Illumina, Inc.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended
January 1, 2006 |
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 |
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For the transition period
from to . |
Commission file number: 000-30361
Illumina, Inc.
(Exact name of Registrant as Specified in Its Charter)
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Delaware |
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33-0804655 |
(State or other Jurisdiction
of
Incorporation or Organization) |
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(I.R.S. Employer
Identification No.) |
9885 Towne Centre Drive,
San Diego, California |
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92121 |
(Address of Principal Executive
Offices) |
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(zip code) |
Registrants telephone number, including area code:
(858) 202-4500
Securities registered pursuant to Section 12(b) of the
Act:
None
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, $0.01 par value
(Title of class)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act
Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act.
Yes o No þ
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K is
not contained herein, and will not be contained, to the best of
Registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any
amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2 of the
Exchange Act. (Check one):
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filer o Accelerated
filer þ Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2 of the
Exchange Act).
Yes o No þ
As of January 31, 2006, there were 41,269,312 shares
of the Registrants Common Stock outstanding. The aggregate
market value of the Common Stock held by non-affiliates of the
Registrant as of July 1, 2005 (the last business day of the
Registrants most recently completed second fiscal
quarter), based on the closing price for the Common Stock on the
Nasdaq National Market on that date, was $463,243,240. This
amount excludes an aggregate of 2,892,533 shares of Common
Stock held by officers and directors and each person known by
the Registrant to own 10% or more of the outstanding Common
Stock. Exclusion of shares held by any person should not be
construed to indicate that such person possesses the power,
directly or indirectly, to direct or cause the direction of the
management or policies of the Registrant, or that the Registrant
is controlled by or under common control with such person.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrants definitive proxy statement for
the annual meeting of stockholders expected to be held on
June 8, 2006 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 JANUARY 1, 2006
TABLE OF CONTENTS
1
PART I
This Annual Report on
Form 10-K may
contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, and
Section 21E of the Securities Exchange Act of 1934. These
statements relate to future events or our future financial
performance. We have attempted to identify forward-looking
statements by terminology including anticipates,
believes, can, continue,
could, estimates, expects,
intends, may, plans,
potential, predicts, should
or will or the negative of these terms or other
comparable terminology. These statements are only predictions
and involve known and unknown risks, uncertainties and other
factors, including the risks outlined under Item 1A.
Risk Factors in this Annual Report, that may cause our
actual results, levels of activity, performance or achievements
to be materially different from any future results, levels or
activity, performance or achievements expressed or implied by
these forward-looking statements. Although we believe that the
expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Accordingly, you should
not unduly rely on these forward-looking statements, which speak
only as of the date of this Annual Report. We are not under any
duty to update any of the forward-looking statements after the
date we file this Annual Report on
Form 10-K or to
conform these statements to actual results, unless required by
law. You should, however, review the factors and risks we
describe in the reports we file from time to time with the
Securities and Exchange Commission.
Illumina®,
Array of
Arraystm,
BeadArraytm,
DASL®,
GoldenGate®,
Infiniumtm,
Sentrix®
and
Oligator®
are our trademarks. This report also contains brand names,
trademarks or service marks of companies other than Illumina,
and these brand names, trademarks and service marks are the
property of their respective holders.
Available Information
Our annual report on
Form 10-K,
quarterly reports on
Form 10-Q, current
reports on
Form 8-K, and all
amendments to those reports are available free of charge on our
website, www.illumina.com. The information on our website is not
incorporated by reference into this report. Such reports are
made available as soon as reasonably practicable after filing
with, or furnishing to, the Securities and Exchange Commission.
The SEC also maintains an Internet site at www.sec.gov that
contains reports, proxy and information statements, and other
information regarding issuers that electronically file with the
SEC.
Overview
We were incorporated in April 1998. We develop and market
next-generation tools for the large-scale analysis of genetic
variation and function. Understanding genetic variation and
function is critical to the development of personalized
medicine, a key goal of genomics. Using our technologies, we
have developed a comprehensive line of products that are
designed to provide the performance, throughput, cost
effectiveness and flexibility necessary to enable researchers in
the life sciences and pharmaceutical industries to perform the
billions of tests necessary to extract medically valuable
information from advances in genomics. This information is
expected to correlate genetic variation and gene function with
particular disease states, enhancing drug discovery, allowing
diseases to be detected earlier and more specifically, and
permitting better choices of drugs for individual patients.
In 2001, we began commercial sale of short pieces of DNA called
oligonucleotides, which we refer to as oligos, manufactured
using our proprietary Oligator technology. We believe our
Oligator technology is more cost effective than competing
technologies, and this advantage enabled us to market our oligos
under a price leadership strategy while still achieving
attractive gross margins.
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In 2001, we commercialized the first implementation of our
BeadArray technology, the Sentrix Array Matrix. This is a
disposable matrix with 96 fiber optic bundles arranged in a
pattern that matches the standard
96-well microtiter
plate. Each fiber optic bundle performs more than 1,500 unique
assays, which enables researchers to perform focused genotyping
experiments in a high-throughput format. This format was also
used to initiate our single nucleotide polymorphism
(SNP) genotyping services product line. As a result
of the increasing market acceptance of our high throughput, low
cost BeadArray technology, we have entered into genotyping
services contracts with many leading genotyping centers, and
were awarded $9.1 million from the National Institutes of
Health to play a major role in the first phase of the
International HapMap Project.
Our production-scale BeadLab is a turnkey platform that includes
all hardware and software necessary to enable researchers to
perform genetic analysis research on what we believe is an
unprecedented scale. This system is being marketed to a small
number of high-throughput genotyping users. As of
January 1, 2006, we have installed and recorded revenue for
11 BeadLabs.
In 2003, we announced the launch of several new products,
including 1) a new array format, the Sentrix BeadChip,
which significantly expands market opportunities for our
BeadArray technology and provides increased experimental
flexibility for life science researchers; 2) a gene
expression product line on both the Sentrix Array Matrix and the
Sentrix BeadChip that allows researchers to analyze a focused
set of genes across eight to 96 samples on a single array; and
3) a benchtop SNP genotyping and gene expression system,
the BeadStation, for performing moderate-scale genotyping and
gene expression using our technology. The BeadStation includes
our BeadArray Reader, analysis software and assay reagents and
is designed to match the throughput requirements and variable
automation needs of individual research groups and core labs.
Sales of these products began in the first quarter of 2004 and,
as of January 1, 2006, we have shipped 115 BeadStations.
In late 2004, we announced a strategic collaboration with
Invitrogen Corporation (Invitrogen) to synthesize
and distribute oligos. In the third quarter of 2005, we began
shipping oligo products in connection with this agreement. As
part of the agreement, we have developed the next generation of
our Oligator DNA synthesis technology, which we have designed to
support both plate- and tube-based capabilities. Invitrogen is
responsible for sales, marketing and technical support. Profits
from sales of collaboration products are divided equally between
the two companies.
In 2005, we began shipments of Sentrix BeadChips for
whole-genome gene expression and whole-genome genotyping. The
whole-genome gene expression BeadChips are designed to enable
high-performance, cost-effective, whole-genome expression
profiling of multiple samples on a single chip, resulting in a
dramatic reduction in cost of whole-genome expression analysis.
Our whole-genome expression product line includes multi-sample
products for both the Human and Mouse Genomes. The whole-genome
genotyping BeadChip is designed to scale to high levels of
multiplexing without compromising data quality and to provide
scientists the ability to query hundreds of thousands of SNPs in
parallel. In the second quarter of 2005, we commenced shipment
of our first whole-genome genotyping BeadChip, the HumanHap1,
which interrogates more than 100,000 SNPs in parallel.
In April 2005, we completed the acquisition of CyVera
Corporation, a privately-held Connecticut-based company,
pursuant to which CyVera became a wholly-owned subsidiary of
Illumina. We believe that CyVeras digital-microbead
platform will be highly complementary to our portfolio of
products and services. The acquisition is expected to provide us
with a comprehensive approach to bead-based assays for biomarker
research and development and in-vitro and molecular diagnostic
opportunities, including those that require low-complexity as
well as high-complexity testing. We expect the first products
based on CyVeras technology to be available in the second
half of 2006. The purchase price associated with the transaction
was approximately $17.8 million. We allocated
$15.8 million of this purchase price to acquired in-process
research and development and charged such amount against
earnings in the second quarter of 2005.
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In January 2006, we began shipment of the new Sentrix
HumanHap300 Genotyping BeadChip to customers around the world.
Using the Infinium assay, which enables us to select virtually
any SNP in the genome, the HumanHap300 BeadChip offers genomic
coverage for more than 317,000 SNPs. We selected the SNP assays
in collaboration with a consortium of scientists that are
leaders in the genotyping field. We believe this product has
quality and performance features that support our expectation
that it will become an important discovery tool for researchers
seeking to understand the genetic basis of common, yet complex
diseases.
We are seeking to continue to expand our customer base for our
BeadArray technology; however, we can give no assurance that our
sales efforts will continue to be successful.
We were incorporated in California in April 1998. We
reincorporated in Delaware in July 2000. Our principal executive
offices are located at 9885 Towne Centre Drive, San Diego,
California 92121. Our telephone number is (858) 202-4500.
Industry Background
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Genetic Variation and 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,
including predisposition to disease and differential response to
drugs. Genetic variation affects disease susceptibility,
including predisposition to cancer, diabetes, cardiovascular
disease and Alzheimers disease. In addition, genetic
variation may cause people to respond differently to the same
drug treatment. Some people may respond well, others may not
respond at all, and still others may experience adverse side
effects. A common form of genetic variation is a SNP. A SNP is a
variation in a single position in a DNA sequence. It is
estimated that the human genome contains over nine million SNPs.
While in some cases a single SNP will be responsible for
medically important effects, it is now believed that
combinations of SNPs may contribute to the development of most
major diseases. Since there are millions of SNPs, it is
important to investigate many representative, well-chosen SNPs
simultaneously in order to discover medically valuable
information.
Another contributor to disease and dysfunction is the over- or
under-expression of genes within an organisms cells. A
very complex network of genes interacts to produce healthy
individuals. The challenge for scientists is to delineate the
associated genes expression patterns and their
relationship to disease. Until recently, this problem was
addressed by investigating effects on a gene-by-gene basis. This
is time consuming, and difficulties exist when several pathways
can not be observed or controlled at the same time.
With the advent of microarray technology, thousands of genes can
now be tested at the same time.
SNP genotyping is the process of determining which base (A, C, G
or T) is present at a particular site in the genome within an
individual or other organism. The use of SNP genotyping to
obtain meaningful statistics on the effect of an individual SNP
or a collection of SNPs, and to apply that information to
clinical trials and diagnostic testing, requires the analysis of
millions of SNP genotypes and the testing of large populations
for each disease. For example, a single large clinical trial
could involve genotyping 300,000 SNPs per patient in
1,000 patients, thus requiring 300 million assays.
Using previously available technologies, this scale of SNP
genotyping was both impractical and prohibitively expensive.
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Large-scale SNP genotyping can be used in a variety of ways,
including studies designed to understand the genetic
contributions to disease (disease association studies),
genomics-based drug development, clinical trial analysis,
disease predisposition testing, and disease diagnosis. SNP
genotyping can also be used outside of healthcare, for example
in the development of plants and animals with desirable
commercial characteristics. These markets will require billions
of SNP genotyping assays annually.
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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.
Our Technologies
We have developed a proprietary array technology that enables
the large-scale analysis of genetic variation and function. Our
BeadArray technology combines microscopic beads and a substrate
in a simple proprietary manufacturing process to produce arrays
that can perform many assays simultaneously. Our BeadArray
technology provides a unique combination of high throughput,
cost effectiveness, and flexibility. We achieve high throughput
with a high density of test sites per array and we are able to
format arrays either in a pattern arranged to match the wells of
standard microtiter plates or in various configurations in the
format of standard microscope slides. We seek to maximize cost
effectiveness by reducing consumption of expensive reagents and
valuable samples, and through the low manufacturing costs
associated with our technologies. Our ability to vary the size,
shape and format of the well patterns and to create specific
bead pools, or sensors, for different applications provides the
flexibility to address multiple markets and market segments. We
believe that these features have enabled our BeadArray
technology to become a leading platform for the emerging
high-growth market of SNP genotyping and expect they will enable
us to become a key player in the gene expression market.
Our proprietary BeadArray technology combines microwells etched
into a substrate and specially prepared beads that self-assemble
into an array. We have deployed our BeadArray technology in two
different Sentrix array formats, the Array Matrix and the
BeadChip. Our first bead-based product was the Array Matrix
which incorporates fiber optic bundles. The fiber optic bundles,
which we cut into lengths of less than one inch, are
manufactured to our specifications. Each bundle is comprised of
approximately 50,000 individual fibers and 96 of these bundles
are placed into an aluminum plate, which forms an Array Matrix.
BeadChips are fabricated in microscope slide-shaped sizes with
varying numbers of sample sites per slide. Both formats are
chemically etched to create tens to hundreds of thousands of
wells for each sample site.
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In a separate process, we create sensors by affixing a specific
type of molecule to each of the billions of microscopic beads in
a batch. We make different batches of beads, with the beads in a
given batch coated with one particular type of molecule. The
particular molecules on a bead define that beads function
as a sensor. For example, we create a batch of SNP sensors by
attaching a particular DNA sequence, or oligo, to each bead in
the batch. We combine batches of coated beads to form a pool
specific to the type of array we intend to create. A bead pool
one milliliter in volume contains sufficient beads to produce
thousands of arrays. One of the advantages of this technology is
that it allows us to create universal arrays for SNP genotyping,
and by varying the reagent kit, we are able to use the array to
test for any combination of SNPs.
To form an array, a pool of coated beads is brought into contact
with the array surface where they are randomly drawn into the
wells, one bead per well. The tens of thousands of beads in the
wells comprise our individual arrays. Because the beads assemble
randomly into the wells, we perform a final procedure called
decoding in order to determine which bead type
occupies which well in the array. We employ several proprietary
methods for decoding, a process that requires only a few steps
to identify all the beads in the array. One beneficial
by-product of the decoding process is a validation of each bead
in the array. This quality control test characterizes the
performance of each bead and can identify and eliminate use of
any empty wells. We ensure that each bead type on the array is
sufficiently represented by including multiple copies of each
bead type. Multiple bead type copies improve the reliability and
accuracy of the resulting data by allowing statistical
processing of the results of identical beads. We believe we are
the only microarray company to provide this level of quality
control in the industry.
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. The BeadArray Reader detects the matched molecules by
shining a laser on the fiber optic bundle or on the BeadChip.
Since the molecules in the sample have a structure that causes
them to emit light in response to a laser, detection of a
binding event is possible. This allows the measurement of the
number of molecules bound to each coated bead, resulting in a
quantitative analysis of the sample.
Genomic applications require many different short pieces of DNA
that can be made synthetically, called oligos. For example, SNP
genotyping may require three to four different oligos per assay.
A SNP genotyping experiment analyzing 10,000 SNPs may therefore
require 30,000 to 40,000 different oligos, contributing
significantly to the expense of the experiment.
We have developed our proprietary Oligator technology for the
parallel synthesis of many different oligos to meet the
requirements of large-scale genomics applications. We believe
that our Oligator technology is substantially more cost
effective and provides significantly higher throughput than
available commercial alternatives. Our synthesis machines are
computer controlled and utilize many robotic processes to
minimize the amount of labor used in the manufacturing process.
In 2005, we implemented our fourth-generation Oligator
technology, which is capable of manufacturing up to 13,000
different oligos per run. This is an improvement over prior
generations of technology where we could only manufacture
approximately 3,000 oligos per run. This increase in scale was
necessary to enable us to support the manufacture of oligos
under our collaboration with Invitrogen as well as to support
our increased need for oligos, a critical component of our
BeadArray technology.
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Key Advantages of Our BeadArray and Oligator
Technologies |
We believe that our BeadArray and Oligator technologies provide
distinct advantages, in a variety of applications, over
competing technologies, by creating cost-effective, highly
miniaturized arrays with the following advantages:
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. The Oligators parallel synthesis capability
allows us to manufacture the diversity of oligos necessary to
support large-scale genomic applications.
Cost Effectiveness. Our array products substantially
reduce the cost of 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,
these products require smaller reagent volumes than other array
technologies, and therefore reduce reagent costs. Our
cost-effective Oligator technology further reduces reagent
costs, as well as the cost of coating beads.
Flexibility. A wide variety of conventional chemistries
are available for attaching different molecules, such as DNA,
RNA, proteins, and other chemicals to beads. By using beads, we
are able to take advantage of these chemistries to create a wide
variety of sensors, which we assemble into arrays using the same
proprietary manufacturing process. In addition, we can have
fiber optic bundles and BeadChips manufactured in multiple
shapes and sizes with wells organized in various arrangements to
optimize them for different markets and market segments. In
combination, the use of beads and etched wells provides the
flexibility and scalability for our BeadArray technology to be
tailored to perform many applications in many different market
segments, from drug discovery to diagnostics. Our Oligator
technology allows us to manufacture a wide diversity of lengths
and quantities of oligos.
Quality. 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
the performance, cost and ease of use. By developing assays that
are easy to use, we can minimize the potential for the
introduction of experimental error into the experiment. We
believe that this enables the researcher to obtain high quality
data from their experiments. Additionally, we manufacture
substantially all of the reagents used in our assays which
allows us to control the quality of the product delivered to the
customer.
Our Strategy
Our goal is to make our BeadArray platforms the industry
standard for products and services utilizing array technologies.
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, Sentrix Array
Matrix and BeadChip products; |
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expanding our technologies into multiple product lines and
market segments; and |
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strengthening our technological leadership. |
Products and Services
The first implementation of our BeadArray technology, the
Sentrix Array Matrix, is a disposable matrix with 96 fiber optic
bundles arranged in a pattern that matches the standard
96-well microtiter
plate. Each fiber optic bundle performs more than 1,500 unique
assays. The BeadChip, introduced in 2003, is fabricated in
multiple configurations to support multiple applications and
scanning technologies.
We have provided genotyping services using our proprietary
BeadArray technology since 2001. In addition, we have developed
our first genotyping and gene expression products based on this
technology. These products include disposable Sentrix 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.
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 two million genotypes per day based on
individual samples. 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 Sentrix
Array Matrix, for SNP genotyping. The Sentrix Array Matrix uses
a universal format that allows it to analyze any set of SNPs. We
have also developed reagent kits based on GoldenGate assay
protocols and the BeadArray Reader, a laser scanner, which is
used to read our array products.
Depending on throughput and automation requirements, our
customers can select the system configuration to best meet their
needs. For production-scale throughput, our BeadLab would be
appropriate, and for moderate-scale throughput, our BeadStation
would be selected. Our BeadLab includes our BeadArray Reader,
combined with LIMS, standard operating procedures and analytical
software and fluid handling robotics. This production-scale
system was commercialized in late 2002 and when installed, this
system can routinely produce millions of genotypes per day.
The BeadStation, a system for performing moderate-scale
genotyping designed to match the throughput requirements of
individual research groups and core labs, was commercialized in
late 2003. The BeadStation includes our BeadArray Reader and
genotyping and/or gene expression analysis software. Our
BeadStations are fully upgradeable to a full BeadLab through
various steps that add automation, sample preparation equipment
and LIMS capability. For use in custom SNP genotyping, both the
BeadLab and BeadStation utilize GoldenGate assay reagents and
our Array Matrix.
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 2004, we announced a new Sentrix Human-1 Genotyping BeadChip
for whole-genome genotyping. This BeadChip provides to
scientists the ability to interrogate over 100,000 SNPs located
in high-value genetic regions of the human genome. In 2006, we
announced the Sentrix HumanHap300 Genotyping BeadChip for
larger-scale SNPs studies, which can assay more than 317,000
SNPs displayed across the entire human genome.
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In 2005, we announced the MHC Panel Set, which allows the
interrogation of a
difficult-to-assay area
of the genome, often associated with autoimmune diseases. In
addition, we announced the Mouse-6 and MouseRef-8 Gene
Expression BeadChip allowing the study of the levels of gene
expression in mouse model.
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Gene Expression Profiling |
With the addition of application specific accessory kits, our
production-scale BeadLabs and BeadStations are capable of
performing a growing number of applications, including gene
expression profiling.
In 2003, we introduced our focused set gene expression products
on both the Sentrix Array Matrix and Sentrix BeadChip platforms.
Our system includes a BeadArray Reader for imaging Sentrix 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 Sentrix 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.
The BeadArray Reader, an instrument we developed, is a key
component of both our production-scale BeadLab and our benchtop
BeadStation. This scanning equipment uses a laser to read the
results of experiments that are captured on our arrays and was
designed to be used in all areas of genetic analysis that use
our Sentrix Array Matrices and Sentrix BeadChips.
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High-Throughput Oligo Synthesis |
We have put in place a state of the art oligo manufacturing
facility. This facility serves both the commercial needs under
our collaboration with Invitrogen and our internal needs. In
addition to their use to coat beads, these oligos are components
of the reagent kits for our BeadArray products and are used for
assay development. We manufacture oligos in a wide range of
lengths and in several scales, with the ability to add many
types of modifications. We offer a range of quality control
options and have implemented a laboratory information management
system to control much of the manufacturing process. In 2003, we
introduced the first standard product offerings in our Oligator
product line, a whole-genome oligo reference set designed and
optimized for spotted gene expression microarrays, and in 2004,
we introduced a mouse genome oligo set, also for use on spotted
gene expression arrays. In 2005, we stopped selling oligos
directly into the market and began shipping oligos under our
collaboration with Invitrogen.
9
Collaboration with Invitrogen Corporation
In December 2004, we entered into a strategic collaboration with
Invitrogen. The goal of the collaboration is to combine our
expertise in oligo manufacturing with the sales, marketing and
distribution capabilities of Invitrogen. In connection with the
collaboration, we have developed the next generation
Oligator®
DNA synthesis technology. This technology includes both plate-
and tube-based capabilities. Under the terms of the agreement,
Invitrogen paid us an upfront non-refundable collaboration
payment of $2.3 million in the first quarter of 2005.
Additionally, upon the achievement of a certain milestone,
Invitrogen was obligated to make a milestone payment of
$1.1 million to us. As of January 1, 2006, this
milestone has been achieved and the milestone payment was
received. We have 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 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 will be divided equally between
the two companies.
Research and Development
We have made substantial investments in research and development
since our inception. We have assembled a team of skilled
engineers and scientists who are specialists in biology,
chemistry, informatics, instrumentation, optical systems,
software, manufacturing and other related areas required to
complete the development of our products. Our research and
development efforts have focused primarily on the tasks required
to optimize our BeadArray and Oligator technologies and to
support commercialization of the products and services derived
from these technologies. These efforts include the following,
among others:
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We enhanced the quality and manufacturing yield of our Sentrix
Array Matrices and BeadChips. We are exploring ways to continue
to increase the level of automation in the manufacturing process
to further reduce the time and cost of producing arrays. We
intend to add capacity to manufacture Sentrix Array Matrices and
BeadChips throughout 2006. We believe this additional capacity
will allow us to manufacture our products in sufficient quantity
to meet our business plan for 2006. |
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We introduced a number of initiatives in 2002 and 2003 to
improve the yield and quality of our oligos while reducing cost
substantially. By refining our understanding of the design and
operation of our Oligator technology, we have been able to make
numerous changes in our process, which we believe provides us a
more cost effective system than competing technologies. In 2005,
we expanded our Oligator technology under the collaboration
agreement with Invitrogen discussed above. In addition, we
expanded our oligo manufacturing facility to support high volume
shipments. |
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We have developed the BeadArray Reader, a laser scanning
instrument that scans our Sentrix array platforms. Laser
scanners provide the high sensitivity and resolution required to
address the extremely dense geometries of our bead-based arrays.
We made the first commercial shipments of our scanners in the
first quarter of 2003 as part of our BeadLab. |
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We completed development of and launched our Direct Hyb and DASL
gene expression assays on both array formats. We believe the
combination of our gene expression products flexibility and
low-per-sample cost will enable larger and more meaningful gene
expression studies. |
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We completed the CyVera acquisition, which we believe provides
us with a comprehensive approach to bead-based assays for
biomarker research and development and in-vitro and molecular
diagnostic opportunities, including those that require low
complexity as well as high-complexity testing. We believe the
CyVera technology will be highly complementary to our own
portfolio of products and services. We believe it will enhance
our capabilities to service our existing customers and
accelerate the development of additional technologies, products
and services. |
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We completed the development and launch of our Infinium
whole-genome genotyping solution. This family of products offers
a flexible BeadChip design and high density architecture.
Infinium Whole-Genome Genotyping products are based on our
BeadArray technology and provide the industrys only 100%
quality control, with an average 30-fold feature
redundancy. The revolutionary Infinium assays and corresponding
Sentrix BeadChips allow large-scale interrogation of variation
in the human genome. |
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We have been exploring the underlying molecular biology and
chemistry issues related to developing assays and performing
experiments on our BeadArray platforms. By improving our
processes and protocols, we have substantially increased the
number of assays we can process simultaneously in a single
sample on our arrays. |
Our research and development expenses for 2005, 2004 and 2003
(inclusive of charges relating to stock-based compensation of
$0.1 million, $0.3 million, and $1.3 million,
respectively) were $27.7 million, $21.1 million and
$22.5 million, respectively. As compared to 2005, we expect
research and development expense to increase in absolute dollars
during 2006, as we continue to expand our research and product
development efforts, but decrease as a percentage of overall
revenue in 2006.
