UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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For Quarterly Period Ended June 29, 2008
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o
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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
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(State or other Jurisdiction of
Incorporation or Organization)
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(I.R.S. Employer
Identification No.)
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9885 Towne Centre Drive, San Diego, CA
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92121
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(Address of Principal Executive Offices)
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(Zip Code)
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(858) 202-4500
(Registrants telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
þ
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
þ
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Accelerated filer
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Non-accelerated filer
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(Do not check if a smaller reporting company)
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Smaller reporting company
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes
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No
þ
As of July 15, 2008, there were 57,163,393 shares of the Registrants Common Stock outstanding.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Illumina, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
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June 29, 2008
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December 30, 2007 (1)
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(Unaudited)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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132,968
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$
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174,941
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Short-term investments
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170,307
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211,141
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Accounts receivable, net
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101,985
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83,119
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Inventory, net
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67,972
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53,980
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Deferred tax assets, current portion
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23,778
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26,934
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Prepaid expenses and other current assets
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9,646
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12,640
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Total current assets
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506,656
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562,755
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Property and equipment, net
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72,125
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46,274
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Long-term investments
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52,825
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Goodwill
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228,734
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228,734
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Intangible assets, net
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53,011
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58,116
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Deferred tax assets, long-term portion
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67,209
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80,245
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Other assets, net
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12,125
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11,608
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Total assets
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$
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992,685
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$
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987,732
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current liabilities:
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Accounts payable and accrued liabilities
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$
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86,048
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$
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75,163
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Litigation settlements payable
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90,536
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Current portion of long-term debt
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400,000
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16
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Total current liabilities
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486,048
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165,715
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Long-term debt, less current portion
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400,000
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Other long-term liabilities
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14,885
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10,339
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Commitments and contingencies
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Stockholders equity
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491,752
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411,678
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Total liabilities and stockholders equity
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$
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992,685
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$
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987,732
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(1)
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The Condensed Consolidated Balance Sheet at December 30, 2007 has been derived from the
audited financial statements as of that date.
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See accompanying notes to the condensed consolidated financial statements.
3
Illumina, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share amounts)
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Three Months Ended
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Six Months Ended
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June 29, 2008
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July 1, 2007
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June 29, 2008
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July 1, 2007
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Revenue:
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Product revenue
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$
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128,552
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$
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74,297
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$
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239,235
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$
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135,562
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Service and other revenue
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11,625
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10,238
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22,803
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21,123
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Total revenue
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140,177
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84,535
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262,038
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156,685
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Costs and expenses:
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Cost of product revenue (including non-cash stock
compensation expense of $1,337, $956, $2,642 and $1,839,
respectively, excluding impairment of manufacturing
equipment and amortization of intangible assets)
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47,148
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27,036
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89,673
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48,850
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Cost of service and other revenue (including non-cash
stock compensation expense of $80, $77, $179 and $140,
respectively)
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3,311
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3,105
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6,867
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6,412
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Research and development (including non-cash stock
compensation expense of $3,448, $2,497, $6,754 and $4,428,
respectively)
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23,493
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18,184
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44,057
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34,140
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Selling, general and administrative (including non-cash
stock compensation expense of $7,410, $4,255, $13,556 and
$9,056, respectively)
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35,616
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23,297
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69,443
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46,930
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Impairment of manufacturing equipment
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4,069
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4,069
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Amortization of intangible assets
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2,669
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662
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5,084
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1,104
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Acquired in-process research and development
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303,400
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Total costs and expenses
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116,306
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72,284
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219,193
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440,836
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Income (loss) from operations
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23,871
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12,251
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42,845
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(284,151
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Interest and other income, net
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830
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2,343
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4,410
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5,066
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Income (loss) before income taxes
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24,701
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14,594
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47,255
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(279,085
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Provision for income taxes
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9,303
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5,330
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18,429
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9,727
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Net income (loss)
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$
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15,398
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$
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9,264
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$
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28,826
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$
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(288,812
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Net income (loss) per basic share
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$
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0.27
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$
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0.17
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$
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0.51
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$
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(5.39
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Net income (loss) per diluted share
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$
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0.23
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$
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0.16
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$
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0.44
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$
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(5.39
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Shares used in calculating basic net income (loss) per share
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56,787
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53,778
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56,310
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53,604
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Shares used in calculating diluted net income (loss) per share
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66,698
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58,061
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65,231
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53,604
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See accompanying notes to the condensed consolidated financial statements.
4
Illumina, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
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Six Months Ended
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June 29,
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July 1,
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2008
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2007
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Operating activities:
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Net income (loss)
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$
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28,826
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$
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(288,812
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Adjustments to reconcile net income (loss) to net cash (used in)
provided by operating activities:
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Acquired in-process research and development
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303,400
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Amortization of increase in inventory valuation
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942
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Amortization of intangible assets
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5,084
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1,126
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Amortization of debt issuance costs
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679
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501
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Depreciation expense
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7,730
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5,438
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Impairment of manufacturing equipment
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4,069
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Stock-based compensation expense
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23,131
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15,463
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Amortization of gain on sale of land and building
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(85
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(102
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)
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Changes in operating assets and liabilities:
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Accounts receivable
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(17,281
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)
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(12,536
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Inventory
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(13,371
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)
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(14,869
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Deferred tax assets
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16,201
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Prepaid expenses and other current assets
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4,127
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(760
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Other assets
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(1,142
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)
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1,524
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Accounts payable and accrued liabilities
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3,516
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20,260
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Litigations settlements payable
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(90,536
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)
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Accrued income taxes
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(1,964
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)
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7,712
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Other long-term liabilities
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5,484
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(161
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)
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Net cash (used in) provided by operating activities
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(25,532
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)
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39,126
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Investing activities:
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Cash obtained in acquisition, net of cash paid for transaction costs
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72,532
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Purchases of available-for-sale securities
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(247,451
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(296,879
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Sales and maturities of available-for-sale securities
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231,767
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130,308
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Purchases of property and equipment
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(29,823
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(9,925
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Proceeds from sale of fixed assets
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40
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Net cash used in investing activities
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(45,507
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(103,924
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Financing activities:
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Payments on long-term debt
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(16
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(69
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)
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Proceeds from issuance of convertible debt, net of issuance costs
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390,296
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Purchase of convertible note hedges
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(139,040
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)
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Proceeds from the exercise of warrants
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2,184
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92,440
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Common stock repurchases
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(251,622
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)
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Proceeds from issuance of common stock
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27,982
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15,410
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Net cash provided by financing activities
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30,150
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107,415
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Effect of foreign currency translation on cash and cash equivalents
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(1,084
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)
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114
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Net (decrease) increase in cash and cash equivalents
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(41,973
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)
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42,731
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Cash and cash equivalents at beginning of period
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174,941
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38,386
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Cash and cash equivalents at end of period
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$
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132,968
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$
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81,117
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See accompanying notes to the condensed consolidated financial statements.
5
Illumina, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Summary of Significant Accounting Principles
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with U.S. generally accepted accounting principles for interim financial information and
the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by U.S. generally accepted accounting principles for
complete financial statements. The unaudited condensed consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and
balances have been eliminated in consolidation. In managements opinion, the accompanying financial
statements reflect all adjustments, consisting of normal recurring accruals, considered necessary
for a fair presentation of the results for the interim periods presented.
Interim financial results are not necessarily indicative of results anticipated for the full
year. These unaudited financial statements should be read in conjunction with the Companys 2007
audited financial statements and footnotes included in the Companys Annual Report on Form 10-K for
the year ended December 30, 2007, as filed with the Securities and Exchange Commission (SEC) on
February 26, 2008.
The preparation of financial statements requires that management make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and
related disclosure of contingent assets and liabilities. Actual results could differ from those
estimates.
Fiscal Year
The Companys fiscal year consists of 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 three and six months ended June 29, 2008 and July 1, 2007 were both 13 and 26 weeks,
respectively.
Revenue Recognition
The Companys revenue is generated primarily from the sale of products and services. Product
revenue consists of sales of arrays, reagents, flow cells, instrumentation, and oligonucleotides
(oligos), which are short sequences of DNA. Service and other revenue consists of revenue received
for performing genotyping and sequencing services, extended warranty sales and amounts earned under
research agreements with government grants, which are recognized in the period during which the
related costs are incurred.
The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has
occurred or services have been rendered, the sellers price to the buyer is fixed or determinable
and collectibility is reasonably assured. In instances where final acceptance of the product or
system is required, revenue is deferred until all the acceptance criteria have been met. All
revenue is recorded net of any applicable allowances for returns or discounts.
Revenue for product sales is recognized generally upon shipment and transfer of title to the
customer, provided no significant obligations remain and collection of the receivables is
reasonably assured. Revenue from the sale of instrumentation is recognized when earned, which is
generally upon shipment. Revenue for genotyping and sequencing services is recognized when earned,
which is generally at the time the genotyping and sequencing analysis data is delivered to the
customer.
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.
6
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.
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. For
arrangements with multiple elements, revenue recognition is based on the individual units of
accounting determined to exist in the arrangement. A delivered item is considered a separate unit
of accounting when the delivered item has value to the customer on a stand-alone basis, there is
objective and reliable evidence of the fair value of the undelivered items and, if the delivered
item carries a general right of return, delivery or performance of the undelivered items is
considered probable and substantially in the Companys control. Items are considered to have
stand-alone value when they are sold separately by any vendor or when the customer could resell the
item on a stand-alone basis. The fair value of an item is generally the price charged for the
product, if the item is regularly sold on a stand-alone basis. When objective and reliable evidence
of fair value exists for all units of accounting in an arrangement, the arrangement consideration
is generally allocated to each unit of accounting based upon its relative fair value. In those
instances when objective and reliable evidence of fair value exists for the undelivered items but
not for the delivered items, the residual method is used to allocate the arrangement consideration.
Under the residual method, the amount of arrangement consideration allocated to the delivered items
equals the total arrangement consideration less the aggregate fair value of the undelivered items.
When the Company is unable to establish stand-alone value for delivered items or when fair value of
undelivered items has not been established, revenue is deferred until all elements are delivered
and services have been performed, or until fair value can objectively be determined for any
remaining undelivered elements. 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.
Impairment of Long-lived Assets
In accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets
, if indicators of impairment exist, the Company assesses the recoverability of the affected
long-lived assets by determining whether the carrying value of such assets can be recovered through
undiscounted future operating cash flows. If impairment is indicated, the Company measures the
future discounted cash flows associated with the use of the asset and adjusts the value of the
asset accordingly. Factors that would necessitate an impairment assessment include a significant
decline in the Companys stock price and market capitalization compared to its net book value,
significant changes in the ability of a particular asset to generate positive cash flows and
significant changes in the Companys strategic business objectives and utilization of the asset.
Stock-Based Compensation
The Company
uses the Black-Scholes-Merton option-pricing model to determine the fair value of
stock-based awards under Statement of Financial Accounting Standards (SFAS) No. 123R,
Share-Based
Payment
. This model incorporates various assumptions including volatility, expected life and
interest rates. During the comparable period of the prior year, the Company used an expected
stock-price volatility assumption that was primarily based on historical realized volatility of the
stock during a period of time. For the current quarter, volatility was determined by equally
weighing the historical and implied volatility of the Companys common stock. The historical
volatility of the Companys common stock over the most recent period is generally commensurate with
the estimated expected life of the Companys stock options, adjusted for the impact of unusual
fluctuations not reasonably expected to recur and other relevant factors. The implied volatility is
calculated from the implied market volatility of exchange-traded call options on the Companys
common stock. The expected life of an award is based on historical experience and on the terms and
conditions of the stock awards granted to employees.
7
The assumptions used for the specified reporting periods and the resulting estimates of
weighted-average fair value per share of options granted and for stock purchases under the Employee
Stock Purchase Plan (ESPP) during those periods are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 29, 2008
|
|
July 1, 2007
|
|
June 29, 2008
|
|
July 1, 2007
|
Interest rate stock options
|
|
|
2.86 3.14
|
%
|
|
|
4.61 4.68
|
%
|
|
|
2.86 3.14
|
%
|
|
|
4.61 4.75
|
%
|
Interest rate stock purchases
|
|
|
4.47 4.71
|
%
|
|
|
4.83 4.86
|
%
|
|
|
4.47 4.71
|
%
|
|
|
4.83 4.86
|
%
|
Volatility stock options
|
|
|
52 54
|
%
|
|
|
66 68
|
%
|
|
|
52 56
|
%
|
|
|
66 70
|
%
|
Volatility stock purchases
|
|
|
58 69
|
%
|
|
|
75 76
|
%
|
|
|
58 69
|
%
|
|
|
75 76
|
%
|
Expected life stock options
|
|
6 years
|
|
|
6 years
|
|
|
6 years
|
|
|
6 years
|
|
Expected life stock purchases
|
|
|
6 12 months
|
|
|
|
6 12 months
|
|
|
|
6 12 months
|
|
|
|
6 12 months
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Weighted average fair value per share of options granted
|
|
$
|
40.54
|
|
|
$
|
21.29
|
|
|
$
|
35.90
|
|
|
$
|
25.02
|
|
Weighted average fair value per share of employee stock
purchases
|
|
$
|
16.63
|
|
|
$
|
11.84
|
|
|
$
|
16.63
|
|
|
$
|
11.84
|
|
As of June 29, 2008, approximately $147.3 million of total unrecognized compensation cost
related to stock options, restricted stock and ESPP shares issued to date is expected to be
recognized over a weighted-average period of approximately 1.5 years.
Net Income (Loss) per Share
Basic and diluted net income (loss) per common share is presented in conformity with SFAS No.
128,
Earnings per Share,
for all periods presented. In accordance with SFAS No. 128, basic net
income (loss) per share is computed using the weighted-average number of shares of common stock
outstanding during the period, less shares subject to repurchase. Diluted net income (loss) per
share is computed using the weighted average number of common and dilutive common equivalent shares
from the Companys Convertible Senior Notes, equity awards, warrants sold in connection with the
Convertible Senior Notes, and warrants assumed in the acquisition of Solexa using the treasury
stock method. The following table presents the calculation of weighted-average shares used to
calculate basic and diluted net income (loss) per share (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 29, 2008
|
|
July 1, 2007
|
|
June 29, 2008
|
|
July 1, 2007
|
Weighted-average shares outstanding
|
|
|
56,787
|
|
|
|
53,802
|
|
|
|
56,310
|
|
|
|
53,628
|
|
Less: Weighted-average shares of common stock subject to repurchase
|
|
|
|
|
|
|
(24
|
)
|
|
|
|
|
|
|
(24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used in calculating basic net income (loss)
per share
|
|
|
56,787
|
|
|
|
53,778
|
|
|
|
56,310
|
|
|
|
53,604
|
|
Plus: Effect of dilutive Convertible Senior Notes
|
|
|
4,043
|
|
|
|
|
|
|
3,668
|
|
|
|
Plus: Effect of dilutive equity awards
|
|
|
2,895
|
|
|
3,505
|
|
|
|
2,802
|
|
|
|
|
Plus: Effect of dilutive warrants sold in connection with the
Convertible Senior Notes
|
|
|
1,791
|
|
|
|
|
|
|
1,250
|
|
|
|
Plus: Effect of dilutive warrants assumed in the acquisition of Solexa
|
|
|
1,182
|
|
|
778
|
|
|
|
1,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used in calculating diluted net income (loss)
per share
|
|
|
66,698
|
|
|
|
58,061
|
|
|
|
65,231
|
|
|
|
53,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income (Loss)
Comprehensive income (loss) is comprised of net income (loss) and other comprehensive income
(loss). Other comprehensive income (loss) includes foreign currency translation adjustments and
unrealized gains and losses on the Companys available-for-sale securities, including a temporary
impairment charge of $3.1 million as of June 29, 2008 associated with the Companys auction rate
securities. Refer to Note 4 for further discussion regarding this unrealized loss.
The components of other comprehensive income (loss) are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 29, 2008
|
|
|
July 1, 2007
|
|
|
June 29, 2008
|
|
|
July 1, 2007
|
|
Net income (loss)
|
|
$
|
15,398
|
|
|
$
|
9,264
|
|
|
$
|
28,826
|
|
|
$
|
(288,812
|
)
|
Foreign currency translation adjustments
|
|
|
(219
|
)
|
|
|
66
|
|
|
|
155
|
|
|
|
201
|
|
Unrealized (loss) gain on investments
|
|
|
(958
|
)
|
|
|
97
|
|
|
|
(2,242
|
)
|
|
|
(10,728
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss)
|
|
$
|
14,221
|
|
|
$
|
9,427
|
|
|
$
|
26,739
|
|
|
$
|
(299,339
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
Reclassifications
Certain previously reported amounts have been reclassified to conform to the current periods
presentation.
Recent Accounting Pronouncements
SFAS No. 141(R),
Business Combinations
, was issued in December of 2007. SFAS No. 141(R)
establishes principles and requirements for how the acquirer of a business recognizes and measures
in its financial statements the identifiable assets acquired, the liabilities assumed, and any
non-controlling interest in the acquiree. SFAS No. 141(R) also provides guidance for recognizing
and measuring the goodwill acquired in the business combination and sets forth what information to
disclose to enable users of the financial statements to evaluate the nature and financial effects
of the business combination. The guidance will become effective for fiscal years beginning after
December 15, 2008. The Company is currently evaluating the impact, if any, the adoption of this
pronouncement will have on the Companys consolidated financial statements.
