (EITF)No. 00-21,Revenue Arrangements with Multiple Deliverables,provides guidance on accountingservice has no history of sales, the Company relies upon prices set by the Company’s pricing committee adjusted 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. applicable discounts.
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. Changes in the allocation of the sales price between delivered and undelivered elements can impact the timing of revenue recognition but do not change the total revenue recognized on any arrangement.
SomeFair Value Measurements
The Company determines the fair value of its assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The Company uses a fair value hierarchy with three levels of inputs, of which the first two are considered observable and the last unobservable, to measure fair value:
| | |
| • | Level 1 —Quoted prices in active markets for identical assets or liabilities. |
|
| • | Level 2 —Inputs, other than Level 1, that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
|
| • | Level 3 —Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
The following table presents the Company’s agreements contain multiple elements that include milestone payments. Revenue fromfair value hierarchy for assets measured at fair value on a milestone achievement is recognized when earned,recurring basis as evidenced by acknowledgement from the Company’s 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 Company’s 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.January 3, 2010 (in thousands):
| | | | | | | | | | | | | | | | | |
| | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| |
| Debt securities in government sponsored entities | | $ | 289,701 | | | $ | — | | | $ | — | | | $ | 289,701 | |
| Corporate debt securities | | | 192,821 | | | | — | | | | — | | | | 192,821 | |
| Auction rate securities | | | — | | | | — | | | | 54,900 | | | | 54,900 | |
| U.S. Treasury securities | | | 11,472 | | | | — | | | | — | | | | 11,472 | |
| | | | | | | | | | | | | | | | | |
| Total assets measured at fair value | | $ | 493,994 | | | $ | — | | | $ | 54,900 | | | $ | 548,894 | |
| | | | | | | | | | | | | | | | | |
F-12
ILLUMINA, INC.
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.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Shipping and Handling Expenses
Shipping and handling expenses are included in cost of product revenue and totaled $1.8$4.8 million, $1.3$3.7 million and $0.5$2.2 million for the years ended January 3, 2010, December 31, 2006, January 1, 200628, 2008 and January 2, 2005,December 30, 2007, 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$4.2 million, $1.2$3.4 million and $0.8$2.8 million for the years ended January 3, 2010, December 31, 2006, January 1, 200628, 2008 and January 2, 2005,December 30, 2007, respectively.
F-11
ILLUMINA, INC.Leases
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Leases are reviewed and classified as capital or operating at their inception. For leases that contain rent escalations, the Company records the total rent payable on a straight-line basis over the term of the lease, which includes the construction build-out period but excludes lease extension periods. The difference between rent payments and straight-line rent expense is recorded in other long-term liabilities. Landlord allowances are also recorded in other long-term liabilities, which are amortized on a straight-line basis over the lease term as a reduction to rent expense.
Income Taxes
In accordance with SFAS No. 109,Accounting for Income Taxes, theThe 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. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the provision for income taxes in the period that includes the enactment date.
Deferred tax assets are regularly assessed to determine the likelihood they will be recovered from future taxable income. A valuation allowance is established when the Company believes it is more likely than not the future realization of all or some of thea deferred tax assetsasset will not be achieved. The evaluation ofIn evaluating the need for a valuation allowance is performed on aability to recover deferred tax assets within the jurisdiction by jurisdiction basis, and includes a review ofwhich they arise the Company considers all available positive and negative evidence. Factors reviewed include the cumulative pre-tax book income for the past three years, scheduled reversals of deferred tax liabilities, history of earnings and reliable forecasting, projections of pre-tax book income over the foreseeable future, and the impact of any feasible and prudent tax planning strategies.
Due to the adoption of SFAS No. 123 (revised 2004), Share-Based Payment, theThe 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 thewith-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 Company’s 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-12F-13
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company recognizes the impact of a tax position in the financial statements only if that position is more likely than not of being sustained upon examination by taxing authorities, based on the technical merits of the position. Any interest and penalties related to uncertain tax positions will be reflected in income tax expense.
Functional Currency
Prior to the third quarter of 2008, the Company identified the local currency as the functional currency in each of its foreign subsidiaries, with all translation adjustments recorded as part of other comprehensive income. Beginning in the third quarter of 2008, the Company reorganized its international structure to execute a more efficient relationship between product development, product manufacturing and sales. This reorganization increased the foreign subsidiaries’ dependence on the U.S. entity for management decisions, financial support, production assets and inventory, thereby making the foreign subsidiaries a direct and integral component of the U.S. entity’s operations. As a result, the Company reassessed the primary economic environment of its foreign subsidiaries, resulting in a U.S. dollar functional currency determination. Beginning in the third quarter of 2008, the Company remeasures its foreign subsidiaries’ assets and liabilities and revenue and expense accounts related to monetary assets and liabilities to the U.S. dollar and records the net gains or losses resulting from remeasurement in other income (expense), net in the consolidated statements of operations. Gains resulting from remeasurement were $0.4 million and $1.9 million for the years ended January 3, 2010 and December 28, 2008, respectively. There were no gains or losses resulting from remeasurement in the year ended December 30, 2007.
Derivatives
The Company is exposed to foreign exchange rate risks in the normal course of business. To manage a portion of the accounting exposure resulting from changes in foreign currency exchange rates, the Company enters into foreign exchange contracts to hedge monetary assets and liabilities that are denominated in currencies other than the functional currency of its subsidiaries. These foreign exchange contracts are carried at fair value and do not qualify for hedge accounting treatment and are not designated as hedging instruments. Changes in the value of the derivative are recognized in other income (expense), net, in the consolidated statements of operations for the current period, along with an offsetting gain or loss on the underlying assets or liabilities.
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 enterprise’s 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 Company’s 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 appliedestimate the fair value recognition provisions of SFAS No. 123 to stock-based compensation duringstock options granted and stock purchases under 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 valuationEmployee Stock Purchase Plan (ESPP). This 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 expected volatility, expected option life, expected dividends, and the risk-free interest rates. The expectedCompany determines volatility is based onby equally weighing the historical and implied volatility of the Company’s common stock. The historical volatility of the Company’s common stock over the most recent period is generally commensurate with the estimated expected life of the Company’s stock options, adjusted for the impact of unusual fluctuations not reasonably expected to recur and other relevant factors. The implied volatility is calculated from the implied market volatility of exchange-traded call options on the Company’s common stock. The expected life of an award is based on historical forfeiture experience, exercise activity, and on the terms and conditions of the stock awards granted to employees.
F-14
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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
| | Year Ended |
| | | December 31,
| | January 1,
| | January 2,
| | January 3,
| | December 28,
| | December 30,
|
| | | 2006 | | 2006 | | 2005 | | 2010 | | 2008 | | 2007 |
| |
| Interest rate — stock options | | 4.73% | | 4.08% | | 3.25% | | 1.69 - 1.97% | | 2.31 - 3.52% | | 3.68 - 4.90% |
| Interest rate — stock purchases | | 4.08 - 4.85% | | 3.25 - 4.08% | | 3.25 - 3.31% | | 0.28 - 2.90% | | 1.88 - 4.71% | | 4.71 -4.86% |
| Volatility — stock options | | 76% | | 90% | | 97% | | 55 - 58% | | 51 - 65% | | 55-70% |
| Volatility — stock purchases | | 76 - 90% | | 90 - 103% | | 97 - 103% | | 48 - 58% | | 53 - 69% | | 69 - 76% |
| Expected life — stock options | | 6 years | | 5 years | | 5 years | | 5 years | | 5 - 6 years | | 6 years |
| Expected life — stock purchases | | 6 - 12 months | | 6 - 24 months | | 6 - 12 months | | 6 - 12 months | | 6 - 12 months | | 6 - 12 months |
| Expected dividend yield | | 0% | | 0% | | 0% | | 0% | | 0% | | 0% |
| Weighted average fair value per share of options granted | | $18.88 | | $7.38 | | $5.25 | | $14.79 | | $18.31 | | $12.86 |
| Weighted average fair value per share of employee stock purchases | | $4.76 | | $1.81 | | $1.36 | | $9.24 | | $11.45 | | $7.33 |
The fair value of restricted stock units granted during the years ended January 3, 2010 and December 28, 2008 was based on the market price of our common stock on the date of grant.
As of January 3, 2010, $153.1 million of total unrecognized compensation cost related to stock options, restricted stock and ESPP shares issued to date is expected to be recognized over a weighted-average period of approximately 1.67 years.
Total share-based compensation expense for employee stock options and stock purchases consists of the following (in thousands, except per share data):
| | | | | | | | | | | | | |
| | | Year Ended | |
| | | January 3,
| | | December 28,
| | | December 30,
| |
| | | 2010 | | | 2008 | | | 2007 | |
| |
| Cost of product revenue | | $ | 4,776 | | | $ | 4,710 | | | $ | 4,045 | |
| Cost of service and other revenue | | | 514 | | | | 400 | | | | 279 | |
| Research and development | | | 19,960 | | | | 14,086 | | | | 10,016 | |
| Selling, general and administrative | | | 35,561 | | | | 28,492 | | | | 19,406 | |
| | | | | | | | | | | | | |
| Share-based compensation expense before taxes | | | 60,811 | | | | 47,688 | | | | 33,746 | |
| Related income tax benefits | | | (20,121 | ) | | | (15,844 | ) | | | (11,005 | ) |
| | | | | | | | | | | | | |
| Share-based compensation expense, net of taxes | | $ | 40,690 | | | $ | 31,844 | | | $ | 22,741 | |
| | | | | | | | | | | | | |
| Net share-based compensation expense per share of common stock: | | | | | | | | | | | | |
| Basic | | $ | 0.33 | | | $ | 0.27 | | | $ | 0.21 | |
| | | | | | | | | | | | | |
| Diluted | | $ | 0.30 | | | $ | 0.24 | | | $ | 0.21 | |
| | | | | | | | | | | | | |
Net Income (Loss) per Share
On July 22, 2008, the Company announced atwo-for-one stock split in the form of a 100% stock dividend with a record date of September 10, 2008 and a distribution date of September 22, 2008. Share and per share amounts have been restated to reflect the stock split for all periods presented.
F-14F-15
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)or loss per share is computed usingby dividing net income or loss by the weighted-average number of shares of common stockshares outstanding during the period, less shares subject to repurchase.reporting period. Diluted net income (loss) per share is typically computed usingby dividing net income by the weighted average number of common andshares outstanding during the reporting period increased to include dilutive potential common equivalent shares from stock options using the treasury stock method. Dilutive potential common shares consist of stock options with combined exercise prices and unrecognized compensation expense that are less than the average market price of the Company’s common stock, restricted stock units with unrecognized compensation expense, convertible debt when the average market price of the Company’s common stock is above the conversion price of $21.83 and warrants with exercise prices that are less than the average market price of the Company’s common stock. Under the treasury stock method, the amount that must be paid to exercise stock options and warrants, the amount of compensation expense for future services that the Company has not yet recognized for stock options and restricted stock units and the amount of tax benefits that will be recorded in additional paid-in capital when the awards become deductible are assumed to be used to repurchase shares. In loss periods, basic net loss per share and diluted net loss per share are identical since the effect of dilutive potential common shares is anti-dilutive and therefore excluded.