Government Grants
Government grants allow us to fund internal scientific programs
and exploratory research. We retain ownership of all
intellectual property and commercial rights generated during
these projects, subject to a non-exclusive, non-transferable,
paid-up license to
practice, for or on behalf of the United States, inventions made
with federal funds. This license is retained by the
U.S. government as provided by applicable statutes and
regulations. We do not believe that the retained license will
have any impact on our ability to market our products, and we do
not need government approval with respect to this license in
order to enter into collaborations or other relationships with
third parties. We were the recipient of a grant from the
National Institutes of Health covering our 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. We received $9.1 million of funding for this
project which covered basic research activities, the development
of SNP assays and the genotyping to be performed on those
assays, all of which was earned in prior years, except for
approximately $0.8 million, which was recognized as revenue
during the first quarter of fiscal 2005.
Intellectual Property
We have an extensive patent portfolio, including, as of
February 1, 2006, ownership of, or exclusive licenses to,
38 issued U.S. patents and 102 pending U.S. patent
applications, including six allowed applications that have not
yet issued as patents, some of which derive from a common parent
application. Our issued patents, which cover various aspects of
our array, assay, oligo synthesis, instrument and chemical
detection technologies, expire between 2011 and 2022. We are
seeking to extend this patent protection on our BeadArray, DASL,
GoldenGate, Infinium, CyVera, Oligator, Sentrix, Array of Arrays
and related technologies. We have received or filed counterparts
for many of these patents and applications in one or more
foreign countries.
11
We also rely upon trade secrets, know-how, copyright and
trademark protection, as well as continuing technological
innovation and licensing opportunities to develop and maintain
our competitive position. Our success will depend in part on our
ability to obtain patent protection for our products and
processes, to preserve our copyrights and trade secrets, to
operate without infringing the proprietary rights of third
parties and to acquire licenses related to enabling technology
or products used with our BeadArray, DASL, GoldenGate, Infinium,
Sentrix, Array of Arrays, CyVera and Oligator technologies.
We are party to various exclusive and non-exclusive license
agreements with third parties, which grant us rights to use key
aspects of our array technology, assay methods, chemical
detection methods, reagent kits and scanning equipment. We have
exclusive licenses from Tufts University to patents that cover
our use of BeadArray technology. These patents were filed by
Dr. David Walt, a member of our board of directors, the
Chairman of our Scientific Advisory Board and one of our
founders. Our exclusive licenses expire with the termination of
the underlying patents, which will occur between 2010 and 2019.
In 2001, we entered into a non-exclusive license agreement with
Amersham Biosciences that covers certain technology contained in
our BeadArray Reader. In 2002, we obtained a non-exclusive
license from Dade Behring Marburg GmbH that relates to certain
components of our GoldenGate assay. We also have additional
nonexclusive licenses from various third parties for other
components of our products. In all cases, the agreements remain
in effect over the term of the underlying patents, may be
terminated at our request without further obligation and require
that we pay customary royalties while the agreement is in effect.
Marketing and Distribution
Our current products address the genetic analysis portion of the
life sciences market, in particular, experiments involving SNP
genotyping and gene expression profiling. These experiments may
be involved in many areas of biologic research, including basic
human disease research, pharmaceutical drug discovery and
development, pharmacogenomics, toxicogenomics and agricultural
research. Our potential customers include pharmaceutical,
biotechnology, agrichemical, diagnostics and consumer products
companies, as well as academic or private research centers. The
genetic analysis market is relatively new and emerging and its
size and speed of development will be ultimately driven by,
among other items:
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the ability of the research community to extract medically
valuable information from genomics and to apply that knowledge
to multiple areas of disease-related research and treatment; |
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the availability of sufficiently low cost, high-throughput
research tools to enable the large amount of experimentation
required to study genetic variation and 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, Japan and Singapore. In
each of these areas, we have dedicated sales, service and
application support personnel responsible for expanding and
managing their respective customer bases. In markets outside of
these areas, primarily the Pacific Rim countries and Europe, we
sell our products and provide services to customers through
distributors that specialize in life science products. We expect
to significantly increase our sales and distribution resources
during 2006 and beyond as we launch a number of new products and
expand the number of customers that can use our products.
In 2004, we entered into a strategic collaboration with
Invitrogen with a goal of leveraging our strength in oligo
synthesis with Invitrogens extensive sales, marketing and
distribution channels. We transitioned all responsibility for
oligo sales, marketing and technical support to Invitrogen in
the beginning of the third quarter of 2005.
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Manufacturing
We manufacture our array platforms, reagent kits, scanning
equipment and oligos in-house and believe that we currently have
the ability to manufacture these in sufficient quantity to meet
our business plan for 2006. We currently depend upon outside
suppliers for materials used in the manufacture of our products.
We intend to continue, and may extend, the outsourcing of
portions of our manufacturing process to subcontractors where we
determine it is in our best commercial interests.
During 2001, we moved into a new facility which allowed us to
design the manufacturing areas to fit our specific processes,
and optimize material flow and personnel movement. 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.
Competition
Although we expect that our BeadArray products and services will
provide significant advantages over currently available products
and services, we expect to encounter intense competition from
other companies that offer products and services for the SNP
genotyping and gene expression markets. These include companies
such as Aclara Biosciences (acquired by ViroLogic), Affymetrix,
Agilent, Amersham Biosciences (acquired by GE Corp. and now
named GE Healthcare), Applied Biosystems, Beckman Coulter,
Caliper Technologies, Luminex, ParAllele Bioscience (acquired by
Affymetrix), Perlegen Sciences, NimbleGen, Sequenom and Third
Wave Technologies. Some of these companies have or will have
substantially greater financial, technical, research, and other
resources and larger, more established marketing, sales,
distribution and service organizations than we do. In addition,
they may have greater name recognition than we do in the markets
we need to address and in some cases a large installed base of
systems. Each of these markets is very competitive and we expect
new competitors to emerge and the intensity of competition to
increase in the future. In order to effectively compete with
these companies, we will need to demonstrate that our products
have superior throughput, cost and accuracy advantages over the
existing products. Rapid technological development may result in
our products or technologies becoming obsolete. Products offered
by us could be made obsolete either by less expensive or more
effective products based on similar or other technologies.
Although we believe that our technology and products will offer
advantages that will enable us to compete effectively with these
companies, we cannot assure you that we will be successful.
Segment and Geographic Information
We operate in one business segment, for the development,
manufacture and commercialization of tools for genetic analysis.
Our operations are treated as one segment as we only report
operating results on an aggregate basis to chief operating
decision makers of Illumina.
During 2005, $28.0 million, or 38%, of our total revenue
came from customers outside the United States, as compared to
$26.4 million, or 52%, in 2004. Sales to territories
outside of the United States are generally denominated in U.S.
dollars. We expect that sales to international customers will be
an important and growing source of revenue. We have sales
support resources in Western Europe and direct sales offices in
Japan, Singapore and China. In addition, we have distributor
relationships in various countries in the Pacific Rim region and
Europe.
Information about the geographies in which we operate can be
found in the notes to the consolidated financial statements at
Note 11, Segment Information, Geographic Data and
Significant Customers.
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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 fourth quarter of the calendar year as academic
customers spend unused budget allocations before the end of the
governments fiscal year.
Environmental Matters
We are dedicated to the protection of our employees and the
environment. Our operations require the use of hazardous
materials which subject us to a variety of federal, state and
local environmental and safety laws and regulations. We believe
we are in material compliance with current applicable laws and
regulations; however, we could be held liable for damages and
fines should contamination of the environment or individual
exposures to hazardous substances occur. In addition, we cannot
predict how changes in these laws and regulations, or the
development of new laws and regulations, will affect our
business operations or the cost of compliance.
Employees
As of January 1, 2006, we had a total of 375 employees, 73
of whom hold Ph.D. degrees. 44 of our employees with Ph.D.
degrees are engaged in full-time research and development
activities. None of our employees are represented by a labor
union. We consider our employee relations to be positive.
Executive Officers
Our executive officers as of February 1, 2006, are as
follows:
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Position |
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Jay T. Flatley
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53 |
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President, Chief Executive Officer
and Director
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Christian O. Henry
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37 |
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Vice President, Chief Financial
Officer
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Tristan B. Orpin
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39 |
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Vice President of Worldwide Sales
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John R. Stuelpnagel, DVM
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48 |
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Co-Founder, Senior Vice President,
Chief Operating Officer and Director
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Jay T. Flatley has served as our President, Chief
Executive Officer and a Director since October 1999. Prior to
joining Illumina, Mr. Flatley was co-founder, President,
Chief Executive Officer and a Director of Molecular Dynamics, a
life sciences company, from May 1994 to September 1999. He
served in various other positions with that company from 1987 to
1994. From 1985 to 1987, Mr. Flatley was Vice President of
Engineering and Vice President of Strategic Planning at Plexus
Computers, a UNIX computer company. Mr. Flatley also serves
as a director at GenVault. Mr. Flatley holds a B.A. in
Economics from Claremont McKenna College and a B.S. and M.S. in
Industrial Engineering from Stanford University.
Christian O. Henry joined Illumina in June 2005 as Vice
President and Chief Financial Officer. He 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. He previously held a similar position at Nektar
Therapeutics (formerly Inhale Therapeutic Systems, Inc.).
Mr. Henry received a BA in biochemistry and cell biology
from the University of California, San Diego, and an M.B.A.
from the University of California, Irvine. Mr. Henry is a
certified public accountant.
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Tristan B. Orpin has served as our Vice President of
Worldwide Sales since December 2002. Prior to joining us,
Mr. Orpin was the Vice President of Sales and Marketing at
Sequenom, a genomics company, from August 2001 to November 2002,
and was Director of Sales and Marketing at Sequenom from
September 1999 to August 2001. From December 1988 to September
1999, Mr. Orpin served in several senior sales and
marketing positions at Bio-Rad Laboratories, a life sciences
company. Mr. Orpin received his BSc. in Biochemistry from
the University of Melbourne.
John R. Stuelpnagel, D.V.M., one of our founders, is our
Senior Vice President and Chief Operating Officer and has been a
director since April 1998. From October 1999 to April 2002, he
served as our Vice President of Business Development. From April
1998 to October 1999, he served as our acting President and
Chief Executive Officer and was acting Chief Financial Officer
through April 2000. While founding Illumina,
Dr. Stuelpnagel was an associate with CW Group, a venture
capital firm, from June 1997 to September 1998 and with Catalyst
Partners, a venture capital firm, from August 1996 to June 1997.
Dr. Stuelpnagel received his B.S. in Biochemistry and his
Doctorate in Veterinary Medicine from the University of
California, Davis and his M.B.A. from the University of
California, Los Angeles.
Our business is subject to various risks, including those
described below. In addition to the other information included
in this Form 10-K,
the following issues could adversely affect our operating
results or our stock price.
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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. |
Our commercial success depends in part on our non-infringement
of the patents or proprietary rights of third parties and the
ability to protect our own intellectual property. Affymetrix,
Inc. filed a complaint against us in July 2004, alleging
infringement of six of its patents, and other third parties have
asserted or may assert that we are employing their proprietary
technology without authorization. As we enter new markets, we
expect that competitors will likely assert that our products
infringe their intellectual property rights as part of a
business strategy to impede our successful entry into those
markets. In addition, third parties may have obtained and may in
the future obtain patents and claim that 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. We may incur
the same costs and diversions in enforcing our patents and other
proprietary rights against others. Furthermore, parties making
claims against us may be able to obtain injunctive or other
relief, which effectively could block our ability to further
develop, commercialize and sell products, and could result in
the award of substantial damages against us. In the event of a
successful claim of infringement against us, we may be required
to pay damages and obtain one or more licenses from third
parties, or be prohibited from selling certain products. We may
not be able to obtain these licenses at a reasonable cost, or at
all. In that event, we could encounter delays in product
introductions while we attempt to develop alternative methods or
products. Defense of any lawsuit or failure to obtain any of
these licenses on favorable terms could prevent us from
commercializing products, and the prohibition of sale of any of
our products could materially affect our ability to grow and to
attain profitability.
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We expect intense competition in our target markets, which
could render our products obsolete, result in significant price
reductions or substantially limit the volume of products that we
sell. This would limit our ability to compete and achieve
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
function and other applications using technologies such as
two-dimensional electrophoresis, capillary electrophoresis, mass
spectrometry, flow cytometry, microfluidics, 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. 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 have. Furthermore, the 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.
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We may encounter difficulties in integrating recently
completed or future acquisitions that could adversely affect our
business. |
In 2005, we acquired CyVera Corporation and may in the future
acquire technology, products or businesses related to our
current or future business. We have limited experience in
acquisition activities and may have to devote substantial time
and resources in order to complete acquisitions. Further, these
potential acquisitions entail risks, uncertainties and potential
disruptions to our business. For example, we may not be able to
successfully integrate a companys operations,
technologies, products and services, information systems and
personnel into our business. An acquisition may further strain
our existing financial and managerial resources, and divert
managements attention away from our other business
concerns. In connection with the CyVera acquisition, we assumed
certain liabilities and hired certain employees of CyVera, which
is expected to result in an increase in research and development
expenses and our capital expenditures. There may also be
unanticipated costs and liabilities associated with an
acquisition that could adversely affect our operating results.
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We have only recently achieved profitability and may not
be able to remain profitable. |
We have incurred net losses each year since our inception. As of
January 1, 2006, our accumulated deficit was
$144.6 million and we incurred a net loss of
$20.9 million for the year ended January 1, 2006. We
recorded a modest profit in the fourth quarter of 2005 and we
may not be profitable in 2006, due in part to the impact of
Statement of Financial Accounting Standard (SFAS)
No. 123R, which is expected to add additional expense of
$9.0 million to $12.0 million in 2006. Our ability to
maintain or increase profitability will depend, in part, on the
rate of growth, if any, of our revenue and on the level of our
expenses. We expect to continue incurring significant expenses
for research and development, for developing our manufacturing
capabilities and for sales and marketing efforts to
commercialize our products. In addition, we expect that our
selling and marketing expenses will increase at a higher rate in
the future as a result of the launch of new products. As a
result, we expect that our operating expenses will increase
significantly as we grow and, consequently, we will need to
generate significant additional revenue to maintain
profitability. Even if we maintain profitability, we may not be
able to increase profitability on a quarterly basis.
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The growth and profitability of our oligo business depends
on a third party. |
In December 2004, we entered into a collaboration agreement with
Invitrogen to sell and market our oligos worldwide. Under the
terms of the collaboration, Invitrogen is responsible for sales,
marketing and technical support, while we are responsible for
the manufacture of the collaboration products. As Invitrogen is
solely responsible for the sales and marketing support of the
collaboration, our continued growth and profitability related to
these products depends on the extent to which Invitrogen is
successful in penetrating the oligo market and selling the
collaboration products. If Invitrogen is not successful in
selling the collaboration products, our business, financial
condition and results of operations may suffer.
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We have a limited history of commercial sales of systems
and consumable products, and our success depends on our ability
to develop commercially successful products and on market
acceptance of our new and relatively unproven
technologies. |
We may not possess all of the resources, capability and
intellectual property necessary to develop and commercialize all
the products or services that may result from our technologies.
Sales of our genotyping and gene expression systems only began
in 2003, and some of our other technologies are in the early
stages of commercialization or are still in development. You
should evaluate us in light of the uncertainties and
complexities affecting similarly situated companies developing
tools for the life sciences and pharmaceutical industries. We
must conduct a substantial amount of additional research and
development before some of our products will be ready for sale
and we currently have fewer resources available for research and
development activities than many of our competitors. We may not
be able to develop or launch new products in a timely manner, or
at all, or they may not meet customer requirements or be of
sufficient quality or at a price that enables us to compete
effectively in the marketplace. Problems frequently encountered
in connection with the development or early commercialization of
products and services using new and relatively unproven
technologies might limit our ability to develop and successfully
commercialize these products and services. In addition, we may
need to enter into agreements to obtain intellectual property
necessary to commercialize some of our products or services,
which may not be available on favorable terms, or at all.
Historically, life sciences and pharmaceutical companies have
analyzed genetic variation and function using a variety of
technologies. In order to be successful, our products must meet
the commercial requirements of the life sciences and
pharmaceutical industries as tools for the large-scale analysis
of genetic variation and function.
Market acceptance will depend on many factors, including:
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our ability to demonstrate to potential customers the benefits
and cost effectiveness of our products and services relative to
others available in the market; |
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the extent and effectiveness of our efforts to market, sell and
distribute our products; |
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our ability to manufacture products in sufficient quantities
with acceptable quality and reliability and at an acceptable
cost; |
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the willingness and ability of customers to adopt new
technologies requiring capital investments; and |
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the extended time lag and sales expenses involved between the
time a potential customer is contacted on a possible sale of our
products and services and the time the sale is consummated or
rejected by the customer. |
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Any inability to adequately protect our proprietary
technologies could harm our competitive position. |
Our success will depend in part on our ability to obtain patents
and maintain adequate protection of our intellectual property in
the United States and other countries. If we do not protect our
intellectual property adequately, competitors may be able to use
our technologies and thereby erode our competitive advantage.
The laws of some foreign countries do not protect proprietary
rights to the same extent as the laws of the United States, and
many companies have encountered significant problems in
protecting their proprietary rights abroad. These problems can
be caused by the absence of rules and methods for defending
intellectual property rights.
The patent positions of companies developing tools for the life
sciences and pharmaceutical industries, including our patent
position, generally are uncertain and involve complex legal and
factual questions. We will be able to protect our proprietary
rights from unauthorized use by third parties only to the extent
that our proprietary technologies are covered by valid and
enforceable patents or are effectively maintained as trade
secrets. We intend to apply for patents covering our
technologies and products, as we deem appropriate. However, our
patent applications may be challenged and may not result in
issued patents or may be invalidated or narrowed in scope after
they are issued. Questions as to inventorship may also arise.
For example, a former employee recently 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 patents and seeking a judgment that the related
patents and applications are unenforceable. See
Item 3. Legal Proceedings for a description of
this complaint. 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 licenses to practice the technology, which
may not be available on favorable terms, if at all.
In addition, our existing patents and any future patents we
obtain may not be sufficiently broad to prevent others from
practicing our technologies or from developing competing
products. There also is risk that others may independently
develop similar or alternative technologies or design around our
patented technologies. Also, our patents may fail to provide us
with any competitive advantage. We may need to initiate
additional lawsuits to protect or enforce our patents, or
litigate against third party claims, which would be expensive
and, if we lose, may cause us to lose some of our intellectual
property rights and reduce our ability to compete in the
marketplace.
We also rely upon trade secret protection for our confidential
and proprietary information. We have taken security measures to
protect our proprietary information. These measures, however,
may not provide adequate protection for our trade secrets or
other proprietary information. We seek to protect our
proprietary information by entering into confidentiality
agreements with employees, collaborators and consultants.
Nevertheless, employees, collaborators or consultants may still
disclose our proprietary information, and we may not be able to
meaningfully protect our trade secrets. In addition, others may
independently develop substantially equivalent proprietary
information or techniques or otherwise gain access to our trade
secrets.
18
|
|
|
Our manufacturing capacity may limit our ability to sell
our products. |
We are currently ramping 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
plans in place to help ensure we have adequate capacity to meet
our business plan in 2006, 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.
|
|
|
Our sales, marketing and technical support organization
may limit our ability to sell our products. |
We currently have fewer resources available for sales and
marketing and technical support services as compared to our
primary competitors. In order to effectively commercialize our
genotyping and gene expression systems and other products to
follow, we will need to expand our sales, marketing and
technical support staff both domestically and internationally.
We may not be successful in establishing or maintaining either a
direct sales force or distribution arrangements to market our
products and services. In addition, we compete primarily with
much larger companies, that have larger sales and distribution
staffs and a significant installed base of products in place,
and the efforts from a limited sales and marketing force may not
be sufficient to build the market acceptance of our products
required to support continued growth of our business.
|
|
|
If we are unable to develop and maintain operation of our
manufacturing capability, we may not be able to launch or
support our products in a timely manner, or at all. |
We currently possess only one facility capable of manufacturing
our products and services for both sale to our customers and
internal use. If a natural disaster were to significantly damage
our facility or if other events were to cause our operations to
fail, these events could prevent us from developing and
manufacturing our products and services. Also, many of our
manufacturing processes are automated and are controlled by our
custom-designed Laboratory Information Management System
(LIMS). Additionally, as part of the decoding step
in our array manufacturing process, we record several images of
each array to identify what bead is in each location on the
array and to validate each bead in the array. This requires
significant network and storage infrastructure. If either our
LIMS system or our networks or storage infrastructure were to
fail for an extended period of time, it would adversely impact
our ability to manufacture our products on a timely basis and
may prevent us from achieving our expected shipments in any
given period.
19
|
|
|
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 managing our growth.
These difficulties could increase our losses. |
We expect 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 losses could increase. 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.
|
|
|
We may need additional capital in the future. If
additional capital is not available on acceptable terms, we may
have to curtail or cease operations. |
Our future capital requirements will be substantial and will
depend on many factors including our ability to successfully
market our genetic analysis systems and services, the need for
capital expenditures to support and expand our business, the
progress and scope of our research and development projects, the
filing, prosecution and enforcement of patent claims, the
outcome of our legal proceedings with Affymetrix, the defense of
any future litigation involving us 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. We anticipate that our current cash and cash
equivalents, revenue from sales and funding from grants will be
sufficient to fund our anticipated operating needs, barring
unforeseen developments. However, this expectation is based upon
on our current operating plan, which may change as a result of
many factors. Consequently, we may need additional funding in
the future. Our inability to raise capital would seriously harm
our business and product development efforts. In addition, we
may choose to raise additional capital due to market conditions
or strategic considerations, such as an acquisition, even if we
believe we have sufficient funds for our current or future
operating plans. To the extent that additional capital is raised
through the sale of equity, the issuance of these securities
could result in dilution to our stockholders.
We currently have no credit facility or committed sources of
capital available as of January 1, 2006. To the extent
operating and capital resources are insufficient to meet future
requirements, we will have to raise additional funds to continue
the development and commercialization of our technologies. These
funds may not be available on favorable terms, or at all. If
adequate funds are not available on attractive terms, we may be
required to curtail operations significantly or to obtain funds
by entering into financing, supply or collaboration agreements
on unattractive terms.
20
|
|
|
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 and John Stuelpnagel, our senior vice
president and chief operating officer. 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 38% of our revenue for the year ended
January 1, 2006 was derived from customers outside the
United States. We intend to continue to expand our international
presence and export sales to international customers and we
expect the total amount of
non-U.S. sales to
continue to grow. Export sales entail a variety of risks,
including:
|
|
|
|
|
currency exchange fluctuations; |
|
|
|
unexpected changes in legislative or regulatory requirements of
foreign countries into which we import our products; |
|
|
|
difficulties in obtaining export licenses or other trade
barriers and restrictions resulting in delivery delays; and |
|
|
|
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 material adverse effect on
our business, financial condition and operating results.
21
|
|
|
Our success depends upon the continued emergence and
growth of markets for analysis of genetic variation and
function. |
We design our products primarily for applications in the life
sciences and pharmaceutical industries. The usefulness of our
technology depends in part upon the availability of genetic data
and its usefulness in identifying or treating disease. We are
initially focusing on markets for analysis of genetic variation
and 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
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 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
profitability.
|
|
|
We expect that our results of operations will fluctuate.
This fluctuation could cause our stock price to decline. |
Our revenue is subject to fluctuations due to the timing of
sales of high-value products and services projects, the impact
of seasonal spending patterns, the timing and size of research
projects our customers perform, changes in overall spending
levels in the life sciences industry, the timing and amount of
government grant funding programs and other unpredictable
factors that may affect customer ordering patterns. Given the
difficulty in predicting the timing and magnitude of sales for
our products and services, we may experience
quarter-to-quarter
fluctuations in revenue resulting in the potential for a
sequential decline in quarterly revenue. A large portion of our
expenses are relatively fixed, including expenses for
facilities, equipment and personnel. In addition, we expect
operating expenses to continue to increase significantly.
Accordingly, if revenue does not grow as anticipated, we may not
be able to maintain 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 revenue growth in
2006 or cause a sequential decline in quarterly revenues. Due to
the possibility of fluctuations in our revenue and expenses, we
believe that quarterly comparisons of our operating results are
not a good indication of our future performance. If our
operating results fluctuate or do not meet the expectations of
stock market analysts and investors, our stock price probably
would decline.
|
|
Item 1B. |
Unresolved Staff Comments. |
None.