In May 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP)
No. APB 14-1,
Accounting for Convertible Debt Instruments that May be Settled in Cash upon
Conversion (Including Partial Cash Settlement)
(FSP APB 14-1 or the FSP) that significantly impacts
the accounting for convertible debt. The FSP requires cash settled convertible debt, such as the
Companys $400.0 million aggregate principal amount of convertible notes that are currently
outstanding, to be bifurcated into debt and equity components and accounted for separately at
issuance. The value assigned to the debt component would be the estimated fair value, as of the
issuance date, of a similar bond without the conversion feature. The difference between the bond
cash proceeds and this estimated fair value would be recorded as a debt discount and amortized to
interest expense over the life of the bond, resulting in the recognition of interest expense on
these securities at an effective rate more comparable to what the Company would have incurred had
the Company issued nonconvertible debt with otherwise similar terms. The equity component of the
convertible debt securities would be included in the paid-in-capital section of stockholders
equity on the Companys consolidated balance sheets, and the initial carrying values of these debt
securities would be correspondingly reduced. Although FSP APB 14-1 has no impact on the Companys
actual past or future cash flows, it requires the Company to record a significant amount of
non-cash interest expense as the debt discount is amortized which would result in a material
adverse impact on the results of operations and on earnings per share. The Company is currently
evaluating the impact this FSP will have on its results of operations upon adoption. In addition,
if the Companys convertible debt is redeemed or converted prior to maturity, any unamortized debt
discount at the time of such redemption or conversion would result in a loss on extinguishment. FSP
APB 14-1 will become effective for fiscal years beginning after December 15, 2008, and require
retrospective application.
2. Acquisition of Solexa, Inc.
On January 26, 2007, the Company completed its acquisition of Solexa, Inc. (Solexa), a
Delaware corporation, in a stock-for-stock merger transaction. The Company issued approximately
13.1 million shares of its common stock as consideration for this merger.
The purchase price of the acquisition is as follows (in thousands):
|
|
|
|
|
Fair market value of securities issued
|
|
$
|
527,067
|
|
Fair market value of change of control bonuses and related taxes
|
|
|
8,182
|
|
Transaction costs not included in Solexa net tangible assets acquired
|
|
|
8,138
|
|
Fair market value of vested stock options, warrants and restricted stock assumed
|
|
|
75,334
|
|
|
|
|
|
Total purchase price
|
|
$
|
618,721
|
|
|
|
|
|
Based on the estimated fair values at the acquisition date, the Company allocated $303.4
million to in-process research and development (IPR&D), $62.2 million to tangible assets acquired
and liabilities assumed and $24.4 million to intangible assets. The remaining excess of the
purchase price over the fair value of net assets acquired of $228.7 million was allocated to
goodwill.
9
The results of Solexas operations have been included in the Companys consolidated financial
statements since the acquisition date of January 26, 2007. The following unaudited pro forma
information shows the results of the Companys operations for the specified reporting periods as
though the acquisition had occurred as of the beginning of that period (in thousands, except per
share data):
|
|
|
|
|
|
|
Six Months Ended
|
|
|
July 1, 2007
|
Revenue
|
|
$
|
156,740
|
|
Net income
|
|
$
|
6,935
|
|
Basic net income per share
|
|
$
|
0.13
|
|
Diluted net income per share
|
|
$
|
0.12
|
|
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 period presented, or the results that may occur in the future. The pro forma results exclude
the $303.4 million non-cash acquired IPR&D charge recorded upon the closing of the acquisition
during the first quarter of 2007.
3. Segment Information
During the first quarter of 2008, the Company reorganized its operating structure into a newly
created Life Sciences Business Unit, which includes all products and services related to the
research market, namely the BeadArray, BeadXpress and Sequencing product lines. The Company also
created a Diagnostics Business Unit to focus on the emerging opportunity in molecular diagnostics.
For the three and six months ended June 29, 2008, the Company had limited activity related to the
Diagnostics Business Unit and operating results were reported on an aggregate basis to the chief
operating decision maker of the Company, the chief executive officer. In accordance with SFAS No.
131,
Disclosures about Segments of an Enterprise and Related Information
, the Company operated in
one segment for the three and six months ended June 29, 2008.
4. Cash and Cash Equivalents and Investments
Cash and cash equivalents are comprised of short-term, highly liquid investments with
maturities of 90 days or less from the date of purchase. Investments are comprised of
available-for-sale securities recorded at estimated fair value. Unrealized gains and losses
associated with the Companys investments, if any, are reported in stockholders equity in
accordance with SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities
.
As of June 29, 2008, the Companys excess cash balances were primarily invested in marketable
debt securities, including treasury bills and commercial paper with strong credit ratings,
corporate bonds and short maturity mutual funds providing similar financial returns. Additionally,
the Company had $55.9 million in auction rate securities issued primarily by municipalities and
universities. During the six months ended June 29, 2008, the Company recorded an unrealized loss of
$3.1 million due to the failure associated with the auctions of each of these securities, which may cause the Companys ability to liquidate its investment and fully recover the carrying value in
the near term to be limited or not exist. The Company has determined this reduction in fair value
to be temporary. This unrealized loss reduced the fair value of the Companys auction rate
securities to $52.8 million. These securities are classified as long-term investments, and the
unrealized loss is included as a component of other comprehensive income within stockholders
equity in the Companys consolidated balance sheet.
The municipal auction rate securities held by the Company are rated by the following agencies:
Fitch, Moodys and Standard & Poors. All of the securities held by the Company are currently rated
AAA, the highest rating. Although their credit ratings did not deteriorate, there was insufficient
demand at auction for all of the high-grade auction rate securities held by the Company during the
first quarter of 2008, causing them to be illiquid. During the second quarter of 2008, the credit
market did not recover and the auction rate securities remained illiquid. In the event the Company
needs to access the funds that are in an illiquid state, it may not be able to do so without a loss
of principal until a future auction on these investments is successful, the securities are redeemed
by the issuer or they mature. As a result, the Company has recorded an unrealized loss during the
six months ended June 29, 2008. This unrealized loss was determined in accordance with SFAS No.
157,
Fair Value Measurements
, which was adopted by the Company on January 1, 2008.
As a basis for considering market participant assumptions in fair value measurements, SFAS No.
157 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to
measure fair value into three broad levels. The fair value hierarchy gives the highest priority to
quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest
priority to unobservable inputs (Level 3). Due to the lack of actively traded market data, the
value of these securities and resulting unrealized loss was determined using Level 3 hierarchical inputs.
These inputs include managements assumptions of pricing by
market participants, including assumptions about risk. In accordance with SFAS No. 157, the Company
used the concepts of fair value based on estimated discounted future cash flows of interest income
over a projected five-year period reflective of the length of time the Company
10
anticipates it will take the securities to become liquid. A discount rate of approximately 5% was
utilized when preparing this model. The classification of these securities as long-term assets was
deemed appropriate as the Company believes it may not be able to liquidate its investments without
significant loss within the next year. Potentially, it could take until the final maturity of the
underlying notes (ranging from 23 years to 39 years) to realize these investments recorded value.
The Company currently believes these securities are not permanently impaired, primarily due to the
government guarantee of the underlying securities and the Companys ability to hold these
securities for the foreseeable future. The Companys cash, cash equivalents and short-term
investments total $303.3 million as of June 29, 2008. Based on the liquidity of these funds and the
Companys projected cash flows from operations, the Company believes that the illiquidity on the
auction rate security investments will not materially affect its ability to execute its current
business plan.
5. Inventories
Inventories are stated at the lower of standard cost (which approximates actual cost) or
market. Inventory includes raw materials and finished goods that may be used in the research and
development process and such items are expensed as consumed or expired. Provisions for slow moving,
excess and obsolete inventories are provided based on product life cycle and development plans,
product expiration and quality issues, historical experience and inventory levels. The components
of net inventories are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 29, 2008
|
|
|
December 30, 2007
|
|
Raw materials
|
|
$
|
31,008
|
|
|
$
|
27,098
|
|
Work in process
|
|
|
29,742
|
|
|
|
20,321
|
|
Finished goods
|
|
|
7,222
|
|
|
|
6,561
|
|
|
|
|
|
|
|
|
Total inventory, net
|
|
$
|
67,972
|
|
|
$
|
53,980
|
|
|
|
|
|
|
|
|
6. Impairment of Manufacturing Equipment
During fiscal 2008, the Company implemented next-generation imaging and decoding systems to be
used in manufacturing. These systems were developed to increase existing capacity and allow the
Company to transition to the Infinium High-Density (HD) product line. As a result of this
transition, the demand for products manufactured on the previous infrastructure was reduced and
certain systems were no longer being utilized. In accordance with SFAS No. 144,
Accounting for the
Impairment or Disposal of Long-Lived Assets
, a non-cash impairment charge of $4.1 million was
recorded in the second quarter of fiscal 2008 for the excess machinery. This charge is included as
a separate line item in the Companys consolidated statement of operations. There was no change to
useful lives and related depreciation expense of the remaining assets, as the Company believes
these estimates are currently reflective of the period the assets will be used in operations.
7. Goodwill and Intangible Assets
The Company accounts for goodwill and intangible assets under SFAS No. 142,
Goodwill and Other
Intangible Assets
. As such, goodwill and other indefinite-lived intangible assets are not
amortized, but are subject to annual impairment reviews, or more frequent reviews if events or
circumstances indicate there may be impairment. The Company performed its annual impairment test of
goodwill as of May 30, 2008, noting no impairment, and has determined there has been no impairment
of goodwill through June 29, 2008.
The Companys intangible assets are comprised primarily of acquired core technology and
customer relationships from the acquisition of Solexa and licensed technology from the Affymetrix
settlement entered into on January 9, 2008. As a result of this settlement, the Company agreed,
without admitting liability, to make a one-time payment to Affymetrix of $90.0 million. In return,
Affymetrix agreed to dismiss with prejudice all lawsuits it had brought against the Company, and
the Company agreed to dismiss with prejudice its counterclaims in the relevant lawsuits. Affymetrix
also agreed not to sue the Company or its affiliates or customers for making, using or selling any
of the Companys current products, evolutions of those products or services related to those
products. In addition, Affymetrix agreed that, for four years, it will not sue the Company for
making, using or selling the Companys products or services that are based on future technology
developments. The covenant not to sue covers all fields other than photolithography, the process by
which Affymetrix manufactures its arrays and a field in which the Company does not operate.
11
Of the total $90.0 million payment made on January 25, 2008, $36.0 million was recorded as
licensed technology and classified as an intangible asset. The remaining $54.0 million was charged
to expense during the fourth quarter of 2007. This allocation was determined in accordance with
SFAS No. 5,
Accounting for Contingencies
, and EITF 00-21 using the concepts of fair value based on
the past and estimated future revenue streams related to the products covered by the patents
previously under dispute. The value of the licensed technology is the benefit derived, calculated
using estimated discounted cash flows and future revenue projections, from the perpetual covenant
not to sue for damages related to the sale of the Companys current products. The Company utilized
a discount rate of 9.25% when preparing this model. The effective life of the licensed technology
extends through 2015, the final expiry date of all patents considered in valuing the intangible
asset. The related amortization is based on the higher of the percentage of usage or the
straight-line method. The percentage of usage was determined using actual and projected revenues
generated from products covered by the patents previously under dispute. For the current quarter,
the percentage of usage was higher than the straight-line method, resulting in an expense of $2.0
million and $3.8 million for the three and six months ended June 29, 2008, respectively.
Acquired core technology and customer relationships are being amortized on a straight-line
basis over their effective useful lives of 10 and three years, respectively. The amortization of
the Companys intangible assets is excluded from cost of product revenue and is separately
classified as amortization of intangible assets on the Companys consolidated statements of
operations.
The following is a summary of the Companys amortizable intangible assets as of the respective
balance sheet dates (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 29, 2008
|
|
|
December 30, 2007
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Intangibles,
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Intangibles,
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
Licensed technology
|
|
$
|
36,000
|
|
|
$
|
(3,759
|
)
|
|
$
|
32,241
|
|
|
$
|
36,000
|
|
|
$
|
|
|
|
$
|
36,000
|
|
Core technology
|
|
|
23,500
|
|
|
|
(3,329
|
)
|
|
|
20,171
|
|
|
|
23,500
|
|
|
|
(2,154
|
)
|
|
|
21,346
|
|
Customer relationships
|
|
|
900
|
|
|
|
(425
|
)
|
|
|
475
|
|
|
|
900
|
|
|
|
(275
|
)
|
|
|
625
|
|
License agreements
|
|
|
1,029
|
|
|
|
(905
|
)
|
|
|
124
|
|
|
|
1,029
|
|
|
|
(884
|
)
|
|
|
145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets, net
|
|
$
|
61,429
|
|
|
$
|
(8,418
|
)
|
|
$
|
53,011
|
|
|
$
|
61,429
|
|
|
$
|
(3,313
|
)
|
|
$
|
58,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8. Warranties
The Company generally provides a one-year warranty on genotyping, gene expression systems and
sequencing 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 a cost of revenue ratably over the term of the maintenance contract.
Changes in the Companys warranty liability during the specified reporting period are as
follows (in thousands):
|
|
|
|
|
Balance at December 30, 2007
|
|
$
|
3,716
|
|
Additions charged to cost of revenue
|
|
|
4,905
|
|
Repairs and replacements
|
|
|
(3,526
|
)
|
|
|
|
|
Balance at June 29, 2008
|
|
$
|
5,095
|
|
|
|
|
|
9. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 29, 2008
|
|
|
December 30, 2007
|
|
Accounts payable
|
|
$
|
35,350
|
|
|
$
|
24,311
|
|
Compensation
|
|
|
20,709
|
|
|
|
17,410
|
|
Short-term deferred revenue
|
|
|
6,283
|
|
|
|
7,541
|
|
Reserve for product warranties
|
|
|
5,095
|
|
|
|
3,716
|
|
Taxes
|
|
|
4,591
|
|
|
|
8,298
|
|
Customer deposits
|
|
|
3,346
|
|
|
|
5,266
|
|
Accrued royalties
|
|
|
3,161
|
|
|
|
1,867
|
|
Legal and other professional fees
|
|
|
2,394
|
|
|
|
4,276
|
|
Short-term deferred rent
|
|
|
932
|
|
|
|
1,251
|
|
Other
|
|
|
4,187
|
|
|
|
1,227
|
|
|
|
|
|
|
|
|
Total accounts payable and accrued liabilities
|
|
$
|
86,048
|
|
|
$
|
75,163
|
|
|
|
|
|
|
|
|
12
10. Stockholders Equity
Stock Options
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. Additionally, in connection with the acquisition of Solexa, the Company
assumed stock options granted under the 2005 Solexa Equity Incentive Plan (the 2005 Solexa Equity
Plan). The 2005 Stock Plan and the 2005 Solexa Equity Plan initially provided that an aggregate of
up to 12,285,619 shares of the Companys common stock be reserved and available to be issued. The
2005 Stock Plan provides for an automatic annual increase in the shares reserved for issuance by
the lesser of 5% of the 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. Additionally, during the Companys Annual Meeting of Stockholders
held on May 16, 2008, the stockholders ratified an amendment to increase the maximum number of
shares of common stock authorized for issuance under the 2005 Stock Plan by 1,200,000 shares. As
of June 29, 2008, options to purchase 3,730,108 shares remained available for future grant under
the 2005 Stock Plan and 2005 Solexa Equity Plan.
On January 29, 2008, the Companys board of directors approved the New Hire Stock and
Incentive Plan, which provides for the issuance of options and shares of restricted stock to newly
hired employees. There is no set number of shares reserved for issuance under this Plan.