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
| | | Year Ended | |
| | | December 31,
| | January 1,
| | January 2,
| | | January 3,
| | December 28,
| | December 30,
| |
| | | 2006 | | 2006 | | 2005 | | | 2010 | | 2008 | | 2007 | |
| |
| Weighted-average shares outstanding | | | 44,537 | | | | 40,199 | | | | 36,165 | | | | 123,154 | | | | 116,855 | | | | 108,328 | |
| Less: Weighted-average shares of common stock subject to repurchase | | | (36 | ) | | | (52 | ) | | | (320 | ) | | | — | | | | — | | | | (20 | ) |
| | | | | | | | | | | | | | | |
| Weighted-average shares used in calculating basic net income (loss) per share | | | 44,501 | | | | 40,147 | | | | 35,845 | | | | 123,154 | | | | 116,855 | | | | 108,308 | |
| Plus: Effect of dilutive potential common shares | | | 4,253 | | | | — | | | | — | | |
| Plus: Effect of dilutive Convertible Senior Notes | | | | 6,497 | | | | 6,653 | | | | — | |
| Plus: Effect of dilutive equity awards | | | | 4,335 | | | | 5,373 | | | | — | |
| Plus: Effect of dilutive warrants sold in connection with the Convertible Senior Notes | | | | 1,566 | | | | 2,487 | | | | — | |
| Plus: Effect of dilutive warrants assumed in the acquisition of Solexa | | | | 1,544 | | | | 2,239 | | | | — | |
| | | | | | | | | | | | | | | |
| Weighted-average shares used in calculating diluted net income (loss) per share | | | 48,754 | | | | 40,147 | | | | 35,845 | | | | 137,096 | | | | 133,607 | | | | 108,308 | |
| | | | | | | | | | | | | | | |
| Weighted average shares excluded from calculation due to anti-dilutive effect | | | | 924 | | | | 370 | | | | 42,882 | |
| | | | | | | | | |
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 (loss) is comprised of net income (loss) and other comprehensive income.income (loss). Other comprehensive income (loss) includes unrealized gains and losses on the Company’savailable-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.
F-16
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The components of accumulated other comprehensive income are as follows (in thousands):
| | | | | | | | | | |
| | | Year Ended
| | Year Ended
| | | | | | | | | |
| | | December 31,
| | January 1,
| | | January 3,
| | December 28,
| |
| | | 2006 | | 2006 | | | 2010 | | 2008 | |
| |
| Foreign currency translation adjustments | | | 601 | | | | 248 | | | $ | 1,338 | | | $ | 1,338 | |
Unrealized gain onavailable-for-sale securities, net of deferred tax | | | 10,693 | | | | — | | | | 1,492 | | | | 1,084 | |
| Unrealized gain on cash flow hedges | | | — | | | | 10 | | |
| | | | | | | | | | | |
| Total other comprehensive income | | $ | 11,294 | | | $ | 258 | | | $ | 2,830 | | | $ | 2,422 | |
| | | | | | | | | | | |
F-15
ILLUMINA, INC.Recent Accounting Pronouncements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Adopted Accounting Pronouncements
Acquisition of CyVera CorporationConvertible Debt Instruments
On April 8, 2005,In May 2008, the Financial Accounting Standards Board (FASB) issued authoritative guidance for convertible debt instruments that may be settled in cash upon conversion. The Company adopted the guidance effective December 29, 2008, impacting the accounting for the Company’s convertible senior notes by requiring the Company completed its acquisition of 100%to account separately for the liability and equity components of the voting equity interestsconvertible debt. The liability component is measured at its estimated fair value such that the effective interest expense associated with the convertible debt reflects the issuer’s borrowing rate at the date of CyVera Corporation (CyVera). Pursuantissuance for similar debt instruments without the conversion feature. The difference between the cash proceeds associated with the convertible debt and this estimated fair value is recorded as a debt discount and amortized to interest expense over the life of the convertible debt using the effective interest rate method. Upon application of this guidance, the only change to diluted earnings per share resulted from the effects of increased interest expense and the associated tax effects. The guidance requires retrospective application to the terms of instruments as they existed for all periods presented. See Note 7 for information on the impact of our adoption of the guidance and the assumptions we used to estimate the fair value of the liability component.
Derivatives
In June 2008, the FASB ratified authoritative guidance addressing the accounting for certain instruments (or embedded features) determined to be indexed to an Agreemententity’s own stock. This guidance provides that an entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and Plansettlement provisions. The Company adopted this guidance effective December 29, 2008, requiring the Company to perform additional analyses on both its freestanding equity derivatives and embedded equity derivative features. However, the adoption of Merger, dated as of February 22, 2005 (the Merger Agreement), by and among Illumina, Semaphore Acquisition Sub, Inc.,this guidance did not have 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 CyVera’s operations have been included inmaterial effect on the Company’s consolidated financial statements since the acquisition date of April 8, 2005.statements.
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 Company’s own portfolioFair Value of products and services and will enhance the Company’s capabilities to service its existing customers as well as accelerate the development of additional technologies, products and services. The Company believes that integrating CyVera’s capabilities with the Company’s 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 CyVera’s 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.Financial Instruments
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The fair value ofIn April 2009, the Shares was determined basedFASB issued additional authoritative guidance on the average closing price of the Company’s 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,financial instruments, which equates to a total fair value of $14.4 million.provides:
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 | |
| | | | | |
| | |
| • | further provisions on estimating fair value when the markets become inactive and quoted prices reflect distressed transactions; |
|
| • | extended disclosure requirements for interim financial statements regarding the fair value of financial instruments; and |
|
| • | new criteria for recording impairment charges on investments in debt instruments. |
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 millionadopted the guidance on a prospective basis in the interim period ended June 28, 2009 without material impact on the Company’s consolidated financial statements. Refer to Note 3 for further detailed discussion on the fair value of financial instruments.
Accounting for Subsequent Events
In May 2009, the FASB issued authoritative guidance related to general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The Company adopted this guidance in the interim period ended June 28, 2009 without material impact on the Company’s consolidated financial statements.
FASB Codification
In June 2009, the FASB issued authoritative guidance for the FASB Codification to become the source of authoritative, nongovernmental GAAP. The Codification did not change GAAP but reorganizes the literature. The Company adopted this guidance in the interim period ended September 27, 2009 without material impact on the Company’s consolidated financial statements.
Revenue Recognition
In September 2009, the FASB ratified authoritative accounting guidance regarding revenue recognition for arrangements with multiple deliverables. The guidance affects the determination of separate units of accounting in arrangements with multiple deliverables and the allocation of transaction consideration to each of the purchase priceidentified units of accounting. Previously, a delivered item was considered a separate unit of accounting when it had value to in-process researchthe customer on a stand-alone basis and development projects. In-process researchthere was objective and development (IPR&D) representsreliable evidence of the valuationfair value of acquired, to-be-completed research projects. At the acquisition date, CyVera’s ongoing researchundelivered items. The new guidance eliminates the requirement for objective and development initiatives were primarily involved withreliable evidence of fair value to exist for the developmentundelivered items in order for a delivered item to be treated as a separate unit of its VeraCode technology and the BeadXpress Reader. These two projects were approximately 50% and 25% completeaccounting. The guidance also requires arrangement consideration to be allocated at the dateinception of acquisition, respectively. Asthe arrangement to all deliverables using the relative-selling-price method and eliminates the use of December 31, 2006, these two projects were approximately 90% and 80% complete, respectively.the residual method of allocation. Under the relative-selling-price method, the selling price for each deliverable is determined using VSOE of selling price or third-party evidence of selling price if VSOE does not exist. If neither VSOE nor third-party evidence of selling price exists for a deliverable, the guidance requires an entity to determine the best estimate of the selling price.
The value assigned to purchased IPR&D was determined by estimatingCompany adopted the costs to developguidance on a prospective basis in 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 byinterim period ended September 27, 2009. Prospective application required the Company and its competitors. The resulting net cash flows from such projects are basedto apply the guidance to all revenue arrangements entered into or materially modified since the beginning of fiscal 2009. This prospective application had no impact on the Company’s estimatesconsolidated financial statements for the interim periods ended March 29, 2009 and June 28, 2009. During the third and fourth quarter of cost2009, the Company recorded additional revenue of sales, operating expenses,$2.3 million and income taxes from such projects. The rates utilized to discount$5.7 million respectively, which would have been deferred under previous accounting guidance. In future interim and fiscal year periods, the net cash flows to their present value were basedadoption of this guidance may have a material impact on estimated cost of capital calculations. Duethe Company’s financial results to the natureextent the Company enters into arrangements with multiple deliverables and does not have VSOE or third party evidence of selling price for material undelivered elements. Refer to theSummary of Significant Accounting Principlesin Note 1 for further information on the Company’s revenue recognition policies.
In September 2009, the FASB also ratified authoritative accounting guidance requiring the sales of all tangible products containing both software and non-software components that function together to deliver the product’s essential functionality to be excluded from the scope 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.software revenue guidance. The Company believes that these discount rates were commensurate withadopted the projects’ stageguidance on a prospective basis during the three months ended September 27, 2009 effective for all periods in 2009. Prior to the adoption of development andthis guidance, the uncertaintiesCompany assessed all software items included in the economic estimates described above.
If these projects are not successfully developed,Company’s product offerings to be incidental to the salesproduct itself 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.therefore,
The following unaudited pro forma information shows the results of the Company’s 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,excluded all sales from 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 meritsscope of the position. The provisions of FIN No. 48 are effective as of the beginning of the Company’s 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 expectrelated software revenue guidance. As a result, the adoption of FIN No. 48this guidance had no impact on the Company’s consolidated financial statements.
Definition of a Business
During 2009, the FASB revised guidance related to business combinations, which changed the definition of a business. Previously, a business was defined as having three elements: (i) inputs, (ii) processes applied to those inputs, and (iii) outputs. The new guidance broadens the definition and no longer requires the third element to be present for a set of activities and assets to be considered a business. The Company has adopted this guidance for the interim period ending January 3, 2010. The adoption of this guidance did not have a material impact on itsthe Company’s consolidated resultsfinancial statements.