22
Our principal research and development, manufacturing and
administrative facilities occupy approximately
116,000 square feet of three buildings located in
San Diego, California, which we purchased, along with eight
acres of adjacent land, in January 2002. In connection with this
purchase we assumed a $26.0 million,
10-year mortgage on the
property at a fixed interest rate of 8.36%. In June 2004, we
entered into a conditional agreement to sell our land and
buildings for $42.0 million and to lease back such property
for an initial term of ten years. The sale was completed in
August 2004, at which time the lease was signed. Under the terms
of the lease, we made a $1.9 million security deposit and
are obligated to pay monthly rent of approximately $318,643 for
the first year with an annual increase of 3% in each subsequent
year. The current monthly rent under this lease is $328,202. The
lease contains an option to review for three additional periods
of five years each. In January 2006, we began leasing
approximately 4,500 square feet of industrial space in
San Diego, California to be used for distribution and
storage of our products. The initial term of this lease is three
years. In conjunction with our acquisition of CyVera in April
2005, we also lease office space for a facility located in
Connecticut that occupies 14,884 square feet of office
space. This lease is non-cancelable and expires as of April
2008. This facility is used primarily for research and
development purposes. We expect that these facilities will be
sufficient for our
U.S.-based operations
through at least 2006.
In February 2003, we began leasing approximately
3,300 square feet of office space in Tokyo and, in January
2004, we began leasing approximately 1,600 square feet of
office space in Singapore. In November 2005, we began leasing
approximately 200 square feet of office space in China.
These facilities are used by local sales, marketing and field
service personnel.
|
|
Item 3. |
Legal Proceedings. |
We have incurred substantial costs in defending ourselves
against patent infringement claims, and expect to devote
substantial financial and managerial resources to protect our
intellectual property and to defend against the claims described
below as well as any future claims asserted against us.
Affymetrix Litigation
On July 26, 2004, Affymetrix, Inc. (Affymetrix)
filed a complaint in the U.S. District Court for the
District of Delaware alleging that the use, manufacture and sale
of our BeadArray products and services, including the Array
Matrix and BeadChip products, infringe six Affymetrix patents.
Affymetrix seeks an injunction against the sale of products, if
any, that are determined to be infringing these patents,
unspecified monetary damages, interest and attorneys fees.
On September 15, 2004, we filed our answer and
counterclaims to Affymetrix complaint, seeking declaratory
judgments from the court that we do not infringe the Affymetrix
patents, and that such patents are invalid, and filed
counterclaims against Affymetrix for unfair competition and
interference with actual and prospective economic advantage. On
January 7, 2006, we sought leave 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. Trial is scheduled for October 16, 2006. We believe
we have meritorious defenses against each of the infringement
claims alleged by Affymetrix and intend to vigorously defend
ourselves against this suit. However, we cannot be sure that we
will prevail in this matter. Any unfavorable determination, and
in particular, any significant cash amounts required to be paid
by us or prohibition of the sale of our products and services,
could result in a material adverse effect on our business,
financial condition and results of operations.
23
Dr. Anthony W. Czarnik v. Illumina, Inc.
On June 15, 2005, Dr. Anthony W. 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 our patents and patent applications and alleging that
we committed inequitable conduct and fraud in not naming him as
an inventor. Dr. Czarnik seeks an order requiring us and
the U.S. Patent and Trademark Office to correct the
inventorship of certain of our patents and patent applications
by adding Dr. Czarnik as an inventor, a judgment declaring
certain of our patents and patent applications unenforceable,
unspecified monetary damages and attorneys fees. On
August 4, 2005 we filed a motion to dismiss the complaint
for lack of standing and failure to state a claim. While this
motion was pending, Dr. Czarnik filed an amended complaint
on September 23, 2005. On October 7, 2005, we filed a
motion to dismiss the amended complaint for lack of standing and
failure to state a claim, and this motion is still pending.
There has been no trial date set for this case. We believe we
have meritorious defenses against this claim.
Termination-of-Employment
Lawsuit
In March 2001, a complaint seeking damages of an unspecified
amount was filed against us by Dr. Czarnik in the Superior
Court of the State of California in connection with the
employees termination of employment with Illumina. In June
2002, a California Superior Court judgment was rendered against
us and we recorded a $7.7 million charge in our financial
results for the second quarter of 2002 to cover total damages
and remaining expenses. We appealed the decision, and in
December 2004, the Fourth Appellate District Court of Appeal, in
San Diego, California, reduced the amount of the award. We
recorded interest expense on the $7.7 million during the
appeal based on the statutory rate. As a result of the revised
judgment, we reduced the $9.2 million liability on our
balance sheet to $5.9 million and recorded a gain of
$3.3 million as a litigation judgment in the fourth quarter
of 2004. In January 2005, we paid the $5.9 million and
removed the liability from our balance sheet.
|
|
Item 4. |
Submission of Matters to a Vote of Security
Holders. |
No matters were submitted to a vote of security holders during
the fourth quarter of 2005.
24
PART II
|
|
Item 5. |
Market for Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities. |
Our common stock has been quoted on the Nasdaq National 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 National Market. Our
present policy is to retain earnings, if any, to finance future
growth. We have never paid cash dividends and have no present
intention to pay cash dividends in the foreseeable future.
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
|
| |
|
|
High | |
|
Low | |
|
|
| |
|
| |
First Quarter
|
|
$ |
10.24 |
|
|
$ |
6.50 |
|
Second Quarter
|
|
|
8.88 |
|
|
|
6.07 |
|
Third Quarter
|
|
|
7.22 |
|
|
|
4.23 |
|
Fourth Quarter
|
|
|
9.65 |
|
|
|
6.16 |
|
At January 31, 2006, there were approximately 229
stockholders of record, and the closing price per share of our
common stock, as reported on the Nasdaq National Market on such
date, was $21.44.
Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
We did not repurchase any of our securities during 2005.
Use of Proceeds
We completed our initial public offering of common stock in July
2000, resulting in net proceeds of $101.3 million. We will
continue to use proceeds from our initial public offering to
fund operations. Through January 1, 2006, we have used
approximately $30.9 million to purchase property, plant and
equipment, approximately $2.4 million for the acquisition
of CyVera, and approximately $46.8 million to fund general
operating expenses. The remaining balance is invested in a
variety of interest-bearing instruments including
U.S. Treasury securities, and money market accounts.
25
|
|
Item 6. |
Selected Financial Data. |
The following selected historical consolidated financial data
has been derived from our audited consolidated financial
statements. The balance sheet data as of January 1, 2006
and January 2, 2005 and statement of operations data for
each of the three years in the period ended January 1, 2006
are derived from audited consolidated financial statements
included in this Annual Report on
Form 10-K. The
balance sheet data as of December 28, 2003,
December 29, 2002, and December 30, 2001 and statement
of operations data for each of the two years in the period ended
December 29, 2002 are derived from our audited consolidated
financial statements that are not included in this Annual Report
on Form 10-K. The
Companys fiscal year is 52 or 53 weeks ending the
Sunday closest to December 31, with quarters of 13 or
14 weeks ending the Sunday closest to March 31,
June 30, and September 30. The years ended
January 1, 2006 and January 2, 2005 were 52 and
53 weeks, respectively. You should read this table in
conjunction with Item 7, Managements Discussion
and Analysis of Financial Condition and Results of
Operations, and Item 8, Financial Statements
and Supplementary Data.
Statement of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
Year Ended | |
|
Year Ended | |
|
Year Ended | |
|
Year Ended | |
|
|
January 1, | |
|
January 2, | |
|
December 28, | |
|
December 29, | |
|
December 30, | |
|
|
2006 | |
|
2005 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except per share data) | |
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue
|
|
$ |
57,752 |
|
|
$ |
40,497 |
|
|
$ |
18,378 |
|
|
$ |
4,103 |
|
|
$ |
897 |
|
|
|
Service and other revenue
|
|
|
13,935 |
|
|
|
8,075 |
|
|
|
6,496 |
|
|
|
3,305 |
|
|
|
99 |
|
|
|
Research revenue
|
|
|
1,814 |
|
|
|
2,011 |
|
|
|
3,161 |
|
|
|
2,632 |
|
|
|
1,490 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
73,501 |
|
|
|
50,583 |
|
|
|
28,035 |
|
|
|
10,040 |
|
|
|
2,486 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenue
|
|
|
19,920 |
|
|
|
11,572 |
|
|
|
7,437 |
|
|
|
1,815 |
|
|
|
489 |
|
|
Cost of service and other revenue
|
|
|
3,261 |
|
|
|
1,687 |
|
|
|
2,600 |
|
|
|
1,721 |
|
|
|
68 |
|
|
Research and development
|
|
|
27,725 |
|
|
|
21,114 |
|
|
|
22,511 |
|
|
|
26,848 |
|
|
|
20,735 |
|
|
Selling, general and administrative
|
|
|
27,972 |
|
|
|
25,080 |
|
|
|
18,899 |
|
|
|
9,099 |
|
|
|
5,663 |
|
|
Acquired in-process research and
development
|
|
|
15,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred
compensation and other stock-based compensation charges
|
|
|
270 |
|
|
|
844 |
|
|
|
2,454 |
|
|
|
4,360 |
|
|
|
5,850 |
|
|
|
Litigation judgment (settlement),
net
|
|
|
|
|
|
|
(4,201 |
) |
|
|
756 |
|
|
|
8,052 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
94,948 |
|
|
|
56,096 |
|
|
|
54,657 |
|
|
|
51,895 |
|
|
|
32,805 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(21,447 |
) |
|
|
(5,513 |
) |
|
|
(26,622 |
) |
|
|
(41,855 |
) |
|
|
(30,319 |
) |
Interest income
|
|
|
1,404 |
|
|
|
941 |
|
|
|
1,821 |
|
|
|
3,805 |
|
|
|
6,198 |
|
Interest and other expense
|
|
|
(831 |
) |
|
|
(1,653 |
) |
|
|
(2,262 |
) |
|
|
(2,281 |
) |
|
|
(702 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(20,874 |
) |
|
$ |
(6,225 |
) |
|
$ |
(27,063 |
) |
|
$ |
(40,331 |
) |
|
$ |
(24,823 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share, basic and
diluted
|
|
$ |
(0.52 |
) |
|
$ |
(0.17 |
) |
|
$ |
(0.85 |
) |
|
$ |
(1.31 |
) |
|
$ |
(0.83 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in calculating net loss
per share, basic and diluted
|
|
|
40,147 |
|
|
|
35,845 |
|
|
|
31,925 |
|
|
|
30,890 |
|
|
|
29,748 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 loss per share.
26
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, | |
|
January 2, | |
|
December 28, | |
|
December 29, | |
|
December 30, | |
|
|
2006 | |
|
2005 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Cash, cash equivalents and current
restricted cash and investments
|
|
$ |
50,822 |
|
|
$ |
66,994 |
|
|
$ |
32,882 |
|
|
$ |
66,294 |
|
|
$ |
93,786 |
|
Working capital
|
|
|
57,992 |
|
|
|
64,643 |
|
|
|
32,229 |
|
|
|
58,522 |
|
|
|
91,452 |
|
Total assets
|
|
|
100,610 |
|
|
|
94,907 |
|
|
|
99,234 |
|
|
|
121,906 |
|
|
|
122,465 |
|
Long-term debt obligations
|
|
|
54 |
|
|
|
|
|
|
|
24,999 |
|
|
|
25,620 |
|
|
|
590 |
|
Accumulated deficit
|
|
|
(144,586 |
) |
|
|
(123,712 |
) |
|
|
(117,487 |
) |
|
|
(90,424 |
) |
|
|
(50,093 |
) |
Total stockholders equity
|
|
|
72,497 |
|
|
|
72,262 |
|
|
|
47,388 |
|
|
|
71,744 |
|
|
|
106,791 |
|
|
|
Item 7. |
Managements Discussion and Analysis of Financial
Condition and Results of Operation. |
The following discussion and analysis should be read with
Item 6. Selected Financial Data and our
consolidated financial statements and notes thereto included
elsewhere in this Annual Report on
Form 10-K. The
discussion and analysis in this Annual Report on
Form 10-K contains
forward-looking statements that involve risks and uncertainties,
such as statements of our plans, objectives, expectations and
intentions. Words such as anticipate,
believe, continue, estimate,
expect, intend, may,
plan, potential, predict,
project or similar words or phrases, or the
negatives of these words, may identify forward-looking
statements, but the absence of these words does not necessarily
mean that a statement is not forward looking. Examples of
forward-looking statements include, among others, statements
regarding the integration of CyVeras technology with our
existing technology, the commercial launch of new products,
including products based on CyVeras technology, and the
duration which our existing cash and other resources is expected
to fund our operating activities. Forward-looking statements are
subject to known and unknown risks and uncertainties and are
based on potentially inaccurate assumptions that could cause
actual results to differ materially from those expected or
implied by the forward looking statements. Factors that could
cause or contribute to these differences include those discussed
in Item 1A. Risk Factors as well as those
discussed elsewhere. The risk factors and other cautionary
statements made in this Annual Report on
Form 10-K should
be read as applying to all related forward-looking statements
wherever they appear in this Annual Report on
Form 10-K.
Overview
We were incorporated in April 1998. We develop and market
next-generation tools for the large-scale analysis of genetic
variation and function. Understanding genetic variation and
function is critical to the development of personalized
medicine, a key goal of genomics. Using our technologies, we
have developed a comprehensive line of products that are
designed to provide the performance, throughput, cost
effectiveness and flexibility necessary to enable researchers in
the life sciences and pharmaceutical industries to perform the
billions of tests necessary to extract medically valuable
information from advances in genomics. This information is
expected to correlate genetic variation and gene function with
particular disease states, enhancing drug discovery, allowing
diseases to be detected earlier and more specifically, and
permitting better choices of drugs for individual patients.
27
In 2001, we began commercial sale of short pieces of DNA called
oligonucleotides, which we refer to as oligos, manufactured
using our proprietary Oligator technology. We believe our
Oligator technology is more cost effective than competing
technologies, and this advantage enabled us to market our oligos
under a price leadership strategy while still achieving
attractive gross margins.
In 2001, we commercialized the first implementation of our
BeadArray technology, the Sentrix Array Matrix. This is a
disposable matrix with 96 fiber optic bundles arranged in a
pattern that matches the standard
96-well microtiter
plate. Each fiber optic bundle performs more than 1,500 unique
assays, which enables researchers to perform focused genotyping
experiments in a high-throughput format. This format was also
used to initiate our single nucleotide polymorphism
(SNP) genotyping services product line. As a result
of the increasing market acceptance of our high throughput, low
cost BeadArray technology, we have entered into genotyping
services contracts with many leading genotyping centers, and
were awarded $9.1 million from the National Institutes of
Health to play a major role in the first phase of the
International HapMap Project.
Our production-scale BeadLab is a turnkey platform that includes
all hardware and software necessary to enable researchers to
perform genetic analysis research on what we believe is an
unprecedented scale. This system is being marketed to a small
number of high-throughput genotyping users. As of
January 1, 2006, we have installed and recorded revenue for
11 BeadLabs.
In 2003, we announced the launch of several new products,
including 1) a new array format, the Sentrix BeadChip,
which significantly expands market opportunities for our
BeadArray technology and provides increased experimental
flexibility for life science researchers; 2) a gene
expression product line on both the Sentrix Array Matrix and the
Sentrix BeadChip that allows researchers to analyze a focused
set of genes across eight to 96 samples on a single array; and
3) a benchtop SNP genotyping and gene expression system,
the BeadStation, for performing moderate-scale genotyping and
gene expression using our technology. The BeadStation includes
our BeadArray Reader, analysis software and assay reagents and
is designed to match the throughput requirements and variable
automation needs of individual research groups and core labs.
Sales of these products began in the first quarter of 2004 and,
as of January 1, 2006, we have shipped 115 BeadStations.
In late 2004, we announced a strategic collaboration with
Invitrogen Corporation (Invitrogen) to synthesize
and distribute oligos. In the third quarter of 2005, we began
shipping oligo products in connection with this agreement. As
part of the agreement, we have developed the next generation of
our Oligator DNA synthesis technology, which we have designed to
support both plate- and tube-based capabilities. Invitrogen is
responsible for sales, marketing and technical support. Profits
from sales of collaboration products are divided equally between
the two companies.
In 2005, we began shipments of Sentrix BeadChips for
whole-genome gene expression and whole-genome genotyping. The
whole-genome gene expression BeadChips are designed to enable
high-performance, cost-effective, whole-genome expression
profiling of multiple samples on a single chip, resulting in a
dramatic reduction in cost of whole-genome expression analysis.
Our whole-genome expression product line includes multi-sample
products for both the Human and Mouse Genomes. The whole-genome
genotyping BeadChip is designed to scale to high levels of
multiplexing without compromising data quality and to provide
scientists the ability to query hundreds of thousands of SNPs in
parallel. In the second quarter of 2005, we commenced shipment
of our first whole-genome genotyping BeadChip, the HumanHap1,
which interrogates more than 100,000 SNPs in parallel.
28
In April 2005, we completed the acquisition of CyVera
Corporation, a privately-held Connecticut-based company,
pursuant to which CyVera became a wholly-owned subsidiary of
Illumina. We believe that CyVeras digital-microbead
platform will be highly complementary to our portfolio of
products and services. The acquisition is expected to provide us
with a comprehensive approach to bead-based assays for biomarker
research and development and in-vitro and molecular diagnostic
opportunities, including those that require low-complexity as
well as high-complexity testing. We expect the first products
based on CyVeras technology to be available in the second
half of 2006. The purchase price associated with the transaction
was approximately $17.8 million. We allocated
$15.8 million of this purchase price to acquired in-process
research and development and charged such amount against
earnings in the second quarter of 2005.
In January 2006, we began shipment of the new Sentrix
HumanHap300 Genotyping BeadChip to customers around the world.
Using the Infinium assay, which enables us to select virtually
any SNP in the genome, the HumanHap300 BeadChip offers genomic
coverage for more than 317,000 SNPs. We selected the SNP assays
in collaboration with a consortium of scientists that are
leaders in the genotyping field. We believe this product has
quality and performance features that support our expectation
that it will become an important discovery tool for researchers
seeking to understand the genetic basis of common, yet complex
diseases.
Our revenue is subject to fluctuations due to the timing of
sales of high-value products and service projects, the impact of
seasonal spending patterns, the timing and size of research
projects our customers perform, changes in overall spending
levels in the life science industry, the timing and amount of
government grant funding programs and other unpredictable
factors that may affect our customer ordering patterns. Any
significant delays in the commercial launch or any lack or delay
of commercial acceptance of new products, unfavorable sales
trends in our existing product lines, or impacts from the other
factors mentioned above, could adversely affect our revenue
growth in 2006 or cause a sequential decline in quarterly
revenues. Due to the possibility of fluctuations in our revenue
and net income or loss, we believe quarterly comparisons of our
operating results are not a good indication of our future
performance.
We have incurred substantial operating losses since our
inception. As of January 1, 2006, our accumulated deficit
was $144.6 million, and total stockholders equity was
$72.5 million. These losses have principally occurred as a
result of the substantial resources required for the research,
development and manufacturing scale up effort required to
commercialize our products and services, an acquired in-process
research and development charge of $15.8 million related to
our acquisition of CyVera and a charge of $5.9 million
related to a
termination-of-employment
lawsuit. We expect to continue to incur substantial costs for
research, development and manufacturing scale up activities over
the next several years. We will also need to significantly
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. As a
result of the expected increase in expenses, we will need to
increase revenue significantly to achieve sustained
profitability.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and
results of operations is based upon our consolidated financial
statements, which have been prepared in accordance with
U.S. generally accepted accounting principles. The
preparation of financial statements requires that management
make estimates, assumptions and judgments with respect to the
application of accounting policies that affect the reported
amounts of assets, liabilities, revenues and expenses, and the
disclosures of contingent assets and liabilities. Actual results
could differ from those estimates.
29
Our significant accounting policies are described in Note 1
to our consolidated financial statements. Certain accounting
policies are deemed critical if 1) they require an
accounting estimate to be made based on assumptions that were
highly uncertain at the time the estimate was made, and
2) changes in the estimate that are reasonably likely to
occur, or different estimates that we reasonably could have used
would have a material effect on our consolidated financial
statements.
Management has discussed the development and selection of these
critical accounting policies with the Audit Committee of our
Board of Directors, and the Audit Committee has reviewed the
disclosure. In addition, there are other items within our
financial statements that require estimation, but are not deemed
critical as defined above.
We believe the following critical accounting policies reflect
our more significant estimates and assumptions used in the
preparation of the consolidated financial statements.
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. As
described below, significant judgments and estimates must be
made and used in connection with the revenue recognized in any
accounting period.
We recognize revenue in accordance with the guidelines
established by SEC Staff Accounting Bulletin (SAB)
No. 104. Under SAB No. 104, revenue cannot be
recorded until all of the following criteria have been met:
persuasive evidence of an arrangement exists; delivery has
occurred or services have been rendered; the sellers price
to the buyer is fixed or determinable; and collectibility is
reasonably assured.
Revenue for product sales is recognized generally upon shipment
and transfer of title to the customer, provided no significant
obligations remain and collection of the receivables is
reasonably assured. Revenue from the sale of instrumentation is
recognized when earned, which is generally upon shipment.
However, in the case of BeadLabs, revenue is recognized upon the
completion of installation, training and the receipt of customer
acceptance. Revenue for genotyping services is recognized when
earned, which is generally at the time the genotyping analysis
data is delivered to the customer or as specific milestones are
achieved.
In order to assess whether the price is fixed and determinable,
we ensure there are no refund rights. If payment terms are based
on future performance, 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, we defer revenue recognition until the time collection
becomes reasonably assured, which is generally upon receipt of
payment. Changes in judgments and estimates made in determining
whether the criteria of SAB No. 104 have been met
might result in a change in the timing or amount of revenue
recognized.
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, our gross margins could be
adversely affected.
30
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.
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 we
receive in excess of amounts earned are classified as deferred
revenue until earned.
A third source of revenue, research revenue, consists of amounts
earned under research agreements with government grants, which
is recognized in the period during which the related costs are
incurred. All revenue is recorded net of any applicable
allowances for returns or discounts.
|
|
|
Allowance for Doubtful Accounts |
We maintain an allowance for doubtful accounts for estimated
losses resulting from the inability of our customers to make
required payments. We evaluate the collectibility of our
accounts receivable based on a combination of factors. We
regularly analyze customer accounts, review the length of time
receivables are outstanding and review historical loss rates. If
the financial condition of our customers were to deteriorate,
additional allowances could be required.
We record adjustments to inventory for potentially excess,
obsolete or impaired goods in order to state inventory at net
realizable value. We must make assumptions about future demand,
market conditions and the release of new products that will
supercede old ones. We regularly review inventory for excess and
obsolete products and components, taking into account product
life cycle and development plans, product expiration and quality
issues, historical experience and our current inventory levels.
If actual market conditions are less favorable than anticipated,
additional inventory adjustments could be required.
31
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 in each matter.
|
|
|
Goodwill and Intangible Asset Valuation |
The purchase method of accounting for acquisitions requires
extensive use of accounting estimates and judgments to allocate
the purchase price to the fair value of the net tangible and
intangible assets acquired, including in-process research and
development (IPR&D). Goodwill and intangible
assets deemed to have indefinite lives are not amortized, but
are subject to annual impairment tests. The amounts and useful
lives assigned to other acquired intangible assets impact future
amortization, and the amount assigned to IPR&D is expensed
immediately. Determining the fair values and useful lives of
intangible assets especially requires the exercise of judgment.
While there are a number of different acceptable generally
accepted valuation methods to estimate the value of intangible
assets acquired, we primarily use the discounted cash flow
method. This method requires significant management judgment to
forecast the future operating results used in the analysis. In
addition, other significant estimates are required such as
residual growth rates and discount factors. The estimates we use
to value and amortize intangible assets are consistent with the
plans and estimates that we use to manage our business and are
based on available historical information and industry estimates
and averages. These judgments can significantly affect our net
operating results.
During 2001, we adopted SFAS No. 142.
SFAS No. 142 requires that goodwill and certain
intangible assets be assessed for impairment using fair value
measurement techniques. If the carrying amount of a reporting
unit exceeds its fair value, then a goodwill impairment test is
performed to measure the amount of the impairment loss, if any.
The goodwill impairment test compares the implied fair value of
the reporting units goodwill with the carrying amount of
that goodwill. The implied fair value of goodwill is determined
in the same manner as in a business combination. Determining the
fair value of the implied goodwill is judgmental in nature and
often involves the use of significant estimates and assumptions.
These estimates and assumptions could have a significant impact
on whether or not an impairment charge is recognized and also
the magnitude of any such charge. Estimates of fair value are
primarily determined using discounted cash flows and market
comparisons. These approaches use significant estimates and
assumptions, including projection and timing of future cash
flows, discount rates reflecting the risk inherent in future
cash flows, perpetual growth rates, determination of appropriate
market comparables, and determination of whether a premium or
discount should be applied to comparables. It is reasonably
possible that the plans and estimates used to value these assets
may be incorrect. If our actual results, or the plans and
estimates used in future impairment analyses, are lower than the
original estimates used to assess the recoverability of these
assets, we could incur additional impairment charges. As of
January 1, 2006, we had $2.1 million of goodwill. This
goodwill is reported as a separate line item in the balance
sheet for fiscal 2005.