The
Companys stock option activity under all stock option plans
during the six months ended June 29, 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
Options
|
|
Exercise Price
|
Outstanding at December 30, 2007
|
|
|
10,423,934
|
|
|
$
|
24.26
|
|
Granted
|
|
|
1,244,550
|
|
|
$
|
67.56
|
|
Exercised
|
|
|
(1,542,135
|
)
|
|
$
|
16.55
|
|
Cancelled
|
|
|
(463,572
|
)
|
|
$
|
36.59
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 29, 2008
|
|
|
9,662,777
|
|
|
$
|
30.45
|
|
|
|
|
|
|
|
|
|
|
The following is a further breakdown of the options outstanding as of June 29, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
|
Remaining
|
|
Weighted
|
|
|
|
|
|
Price
|
Range of
|
|
Options
|
|
Life
|
|
Average
|
|
Options
|
|
of Options
|
Exercise Prices
|
|
Outstanding
|
|
in Years
|
|
Exercise Price
|
|
Exercisable
|
|
Exercisable
|
$0.03-7.18
|
|
|
1,058,855
|
|
|
|
4.35
|
|
|
$
|
5.10
|
|
|
|
676,171
|
|
|
$
|
4.65
|
|
$7.41-8.60
|
|
|
1,021,373
|
|
|
|
5.59
|
|
|
$
|
8.31
|
|
|
|
538,287
|
|
|
$
|
8.19
|
|
$8.70-17.35
|
|
|
1,174,397
|
|
|
|
6.41
|
|
|
$
|
12.42
|
|
|
|
633,298
|
|
|
$
|
12.08
|
|
$17.73-26.34
|
|
|
1,051,383
|
|
|
|
6.90
|
|
|
$
|
21.98
|
|
|
|
383,455
|
|
|
$
|
21.85
|
|
$26.60-33.99
|
|
|
1,007,475
|
|
|
|
8.32
|
|
|
$
|
30.27
|
|
|
|
280,153
|
|
|
$
|
29.33
|
|
$34.07-39.22
|
|
|
1,114,295
|
|
|
|
8.16
|
|
|
$
|
37.29
|
|
|
|
313,692
|
|
|
$
|
36.86
|
|
$39.42-40.08
|
|
|
1,176,368
|
|
|
|
7.77
|
|
|
$
|
40.07
|
|
|
|
289,738
|
|
|
$
|
40.07
|
|
$40.23-64.97
|
|
|
1,312,731
|
|
|
|
9.23
|
|
|
$
|
54.46
|
|
|
|
54,102
|
|
|
$
|
55.40
|
|
$65.16-78.28
|
|
|
689,900
|
|
|
|
9.70
|
|
|
$
|
68.56
|
|
|
|
9,375
|
|
|
$
|
67.59
|
|
$82.74-82.74
|
|
|
56,000
|
|
|
|
9.98
|
|
|
$
|
82.74
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.03-82.74
|
|
|
9,662,777
|
|
|
|
7.36
|
|
|
$
|
30.45
|
|
|
|
3,178,271
|
|
|
$
|
18.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average remaining life in years of options exercisable is 6.51 years as of June
29, 2008.
The aggregate intrinsic value of options outstanding and options exercisable as of June 29,
2008 was $544.4 million and $217.2 million, respectively. Aggregate intrinsic value represents the
difference between the Companys closing stock price on the last trading day of the fiscal period,
which was $86.79 on June 27, 2008, and the exercise price multiplied by the number of options
outstanding. Total intrinsic value of options exercised was $46.2 million and $20.4 million
for the six months ended June 29, 2008 and July 1, 2007, respectively.
13
Employee Stock Purchase Plan
In February 2000, the board of directors and stockholders adopted the 2000 ESPP. A total of
7,733,713 shares of the Companys common stock have been reserved for issuance under the ESPP. The
ESPP 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 ESPP is equal to 85% of the fair market value
of the common stock on the first or last day of the offering period, whichever is lower. The
initial offering period commenced in July 2000. In addition, beginning with fiscal 2001, the ESPP
provides for annual increases of shares available for issuance by the lesser of 3% of the number of
outstanding shares of the Companys common stock on the last day of the immediately preceding
fiscal year, 1,500,000 shares or such lesser amount as determined by the Companys board of
directors. Shares totaling 69,664 were issued under the ESPP during the six months ended June 29,
2008. As of June 29, 2008, there were 5,465,516 shares available for issuance under the ESPP.
Restricted Stock Units
In 2007 the Company began granting restricted stock units pursuant to its 2005 Stock Plan as
part of its regular annual employee equity compensation review program. Restricted stock units are
share awards that, upon vesting, will deliver to the holder shares of the Companys common stock.
Restricted stock units granted during 2007 vest over four years as follows: 15% vest on the first
and second anniversaries of the grant date, 30% vest on the third anniversary of the grant date and
40% vest on the fourth anniversary of the grant date. Effective January 2008, the Company changed
the vesting schedule for grants of new restricted stock units. Currently, restricted stock units
vest 15% on the first anniversary of the grant date, 20% on the second anniversary of the grant
date, 30% on the third anniversary of the grant date and 35% on the fourth anniversary of the grant
date.
A summary of the Companys restricted stock unit activity and related information for the six
months ended June 29, 2008 is as follows:
|
|
|
|
|
|
|
Restricted Stock Units (1)
|
Outstanding at December 30, 2007
|
|
|
197,250
|
|
Awarded
|
|
|
219,770
|
|
Vested
|
|
|
|
|
Cancelled
|
|
|
(9,110
|
)
|
|
|
|
|
|
Outstanding at June 29, 2008
|
|
|
407,910
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Each stock unit represents the fair market value of one share of common stock.
|
The weighted average grant-date fair value per share for the restricted stock units was $72.16
for the six months ended June 29, 2008.
Based on the closing price of the Companys common stock of $86.79 on June 27, 2008, the total
pretax intrinsic value of all outstanding restricted stock units on that date was $35.4 million.
No restricted stock units were outstanding as of July 1, 2007.
Warrants
In conjunction with its acquisition of Solexa, the Company assumed 2,244,843 warrants issued
by Solexa prior to the acquisition. During the six months ended June 29, 2008, there were 131,645
warrants exercised, resulting in cash proceeds to the Company of approximately $2.2 million.
14
A summary of all warrants outstanding as of June 29, 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Exercise Price
|
|
Expiration Date
|
31,989
|
|
|
$
|
57.62
|
|
|
|
9/24/2008
|
|
119,255
|
|
|
$
|
14.54
|
|
|
|
4/25/2010
|
|
432,020
|
|
|
$
|
14.54
|
|
|
|
7/12/2010
|
|
404,623
|
|
|
$
|
21.81
|
|
|
|
11/23/2010
|
|
599,914
|
|
|
$
|
21.81
|
|
|
|
1/19/2011
|
|
9,161,160
|
(1)
|
|
$
|
62.87
|
|
|
|
2/15/2014
|
|
|
|
|
|
|
|
|
|
|
|
10,748,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Represents warrants sold in connection with the offering of the Companys Convertible Senior
Notes (See Note 11).
|
Treasury Stock
In connection with its issuance of $400.0 million principal amount of 0.625% Convertible
Senior Notes due 2014 on February 16, 2007, the Company repurchased 5.8 million shares of its
outstanding common stock for approximately $201.6 million in privately negotiated transactions
concurrently with the offering. Additionally, during 2007, the Company repurchased approximately
1.6 million shares of its common stock under a Rule 10b5-1 trading plan for approximately $50.0
million. This plan expired during 2007.
11. Convertible Senior Notes
On February 16, 2007, the Company issued $400.0 million principal amount of 0.625% Convertible
Senior Notes due 2014 (the Notes), which included the exercise of the initial purchasers option to
purchase up to an additional $50.0 million aggregate principal amount of Notes. The net proceeds
from the offering, after deducting the initial purchasers discount and offering expenses, were
approximately $390.3 million. The Company will pay 0.625% interest per annum on the principal
amount of the Notes, payable semi-annually in arrears in cash on February 15 and August 15 of each
year. The Company made an interest payment of approximately $1.3 million on February 15, 2008. The
Notes mature on February 15, 2014.
The Notes will be convertible into cash and, if applicable, shares of the Companys common
stock, $0.01 par value per share, based on an initial conversion rate, subject to adjustment, of
22.9029 shares per $1,000 principal amount of Notes (which represents an initial conversion price
of approximately $43.66 per share), only in the following circumstances and to the following
extent: (1) during the five business-day period after any five consecutive trading period (the
measurement period) in which the trading price per Note for each day of such measurement period was
less than 97% of the product of the last reported sale price of the Companys common stock and the
conversion rate on each such day; (2) during any calendar quarter after the calendar quarter ending
April 1, 2007, if the last reported sale price of the Companys common stock for 20 or more trading
days in a period of 30 consecutive trading days ending on the last trading day of the immediately
preceding calendar quarter exceeds 130% of the applicable conversion price in effect on the last
trading day of the immediately preceding calendar quarter; (3) upon the occurrence of specified
events; and (4) the Notes will be convertible at any time on or after November 15, 2013 through the
third scheduled trading day immediately preceding the maturity date. The requirements of the second
condition were satisfied in the first quarter of 2008, and the Notes accordingly became convertible
from April 1, 2008 through, and including, June 30, 2008. The Company has determined that the
requirements of this same condition have again been satisfied in the second quarter of 2008, and,
accordingly, the Notes will continue to be convertible through, and including, September 30, 2008.
Generally upon conversion of a Note, the Company will pay the conversion value of the Note in cash,
up to the principal amount of the Note. Any excess of the conversion value over the principal
amount is payable in shares of the Companys common stock. As of June 29, 2008, the principal
amount of these Notes was classified as current liabilities. If, during the third quarter, none of
the conditions to convertibility are satisfied, then the Company will reclassify the principal
amount of these Notes to long-term debt.
In connection with the offering of the Notes in February 2007, the Company entered into
convertible note hedge transactions (the hedge) with the initial purchasers and/or their affiliates
(the counterparties) entitling the Company to purchase up to 11,451,480 shares of the Companys
common stock at an initial strike price of $43.66 per share, subject to adjustment. In addition,
the Company sold to these counterparties warrants (the warrants) to acquire 9,161,160 shares of the
Companys common stock at an initial strike price of $62.87 per share, subject to adjustment, with
the maximum number of shares issuable under these warrants to be capped at 18,322,320 should the
convertible note hedge transaction be unwound. The cost of the hedge that was not covered by the
proceeds from the sale of
15
the warrants was approximately $46.6 million and was reflected as a reduction of additional
paid-in capital. The hedge is expected to reduce the potential equity dilution upon conversion of
the Notes if the daily volume-weighted average price per share of the Companys common stock
exceeds the strike price of the hedge. The warrants could have a dilutive effect on the Companys
earnings per share to the extent that the price of the Companys common stock exceeds the strike
price of the warrants on the exercise dates of the warrants, which occur during 2014, and the
counterparties exercise them.
12. Legal Proceedings
In the recent past, the Company incurred substantial costs in defending against patent
infringement claims and expects, going forward, to devote substantial financial and managerial
resources to protect the Companys intellectual property and to defend against any future claims
asserted against the Company.
Applied Biosystems Litigation
On December 26, 2006, Applied Biosystems Inc. (Applied Biosystems), formerly known as Applera
Corporation, filed suit in California Superior Court, Santa Clara County against Solexa (which was
acquired by the Company on January 26, 2007). This State Court action was related to the ownership
of several patents assigned in 1995 to Solexas predecessor company (Lynx Therapeutics) by a former
employee (Dr. Stephen Macevicz), who is the inventor of these patents and is named as a
co-defendant in the suit. Lynx was originally a unit of Applied Biosystems but was spun out in
1992. On May 31, 2007, Applied Biosystems filed a second suit, this time against the Company, in
the U.S. District Court for the Northern District of California. This second suit sought a
declaratory judgment of non-infringement of the Macevicz patents that are the subject of the State
Court action mentioned above. Both suits were later consolidated in the U.S. District Court for the
Northern District of California, San Francisco Division. By these consolidated actions, Applied
Biosystems is seeking ownership of the Macevicz patents, unspecified costs and damages, and a
declaration of non-infringement and invalidity of these patents. Applied Biosystems is not
asserting any claim for patent infringement against the Company.
The Macevicz patents relate to methods for sequencing DNA using successive rounds of
oligonucleotide probe ligation (sequencing-by-ligation). The Companys Genome Analyzer products use
a different technology called Sequencing-by-Synthesis (SBS), which the Company believes is not
covered by any of these patents. In addition, the Company has no plans to use any of the
Sequencing-by-Ligation technologies covered by these patents.
13. Employee Benefit Plans
Retirement Plan
The Company has a 401(k) savings plan covering substantially all of its employees. Company
contributions to the plan are discretionary. During the six months ended June 29, 2008 and July 1,
2007, the Company made matching contributions of $1.2 million and $0.5 million, respectively.
Executive Deferred Compensation Plan
For the Companys executives and members of the board of directors, the Company adopted the
Illumina, Inc. Deferred Compensation Plan (the Plan) that became effective January 1, 2008.
Eligible participants can contribute up to 80% of their base salary and 100% of all other forms of
compensation into the Plan, including bonus, commission and director fees. The Company has agreed
to credit the participants contributions with earnings that reflect the performance of certain
independent investment funds. On a discretionary basis, the Company may also make employer
contributions to participant accounts in any amount determined by the Company. The vesting
schedules of employer contributions are at the sole discretion of the Compensation Committee.
However, all employer contributions shall become 100% vested upon the occurrence of the
participants disability, death, or retirement, or a change in control of the Company. The benefits
under this plan are unsecured. Participants are generally eligible to receive payment of their
vested benefit at the end of their elected deferral period or after termination of their employment
with the Company for any reason or at a later date to comply with the restrictions of Section 409A.
As of June 29, 2008, no employer contributions were made to the Plan.
16
In January 2008, the Company also established a rabbi trust for the benefit of its directors
and officers under the Plan. In accordance with FASB Interpretation (FIN) No. 46,
Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51
, and
EITF 97-14,
Accounting for Deferred Compensation Arrangements Where Amounts Earned Are Held in
a Rabbi Trust and Invested
, the Company has included the assets of the rabbi trust in its
consolidated balance sheet since the trusts inception. As of June 29, 2008, the assets of the
trust and liabilities of the Company were $1.2 million and $1.1 million, respectively. The assets
and liabilities are classified as other assets and accrued liabilities, respectively, on the
Companys balance sheet as of June 29, 2008. Changes in the values of the assets held by the rabbi
trust accrue to the Company.
14. Subsequent Events
Acquisition of Avantome, Inc. (Avantome)
On
July 22 2008, the Company announced its acquisition of Avantome, a development stage
company. The primary purpose of the acquisition was to obtain Avantomes low-cost, long-read,
sequencing technology. As consideration for the acquisition, the Company paid $25.0 million in
cash up front and may pay up to an additional $35.0 million in contingent cash consideration based
on the achievement of certain milestones. The Company will assess the contingent consideration
payable in accordance with the provisions of SFAS No. 141,
Business Combinations
, and EITF 95-8,
Accounting for Contingent Consideration Paid to the Shareholders of an Acquired Enterprise in a
Purchase Business Combination.
The Company plans to record these payments as additional purchase
consideration based upon the economic form of the transaction. Any adjustment to the purchase
price allocation will be made when the amount of actual contingent consideration is determinable
beyond a reasonable doubt.
|
|
|
Item 2.
|
|
Managements Discussion and Analysis of Financial Condition and Results of Operations.
|
This discussion and analysis should be read in conjunction with our financial statements and
accompanying notes included in this Quarterly Report on Form 10-Q and the financial statements and
notes thereto for the year ended December 30, 2007 included in our Annual Report on Form 10-K.
Operating results are not necessarily indicative of results that may occur in future periods.
The discussion and analysis in this Quarterly Report on Form 10-Q contain forward-looking
statements that involve risk 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, the integration of Solexa, Inc.s technology with
our existing technology, the commercial launch of new products, including products based on our
Solexa, Inc. (Solexa) and our VeraCode technologies, 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, but are not limited to, those discussed in the subsection
entitled Item 1A. Risk Factors. below as well as those discussed elsewhere. Accordingly, you
should not unduly rely on these forward-looking statements, which speak only as of the date of this
Quarterly Report. We undertake no obligation to publicly revise these forward-looking statements to
reflect circumstances or events after the date of this Quarterly Report or to reflect the
occurrence of unanticipated events. 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 (SEC).
Overview
We are a leading developer, manufacturer and marketer of integrated systems for the large
scale analysis of genetic variation and biological function. Using our proprietary technologies, we
provide a comprehensive line of products and services that currently serve the sequencing,
genotyping and gene expression markets. In the future, we expect to enter the market for molecular
diagnostics. Our customers include leading genomic research centers, pharmaceutical companies,
academic institutions, clinical research organizations and biotechnology companies. Our tools
provide researchers around the world with the performance, throughput, cost effectiveness and
flexibility necessary to perform the billions of genetic tests needed to extract valuable medical
information from advances in genomics and proteomics. We believe this information will enable
researchers to correlate genetic variation and biological function, which will enhance drug
discovery and clinical research, allow diseases to be detected earlier and permit better choices of
drugs for individual patients.
17
Our Technologies
BeadArray Technology
We have developed a proprietary array technology that enables the large-scale analysis of
genetic variation and biological function. Our BeadArray technology combines microscopic beads and
a substrate in a simple proprietary manufacturing process to produce arrays that can perform many
assays simultaneously. Our BeadArray technology provides a unique combination of high throughput,
cost effectiveness, and flexibility. We believe that these features have enabled our BeadArray
technology to become a leading platform for the emerging high-growth market of single-nucleotide
polymorphism (SNP) genotyping and expect they will enable us to become a key player in the gene
expression market.
Sequencing Technology
Our DNA sequencing technology, acquired as part of the Solexa merger that was completed on
January 26, 2007, is based on the use of our proprietary sequencing-by-synthesis (SBS)
biochemistry. Our technology is capable of generating several billion bases of DNA sequence from a
single experiment with a single sample preparation, dramatically reducing the cost and improving
the practicality, of human resequencing compared to conventional technologies.
VeraCode Technology
The VeraCode technology, acquired as part of the acquisition of CyVera Corporation in April
2005, enables cost-effective, high-throughput analysis of DNA, RNA and proteins at mid- to low-
multiplex range. Multiplexing refers to the number of individual pieces of information that are
simultaneously extracted from one sample. In addition to Life Science research applications, we
believe the molecular diagnostics market will require systems that are extremely high throughput
and cost effective in this mid- to low-multiplex range. We began shipping the BeadXpress System,
which uses the VeraCode technology, for Life Science research applications during the first quarter
of 2007, along with several assays for the system. In the research market, we expect our customers
to utilize our BeadArray technology for their higher multiplex projects and then move to our
BeadXpress system for their lower multiplex projects utilizing the same assays.