Fair Value 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.Liabilities
In September 2006,August 2009, the FASB issued SFAS No. 157,Fair Value Measurements. SFAS No. 157 definesauthoritative guidance related to measuring liabilities at fair value establisheswhen a framework for measuring fair valuequoted price in generally accepted accounting principles and expands disclosures about fair value measurements.an active market is not available. 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. 157guidance is effective for fiscal yearsreporting periods beginning after December 15, 2007.August 28, 2009. The Company has adopted this guidance in the interim period ending January 3, 2010. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
New Accounting Pronouncements
Variable Interest Entities
In June 2009, the FASB issued authoritative guidance that amends the evaluation criteria to identify the primary beneficiary of a variable interest entity and requires a quarterly reassessment of the treatment of such entities. The guidance also requires additional disclosures about an enterprise’s involvement in a variable interest entity. The Company will adopt this guidance in the first interim period of fiscal 2010 and is currently evaluating the impact if any,of the pending adoption of SFAS No. 157 will have on itsthe consolidated results of operations and financial position.statements.
| |
| 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 ofavailable-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 Company’s 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,
| | | January 3,
| | December 28,
| |
| | | 2006 | | 2006 | | | 2010 | | 2008 | |
| |
| Accounts receivable from product and service sales | | $ | 39,627 | | | $ | 17,055 | | | $ | 157,536 | | | $ | 132,564 | |
| Notes receivable from product sales | | | 112 | | | | 441 | | |
| Accounts receivable from government grants | | | 167 | | | | 180 | | |
| Other receivables | | | 416 | | | | 257 | | | | 1,613 | | | | 1,840 | |
| | | | | | | | | | | |
| | | | 40,322 | | | | 17,933 | | | | 159,149 | | | | 134,404 | |
| Allowance for doubtful accounts | | | (338 | ) | | | (313 | ) | | | (1,398 | ) | | | (1,138 | ) |
| | | | | | | | | | | |
| Total | | $ | 39,984 | | | $ | 17,620 | | | $ | 157,751 | | | $ | 133,266 | |
| | | | | | | | | | | |
Inventory, net, consists of the following (in thousands):
| | | | | | | | | | | | | | | | | |
| | | December 31,
| | January 1,
| | | January 3,
| | December 28,
| |
| | | 2006 | | 2006 | | | 2010 | | 2008 | |
| |
| Raw materials | | $ | 8,365 | | | $ | 4,575 | | | $ | 39,144 | | | $ | 32,501 | |
| Work in process | | | 8,907 | | | | 4,546 | | | | 51,670 | | | | 34,063 | |
| Finished goods | | | 2,897 | | | | 1,188 | | | | 1,962 | | | | 6,867 | |
| | | | | | | | | | | |
| Total | | $ | 20,169 | | | $ | 10,309 | | |
| Total inventory, net | | | $ | 92,776 | | | $ | 73,431 | |
| | | | | | | | | | | |
F-20F-19
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Property and equipment consist of the following (in thousands):
| | | | | | | | | | | | | | | | | |
| | | December 31,
| | January 1,
| | | January 3,
| | December 28,
| |
| | | 2006 | | 2006 | | | 2010 | | 2008 | |
| |
| Leasehold improvements | | $ | 1,760 | | | $ | 819 | | | $ | 55,322 | | | $ | 26,637 | |
| Manufacturing and laboratory equipment | | | 30,523 | | | | 19,430 | | | | 92,956 | | | | 83,317 | |
| Computer equipment and software | | | 10,383 | | | | 8,121 | | | | 37,071 | | | | 27,490 | |
| Furniture and fixtures | | | 3,114 | | | | 2,139 | | | | 5,993 | | | | 4,167 | |
| | | | | | | | | | | |
| | | | 45,780 | | | | 30,509 | | | | 191,342 | | | | 141,611 | |
| Accumulated depreciation and amortization | | | (20,146 | ) | | | (14,378 | ) | | | (74,154 | ) | | | (52,175 | ) |
| | | | | | | | | | | |
| Total | | $ | 25,634 | | | $ | 16,131 | | | $ | 117,188 | | | $ | 89,436 | |
| | | | | | | | | | | |
Depreciation expense was $6.1$24.5 million, $3.8$17.3 million and $3.7$11.5 million for the years ended January 3, 2010, December 31, 2006, January 1, 200628, 2008 and January 2, 2005,December 30, 2007, respectively.
Accrued liabilities consist of the following (in thousands):
| | | | | | | | | | | | | | | | | |
| | | December 31,
| | January 1,
| | | January 3,
| | December 28,
| |
| | | 2006 | | 2006 | | | 2010 | | 2008 | |
| |
| Compensation | | $ | 8,239 | | | $ | 4,922 | | | $ | 32,487 | | | $ | 30,330 | |
| Legal and other professional fees | | | 3,831 | | | | 2,311 | | |
| Short-term deferred revenue | | | | 27,445 | | | | 15,862 | |
| Taxes | | | 1,804 | | | | 939 | | | | 12,109 | | | | 9,456 | |
| Reserve for product warranties | | | 996 | | | | 751 | | | | 10,215 | | | | 8,203 | |
| Customer deposits | | | 3,703 | | | | 1,361 | | | | 6,121 | | | | 6,583 | |
| Short-term deferred revenue | | | 3,382 | | | | 1,937 | | |
| Short-term deferred gain on sale of building | | | 375 | | | | 375 | | |
| Accrued royalties | | | | 2,552 | | | | 2,695 | |
| Legal and other professional fees | | | | 1,818 | | | | 1,708 | |
| Other | | | 1,530 | | | | 1,614 | | | | 5,506 | | | | 5,518 | |
| | | | | | | | | | | |
| Total | | $ | 23,860 | | | $ | 14,210 | | | $ | 98,253 | | | $ | 80,355 | |
| | | | | | | | | | | |
F-20
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
| 3. | Derivative Financial InstrumentsShort-term investments |
SFAS No. 133,The following is a summary of short-term investments (in thousands):
| | | | | | | | | | | | | | | | | |
| | | January 3, 2010 | |
| | | | | | Gross
| | | Gross
| | | | |
| | | Amortized
| | | Unrealized
| | | Unrealized
| | | Estimated
| |
| | | Cost | | | Gains | | | Losses | | | Fair Value | |
| |
Available-for-sale securities: | | | | | | | | | | | | | | | | |
| Debt securities in government sponsored entities | | $ | 289,101 | | | $ | 702 | | | $ | (102 | ) | | $ | 289,701 | |
| Corporate debt securities | | | 190,949 | | | | 2,039 | | | | (166 | ) | | | 192,822 | |
| U.S. treasury securities | | | 11,487 | | | | 12 | | | | (28 | ) | | | 11,471 | |
| | | | | | | | | | | | | | | | | |
Totalavailable-for-sale securities | | | 491,537 | | | | 2,753 | | | | (296 | ) | | | 493,994 | |
| Trading securities: | | | | | | | | | | | | | | | | |
| Auction rate securities | | | 54,900 | | | | — | | | | (6,129 | ) | | | 48,771 | |
| Put option | | | — | | | | 6,129 | | | | — | | | | 6,129 | |
| | | | | | | | | | | | | | | | | |
| Total trading securities | | | 54,900 | | | | 6,129 | | | | (6,129 | ) | | | 54,900 | |
| | | | | | | | | | | | | | | | | |
| Total short-term investments | | $ | 546,437 | | | $ | 8,882 | | | $ | (6,425 | ) | | $ | 548,894 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | December 28, 2008 | |
| | | | | | Gross
| | | Gross
| | | | |
| | | Amortized
| | | Unrealized
| | | Unrealized
| | | Estimated
| |
| | | Cost | | | Gains | | | Losses | | | Fair Value | |
| |
Available-for-sale securities: | | | | | | | | | | | | | | | | |
| Debt securities in government sponsored entities | | $ | 218,964 | | | $ | 1,544 | | | $ | — | | | $ | 220,508 | |
| Corporate debt securities | | | 92,301 | | | | 547 | | | | (305 | ) | | | 92,543 | |
| | | | | | | | | | | | | | | | | |
| Total | | $ | 311,265 | | | $ | 2,091 | | | $ | (305 | ) | | $ | 313,051 | |
| | | | | | | | | | | | | | | | | |
AccountingAvailable-For-Sale Securities
As of January 3, 2010, the Company had 38available-for-sale securities in a gross unrealized loss position, all of which had been in such position for Derivative Instrumentsless than twelve months. All impairments are not considered other than temporary as it is likely the Company will not have to sell any securities before the recovery of their cost basis and Hedging Activities,requires that all derivatives be recognized onit is not the balance sheet at their fair value. Changes inCompany’s intent to do so. The following table shows the fair valuevalues and the gross unrealized losses of derivatives are recorded each periodthe Company’savailable-for-sale securities that were in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transactionan unrealized loss position at January 3, 2010 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.December 28, 2008 aggregated by investment category (in thousands):
| | | | | | | | | | | | | | | | | |
| | | January 3, 2010 | | | December 28, 2008 | |
| | | | | | Gross
| | | | | | Gross
| |
| | | | | | Unrealized
| | | | | | Unrealized
| |
| | | Fair Value | | | Losses | | | Fair Value | | | Losses | |
| |
| Government sponsored entities | | $ | 73,783 | | | $ | (102 | ) | | $ | — | | | $ | — | |
| Corporate debt securities | | | 26,488 | | | | (166 | ) | | | 19,240 | | | | (305 | ) |
| U.S. treasury securities | | | 4,471 | | | | (28 | ) | | | — | | | | — | |
| | | | | | | | | | | | | | | | | |
| Total | | $ | 104,742 | | | $ | (296 | ) | | $ | 19,240 | | | $ | (305 | ) |
| | | | | | | | | | | | | | | | | |
F-21
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Periodically,Realized gains and losses are determined based on the Company hedges significant foreign currency firm sales commitmentsspecific identification method 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 andincome (expense), net in the consolidated statements of operations. Gross realized losses on sales ofavailable-for-sale securities were immaterial for the effective portion are recognized with the underlying hedge transaction. Asyears ended January 3, 2010, December 28, 2008 and December 30, 2007. Gross realized gains on sales 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 $0.1available-for-sale securities totaled $1.0 million and $5.2$0.6 million for the years ended January 3, 2010 and December 31, 200628, 2008 respectively, and January 1, 2006, respectively. The Company did not hold any derivative financial instruments prior to fiscal 2004.were immaterial for the year ended December 30, 2007.
OnContractual maturities ofavailable-for-sale securities at January 3, 2010 were as follows (in thousands):
| | | | | |
| | | Estimated
| |
| | | Fair Value | |
| |
| Due within one year | | $ | 169,671 | |
| After one but within five years | | | 324,323 | |
| | | | | |
| Total | | $ | 493,994 | |
| | | | | |
Trading Securities
At January 3, 2010, the Company’s trading securities consisted of $54.9 million (at cost) in auction rate securities issued primarily by municipalities and universities. The auction rate securities are held in a brokerage account with UBS Financial Services, Inc., a subsidiary of UBS. These securities are debt instruments with a long-term maturity and with an interest rate that is reset in short intervals through auctions.
The markets for auction rate securities effectively ceased when the vast majority of auctions failed in February 16, 2007,2008, preventing investors from selling these securities. As of January 3, 2010, the Company issued $400 million principal amount of 0.625% Convertible Senior Notes due 2014 (the Notes), which includedsecurities continued to fail auction and remained illiquid. Changes in 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 purchasersand/or their affiliates (the counterparties) entitling the Company to purchase sharesfair value of the Company’s common stock at an initial strike price of $43.66 per share, subject to adjustment. auction rate securities from December 28, 2008 through January 3, 2010 are as follows (in thousands):
| | | | | |
| Fair value as of December 28, 2008 | | $ | 47,235 | |
| Redeemed by issuer | | | (1,000 | ) |
| Unrealized Gain(1) | | | 2,536 | |
| | | | | |
| Fair value as of January 3, 2010 | | $ | 48,771 | |
| | | | | |
| | |
| (1) | | Unrealized gains and losses associated with the Company’s auction rate securities are classified as other income (expense), net in the consolidated statements of operations for the year ended January 3, 2010. |
In addition,determining the Company sold to these counterparties warrants to acquire sharesfair value of the Company’s common stockauction rate securities, the Company considered trades in the secondary market. However, due to the auction failures of the auction rate securities in the marketplace and the lack of trading in the secondary market of these instruments, there was insufficient observable auction rate security market information available to directly determine the fair value of the Company’s investments. As a result, the value of these securities and resulting unrealized gain was determined using Level 3 hierarchical inputs. These inputs include management’s assumptions of pricing by market participants, including assumptions about risk. The Company used the concepts of fair value based on estimated discounted future cash flows of interest income over a projected 17 year period, which is reflective of the weighted average life of the student loans in the underlying trust. In preparing this model, the Company used historical data of the rates upon which a majority of the auction rate securities’ contractual rates were based, such as the LIBOR and average trailing twelve-month90-day treasury interest rate spreads, to estimate future interest rates. The Company also considered the discount factors, taking into account the credit ratings of the auction rate securities, using a range of discount rates from 5.9% to 7.2%. The Company obtained information from multiple sources, including UBS, to determine a reasonable range of assumptions to use in valuing the auction rate securities. The Company’s model was corroborated by a separate comparable cash flow analysis prepared by UBS. To understand the sensitivity of the Company’s valuation, the liquidity factor and estimated
F-22
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
remaining life was varied. Variations in those results were evaluated and it was determined the factors and valuation method chosen were reasonable and representative of the Company’s auction rate security portfolio.