32
Recently Issued Accounting Standards
In December 2004, the Financial Accounting Standards Board
(FASB) issued SFAS No. 123 (revised 2004),
Share Based Payment (SFAS 123R), which
is a revision of SFAS No. 123, Accounting for
Stock-Based Compensation. This statement supercedes
Accounting Principles Bulletin (APB) Opinion
No. 25, Accounting for Stock Issued to Employees,
and amends SFAS No. 95, Statement of Cash
Flows. Generally, the approach in SFAS No. 123R is
similar to the approach described in SFAS No. 123;
however, SFAS No. 123R requires all share-based
payments to employees, including grants of employee stock
options, to be recognized in the income statement based on their
fair values. Pro forma disclosure is no longer an alternative.
SFAS No. 123R permits companies to adopt its
requirements using either a modified prospective
method or a modified retrospective method. Under the
modified prospective method, compensation cost is
recognized in the financial statements beginning with the
effective date, based on the requirements of
SFAS No. 123R for all share-based payments granted
after that date, and based on the requirements for
SFAS No. 123 for all unvested awards granted prior to
the effective date of SFAS No. 123R. Under the
modified retrospective method, the requirements are
the same as under the modified prospective method,
but companies may restate financial statements of previous
periods based on pro forma disclosures made in accordance with
SFAS No. 123. We currently utilize the Black-Scholes
model to measure the fair value of stock options granted to
employees under the pro forma disclosure requirements of
SFAS No. 123. While SFAS No. 123R permits
companies to continue to use such model, it also permits the use
of a lattice model. We have deterimined we will use
the Black-Scholes model to measure the fair value of employee
stock options under SFAS No. 123R. The new standard is
effective for companies that are not small business issuers,
like us, beginning with the first reporting period during the
first fiscal year beginning on or after June 15, 2005, and
we adopted SFAS No. 123R at the beginning of our new
reporting period on January 2, 2006.
We currently account for share-based payments to employees using
APB No. 25s intrinsic value method and, as such,
recognize no compensation cost for employee stock options
granted with exercise prices equal to or greater than the fair
value of our common stock on the date of the grant. Accordingly,
the adoption of SFAS No. 123Rs fair value method
is expected to result in significant non-cash charges which will
increase our reported operating expenses. However, it will have
no impact on our cash flows. The precise impact of adoption of
SFAS No. 123R cannot be predicted at this time because
it will depend on the level of share-based payments granted in
the future. However, had we adopted SFAS No. 123R in
prior periods, we believe the impact of that standard would have
approximated the impact of SFAS No. 123 as described
in the disclosure of pro forma net loss in the notes to our
consolidated financial statements.
In November 2004, the FASB issued SFAS No. 151,
Inventory Costs. We are required to adopt the provisions
of SFAS No. 151, on a prospective basis, as of
January 2, 2006. SFAS No. 151 clarifies the
accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material.
SFAS No. 151 requires that those items if
abnormal be recognized as expenses in the period
incurred. In addition, SFAS No. 151 requires the
allocation of fixed production overheads to the costs of
conversions based upon the normal capacity of the production
facilities. We do not believe that the adoption of
SFAS No. 151 will have a material impact on our
financial position or results of operations.
33
Results of Operations
To enhance comparability, the following table sets forth audited
consolidated statement of operations data for the years ended
January 1, 2006, January 2, 2005, and
December 28, 2003 stated as a percentage of total
revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
Year Ended | |
|
Year Ended | |
|
|
January 1, | |
|
January 2, | |
|
December 28, | |
|
|
2006 | |
|
2005 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue
|
|
|
79 |
% |
|
|
80 |
% |
|
|
66 |
% |
|
Service and other revenue
|
|
|
19 |
|
|
|
16 |
|
|
|
23 |
|
|
Research revenue
|
|
|
2 |
|
|
|
4 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
100 |
|
|
|
100 |
|
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenue
|
|
|
27 |
|
|
|
23 |
|
|
|
27 |
|
|
Cost of service and other revenue
|
|
|
4 |
|
|
|
3 |
|
|
|
9 |
|
|
Research and development
|
|
|
38 |
|
|
|
41 |
|
|
|
80 |
|
|
Selling, general and administrative
|
|
|
38 |
|
|
|
50 |
|
|
|
67 |
|
|
Acquired in-process research and
development
|
|
|
22 |
|
|
|
|
|
|
|
|
|
|
Amortization of deferred
compensation and other stock-based compensation charges
|
|
|
|
|
|
|
2 |
|
|
|
9 |
|
|
Litigation judgment (settlement),
net
|
|
|
|
|
|
|
(8 |
) |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
129 |
|
|
|
111 |
|
|
|
195 |
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(29 |
) |
|
|
(11 |
) |
|
|
(95 |
) |
Interest income
|
|
|
2 |
|
|
|
2 |
|
|
|
6 |
|
Interest and other expense
|
|
|
(1 |
) |
|
|
(3 |
) |
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(28 |
%) |
|
|
(12% |
) |
|
|
(97% |
) |
|
|
|
|
|
|
|
|
|
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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%, as compared to 2004.
34
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 have
shipped a total of 115 BeadStations and 11 BeadLabs.
Service and other revenue increased to $13.9 million in
2005 from $8.1 million in 2004. The increase in service and
other revenue is primarily due to higher demand for third-party
SNP genotyping service contracts during the 2005 period. In
addition, due to the achievement of a milestone associated with
our collaboration agreement with Invitrogen, we recognized
revenue of $1.1 million in the fourth quarter of 2005.
These increases were partially offset by decreased revenue
related to the International HapMap Project. We completed all
revenue-generating genotyping services for the International
HapMap project early in the first quarter of 2005. We expect
sales from third-party SNP genotyping services contracts to
fluctuate on a yearly and quarterly basis, depending on the mix
and number of contracts that are completed. The timing of
completion of a SNP genotyping services contract is highly
dependent on the customers schedule for delivering the
SNPs and samples to us.
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. We expect revenue
from government grants to decline in the future as we continue
to expand our focus on commercial operations.
|
|
|
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, as compared to $13.3 million
for the year ended January 2, 2005 due primarily to the
significant increase in product revenue. Gross margin on product
and service and other revenue was 68% for 2005, as compared to
73% for 2004.
35
Cost of product revenue increased to $19.9 million for the
year ended January 1, 2006, as 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, as 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, as 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 is 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, as 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.
|
|
|
Research and Development Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
Year Ended | |
|
|
|
|
January 1, | |
|
January 2, | |
|
Percentage | |
|
|
2006 | |
|
2005 | |
|
Change | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
|
|
Research and development
|
|
$ |
27,725 |
|
|
$ |
21,114 |
|
|
|
31% |
|
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
$27.7 million for the year ended January 1, 2006, as
compared to $21.1 million for the year ended
January 2, 2005. 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 Microbead
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.
Stock based compensation related to research and development
employees and consultants was approximately $0.1 million
for the year ended January 1, 2006, as compared to
$0.3 million for the year ended January 2, 2005.
36
|
|
|
Selling, General and Administrative Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
Year Ended | |
|
|
|
|
January 1, | |
|
January 2, | |
|
Percentage | |
|
|
2006 | |
|
2005 | |
|
Change | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
|
|
Selling, general and administrative
|
|
$ |
27,972 |
|
|
$ |
25,080 |
|
|
|
12% |
|
Our selling, general and administrative expenses consist
primarily of personnel costs for sales and marketing, finance,
human resources, business development, legal and general
management, as well as professional fees, such as expenses for
legal and accounting services.
Selling, general and administrative expenses increased to
$28.0 million for the year ended January 1, 2006, as
compared to $25.1 million for the year ended
January 2, 2005. Our 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
$0.7 million in 2005, as compared to 2004, due primarily to
a $2.5 million decrease in litigation expenses, partially
offset by a $1.5 million increase in personnel-related
expenses.
We expect our selling, general and administrative expenses to
accelerate as we expand our staff, add sales and marketing
infrastructure and incur increased litigation costs and
additional costs to support the commercialization and support of
an increasing number of products.
Stock based compensation for selling, general and administrative
employees, directors and consultants was $0.2 million for
the year ended January 1, 2006, as compared to
$0.5 million for the year ended January 2, 2005.
During 2005, we recorded non-cash compensation expense for
accelerated vesting of options for certain employees totaling
approximately $0.1 million. This compensation was provided
as incentive to continue to work as key members of the sales
team associated with the Invitrogen collaboration.
|
|
|
Acquired In-Process Research and Development |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
Year Ended |
|
|
|
|
January 1, | |
|
January 2, |
|
Percentage | |
|
|
2006 | |
|
2005 |
|
Change | |
|
|
| |
|
|
|
| |
|
|
(In thousands) |
|
|
Acquired in-process research and
development
|
|
$ |
15,800 |
|
|
$ |
|
|
|
|
N/A |
|
During the year ended January 1, 2006, we recorded
$15.8 million of acquired IPR&D resulting from the
CyVera acquisition. These amounts were expensed on the
acquisition dates because the acquired technology had not yet
reached technological feasibility and had no alternative future
uses. At the acquisition date, CyVeras ongoing research
and development initiatives were primarily the development of
its microbead technology platform and optical
instrumentation/reader concepts. 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 2004.
37
|
|
|
Amortization of Deferred Compensation and Other Stock-Based
Compensation Charges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
Year Ended | |
|
|
|
|
January 1, | |
|
January 2, | |
|
Percentage | |
|
|
2006 | |
|
2005 | |
|
Change | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
|
|
Amortization of deferred
compensation and other stock- based compensation charges
|
|
$ |
270 |
|
|
$ |
844 |
|
|
|
(68 |
%) |
Since our inception, in connection with the grant of certain
stock options and sales of restricted stock to employees,
founders and directors through July 25, 2000, we have
recorded deferred stock compensation totaling approximately
$17.6 million, representing the difference between the
exercise or purchase price and the fair value of our common
stock as estimated by our management for financial reporting
purposes on the date such stock options were granted or
restricted common stock was sold. Deferred compensation is
included as a reduction of stockholders equity and is
being amortized over the vesting period of the options and
restricted stock. In 2005, we recorded $0.2 million as
deferred compensation related to unvested options associated
with our acquisition of CyVera. In addition, in 2005, we granted
a restricted stock award to an employee and recorded deferred
stock compensation totaling $0.2 million. During the years
ended January 1, 2006 and January 2, 2005, we recorded
amortization of deferred stock compensation of approximately
$0.3 million and $0.8 million, respectively.
We recognize compensation expense over the vesting period for
employees, founders and directors, using an accelerated
amortization methodology in accordance with FASB Interpretation
No. 28. For consultants, deferred compensation is recorded
at the fair value for the options granted or stock sold in
accordance with SFAS No. 123 and is periodically
re-measured and expensed in accordance with EITF
No. 96-18.
In 2005, we recorded approximately $48,000 as deferred
compensation expense related to our acquisition of CyVera. We
also recorded non-cash compensation expense related to
accelerated vesting of options for certain employees totaling
approximately $0.1 million. This compensation was provided
to these employees as incentive to continue to work as key
members of the sales team associated with the Invitrogen
collaboration. In addition, in 2005 we granted a restricted
stock award to an employee and recorded a non-cash compensation
charge of $21,000. We expect expenses related to stock-based
compensation to increase significantly beginning in 2006 as we
implement the requirements of SFAS No. 123R. Although
the adoption of SFAS No. 123Rs fair value method
is expected to result in a significant increase in our reported
operating expenses, it will have no impact on our cash flows.
SFAS No. 123R is discussed further in Recently
Issued Accounting Standards in Item 7 and in
Note 1 to our consolidated financial statements.
|
|
|
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 |
%) |
38
We recorded a $7.7 million charge in June 2002 to
cover total damages and estimated expenses related to a jury
verdict in a
termination-of-employment
lawsuit. We appealed the decision, and in December 2004,
the Fourth Appellate District Court of Appeal, in
San Diego, California, reduced the amount of the award.
During the appeal process, the court required us to incur
interest charges on the judgment amount at statutory rates until
the case was resolved. During the years ended January 2,
2005 and December 28, 2003, we recorded $0.6 million
and $0.8 million, respectively, of such interest charges as
litigation expense. As a result of the revised judgment, we
reduced the $9.2 million liability on our balance sheet to
$5.9 million and recorded a gain of $3.3 million as a
litigation judgment in the fourth quarter of 2004. In addition,
in August 2004, we recorded a $1.5 million gain as a
result of a settlement with Applera.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
Year Ended | |
|
|
|
|
January 1, | |
|
January 2, | |
|
Percentage | |
|
|
2006 | |
|
2005 | |
|
Change | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
|
|
Interest income
|
|
$ |
1,404 |
|
|
$ |
941 |
|
|
|
49% |
|
Interest income on our cash and cash equivalents and investments
was $1.4 million and $0.9 million for the years ended
January 1, 2006 and January 2, 2005, respectively. The
increase was due to higher average cash balances and higher
effective interest rates compared to the prior year.
|
|
|
Interest and Other Expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
Year Ended | |
|
|
|
|
January 1, | |
|
January 2, | |
|
Percentage | |
|
|
2006 | |
|
2005 | |
|
Change | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
|
|
Interest and other expense
|
|
$ |
831 |
|
|
$ |
1,653 |
|
|
|
(50 |
%) |
Interest and other expense consists of interest expense,
expenses related to foreign exchange transaction costs, foreign
income taxes and gains and losses on disposals of assets.
Interest and other expense decreased to $0.8 million for
the year ended January 1, 2006, as compared to
$1.7 million for the year ended January 2, 2005.
Interest expense was $7,000 for the year ended January 1,
2006, as compared to $1.4 million for the year ended
January 2, 2005. Interest expense in the 2004 period
relates primarily to a $26.0 million fixed rate loan that
was paid off in August 2004 in connection with the sale of
our San Diego facilities.
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. Estimated foreign income taxes were approximately
$0.2 million and $0.1 million for the years ended
January 1, 2006 and January 2, 2005, respectively. 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 |
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.
39
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. We are in the final stages of completing our formal
Section 382 and 383 analysis and it is anticipated that
approximately $0.2 million of our net operating loss
carryforwards may be limited.
|
|
|
Comparison of Years Ended January 2, 2005 and
December 28, 2003 |
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 2, 2005 and
December 28, 2003 were 53 and 52 weeks, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
Year Ended | |
|
|
|
|
January 2, | |
|
December 28, | |
|
Percentage | |
|
|
2005 | |
|
2003 | |
|
Change | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
|
|
Product revenue
|
|
$ |
40,497 |
|
|
$ |
18,378 |
|
|
|
120 |
% |
Service revenue
|
|
|
8,075 |
|
|
|
6,496 |
|
|
|
24 |
|
Research revenue
|
|
|
2,011 |
|
|
|
3,161 |
|
|
|
(36 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$ |
50,583 |
|
|
$ |
28,035 |
|
|
|
80 |
% |
|
|
|
|
|
|
|
|
|
|
Revenue for the years ended January 2, 2005 and
December 28, 2003 was $50.6 million and
$28.0 million, respectively. Product revenue increased to
$40.5 million in 2004 from $18.4 million in 2003. The
increase resulted almost entirely from sales of consumables used
on our BeadLabs and BeadStations and sales of our benchtop
BeadStations, offset by fewer sales of our production-scale
BeadLabs. In 2003, we had no sales of BeadStations and we only
began selling consumable products in May 2003.
Service revenue increased to $8.1 million for the year
ended January 2, 2005 from $6.5 million in for the
year ended December 28, 2003. Substantially all of this
increase relates to SNP genotyping services performed for the
International HapMap Project. We are the recipient of a grant
from the National Institutes of Health covering our
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. We received $9.1 million of
funding for this project which covered basic research
activities, the development of SNP assays and the genotyping to
be performed on those assays. We had recognized revenue from
this grant of $8.3 million through the end of 2004. The
remaining $0.8 million of funding remaining related to this
project was received and recognized as revenue in early 2005.
Government grants and other research funding decreased to
$2.0 million for the year ended January 2, 2005 from
$3.2 million for the year ended December 28, 2003,
primarily due to a decrease in internal research spending for
our grant from the National Institutes of Health covering our
participation in the International HapMap Project.
40
|
|
|
Cost of Product and Service Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
Year Ended | |
|
|
|
|
January 2, | |
|
December 28, | |
|
Percentage | |
|
|
2005 | |
|
2003 | |
|
Change | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
|
|
Cost of product revenue
|
|
$ |
11,572 |
|
|
$ |
7,437 |
|
|
|
56 |
% |
Cost of service revenue
|
|
|
1,687 |
|
|
|
2,600 |
|
|
|
(35 |
%) |
|
|
|
|
|
|
|
|
|
|
Total cost of product and service
revenue
|
|
$ |
13,259 |
|
|
$ |
10,037 |
|
|
|
32 |
% |
|
|
|
|
|
|
|
|
|
|
Cost of product and service revenue represents manufacturing
costs incurred in the production process, including component
materials, assembly labor and overhead, installation, warranty,
packaging and delivery costs, as well as costs associated with
performing genotyping services on behalf of our customers. Costs
related to research revenue are included in research and
development expense.
Cost of product revenue increased to $11.6 million for the
year ended January 2, 2005 from $7.4 million for the
year ended December 28, 2003. Substantially all of this
increase was driven by the sales of our BeadStations and
consumables. Gross margin on product revenue increased to 71% in
the year ended January 2, 2005, from 60% for the year ended
December 28, 2003, due primarily to increased sales of
higher margin consumable products, as well as efficiencies
gained in oligo manufacturing.
Cost of service revenue decreased to $1.7 million for the
year ended January 2, 2005 from $2.6 million for the
year ended December 28, 2003. Gross margin on service
revenue increased to 79% in the year ended January 2, 2005,
from 60% for the year ended December 28, 2003. This
decrease in cost and increase in gross margin is due primarily
to efficiencies gained in SNP genotyping services, as well as
lower costs of oligos used in the genotyping services process.
|
|
|
Research and Development Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
Year Ended | |
|
|
|
|
January 2, | |
|
December 28, | |
|
Percentage | |
|
|
2005 | |
|
2003 | |
|
Change | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
|
|
Research and development
|
|
$ |
21,114 |
|
|
$ |
22,511 |
|
|
|
(6 |
%) |
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 decreased $1.4 million to
$21.1 million for the year ended January 2, 2005 from
$22.5 million for the year ended December 28, 2003.
Approximately $0.9 million of the decrease is attributable
to personnel-related expenses and related lab supplies and the
majority of the remaining $0.5 million is attributable to
lower manufacturing-related resources needed to support research
efforts and a decrease in depreciation expense.
During the year ended January 2, 2005, the cost of
BeadArray technology research activities decreased
$0.4 million, as compared to the year ended
December 28, 2003. The decrease is primarily the result of
completing the development of several products that were
commercially launched in late 2003 and 2004 such as our
BeadStation and focused gene set array products.
Research to support our Oligator technology platform decreased
$1.0 million in the year ended January 2, 2005, as
compared to the year ended December 28, 2003. In the second
quarter of 2003, we implemented additional Oligator
manufacturing and software enhancements to expand capacity,
increase throughput, and further reduce operating costs. In
addition, as we increase our product sales, a smaller portion of
our manufacturing resources are now used to support research
efforts as compared to the same periods in 2003.
41
Stock based compensation related to research and development
employees and consultants was $0.3 million for the year
ended January 2, 2005, as compared to $1.3 million for
the year ended December 28, 2003.
|
|
|
Selling, General and Administrative Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
Year Ended | |
|
|
|
|
January 2, | |
|
December 28, | |
|
Percentage | |
|
|
2005 | |
|
2003 | |
|
Change | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
|
|
Selling, general and administrative
|
|
$ |
25,080 |
|
|
$ |
18,899 |
|
|
|
33% |
|
Our selling, general and administrative expenses consist
primarily of personnel costs for sales and marketing, finance,
human resources, business development and general management, as
well as professional fees, such as expenses for legal and
accounting services. Selling, general and administrative
expenses increased $6.2 million to $25.1 million for
the year ended January 2, 2005 from $18.9 million for
the year ended December 28, 2003. Approximately
$5.2 million of the increase is due to higher sales and
marketing costs, of which $4.1 million is attributable to
personnel-related expenses and $0.7 million is attributable
to an increase in facility-related expenses. Approximately
$1.0 million of the increase in selling, general and
administrative expenses is related to general and administrative
costs, of which $0.4 million is related to
personnel-related expenses, and the majority of the remaining
$0.6 million is attributable to expenses associated with
Sarbanes-Oxley compliance and our international expansion.
Stock based compensation related to selling, general and
administrative employees, directors and consultants was
$0.5 million for the year ended January 2, 2005, as
compared to $1.2 million for the year ended
December 28, 2003.
|
|
|
Amortization of Deferred Compensation and Other Stock-Based
Compensation Charges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
Year Ended | |
|
|
|
|
January 2, | |
|
December 28, | |
|
Percentage | |
|
|
2005 | |
|
2003 | |
|
Change | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
|
|
Amortization of deferred
compensation and other stock-based compensation charges
|
|
$ |
844 |
|
|
$ |
2,454 |
|
|
|
(66 |
%) |
From our inception through July 27, 2000, in connection
with the grant of certain stock options and sales of restricted
stock to employees, founders and directors, we have recorded
deferred stock compensation totaling $17.6 million,
representing the difference between the exercise or purchase
price and the fair value of our common stock as estimated for
financial reporting purposes on the date such stock options were
granted or such restricted stock was sold. We recorded this
amount as a component of stockholders equity and amortize
the amount as a charge to operations over the vesting period of
the restricted stock and options.
We recorded amortization of deferred compensation of
$0.8 million and $2.5 million for the years ended
January 2, 2005 and December 28, 2003, respectively.
We recognize compensation expense over the vesting period for
employees, founders and directors, using an accelerated
amortization methodology in accordance with the
FIN No. 28. For consultants, deferred compensation is
recorded at the fair value for the options granted or stock sold
in accordance with SFAS No. 123 and is periodically
re-measured and expensed in accordance with EITF No. 96-18.
|
|
|
Litigation Judgment (Settlement), net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
Year Ended | |
|
|
|
|
January 2, | |
|
December 28, | |
|
Percentage | |
|
|
2005 | |
|
2003 | |
|
Change | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
|
|
Litigation judgment (settlement),
net
|
|
$ |
(4,201 |
) |
|
$ |
756 |
|
|
|
(656 |
%) |
42
We recorded a $7.7 million charge in June 2002 to cover
total damages and estimated expenses related to a jury verdict
in a
termination-of-employment
lawsuit. We appealed the decision, and in December 2004, the
Fourth Appellate District Court of Appeal, in San Diego,
California, reduced the amount of the award. During the appeal
process, the court required us to incur interest charges on the
judgment amount at statutory rates until the case was resolved.
For the years ended January 2, 2005 and December 28,
2003 we recorded $0.6 million and $0.8 million,
respectively, of such interest charges as litigation expense. As
a result of the revised judgment, we reduced the
$9.2 million liability on our balance sheet to
$5.9 million and recorded a gain of $3.3 million as a
litigation judgment in the fourth quarter of 2004.
In 1999, we 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 our BeadArray
technology with Applied Biosystems assay chemistry and
scanner technology. In conjunction with the agreement, Applied
Biosystems agreed to provide us 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 our balance
sheet as of December 28, 2003. In December 2002,
Applied Biosystems initiated a patent infringement suit and
sought to compel arbitration of an alleged breach of the joint
development agreement. We 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, we entered into a settlement and cross-license
agreement with Applera. As a result of the settlement, we
removed the $10.0 million liability from our balance sheet,
made a payment of $8.5 million to Applera and recorded a
gain of $1.5 million as a litigation settlement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
Year Ended | |
|
|
|
|
January 2, | |
|
December 28, | |
|
Percentage | |
|
|
2005 | |
|
2003 | |
|
Change | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
|
|
Interest income
|
|
$ |
941 |
|
|
$ |
1,821 |
|
|
|
(48% |
) |
Interest income on our cash and cash equivalents and investments
was $0.9 million and $1.8 million for the years ended
January 2, 2005 and December 28, 2003, respectively.
The decrease is due to lower effective interest rates, partially
offset by higher average cash balances.
|
|
|
Interest and Other Expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
Year Ended | |
|
|
|
|
January 2, | |
|
December 28, | |
|
Percentage | |
|
|
2005 | |
|
2003 | |
|
Change | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
|
|
Interest and other expense
|
|
$ |
1,653 |
|
|
$ |
2,262 |
|
|
|
(27% |
) |
Interest and other expense primarily consisted of interest
expense, which was $1.4 million and $2.2 million for
the years ended January 2, 2005 and December 28, 2003,
respectively. Interest expense relates primarily to a
$26.0 million fixed rate loan, which was paid off in August
2004 in connection with the sale of our San Diego
facilities.
In the year ended January 2, 2005, we recorded
approximately $150,000 in losses due to foreign currency
transactions as compared to approximately $5,000 in gains for
the year ended December 28, 2003. Estimated foreign income
taxes were approximately $135,000 and $45,000 for the years
ended January 2, 2005 and December 28, 2003,
respectively.
43
|
|
|
Provision for Income Taxes |
We incurred net operating losses for the years ended
January 2, 2005 and December 28, 2003, 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 2, 2005, we had net operating loss carryforwards
for federal and state tax purposes of approximately
$86.5 million and $39.1 million, respectively, which
begin to expire in 2018, unless previously utilized.