Product Developments
Consumables
During the six months ended June 29, 2008, we introduced two new products for DNA analysis:
the Infinium High-Density (HD) Human1M-Duo (two samples per chip) and the Human610-Quad (four
samples per chip), featuring up to 2.3 million SNPs per BeadChip. The new Infinium HD product line
doubles sample throughput compared to prior generations of the product and reduces DNA input
requirements by as much as seventy percent. First customer shipments of the Human610-Quad occurred
in the first quarter of 2008. The Human1M-Duo BeadChips began shipment in the second quarter of
2008.
Additionally, in April 2008, we introduced a new product for RNA analysis: the HumanHT12
Gene Expression BeadChip which enables researchers to perform whole genome gene expression on
twelve samples in parallel. Shipment of this product began during the second quarter of 2008.
Instruments
During the first quarter of 2008, we launched the next-generation Genome Analyzer, the Genome
Analyzer II (GAII) DNA Sequencing platform. We believe the GAII significantly improves the overall
robustness and throughput of the Genome Analyzer and enables researchers to achieve industry
leading accuracy and daily throughput at the lowest operating cost. Shipments began during the
first quarter of 2008.
In April 2008, we launched the iScan System, a next-generation BeadChip scanner that, we
believe, provides researchers conducting genotyping and gene expression studies with significantly
greater throughput, enhanced automation, and improved ease of use. When used with the Human1M-Duo
or the Human610-Quad and our Laboratory Information Management Systems (LIMS) and
automation options, the iScan System can complete genotyping studies up to six times faster
than studies run on our BeadStation. Under an Early Access Program, we began shipping the iScan
System in the first quarter of 2008 to customers in both the academic and industrial sectors.
However, broad commercial shipment of the iScan System did not commence until the second quarter of
2008.
18
Critical Accounting Policies and Estimates
General
Our discussion and analysis of our financial condition and results of operations is based upon
our condensed unaudited consolidated financial statements, which have been prepared in accordance
with U.S. generally accepted accounting principles. The preparation of financial statements
requires that management make estimates, assumptions and judgments with respect to the application
of accounting policies that affect the reported amounts of assets, liabilities, revenue and
expenses, and the disclosures of contingent assets and liabilities. Actual results could differ
from those estimates. Our significant accounting policies are described in Note 1 to our unaudited
condensed 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
unaudited condensed 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 unaudited condensed consolidated financial statements.
Revenue Recognition
Our revenue is generated primarily from the sale of products and services. Product revenue
consists of sales of arrays, reagents, flow cells, instrumentation and oligonucleotides (oligos).
Service and other revenue consists of revenue received for performing genotyping and sequencing
services, extended warranty sales and amounts earned under research agreements with government
grants, which are recognized in the period during which the related costs are incurred.
We recognize revenue in accordance with the guidelines established by SEC Staff Accounting
Bulletin (SAB) No. 104,
Revenue Recognition
. 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. All revenue is recorded net of any
applicable allowances for returns or discounts.
Revenue for product sales is recognized generally upon shipment and transfer of title to the
customer, provided no significant obligations remain and collection of the receivables is
reasonably assured. Revenue from the sale of instrumentation is recognized when earned, which is
generally upon shipment. Revenue for genotyping and sequencing services is recognized when earned,
which is generally at the time the genotyping and sequencing analysis data is delivered to the
customer.
In order to assess whether the price is fixed and determinable, we ensure there are no refund
rights. If payment terms are based on future performance or a right of return exists, we defer
revenue recognition until the price becomes fixed and determinable. We assess collectibility based
on a number of factors, including past transaction history with the customer and the
creditworthiness of the customer. If we determine that collection of a payment is not reasonably
assured, revenue recognition is deferred until the time collection becomes reasonably assured,
which is generally upon receipt of payment. Changes in judgments and estimates regarding
application of SAB No. 104 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, gross margins could be adversely affected.
19
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.
Investments
Effective January 1, 2008, we adopted Statement of Financial Accounting Standards (SFAS) No.
157,
Fair Value Measurements
. In February 2008, the Financial Accounting Standards Board (FASB)
issued FASB Staff Position (FSP) No. SFAS 157-2,
Effective Date of FASB Statement No. 157
, which
provides a one year deferral of the effective date of SFAS No. 157 for non-financial assets and
non-financial liabilities, except those that are recognized or disclosed in the financial
statements at fair value at least annually. Therefore, we have adopted the provisions of SFAS No.
157 with respect to financial assets and liabilities only and will adopt the provisions for
non-financial assets and non-financial liabilities effective December 29, 2008.
We determine fair value of our financial assets and liabilities in accordance with SFAS No.
157. Fair value is defined under SFAS No. 157 as the exchange price that would be received for an
asset or paid to transfer a liability (an exit price) in the principal or most advantageous market
for the asset or liability in an orderly transaction between market participants on the measurement
date. Valuation techniques used to measure fair value under SFAS No. 157 must maximize the use of
observable inputs and minimize the use of unobservable inputs. The standard describes a fair value
hierarchy based on three levels of inputs, of which the first two are considered observable and the
last unobservable, that may be used to measure fair value which are the following:
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Level 1 Quoted prices in active markets for identical assets or liabilities.
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Level 2 Inputs other than Level 1 that are observable, either directly or indirectly,
such as quoted prices for similar assets or liabilities; quoted prices in markets that are
not active; or other inputs that are observable or can be corroborated by observable market
data for substantially the full term of the assets or liabilities.
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Level 3 Unobservable inputs that are supported by little or no market activity and
that are significant to the fair value of the assets or liabilities.
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In using this fair value hierarchy and the framework established by SFAS No. 157, management
may be required to make assumptions of pricing by market participants and assumptions about risk,
specifically when using unobservable inputs to determine fair value. These assumptions are
judgmental in nature and may significantly affect our results of operations.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts for estimated losses resulting from the
inability of our customers to make required payments. We evaluate the collectibility of our
accounts receivable based on a combination of factors. We regularly analyze customer accounts,
review the length of time receivables are outstanding and review historical loss rates. If the
financial condition of our customers were to deteriorate, additional allowances could be required.
Inventory Valuation
We record adjustments to inventory for potentially excess, obsolete or impaired goods in order
to state inventory at net realizable value. We must make assumptions about future demand, market
conditions and the release of new products that will supersede old ones. We regularly review
inventory for excess and obsolete products and components, taking into account product life cycle
and development plans, product expiration and quality issues, historical experience and our current
inventory levels. If actual market conditions are less favorable than anticipated, additional
inventory adjustments could be required.
20
Contingencies
We are subject to legal proceedings primarily related to intellectual property matters. Based
on the information available at the balance sheet dates and through consultation with our legal
counsel, we assess the likelihood of any adverse judgments or outcomes of these matters, as well as
the potential ranges of probable losses. If losses are probable and reasonably estimable, we will
record a liability in accordance with SFAS No. 5,
Accounting for Contingencies
.
Goodwill and Intangible Asset Valuation
We make significant judgments in relation to the valuation of goodwill and intangible assets
resulting from acquisitions and litigation settlements.
In determining the carrying amounts of our goodwill and intangible assets arising from
acquisitions, we use the purchase method of accounting. The purchase method of accounting requires
extensive use of accounting estimates and judgments to allocate the purchase price to the fair
value of the net tangible and intangible assets acquired, including in-process research and
development (IPR&D). Goodwill and intangible assets deemed to have indefinite lives are not
amortized, but are subject to at least annual impairment tests. The amounts and useful lives
assigned to other acquired intangible assets impact future amortization, and the amount assigned to
IPR&D is expensed immediately.
Determining the fair values and useful lives of intangible assets acquired as part of
litigation settlements also requires the exercise of judgment. While there are a number of
different generally accepted valuation methods to estimate the value of intangible assets, we used
the discounted cash flow method in determining the value of licensed technology associated with the
settlement of our Affymetrix litigation. This method required significant management judgment to
forecast the future operating results used in the analysis. In addition, other significant
estimates were required such as residual growth rates and discount factors. The estimates we used
to value and amortize intangible assets were consistent with the plans and estimates that we use to
manage our business and were based on available historical information and industry estimates and
averages. These judgments can significantly affect our net operating results.
SFAS No. 142,
Goodwill and Other Intangible Assets,
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. We have performed our annual test of goodwill as of May 30, 2008, noting no impairment,
and have determined there has been no impairment of goodwill through June 29, 2008.
Impairment of Long-Lived Assets
In accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets,
if indicators of impairment exist, we assess 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, we measure the future
discounted cash flows associated with the use of the asset and adjust the value of the asset
accordingly. Certain estimates and assumptions are used in determining the fair value of
long-lived assets. These estimates and assumptions are judgmental in nature and could have a
significant impact on the determination of the recognition of an impairment charge and the
magnitude of any such change. 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.
21
Stock-Based Compensation
We account for stock-based compensation in accordance with SFAS No. 123R,
Share-Based Payment.
Under the provisions of SFAS No. 123R, stock-based compensation cost is estimated at the grant date
based on the awards fair-value as calculated by the Black-Scholes-Merton (BSM) option-pricing
model and is recognized as expense over the requisite service period. The BSM model requires
various highly judgmental assumptions including volatility, forfeiture rates, and expected option
life. If any of these assumptions used in the BSM model change significantly, stock-based
compensation expense resulting from new equity awards may differ materially in the future from that
recorded in the current period.
Income Taxes
In accordance with SFAS No. 109,
Accounting for Income Taxes
, the provision for income taxes
is computed using the asset and liability method, under which deferred tax assets and liabilities
are recognized for the expected future tax consequences of temporary differences between the
financial reporting and tax bases of assets and liabilities, and for the expected future tax
benefit to be derived from tax loss and credit carryforwards. Deferred tax assets and liabilities
are determined using the enacted tax rates in effect for the years in which those tax assets are
expected to be realized. A valuation allowance is established when it is more likely than not the
future realization of all or some of the deferred tax assets will not be achieved. The evaluation
of the need for a valuation allowance is performed on a jurisdiction by jurisdiction basis, and
includes a review of all available positive and negative evidence. As of June 29, 2008, we have
maintained a valuation allowance only against certain U.S. and foreign deferred tax assets that we
concluded have not met the more likely than not threshold required under SFAS No. 109.
Due to the adoption of SFAS No. 123R, we recognize excess tax benefits associated with
share-based compensation to stockholders equity only when realized. When assessing whether excess
tax benefits relating to share-based compensation have been realized, we follow the
with-and-without approach, excluding any indirect effects of the excess tax deductions. Under this
approach, excess tax benefits related to share-based compensation are not deemed to be realized
until after the utilization of all other tax benefits available to us.
Effective January 1, 2007, we adopted FASB Interpretation (FIN) No. 48,
Accounting for
Uncertainty in Income Taxes an interpretation of FASB Statement No. 109
, which clarifies the
accounting for uncertainty in tax positions. FIN No. 48 requires that we recognize the impact of a
tax position in our financial statements only if that position is more likely than not of being
sustained upon examination by taxing authorities, based on the technical merits of the position.
Any interest and penalties related to uncertain tax positions will be reflected in income tax
expense.
Results of Operations
To enhance comparability, the following table sets forth our unaudited condensed consolidated
statements of operations for the specified reporting periods stated as a percentage of total
revenue.
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Three Months Ended
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Six Months Ended
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|
June 29,
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July 1,
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|
June 29,
|
|
July 1,
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|
2008
|
|
2007
|
|
2008
|
|
2007
|
Revenue:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Product revenue
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|
|
92
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%
|
|
|
88
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%
|
|
|
91
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%
|
|
|
87
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%
|
Service and other revenue
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|
|
8
|
|
|
|
12
|
|
|
|
9
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
|
|
100
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Costs and expenses:
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|
|
|
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|
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|
|
|
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Cost of product revenue
|
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|
34
|
|
|
|
32
|
|
|
|
34
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|
|
|
31
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|
Cost of service and other revenue
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|
|
2
|
|
|
|
4
|
|
|
|
3
|
|
|
|
4
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|
Research and development
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|
|
17
|
|
|
|
21
|
|
|
|
17
|
|
|
|
22
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|
Selling, general and administrative
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|
|
25
|
|
|
|
28
|
|
|
|
26
|
|
|
|
30
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|
Impairment of manufacturing equipment
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|
|
3
|
|
|
|
|
|
|
|
2
|
|
|
|
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|
Amortization of intangible assets
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|
|
2
|
|
|
|
1
|
|
|
|
2
|
|
|
|
1
|
|
Acquired in-process research and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
83
|
|
|
|
86
|
|
|
|
84
|
|
|
|
281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
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|
|
17
|
|
|
|
14
|
|
|
|
16
|
|
|
|
(181
|
)
|
Interest and other income, net
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|
|
1
|
|
|
|
3
|
|
|
|
2
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Income (loss) before income taxes
|
|
|
18
|
|
|
|
17
|
|
|
|
18
|
|
|
|
(178
|
)
|
Provision for income taxes
|
|
|
7
|
|
|
|
6
|
|
|
|
7
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
11
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%
|
|
|
11
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%
|
|
|
11
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%
|
|
|
(184
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)%
|
|
|
|
|
|
|
|
|
|
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22
Three and Six Months Ended June 29, 2008 and July 1, 2007
Our fiscal year consists of 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
three and six months ended June 29, 2008 and July 1, 2007 were both 13 and 26 weeks, respectively.
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
June 29,
|
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July 1,
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|
Percentage
|
|
|
June 29,
|
|
|
July 1,
|
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Percentage
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Product revenue
|
|
$
|
128,552
|
|
|
$
|
74,297
|
|
|
|
73
|
%
|
|
$
|
239,235
|
|
|
$
|
135,562
|
|
|
|
76
|
%
|
Service and other revenue
|
|
|
11,625
|
|
|
|
10,238
|
|
|
|
14
|
%
|
|
|
22,803
|
|
|
|
21,123
|
|
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
140,177
|
|
|
$
|
84,535
|
|
|
|
66
|
%
|
|
$
|
262,038
|
|
|
$
|
156,685
|
|
|
|
67
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in product revenue for both periods presented resulted primarily from higher
consumable sales, as well as sales of the GAII. Growth in consumable revenue was primarily
attributable to significant demand for our Infinium products, specifically the Human610-Quad, which
we began shipping during the first quarter of 2008, and overall growth in our installed base of
instruments. We expect product revenue to continue to increase, which can be mainly attributed to
the launch of several new products, sales of existing products and the growth of our installed base
of instruments.
Service and other revenue increased for both periods presented primarily due to the increase
in extended warranty sales coupled with the completion of several significant Infinium and iSelect
custom SNP genotyping service contracts. As product sales increase, we expect to see continued
increases in the sale of our extended warranty contracts. We expect sales from SNP genotyping
service contracts to fluctuate on a yearly and quarterly basis, depending on the mix, the number of
contracts completed and the success of our certified service providers. The timing of completion of
SNP genotyping service contracts is highly dependent on the customers schedules for delivering the
SNPs and samples to us.
Cost of Revenue
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|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
June 29,
|
|
|
July 1,
|
|
|
Percentage
|
|
|
June 29,
|
|
|
July 1,
|
|
|
Percentage
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Cost of product revenue
|
|
$
|
47,148
|
|
|
$
|
27,036
|
|
|
|
74
|
%
|
|
$
|
89,673
|
|
|
$
|
48,850
|
|
|
|
84
|
%
|
Cost of service and other revenue
|
|
|
3,311
|
|
|
|
3,105
|
|
|
|
7
|
%
|
|
|
6,867
|
|
|
|
6,412
|
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
$
|
50,459
|
|
|
$
|
30,141
|
|
|
|
67
|
%
|
|
$
|
96,540
|
|
|
$
|
55,262
|
|
|
|
75
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue, which excludes impairment of manufacturing equipment and amortization of
intangible assets, 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 and sequencing services on behalf of
our customers.
The increase in cost of product revenue for both periods presented was primarily driven by
higher consumable and instrument sales, including increased sales of our GAII. Additionally, there
was an increase in non-cash stock-based compensation expense included in cost of product revenue
from $1.0 million and $1.8 million, respectively, for the three and six months ended July 1, 2007
to $1.3 million and $2.6 million, respectively, for the three and six months ended June 29, 2008.
Cost of service and other revenue increased for both periods presented primarily due to higher
service revenue. Non-cash stock-based compensation expense included in cost of service and other
revenue remained relatively consistent at $0.1 million and $0.2 million, respectively, for the
three and six months ended June 29, 2008 as compared to $0.1 million for both the three and six
months ended July 1, 2007.
23
Research and Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
June 29,
|
|
July 1,
|
|
Percentage
|
|
June 29,
|
|
July 1,
|
|
Percentage
|
|
|
2008
|
|
2007
|
|
Change
|
|
2008
|
|
2007
|
|
Change
|
|
|
(in thousands)
|
|
|
|
|
|
(in thousands)
|
Research and development
|
|
$
|
23,493
|
|
|
$
|
18,184
|
|
|
|
29
|
%
|
|
$
|
44,057
|
|
|
$
|
34,140
|
|
|
|
29
|
%
|
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.