As a result of the auction rate failures, various regulatory agencies initiated investigations into the sales and marketing practices of several banks and broker-dealers, including UBS, which sold auction rate securities, alleging violations of federal and state laws. Along with several other broker-dealers, UBS subsequently reached a settlement with the federal and state regulators that required them to repurchase auction rate securities from certain investors at par at some future date. In November 2008, the Company signed a settlement agreement granting the Company an initial strike priceoption to sell its auction rate securities at par value to UBS during the period of $62.87 per share,June 30, 2010 through July 2, 2012 (the Settlement). In accepting the Settlement, the Company released UBS from any claims relating to the marketing and sale of auction rate securities. Although the Company expects to sell its auction rate securities under the Settlement, if the Settlement is not exercised before July 2, 2012, it will expire and UBS will have no further rights or obligation to buy the Company’s auction rate securities. In lieu of the acceptance of the Settlement, the auction rate securities will continue to accrue interest as determined by the auction process or the terms outlined in the prospectus of the auction rate securities if the auction process fails. In addition to offering to repurchase the Company’s auction rate securities, as part of the Settlement, UBS has agreed to provide the Company with a “no net cost” loan up to 75% of the par value of the auction rate securities until June 30, 2010. According to the terms of the Settlement, the interest rate on the loan will approximate the weighted average interest or dividend rate payable to the Company by the issuer of any auction rate securities pledged as collateral.
UBS’s obligations under the Settlement are not secured by its assets and do not require UBS to obtain any financing to support its performance obligations under the Settlement. UBS has disclaimed any assurance that it will have sufficient financial resources to satisfy its obligations under the Settlement.
To account for the Settlement, the Company recorded a separate freestanding asset (put option) of $8.7 million and recognized a corresponding gain in earnings during the fourth quarter of 2008. Changes in the fair value of the Company’s put option from December 28, 2008 through January 3, 2010 are as follows (in thousands):
| | | | | |
| Fair value as of December 28, 2008 | | $ | 8,665 | |
| Unrealized loss(1) | | | (2,536 | ) |
| | | | | |
| Fair value as of January 3, 2010 | | $ | 6,129 | |
| | | | | |
| | |
| (1) | | Unrealized gains and losses associated with the Company’s put option are classified as other income (expense), net in the consolidated statements of operations for the year ended January 3, 2010. |
Since the put option does not meet the definition of a derivative instrument, the Company elected to measure it at fair value in accordance with authoritative guidance related to the fair value option for financial assets and financial liabilities. The Company valued the put option using a discounted cash flow approach including estimates of interest rates, timing and amount of cash flow, with consideration given to UBS’s financial ability to repurchase the auction rate securities beginning June 30, 2010. These assumptions are volatile and subject to adjustment. See Note 15 for further discussionchange as the underlying sources of these transactions.assumptions and market conditions change.
The Company will continue to recognize gains and losses in earnings approximating the changes in the fair value of the auction rate securities at each balance sheet date. These gains and losses are expected to be approximately offset by changes in the fair value of the put option.
The fair value of the auction rate securities and the put option total $54.9 million and $55.9 million at January 3, 2010 and December 28, 2008, respectively. At January 3, 2010, the auction rate securities were classified as short-term investments as the Company intends to exercise the right to sell the securities back to UBS within the next year. At December 28, 2008, the Company classified these securities as long-term assets
F-23
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
since the Company believed it would not able to liquidate its investments without significant loss during the year ended January 3, 2010.
The Company’s intangible assets are comprised primarily of licensed technology from the Affymetrix settlement entered into on January 9, 2008 and acquired core technology and customer relationships from the acquisition of Solexa. As a result of the Affymetrix settlement, the Company agreed, without admitting liability, to make a one-time payment to Affymetrix of $90.0 million. In return, Affymetrix agreed to dismiss with prejudice all lawsuits it had brought against the Company, and the Company agreed to dismiss with prejudice its counterclaims in the relevant lawsuits. Affymetrix also agreed not to sue the Company or its affiliates or customers for making, using or selling any of the Company’s current products, evolutions of those products or services related to those products. In addition, Affymetrix agreed that, for four years, it will not sue the Company for making, using or selling the Company’s products or services that are based on future technology developments. The covenant not to sue covers all fields other than photolithography, the process by which Affymetrix manufactures its arrays and a field in which the Company does not operate.
Of the total $90.0 million payment made on January 25, 2008, $36.0 million was recorded as licensed technology and classified as an intangible asset. The remaining $54.0 million was charged to expense during the fourth quarter of 2007. This allocation was determined based on the fair value of past and estimated future revenue streams related to the products covered by the patents previously under dispute. The value of the licensed technology is the benefit derived, calculated using estimated discounted cash flows and future revenue projections, from the perpetual covenant not to sue for damages related to the sale of the Company’s current products. The effective life of the licensed technology extends through 2015, the final expiry date of all patents considered in valuing the intangible asset. The related amortization is based on the higher of the percentage of usage or the straight-line method. The percentage of usage was determined using actual and projected revenues generated from products covered by the patents previously under dispute.
Acquired core technology and customer relationships are being amortized on a straight-line basis over their effective useful lives of ten and three years, respectively. The amortization of the Company’s intangible assets is excluded from cost of product revenue and is separately classified as amortization of intangible assets on the Company’s consolidated statements of operations.
The following is a summary of the Company’s amortizable intangible assets as of the respective balance sheet dates (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | January 3, 2010 | | | December 28, 2008 | |
| | | Gross Carrying
| | | Accumulated
| | | Intangibles,
| | | Gross Carrying
| | | Accumulated
| | | Intangibles,
| |
| | | Amount | | | Amortization | | | Net | | | Amount | | | Amortization | | | Net | |
| |
| Licensed technology | | $ | 36,000 | | | $ | (11,820 | ) | | $ | 24,180 | | | $ | 36,000 | | | $ | (7,788 | ) | | $ | 28,212 | |
| Core technology | | | 23,500 | | | | (6,854 | ) | | | 16,646 | | | | 23,500 | | | | (4,504 | ) | | | 18,996 | |
| Customer relationships | | | 900 | | | | (875 | ) | | | 25 | | | | 900 | | | | (575 | ) | | | 325 | |
| License agreements | | | 4,456 | | | | (1,519 | ) | | | 2,937 | | | | 1,154 | | | | (932 | ) | | | 222 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total intangible assets, net | | $ | 64,856 | | | $ | (21,068 | ) | | $ | 43,788 | | | $ | 61,554 | | | $ | (13,799 | ) | | $ | 47,755 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Amortization expense associated with the intangible assets was $6.7 million and $10.4 million for the years ended January 3, 2010 and December 28, 2008, respectively.
F-24
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The estimated annual amortization of intangible assets for the next five years is shown in the following table (in thousands). Actual amortization expense to be reported in future periods could differ from these estimates as a result of acquisitions, divestitures, asset impairments and other factors.
| | | | | |
| 2010 | | $ | 6,816 | |
| 2011 | | | 6,781 | |
| 2012 | | | 6,770 | |
| 2013 | | | 6,755 | |
| 2014 | | | 6,736 | |
| Thereafter | | | 9,930 | |
| | | | | |
| Total | | $ | 43,788 | |
| | | | | |
| |
| 5. | Impairment of Manufacturing Equipment |
During fiscal 2008, the Company implemented next-generation imaging and decoding systems to be used in manufacturing. These systems were developed to increase existing capacity and allow the Company to transition to the Infinium High-Density (HD) product line. As a result of this transition, the demand for products manufactured on the previous infrastructure was reduced and certain systems were no longer being utilized. A non-cash impairment charge of $4.1 million was recorded in the second quarter of fiscal 2008 for the excess machinery. This charge is included as a separate line item in the Company’s consolidated statement of operations. There was no change to useful lives and related depreciation expense of the remaining assets as the Company believes these estimates are currently reflective of the period the assets will be used in operations.
| |
| 6. | Warranties and Maintenance Contracts |
The Company generally provides a one-year warranty on genotyping, and gene expression and sequencing systems. Additionally, the Company provides a warranty on its consumable sales through the expiry date, which generally ranges from six to twelve months after the manufacture date. At the time revenue is recognized, the Company establishes an accrual for estimated warranty expenses associated with system sales.based on historical experience as well as anticipated product performance. This expense is recorded as a component of cost of product revenue. Estimated warranty expenses associated with extended maintenance contracts for systems are recorded as a cost of service and other revenue ratably over the term of the maintenance contract.
Changes in the Company’s warranty liability during the three years ended December 31, 2006reserve for product warranties from January 1, 2007 through January 3, 2010 are as follows (in thousands):
| | | | | | | | | |
| Balance as of December 28, 2003 | | $ | 230 | | |
| Balance as of January 1, 2007 | | | $ | 996 | |
| Additions charged to cost of revenue | | | 603 | | | | 4,939 | |
| Repairs and replacements | | | (446 | ) | | | (2,219 | ) |
| | | | | | | |
| Balance as of January 2, 2005 | | | 387 | | |
| Balance as of December 30, 2007 | | | | 3,716 | |
| Additions charged to cost of revenue | | | 1,094 | | | | 13,044 | |
| Repairs and replacements | | | (730 | ) | | | (8,557 | ) |
| | | | | | | |
| Balance as of January 1, 2006 | | | 751 | | |
| Balance as of December 28, 2008 | | | | 8,203 | |
| Additions charged to cost of revenue | | | 1,379 | | | | 14,613 | |
| Repairs and replacements | | | (1,134 | ) | | | (12,601 | ) |
| | | | | | | |
| Balance as of December 31, 2006 | | $ | 996 | | |
| Balance as of January 3, 2010 | | | $ | 10,215 | |
| | | | | | | |
F-22F-25
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
5.7. | CommitmentsConvertible Senior Notes |
On February 16, 2007, the Company issued $400.0 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. 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. The Company made interest payments of $1.2 million on February 15, 2009 and August 15, 2009. The notes mature on February 15, 2014.