As of January 2, 2005, we also had U.S. federal and
state research and development tax credit carryforwards of
approximately $3.1 million and $3.0 million,
respectively, which begin to expire in 2018, unless previously
utilized.
Liquidity and Capital Resources
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
Year Ended | |
|
Year Ended | |
|
|
January 1, | |
|
January 2, | |
|
December 28, | |
|
|
2006 | |
|
2005 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Net cash used in operating
activities
|
|
$ |
(9,008 |
) |
|
$ |
(19,574 |
) |
|
$ |
(18,256 |
) |
Net cash provided by (used in)
investing activities
|
|
|
(1,535 |
) |
|
|
57,022 |
|
|
|
28,468 |
|
Net cash provided by financing
activities
|
|
|
5,963 |
|
|
|
4,875 |
|
|
|
216 |
|
Effect of foreign currency
translation
|
|
|
613 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and
cash equivalents
|
|
$ |
(3,967 |
) |
|
$ |
42,324 |
|
|
$ |
10,428 |
|
|
|
|
|
|
|
|
|
|
|
As of January 1, 2006, we had cash and cash equivalents of
approximately $50.8 million. We currently invest our excess
cash balances in U.S. dollar-based, short-term money market
mutual funds.
Our operating activities used cash of $9.0 million in the
year ended January 1, 2006, as compared to
$19.6 million in the year ended January 2, 2005. 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. The accounts receivable and inventory
increases over the prior year are primarily due to our
significant year-over-year sales growth of 45%, which resulted
from increased customer demand and our introduction of new
products and services into the market. The increase in accounts
payable and accrued liability balances was driven primarily by
increases in general business activity associated with such
sales growth, as well as expenses associated with the expansion
of our corporate infrastructure to accommodate this growth. Net
cash used in operating activities in the year ended
January 2, 2005 was primarily the result of a net loss from
operations of $6.2 million, the payment of an
$8.5 million legal settlement, as described under
Litigation Judgment (Settlement), net, a
$7.2 million increase in accounts receivable due to
increased sales and a $2.0 million increase in other assets
primarily for the security deposit for the building lease,
reduced by non-cash charges of $4.0 million for
depreciation and amortization.
44
Our investing activities used cash of $1.5 million in the
year ended January 1, 2006, as compared to providing cash
of $57.0 million in the year ended January 2, 2005.
Cash used in 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. Cash provided by
investing activities in the year ended January 2, 2005 was
due to $40.7 million in proceeds from the sale of our land
and buildings, net of fees, and $19.7 million from the sale
or maturity of investment securities, net of purchases of
investment securities used to provide operating funds for our
business, reduced by $3.4 million for the purchase of
property and equipment.
Our financing activities provided $6.0 million in the year
ended January 1, 2006, as compared to $4.9 million for
the year ended January 2, 2005. Cash provided from
financing activities in the year ended January 1, 2006 was
due primarily to proceeds from the issuance of common stock from
option exercises. Cash provided from financing activities in the
year ended January 2, 2005 was due primarily to proceeds
from the issuance of common stock, including $28.7 million
of net proceeds from the sale of approximately 4.6 million
shares of our common stock in May 2004, offset by the
$25.4 million in long-term debt we paid off in connection
with the sale of our land and buildings.
In June 2002, we recorded a $7.7 million charge to cover
total damages and estimated expenses related to a
termination-of-employment
lawsuit. As a result of our decision to appeal the ruling, we
filed a surety bond with the court in October 2002 of 1.5 times
the judgment amount, or approximately $11.3 million. Under
the terms of the bond, we were required to maintain a letter of
credit for 90% of the bond amount to secure the bond. Further,
we were required to deposit approximately $12.5 million of
marketable securities as collateral for the letter of credit and
accordingly, these funds were restricted from use for corporate
purposes. A judgment was rendered in December 2004 and a
$5.9 million payment was made in early 2005, at which time
the restricted funds were released.
We anticipate that our current cash and cash equivalents,
revenue from sales and funding from grants will be sufficient to
fund our anticipated operating needs, barring unforeseen
developments. Operating needs include the planned costs to
operate our business including amounts required to fund working
capital and capital expenditures. At the present time, we have
no material commitments for capital expenditures. However, our
future capital requirements and the adequacy of our available
funds will depend on many factors, including our ability to
successfully commercialize our SNP genotyping and gene
expression systems and extensions to those products and to
expand our oligos and SNP genotyping services product lines,
scientific progress in our research and development programs,
the magnitude of those programs, competing technological and
market developments, the successful resolution of our legal
proceedings with Affymetrix, the success of our collaboration
with Invitrogen 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. In
addition, we may choose to raise additional capital due to
market conditions or strategic considerations, such as an
acquisition, even if we believe we have sufficient funds for our
current or future operating plans. Further, any additional
equity financing may be dilutive to our then existing
stockholders and may adversely affect their rights and any debt
financing may carry covenants that could restrict our operations.
In December 2003, we filed a shelf registration statement that
would allow us to raise up to $65 million of funding
through the sale of common stock in one or more transactions. In
May 2004, we raised approximately $28.7 million, net of
offering expenses, through the sale of our common stock under
this shelf registration statement.
45
|
|
|
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 January 1, 2006, we were not
involved in any SPE transactions.
In January 2002, we purchased two newly constructed buildings
and assumed a $26.0 million,
10-year mortgage on the
property at a fixed interest rate of 8.36%. In June 2004, we
entered into a conditional agreement to sell our land and
buildings for $42.0 million and to lease back such property
for an initial term of ten years. The sale was completed in
August 2004 at which time the lease was signed. After the
repayment of the remaining $25.2 million debt and other
related transaction expenses, we received $15.5 million in
net cash proceeds. We removed the land and net book value of the
buildings of $36.9 million from our balance sheet and are
recording the resulting $3.7 million gain on the sale of
the property over the ten-year 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 August 2014. The current monthly rent under this lease
is $328,202. The lease contains an option to renew for three
additional periods of five years each.
We also lease office space for a facility in Connecticut, an
additional manufacturing storage facility in San Diego and
for three foreign facilities located in Japan, Singapore and
China under non-cancelable operating leases that expire at
various times through December 2008. These leases contain
renewal options ranging from one to three years.
As of January 1, 2006, our contractual obligations are (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period | |
|
|
| |
|
|
|
|
Less Than | |
|
|
|
More Than | |
Contractual Obligation |
|
Total | |
|
1 Year | |
|
1 3 Years | |
|
3 5 Years | |
|
5 Years | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Operating leases
|
|
$ |
39,513 |
|
|
$ |
4,557 |
|
|
$ |
8,708 |
|
|
$ |
8,833 |
|
|
$ |
17,415 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
39,513 |
|
|
$ |
4,557 |
|
|
$ |
8,708 |
|
|
$ |
8,833 |
|
|
$ |
17,415 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The above table does not include orders for goods and services
entered into in the normal course of business that are not
enforceable or legally binding.
|
|
Item 7A. |
Quantitative and Qualitative Disclosures About Market
Risk. |
|
|
|
Interest Rate Sensitivity |
Our exposure to market risk for changes in interest rates
relates primarily to our investment portfolio. The fair market
value of fixed rate securities may be adversely impacted by
fluctuations in interest rates while income earned on floating
rate securities may decline as a result of decreases in interest
rates. Under our current policies, we do not use interest rate
derivative instruments to manage exposure to interest rate
changes. We attempt to ensure the safety and preservation of our
invested principal funds by limiting default risk, market risk
and reinvestment risk. We mitigate default risk by investing in
investment grade securities. We have historically maintained a
relatively short average maturity for our investment portfolio,
and we believe a hypothetical 100 basis point adverse move
in interest rates along the entire interest rate yield curve
would not materially affect the fair value of our interest
sensitive financial instruments.
46
|
|
|
Foreign Currency Exchange Risk |
Although most of our revenue is realized in U.S. dollars,
some portions of our revenue are realized in foreign currencies.
As a result, our financial results could be affected by factors
such as changes in foreign currency exchange rates or weak
economic conditions in foreign markets. The functional
currencies of our subsidiaries are their respective local
currencies. Accordingly, the accounts of these operations are
translated from the local currency to the U.S. dollar using
the current exchange rate in effect at the balance sheet date
for the balance sheet accounts, and using the average exchange
rate during the period for revenue and expense accounts. The
effects of translation are recorded in accumulated other
comprehensive income as a separate component of
stockholders equity.
Exchange gains and losses arising from transactions denominated
in foreign currencies are recorded in operations. In July 2004,
we began hedging significant foreign currency firm sales
commitments and accounts receivable with forward contracts. We
only use derivative financial instruments to reduce foreign
currency exchange rate risks; we do not hold any derivative
financial instruments for trading or speculative purposes. Our
forward exchange contracts have been designated as cash flow
hedges and accordingly, to the extent effective, any unrealized
gains or losses on these foreign currency forward contracts are
reported in other comprehensive income. Realized gains and
losses for the effective portion are recognized with the
underlying hedge transaction. The notional settlement amount of
the foreign currency forward contracts outstanding at
January 1, 2006 and January 2, 2005 were
$0.1 million and $4.0 million, respectively. As of
January 1, 2006, we had one foreign currency forward
contract outstanding. This contract had a fair value of $882,
representing an unrealized gain, and was included in other
current assets at January 1, 2006. This contract is set to
expire in March 2006 and is with a reputable bank institution.
As of January 2, 2005, the outstanding contracts had a fair
value of $0.2 million, representing an unrealized loss, and
were included in other current liabilities at January 2,
2005. We settled foreign exchange contracts of $5.2 million
and $0.3 million for the years ended January 1, 2006
and January 2, 2005, respectively. Our hedging program
reduces, but does not entirely eliminate the impact of currency
exchange rate movements. We believe we have hedged all
significant firm commitments denominated in foreign currencies,
and as a result, any increase or decrease in the exchange rates
of these commitments would have no material net effect to our
balance sheet or our results of operations. The Company did not
hold any derivative financial instruments prior to fiscal 2004.
|
|
Item 8. |
Financial Statements and Supplementary Data. |
The Report of Independent Registered Public Accounting Firm,
Financial Statements and Notes to Financial Statements begin on
page F-1 immediately following the signature page and are
incorporated herein by reference.
Our fiscal year is 52 or 53 weeks ending on the Sunday
closest to December 31, with quarters of 13 or
14 weeks ending on the Sunday closest to March 31,
June 30 and September 30. The years ended
January 1, 2006 and January 2, 2005 were 52 and
53 weeks, respectively.
|
|
Item 9. |
Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure. |
None.
47
|
|
Item 9A. |
Controls and Procedures. |
We have established and maintain disclosure controls and
procedures that are designed to ensure that we record, process,
summarize, and report information we are required to disclose in
our periodic reports filed with the Securities and Exchange
Commission in the manner and within the time periods specified
in the SECs rules and forms. We also design our disclosure
controls to ensure that the information is accumulated and
communicated to our management, including the chief executive
officer and the chief financial officer, as appropriate to allow
timely decisions regarding required disclosure. We also maintain
internal controls and procedures that are designed to ensure
that we comply with applicable laws and our established
financial policies. 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 have evaluated the design and operation of our disclosure
controls and procedures to determine whether they are effective
in ensuring that the disclosure of required information is
timely made in accordance with the Exchange Act and the rules
and regulations of the Securities and Exchange Commission. This
evaluation was made under the supervision and with the
participation of management, including our chief executive
officer and chief financial officer as of January 1, 2006.
Our management does not expect that our disclosure controls or
our internal controls will prevent all error and all fraud. A
control system, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of
a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in
all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of
fraud, if any, have been detected. These inherent limitations
include the realities that judgments in decision-making can be
faulty, and that breakdowns can occur because of a simple error
or mistake. Additionally, controls can be circumvented by the
individual acts of some persons, by collusion of two or more
people, or by management override of the control. The design of
any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can
be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions; over time,
controls may become inadequate because of changes in conditions,
or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or
fraud may occur and not be 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 our last fiscal quarter and that has materially affected,
or is reasonably likely to materially affect, our internal
control over financial reporting. That evaluation did not
identify any such change.
The chief executive officer and chief financial officer have
concluded, based on their review, that as of January 1,
2006, our disclosure controls and procedures, as defined by
Exchange Act
Rules 13a-15(e)
and 15d-15(e), are
effective to ensure that information required to be disclosed by
us in reports that we file under the Exchange Act is recorded,
processed, summarized and reported within the time periods
specified in the Securities and Exchange Commissions rules
and forms. In addition, no change in our internal control over
financial reporting that has materially affected, or is
reasonably likely to materially affect, our internal control
over financial reporting has occurred during the fourth quarter
of 2005.
48
MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term
is defined in Exchange Act
Rules 13a-15(f)
and 15d-15(f). Because
of its inherent limitations, internal control over financial
reporting may not prevent or detect all misstatements.
Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial
statement preparation and presentation.
We conducted an evaluation of the effectiveness of our internal
control over financial reporting based on the framework in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on our evaluation under the framework in
Internal Control Integrated Framework, our
management concluded that our internal control over financial
reporting was effective as of January 1, 2006.
Our managements assessment of the effectiveness of our
internal control over financial reporting as of January 1,
2006 has been audited by Ernst & Young LLP, Independent
Registered Public Accounting Firm. This report from Ernst &
Young LLP, which expressed an unqualified opinion on
managements assessment and the effectiveness of our
internal controls over financial reporting as of January 1,
2006, is included herein.
49
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
INTERNAL
CONTROL OVER FINANCIAL REPORTING
The Board of Directors and Stockholders
Illumina, Inc.
We have audited managements assessment, included in the
accompanying Managements Report on Internal Control over
Financial Reporting, that Illumina, Inc. maintained effective
internal control over financial reporting as of January 1,
2006, based on criteria established in Internal
Control Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (the COSO
criteria). Illumina Inc.s management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting. Our responsibility is to express an
opinion on managements assessment and an opinion on the
effectiveness of the companys internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that Illumina, Inc.
maintained effective internal control over financial reporting
as of January 1, 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 January 1,
2006, based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Illumina, Inc. as of
January 1, 2006 and January 2, 2005, and the related
consolidated statements of operations, stockholders
equity, and cash flows for the years ended January 1, 2006,
January 2, 2005 and December 28, 2003 of Illumina,
Inc. and our report dated February 15, 2006 expressed an
unqualified opinion thereon.
San Diego, California
February 15, 2006
50
|
|
Item 9B. |
Other Information. |
None.
PART III
|
|
Item 10. |
Directors and Executive Officers of the Registrant. |
(a) Identification of Directors. Information concerning our
directors is incorporated by reference from the section entitled
Proposal 1 Election of Directors
contained in our definitive Proxy Statement with respect to our
2006 Annual Meeting of Stockholders to be filed with the SEC no
later than May 1, 2006.
(b) Identification of Executive Officers. Information
concerning our executive officers is set forth under
Executive Officers in Part I of this Annual
Report on
Form 10-K and is
incorporated herein by reference.
(c) Compliance with Section 16(a) of the Exchange Act.
Information concerning compliance with Section 16(a) of the
Securities Exchange Act of 1934 is incorporated by reference
from the section entitled Compliance with
Section 16(a) of the Securities Exchange Act
contained in our definitive Proxy Statement with respect to our
2006 Annual Meeting of Stockholders to be filed with the SEC no
later than May 1, 2006.
(d) Information concerning the audit committee financial
expert as defined by the SEC rules adopted pursuant to the
Sarbanes-Oxley Act of 2002 is incorporated by reference from our
definitive Proxy Statement with respect to our 2006 Annual
Meeting of Stockholders to be filed with the SEC no later than
May 1, 2006.
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 section
under Investors. The information on our website is
not incorporated by reference into this report.
|
|
Item 11. |
Executive Compensation. |
Information concerning executive compensation is incorporated by
reference from the sections entitled Executive
Compensation and Other Information contained in our
definitive Proxy Statement with respect to our 2006 Annual
Meeting of Stockholders to be filed with the SEC no later than
May 1, 2006.
|
|
Item 12. |
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters. |
Information concerning the security ownership of certain
beneficial owners and management is incorporated by reference
from the section entitled Ownership of Securities
contained in our definitive Proxy Statement with respect to our
2006 Annual Meeting of Stockholders to be filed with the SEC no
later than May 1, 2006.
51
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
January 1, 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.
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|
(c) Number of | |
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Securities | |
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Remaining | |
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Available for | |
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Future Issuance | |
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(a) Number of | |
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Under Equity | |
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Securities to be | |
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(b)Weighted- | |
|
Compensation | |
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Issued Upon | |
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Average | |
|
Plans (Excluding | |
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|
Exercise of | |
|
Exercise Price | |
|
Securities | |
|
|
Outstanding | |
|
of Outstanding | |
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Reflected in | |
Plan Category |
|
Options | |
|
Options | |
|
Column (a)) | |
|
|
| |
|
| |
|
| |
Equity compensation plans approved
by security holders
|
|
|
7,326,431 |
|
|
$ |
7.96 |
|
|
|
5,660,884(1)(2) |
|
Equity compensation plans not
approved by security holders
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
7,326,431 |
|
|
$ |
7.96 |
|
|
|
5,660,884 |
|
|
|
|
|
|
|
|
|
|
|
Please refer to Note 6 to the consolidated financial
statements included in this Annual Report on
Form 10-K for a
description of our equity compensation plans.
|
|
(1) |
Includes 3,870,374 shares 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 1,790,510 shares available for grant under our
2000 employee stock purchase plan. The 2000 employee stock
purchase plan provides for an automatic annual increase in the
shares reserved for issuance by the lesser of (1) three
percent of outstanding shares of our common stock on the last
day of the immediately preceding fiscal year or
(2) 1,500,000 shares. |
|
|
Item 13. |
Certain Relationships and Related Transactions. |
Information concerning certain relationships and related
transactions is incorporated by reference from the sections
entitled Proposal One: Election of Directors,
Executive Compensation and Other Information and
Certain Transactions contained in our Definitive
Proxy Statement with respect to our 2006 Annual Meeting of
Stockholders to be filed with the SEC no later than May 1,
2006.
|
|
Item 14. |
Principal Accounting Fees and Services. |
Information concerning principal accounting fees and services is
incorporated by reference from the sections entitled
Proposal Two: Ratification of Independent
Auditors contained in our Definitive Proxy Statement with
respect to our 2006 Annual Meeting of Stockholders to be filed
with the SEC no later than May 1, 2006.
52
PART IV
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|
Item 15. |
Exhibits, Financial Statement Schedules. |
(a) The following documents are filed as a part of this
report:
(1) Consolidated Financial Statements:
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Page | |
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| |
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F-1 |
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F-2 |
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F-3 |
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F-4 |
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F-5 |
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F-6 |
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F-7 |
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|
(2) Financial Statement
Schedule:
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F-31 |
|
(3) Exhibits:
|
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|
|
Exhibit |
|
|
Number |
|
Description of Document |
|
|
|
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2 |
.1(16) |
|
Agreement and Plan of Merger by and
among Illumina, Inc., Semaphore Acquisition Sub, Inc., and
Cyvera Corporation, dated February 22, 2005.
|
|
|
3 |
.1(2) |
|
Amended and Restated Certificate of
Incorporation.
|
|
|
3 |
.2(1) |
|
Bylaws.
|
|
|
3 |
.3(5) |
|
Certificate of Designation for
Series A Junior Participating Preferred Stock (included as an
exhibit to exhibit 4.3).
|
|
|
4 |
.1(1) |
|
Specimen Common Stock Certificate.
|
|
|
4 |
.2(1) |
|
Amended and Restated Investors
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 Company and Equiserve Trust Company, N.A.
|
|
|
+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(1) |
|
2000 Employee Stock Purchase Plan.
|
|
|
10 |
.4(1) |
|
Sublease Agreement dated August
1998 between Registrant and Gensia Sicor Inc. for
Illuminas 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.
|
53
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description of Document |
|
|
|
|
|
10 |
.9(1) |
|
Option Agreement and Joint Escrow
Instructions, dated July 6, 2000, between Diversified Eastgate
Venture and Registrant.
|
|
|
10 |
.10(4) |
|
First Amendment to Joint
Development Agreement dated March 27, 2001 between Registrant
and PE Corporation, now known as Applied Biosystems Group (with
certain confidential portions omitted).
|
|
|
10 |
.11(6) |
|
First Amendment to Option Agreement
and Escrow Instructions dated May 25, 2001 between Diversified
Eastgate Venture and Registrant.
|
|
|
10 |
.12(13) |
|
Second Amendment to Option
Agreement and Escrow Instructions dated July 18, 2001 between
Diversified Eastgate Venture and Registrant.
|
|
|
10 |
.13(14) |
|
Third Amendment to Option Agreement
and Escrow Instructions dated September 27, 2001 between
Diversified Eastgate Venture and Registrant.
|
|
|
10 |
.14(15) |
|
First Amendment to Eastgate Pointe
Lease dated September 27, 2001 between Diversified Eastgate
Venture and Registrant.
|
|
|
10 |
.15(8) |
|
Replacement Reserve Agreement,
dated as of January 10, 2002, between the Company and BNY
Western Trust Company as Trustee for Washington Capital Joint
Master Trust Mortgage Income Fund.
|
|
|
10 |
.16(17) |
|
Loan Assumption and Modification
Agreement, dated as of January 10, 2002, between the Company,
Diversified Eastgate Venture and BNY Western Trust Company as
Trustee for Washington Capital Joint Master Trust Mortgage
Income Fund.
|
|
|
10 |
.17(18) |
|
Tenant Improvement and Leasing
Commission Reserve Agreement, dated as of January 10, 2002,
between the Company and BNY Western Trust Company as Trustee for
Washington Capital Joint Master Trust Mortgage Income Fund.
|
|
|
+10 |
.18(19) |
|
2000 Employee Stock Purchase Plan
as amended and restated through March 21, 2002.
|
|
|
+10 |
.19(20) |
|
2000 Stock Plan as amended and
restated through March 21, 2002.
|
|
|
10 |
.20(21) |
|
Non-exclusive License Agreement
dated January 2002 between Amersham Biosciences Corp. and
Registrant (with certain confidential portions omitted).
|
|
|
10 |
.21(22) |
|
License Agreement dated June 2002
between Dade Behring Marburg GmbH and Registrant (with certain
confidential portions omitted).
|
|
|
10 |
.22(23) |
|
Purchase and Sale Agreement and
Escrow Instructions dated June 18, 2004 between Bernardo
Property Advisors, Inc. and Registrant.
|
|
|
10 |
.23(24) |
|
Single Tenant Lease dated
August 18, 2004 between BioMed Realty Trust Inc. and
Registrant.
|
|
|
10 |
.24(25) |
|
Settlement and Cross License
Agreement dated August 18, 2004 between Applera Corporation
and Registrant (with certain confidential portions omitted).
|
|
|
10 |
.28(26) |
|
Collaboration Agreement dated
December 17, 2004 between Invitrogen Incorporated and Registrant
(confidential treatment has been requested with respect to
certain portions of this exhibit).
|
|
|
10 |
.29(27) |
|
Offer letter for Christian O. Henry
dated April 26, 2005.
|
|
|
10 |
.30(28) |
|
Forms of Stock Option Agreement
under 2000 Stock Plan.
|
|
|
14 |
(10) |
|
Code of Ethics.
|
|
|
21 |
.1 |
|
Subsidiaries of the Company.
|
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23 |
.1 |
|
Consent of Independent Registered
Public Accounting Firm.
|
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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.
|
54
|
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|
|
|
Exhibit |
|
|
Number |
|
Description of Document |
|
|
|
|
|
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.