Although research and development expenses as a percentage of revenue decreased to 17% for
both the three and six months ended June 29, 2008, from 21% and 22%, respectively, for the three
and six months ended July 1, 2007, there was an overall increase in research and development
expenditures. Costs to support our BeadArray technology research activities increased approximately
$3.2 million and $5.8 million, respectively, for the three and six months ended June 29, 2008,
compared to the three months and six months ended July 1, 2007, primarily due to an overall
increase in personnel-related expenses, increased lab and material expenses and the development of
new products. Approximately $1.8 million and $3.7 million, respectively, of the increase for the
three and six months ended June 29, 2008 is due to higher research and development expenses
associated with the continued development of our Sequencing technology. In addition, non-cash
stock-based compensation expense increased by approximately $1.0 million and $2.3 million,
respectively, compared to the three and six months ended July 1, 2007. These increases were
partially offset by a $0.9 million and $2.2 million, respectively, decrease in research and
development expenses related to the VeraCode technology, compared to the three and six months ended
July 1, 2007. We began shipping our BeadXpress System, which is based on our VeraCode technology,
during the first quarter of 2007. As a result of completing the development of this product, the
related research and development expenses have decreased.
We believe a substantial investment in research and development is essential to remaining
competitive and expanding into additional markets. Accordingly, we expect our research and
development expenses to increase in absolute dollars as we expand our product base.
Selling, General and Administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
June 29,
|
|
July 1,
|
|
Percentage
|
|
June 29,
|
|
July 1,
|
|
Percentage
|
|
|
2008
|
|
2007
|
|
Change
|
|
2008
|
|
2007
|
|
Change
|
|
|
(in thousands)
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
Selling, general and administrative
|
|
$
|
35,616
|
|
|
$
|
23,297
|
|
|
|
53
|
%
|
|
$
|
69,443
|
|
|
$
|
46,930
|
|
|
|
48
|
%
|
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 as a percentage of revenue were 25% and 26%, respectively, for the
three and six months ended June 29, 2008, compared to 28% and 30%, respectively, for the three and
six months ended July 1, 2007. Selling, general and administrative expenses for the three and six
months ended June 29, 2008 included stock-based compensation expenses totaling $7.4 million and
$13.6 million, respectively, compared to $4.3 million and $9.1 million, respectively, for the three
and six months ended July 1, 2007.
Sales and marketing expenses increased by $7.9 million for the three months ended June 29,
2008 compared to the three months ended July 1, 2007. The increase is primarily due to increases of
$7.0 million attributable to personnel-related expenses to support the growth of our business, $0.5
million of non-cash stock-based compensation expense, and $0.4 million attributable to other
non-personnel-related expenses consisting mainly of sales and marketing activities for our existing
and new products. Included as part of these personnel-related expenses is employee travel expenses
of $1.2 million due to increased headcount and continued international
expansion. General and administrative expense increased by $4.4 million during the three
months ended June 29, 2008, compared to the three months ended July 1, 2007. This increase was due
to increases of $2.6 million of non-cash stock-based compensation expense and $1.8 million in
personnel-related expenses associated with the growth of our business.
24
Sales and marketing expenses increased $17.9 million for the six months ended June 29, 2008,
compared to the six months ended July 1, 2007. The increase is primarily due to increases of $14.5
million attributable to personnel-related expenses to support the growth of our business. Included
as part of these personnel-related expenses is employee travel expenses of $2.8 million due to
increased headcount and continued international expansion. The remaining $3.4 million increase is
attributed to non-personnel-related costs of $2.3 million consisting mainly of sales and marketing
activities for our existing and new products and $1.1 million of non-cash stock-based compensation
expense. General and administrative expense increased $4.6 million during the six months ended
June 29, 2008, compared to the six months ended July 1, 2007, due to increases of $4.4 million in
personnel-related expenses associated with the growth of our business, $3.4 million of non-cash
stock-based compensation expense and $0.3 million in outside consulting services offset by a
decrease of $3.5 million in legal costs primarily related to the settlement of the Affymetrix
litigation during the first quarter of 2008.
We expect our selling, general and administrative expenses to increase in absolute dollars as
we expand our staff, add sales and marketing infrastructure and incur additional costs to support
the growth in our business.
Impairment of Manufacturing Equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
June 29,
|
|
July 1,
|
|
Percentage
|
|
June 29,
|
|
July 1,
|
|
Percentage
|
|
|
2008
|
|
2007
|
|
Change
|
|
2008
|
|
2007
|
|
Change
|
|
|
(in thousands)
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
Impairment of manufacturing equipment
|
|
$
|
4,069
|
|
|
$
|
|
|
|
|
100
|
%
|
|
$
|
4,069
|
|
|
$
|
|
|
|
|
100
|
%
|
The impairment of manufacturing equipment resulted from our assessment of recoverability on a
portion of our imaging and decoding systems that were no longer being utilized due to the
development of our next-generation system and our transition to the Infinium HD product line.
Amortization of Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
June 29,
|
|
July 1,
|
|
Percentage
|
|
June 29,
|
|
July 1,
|
|
Percentage
|
|
|
2008
|
|
2007
|
|
Change
|
|
2008
|
|
2007
|
|
Change
|
|
|
(in thousands)
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
Amortization of intangible assets
|
|
$
|
2,669
|
|
|
$
|
662
|
|
|
|
303
|
%
|
|
$
|
5,084
|
|
|
$
|
1,104
|
|
|
|
361
|
%
|
Amortization of intangible assets as a percentage of revenue was 2% for both the three and six
months ended June 29, 2008, compared to 1% for both the three and six months ended July 1, 2007.
The increase in amortization expense is primarily due to the settlement of our lawsuit with
Affymetrix on January 9, 2008 resulting in the recording of an intangible asset of $36.0 million.
We began amortizing this asset during the first quarter of 2008, causing an increase in
amortization of intangible assets of $2.0 million and $3.8 million, respectively, for the three and
six months ended June 29, 2008 as compared to the three and six months ended July 1, 2007. The
additional increase of $0.2 million during the six months ended June 29, 2008 as compared to the
six months ended July 1, 2007 represents an additional month of amortization associated with the
assets acquired from Solexa due to the timing of the acquisition in 2007.
Acquired In-Process Research and Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
June 29,
|
|
July 1,
|
|
Percentage
|
|
June 29,
|
|
July 1,
|
|
Percentage
|
|
|
2008
|
|
2007
|
|
Change
|
|
2008
|
|
2007
|
|
Change
|
|
|
(in thousands)
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
Acquired In-Process Research and Development
|
|
$
|
|
|
|
$
|
|
|
|
|
|
%
|
|
$
|
|
|
|
$
|
303,400
|
|
|
|
(100
|
%)
|
As a result of the Solexa acquisition in January 2007, we recorded an acquired IPR&D charge of
$303.4 million. No acquisitions resulting in similar charges occurred during the three and six
months ended June 29, 2008.
25
Interest and Other Income, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
June 29,
|
|
|
July 1,
|
|
|
Percentage
|
|
|
June 29,
|
|
|
July 1,
|
|
|
Percentage
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Interest and other income, net
|
|
$
|
830
|
|
|
$
|
2,343
|
|
|
|
(65
|
%)
|
|
$
|
4,410
|
|
|
$
|
5,066
|
|
|
|
(13
|
%)
|
Interest income on our cash and cash equivalents and investments was $2.0 million and $5.7
million for the three and six months ended June 29, 2008, compared to $4.1 million and $7.3 million
for the three and six months ended July 1, 2007. The decrease in interest income over the prior
period was primarily driven by lower interest rates on our cash and investment portfolio coupled
with lower average cash balances.
Interest expense related to our convertible debt represented $1.0 million and $2.0 million,
respectively, of interest and other income, net for the three and six months ended June 29, 2008
and $1.0 million and $1.5 million, respectively, of interest and other income, net for the three
and six months ended July 1, 2007.
In addition, we recorded approximately $0.2 million in net foreign currency transaction losses
for the three months ended June 29, 2008 and net foreign currency transaction gains of $0.7 million
during the six months ended June 29, 2008. For both the three and six months ended July 1, 2007,
net foreign currency transaction losses of $0.7 million were recorded.
Provision for Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
June 29,
|
|
|
July 1,
|
|
|
Percentage
|
|
|
June 29,
|
|
|
July 1,
|
|
|
Percentage
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
9,303
|
|
|
$
|
5,330
|
|
|
|
75
|
%
|
|
$
|
18,429
|
|
|
$
|
9,727
|
|
|
|
89
|
%
|
The provision for income taxes consists of federal, state, and foreign income tax expenses.
The increase in the provision for income taxes for the three and six months ended June 29, 2008 as
compared to the three and six months ended July 1, 2007 was primarily driven by the increase in the
income (loss) before income taxes and the expiration of the U.S. federal research and development
tax credit.
As of December 30, 2007, we had net operating loss carryforwards for federal and state tax
purposes of approximately $28.7 million and $99.1 million, respectively, which begin to expire in
2025 and 2015, respectively, unless previously utilized. In addition, we also had U.S. federal and
state research and development tax credit carryforwards of approximately $9.2 million and $9.3
million respectively, which begin to expire in 2018 and 2019 respectively, unless previously
utilized.
Pursuant to Section 382 and 383 of the Internal Revenue Code, utilization of our net operating
losses and credits may be subject to annual limitations in the event of any significant future
changes in our ownership structure. These annual limitations may result in the expiration of net
operating losses and credits prior to utilization. Previous limitations due to Section 382 and 383
have been reflected in the deferred tax assets as of June 29, 2008.
Based upon the available evidence as of June 29, 2008, we are not able to conclude it is more
likely than not certain U.S. and foreign deferred tax assets will be realized. Therefore, we have
recorded a valuation allowance of approximately $2.9 million and $25.8 million against certain U.S.
and foreign deferred tax assets, respectively.
As of June 29, 2008, no material changes have been made to our uncertain tax positions
recorded in 2007 in accordance with FIN No. 48,
Accounting for Uncertainty in Income Taxes an
Interpretation of FASB Statement No. 109
.
26
Liquidity and Capital Resources
Cashflow (in thousands)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 29, 2008
|
|
|
July 1, 2007
|
|
Net cash (used in) provided by operating activities
|
|
$
|
(25,532
|
)
|
|
$
|
39,126
|
|
Net cash used in investing activities
|
|
|
(45,507
|
)
|
|
|
(103,924
|
)
|
Net cash provided by financing activities
|
|
|
30,150
|
|
|
|
107,415
|
|
Effect of foreign currency translation on cash and cash equivalents
|
|
|
(1,084
|
)
|
|
|
114
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
$
|
(41,973
|
)
|
|
$
|
42,731
|
|
|
|
|
|
|
|
|
Historically, our sources of cash have included:
|
|
|
issuance of equity and debt securities, including cash generated from the exercise of
stock options and participation in our Employee Stock Purchase Plan (ESPP);
|
|
|
|
|
cash generated from operations, primarily from the collection of accounts receivable
resulting from product sales; and
|
|
|
|
|
interest income.
|
Our historical cash outflows have primarily been associated with:
|
|
|
cash used for operating activities such as the purchase and growth of inventory,
expansion of our sales and marketing and research and development infrastructure and other
working capital needs;
|
|
|
|
|
cash used for our stock repurchases;
|
|
|
|
|
expenditures related to increasing our manufacturing capacity and improving our
manufacturing efficiency;
|
|
|
|
|
interest payments on our debt obligations; and
|
|
|
|
|
in the first quarter of 2008, a $90.0 million one-time payment was made to Affymetrix on
January 25, 2008, in accordance with the settlement agreement entered into on January 9,
2008.
|
Other factors that impact our cash inflow and outflow include:
|
|
|
significant increases in our product and services revenue. As our product sales have
increased significantly since 2001, operating income has increased significantly as well,
providing us with an increased source of cash to finance the expansion of our operations;
and
|
|
|
|
|
fluctuations in our working capital;
|
As of June 29, 2008, we had cash, cash equivalents and short-term investments of $303.3
million, compared to $386.1 million as of December 30, 2007. We currently invest our funds in
treasury notes, commercial paper, auction rate securities, corporate bonds and U.S. dollar-based
short maturity mutual funds. We do not hold securities backed by mortgages. As of June 29, 2008,
we had $55.9 million in auction rate securities issued primarily by municipalities and
universities, which are classified as long-term investments. During the six months ended June 29,
2008, we recorded an unrealized loss of $3.1 million due to the failure associated with the
auctions of each of these securities, which caused our ability to liquidate our investment and
fully recover the carrying value in the near term to be limited or not exist. We have determined
this reduction in fair value to be temporary. This unrealized loss reduced the fair value of our
auction rate securities as of June 29, 2008 to $52.8 million. This value was determined in
accordance with SFAS No. 157. We used Level 3 hierarchical inputs, due to the lack of actively
traded market data, including managements assumptions of pricing by market participants and
assumptions about risk. We based our fair value determination on estimated discounted future cash
flows of interest income over a projected period reflective of the length of time the Company
anticipates it will take the securities to become liquid. We considered any impairment on these
investments to be temporary, thus any changes in fair value were recorded to other comprehensive
income and there was no effect on operating income during the three and six months ended June 29,
2008. Refer to our Risk Factor: Negative conditions in the global credit markets may impair the
liquidity of a portion of our investment portfolio under Item 1A of our Annual Report on Form
10-K for the fiscal year ended December 30, 2007.
27
The primary inflows of cash during the six months ended June 29, 2008 were approximately
$231.8 million from the sale and maturity of our investments in available-for-sale securities and
approximately $28.0 million from the exercise of our stock options. The primary cash outflows
during the six months ended June 29, 2008 were attributable to the purchase of available-for-sale
securities for approximately $247.5 million, the one-time payment of $90.0 million made to
Affymetrix in accordance with the settlement agreement and $29.8 million in capital expenditures
primarily for construction-in-progress associated with the expansion of our San Diego facilities,
additions to manufacturing equipment as well as the development of our manufacturing facility in
Singapore.
Our primary short-term needs for capital, which are subject to change, include expenditures
related to:
|
|
|
our facilities expansion needs, including costs of leasing additional facilities;
|
|
|
|
|
the acquisition of equipment and other fixed assets for use in our current and future
manufacturing and research and development facilities;
|
|
|
|
|
support of our commercialization efforts related to our current and future products,
including expansion of our direct sales force and field support resources both in the United
States and abroad;
|
|
|
|
|
the continued advancement of research and development efforts; and
|
|
|
|
|
improvements in our manufacturing capacity and efficiency.
|
We expect that our product revenue and the resulting operating income, as well as the status
of each of our new product development programs, will significantly impact our cash management
decisions.
Our outstanding convertible notes became convertible into cash and shares of our common stock
as of March 31, 2008 and will continue to be convertible at least through, and including, September
30, 2008. Generally, upon conversion of a note, we must pay the conversion value of the note in
cash, up to the principal amount of the note. Any excess of the conversion value over the principal
amount is payable in shares of our common stock. We currently do not have sufficient cash to pay
the cash amounts that would be due, based on current stock prices, if all the notes were converted.
However, based on the current trading prices of the notes, we do not currently expect any notes to
be converted through September 30, 2008, so long as they continue to trade at above their
conversion value. However, holders of the notes may nonetheless convert their notes during this
period. If we fail to deliver the consideration that is due upon conversion when required, we will
be in default under the indenture for the notes, which may permit the noteholders to cause the
notes to be immediately payable in full.
On
July 22 2008, we announced our acquisition of Avantome, Inc. As consideration for the
acquisition, we will pay $25.0 million in cash up front and may pay up to an additional $35.0
million in contingent cash consideration based on the achievement of
certain milestones.
We anticipate that our current cash and cash equivalents and income from operations will be
sufficient to fund our operating needs for at least the next 12 months, barring unforeseen
circumstances. Operating needs include the planned costs to operate our business, including amounts
required to fund working capital and capital expenditures. At the present time, we have no material
commitments for capital expenditures. Due to expansion of our facilities and manufacturing
operations, we anticipate spending approximately $55.1 million in capital expenditures during 2008.
Our future capital requirements and the adequacy of our available funds will depend on many
factors, including:
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our ability to successfully commercialize our sequencing and VeraCode technologies and to
expand our SNP genotyping and sequencing services product lines;
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|
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scientific progress in our research and development programs and the magnitude of those
programs;
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competing technological and market developments; and
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the need to enter into collaborations with other companies or acquire other companies or
technologies to enhance or complement our product and service offerings.
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28
As a result of the factors listed above, we may require additional funding in the future. Our
failure to raise capital on acceptable terms, when needed, could have a material adverse effect on
our business.
Recent Accounting Pronouncements
See Note 1 to our consolidated financial statements for a description of the effect of
recently issued accounting pronouncements.
Item 3. 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.
For example, if a 100 basis point change in overall interest rates were to occur in 2008, our
interest income would change by approximately $3.0 million in relation to amounts we would expect
to earn, based on our cash, cash equivalents, and available-for-sale investment securities as of
June 29, 2008.