The notes will be convertible into cash and, if applicable, shares of the Company’s common stock, $0.01 par value per share, based on a conversion rate, subject to adjustment, of 45.8058 shares per $1,000 principal amount of notes (which represents a conversion price of approximately $21.83 per share), only in the following circumstances and to the following extent: (1) during the fivebusiness-day period after any five consecutivetrading-day 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 Company’s common stock and the conversion rate on each such day; (2) during any calendar quarter, if the last reported sale price of the Company’s 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) at any time on or after November 15, 2013 through the third scheduled trading day immediately preceding the maturity date. The requirements of the second condition above were satisfied during the first, second and third quarters of 2009. Accordingly, the notes were convertible during the period from, and including, April 1, 2009 through, and including, December 31, 2009. Additionally, these same requirements were satisfied during the third quarter of 2008, and, as a result, the notes were convertible during the period from, and including, October 1, 2008 through, and including, December 31, 2008. On December 29, 2008, a noteholder converted notes in an aggregate principal amount of $10.0 million. On February 4, 2009, the settlement date, we paid the noteholder the conversion value of the notes in cash, up to the principal amount of the notes. The excess of the conversion value over the principal amount, totaling $2.9 million, was paid in shares of common stock. This equity dilution upon conversion of the notes was offset by the reacquisition of the shares under the convertible note hedge transactions entered into in connection with the offering of the notes.
The hedge transaction entered with the initial purchasersand/or their affiliates (the hedge counterparties) entitles the Company to purchase up to 18,322,320 shares of the Company’s common stock at a strike price of approximately $21.83 per share, subject to adjustment. In addition, the Company sold to these hedge counterparties warrants exercisable, on a cashless basis, for up to 18,322,320 shares of the Company’s common stock at a strike price of $31.435 per share, subject to adjustment. The cost of the hedge transaction that was not covered by the proceeds from the sale of the warrants was approximately $46.6 million and was reflected as a reduction of additional paid-in capital. The hedge transaction is expected to reduce the potential equity dilution upon conversion of the notes to the extent the Company exercises the hedge to purchase shares from the hedge counterparties to deliver to converting noteholders. However, the warrants could have a dilutive effect on the Company’s earnings per share to the extent that the price of the Company’s common stock exceeds the strike price of the warrants.
Impact of the Adoption of Authoritative Guidance Related to Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion
See Note 1 for a description of the Company’s adoption of authoritative guidance related to accounting for convertible debt instruments that may be settled in cash upon conversion. The following table summarizes
F-26
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the effects of this new guidance on the Company’s consolidated balance sheets as of January 3, 2010 and its consolidated statements of operations for the year ended January 3, 2010 (in thousands except per share data).
| | | | | |
| | | January 3, 2010
| |
| | | Adjustments | |
| |
| Assets: | | | | |
| Prepaid expenses and other current assets | | $ | (2,051 | ) |
| Deferred tax assets, long-term portion | | | (38,135 | ) |
| Total assets | | | (40,186 | ) |
| Liabilities and Stockholders’ Equity: | | | | |
| Current portion of long-term debt | | | (99,797 | ) |
| Conversion option subject to cash settlement | | | 99,797 | |
| Stockholder’s equity | | | (40,186 | ) |
| Total liabilities and stockholders’ equity | | | (40,186 | ) |
| | | | |
| | Year Ended
| |
| | January 3, 2010
| |
| | Adjustments | |
|
| Income from operations | | $ | — | |
| Interest expense | | | (19,656 | )* |
| Other income (expense), net | | | 767 | |
| Provision for income taxes | | | (7,691 | ) |
| Net income | | | (11,198 | ) |
| Net income per basic share | | | (0.09 | ) |
| Net income per diluted share | | | (0.08 | ) |
| | |
| * | | These adjustments include only non-cash interest expense. Cash interest expense for the year ended January 3, 2010 totaled $2.4 million. |
In addition, we have included below reconciliations (in thousands, except per share data) between amounts reported in previous filings as of December 28, 2008 to the amounts reported in the current filing for the same period to reflect retroactive adjustments.
| | | | | | | | | | | | | |
| | | December 28, 2008 | |
| | | Pre adoption | | | Adjustments | | | Post adoption | |
| |
| Assets: | | | | | | | | | | | | |
| Prepaid expenses and other current assets | | $ | 9,530 | | | $ | 4,624 | | | $ | 14,154 | |
| Deferred tax assets, long-term portion | | | 93,603 | | | | (47,361 | ) | | | 46,242 | |
| Other assets | | | 12,017 | | | | (7,192 | ) | | | 4,825 | |
| Total assets | | | 1,377,100 | | | | (49,929 | ) | | | 1,327,171 | |
| Liabilities and Stockholders’ Equity: | | | | | | | | | | | | |
| Current portion of long-term debt | | | 399,999 | | | | (123,110 | ) | | | 276,889 | |
| Conversion option subject to cash settlement | | | — | | | | 123,110 | | | | 123,110 | |
| Stockholder’s equity | | | 848,596 | | | | (49,929 | ) | | | 798,667 | |
| Total liabilities and stockholders’ equity | | | 1,377,100 | | | | (49,929 | ) | | | 1,327,171 | |
F-27
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended | |
| | | December 28, 2008 | | | December 30, 2007 | |
| | | Pre adoption | | | Adjustments | | | Post adoption | | | Pre adoption | | | Adjustments | | | Post adoption | |
| |
| Income (loss) from operations | | $ | 80,457 | | | $ | — | | | $ | 80,457 | | | $ | (301,201 | ) | | $ | — | | | $ | (301,201 | ) |
| Interest expense | | | (3,991 | ) | | | (18,219 | )* | | | (22,210 | ) | | | (3,562 | ) | | | (14,735 | )* | | | (18,297 | ) |
| Provision (benefit) for income taxes | | | 40,429 | | | | (7,158 | ) | | | 33,271 | | | | (10,426 | ) | | | (5,789 | ) | | | (16,215 | ) |
| Net income (loss) | | | 50,477 | | | | (11,061 | ) | | | 39,416 | | | | (278,359 | ) | | | (8,946 | ) | | | (287,305 | ) |
| Net income (loss) per basic share | | | 0.43 | | | | (0.09 | ) | | | 0.34 | | | | (2.57 | ) | | | (0.08 | ) | | | (2.65 | ) |
| Net income (loss) per diluted share | | | 0.38 | | | | (0.08 | ) | | | 0.30 | | | | (2.57 | ) | | | (0.08 | ) | | | (2.65 | ) |
| | |
| * | | These adjustments include only non-cash interest expense. Cash interest expense for the year ended December 28, 2008 and Long-term DebtDecember 30, 2007 totaled $2.6 million and $1.4 million, respectively. |
The new guidance requires the carrying amount of the liability component to be estimated by measuring the fair value of a similar liability that does not have an associated conversion feature. As the Company was unable to find any other comparable companies in industry and size with outstanding non-convertible public debt, the Company determined that senior, unsecured corporate bonds represent a similar liability to the convertible senior notes without the conversion option. To measure the fair value of the similar liability at February 16, 2007, the Company estimated an interest rate using assumptions that market participants would use in pricing the liability component, including market interest rates, credit standing, yield curves and volatilities, all of which are defined as Level 2 Observable Inputs. The estimated interest rate of 8.27% was applied to the convertible senior notes and coupon interest using a present value technique to arrive at the fair value of the liability component. The difference between the cash proceeds associated with the convertible debt and this estimated fair value of the liability component is recorded as an equity component. We classified a portion of the equity component as temporary equity measured as the excess of a) the amount of cash that would be required to be paid upon conversion over b) the current carrying amount of the liability-classified component. This amount is reflected within conversion option subject to cash settlement in the consolidated balance sheets.
As of December 28, 2008, the principal amount of the convertible senior notes was $400.0 million and the unamortized discount was $123.1 million resulting in a net carrying amount of the liability component of $276.9 million. As of January 3, 2010, the principal amount of the liability component was $390.0 million due to the conversion of $10.0 million of the notes during the first quarter of 2009. Upon conversion, the Company recorded a gain of $0.8 million in the first quarter of 2009, calculated as the difference between the carrying amount of the converted notes and their estimated fair value as of the settlement date. To measure the fair value of the converted notes as of the settlement date, the Company calculated an interest rate of 11.3% using Level 2 Observable Inputs. This rate was applied to the converted notes and coupon interest rate using the same present value technique used in the issuance date valuation. The unamortized discount on the remaining convertible senior notes as of January 3, 2010 was $99.8 million, resulting in a net carrying amount of $290.2 million. The remaining period over which the discount on the liability component will be amortized is 4.12 years.
F-28
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Building Loan
In July 2000, the Company entered into a10-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 Company’s 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 leases office and manufacturing facilities under various noncancellable operating lease agreements. Facilities leases generally provide for periodic rent increases, and many contain escalation clauses and renewal options. Certain leases require the Company entered into a ten-year lease for its San Diego facility after the landto pay property taxes 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.routine maintenance. 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 facilitiesheadquartered in San Diego, California and four foreignleases facilities located in Hayward, California, the United Kingdom, The Netherlands, Japan, Singapore, ChinaAustralia 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.China.
As of December 31, 2006, annualAnnual future minimum payments under these operating leases as of January 3, 2010 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 | |
| | | | | |
| | | | | |
| 2010 | | $ | 11,668 | |
| 2011 | | | 12,393 | |
| 2012 | | | 12,477 | |
| 2013 | | | 11,907 | |
| 2014 | | | 10,403 | |
| Thereafter | | | 89,567 | |
| | | | | |
| Total | | $ | 148,415 | |
| | | | | |
Rent expense, net of amortization of the deferred gain on sale of property, was $4,723,041, $4,737,218,$13.6 million, $10.7 million and $1,794,234$7.7 million for the years ended January 3, 2010, December 31, 2006, January 1, 200628, 2008 and January 2, 2005,December 30, 2007, respectively.
| |
6.9. | Stockholders’ Equity |
Common stockStock
AsOn July 22, 2008, the Company announced atwo-for-one stock split in the form of December 31, 2006,a 100% stock dividend with a record date of September 10, 2008 and a distribution date of September 22, 2008. Share and per share amounts have been restated to reflect the stock split for all periods presented.
On August 12, 2008, a total of 8,050,000 shares were sold to the public at a public offering price of $43.75 per share, raising net proceeds to the Company of $342.7 million, after deducting underwriting discounts and commissions and offering expenses.
On January 3, 2010, the Company had 46,857,512119,475,815 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 Company’s new 2005 Stock and Incentive Plan based on service performance. These shares vest monthly over a three-year period.outstanding.
Stock Options
2005 Stock and Incentive Plan
In June 2005, the stockholders ofOn January 3, 2010, the Company approvedhad three active stock plans: the 2005 Stock and Incentive Plan (the 2005 Stock Plan). Upon adoption, the 2005 Solexa Equity Incentive Plan (the 2005 Solexa Equity Plan) and the New Hire Stock and Incentive Plan. As of January 3, 2010, options to purchase 7,280,267 shares remained available for future grant under the 2005 Stock Plan issuanceand 2005 Solexa Equity Plan. There is no set number of options under the Company’s existing 2000 Stock Plan ceased. The 2005 Stock Plan provides that an aggregate of up to 11,542,358 shares of the Company’s 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 byunder the lesserNew Hire Stock and Incentive Plan.