|
|
|
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|
+ |
Management contract or corporate plan or arrangement |
|
|
|
|
(1) |
Incorporated by reference to the same numbered exhibit filed
with our Registration Statement on Form S-1 (333-33922)
filed April 3, 2000, as amended. |
|
|
(2) |
Incorporated by reference to the same numbered exhibit filed
with our Annual Report on
Form 10-K (File
No. 000-30361) for the year ended December 31, 2000
filed March 29, 2001. |
|
|
(3) |
[reserved] |
|
|
(4) |
Incorporated by reference to Exhibit 10.13 filed with our
Form 10-Q (File No. 000-30361) for the quarterly
period ended March 31, 2001 filed May 8, 2001. |
|
|
(5) |
Incorporated by reference to the same numbered exhibit filed
with our Registration Statement on Form 8-A (File
No. 000-30361) filed May 14, 2001. |
|
|
(6) |
Incorporated by reference exhibit 10.15 filed with our
Form 10-Q (File No. 000-30361) for the quarterly
period ended June 30, 2001 filed August 13, 2001. |
|
|
(7) |
Incorporated by reference to the same numbered exhibit filed
with our Form 10-Q (File
No. 000-30361) for
the quarterly period ended September 30, 2001 filed
November 14, 2001. |
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|
(8) |
Incorporated by reference to the exhibit 10.18 filed with
our Form 10-Q (File No. 000-30361) for the quarterly period
ended March 31, 2002 filed May 13, 2002. |
|
|
(9) |
Incorporated by reference to the same numbered exhibit filed
with Amendment No. 1 to our Registration Statement on
Form S-3 (File No. 333-111496) filed March 2, 2004. |
|
|
(10) |
Incorporated by reference to the same numbered exhibit filed
with our Annual Report on Form 10-K (File
No. 000-30361) for the year ended December 28, 2003
filed March 12, 2004. |
|
(11) |
Incorporated by reference to the same numbered exhibit filed
with our Form 10-Q (File No. 000-30361) for the
quarterly period ended June 27, 2004 filed August 6, 2004. |
|
(12) |
Incorporated by reference to the same numbered exhibit filed
with our Form 10-Q (File No. 000-30361) for the
quarterly period ended October 3, 2004 filed
November 12, 2004. |
|
(13) |
Incorporated by reference to exhibit 10.16 filed with our
Form 10-Q (File No. 000-30361) for the quarterly
period ended September 30, 2001 filed November 14,
2001. |
|
(14) |
Incorporated by reference to exhibit 10.17 filed with our
Form 10-Q (File No. 000-30361) for the quarterly
period ended September 30, 2001 filed November 14,
2001. |
|
(15) |
Incorporated by reference to exhibit 10.18 filed with our
Form 10-Q (File No. 000-30361) for the quarterly
period ended September 30, 2001 filed November 14,
2001. |
|
(16) |
Incorporated by reference to exhibit 2.01 filed with our
Form 8-K (File No. 000-30361) filed April 14,
2005. |
|
(17) |
Incorporated by reference to the exhibit 10.19 filed with
our Form 10-Q (File No. 000-30361) for the quarterly period
ended March 31, 2002 filed May 13, 2002. |
|
(18) |
Incorporated by reference to the exhibit 10.20 filed with
our Form 10-Q (File No. 000-30361) for the quarterly period
ended March 31, 2002 filed May 13, 2002. |
|
(19) |
Incorporated by reference to the exhibit 10.21 filed with
our Form 10-Q (File No. 000-30361) for the quarterly period
ended March 31, 2002 filed May 13, 2002. |
|
(20) |
Incorporated by reference to the exhibit 10.22 filed with
our Form 10-Q (File No. 000-30361) for the quarterly period
ended March 31, 2002 filed May 13, 2002. |
55
|
|
(21) |
Incorporated by reference to exhibit 10.24 filed with
Amendment No. 1 to our Registration Statement on Form S-3
(File No. 333-111496) filed March 2, 2004. |
|
(22) |
Incorporated by reference to exhibit 10.23 filed with our
Amendment No. 1 to our Registration Statement on
Form S-3 (File No. 333-111496) filed March 2,
2004. |
|
(23) |
Incorporated by reference to exhibit 10.25 filed with our
Form 10-Q (File No. 000-30361) for the quarterly
period ended June 27, 2004 filed August 6, 2004. |
|
(24) |
Incorporated by reference to exhibit 10.26 filed with our
Form 10-Q (File No. 000-30361) for the quarterly
period ended October 3, 2004 filed November 12, 2004. |
|
(25) |
Incorporated by reference to exhibit 10.27 filed with our
Form 10-Q (File No. 000-30361) for the quarterly
period ended October 3, 2004 filed November 12, 2004. |
|
(26) |
Incorporated by reference to exhibit 10.28 filed with our
Form 10-K (File No. 000-30361) for the year ended
January 2, 2005 filed March 8, 2005. |
|
(27) |
Incorporated by reference to exhibit 10.33 filed with our
Form 10-Q (File No. 000-30361) for the quarterly
period ended July 3, 2005 filed August 8, 2005. |
|
(28) |
Incorporated by reference to exhibit 10.29 filed with our
Form 10-K (File No. 000-30361) for the year ended
January 2, 2005 filed March 8, 2005. |
Supplemental Information
No Annual Report to stockholders or proxy materials has been
sent to stockholders as of the date of this report. The Annual
Report to stockholders and proxy material will be furnished to
our stockholders subsequent to the filing of this Annual Report
on Form 10-K and
we will furnish such material to the SEC at that time.
56
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 March 6, 2006.
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|
|
|
Jay T. Flatley |
|
President and Chief Executive Officer |
March 6, 2006
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENT, that each person whose
signature appears below constitutes and appoints Jay T. Flatley
and Christian O. Henry, and each or any one of them, his true
and lawful
attorney-in-fact and
agent, with full power of substitution and resubstitution, for
him and in his name, place and stead, in any and all capacities,
to sign any and all amendments to this Annual Report on
Form 10-K, and to
file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange
Commission, granting unto said
attorneys-in-fact and
agents, and each of them, full power and authority to do and
perform each and every act and thing requisite and necessary to
be done in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and
confirming all that said
attorneys-in-fact and
agents, or any of them, or their or his substitutes or
substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, this Annual Report on
Form 10-K has been
signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
|
|
|
|
|
|
|
|
/s/
Jay T. Flatley
Jay
T. Flatley
|
|
President, Chief Executive Officer
and Director (Principal Executive Officer)
|
|
March 6, 2006
|
|
/s/
Christian O. Henry
Christian
O. Henry
|
|
Vice President and Chief Financial
Officer (Principal Financial and Accounting Officer)
|
|
March 6, 2006
|
|
/s/
John R. Stuelpnagel
John
R. Stuelpnagel
|
|
Senior Vice President, Chief
Operating Officer and Director
|
|
March 6, 2006
|
|
/s/
William H. Rastetter
William
H. Rastetter
|
|
Chairman of the Board of Directors
|
|
March 6, 2006
|
|
/s/
Daniel M. Bradbury
Daniel
M. Bradbury
|
|
Director
|
|
March 6, 2006
|
57
|
|
|
|
|
|
|
|
/s/
Karin Eastham
Karin
Eastham
|
|
Director
|
|
March 6, 2006
|
|
/s/
Paul Grint
Paul
Grint
|
|
Director
|
|
March 6, 2006
|
|
/s/
David R. Walt
David
R. Walt
|
|
Director
|
|
March 6, 2006
|
58
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Illumina, Inc.
We have audited the accompanying consolidated balance sheets of
Illumina, Inc. as of January 1, 2006 and January 2,
2005, and the related consolidated statements of operations,
stockholders equity, and cash flows for the years ended
January 1, 2006, January 2, 2005, and
December 28, 2003. Our audits also include the financial
statement schedule listed in the Index at Item 15(a). These
financial statements and schedule are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Illumina, Inc. as of January 1, 2006
and January 2, 2005, and the results of its operations and
its cash flows for the years ended January 1, 2006,
January 2, 2005, and December 28, 2003, 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 consolidated financial
statements taken as a whole, presents fairly in all material
respects the information set forth therein.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of Illumina, Inc.s internal control over
financial reporting as of January 1, 2006, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission and our report dated February 15,
2006 expressed an unqualified opinion thereon.
San Diego, California
February 15, 2006
F-2
ILLUMINA, INC.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, | |
|
January 2, | |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
(In thousands, except | |
|
|
share amounts) | |
ASSETS |
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
50,822 |
|
|
$ |
54,789 |
|
|
Restricted cash and investments
|
|
|
|
|
|
|
12,205 |
|
|
Accounts receivable, net
|
|
|
17,620 |
|
|
|
11,891 |
|
|
Inventory, net
|
|
|
10,309 |
|
|
|
3,807 |
|
|
Prepaid expenses and other current
assets
|
|
|
959 |
|
|
|
999 |
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
79,710 |
|
|
|
83,691 |
|
Property and equipment, net
|
|
|
16,131 |
|
|
|
8,574 |
|
Goodwill
|
|
|
2,125 |
|
|
|
|
|
Intangible and other assets, net
|
|
|
2,644 |
|
|
|
2,642 |
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
100,610 |
|
|
$ |
94,907 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY |
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
7,390 |
|
|
$ |
2,684 |
|
|
Accrued liabilities
|
|
|
14,210 |
|
|
|
10,407 |
|
|
Litigation judgment
|
|
|
|
|
|
|
5,957 |
|
|
Current portion of long-term debt
|
|
|
118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
21,718 |
|
|
|
19,048 |
|
Long-term debt, less current portion
|
|
|
54 |
|
|
|
|
|
Deferred gain on sale of land and
building
|
|
|
2,843 |
|
|
|
3,218 |
|
Other long term liabilities
|
|
|
3,498 |
|
|
|
379 |
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value,
120,000,000 shares authorized, 41,294,003 shares
issued and outstanding at January 1, 2006,
38,120,685 shares issued and outstanding at January 2,
2005
|
|
|
413 |
|
|
|
381 |
|
|
Additional paid-in capital
|
|
|
216,766 |
|
|
|
195,653 |
|
|
Deferred compensation
|
|
|
(354 |
) |
|
|
(156 |
) |
|
Accumulated other comprehensive
income
|
|
|
258 |
|
|
|
96 |
|
|
Accumulated deficit
|
|
|
(144,586 |
) |
|
|
(123,712 |
) |
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
72,497 |
|
|
|
72,262 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$ |
100,610 |
|
|
$ |
94,907 |
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements
F-3
ILLUMINA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
Year Ended | |
|
Year Ended | |
|
|
January 1, | |
|
January 2, | |
|
December 28, | |
|
|
2006 | |
|
2005 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands, except per share amounts) | |
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue
|
|
$ |
57,752 |
|
|
$ |
40,497 |
|
|
$ |
18,378 |
|
|
|
Service and other revenue
|
|
|
13,935 |
|
|
|
8,075 |
|
|
|
6,496 |
|
|
|
Research revenue
|
|
|
1,814 |
|
|
|
2,011 |
|
|
|
3,161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
73,501 |
|
|
|
50,583 |
|
|
|
28,035 |
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenue
|
|
|
19,920 |
|
|
|
11,572 |
|
|
|
7,437 |
|
|
|
Cost of service and other revenue
|
|
|
3,261 |
|
|
|
1,687 |
|
|
|
2,600 |
|
|
|
Research and development
|
|
|
27,725 |
|
|
|
21,114 |
|
|
|
22,511 |
|
|
|
Selling, general and administrative
|
|
|
27,972 |
|
|
|
25,080 |
|
|
|
18,899 |
|
|
|
Acquired in-process research and
development
|
|
|
15,800 |
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred
compensation and other stock-based compensation charges
|
|
|
270 |
|
|
|
844 |
|
|
|
2,454 |
|
|
|
Litigation judgment (settlement),
net
|
|
|
|
|
|
|
(4,201 |
) |
|
|
756 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
94,948 |
|
|
|
56,096 |
|
|
|
54,657 |
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(21,447 |
) |
|
|
(5,513 |
) |
|
|
(26,622 |
) |
Interest income
|
|
|
1,404 |
|
|
|
941 |
|
|
|
1,821 |
|
Interest and other expense
|
|
|
(831 |
) |
|
|
(1,653 |
) |
|
|
(2,262 |
) |
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(20,874 |
) |
|
$ |
(6,225 |
) |
|
$ |
(27,063 |
) |
|
|
|
|
|
|
|
|
|
|
Net loss per share, basic and
diluted
|
|
$ |
(0.52 |
) |
|
$ |
(0.17 |
) |
|
$ |
(0.85 |
) |
|
|
|
|
|
|
|
|
|
|
Shares used in calculating net loss
per share, basic and diluted
|
|
|
40,147 |
|
|
|
35,845 |
|
|
|
31,925 |
|
|
|
|
|
|
|
|
|
|
|
The composition of stock-based
compensation is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
$ |
84 |
|
|
$ |
348 |
|
|
$ |
1,289 |
|
|
Selling, general and administrative
|
|
|
186 |
|
|
|
496 |
|
|
|
1,165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
270 |
|
|
$ |
844 |
|
|
$ |
2,454 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements
F-4
ILLUMINA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated | |
|
|
|
|
|
|
Common stock | |
|
Additional | |
|
|
|
Other | |
|
|
|
Total | |
|
|
| |
|
Paid-In | |
|
Deferred | |
|
Comprehensive | |
|
Accumulated | |
|
Stockholders | |
|
|
Shares | |
|
Amount | |
|
Capital | |
|
Compensation | |
|
Income (Loss) | |
|
Deficit | |
|
Equity | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Balance as of December 29, 2002
|
|
|
32,500 |
|
|
$ |
325 |
|
|
$ |
164,483 |
|
|
$ |
(3,617 |
) |
|
$ |
977 |
|
|
$ |
(90,424 |
) |
|
$ |
71,744 |
|
|
Issuance of common stock for cash
|
|
|
408 |
|
|
|
4 |
|
|
|
899 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
903 |
|
|
Repurchase of restricted common
stock
|
|
|
(21 |
) |
|
|
|
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8 |
) |
|
Amortization of deferred
compensation
|
|
|
|
|
|
|
|
|
|
|
12 |
|
|
|
2,442 |
|
|
|
|
|
|
|
|
|
|
|
2,454 |
|
|
Reversal of deferred compensation
related to unvested stock options and restricted stock of
terminated employees
|
|
|
|
|
|
|
|
|
|
|
(72 |
) |
|
|
72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on available-for
sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(702 |
) |
|
|
|
|
|
|
(702 |
) |
|
Foreign currency translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60 |
|
|
|
|
|
|
|
60 |
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27,063 |
) |
|
|
(27,063 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27,705 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on
available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29 |
|
|
|
|
|
|
|
29 |
|
|
Unrealized gain on hedging contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56 |
|
|
|
|
|
|
|
56 |
|
|
Foreign currency translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77 |
|
|
|
|
|
|
|
77 |
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,874 |
) |
|
|
(20,874 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,712 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2006
|
|
|
41,294 |
|
|
$ |
413 |
|
|
$ |
216,766 |
|
|
$ |
(354 |
) |
|
$ |
258 |
|
|
$ |
(144,586 |
) |
|
$ |
72,497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements
F-5
ILLUMINA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
Year Ended | |
|
Year Ended | |
|
|
January 1, | |
|
January 2, | |
|
December 28, | |
|
|
2006 | |
|
2005 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(20,874 |
) |
|
$ |
(6,225 |
) |
|
$ |
(27,063 |
) |
|
|
Adjustments to reconcile net loss
to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired in-process research and
development
|
|
|
15,800 |
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
4,116 |
|
|
|
3,956 |
|
|
|
4,545 |
|
|
|
Loss on disposal of property and
equipment
|
|
|
293 |
|
|
|
|
|
|
|
175 |
|
|
|
Amortization of premium on
investments
|
|
|
(14 |
) |
|
|
354 |
|
|
|
432 |
|
|
|
Amortization of deferred
compensation and other stock-based compensation charges
|
|
|
270 |
|
|
|
844 |
|
|
|
2,454 |
|
|
|
Amortization of gain on sale of
land and building
|
|
|
(375 |
) |
|
|
(156 |
) |
|
|
|
|
|
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(7,039 |
) |
|
|
(7,202 |
) |
|
|
(1,296 |
) |
|
|
|
Inventory
|
|
|
(6,502 |
) |
|
|
(1,785 |
) |
|
|
277 |
|
|
|
|
Prepaid expenses and other current
assets
|
|
|
290 |
|
|
|
(29 |
) |
|
|
8 |
|
|
|
|
Other assets
|
|
|
395 |
|
|
|
(2,041 |
) |
|
|
(151 |
) |
|
|
|
Accounts payable
|
|
|
3,193 |
|
|
|
697 |
|
|
|
260 |
|
|
|
|
Accrued liabilities
|
|
|
4,214 |
|
|
|
1,958 |
|
|
|
1,742 |
|
|
|
|
Litigation judgment
|
|
|
(5,957 |
) |
|
|
567 |
|
|
|
606 |
|
|
|
|
Other long-term liabilities
|
|
|
3,182 |
|
|
|
(512 |
) |
|
|
(245 |
) |
|
|
|
Advance payment from former
collaborator
|
|
|
|
|
|
|
(10,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating
activities
|
|
|
(9,008 |
) |
|
|
(19,574 |
) |
|
|
(18,256 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for acquisition, net of
cash acquired
|
|
|
(2,388 |
) |
|
|
|
|
|
|
|
|
|
Purchases of available-for-sale
securities
|
|
|
|
|
|
|
(6,603 |
) |
|
|
(1,940 |
) |
|
Sales and maturities of
available-for-sale securities
|
|
|
12,248 |
|
|
|
26,348 |
|
|
|
32,456 |
|
|
Proceeds from sale of land and
building, net of fees
|
|
|
|
|
|
|
40,667 |
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(11,395 |
) |
|
|
(3,355 |
) |
|
|
(2,032 |
) |
|
Acquisition of intangible assets
|
|
|
|
|
|
|
(35 |
) |
|
|
(16 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by
investing activities
|
|
|
(1,535 |
) |
|
|
57,022 |
|
|
|
28,468 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments on long-term debt
|
|
|
(83 |
) |
|
|
(25,387 |
) |
|
|
(342 |
) |
|
Payments on equipment financing
|
|
|
|
|
|
|
(232 |
) |
|
|
(337 |
) |
|
Proceeds from issuance of common
stock
|
|
|
6,046 |
|
|
|
30,507 |
|
|
|
903 |
|
|
Repurchase of common stock
|
|
|
|
|
|
|
(13 |
) |
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
5,963 |
|
|
|
4,875 |
|
|
|
216 |
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency
translation on cash and cash equivalents
|
|
|
613 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and
cash equivalents
|
|
|
(3,967 |
) |
|
|
42,324 |
|
|
|
10,428 |
|
Cash and cash equivalents at
beginning of the year
|
|
|
54,789 |
|
|
|
12,465 |
|
|
|
2,037 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of
the year
|
|
$ |
50,822 |
|
|
$ |
54,789 |
|
|
$ |
12,465 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash
flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for
interest
|
|
$ |
15 |
|
|
$ |
1,368 |
|
|
$ |
2,222 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements
F-6
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
1. |
Organization and Summary of Significant Accounting
Policies |
|
|
|
Organization and Business |
Illumina, Inc. (the Company) was incorporated on
April 28, 1998. The Company develops and markets
next-generation tools for the large-scale analysis of genetic
variation and function. Using the Companys technologies,
it has developed a comprehensive line of products that are
designed to provide the performance, throughput, cost
effectiveness and flexibility necessary to enable researchers in
the life sciences and pharmaceutical industries to perform the
billions of tests necessary to extract medically valuable
information from advances in genomics. This information is
expected to correlate genetic variation and gene function with
particular disease states, enhancing drug discovery, allowing
diseases to be detected earlier and more specifically, and
permitting better choices of drugs for individual patients.
The consolidated financial statements of the Company have been
prepared in conformity with U.S. generally accepted
accounting principles and include the accounts of the Company
and its wholly-owned subsidiaries. All intercompany transactions
and balances have been eliminated in consolidation.
The Companys fiscal year is 52 or 53 weeks ending the
Sunday closest to December 31, with quarters of 13 or
14 weeks ending the Sunday closest to March 31,
June 30, and September 30. The years ended
January 1, 2006 and January 2, 2005 were 52 and
53 weeks, respectively.
Certain prior year amounts have been reclassified to conform to
current year presentation.
The preparation of financial statements requires that management
make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenue and expenses, goodwill and
related disclosure of contingent assets and liabilities. Actual
results could differ from those estimates.
|
|
|
Cash and Cash Equivalents |
Cash and cash equivalents are comprised of short-term, highly
liquid investments primarily in money market-type funds.
F-7
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company applies Statement of Financial Accounting Standards
(SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities, to its
investments. Under SFAS No. 115, the Company
classifies its investments as Available-for-Sale and
records such assets at estimated fair value in the balance
sheet, with unrealized gains and losses, if any, reported in
stockholders equity. The Company invests in marketable
debt securities, primarily government securities and corporate
bonds and notes, with strong credit ratings or short maturity
mutual funds providing similar financial returns. As of
January 1, 2006, the Companys excess cash balances
were invested mainly in short-term, highly liquid money market
mutual funds. The Company limits the amount of investment
exposure as to institutions, maturity and investment type. The
cost of securities sold is determined based on the specific
identification method. Gross realized gains totaled $0, $453,750
and $342,693 for the years ended January 1, 2006,
January 2, 2005 and December 28, 2003, respectively.
Gross realized losses were not material for all periods
presented.
|
|
|
Restricted Cash and Investments |
As of January 2, 2005, restricted cash and investments
consisted of corporate debt securities that are used as
collateral against a letter of credit and a $100,000 bond
deposit with the San Diego Superior Court related to the
Applied Biosystems litigation as described more fully in
Note 7. The letter of credit and bond deposit were released
in January of 2005.
|
|
|
Fair Value of Financial Instruments |
The carrying amounts of certain of the Companys financial
instruments, including cash and cash equivalents, accounts and
notes receivable, accounts payable and accrued liabilities,
approximate fair value.
|
|
|
Accounts and Notes Receivable |
Trade accounts receivable are recorded at net invoice value and
notes receivable are recorded at contractual value plus earned
interest. Interest income on notes receivable is recognized
according to the terms of each related agreement. The Company
considers receivables past due based on the contractual payment
terms. The Company reviews its exposure to amounts receivable
and reserves specific amounts if collectibility is no longer
reasonably assured. The Company also reserves a percentage of
the net trade receivable balance based on collection history.
The Company re-evaluates such reserves on a regular basis and
adjusts its reserves as needed.
Cash equivalents, investments and accounts receivable are
financial instruments that potentially subject the Company to
concentrations of credit risk. Most of the Companys cash
and cash equivalents as of January 1, 2006 were deposited
with financial institutions in the United States and Company
policy restricts the amount of credit exposure to any one issuer
and to any one type of investment, other than securities issued
by the U.S. Government. The Company has historically not
experienced significant credit losses from accounts receivable.
The Company performs a regular review of customer activity and
associated credit risks and generally does not require
collateral. The Company maintains an allowance for doubtful
accounts based upon a percentage of the net trade receivable
balance based on collection history and re-evaluates such
reserves on a regular basis.
F-8
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Companys products require customized components that
currently are available from a limited number of sources. The
Company obtains certain key components included in its products
from single vendors. No assurance can be given that these or
other product components will be available in sufficient
quantities at acceptable costs in the future.
Approximately 38%, 52% and 51% of the Companys revenue for
the year ended January 1, 2006, January 2, 2005 and
December 28, 2003 was derived from customers outside the
United States. Approximately 48% and 70% of the Companys
net accounts receivable balance as of January 1, 2006 and
January 2, 2005, respectively, was related to customers
outside the United States. Sales to territories outside of the
United States are generally denominated in
U.S. dollars. International sales entail a variety of
risks, including currency exchange fluctuations, longer payment
cycles and greater difficulty in accounts receivable collection.
The Company is also subject to general geopolitical risks, such
as political, social and economic instability and changes in
diplomatic and trade relations. The risks of international sales
are mitigated in part by the extent to which sales are
geographically distributed.
Inventories are stated at the lower of standard cost (which
approximates actual cost) or market. Inventory includes raw
materials and finished goods that may be used in the research
and development process and such items are expensed as consumed.
Provisions for slow moving, excess and obsolete inventories are
provided based on product life cycle and development plans,
product expiration and quality issues, historical experience and
inventory levels.
Property and equipment are stated at cost, subject to review of
impairment, and depreciated over the estimated useful lives of
the assets (generally three to seven years) using the
straight-line method. Amortization of leasehold improvements is
computed over the shorter of the lease term or the estimated
useful life of the related assets.
Intangible assets consist of license agreements and acquired
technology. The cost of the Companys license agreements
was $844,450 and the Company has amortized $785,366 through
January 1, 2006. Amortization expense related to license
agreements for the years ending January 1, 2006,
January 2, 2005 and December 28, 2003 was $292,033,
$300,000 and $185,000, respectively. The licenses will be fully
amortized by 2008.
In accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, if indicators
of impairment exist, the Company assesses the recoverability of
the affected long-lived assets by determining whether the
carrying value of such assets can be recovered through
undiscounted future operating cash flows. If impairment is
indicated, the Company measures the future discounted cash flows
associated with the use of the asset and adjusts the value of
the asset accordingly. While the Companys current and
historical operating and cash flow losses are indicators of
impairment, the Company believes the future cash flows to be
received from the long-lived assets recorded at January 1,
2006 will exceed the assets carrying value, and
accordingly the Company has not recognized any impairment losses
through January 1, 2006.
F-9
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
Reserve for Product Warranties |
The Company generally provides a one-year warranty on
instrumentation. At the time revenue is recognized, the Company
establishes an accrual for estimated warranty expenses
associated with system sales. This expense is recorded as a
component of cost of revenue.
The Companys revenue is generated primarily from the sale
of products and services. Product revenue consists of sales of
arrays, reagents, instrumentation, and oligos. Service and other
revenue consists of revenue received for performing genotyping
services, extended warranty sales and revenue earned from
milestone payments.
The Company recognizes revenue in accordance with the guidelines
established by SEC Staff Accounting Bulletin (SAB)
No. 104. Under SAB No. 104, revenue cannot be recorded
until all of the following criteria have been met: persuasive
evidence of an arrangement exists; delivery has occurred or
services have been rendered; the sellers price to the
buyer is fixed or determinable; and collectibility is reasonably
assured.