Market Price Sensitive Instruments
In order to potentially reduce equity dilution, we entered into convertible note hedge
transactions, entitling us to purchase up to 11,451,480 shares of our common stock at an initial
strike price of $43.66 per share, subject to adjustment. We also entered into warrant transactions
with the counterparties of the convertible note hedge transactions. In addition, the Company sold
to these counterparties warrants (the warrants) to acquire 9,161,160 shares of the Companys common
stock at an initial strike price of $62.87 per share, subject to adjustment, with the maximum
number of shares issuable under these warrants to be capped at 18,322,320 should the convertible
note hedge transaction be unwound. The anti-dilutive effect of the bond hedge transactions, if any,
could be partially or fully offset to the extent the trading price of our common stock exceeds the
strike price of the warrants on the exercise dates of the warrants, which occur during 2014,
assuming the counterparties exercise those warrants.
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 the majority 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.
Item 4. Controls and Procedures.
We design our internal controls to provide reasonable assurance that (1) our transactions are
properly authorized; (2) our assets are safeguarded against unauthorized or improper use; and (3)
our transactions are properly recorded and reported in conformity with U.S. generally accepted
accounting principles. We also maintain internal controls and procedures to ensure that we comply
with applicable laws and our established financial policies.
We have carried out an evaluation, under the supervision and with the participation of our
management, including our principal executive officer and principal financial officer, of the
effectiveness of the design and operation of our disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the
Securities
29
Exchange Act), as of June 29, 2008. Based upon that evaluation, our principal executive
officer and principal financial officer concluded that, as of June 29, 2008, our disclosure
controls and procedures are effective to ensure that (a) the information required to be disclosed
by us in the reports that we file or submit under the Securities Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the SECs rules and forms,
and (b) such information is accumulated and communicated to our management, including our principal
executive officer and principal financial officers, or persons performing similar functions, as
appropriate to allow timely decisions regarding required disclosure. In designing and evaluating
our disclosure controls and procedures, our management recognized that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and our management have concluded that the disclosure controls and
procedures are effective at the reasonable assurance level. Because of inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that all control issues,
if any, within a company have been detected.
An evaluation was also performed under the supervision and with the participation of our
management, including our chief executive officer and chief financial officer, of any change in our
internal control over financial reporting that occurred during the second quarter of 2008 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.
30
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
In the recent past, we incurred substantial costs in defending ourselves against patent
infringement claims and expect, going forward, to devote substantial financial and managerial
resources to protect our intellectual property and to defend against any future claims asserted
against us.
Applied Biosystems Litigation
On December 26, 2006, the Applied Biosystems Group of Applera Corporation (Applied Biosystems)
filed suit in California Superior Court, Santa Clara County against Solexa (which we acquired on
January 26, 2007). This State Court action was related to the ownership of several patents assigned
in 1995 to Solexas predecessor company (Lynx Therapeutics) by a former employee (Dr. Stephen
Macevicz), who is the inventor of these patents and is named as a co-defendant in the suit. Lynx
was originally a unit of Applied Biosystems but was spun out in 1992. On May 31, 2007, Applied
Biosystems filed a second suit, this time against us, in the U.S. District Court for the Northern
District of California. This second suit sought a declaratory judgment of non-infringement of the
Macevicz patents that are the subject of the State Court action mentioned above. Both suits were
later consolidated in the U.S. District Court for the Northern District of California, San
Francisco Division. By these consolidated actions, Applied Biosytems is seeking ownership of the
Macevicz patents, unspecified costs and damages, and a declaration of non-infringement and
invalidity of these patents. Applied Biosystems is not asserting any claim for patent infringement
against us.
The Macevicz patents relate to methods for sequencing DNA using successive rounds of
oligonucleotide probe ligation (sequencing-by-ligation). Our Genome Analyzer products use a
different technology called Sequencing-by-Synthesis (SBS), which we believe is not covered by any
of these patents. In addition, we have no plans to use any of the Sequencing-by-Ligation
technologies covered by these patents.
ITEM 1A. Risk Factors.
Our business is subject to various risks, including those described in Item 1A of our annual
report on Form 10-K for the fiscal year ended December 30, 2007, which we filed with the SEC on
February 26, 2008 and strongly encourage you to review. Except as set forth below, there have been
no material changes from the risk factors disclosed in that section of our Form 10-K.
We no longer consider the risk factor in our annual report titled
The combined company may
fail to realize the anticipated benefits of the acquisition as a result of our failure to achieve
anticipated revenue growth following the acquisition
to be material. This risk factor, which
addressed the realization of the anticipated benefits of our Solexa acquisition, is no longer
considered material because we have experienced operating profits resulting from the acquisition.
In addition, we no longer consider the risk factor in our annual report titled
The accounting
method for our convertible debt securities may be subject to change
to be relevant, because the
Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) No. APB 14-1 in May
2008. This FSP finalized the proposed change in accounting treatment for our convertible notes. We
refer you to the discussion under the heading Recent Accounting Pronouncements in Note 1 to our
financial statements.
In addition, we consider the following additional risk factors to be relevant to our business:
We may not have the ability to pay the cash payments due upon conversion of our outstanding
convertible notes.
In February 2007, we issued $400.0 million of 0.625% convertible senior notes due February
2014. The notes are convertible into cash and, if applicable, shares of our common stock only if
specified conditions are satisfied. During the first quarter of 2008, we determined that one of
these conditions was satisfied, and, accordingly, the notes were convertible from, and including,
April 1, 2008 through, and including, June 30, 2008. The requirements of the same condition were
again satisfied in the second quarter of 2008, and, accordingly, the Notes will continue to be
convertible through, and including, September 30, 2008.
31
Generally, upon conversion of a note, we must pay the conversion value of the note in cash, up
to the principal amount of the note. Any excess of the conversion value over the principal amount
is payable in shares of our common stock. We currently do not have
sufficient cash to pay the cash amounts that would be due, based on current stock prices, if
all the notes were converted. However, as was the case during the second calendar quarter of 2008,
the notes currently continue to trade above their conversion value. As a result, we do not
currently expect any notes to be converted during the third calendar quarter of 2008. Holders of
the notes may nonetheless convert their notes during this period.
If a significant amount of the notes are tendered for conversion, we may have to seek
additional financing to satisfy our conversion obligation. We may be unable to obtain any needed
additional financing on favorable terms, if at all. In addition, if we raise funds by issuing
additional equity securities, our existing stockholders may experience dilution. Additional debt
financing, if available, may subject us to restrictive covenants and will increase our interest
expense. If we fail to deliver the consideration that is due upon conversion when required, we will
be in default under the indenture for the notes, which may permit the noteholders to cause the
notes to be immediately payable in full.
Loss of the tax deduction on our outstanding convertible notes.
We could lose some or all of the tax deduction for interest expense associated with our $400.0
million aggregate principal amount of convertible notes due in 2014 if the foregoing notes are not
subject to the special Treasury Regulations governing integration of certain debt instruments,
which we do not expect to be the case, the notes are converted, or we invest in non-taxable
investments.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None during the second quarter of fiscal 2008.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
Our 2007 Annual Meeting of Stockholders was held on May 16, 2008. Directors Daniel M. Bradbury
and Roy A. Whitfield will continue to serve as directors with terms expiring at our 2011 Annual
Meeting of Stockholders. Our stockholders ratified the appointment of Ernst & Young LLP as our
independent auditors for 2008. Our stockholders also ratified an amendment to increase the maximum
number of shares of common stock authorized for issuance under our 2005 Stock and Incentive Plan by
1,200,000 shares.
Our stockholders voted as follows on the proposals below:
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1.
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Proposal to elect directors:
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For
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Withhold Authority
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Daniel M. Bradbury
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50,326,890
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2,017,976
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Roy A. Whitfield
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51,523,483
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821,383
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2.
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The vote on ratification of the appointment of Ernst & Young LLP as our independent
auditors for 2008 was as follows:
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For
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52,252,008
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Against
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85,303
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Abstain
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7,555
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Non Votes
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0
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3.
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The vote on ratification of the amendment to increase the maximum number of shares of
common stock authorized for issuance under our 2005 Stock and Incentive Plan by 1,200,000
shares was as follows:
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For
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25,724,285
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Against
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19,179,703
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Abstain
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300,799
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Non Votes
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7,140,079
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32
Item 5. Other Information.
None.
Item 6. Exhibits.
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Exhibit
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Number
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Description of Document
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10.43
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Amended and Restated Stock and Incentive Plan.
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10.53
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Change in Control Severance Agreement between the Registrant and Gregory F. Heath.
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10.54
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Change in Control Severance Agreement between the Registrant and Joel McComb.
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10.55
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Indemnification Agreement between the Registrant and Gregory F. Heath.
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10.56
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Indemnification Agreement between the Registrant and Joel McComb.
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31.1
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Certification of Jay T. Flatley pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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31.2
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Certification of Christian O. Henry pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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32.1
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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.
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32.2
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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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33
SIGNATURES
Pursuant to the requirements 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.
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Illumina, Inc.
(Registrant)
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Date: July 25, 2008
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/s/ Christian O. Henry
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Christian O. Henry
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Senior Vice President and Chief Financial Officer
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34
EXHIBIT 10.43
ILLUMINA, INC.
2005 STOCK AND INCENTIVE PLAN
1.
Purposes of the Plan
. The purposes of this 2005 Stock and Incentive Plan are to
attract and retain the best available personnel for positions of substantial responsibility, to
provide additional incentive to Service Providers, and to promote the success of the Companys
business. Options granted under the Plan may be Incentive Stock Options or Nonstatutory Stock
Options, as determined by the Administrator at the time of grant. Stock Awards (including Stock
Grants, Stock Units and Stock Appreciation Rights) and Cash Awards may also be granted under the
Plan.
2.
Definitions
. As used herein, the following definitions shall apply:
(a)
Administrator
means the Board or any of its Committees as shall be administering
the Plan, in accordance with Section 4 hereof.
(b)
Applicable Laws
means the requirements relating to the administration of stock
option and restricted stock plans, the grant of options and the issuance of shares under U.S. state
corporate laws, U.S. federal and state securities laws, the Code, any Nasdaq National Market, stock
exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws
of any other country or jurisdiction where Options or Awards are granted under the Plan, as such
laws, rules, regulations and requirements shall be in place from time to time.
(c)
Award
means an Option, a Stock Award or a Cash Award granted in accordance with
the terms of the Plan.
(d)
Award Agreement
means a Stock Award Agreement, Cash Award Agreement and/or
Option Agreement, which may be in written or electronic format, in such form and with such terms
and conditions as may be specified by the Administrator, evidencing the terms and conditions of an
individual Award. Each Award Agreement is subject to the terms and conditions of the Plan.
(e)
Board
means the Board of Directors of the Company.
(f)
Cash Award
means a bonus opportunity awarded under Section 15 pursuant to which
a Participant may become entitled to receive an amount based on the satisfaction of such
performance criteria as are specified in the agreement or other documents evidencing the Award (the
Cash Award Agreement
).
(g)
Code
means the Internal Revenue Code of 1986, as amended.
(h)
Committee
means a committee of Directors appointed by the Board in accordance
with Section 4 hereof.
(i)
Common Stock
means the common stock of the Company.
(j)
Company
means Illumina, Inc., a Delaware corporation.
(k)
Consultant
means any natural person, including an advisor, engaged by the
Company or a Parent or Subsidiary to render services to such entity.
1
(l)
Corporate Transaction
means any of the following, unless the Administrator
provides otherwise:
(i) any merger or consolidation in which the Company shall not be the surviving entity (or
survives only as a subsidiary of another entity whose stockholders did not own all or substantially
all of the Common Stock in substantially the same proportions as immediately prior to such
transaction),
(ii) the sale of all or substantially all of the Companys assets to any other person or
entity (other than a wholly-owned subsidiary),
(iii) the acquisition of beneficial ownership of a controlling interest (including, without
limitation, power to vote) the outstanding shares of Common Stock by any person or entity
(including a group as defined by or under Section 13(d)(3) of the Exchange Act),
(iv) a contested election of Directors, as a result of which or in connection with which the
persons who were Directors before such election or their nominees (the
Incumbent
Directors
) cease to constitute a majority of the Board; provided however that if the election,
or nomination for election by the Companys stockholders, of any new director was approved by a
vote of at least fifty percent (50%) of the Incumbent Directors, such new Director shall be
considered as an Incumbent Director, or
(v) any other event specified by the Board or a Committee, regardless of whether at the time
an Award is granted or thereafter.
(m)
Director
means a member of the Board.
(n)
Disability
means total and permanent disability as defined in Section 21(e)(3)
of the Code.
(o)
Effective Date
means the date on which the Companys stockholders approve the
Plan.
(p)
Employee
means any person, including Officers and Inside Directors, employed by
the Company or any Parent or Subsidiary of the Company. An Employee shall not be deemed to cease
Employee status by reason of (i) any leave of absence approved by the Company or (ii) transfers
between locations of the Company or between the Company, its Parent, any Subsidiary, or any
successor. For purposes of Incentive Stock Options, no such leave may exceed ninety days, unless
reemployment upon expiration of such leave is guaranteed by statute or contract. If reemployment
upon expiration of a leave of absence approved by the Company is not so guaranteed, then three (3)
months following the 91
st
day of such leave any Incentive Stock Option held by the
Optionee shall cease to be treated as an Incentive Stock Option and shall be treated for tax
purposes as a Nonstatutory Stock Option. Neither service as Director nor payment of a directors
fee by the Company shall be sufficient to constitute employment by the Company.
(q)
Exchange Act
means the Securities Exchange Act of 1934, as amended.
(r)
Fair Market Value
means, as of any date, the value of a Share determined as
follows:
(i) If the Common Stock is listed on any established stock exchange or traded on a national
market system, including without limitation the Nasdaq National Market or the Nasdaq SmallCap
Market of The Nasdaq Stock Market, the Fair Market Value of a Share shall be the closing selling
price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or
system on the day of determination, as reported in
The Wall Street Journal
or such other source as
the Administrator deems reliable;
2
(ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling
prices are not reported, the Fair Market Value of a Share shall be the mean between the high bid
and low asked prices for the Common Stock on the day of determination, as reported in
The Wall
Street Journal
or such other source as the Administrator deems reliable; or
(iii) In the absence of an established market for the Common Stock, the Fair Market Value
shall be determined in good faith by the Administrator.
(s)
Incentive Stock Option
means an Option intended to qualify as an incentive stock
option within the meaning of Section 422 of the Code and the regulations promulgated thereunder and
as designated in the applicable Option Agreement.
(t)
Inside Director
means a Director who is an Employee.
(u)
Nonstatutory Stock Option
means an Option not intended to qualify as an
Incentive Stock Option and/or as designated in the applicable Option Agreement.
(v)
Notice of Grant
means a written or electronic notice evidencing certain terms
and conditions of an individual Option grant. The Notice of Grant is part of the Option Agreement.
(w)
Officer
means a person who is an executive officer of the Company within the
meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder.
(x)
Option
means a stock option granted pursuant to the Plan.
(y)
Option Agreement
means an agreement between the Company and an Optionee
evidencing the terms and conditions of an individual Option grant. The Option Agreement is subject
to the terms and conditions of the Plan.
(z)
Optioned Shares
means the Shares subject to an Option.
(aa)
Optionee
means the holder of an outstanding Option granted under the Plan.
(bb)
Outside Director
means a Director who is not an Employee.
(cc)
Parent
means a parent corporation, whether now or hereafter existing, as
defined in Section 424(e) of the Code or any successor provision.
(dd)
"
Participant
means any holder of one or more Options, Stock Awards or Cash
Awards, or the Shares issuable or issued upon exercise of such Awards, under the Plan.
(ee) "
Plan
means this 2005 Stock and Incentive Plan.
(ff) "
Predecessor Plan
means the Illumina, Inc. 2000 Stock Plan, as amended.
(gg)
"
Qualifying Performance Criteria
means any one or more of the following
performance criteria, either individually, alternatively or in any combination, applied to either
the Company as a whole or to a business unit, Parent, Subsidiary or business segment, either
individually, alternatively or in any combination, and measured either annually or cumulatively
over a period of years, on an absolute basis or relative to a pre-established target, to previous
years results or to a designated comparison group, in each case as specified by the Committee in
the Award: (i) cash flow; (ii) earnings (including gross margin, earnings before interest and
taxes, earnings before taxes, and net earnings); (iii) earnings per share; (iv) growth in earnings
or earnings per share;
3
(v) stock price; (vi) return on equity or average stockholders equity; (vii) total stockholder
return; (viii) return on capital; (ix) return on assets or net assets; (x) return on investment;
(xi) revenue; (xii) income or net income; (xiii) operating income or net operating income; (xiv)
operating profit or net operating profit; (xv) operating margin; (xvi) return on operating revenue;
(xvii) market share; (xviii) contract awards or backlog; (xix) overhead or other expense reduction;
(xx) growth in stockholder value relative to the moving average of the S&P 500 Index or a peer
group index; (xxi) credit rating; (xxii) strategic plan development and implementation (including
individual performance objectives that relate to achievement of the Companys or any business
units strategic plan); (xxiii) improvement in workforce diversity, and (xxiv) any other similar
criteria as may be determined by the Administrator. The Committee may appropriately adjust any
evaluation of performance under a Qualifying Performance Criteria to exclude any of the following
events that occurs during a performance period: (A) asset write-downs; (B) litigation or claim
judgments or settlements; (C) the effect of changes in tax law, accounting principles or other such
laws or provisions affecting reported results; (D) accruals for reorganization and restructuring
programs; and (E) any gains or losses classified as extraordinary or as discontinued operations in
the Companys financial statements.