Stock options granted at the time of 5%hire primarily vest over a four or five-year period, with 20% or 25% of outstanding sharesoptions vesting on the first anniversary of the Company’s common stock ongrant date and the last dayremaining options vesting monthly over the remaining vesting period. Stock options granted subsequent to hiring primarily vest monthly over a four or five-year period. Each grant of options has a maximum term of ten years, measured from the immediately preceding fiscal year, 1,200,000 shares or such lesser amount as determined byapplicable grant date, subject to earlier termination if the Company’s board of directors.optionee’s service with us ceases. Vesting in all cases is subject to
F-24F-29
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the individual’s continued service to us through the vesting date. The Company satisfies option exercises through the issuance of new shares.
The Company’s stock option activity under all stock option plans from December 28, 2003January 1, 2007 through December 31, 2006January 3, 2010 is as follows:
| | | | | | | | | | | | | | | | | |
| | | | | Weighted-
| | | | | Weighted-
| |
| | | | | Average
| | | | | Average
| |
| | | Options | | Exercise Price | | | Options | | Exercise Price | |
| |
| Outstanding at December 28, 2003 | | | 5,228,874 | | | $ | 6.95 | | |
| Outstanding at January 1, 2007 | | | | 16,718,240 | | | $ | 6.97 | |
| Options assumed through business combination | | | | 2,848,664 | | | $ | 10.69 | |
| Granted | | | 1,453,400 | | | $ | 7.08 | | | | 7,569,016 | | | $ | 20.32 | |
| Exercised | | | (139,768 | ) | | $ | 1.98 | | | | (4,358,572 | ) | | $ | 6.03 | |
| Cancelled | | | (337,486 | ) | | $ | 8.80 | | | | (1,929,480 | ) | | $ | 11.19 | |
| | | | | | | |
| Outstanding at January 2, 2005 | | | 6,205,020 | | | $ | 6.99 | | |
| Outstanding at December 30, 2007 | | | | 20,847,868 | | | $ | 12.13 | |
| Granted | | | 2,992,300 | | | $ | 10.02 | | | | 3,091,108 | | | $ | 34.23 | |
| Exercised | | | (869,925 | ) | | $ | 4.66 | | | | (4,571,855 | ) | | $ | 8.52 | |
| Cancelled | | | (1,001,964 | ) | | $ | 11.00 | | | | (1,232,917 | ) | | $ | 19.93 | |
| | | | | | | |
| Outstanding at January 1, 2006 | | | 7,325,431 | | | $ | 7.96 | | |
| Outstanding at December 28, 2008 | | | | 18,134,204 | | | $ | 16.26 | |
| Granted | | | 2,621,050 | | | $ | 27.24 | | | | 1,560,024 | | | $ | 28.86 | |
| Exercised | | | (1,273,119 | ) | | $ | 7.28 | | | | (2,965,606 | ) | | $ | 10.56 | |
| Cancelled | | | (314,242 | ) | | $ | 12.44 | | | | (639,184 | ) | | $ | 14.88 | |
| | | | | | | |
| Outstanding at December 31, 2006 | | | 8,359,120 | | | $ | 13.94 | | |
| Outstanding at January 3, 2010 | | | | 16,089,438 | | | $ | 18.59 | |
| | | | | | | |
At December 31, 2006, options to purchase approximately 2,901,704 shares were exercisable and 2,764,566 shares remain available for future grant.
FollowingThe following is a further breakdown of the options outstanding as of December 31, 2006:January 3, 2010:
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | 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 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | 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 | |
| |
| $0.20-4.26 | | | 1,969,183 | | | | 3.25 | | | $ | 3.36 | | | | 1,602,420 | | | $ | 3.15 | |
| $4.30-6.85 | | | 1,676,898 | | | | 4.99 | | | $ | 5.41 | | | | 1,449,009 | | | $ | 5.31 | |
| $6.87-13.30 | | | 1,803,330 | | | | 5.66 | | | $ | 10.75 | | | | 1,312,461 | | | $ | 10.71 | |
| $13.43-17.58 | | | 1,624,453 | | | | 6.90 | | | $ | 15.62 | | | | 869,862 | | | $ | 15.58 | |
| $17.60-19.61 | | | 1,371,403 | | | | 6.87 | | | $ | 18.74 | | | | 718,826 | | | $ | 18.74 | |
| $19.71-20.04 | | | 1,888,561 | | | | 6.96 | | | $ | 20.03 | | | | 934,462 | | | $ | 20.04 | |
| $20.12-27.97 | | | 1,673,797 | | | | 8.09 | | | $ | 24.38 | | | | 496,340 | | | $ | 23.76 | |
| $28.03-32.49 | | | 2,197,532 | | | | 8.20 | | | $ | 29.97 | | | | 727,353 | | | $ | 30.49 | |
| $32.58-41.37 | | | 1,624,281 | | | | 8.29 | | | $ | 35.05 | | | | 650,680 | | | $ | 35.46 | |
| $42.02-44.38 | | | 260,000 | | | | 8.58 | | | $ | 44.11 | | | | 87,291 | | | $ | 44.09 | |
| | | | | | | | | | | | | | | | | | | | | |
| $0.20-44.38 | | | 16,089,438 | | | | 6.59 | | | $ | 18.59 | | | | 8,848,704 | | | $ | 15.08 | |
| | | | | | | | | | | | | | | | | | | | | |
F-25
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The weighted average remaining life in years of options exercisable is 6.14 years as of January 3, 2010.
The aggregate intrinsic value of options outstanding and options exercisable as of December 31, 2006January 3, 2010 was $212.3$194.5 million and $89.4$107.0 million, respectively. Aggregate intrinsic value represents the difference between the Company’s closing stock price per share on the last trading day of the fiscal period, which was $39.31$30.68 as
F-30
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
of December 29, 2006,31, 2009, and the exercise price multiplied by the number of options outstanding. Total intrinsic value of options exercised was $34.0$73.4 million, $136.6 million and $72.1 million for the yearyears ended January 3, 2010, December 31, 2006.28, 2008 and December 30, 2007, respectively.
2000 Employee Stock Purchase Plan
In February 2000, the board of directors and stockholders adopted the 2000 Employee Stock Purchase Plan (the Purchase Plan).ESPP. A total of 4,827,98815,467,426 shares of the Company’s common stock have been reserved for issuance under the Purchase Plan.ESPP. The Purchase PlanESPP 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 PlanESPP 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 PlanESPP provides for annual increases of shares available for issuance by the lesser of 3% of the number of outstanding shares of the Company’s common stock on the last day of the immediately preceding fiscal year, 1,500,0003,000,000 shares or such lesser amount as determined by the Company’s board of directors. 266,394, 717,164Shares totaling 359,713, 276,198 and 585,855 shares266,962 were issued under the 2000 Employee Stock Purchase PlanESPP during fiscal 2006, 20052009, 2008 and 2004,2007, respectively. As of December 31, 2006,January 3, 2010, there were 2,762,93613,434,449 shares available for issuance under the Purchase Plan.ESPP.
Restricted Stock Units
In 2007 the Company began granting restricted stock units pursuant to its 2005 Stock and Incentive Plan as part of its periodic employee equity compensation review program. Restricted stock units are share awards that, upon vesting, will deliver to the holder shares of the Company’s common stock. Restricted stock units granted during 2007 vest over four years as follows: 15% vest on the first and second anniversaries of the grant date, 30% vest on the third anniversary of the grant date and 40% vest on the fourth anniversary of the grant date. Effective January 2008, the Company changed the vesting schedule for grants of new restricted stock units. Currently, restricted stock units vest 15% on the first anniversary of the grant date, 20% on the second anniversary of the grant date, 30% on the third anniversary of the grant date and 35% on the fourth anniversary of the grant date. The Company satisfies restricted stock units vesting through the issuance of new shares.
A summary of the Company’s restricted stock unit activity and related information from January 1, 2007 through January 3, 2010 is as follows:
| | | | |
| | Restricted Stock Units(1) | |
|
| Outstanding at December 30, 2007 | | | 394,500 | |
| Awarded | | | 1,287,504 | |
| Vested | | | (55,638 | ) |
| Cancelled | | | (47,090 | ) |
| | | | |
| Outstanding at December 28, 2008 | | | 1,579,276 | |
| Awarded | | | 1,292,473 | |
| Vested | | | (246,055 | ) |
| Cancelled | | | (116,986 | ) |
| | | | |
| Outstanding at January 3, 2010 | | | 2,508,708 | |
| | | | |
| | |
| (1) | | Each stock unit represents the fair market value of one share of common stock. |
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ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The weighted average grant-date fair value per share for the restricted stock units was $32.32 and $34.53 for the years ended January 3, 2010 and December 28, 2008, respectively. No restricted stock units were outstanding as of December 30, 2007.
Based on the closing price per share of the Company’s common stock of $30.68 on December 31, 2009, the total pretax intrinsic value of all outstanding restricted stock units on that date was $81.1 million.
Warrants
In conjunction with its acquisition of Solexa, Inc. on January 26, 2007, the Company assumed 4,489,686 warrants issued by Solexa prior to the acquisition. During the year ended January 3, 2010, there were 954,376 warrants exercised, resulting in cash proceeds to the Company of approximately $7.6 million. As of January 3, 2010, 252,164 of the assumed warrants had expired.
A summary of all warrants outstanding as of January 3, 2010 is as follows:
| | | | | | | | | |
Number of Shares | | Exercise Price | | | Expiration Date | |
| |
| 16,380 | | $ | 7.27 | | | | 4/25/2010 | |
| 307,132 | | $ | 7.27 | | | | 7/12/2010 | |
| 732,230 | | $ | 10.91 | | | | 11/23/2010 | |
| 1,027,412 | | $ | 10.91 | | | | 1/19/2011 | |
| 18,322,320(1) | | $ | 31.44 | | | | 2/15/2014 | |
| | | | | | | | | |
| 20,405,474 | | | | | | | | |
| | | | | | | | | |
| | |
| (1) | | Represents warrants sold in connection with the offering of the Company’s convertible senior notes (See Note 7). |
Treasury Stock
In October 2008, the board of directors authorized a $120.0 million stock repurchase program. In fiscal 2008, the Company repurchased 3.1 million shares for $70.8 million under the program.
In July 2009, the board of directors authorized a $75.0 million stock repurchase program and concurrently terminated the $120.0 million stock repurchase program authorized in October 2008. In November 2009, upon the completion of the repurchase program authorized in July 2009, our board of directors authorized an additional $100.0 million stock repurchase program. In fiscal 2009, the Company repurchased a total of 6.1 million shares for $175.1 million under both programs in open-market transactions or through privately negotiated transactions in compliance withRule 10b-18 under the Securities Exchange Act of 1934.
Stockholder Rights Plan
On May 3, 2001, the Boardboard of Directorsdirectors 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,Right, a number of shares of common stock having a market value of
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ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
two times the exercise price of the right.Right. If the Company is acquired in a merger or other business combination transaction after a person acquires 15% or more of the Company’s common stock, each Right will entitle its holder to purchase, at the Right’s then-current exercise price, a number of 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.Right. The Boardboard of Directorsdirectors 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 rightsRights expire on May 14, 2011 unless such date is extended or the rightsRights are earlier redeemed or exchanged by the Company.