Revenue for product sales is recognized generally upon shipment
and transfer of title to the customer, provided no significant
obligations remain and collection of the receivables is
reasonably assured. Revenue from the sale of instrumentation is
recognized when earned, which is generally upon shipment.
However, in the case of BeadLabs, revenue is recognized upon the
completion of installation, training and the receipt of customer
acceptance. Revenue for genotyping services is recognized when
earned, which is generally at the time the genotyping analysis
data is delivered to the customer or as specific milestones are
achieved.
In order to assess whether the price is fixed and determinable,
the Company ensures there are no refund rights. If payment terms
are based on future performance, the Company defers revenue
recognition until the price becomes fixed and determinable. The
Company assesses collectibility based on a number of factors,
including past transaction history with the customer and the
creditworthiness of the customer. If the Company determines that
collection of a payment is not reasonably assured, revenue
recognition is deferred until the time collection becomes
reasonably assured, which is generally upon receipt of payment.
Changes in judgments and estimates made in determining whether
the criteria of SAB No. 104 have been met might result
in a change in the timing or amount of revenue recognized.
Sales of instrumentation generally include a standard one-year
warranty. The Company also sells separately priced maintenance
(extended warranty) contracts, which are generally for one or
two years, upon the expiration of the initial warranty. Revenue
for extended warranty sales is recognized ratably over the term
of the extended warranty period. Reserves are provided for
estimated product warranty expenses at the time the associated
revenue is recognized. If the Company were to experience an
increase in warranty claims or if costs of servicing its
warrantied products were greater than its estimates, gross
margins could be adversely affected.
F-10
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
While the majority of its sales agreements contain standard
terms and conditions, the Company does enter into agreements
that contain multiple elements or non-standard terms and
conditions. Emerging Issues Task Force (EITF)
No. 00-21,
Revenue Arrangements with Multiple Deliverables, provides
guidance on accounting for arrangements that involve the
delivery or performance of multiple products, services, or
rights to use assets within contractually binding arrangements.
Significant contract interpretation is sometimes required to
determine the appropriate accounting, including whether the
deliverables specified in a multiple element arrangement should
be treated as separate units of accounting for revenue
recognition purposes, and if so, how the price should be
allocated among the deliverable elements, when to recognize
revenue for each element, and the period over which revenue
should be recognized. The Company recognizes revenue for
delivered elements only when it determines that the fair values
of undelivered elements are known and there are no uncertainties
regarding customer acceptance.
Some of the Companys agreements contain multiple elements
that include milestone payments. Revenue from a milestone
achievement is recognized when earned, as evidenced by
acknowledgement from the Companys collaborator, provided
that (i) the milestone event is substantive and its
achievability was not reasonably assured at the inception of the
agreement, (ii) the milestone represents the culmination of
an earnings process, (iii) the milestone payment is
non-refundable and (iv) the performance obligations for
both the Company and its collaborators after the milestone
achievement will continue at a level comparable to the level
before the milestone achievement. If all of these criteria are
not met, the milestone achievement is recognized over the
remaining minimum period of the Companys performance
obligations under the agreement. The Company defers
non-refundable upfront fees received under its collaborations
and recognizes them over the period the related services are
provided or over the estimated collaboration term using various
factors specific to the collaboration. Advance payments received
in excess of amounts earned are classified as deferred revenue
until earned.
A third source of revenue, research revenue, consists of amounts
earned under research agreements with government grants, which
is recognized in the period during which the related costs are
incurred. All revenue is recorded net of any applicable
allowances for returns or discounts.
|
|
|
Shipping and Handling Expenses |
Shipping and handling expenses are included in cost of product
revenue and totaled $1,287,802, $493,052 and $224,210 for the
years ended January 1, 2006, January 2, 2005 and
December 28, 2003, respectively.
Expenditures relating to research and development are expensed
in the period incurred.
The Company expenses advertising costs as incurred. Advertising
costs were $1,208,263, $792,508 and $439,710 for the years ended
January 1, 2006, January 2, 2005 and December 28,
2003, respectively.
F-11
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A deferred income tax asset or liability is computed for the
expected future impact of differences between the financial
reporting and tax bases of assets and liabilities, as well as
the expected future tax benefit to be derived from tax loss and
credit carryforwards. Deferred income tax expense is generally
the net change during the year in the deferred income tax asset
or liability. Valuation allowances are established when
realizability of deferred tax assets is uncertain. The effect of
tax rate changes is reflected in tax expense during the period
in which such changes are enacted.
|
|
|
Foreign Currency Translation |
The functional currencies of the Companys wholly-owned
subsidiaries are their respective local currencies. Accordingly,
all balance sheet accounts of these operations are translated to
U.S. dollars using the exchange rates in effect at the
balance sheet date, and revenues and expenses are translated
using the average exchange rates in effect during the period.
The gains and losses from foreign currency translation of these
subsidiaries financial statements are recorded as a
separate component of stockholders equity under the
caption accumulated other comprehensive income.
As of January 1, 2006, the Company has two stock-based
employee and non-employee director compensation plans, which are
described in Note 6. As permitted by
SFAS No. 123, Accounting for Stock-Based
Compensation, the Company accounts for common stock options
granted, and restricted stock sold, to employees, founders and
directors using the intrinsic value method and, thus, recognizes
no compensation expense for options granted, or restricted stock
sold, with exercise prices equal to or greater than the fair
value of the Companys common stock on the date of the
grant. The Company has recorded deferred stock compensation
related to certain stock options, and restricted stock, which
were granted prior to the Companys initial public
offering, with exercise prices below estimated fair value, which
are being amortized on an accelerated amortization methodology
in accordance with Financial Accounting Standards Board
Interpretation Number (FIN) No. 28. In the year
ending January 1, 2006, the Company recorded deferred stock
compensation as part of a business acquisition as well as
deferred stock compensation related to a restricted stock grant
awarded to an employee, which are being amortized over the
vesting period on a straight-line basis.
In June 2005, the stockholders of the Company approved the 2005
Stock and Incentive Plan (the 2005 Stock Plan). Upon
adoption of the 2005 Stock Plan, issuance of options under the
2000 Stock Plan ceased. The 2005 Stock Plan provides that an
aggregate of up to 11,542,358 shares of the Companys
common stock be reserved and available to be issued. In
addition, the 2005 Stock Plan provides for an automatic annual
increase in the shares reserved for issuance by the lesser of 5%
of outstanding shares of the Companys common stock on the
last day of the immediately preceding fiscal year,
1,200,000 shares or such lesser amount as determined by the
Companys board of directors.
F-12
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Pro forma information regarding net loss is required by
SFAS No. 123 and has been determined as if the Company
had accounted for its employee stock options and employee stock
purchases under the fair value method of that statement. The
fair value for these options was estimated at the dates of grant
using the fair value option pricing model (Black-Scholes) with
the following weighted-average assumptions for 2005, 2004 and
2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
Year Ended | |
|
Year Ended | |
|
|
January 1, | |
|
January 2, | |
|
December 28, | |
|
|
2006 | |
|
2005 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Weighted average risk-free interest
rate
|
|
|
4.08 |
% |
|
|
3.25 |
% |
|
|
3.03 |
% |
Expected dividend yield
|
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
Weighted average volatility
|
|
|
90 |
% |
|
|
97 |
% |
|
|
103 |
% |
Estimated life (in years)
|
|
|
5 |
|
|
|
5 |
|
|
|
5 |
|
Weighted average fair value of
options granted
|
|
$ |
7.38 |
|
|
$ |
5.25 |
|
|
$ |
3.31 |
|
For purposes of pro forma disclosures, the estimated fair value
of the options is amortized to expense over the vesting period.
The Companys pro forma information is as follows (in
thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
Year Ended | |
|
Year Ended | |
|
|
January 1, | |
|
January 2, | |
|
December 28, | |
|
|
2006 | |
|
2005 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Net loss, as reported
|
|
$ |
(20,874 |
) |
|
$ |
(6,225 |
) |
|
$ |
(27,063 |
) |
Add: Stock-based compensation
expense recorded
|
|
|
270 |
|
|
|
844 |
|
|
|
2,454 |
|
Less: Assumed stock compensation
expense
|
|
|
(8,393 |
) |
|
|
(10,302 |
) |
|
|
(9,517 |
) |
|
|
|
|
|
|
|
|
|
|
Pro forma net loss
|
|
$ |
(28,997 |
) |
|
$ |
(15,683 |
) |
|
$ |
(34,126 |
) |
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
(0.52 |
) |
|
$ |
(0.17 |
) |
|
$ |
(0.85 |
) |
|
|
|
|
|
|
|
|
|
|
Pro forma basic and diluted net
loss per share
|
|
$ |
(0.72 |
) |
|
$ |
(0.44 |
) |
|
$ |
(1.07 |
) |
|
|
|
|
|
|
|
|
|
|
In December 2004, the Financial Accounting Standards Board
(FASB) issued SFAS No. 123 (revised 2004),
Share Based Payment
(SFAS No. 123R), which is a revision
of SFAS No. 123, Accounting for Stock-Based
Compensation. This statement supercedes Accounting
Principles Bulletin (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and amends
SFAS No. 95, Statement of Cash Flows.
Generally, the approach in SFAS No. 123R is similar to
the approach described in SFAS No. 123; however,
SFAS No. 123R requires all share-based payments to
employees, including grants of employee stock options, to be
recognized in the income statement based on their fair values.
Pro forma disclosure is no longer an alternative.
F-13
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
SFAS No. 123R permits companies to adopt its
requirements using either a modified prospective
method or a modified retrospective method. Under the
modified prospective method, compensation cost is
recognized in the financial statements beginning with the
effective date, based on the requirements of
SFAS No. 123R for all share-based payments granted
after that date, and based on the requirements for
SFAS No. 123 for all unvested awards granted prior to
the effective date of SFAS No. 123R. Under the
modified retrospective method, the requirements are
the same as under the modified prospective method,
but companies may restate financial statements of previous
periods based on pro forma disclosures made in accordance with
SFAS No. 123. The Company currently utilizes the
Black-Scholes model to measure the fair value of stock options
granted to employees under the pro forma disclosure requirements
of SFAS No. 123. While SFAS No. 123R permits
companies to continue to use such model, it also permits the use
of a lattice model. The Company has determined it
will use the Black-Scholes model to measure the fair value of
employee stock options under SFAS No. 123R. The new
standard is effective for companies that are not small business
issuers, like the Company, beginning with the first reporting
period during the first fiscal year beginning on or after
June 15, 2005, and the Company adopted
SFAS No. 123R at the beginning of its new reporting
period on January 2, 2006.
The Company currently accounts for share-based payments to
employees using APB No. 25s intrinsic value method
and, as such, recognizes no compensation cost for employee stock
options granted with exercise prices equal to or greater than
the fair value of the Companys common stock on the date of
the grant. Accordingly, the adoption of
SFAS No. 123Rs fair value method is expected to
result in significant non-cash charges which will increase the
Companys reported operating expenses. However, it will
have no impact on its cash flows. The precise impact of adoption
of SFAS No. 123R cannot be predicted at this time
because it will depend on the level of share-based payments
granted in the future. However, had the Company adopted
SFAS No. 123R in prior periods, it believes the impact
of that standard would have approximated the impact of
SFAS No. 123 as described in the disclosure of pro
forma net loss in this note.
Deferred compensation for options granted, and restricted stock
sold, to consultants has been determined in accordance with
SFAS No. 123 and EITF 96-18 as the fair value of
the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measured.
Deferred charges for options granted and restricted stock sold,
to consultants are periodically remeasured as the underlying
options vest.
F-14
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Basic and diluted net loss per common share are presented in
conformity with SFAS No. 128, Earnings per Share,
for all periods presented. In accordance with
SFAS No. 128, basic and net loss per share is computed
using the weighted-average number of shares of common stock
outstanding during the period, less shares subject to
repurchase. Diluted net loss per share is typically computed
using the weighted average number of common and dilutive common
equivalent shares from stock options using the treasury stock
method. However, for all periods presented, diluted net loss per
share is the same as basic net loss per share because the
Company reported a net loss and therefore the inclusion of
weighted average shares of common stock issuable upon the
exercise of stock options would be antidilutive.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
Year Ended | |
|
Year Ended | |
|
|
January 1, | |
|
January 2, | |
|
December 28, | |
|
|
2006 | |
|
2005 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Weighted-average shares outstanding
|
|
|
40,199 |
|
|
|
36,165 |
|
|
|
32,733 |
|
Less: Weighted-average shares of
common stock subject to repurchase
|
|
|
(52 |
) |
|
|
(320 |
) |
|
|
(808 |
) |
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used in
computing net loss per share, basic and diluted
|
|
|
40,147 |
|
|
|
35,845 |
|
|
|
31,925 |
|
|
|
|
|
|
|
|
|
|
|
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, 6,360,023 and 5,809,649 for the years ended
January 1, 2006, January 2, 2005, and
December 28, 2003, respectively.
|
|
|
Comprehensive Income (Loss) |
Comprehensive loss is comprised of net loss and other
comprehensive income (loss). Other comprehensive income (loss)
includes unrealized gains and losses on the Companys
available-for-sale securities, changes in the fair value of
derivatives designated as effective as cash flow hedges, and
foreign currency translation adjustments. The Company has
disclosed comprehensive loss as a component of
stockholders equity.
The components of accumulated other comprehensive income (loss)
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
Year Ended | |
|
Year Ended | |
|
|
January 1, | |
|
January 2, | |
|
December 28, | |
|
|
2006 | |
|
2005 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Foreign currency translation
adjustments
|
|
$ |
248 |
|
|
$ |
171 |
|
|
$ |
60 |
|
Unrealized gain (loss) on
available-for-sale securities
|
|
|
|
|
|
|
(29 |
) |
|
|
275 |
|
Unrealized gain (loss) on cash flow
hedges
|
|
|
10 |
|
|
|
(46 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive
income
|
|
$ |
258 |
|
|
$ |
96 |
|
|
$ |
335 |
|
|
|
|
|
|
|
|
|
|
|
F-15
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Acquisition of CyVera Corporation
On April 8, 2005, the Company completed its acquisition of
100% of the voting equity interests of CyVera Corporation
(CyVera). Pursuant to an Agreement and Plan of
Merger, dated as of February 22, 2005 (the Merger
Agreement), by and among Illumina, Semaphore Acquisition
Sub, Inc., a Delaware corporation and wholly owned subsidiary of
Illumina (Merger Sub), and CyVera, Merger Sub merged
with and into CyVera, with CyVera surviving as a wholly owned
subsidiary of Illumina. The results of CyVeras operations
have been included in the Companys consolidated financial
statements since the acquisition date of April 8, 2005.
CyVera was created in October 2003 to commercialize its digital
microbead technology platform and optical instrumentation/reader
concepts. The Company believes that the CyVera technology will
be highly complementary to the Companys own portfolio of
products and services; will enhance the Companys
capabilities to service its existing customers; and will
accelerate the development of additional technologies, products
and services. The Company believes that integrating
CyVeras capabilities with the Companys technologies
will better position the Company to address the emerging
biomarker research and development and in-vitro and molecular
diagnostic markets.
Pursuant to the Merger Agreement, Illumina 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, Illumina assumed the
outstanding stock options of CyVera. Approximately 250,000 of
the Shares were deposited into an escrow account with a bank.
For a period of one year from the closing date, these shares
will be held by the bank to satisfy any claims for
indemnification made by the Company or CyVera pursuant to the
Merger Agreement. To the extent that some, or all, of these
shares are not required to satisfy indemnification claims, then
such shares will be distributed pro rata among the CyVera
stockholders.
The results of CyVeras operations have been included in
the accompanying consolidated financial statements from the date
of the acquisition. The total cost of the acquisition is as
follows (in thousands):
|
|
|
|
|
|
Fair market value of securities
issued, net
|
|
$ |
14,433 |
|
Cash paid
|
|
|
2,291 |
|
Transaction costs
|
|
|
681 |
|
Fair market value of options assumed
|
|
|
394 |
|
|
|
|
|
|
Total purchase price
|
|
$ |
17,799 |
|
|
|
|
|
The fair value of the Shares was determined based on the average
closing price of the Companys common stock for five
trading days preceding, and following, February 22, 2005
(the date the transaction was announced). The Company believes
that this time period gives proper consideration to matters such
as price fluctuations and quantities traded and represents a
reasonable period before and after the date on which the terms
of the acquisition were agreed. Based on these closing prices,
the Company estimated the fair value of its common stock to be
$9.167 per share, which equates to a total fair value of
$14.4 million.
F-16
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The final purchase price allocation is shown below:
|
|
|
|
|
|
|
As of April 8, | |
|
|
2005 | |
|
|
| |
|
|
(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 |
|
|
|
|
|
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 expects to perform 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. As of January 1,
2006, the Company has determined there has been no impairment of
goodwill.
The Company allocated $15.8 million of the purchase price
to in-process research and development projects. In-process
research and development (IPR&D) represents the
valuation of acquired, to-be-completed research projects. At the
acquisition date, CyVeras ongoing research and development
initiatives were primarily involved with the development of its
microbead technology platform and optical instrumentation/
reader concepts. These two projects were approximately 50% and
25% complete at the date of acquisition.
The value assigned to purchased IPR&D was determined by
estimating the costs to develop the acquired technology into
commercially viable products, estimating the resulting net cash
flows from the projects, and discounting the net cash flows to
their present value. The revenue projections used to value the
IPR&D were, in some cases, reduced based on the probability
of developing a new technology, and considered the relevant
market sizes and growth factors, expected trends in technology,
and the nature and expected timing of new product introductions
by the Company and its competitors. The resulting net cash flows
from such projects are based on the Companys estimates of
cost of sales, operating expenses, and income taxes from such
projects. The rates utilized to discount the net cash flows to
their present value were based on estimated cost of capital
calculations. Due to the nature of the forecast and the risks
associated with the projected growth and profitability of the
developmental projects, discount rates of 30% were considered
appropriate for the IPR&D. The Company believes that these
discount rates were commensurate with the projects stage
of development and the uncertainties in the economic estimates
described above.
F-17
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
If these projects are not successfully developed, the sales and
profitability of the combined company may be adversely affected
in future periods. The Company believes that the foregoing
assumptions used in the IPR&D analysis were reasonable at
the time of the acquisition. No assurance can be given, however,
that the underlying assumptions used to estimate expected
project sales, development costs or profitability, or the events
associated with such projects, will transpire as estimated. At
the date of acquisition, the development of these projects had
not yet reached technological feasibility, and the research and
development in progress had no alternative future uses.
Accordingly, these costs were charged to expense in the second
quarter of 2005.
The following unaudited pro forma information shows the results
of the Companys operations for the years ended
January 1, 2006, January 2, 2005 and December 28,
2003 as though the acquisition had occurred as of the beginning
of the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
Year Ended | |
|
Year Ended | |
|
|
January 1, | |
|
January 2, | |
|
December 28, | |
|
|
2006 | |
|
2005 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands, except per share data) | |
Revenue
|
|
$ |
73,501 |
|
|
$ |
50,583 |
|
|
$ |
28,035 |
|
Net loss
|
|
|
(6,234 |
) |
|
|
(9,965 |
) |
|
|
(27,616 |
) |
Net loss per share, basic and
diluted
|
|
|
(0.15 |
) |
|
|
(0.27 |
) |
|
|
(0.82 |
) |
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 November 2004, the FASB issued SFAS No. 151,
Inventory Costs. The Company is required to adopt the
provisions of SFAS No. 151, on a prospective basis, as
of January 2, 2006. SFAS No. 151 clarifies the
accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material.
SFAS No. 151 requires that those items if
abnormal be recognized as expenses in the period
incurred. In addition, SFAS No. 151 requires the
allocation of fixed production overheads to the costs of
conversions based upon the normal capacity of the production
facilities. The Company does not believe that the adoption of
SFAS No. 151 will have a material impact on its
financial position or results of operations.
|
|
2. |
Balance Sheet Account Details |
Investments, including restricted investments, consist of the
following, (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2, 2005 | |
|
|
|
|
|
|
| |
|
|
|
|
Amortized | |
|
Gross |
|
Gross | |
|
|
|
|
Cost | |
|
Unrealized Gain |
|
Unrealized Loss | |
|
Market Value | |
|
|
| |
|
|
|
| |
|
| |
Restricted corporate debt securities
|
|
$ |
12,134 |
|
|
$ |
|
|
|
$ |
(29 |
) |
|
$ |
12,105 |
|
The Company had no investments as of January 1, 2006.
F-18
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Accounts receivable consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
January 1, | |
|
January 2, | |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Accounts receivable from product
and service sales
|
|
$ |
17,055 |
|
|
$ |
11,182 |
|
Notes receivable from product sales
|
|
|
441 |
|
|
|
464 |
|
Accounts receivable from government
grants
|
|
|
180 |
|
|
|
108 |
|
Other receivables
|
|
|
257 |
|
|
|
283 |
|
|
|
|
|
|
|
|
|
|
|
17,933 |
|
|
|
12,037 |
|
Allowance for doubtful accounts
|
|
|
(313 |
) |
|
|
(146 |
) |
|
|
|
|
|
|
|
|
Total
|
|
$ |
17,620 |
|
|
$ |
11,891 |
|
|
|
|
|
|
|
|
Inventory consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
January 1, | |
|
January 2, | |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Raw materials
|
|
$ |
4,575 |
|
|
$ |
1,487 |
|
Work in process
|
|
|
4,546 |
|
|
|
1,714 |
|
Finished goods
|
|
|
1,188 |
|
|
|
606 |
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
10,309 |
|
|
$ |
3,807 |
|
|
|
|
|
|
|
|
Property and equipment consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
January 1, | |
|
January 2, | |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Leasehold improvements
|
|
$ |
819 |
|
|
$ |
347 |
|
Manufacturing and laboratory
equipment
|
|
|
19,430 |
|
|
|
11,067 |
|
Computer equipment and software
|
|
|
8,121 |
|
|
|
6,116 |
|
Furniture and fixtures
|
|
|
2,139 |
|
|
|
2,095 |
|
|
|
|
|
|
|
|
|
|
|
30,509 |
|
|
|
19,625 |
|
Accumulated depreciation and
amortization
|
|
|
(14,378 |
) |
|
|
(11,051 |
) |
|
|
|
|
|
|
|
|
Total
|
|
$ |
16,131 |
|
|
$ |
8,574 |
|
|
|
|
|
|
|
|
Depreciation expense was $3.8 million, $3.7 million
and $4.4 million for the years ended January 1, 2006,
January 2, 2005 and December 28, 2003, respectively.
F-19
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Accrued liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
January 1, | |
|
January 2, | |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Compensation
|
|
$ |
4,922 |
|
|
$ |
3,798 |
|
Legal and other professional fees
|
|
|
2,311 |
|
|
|
1,488 |
|
Taxes
|
|
|
939 |
|
|
|
928 |
|
Reserve for product warranties
|
|
|
751 |
|
|
|
387 |
|
Customer deposits
|
|
|
1,361 |
|
|
|
1,671 |
|
Short-term deferred revenue
|
|
|
1,937 |
|
|
|
915 |
|
Short-term deferred gain on sale of
building
|
|
|
375 |
|
|
|
375 |
|
Other
|
|
|
1,614 |
|
|
|
845 |
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
14,210 |
|
|
$ |
10,407 |
|
|
|
|
|
|
|
|
|
|
3. |
Derivative Financial Instruments |
SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, requires that all derivatives be
recognized on the balance sheet at their fair value. Changes in
the fair value of derivatives are recorded each period in
current earnings or other comprehensive income, depending on
whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction. The
Company assesses, both at its inception and on an on-going
basis, whether the derivatives that are used in hedging
transactions are highly effective in offsetting the changes in
cash flows of hedged items. The Company also assesses hedge
ineffectiveness on a quarterly basis and records the gain or
loss related to the ineffective portion to current earnings to
the extent significant.
The Company has a foreign exchange hedging program principally
designed to mitigate the potential impact due to changes in
foreign currency exchange rates. The Company does not hold any
derivative financial instruments for trading or speculative
purposes. The Company primarily uses forward exchange contracts
to hedge foreign currency exposures and they generally have
terms of one year or less. These contracts have been designated
as cash flow hedges and accordingly, to the extent effective,
any unrealized gains or losses on these foreign currency forward
contracts are reported in other comprehensive income. Realized
gains and losses for the effective portion are recognized with
the underlying hedge transaction. The notional settlement amount
of the foreign currency forward contracts outstanding at
January 1, 2006 and January 2, 2005 were
$0.1 million and $4.0 million, respectively. As of
January 1, 2006, the Company had one foreign currency
forward contract outstanding. This contract had a fair value of
$882, representing an unrealized gain, and was included in other
current assets at January 1, 2006. This contract is set to
expire in March 2006 and is with a reputable bank institution.
As of January 2, 2005, the outstanding contracts had a fair
value of $0.2 million, representing an unrealized loss, and
were included in other current liabilities at January 2,
2005. The Company settled foreign exchange contracts of
$5.2 million and $0.3 million for the years ended
January 1, 2006 and January 2, 2005, respectively. The
Companys hedging program reduces, but does not entirely
eliminate the impact of currency exchange rate movements. The
Company believes it has hedged all significant firm commitments
denominated in foreign currencies, and as a result, any increase
or decrease in the exchange rates of these commitments would
have no material net effect to the Companys balance sheet
or its results of operations. The Company did not hold any
derivative financial instruments prior to fiscal 2004.