(hh)
Rule 16b-3
means Rule 16b-3 of the Exchange Act, as the same may be amended
from time to time, or any successor to Rule 16b-3, as in effect when discretion is being exercised
with respect to the Plan.
(ii)
Service Provider
means (i) an individual rendering services to the Company or
any Parent or Subsidiary of the Company in the capacity of an Employee or Consultant or (ii) an
individual serving as a Director.
(jj)
Share
means a share of the Common Stock, as adjusted in accordance with Section
17 hereof.
(kk)
"
Stock Appreciation Right
means a right to receive cash and/or Shares based on a
change in the Fair Market Value of a specific number of Shares granted under Section 14.
(ll)
"
Stock Award
means a Stock Grant, a Stock Unit or a Stock Appreciation Right
granted under Sections 13 or 14 below or other similar awards granted under the Plan (including
phantom stock rights).
(mm)
"
Stock Award Agreement
means a written agreement, the form(s) of which shall be
approved from time to time by the Administrator, between the Company and a holder of a Stock Award
evidencing the terms and conditions of an individual Stock Award grant. Each Stock Award Agreement
shall be subject to the terms and conditions of the Plan.
(nn)
"
Stock Grant
means the award of a certain number of Shares granted under Section
13 below.
(oo)
"
Stock Unit
means a bookkeeping entry representing an amount equivalent to the
Fair Market Value of one Share, payable in cash, property or Shares. Stock Units represent an
unfunded and unsecured obligation of the Company, except as otherwise explicitly provided for by
the Administrator.
(pp)
Subsidiary
means a subsidiary corporation, whether now or hereafter existing,
as defined in Section 424(f) of the Code, or any successor provision.
(qq)
Withholding Taxes
means the federal, state and local income and employment
withholding taxes, or any other taxes required to be withheld, to which the holder of an Award may
be subject in connection with the grant, exercise, or vesting of an Award or the issuance or
transfer of Shares issued or issuable pursuant to an Award.
4
3.
Stock Subject to the Plan
.
(a) Subject to the provisions of Section 17 hereof, the maximum aggregate number of Shares
that may be issued and sold under the Plan is 11,542,358 Shares. This maximum number of Shares
reserved and available for issuance under the Stock Plan consists of Shares reserved for issuance
under the Predecessor Plan that as of May 2, 2005 were either (i) available for grant pursuant to
awards that may be made under the Predecessor Plan or (ii) subject to outstanding options granted
under the Predecessor Plan which Shares might be returned to the Predecessor Plan but such Shares
shall become available for issuance hereunder only if and to the extent the options granted under
the Predecessor Plan to which they are subject terminate or expire or become unexercisable for any
reason without having been exercised in full.
(b) An annual increase in the number of Shares reserved for issuance hereunder shall
automatically occur on the first day of each fiscal year of the Company, beginning with fiscal year
2006 and ending with fiscal year 2010, equal to the lesser of (i) 1,200,000 Shares (subject to
adjustment under Section 17), (ii) 5% of the outstanding Shares as of the last day of the
immediately preceding fiscal year or (iii) a number of Shares determined by the Board. In addition
to any increase, pursuant to the immediately preceding sentence, in the number of Shares reserved
for issuance hereunder, the number of Shares reserved for issuance hereunder shall automatically
increase, on May 16, 2008, by an additional 1,200,000 Shares. The Shares may be authorized, but
unissued, or reacquired Shares, including Shares repurchased by the Company on the open market.
(c) If an outstanding Award expires or terminates for any reason prior to exercise in full, or
without the Shares subject thereto having been issued in full, the unpurchased or unissued Shares
which were subject thereto shall become available for future grant or sale under the Plan (unless
the Plan has terminated);
provided, however
, that Shares that have actually been issued under the
Plan pursuant to an Award shall not be returned to the Plan and shall not become available for
future distribution under the Plan, except that if unvested Shares are repurchased by the Company
at their original purchase price or otherwise forfeited to the Company in connection with
termination of a Participants status as a Service Provider, such Shares shall become available for
future grant under the Plan. Should the exercise or purchase price of an Award under the Plan be
paid with Shares (including by withholding Shares from the Award) or should Shares otherwise
issuable under the Plan be withheld by the Company in satisfaction of the Withholding Taxes
incurred in connection with the exercise, purchase or issuance of Shares under an Award, then the
number of Shares available for issuance under the Plan shall be reduced by the gross number of
Shares issued in connection with the Award, and not by the net number of Shares issued to the
holder of such Award.
4.
Administration of the Plan
.
(a)
Procedure
.
(i)
Multiple Administrative Bodies
. Different Committees with respect to different
groups of Service Providers may administer the Plan.
(ii)
Section 162(m)
. To the extent that the Administrator determines it to be
desirable to qualify Awards granted hereunder as performance-based compensation within the
meaning of Section 162(m) of the Code, the Plan shall be administered by a Committee of two or more
outside directors within the meaning of Section 162(m) of the Code.
(iii)
Rule 16b-3
. To the extent desirable to qualify transactions hereunder as exempt
under Rule 16b-3, the transactions contemplated hereunder shall be structured to satisfy the
requirements for exemption under Rule 16b-3.
(iv)
Other Administration
. Other than as provided above, the Plan shall be
administered by (A) the Board, (B) a Committee, which committee shall be constituted to satisfy
Applicable Laws or (C) subject to the Applicable Laws, one or more officers of the Company to whom
the Board or Committee
5
has delegated the power to grant Awards to persons eligible to receive Awards under the Plan
provided such grantees may not be officers or Directors.
(b)
Powers of the Administrator
. Subject to the provisions of the Plan, and in the
case of a Committee, subject to the specific duties delegated by the Board to such Committee, the
Administrator shall have the authority, in its discretion:
(A) to determine the Fair Market Value of the Common Stock in accordance with Section 2(r) of
the Plan;
(B) to select the Service Providers to whom Awards may be granted hereunder;
(C) to determine the number of Shares or amount of cash to be covered by each Award granted
hereunder;
(D) to approve forms of Award Agreements for use under the Plan;
(E) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any
Award granted hereunder, which terms and conditions include, but are not limited to, the exercise
price and/or purchase price (if applicable), the time or times when Awards may be exercised (which
may be based on performance criteria), the vesting schedule, any vesting and/or exercisability
acceleration or waiver of forfeiture restrictions, the acceptable forms of consideration, the term
and any restriction or limitation regarding any Award or the Shares relating thereto, based in each
case on such factors as the Administrator, in its sole discretion, shall determine and may be
established at the time an Award is granted or thereafter;
(F) to construe and interpret the terms of the Plan and Awards granted pursuant to the Plan;
(G) to prescribe, amend and rescind rules and regulations relating to the Plan, including
rules and regulations relating to sub-plans established for the purpose of satisfying applicable
foreign laws;
(H) to modify or amend each Award (subject to Section 19) hereof), including the discretionary
authority to extend the post-termination exercisability or purchase period of Awards longer than is
originally provided for in the Award Agreement;
(I) to allow Participants to satisfy Withholding Tax obligations by electing to have the
Company withhold from the Shares to be issued upon exercise or settlement of an Award that number
of Shares having a Fair Market Value equal to the minimum amount required to be withheld. The Fair
Market Value of the Shares to be withheld shall be determined on the date that the amount of
Withholding Tax is to be determined. All elections by a Participant to have Shares withheld for
this purpose shall be made in such form and under such conditions as the Administrator may deem
necessary or advisable;
(J) to authorize any person to execute on behalf of the Company any instrument required to
effect the grant of an Award previously granted by the Administrator;
(K) to make all other determinations deemed necessary or advisable for administering the Plan.
6
(c)
Effect of Administrators Decision
. The Administrators decisions, determinations
and interpretations shall be final and binding on all Participants and any other holders of
Options, Stock Awards, Cash Awards or Shares issued under the Plan.
5.
Eligibility
. Nonstatutory Stock Options and Stock Awards may be granted to Service
Providers. Incentive Stock Options and Cash Awards may be granted only to Employees.
6.
Limitations
.
(a) Each Option shall be designated in the Option Agreement as either an Incentive Stock
Option or a Nonstatutory Stock Option. However, notwithstanding designation as an Incentive Stock
Option, no installment under such an Option shall qualify for favorable tax treatment as an
Incentive Stock Option if (and to the extent) the aggregate Fair Market Value of the Shares
(determined at the date of grant) for which such installment first becomes exercisable hereunder
would, when added to the aggregate value (determined as of the respective date or dates of grant)
of the Shares or other securities for which such Option or any other Incentive Stock Options
granted to Optionee prior to the date of grant (whether under the Plan or any other plan of the
Company or any Parent or Subsidiary of the Company) first become exercisable during the same
calendar year, exceed One Hundred Thousand Dollars ($100,000) in the aggregate. Should such One
Hundred Thousand Dollar ($100,000) limitation be exceeded in any calendar year, the Option shall
nevertheless become exercisable for the excess Optioned Shares in such calendar year as a
Nonstatutory Stock Option. For purposes of this Section 6(a), Incentive Stock Options shall be
taken into account in the order in which they were granted.
(b) Neither the Plan nor any Award shall confer upon a Participant any right with respect to
continuing the Participants relationship as a Service Provider with the Company, nor shall they
interfere in any way with the Participants right or the Companys right to terminate such
relationship at any time, with or without cause.
(c) The following limitations shall apply to grants of Options and Stock Awards:
(i) No Service Provider shall be granted, in any fiscal year of the Company, Awards covering
more than 500,000 Shares, subject to adjustment as provided in Section 17 below.
(ii) However, in connection with his or her commencement of Service Provider status, an
individual may be granted Awards covering up to an additional 1,000,000 Shares during the fiscal
year in which such commencement occurs, which shall not count against the limit set forth in
subsection (i) above and subject to adjustment as provided in Section 17 below.
7.
Term of Plan
. The Plan shall become effective on the Effective Date. Unless the
Plan is terminated earlier pursuant to Section 19 hereof, the Plan shall terminate upon the
earliest
to occur of (a) June 28, 2015, (b) the date on which all Shares available for
issuance under the Plan shall have been issued as fully vested Shares or (c) the termination of all
outstanding Awards in connection with a dissolution or liquidation pursuant to Section 17(b) hereof
or a Corporate Transaction pursuant to Section 17(c) hereof. Should the Plan terminate on June 28,
2015, then all Awards outstanding at that time shall continue to have force and effect in
accordance with the provisions of the applicable Award Agreement.
8.
Term of Option
. The term of each Option shall be stated in the Option Agreement;
provided, however that the term shall be no more than ten (10) years from the date of grant or such
shorter term as may be provided in the Option Agreement. Moreover, in the case of an Incentive
Stock Option granted to an Optionee who, at the time the Incentive Stock Option is granted, owns
stock representing more than ten percent (10%) of the total combined voting power of all classes of
stock of the Company or any Parent or Subsidiary, the term of the Incentive Stock Option shall be
five (5) years from the date of grant or such shorter term as may be provided in the Option
Agreement.
9.
Option Exercise Price and Consideration
.
7
(a)
Exercise Price
. The per Share exercise price for the Shares to be issued pursuant
to exercise of an Option shall be determined by the Administrator, subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time the Incentive Stock Option is granted, owns stock
representing more than ten percent (10%) of the voting power of all classes of stock of the Company
or any Parent or Subsidiary, the per Share exercise price shall be no less than 110% of the Fair
Market Value per Share on the date of grant.
(B) granted to any Employee other than an Employee described in paragraph (A) immediately
above, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share
on the date of grant.
(ii) In the case of a Nonstatutory Stock Option, the per Share exercise price shall be no less
than 100% of the Fair Market Value per Share on the date of grant.
(iii) Notwithstanding the foregoing, Options may be granted with a per Share exercise price of
less than 100% of the Fair Market Value per Share on the date of grant pursuant to a merger or
other corporate transaction.
(b)
Waiting Period and Exercise Dates
. At the time an Option is granted, the
Administrator shall fix the period within which the Option may be exercised and shall determine any
conditions (including any vesting conditions) that must be satisfied before the Option may be
exercised.
(c)
Form of Consideration
. The Administrator shall determine the acceptable form of
consideration for exercising an Option, including the method of payment. Such consideration may
consist entirely of:
(i) cash;
(ii) check;
(iii) promissory note;
(iv) other Shares which, in the case of Shares acquired directly or indirectly from the
Company, (A) have been owned by the Optionee for more than six (6) months on the date of surrender
(if it is required to eliminate or reduce accounting charges incurred by the Company in connection
with the Option, or such other period (if any) required to so eliminate or reduce such charges),
and (B) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of
the Shares as to which said Option shall be exercised;
(v) consideration received through a special sale and remittance procedure pursuant to which
the Optionee shall concurrently provide irrevocable instructions to (A) a Company-designated
brokerage firm to effect the immediate sale of the purchased Shares and remit to the Company, out
of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate
exercise price payable for the purchased Shares plus all Withholding Taxes required to be withheld
by the Company by reason of such exercise and (B) the Company to deliver the certificates for the
purchased Shares directly to such brokerage firm in order to complete the sale;
(vi) a reduction in the amount of any Company liability to the Optionee, including any
liability attributable to the Optionees participation in any Company-sponsored deferred
compensation program or arrangement;
8
(vii) any combination of the foregoing methods of payment; or
(viii) such other consideration and method of payment for the issuance of Optioned Shares as
determined by the Administrator and to the extent permitted by Applicable Laws.
(d)
No Option Repricings
. Other than in connection with a change in the Companys
capitalization (as described in Section 17(a) of the Plan), the exercise price of an Option may not
be reduced without stockholder approval.
10.
Exercise of Option
.
(a)
Procedure for Exercise; Rights as a Stockholder
.
(i) Any Option granted hereunder shall be exercisable according to the terms of the Plan and
at such times and under such conditions as determined by the Administrator and set forth in the
Option Agreement. Unless the Administrator provides otherwise, vesting of Options granted
hereunder shall be suspended during any unpaid leave of absence. An Option may not be exercised
for a fraction of a Share.
(ii) An Option shall be deemed exercised when the Company receives: (A) written or electronic
notice of exercise (in accordance with the Option Agreement) from the person entitled to exercise
the Option, and (B) full payment for the Optioned Shares with respect to which the Option is
exercised and (C) satisfaction of any Withholding Taxes. Full payment may consist of any
consideration and method of payment authorized by the Administrator and permitted by the Plan and
shall be set forth in the Option Agreement. Shares issued upon exercise of an Option shall be
issued in the name of the Optionee or, if requested by the Optionee, in the name of the Optionee
and his or her spouse. Until the Shares are issued (as evidenced by the appropriate entry on the
books of the Company or of a duly authorized transfer agent of the Company), no right to vote or
receive dividends or any other rights as a stockholder shall exist with respect to the Optioned
Shares, notwithstanding the exercise of the Option. The Company shall issue (or cause to be
issued) such Shares promptly after the Option is exercised. No adjustment will be made for a
dividend or other right for which the record date is prior to the date the Shares are issued,
except as provided in Section 17 hereof.
(iii) Exercising an Option in any manner shall decrease the number of Optioned Shares
thereafter available, both for purposes of the Plan and for sale under the Option, by the number of
Shares as to which the Option is exercised.
(b)
Termination of Relationship as a Service Provider
. If an Optionee ceases to be a
Service Provider, other than upon the Optionees death or Disability, such Optionee may exercise
his or her Option for a period of three (3) months measured from the date of termination, or such
longer period of time as specified in the Option Agreement, to the extent that the Option is vested
on the date of termination (but in no event later than the expiration of the term of the Option as
set forth in the Option Agreement). If, on the date of termination, the Optionee is not vested as
to his or her entire Option, the Option shall immediately terminate as to all the Optioned Shares
covered by the unvested portion of the Option, and those Optioned Shares shall revert immediately
to the Plan. To the extent the Optionee does not, within the post-termination time period
specified in the Option Agreement, exercise the Option for the Optioned Shares in which Optionee is
vested at the time of such termination of Service Provider status, the Option shall terminate with
respect to those vested Optioned Shares at the end of such period, and those Optioned Shares shall
revert to the Plan.
(c)
Disability of Optionee
. If an Optionee ceases to be a Service Provider as a
result of the Optionees Disability, the Optionee may exercise his or her Option within twelve (12)
months of termination, or such longer period of time as specified in the Option Agreement, to the
extent the Option is vested on the date of termination (but in no event later than the expiration
of the term of such Option as set forth in the Option Agreement). If, on the date of termination,
the Optionee is not vested as to his or her entire Option, the Option shall immediately terminate
as to the Optioned Shares covered by the unvested portion of the Option, and those Optioned Shares
shall revert immediately to the Plan. To the extent the Optionee does not, within the post-
9
termination time period specified in the Option Agreement, exercise the Option for the
Optioned Shares in which Optionee is vested at the time of such termination of Service Provider
status, the Option shall terminate with respect to those vested Optioned Shares at the end of such
period, and those Optioned Shares shall revert to the Plan.