The Company has incurred substantial costs in defending itself against patent infringement claims,From time to time, we are party to litigation 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 complaintother legal proceedings in the U.S. District Court forordinary course, and incidental to the Districtconduct, of Delaware alleging thatour business. While the use, manufacture and saleresults of the Company’s BeadArray products and services, including the Company’s Array Matrix and BeadChip products, infringe six Affymetrix patents. Affymetrix seeks an injunction against the sale of products, if any thatlitigation or other legal proceedings 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 ituncertain, management does not infringebelieve 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 Companyultimate resolution of any pending legal matters is likely 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 court’s Markman opinion construed several key claim terms in favor of the Company and did not adversely affect the Company’s 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 inhave a material adverse effect on its business,our financial condition andposition or 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 Company’s 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 Company’s patents and patent applications by adding Dr. Czarnik as an inventor, a judgment declaring certain of the Company’s patents and patent applications unenforceable, unspecified monetary damages and attorney’s 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 Company’s motion to dismiss the counts of Dr. Czarnik’s 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.
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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 astock-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 coveringSequencing-by-Ligation technologies. Solexa filed its answer to the complaint by the required deadline. The patents at issue were assigned in 1995 to Solexa’s 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 Company’s new Illumina Genome Analyzer system uses a different technology, DNASequencing-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 theSequencing-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 employee’s 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 Corporation’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s Oligator technology into two Invitrogen facilities outside North America. The Company recognizes product revenue upon shipment of collaboration products based on the Company’s 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 Company’s BeadXpress system.
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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 Company’s 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 Company’s 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 Genizon’s 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 anavailable-for-sale security.
The Company has concluded that the purchase of the debenture and the concurrent purchase by Genizon of the Company’s products are “linked” transactions under guidance contained in EITFNo. 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 Company’s 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 income (loss) before income taxes summarized by region is as follows (in thousands):
| | | | | | | | | | | | | |
| | | Year Ended | |
| | | January 3,
| | | December 28,
| | | December 30,
| |
| | | 2010 | | | 2008 | | | 2007 | |
| |
| United States | | $ | 65,081 | | | $ | 46,205 | | | $ | 43,710 | |
| Foreign | | | 49,044 | | | | 26,482 | | | | (347,230 | ) |
| | | | | | | | | | | | | |
| Total income (loss) before income taxes | | $ | 114,125 | | | $ | 72,687 | | | $ | (303,520 | ) |
| | | | | | | | | | | | | |
The provision (benefit) for income taxes consists of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended
| | Year Ended
| | Year Ended
| | | Year Ended | |
| | | December 31,
| | January 1,
| | January 2,
| | | January 3,
| | December 28,
| | December 30,
| |
| | | 2006 | | 2006 | | 2005 | | | 2010 | | 2008 | | 2007 | |
| |
| Current: | | | | | | | | | | | | | | | | | | | | | | | | |
| Federal | | $ | 1,125 | | | $ | — | | | $ | — | | | $ | 43,565 | | | $ | 13,868 | | | $ | 18,564 | |
| State | | | 1,177 | | | | — | | | | — | | | | 2,511 | | | | 2,134 | | | | 4,801 | |
| Foreign | | | 903 | | | | 105 | | | | 135 | | | | 6,204 | | | | 5,042 | | | | (2,172 | ) |
| | | | | | | | | | | | | | | |
| Total current provision | | | 3,205 | | | | 105 | | | | 135 | | | | 52,280 | | | | 21,044 | | | | 21,193 | |
| Deferred: | | | | | | | | | | | | | | | | | | | | | | | | |
| Federal | | | — | | | | — | | | | — | | | | (14,607 | ) | | | 11,700 | | | | (25,071 | ) |
| State | | | — | | | | — | | | | — | | | | 5,184 | | | | 901 | | | | (12,594 | ) |
| Foreign | | | (553 | ) | | | 58 | | | | — | | | | (1,013 | ) | | | (374 | ) | | | 257 | |
| | | | | | | | | | | | | | | |
| Total deferred provision | | | (553 | ) | | | 58 | | | | — | | | | (10,436 | ) | | | 12,227 | | | | (37,408 | ) |
| | | | | | | | | | | | | | | |
| Total tax provision | | $ | 2,652 | | | $ | 163 | | | $ | 135 | | |
| Total tax provision (benefit) | | | $ | 41,844 | | | $ | 33,271 | | | $ | (16,215 | ) |
| | | | | | | | | | | | | | | |
F-33
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The provision (benefit) for income taxes reconciles to the amount computed by applying the federal statutory rate to income (loss) before taxes as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended
| | Year Ended
| | Year Ended
| | | Year Ended | |
| | | December 31,
| | January 1,
| | January 2,
| | | January 3,
| | December 28,
| | December 30,
| |
| | | 2006 | | 2006 | | 2005 | | | 2010 | | 2008 | | 2007 | |
| |
| Tax at federal statutory rate | | $ | 14,945 | | | $ | (7,043 | ) | | $ | (2,179 | ) | | $ | 39,944 | | | $ | 25,440 | | | $ | (106,232 | ) |
| State, net of federal benefit | | | 767 | | | | 633 | | | | (336 | ) | | | 4,275 | | | | 3,461 | | | | (10,304 | ) |
| Alternative minimum tax | | | 1,125 | | | | — | | | | — | | |
| Research and other credits | | | (1,900 | ) | | | (1,239 | ) | | | 34 | | | | (4,050 | ) | | | (4,060 | ) | | | (3,118 | ) |
| Acquired in-process research & development | | | — | | | | 5,372 | | | | — | | | | 4,386 | | | | 9,508 | | | | 116,916 | |
| Adjustments to deferred tax balances | | | (3,509 | ) | | | 2,952 | | | | — | | |
| Change in valuation allowance | | | (10,038 | ) | | | (1,138 | ) | | | 2,330 | | | | (1,967 | ) | | | (6,892 | ) | | | (17,125 | ) |
| Permanent differences | | | 818 | | | | (226 | ) | | | (264 | ) | | | 2,093 | | | | 1,449 | | | | 653 | |
| Foreign rate adjustments | | | | (5,400 | ) | | | 4,124 | | | | 3,160 | |
| Other | | | 444 | | | | 852 | | | | 550 | | | | 2,563 | | | | 241 | | | | (165 | ) |
| | | | | | | | | | | | | | | |
| Total tax provision | | $ | 2,652 | | | $ | 163 | | | $ | 135 | | |
| Total tax provision (benefit) | | | $ | 41,844 | | | $ | 33,271 | | | $ | (16,215 | ) |
| | | | | | | | | | | | | | | |
F-32
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Significant components of the Company’s deferred tax assets and liabilities are as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| | | December 31,
| | January 1,
| | | January 3,
| | December 28,
| |
| | | 2006 | | 2006 | | | 2010 | | 2008 | |
| |
| Deferred tax assets: | | | | | | | | | | | | | | | | |
| Net operating losses | | $ | 13,728 | | | $ | 37,801 | | | $ | 15,869 | | | $ | 33,839 | |
| Tax credits | | | 10,831 | | | | 6,634 | | | | 18,681 | | | | 19,139 | |
| Deferred revenue | | | 2,859 | | | | 1,037 | | |
| Capitalized research and development costs | | | 1,290 | | | | 1,523 | | |
| Accruals and reserves | | | 2,491 | | | | 1,729 | | |
| Other accruals and reserves | | | | 17,813 | | | | 11,341 | |
| Stock compensation | | | 4,736 | | | | — | | | | 25,442 | | | | 15,962 | |
| Inventory capitalization | | | | 4,172 | | | | 3,555 | |
| Other amortization | | | | 4,216 | | | | 3,101 | |
| Other | | | 2,592 | | | | 1,952 | | | | 10,808 | | | | 6,612 | |
| | | | | | | | | | | |
| Total deferred tax assets | | | 38,527 | | | | 50,676 | | | | 97,001 | | | | 93,549 | |
| Valuation allowance on deferred tax assets | | | (36,458 | ) | | | (49,542 | ) | | | (14,852 | ) | | | (15,200 | ) |
| | | | | | | | | | | |
| Net deferred tax assets | | | 2,069 | | | | 1,134 | | | | 82,149 | | | | 78,349 | |
| | | | | | | | | | | |
| Deferred tax liabilities: | | | | | | | | | | | | | | | | |
| Property and equipment | | | (1,516 | ) | | | (1,134 | ) | |
| Net unrealized gain on investments | | | (6,987 | ) | | | — | | |
| Purchased intangible amortization | | | | (5,043 | ) | | | (5,985 | ) |
| Accrued litigation settlements | | | | (3,810 | ) | | | (11,084 | ) |
| Convertible debt | | | | (3,901 | ) | | | (4,905 | ) |
| Other | | | | (2,810 | ) | | | (1,498 | ) |
| | | | | | | | | | | |
| Total deferred tax liabilities | | | (8,503 | ) | | | (1,134 | ) | | | (15,564 | ) | | | (23,472 | ) |
| | | | | | | | | | | |
| Net deferred tax liabilities | | $ | (6,434 | ) | | $ | — | | |
| Net deferred tax assets | | | $ | 66,585 | | | $ | 54,877 | |
| | | | | | | | | | | |
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 jurisdictionjurisdiction-by-jurisdiction basis, and includes a review of all available positive and negative evidence. Based uponon the available evidence as of December 31, 2006,January 3, 2010, the Company iswas not able to conclude it is more likely than not the remainingcertain U.S. and foreign deferred tax assets in the U.S. will be realized. Therefore, the Company has
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ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
recorded a full valuation allowance of $2.8 million and $12.1 million against thecertain U.S. and foreign net 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.respectively.
As of December 31, 2006,January 3, 2010, the Company had net operating loss carryforwards for federal and state tax purposes of approximately $76.4$25.4 million and $39.1$132.1 million, respectively;respectively, which begin to expire in 20222012 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$16.0 million and $6.3$16.2 million, respectively;respectively, which begin to expire in 2018 and 2019, respectively, unless previously utilized.
As of January 3, 2010, the valuation allowance includes $12.3 million of pre-acquisition foreign deferred tax assets of Solexa. In accordance with the adoption of Topic 805 to the extent any of these assets are recognized in the future the adjustment will be recorded as a reduction to the provision for income taxes.
Pursuant to Section 382 and 383 of the Internal Revenue Code, utilization of the Company’s net operating lossesloss and credits may be subject to annual limitations in the event of any significant future changes in it’sits ownership structure. These annual limitations may result in the expiration of net operating losses and credits prior to utilization. PreviousThe deferred tax assets as of January 3, 2010 are net of any previous limitations due to Section 382 and 383383.
Due to the adoption of SFAS No. 123R, 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 reflected inrealized, the deferredCompany follows thewith-and-without approach excluding any indirect effects of the excess 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 ofdeductions. Under this approach, excess tax benefits related to employee stock plans. Whenshare-based compensation are not deemed to be realized until after the utilization of all other tax benefitbenefits available to the Company. During 2009, the Company realized $39.3 million of these assetssuch excess tax benefits, and accordingly recorded a corresponding credit to additional paid in capital. As of January 3, 2010, the Company has $17.1 million of unrealized excess tax benefits associated with share-based compensation. These tax benefits will be accounted for as a credit to additional paid-in capital, if and when realized, rather than a reduction of the provision for income taxes.
The Company’s manufacturing operations in Singapore operate under various tax provision.holidays and incentives that begin to expire in 2018. For the year ended January 3, 2010, these tax holidays and incentives resulted in an approximate $2.3 million decrease to the provision for income taxes and an increase to net income per diluted share of $0.02.