F-20
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
4. |
Warranties and Maintenance Contracts |
The Company generally provides a one-year warranty on genotyping
and gene expression systems. At the time revenue is recognized,
the Company establishes an accrual for estimated warranty
expenses associated with system sales. This expense is recorded
as a component of cost of product revenue. Estimated warranty
expenses associated with extended maintenance contracts are
recorded as cost of revenue ratably over the term of the
maintenance contract.
Changes in the Companys warranty liability during the
three years ended January 1, 2006 are as follows (in
thousands):
|
|
|
|
|
Balance as of December 29, 2002
|
|
$ |
|
|
Additions charged to cost of revenue
|
|
|
230 |
|
|
|
|
|
Balance as of December 28, 2003
|
|
|
230 |
|
Additions charged to cost of revenue
|
|
|
603 |
|
Repairs and replacements
|
|
|
(446 |
) |
|
|
|
|
Balance as of January 2, 2005
|
|
|
387 |
|
Additions charged to cost of revenue
|
|
|
1,094 |
|
Repairs and replacements
|
|
|
(730 |
) |
|
|
|
|
Balance as of January 1, 2006
|
|
$ |
751 |
|
|
|
|
|
|
|
5. |
Commitments and Long-term Debt |
In July 2000, the Company entered into a
10-year lease to rent
space in two newly constructed buildings in San Diego that
are now occupied by the Company. That lease contained an option
to purchase the buildings together with certain adjacent land
that has been approved for construction of an additional
building. The Company exercised that option and purchased the
properties in January 2002 and assumed a $26.0 million,
10-year mortgage on the
property at a fixed interest rate of 8.36%. The Company made
monthly payments of $208,974, representing interest and
principal, through August 2004. Interest expense was $0,
$1.4 million and $2.2 million for the years ended
January 1, 2006, January 2, 2005 and December 28,
2003, respectively.
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 ten year lease term
in accordance with SFAS No. 13, Accounting for
Leases.
The Company leased a portion of the space to a tenant under a
lease which expired in June 2004. Rental income was recorded as
an offset to the Companys facility costs. Rental income
was $0, $409,517, and $695,282 for the years ended
January 1, 2006, January 2, 2005, and
December 28, 2003, respectively.
F-21
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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. Cost and accumulated depreciation of
equipment under capital leases at January 1, 2006 and
January 2, 2005 was $0 and $1,287,789, respectively.
Depreciation of equipment under capital leases was included in
depreciation expense. Interest expense related to capital leases
was $0, $10,500 and $56,661 for the years ended January 1,
2006, January 2, 2005 and December 28, 2003
respectively.
In August 2004, the Company entered into a ten-year lease for
its San Diego facility after the land and building were
sold (as discussed above). Under the terms of the lease, the
Company paid a $1.9 million security deposit and is paying
monthly rent of $318,643 for the first year with an annual
increase of 3% in each subsequent year through August 2014. The
current monthly rent under this lease is $328,202. The lease
contains an option to renew for three additional periods of five
years each. 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. The
Company also leases office space for a facility in Connecticut,
an additional distribution and storage facility in
San Diego and for three foreign facilities located in
Japan, Singapore and China under non-cancelable operating leases
that expire at various times through December 2008. These leases
contain renewal options ranging from one to three years.
As of January 1, 2006, annual future minimum payments under
these operating leases are as follows (in thousands):
|
|
|
|
|
|
2006
|
|
|
4,557 |
|
2007
|
|
|
4,365 |
|
2008
|
|
|
4,343 |
|
2009
|
|
|
4,351 |
|
2010
|
|
|
4,482 |
|
2011 and thereafter
|
|
|
17,415 |
|
|
|
|
|
|
Total
|
|
$ |
39,513 |
|
|
|
|
|
Rent expense, net of amortization of the deferred gain on sale
of property, was $4,737,218, $1,794,234, and $238,065 for the
years ended January 1, 2006, January 2, 2005 and
December 28, 2003, respectively.
F-22
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of January 1, 2006, the Company had
41,294,003 shares of common stock outstanding, of which
4,802,319 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
January 1, 2006, 41,750 shares of common stock were
subject to repurchase. In addition, the Company also issued
12,000 shares for a restricted stock award to an employee
under the Companys new 2005 Stock and Incentive Plan based
on service performance. These shares vest monthly over a
three-year period.
|
|
|
2005 Stock and Incentive Plan |
In June 2005, the stockholders of the Company approved the 2005
Stock and Incentive Plan (the 2005 Stock Plan). Upon
adoption of the 2005 Stock Plan, issuance of options under the
Companys existing 2000 Stock Plan ceased. The 2005 Stock
Plan provides that an aggregate of up to 11,542,358 shares
of the Companys common stock be reserved and available to
be issued. In addition, the 2005 Stock Plan provides for an
automatic annual increase in the shares reserved for issuance by
the lesser of 5% of outstanding shares of the Companys
common stock on the last day of the immediately preceding fiscal
year, 1,200,000 shares or such lesser amount as determined
by the Companys board of directors.
The Companys stock option activity under all stock option
plans from December 29, 2002 through January 1, 2006
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- | |
|
|
|
|
Average | |
|
|
Options | |
|
Exercise Price | |
|
|
| |
|
| |
Outstanding at December 29,
2002
|
|
|
4,422,781 |
|
|
$ |
7.94 |
|
Granted
|
|
|
1,241,175 |
|
|
$ |
3.31 |
|
Exercised
|
|
|
(102,590 |
) |
|
$ |
1.25 |
|
Cancelled
|
|
|
(331,492 |
) |
|
$ |
8.36 |
|
|
|
|
|
|
|
|
Outstanding at December 28,
2003
|
|
|
5,229,874 |
|
|
$ |
6.95 |
|
Granted
|
|
|
1,453,400 |
|
|
$ |
7.08 |
|
Exercised
|
|
|
(139,768 |
) |
|
$ |
1.98 |
|
Cancelled
|
|
|
(337,486 |
) |
|
$ |
8.80 |
|
|
|
|
|
|
|
|
Outstanding at January 2, 2005
|
|
|
6,206,020 |
|
|
$ |
6.99 |
|
Granted
|
|
|
2,992,300 |
|
|
$ |
10.02 |
|
Exercised
|
|
|
(869,925 |
) |
|
$ |
4.66 |
|
Cancelled
|
|
|
(1,001,964 |
) |
|
$ |
11.00 |
|
|
|
|
|
|
|
|
Outstanding at January 1, 2006
|
|
|
7,326,431 |
|
|
$ |
7.96 |
|
|
|
|
|
|
|
|
At January 1, 2006, options to purchase approximately
2,763,225 shares were exercisable and 3,870,374 shares
remain available for future grant.
F-23
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Following is a further breakdown of the options outstanding as
of January 1, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted | |
|
|
|
|
Weighted | |
|
|
|
|
|
Average | |
|
|
|
|
Average | |
|
Weighted | |
|
|
|
Exercise Price | |
Range of | |
|
Options | |
|
Remaining Life | |
|
Average | |
|
Options | |
|
of Options | |
Exercise Prices | |
|
Outstanding | |
|
in Years | |
|
Exercise Price | |
|
Exercisable | |
|
Exercisable | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
$0.03 - 4.44 |
|
|
|
1,401,109 |
|
|
|
6.80 |
|
|
$ |
3.14 |
|
|
|
789,881 |
|
|
$ |
2.91 |
|
|
$4.64 - 6.53 |
|
|
|
1,298,379 |
|
|
|
6.89 |
|
|
$ |
5.77 |
|
|
|
472,989 |
|
|
$ |
5.63 |
|
|
$6.55 - 8.52 |
|
|
|
1,943,164 |
|
|
|
8.17 |
|
|
$ |
8.10 |
|
|
|
604,053 |
|
|
$ |
7.92 |
|
|
$8.60 - 10.26 |
|
|
|
1,290,701 |
|
|
|
7.63 |
|
|
$ |
9.11 |
|
|
|
557,114 |
|
|
$ |
9.30 |
|
|
$10.30 - 16.00 |
|
|
|
1,235,978 |
|
|
|
8.85 |
|
|
$ |
12.67 |
|
|
|
227,042 |
|
|
$ |
12.73 |
|
|
$16.03 - 45.00 |
|
|
|
157,100 |
|
|
|
6.33 |
|
|
$ |
20.75 |
|
|
|
112,146 |
|
|
$ |
22.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.03 - 45.00 |
|
|
|
7,326,431 |
|
|
|
7.66 |
|
|
$ |
7.96 |
|
|
|
2,763,225 |
|
|
$ |
7.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2000 Employee Stock Purchase Plan |
In February 2000, the board of directors and stockholders
adopted the 2000 Employee Stock Purchase Plan (the
Purchase Plan). A total of 3,589,168 shares of
the Companys common stock have been reserved for issuance
under the Purchase Plan. The Purchase Plan permits eligible
employees to purchase common stock at a discount, but only
through payroll deductions, during defined offering periods.
The price at which stock is purchased under the Purchase Plan is
equal to 85% of the fair market value of the common stock on the
first or last day of the offering period, whichever is lower.
The initial offering period commenced in July 2000. In addition,
the Purchase Plan provides for annual increases of shares
available for issuance under the Purchase Plan beginning with
fiscal 2001. 717,164, 585,855 and 304,714 shares were
issued under the 2000 Employee Stock Purchase Plan during fiscal
2005, 2004 and 2003, respectively. As of January 1, 2006,
there were 1,790,510 shares available for issuance under
the Purchase Plan.
|
|
|
Deferred Stock Compensation |
Since the inception of the Company, in connection with the grant
of certain stock options and sales of restricted stock to
employees, founders and directors through July 25, 2000,
the Company has recorded deferred stock compensation totaling
approximately $17.6 million, representing the difference
between the exercise or purchase price and the fair value of the
Companys common stock as estimated by the Companys
management for financial reporting purposes on the date such
stock options were granted or restricted common stock was sold.
Deferred compensation is included as a reduction of
stockholders equity and is being amortized to expense over
the vesting period of the options and restricted stock. In 2005,
the Company recorded $0.2 million as deferred compensation
related to unvested options associated with our acquisition of
CyVera. In addition, in 2005, the Company granted a restricted
stock award to an employee and recorded deferred stock
compensation totaling $0.2 million. During the years ended
January 1, 2006, January 2, 2005 and December 28,
2003, the Company recorded amortization of deferred stock
compensation of approximately $0.3 million,
$0.8 million and $2.5 million, respectively.
F-24
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On May 3, 2001, the Board of Directors of the Company
declared a dividend of one preferred share purchase right (a
Right) for each outstanding share of common stock of
the Company. The dividend was payable on May 14, 2001 (the
Record Date) to the stockholders of record on that
date. Each Right entitles the registered holder to purchase from
the Company one unit consisting of one-thousandth of a share of
its Series A Junior Participating Preferred Stock at a
price of $100 per unit. The Rights will be exercisable if a
person or group hereafter acquires beneficial ownership of 15%
or more of the outstanding common stock of the Company or
announces an offer for 15% or more of the outstanding common
stock. If a person or group acquires 15% or more of the
outstanding common stock of the Company, each Right will entitle
its holder to purchase, at the exercise price of the right, a
number of shares of common stock having a market value of two
times the exercise price of the right. If the Company is
acquired in a merger or other business combination transaction
after a person acquires 15% or more of the Companys common
stock, each Right will entitle its holder to purchase, at the
Rights then-current exercise price, a number of common
shares of the acquiring company which at the time of such
transaction have a market value of two times the exercise price
of the right. The Board of Directors will be entitled to redeem
the Rights at a price of $0.01 per Right at any time before
any such person acquires beneficial ownership of 15% or more of
the outstanding common stock. The rights expire on May 14,
2011 unless such date is extended or the rights are earlier
redeemed or exchanged by the Company.
The Company has incurred substantial costs in defending itself
against patent infringement claims, and expects to devote
substantial financial and managerial resources to protect its
intellectual property and to defend against the claims described
below as well as any future claims asserted against it.
On July 26, 2004, Affymetrix, Inc. (Affymetrix)
filed a complaint in the U.S. District Court for the
District of Delaware alleging that the use, manufacture and sale
of the Companys BeadArray products and services, including
the Array Matrix and BeadChip products, infringe six Affymetrix
patents. Affymetrix seeks an injunction against the sale of
products, if any, that are determined to be infringing these
patents, unspecified monetary damages, interest and
attorneys fees. On September 15, 2004, the Company
filed its answer and counterclaims to Affymetrix
complaint, seeking declaratory judgments from the court that the
Company does not infringe the Affymetrix patents, and that such
patents are invalid, and filed counterclaims against Affymetrix
for unfair competition and interference with actual and
prospective economic advantage. On January 7, 2006, the
Company sought leave to file the 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. Trial is
scheduled for October 16, 2006. The Company believes it has
meritorious defenses against each of the infringement claims
alleged by Affymetrix and intends to vigorously defend 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 products and services,
could result in a material adverse effect on its business,
financial condition and results of operations.
F-25
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
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 Company 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 its patents and patent applications
by adding Dr. Czarnik as an inventor, a judgment declaring
certain of its patents and patent applications unenforceable,
unspecified monetary damages and attorneys fees. On
August 4, 2005, the Company filed a motion to dismiss the
complaint for lack of standing and failure to state a claim.
While this motion was pending, Dr. Czarnik filed an amended
complaint on September 23, 2005. On October 7, 2005,
the Company filed a motion to dismiss the amended complaint for
lack of standing and failure to state a claim, and this motion
is still pending. There has been no trial date set for this
case. The Company believes it has meritorious defenses against
this claim.
|
|
|
Termination-of-Employment
Lawsuit |
In March 2001, a complaint seeking damages of an unspecified
amount was filed against the Company by Dr. Anthony W.
Czarnik, a former employee, in the Superior Court of the State
of California in connection with the employees termination
of employment with the Company. In June 2002, a California
Superior Court judgment was rendered against the Company and the
Company recorded a $7.7 million charge in its financial
results for the second quarter of 2002 to cover total damages
and remaining expenses. The Company appealed the decision, and
in December 2004, the Fourth Appellate District Court of Appeal,
in San Diego, California, reduced the amount of the award.
The Company recorded interest expense on the $7.7 million
during the appeal based on the statutory rate. As a result of
the revised judgment, the Company reduced the $9.2 million
liability on its balance sheet to $5.9 million and recorded
a gain of $3.3 million as a litigation judgment in the
fourth quarter of 2004. In January 2005, the Company paid the
$5.9 million and removed the liability from its balance
sheet.
|
|
|
Litigation with Applera Corporations Applied
Biosystems Group |
In 1999, the Company entered into a joint development agreement
with Applied Biosystems Group, an operating group of Applera
Corporation, under which the companies agreed to jointly develop
a SNP genotyping system that would combine the Companys
BeadArray technology with Applied Biosystems assay
chemistry and scanner technology. In conjunction with the
agreement, Applied Biosystems agreed to provide the Company with
non-refundable research and development support of
$10.0 million, all of which was paid by December 2001 and
recorded as a liability on the Companys balance sheet as
of December 28, 2003. 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-26
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
8. |
Collaborative Agreements |
In December 2004, the Company entered into a strategic
collaboration with Invitrogen Corporation
(Invitrogen). The goal of the collaboration is to
combine the Companys expertise in oligonucleotide
manufacturing with the sales, marketing and distribution
capabilities of Invitrogen. In connection with the
collaboration, the Company is developing the next generation
Oligator®
DNA synthesis technology. This technology is expected to include
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, upon the achievement of a certain
milestone, Invitrogen was obligated to make a milestone payment
of $1.1 million to the Company. The milestone was achieved
in November of 2005 and payment of $1.1 million was made by
Invitrogen.
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
the milestone payment referred to in the prior paragraph upon
its achievement, as evidenced by acknowledgment from Invitrogen
and due to the fact that (i) the milestone event is
substantive and its achievability was not reasonably assured at
the inception of the agreement, (ii) the milestone
represents the culmination of an earnings process,
(iii) the milestone payment is non-refundable and
(iv) the performance obligations for both the Company and
Invitrogen after the milestone achievement will continue at a
level comparable to the level before the milestone achievement.
In addition, the agreement provides for the transfer of the
Companys Oligator technology into two Invitrogen
facilities outside North America. The Company recognizes product
revenue upon shipment of collaboration products based on the
Companys actual manufacturing cost. Collaboration profit,
as defined in the collaboration agreement, from the sale of
collaboration products is divided equally between the two
companies and is recorded as product revenue.
|
|
|
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 January 1,
2006, January 2, 2005, and December 28, 2003, the
Company recorded revenue related to this project totaling
$0.8 million, $4.6 million and $3.7 million,
respectively.
F-27
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of January 1, 2006, the Company had federal and
California tax net operating loss carryforwards of approximately
$103.7 million and $40.1 million, respectively. The
federal and state tax loss carryforwards will begin expiring in
fiscal year 2018 and 2006, respectively, unless previously
utilized. The Company also has 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.
Pursuant to Sections 382 and 383 of the Internal Revenue
Code, annual use of the Companys net operating loss and
credit carryforwards may be limited in the event of a cumulative
ownership change of more than 50 percentage points within a
three-year period. CyVera Corporation had an ownership change
upon acquisition by the Company during 2005, and accordingly,
its federal and Connecticut net operating loss carryforwards and
its federal research and development tax credit carryforwards
are subject to annual limitation. The Company is in the final
stages of completing its formal Section 382 and 383
analysis and it is anticipated that approximately
$0.2 million of its net operating loss carryforwards may be
limited. CyVera Corporations federal net operating loss
carryforwards and research and development tax credit
carryforwards as of the date of acquisition were approximately
$6.5 million and $0.2 million, respectively. To the
extent these assets are recognized, the adjustment will be
offset as a credit to goodwill.
Significant components of the Companys deferred tax assets
as of January 1, 2006 and January 2, 2005 are shown
below (in thousands). A valuation allowance has been established
as of January 1, 2006 and January 2, 2005 to offset
the net deferred tax assets, as realization of such assets has
not met the more likely than not threshold required
under SFAS No. 109.
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, | |
|
January 2, | |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Net operating losses
|
|
$ |
37,801 |
|
|
$ |
32,161 |
|
|
Tax credits
|
|
|
6,634 |
|
|
|
5,076 |
|
|
Deferred revenue
|
|
|
1,037 |
|
|
|
|
|
|
Capitalized research and
development costs
|
|
|
1,523 |
|
|
|
1,857 |
|
|
Property and equipment
|
|
|
(1,134 |
) |
|
|
(299 |
) |
|
Other
|
|
|
3,681 |
|
|
|
6,732 |
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
49,542 |
|
|
|
45,527 |
|
Valuation allowance on deferred tax
assets
|
|
|
(49,542 |
) |
|
|
(45,527 |
) |
|
|
|
|
|
|
|
Net deferred taxes
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
Deferred tax assets of approximately $2.5 million and
$0.4 million as of January 1, 2006 and January 2,
2005, respectively, resulted from the exercise of employee stock
options. When recognized, the tax benefit of these assets will
be accounted for as a credit to goodwill (with respect to vested
stock options issued to employees of CyVera Corporation upon
acquisition), or as a credit to additional paid-in capital,
rather than a reduction of the income tax provision.
The Companys provision for income taxes for the years
ended January 1, 2006 and January 2, 2005 consisted of
$163,000 and $135,000, respectively, for income tax expense
related to its foreign operations. This expense is included with
interest and other expense in the consolidated statements of
operations.
F-28
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following is a reconciliation of the statutory federal
income tax to the Companys effective tax (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
Year Ended | |
|
Year Ended | |
|
|
January 1, | |
|
January 2, | |
|
December 28, | |
|
|
2006 | |
|
2005 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Tax at federal statutory rate
|
|
$ |
(7,043 |
) |
|
$ |
(2,179 |
) |
|
$ |
(9,472 |
) |
State, net of federal benefit
|
|
|
633 |
|
|
|
(336 |
) |
|
|
(1,434 |
) |
Research and other credits
|
|
|
(1,239 |
) |
|
|
34 |
|
|
|
(1,374 |
) |
Acquired in-process
research & development
|
|
|
5,372 |
|
|
|
|
|
|
|
|
|
Adjustments to deferred tax balances
|
|
|
2,952 |
|
|
|
|
|
|
|
|
|
Change in valuation allowance
|
|
|
(1,138 |
) |
|
|
2,330 |
|
|
|
12,130 |
|
Permanent differences
|
|
|
(226 |
) |
|
|
(264 |
) |
|
|
738 |
|
Other
|
|
|
852 |
|
|
|
550 |
|
|
|
(588 |
) |
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$ |
163 |
|
|
$ |
135 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
The Company has a 401(k) savings plan covering substantially all
of its employees. Company contributions to the plan are
discretionary and no such contributions were made during the
years ended January 1, 2006, January 2, 2005 and
December 28, 2003.
|
|
11. |
Segment Information, Geographic Data and Significant
Customers |
The Company has determined that, in accordance with
SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, it operates in one
segment as it only reports operating results on an aggregate
basis to chief operating decision makers of the Company. The
Company had revenue in the following regions for the years ended
January 1, 2006, January 2, 2005 and December 28,
2003 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
Year Ended | |
|
Year Ended | |
|
|
January 1, | |
|
January 2, | |
|
December 28, | |
|
|
2006 | |
|
2005 | |
|
2003 | |
|
|
| |
|
| |
|
| |
United States
|
|
$ |
45,480 |
|
|
$ |
24,166 |
|
|
$ |
13,666 |
|
Europe
|
|
|
17,551 |
|
|
|
12,528 |
|
|
|
5,909 |
|
Asia
|
|
|
6,850 |
|
|
|
9,703 |
|
|
|
5,557 |
|
Other
|
|
|
3,620 |
|
|
|
4,186 |
|
|
|
2,903 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
73,501 |
|
|
$ |
50,583 |
|
|
$ |
28,035 |
|
|
|
|
|
|
|
|
|
|
|
The Company had no customer that provided more than 10% of total
revenue in the year ended January 1, 2006; one customer
that provided approximately 14% of total revenue in the year
ended January 2, 2005 (exclusive of revenue recorded from
the National Institutes of Health) and approximately 18% of
total revenue in the year ended December 28, 2003. Revenue
from the National Institutes of Health accounted for
approximately 1%, 13% and 21% of total revenue for the years
ended January 1, 2006, January 2, 2005 and
December 28, 2003, respectively.
F-29
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
12. |
Quarterly Financial Information (unaudited) |
The following financial information reflects all normal
recurring adjustments, except as noted below, which are, in the
opinion of management, necessary for a fair statement of the
results of interim periods. Summarized quarterly data for fiscal
2005 and 2004 are as follows (in thousands except per share
data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter | |
|
Second Quarter | |
|
Third Quarter | |
|
Fourth Quarter | |
|
|
| |
|
| |
|
| |
|
| |
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 |
|
2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$ |
10,803 |
|
|
$ |
11,486 |
|
|
$ |
13,512 |
|
|
$ |
14,782 |
|
|
Total cost of revenue
|
|
|
2,802 |
|
|
|
3,067 |
|
|
|
3,517 |
|
|
|
3,873 |
|
|
Net income (loss)
|
|
|
(3,931 |
) |
|
|
(3,516 |
) |
|
|
(2,026 |
)(2) |
|
|
3,248 |
(2) |
|
Historical net income (loss) per
share, basic
|
|
|
(0.12 |
) |
|
|
(0.10 |
) |
|
|
(0.05 |
) |
|
|
0.09 |
|
|
Historical net income (loss) per
share, diluted
|
|
|
(0.12 |
) |
|
|
(0.10 |
) |
|
|
(0.05 |
) |
|
|
0.08 |
|
The four quarters for net income (loss) per share for each
fiscal year presented may not add for the year because of the
different numbers of shares outstanding during the years
presented.
|
|
(1) |
During the second quarter of 2005, the Company recorded a
$15.8 million charge related to acquired in-process
research and development from the CyVera acquisition. |
|
(2) |
During the third quarter of 2004, the Company recorded a
$1.5 million reduction in expense for a legal settlement
and, in the fourth quarter of 2004, the Company recorded a
$3.3 million reduction in expense related to the reduction
of a legal judgement (see Note 7). |
F-30
SCHEDULE II VALUATION AND QUALIFYING
ACCOUNTS AND RESERVES
FOR THE THREE YEARS ENDED JANUARY 1, 2006
|
|
|
|
|
|
|
|
|
|
|
|
Allowance | |
|
|
|
|
for Doubtful | |
|
Reserve for | |
|
|
Accounts | |
|
Inventory | |
|
|
| |
|
| |
|
|
(In thousands) | |
Balance as of December 29, 2002
|
|
$ |
145 |
|
|
$ |
273 |
|
|
Charged to expense
|
|
|
118 |
|
|
|
710 |
|
|
Utilizations
|
|
|
(85 |
) |
|
|
(353 |
) |
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
F-31