Residual United StatesU.S. income taxes have not been provided on approximately $0.8$38.6 million of undistributed earnings of foreign subsidiaries as of December 31, 2006January 3, 2010, since the earnings are considered to be permanentlyindefinitely invested in the operations of such subsidiaries.
In July 2006, FASB issued FIN No. 48,Accounting for Uncertainty in Income Taxes — an interpretationThe following table summarizes the gross amount of FASB Statement No. 109, which clarifies the accounting for uncertainty inCompany’s uncertain tax positions. FIN No. 48 requires thatpositions (in thousands):
| | | | | | | | | | | | | |
| | | January 3,
| | | December 28,
| | | December 30,
| |
| | | 2010 | | | 2008 | | | 2007 | |
| |
| Balance at beginning of year | | $ | 9,402 | | | $ | 7,000 | | | $ | 5,381 | |
| Increases related to current year tax positions | | | 2,358 | | | | 2,402 | | | | 1,619 | |
| | | | | | | | | | | | | |
| Balance at end of year | | $ | 11,760 | | | $ | 9,402 | | | $ | 7,000 | |
| | | | | | | | | | | | | |
During 2009 the Company recognize the impactdetermined that $14.4 million of apreviously reported uncertain tax position in its financial statements if that position is more likely thanpositions, which related to pre-acquistion net operating loss carryforwards of Solexa, were not of being sustained on audit, based on the technical merits of the position. The provisions of FIN No. 48 are effectiveuncertain as of the beginningSolexa acquisition in January 2007. Accordingly, the uncertain tax position balances that were previously reported have been reduced by $14.4 million to correctly present the uncertain tax position balances.
F-35
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As of January 3, 2010, $9.6 million of the Company’s 2007 fiscal year, withuncertain tax positions would reduce the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. Company’s annual effective tax rate, if recognized.
The Company does not expect its uncertain tax positions to change significantly over the adoptionnext 12 months. Any interest and penalties related to uncertain tax positions will be reflected in income tax expense. As of FIN No. 48January 3, 2010, no interest or penalties have been accrued related to have a material impact on its consolidated results of operations and financial position, andthe Company’s uncertain tax positions. Tax years 1995 to 2009 remain subject to future examination by the major tax jurisdictions in which the Company is continuingsubject to evaluate the impact, if any, the adoption of FIN No. 48 will have on its disclosure requirements.tax.
| |
| 12. | Retirement PlanEmployee Benefit Plans |
Retirement Plan
The Company has a 401(k) savings plan covering substantially all of its employees. Company contributions to the plan are discretionary. During the yearyears ended January 3, 2010, December 31, 2006,28, 2008 and December 30, 2007, the Company made matching contributions of $0.4 million. No$3.3 million, $2.6 million and $1.4 million, respectively.
Executive Deferred Compensation Plan
For the Company’s executives and members of the board of directors, the Company adopted the Illumina, Inc. Deferred Compensation Plan (the Plan) that became effective January 1, 2008. Eligible participants can contribute up to 80% of their base salary and 100% of all other forms of compensation into the Plan, including bonus, commission and director fees. The Company has agreed to credit the participants’ contributions with earnings that reflect the performance of certain independent investment funds. On a discretionary basis, the Company may also make employer contributions to participant accounts in any amount determined by the Company. The vesting schedules of employer contributions are at the sole discretion of the Compensation Committee. However, all employer contributions shall become 100% vested upon the occurrence of the participant’s disability, death or retirement or a change in control of the Company. The benefits under this plan are unsecured. Participants are generally eligible to receive payment of their vested benefit at the end of their elected deferral period or after termination of their employment with the Company for any reason or at a later date to comply with the restrictions of Section 409A. As of January 3, 2010, no employer contributions were made duringto the yearsPlan.
In January 2008, the Company also established a rabbi trust for the benefit of its directors and executives under the Plan. In accordance with authoritative guidance related to consolidation of variable interest entities and accounting for deferred compensation arrangements where amounts earned are held in a rabbi trust and invested, the Company has included the assets of the rabbi trust in its consolidated balance sheet since the trust’s inception. As of January 3, 2010, the assets of the trust and liabilities of the Company were $4.0 million. The assets and liabilities are classified as other assets and accrued liabilities, respectively, on the Company’s balance sheet as of January 3, 2010. Changes in the values of the assets held by the rabbi trust accrue to the Company.
| |
| 13. | Segment Information, Geographic Data and Significant Customers |
During the first quarter of 2008, the Company reorganized its operating structure into a newly created Life Sciences Business Unit, which includes all products and services related to the research market, namely the sequencing, BeadArray, and VeraCode product lines. The Company also created a Diagnostics Business Unit to focus on the emerging opportunity in molecular diagnostics. For the year ended January 1, 20063, 2010, the Company had limited activity related to the Diagnostics Business Unit, 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 were reported on an aggregate basis to the chief operating decision maker of the Company, ourthe chief executive officer. In
F-36
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
accordance with authoritative guidance for disclosures about segments of an enterprise and related information, the Company operated in one reportable segment for the year ended January 3, 2010.
The Company had revenue in the following regions for the years ended January 3, 2010, December 31, 2006, January 1, 200628, 2008 and January 2, 2005December 30, 2007 (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 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | Year Ended | |
| | | January 3,
| | | December 28,
| | | December 30,
| |
| | | 2010 | | | 2008 | | | 2007 | |
| |
| United States | | $ | 347,195 | | | $ | 280,064 | | | $ | 207,692 | |
| United Kingdom | | | 55,854 | | | | 67,973 | | | | 34,196 | |
| Other European countries | | | 140,931 | | | | 127,397 | | | | 75,360 | |
| Asia-Pacific | | | 96,396 | | | | 72,740 | | | | 35,155 | |
| Other markets | | | 25,948 | | | | 25,051 | | | | 14,396 | |
| | | | | | | | | | | | | |
| Total | | $ | 666,324 | | | $ | 573,225 | | | $ | 366,799 | |
| | | | | | | | | | | | | |
Net revenues are attributable to geographic areas based on the region of destination.
The majority of our product sales consist of consumables and instruments. For the years ended January 3, 2010, December 28, 2008 and December 30, 2007, consumable sales represented 59%, 58% and 53%, respectively, of total revenues and instrument sales comprised 34%, 32%, and 33%, respectively, of total revenues. Our customers include leading genomic research centers, pharmaceutical companies, academic institutions, clinical research organizations and biotechnology companies. The Company had no customercustomers that provided more than 10% of total revenue in the years ended January 3, 2010, December 31, 200628, 2008 and January 1, 2006December 30, 2007.
Net long-lived assets exclude goodwill and one customer that provided approximately 14%other intangible assets since they are not allocated on a geographic basis. The Company had net long-lived assets consisting of total revenueproperty and equipment in the year endedfollowing regions as of 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%3, 2010 and 13% of total revenue for the years ended December 31, 2006, January 1, 2006 and January 2, 2005, respectively.28, 2008(in thousands):
| | | | | | | | | |
| | | January 3,
| | | December 28,
| |
| | | 2010 | | | 2008 | |
| |
| United States | | $ | 75,095 | | | $ | 65,630 | |
| United Kingdom | | | 27,862 | | | | 9,849 | |
| Other European countries | | | 864 | | | | 1,055 | |
| Singapore | | | 12,599 | | | | 12,586 | |
| Other Asia-Pacific countries | | | 768 | | | | 316 | |
| | | | | | | | | |
| Total | | $ | 117,188 | | | $ | 89,436 | |
| | | | | | | | | |
F-37
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
| 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 and cash flows of interim periods. All quarters for 2008 and 2009 were 13 weeks except for the fourth quarter 2009, which was 14 weeks. Summarized quarterly data for fiscal 20062009 and 20052008 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 | |
| | | | | | | | | | | | | | | | | |
| | | First Quarter | | | Second Quarter | | | Third Quarter | | | Fourth Quarter | |
| |
| 2009: | | | | | | | | | | | | | | | | |
| Total revenue | | $ | 165,757 | | | $ | 161,643 | | | $ | 158,360 | | | $ | 180,564 | |
| Total cost of revenue (excluding impairment of manufacturing equipment and amortization of intangible assets) | | | 54,022 | | | | 48,815 | | | | 49,564 | | | | 53,368 | |
| Net income | | | 18,811 | | | | 24,688 | | | | 17,077 | | | | 11,705 | |
| Net income per share, basic | | | 0.15 | | | | 0.20 | | | | 0.14 | | | | 0.10 | |
| Net income per share, diluted | | | 0.14 | | | | 0.18 | | | | 0.12 | | | | 0.09 | |
| 2008: | | | | | | | | | | | | | | | | |
| Total revenue | | $ | 121,861 | | | $ | 140,177 | | | $ | 150,260 | | | $ | 160,927 | |
| Total cost of revenue (excluding amortization of intangible assets) | | | 46,081 | | | | 50,459 | | | | 54,430 | | | | 54,654 | |
| Net income (loss)(1) | | | 10,743 | | | | 12,659 | | | | (10,078 | ) | | | 26,092 | |
| Net income (loss) per share, basic(1) | | | 0.10 | | | | 0.11 | | | | (0.08 | ) | | | 0.21 | |
| Net income (loss) per share, diluted(1) | | | 0.08 | | | | 0.09 | | | | (0.08 | ) | | | 0.20 | |
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 quarterAdjusted for required retroactive adoption of 2005, the Company recorded a $15.8 million charge related to acquired in-process research and development from the CyVera acquisition.authoritative accounting guidance for convertible debt instruments that may be settled in cash upon conversion effective December 29, 2008. |
F-35F-38
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 astock-for-stock merger transaction. In connection with the merger, Solexa shareholders received 0.344 of a share of the Company’s 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 Company’s 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 fivebusiness-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 Company’s 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 Company’s 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 purchasersand/or their affiliates (the counterparties) entitling the Company to purchase shares of the Company’s 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 Company’s 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 Company’s common stock exceeds the strike price of the convertible note hedge transactions. The warrant transactions could have a dilutive effect on the Company’s earnings per share to the extent that the price of the Company’s 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 | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | Balance at
| | | Additions Charged
| | | | | | | |
| | | Beginning of
| | | to Expense/
| | | | | | Balance at End of
| |
| | | Period | | | Revenue(1) | | | Deductions(2) | | | Period | |
| | | (In thousands) | |
| |
| Year ended January 3, 2010 | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 1,138 | | | | 828 | | | | (568 | ) | | $ | 1,398 | |
| Reserve for inventory | | | 6,431 | | | | 8,403 | | | | (4,237 | ) | | | 10,597 | |
| Year ended December 28, 2008 | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 540 | | | | 893 | | | | (295 | ) | | $ | 1,138 | |
| Reserve for inventory | | | 2,089 | | | | 7,154 | | | | (2,812 | ) | | | 6,431 | |
| Year ended December 30, 2007 | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 338 | | | | 237 | | | | (35 | ) | | $ | 540 | |
| Reserve for inventory | | | 850 | | | | 2,302 | | | | (1,063 | ) | | | 2,089 | |
| | |
| (1) | | Additions to the allowance for doubtful accounts and reserve for inventory are charged to selling, general and administrative expense and cost of product revenue respectively. |
|
| (2) | | Deductions for allowance for doubtful accounts and reserve for inventory are for accounts receivable written off and disposal of obsolete inventory. |
F-37F-39