(d)
Death of Optionee
. If an Optionee dies while a Service Provider, the Option may
be exercised within twelve (12) months following Optionees death, or such longer period of time as
specified in the Option Agreement, to the extent that the Option is vested on the date of death
(but in no event later than the expiration of the term of such Option as set forth in the Option
Agreement) by the Optionees designated beneficiary, provided such beneficiary has been designated
prior to Optionees death in a form acceptable to the Administrator. If no such beneficiary has
been designated by the Optionee, then such Option may be exercised by the personal representative
of the Optionees estate or by the person(s) to whom the Option is transferred pursuant to the
Optionees will or in accordance with the laws of descent and distribution. If, at the time of
death, the Optionee is not vested as to his or her entire Option, the Option shall immediately
terminate as to the Optioned Shares covered by the unvested portion of the Option, and those
Optioned Shares shall immediately revert to the Plan. To the extent the Option is not, within the
post-termination time period specified in the Option Agreement, exercised for the Optioned Shares
in which Optionee is vested at the time of such termination of Service Provider status, the Option
shall terminate with respect to those vested Optioned Shares, and those Optioned Shares shall
revert to the Plan.
11.
Formula Option Grants to Outside Directors
. Outside Directors shall automatically
be granted Options in accordance with the following provisions:
(a) All Options granted pursuant to this Section shall be Nonstatutory Stock Options and,
except as otherwise provided in this Section 11, shall be subject to the other terms and conditions
of the Plan.
(b) Each individual who becomes an Outside Director after the Effective Date shall be
automatically granted an Option to purchase 20,000 Shares subject to adjustment as set forth in
Section 17(a) below (the First Option) on the date such individual is elected as a Director,
whether through election by the stockholders of the Company or appointment by the Board to fill a
vacancy;
provided, however,
that an Inside Director who ceases to be an Inside Director but who
remains a Director shall not receive a First Option.
(c) On each annual stockholder meeting commencing with the Effective Date, each Outside
Director who continues to serve in such capacity immediately after such annual stockholder meeting
shall be automatically granted an Option to purchase 7,500 Shares and 1,000 Stock Units subject to
adjustment as set forth in Section 17(a) below (a Subsequent Option); provided that the Outside
Director has served on the Board for at least six calendar months prior to the date of such annual
stockholder meeting.
(d) The terms of a First Option or a Subsequent Option granted pursuant to this Section shall
be as follows:
(i) The term of the Option shall be ten (10) years measured from the date of grant.
(ii) The Option shall be exercisable only during the time that the Outside Director remains a
Director and, with respect to Optioned Shares vested on the last day of service as a Director for
the six (6) month period following the date of the Optionees cessation of service as a Director,
provided, however
, that the Option cannot be exercised after the expiration of the term of the
Option. If, at the time of Optionees cessation of service as a Director, the Optionee is not
vested as to his or her entire Option, the Option shall immediately terminate as to the Optioned
Shares covered by the unvested portion of the Option, and those Optioned Shares shall immediately
revert to the Plan. To the extent the Option is not, within the post-termination time period
specified in the Option Agreement, exercised for the Optioned Shares in which the Optionee is
vested at the time of his or her cessation of Director status, the Option shall terminate with
respect to those vested Optioned Shares, and those Optioned Shares shall revert to the Plan.
10
(iii) The exercise price per Share shall be 100% of the Fair Market Value per Share on the
date of grant of the Option.
(iv) The First Option shall vest and become exercisable as to 33% of the Optioned Shares on
each of the first three anniversaries of its date of grant, provided that the Optionee continues to
serve as a Director on such dates.
(v) The Subsequent Option shall vest and become exercisable as to 100% of the Optioned Shares
on the earlier of (i) the one year anniversary of the date of grant of the Option and (ii) the date
immediately preceding the date of the annual meeting of the Companys stockholders for the year
following the year of grant of the Option, provided that the Optionee continues to serve as a
Director on such date.
(vi) If an Outside Director dies or ceases to serve as a Director as a result of the Outside
Directors Disability while holding any outstanding Option under this Section 11, then that Option
may be exercised within six (6) months following his or her death or termination, or such longer
period of time as specified in the Option Agreement, to the extent that the Option is vested on the
date of death or termination (but in no event later than the expiration of the term of such Option
as set forth in the Option Agreement) by the Outside Directors or the Outside Directors
designated beneficiary, provided such beneficiary has been designated prior to his or her death in
a form acceptable to the Administrator. If no such beneficiary has been designated by the Outside
Director, then such Option may be exercised by the personal representative of his or her estate or
by the person(s) to whom the Option is transferred pursuant to his or her will or in accordance
with the laws of descent and distribution. If, at the time of death or termination as a result of
Disability, the Outside Director is not vested as to his or her entire Option, the Option shall
immediately terminate as to the Optioned Shares covered by the unvested portion of the Option, and
those Optioned Shares shall immediately revert to the Plan. To the extent the Option is not,
within the post-termination time period specified in the Option Agreement, exercised for the
Optioned Shares in which the Outside Director is vested at the time of death or termination as a
result of Disability, the Option shall terminate with respect to those vested Optioned Shares, and
those Optioned Shares shall revert to the Plan.
(vii) In the event of a Corporate Transaction, all Options granted pursuant to this Section II
shall be subject to the terms and conditions of Section 17©; provided that in the event that the
successor corporation does not assume or substitute for each First Option and Subsequent Option,
the Optionee shall fully vest in and have the right to exercise the Option as to all of the
Optioned Shares, including Shares as to which it would not otherwise be vested or exercisable.
(e) The Board shall have sole and exclusive authority to establish, maintain, amend, suspend,
and terminate any program by which Outside Directors are automatically granted Nonstatutory Stock
Options pursuant to this Section 11.
12.
Limited Transferability of Options
. An Option generally may not be sold, pledged,
assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws
of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the
Optionee; provided however that Nonstatutory Stock Options may be transferred by instrument to an
inter vivos or testamentary trust in which the Nonstatutory Stock Options are to be passed to
beneficiaries upon the death of the trustor (settlor) or by gift or pursuant to domestic relations
orders to Immediate Family Members (as defined below) of the Optionee.
Immediate
Family
means any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former
spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law,
brother-in-law, or sister-in-law (including adoptive relationships), a trust in which these persons
have more than fifty percent of the beneficial interest, a foundation in which these persons (or
the Optionee) control the management of assets, and any other entity in which these persons (or the
Optionee) own more than fifty percent of the voting interests. The Optionee may designate one or
more persons as the beneficiary or beneficiaries of his or her outstanding Options, and those
Options shall, in accordance with such designation, automatically be transferred to such
beneficiary or beneficiaries upon the Optionees death while holding those Options. Such
beneficiary or beneficiaries shall take the transferred Options subject to all the terms and
conditions of the applicable agreement evidencing each such
11
transferred Option, including (without limitation) the limited time period during which the
Option may be exercised following the Optionees death.
13.
Stock Grants and Stock Unit Awards
.
Each Stock Award Agreement reflecting the
issuance of a Stock Grant or Stock Unit shall be in such form and shall contain such terms and
conditions as the Administrator shall deem appropriate. The terms and conditions of such
agreements may change from time to time, and the terms and conditions of separate agreements need
not be identical, but each such agreement shall include (through incorporation of provisions hereof
by reference in the agreement or otherwise) the substance of each of the following provisions:
(a)
Consideration
.
A Stock Grant or Stock Unit may be awarded in consideration for
such property or services as is permitted under Applicable Law, including for past services
actually rendered to the Company or a Subsidiary for its benefit.
(b)
Vesting
.
Shares of Common Stock awarded under an agreement reflecting a Stock
Grant and a Stock Unit award may, but need not, be subject to a share repurchase option, forfeiture
restriction or other conditions in favor of the Company in accordance with a vesting or lapse
schedule to be determined by the Administrator.
(c)
Termination of Participants Relationship as a Service Provider
.
In the event a
Participants relationship as a Service Provider terminates, the Company may reacquire any or all
of the Shares held by the Participant which have not vested or which are otherwise subject to
forfeiture or other conditions as of the date of termination under the terms of the agreement.
(d)
Transferability
. Except as determined by the Board, no rights to acquire Shares
under a Stock Grant or a Stock Unit shall be assignable or otherwise transferable by the
Participant except by will or by the laws of descent and distribution.
14.
Stock Appreciation Rights
.
(a)
General
.
Stock Appreciation Rights may be granted either alone, in addition to,
or in tandem with other Awards granted under the Plan. The Administrator may grant Stock
Appreciation Rights to eligible Participants subject to terms and conditions not inconsistent with
this Plan and determined by the Administrator. The specific terms and conditions applicable to the
Participant shall be provided for in the Stock Award Agreement. Stock Appreciation Rights shall be
exercisable, in whole or in part, at such times as the Administrator shall specify in the Stock
Award Agreement.
(b)
Exercise of Stock Appreciation Right
.
Upon the exercise of a Stock Appreciation
Right, in whole or in part, the Participant shall be entitled to a payment in an amount equal to
the excess of the Fair Market Value on the date of exercise of a fixed number of Shares covered by
the exercised portion of the Stock Appreciation Right, over the Fair Market Value on the grant date
of the Shares covered by the exercised portion of the Stock Appreciation Right (or such other
amount calculated with respect to Shares subject to the award as the Administrator may determine).
The amount due to the Participant upon the exercise of a Stock Appreciation Right shall be paid in
such form of consideration as determined by the Administrator and may be in cash, Shares or a
combination thereof, over the period or periods specified in the Stock Award Agreement. A Stock
Award Agreement may place limits on the amount that may be paid over any specified period or
periods upon the exercise of a Stock Appreciation Right, on an aggregate basis or as to any
Participant. A Stock Appreciation Right shall be considered exercised when the Company receives
written notice of exercise in accordance with the terms of the Stock Award Agreement from the
person entitled to exercise the Stock Appreciation Right.
(c)
Transferability
. Except as determined by the Board, no Stock Appreciation Rights
shall be assignable or otherwise transferable by the Participant except by will or by the laws of
descent and distribution.
12
15.
Cash Awards
.
Each Cash Award will confer upon the Participant the opportunity to
earn a future payment tied to the level of achievement with respect to one or more performance
criteria established for a performance period of not less than one (1) year.
(a)
Cash Award
.
Each Cash Award shall contain provisions regarding (i) the target
and maximum amount payable to the Participant as a Cash Award, (ii) the Qualifying Performance
Criteria and level of achievement versus these criteria which shall determine the amount of such
payment, (iii) the period as to which performance shall be measured for establishing the amount of
any payment, (iv) the timing of any payment earned by virtue of performance, (v) restrictions on
the alienation or transfer of the Cash Award prior to actual payment, (vi) forfeiture provisions,
and (vii) such further terms and conditions, in each case not inconsistent with the Plan, as may be
determined from time to time by the Administrator. The maximum amount payable as a Cash Award may
be a multiple of the target amount payable, but the maximum amount payable pursuant to that portion
of a Cash Award granted under this Plan for any fiscal year to any Participant shall not exceed
U.S. $1,000,000.
(b)
Performance Criteria
. The Administrator shall establish the Qualifying
Performance Criteria and level of achievement versus these criteria which shall determine the
target and the minimum and maximum amount payable under a Cash Award. The Administrator may
specify the percentage of the target Cash Award that is intended to satisfy the requirements for
performance-based compensation under Section 162(m) of the Code. Notwithstanding anything to the
contrary herein, the performance criteria for any portion of a Cash Award that is intended to
satisfy the requirements for performance-based compensation under Section 162(m) of the Code
shall be a measure established by the Administrator based on one or more Qualifying Performance
Criteria selected by the Administrator and specified in writing not later than 90 days after the
commencement of the period of service to which the performance goals relates, provided that the
outcome is substantially uncertain at that time (or in such other manner that complies with Section
162(m)).
(c)
Timing and Form of Payment
.
The Administrator shall determine the timing of
payment of any Cash Award. The Administrator may provide for or, subject to such terms and
conditions as the Administrator may specify and Applicable Laws, may permit a Participant to elect
for the payment of any Cash Award to be deferred to a specified date or event. The Administrator
may specify the form of payment of Cash Awards, which may be cash or other property, or may provide
for a Participant to have the option for his or her Cash Award, or such portion thereof as the
Administrator may specify, to be paid in whole or in part in cash or other property.
(d)
Termination of Relationship as a Service Provider
.
The Administrator shall have
the discretion to determine the effect of a termination as a Service Provider due to (i)
Disability, (ii) death or (iii) otherwise shall have on any Cash Award.
16.
Section 162(m) Compliance
.
Any Stock Award (other than an Option or any other
Stock Award having a purchase price equal to 100% of the Fair Market Value on the date such award
is made) or Cash Award that is intended as qualified performance-based compensation within the
meaning of Section 162(m) of the Code must vest or become exercisable or payable contingent on the
achievement of one or more Qualifying Performance Criteria. Notwithstanding anything to the
contrary herein, the Committee shall have the discretion to determine the time and manner of
compliance with Section 162(m) of the Code as required under applicable regulations and to conform
the procedures related to the Award to the requirements of Section 162(m) and may in its discretion
reduce the number of Shares granted or amount of cash or other property to which a Participant may
otherwise have been entitled with respect to an Award designed to qualify as performance-based
compensation under Section 162(m).
17.
Adjustments Upon Changes in Capitalization, Dissolution or Corporate Transaction
.
(a)
Changes in Capitalization
. Subject to any required action by the stockholders of
the Company, (i) the number of Shares which have been authorized for issuance under the Plan but as
to which no Awards have yet been granted or which have been returned to the Plan upon cancellation
or expiration of an Award,
13
(ii) the number of Shares that may be added annually to the Plan pursuant to Section 3(b)(i)
hereof, (iii) the number of Optioned Shares granted under First Options and Subsequent Options
under Section 11 hereof, (iv) the maximum numbers of Shares that may be granted under Awards to any
Service Provider within any fiscal year as set forth in Section 6(c) and (v) the number of Shares
as well as the price per Share subject to each outstanding Award, shall be proportionately adjusted
for any increase or decrease in the number of issued Shares resulting from a stock split, reverse
stock split, stock dividend, combination or reclassification of the Common Stock, or any other
increase or decrease in the number of issued Shares effected without receipt of consideration by
the Company;
provided, however,
that conversion of any convertible securities of the Company shall
not be deemed to have been effected without receipt of consideration. Such adjustment shall be
made by the Administrator, whose determination in that respect shall be final, binding and
conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of
any class, or securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price of Shares.
(b)
Dissolution or Liquidation
. In the event of the proposed dissolution or
liquidation of the Company, the Administrator shall notify each Participant as soon as practicable
prior to the effective date of such proposed transaction. The Administrator in its discretion may
(but need not) provide for a Participant to have the right to exercise his or her Option or Stock
Award until ten (10) days prior to such transaction as to all of the Shares covered thereby,
including Shares as to which the Option or Stock Award would not otherwise be exercisable. In
addition, the Administrator may (but need not) provide that any Company repurchase option
applicable to any unvested Shares purchased upon exercise of an Option or issued under a Stock
Award shall lapse as to all such Shares, provided the proposed dissolution or liquidation takes
place at the time and in the manner contemplated. To the extent it has not been previously
exercised, an Award will terminate immediately prior to the consummation of such proposed action.
(c)
Corporate Transaction
.
(i) In the event of a Corporate Transaction, as determined by the Board or a Committee, the
Board or Committee may, in its discretion, (i) provide for the assumption or substitution of, or
adjustment to, each outstanding Award; (ii) accelerate the vesting of Options and terminate any
restrictions on Cash Awards or Stock Awards; and/or (iii) provide for termination of Awards as a
result of the Corporate Transaction on such terms and conditions as it deems appropriate, including
providing for the cancellation of Awards for a cash payment to the Participant. For the purposes
of this paragraph, the Award shall be considered assumed if, following the Corporate Transaction,
the Award confers the right to purchase or receive, for each Share or amount of cash covered by the
Award immediately prior to the Corporate Transaction, the consideration (whether stock, cash, or
other securities or property) received in the Corporate Transaction by holders of Common Stock for
each Share held on the effective date of the Corporate Transaction (and if holders were offered a
choice of consideration, the type of consideration chosen by the holders of a majority of the
outstanding Shares);
provided, however,
that if such consideration received in the Corporate
Transaction is not solely common stock of the successor corporation or its Parent, the
Administrator may, with the consent of the successor corporation, provide for the consideration to
be received upon the exercise of the Award, for each Share covered by the Award, to be solely
common stock of the successor corporation or its Parent equal in fair market value to the per share
consideration received by holders of Shares in the Corporate Transaction.
(ii) Each Option or Stock Award which is assumed pursuant to this Section 17(c) shall be
appropriately adjusted, immediately after such Corporate Transaction, to apply to the number and
class of securities which would have been issuable to the Participant in consummation of such
Corporate Transaction had the Option or Stock Award been exercised immediately prior to such
Corporate Transaction. Appropriate adjustments to reflect such Corporate Transaction shall also be
made to (A) the exercise or purchase price payable per share under each outstanding Option or Stock
Award, provided the aggregate exercise or purchase price payable for such securities shall remain
the same, (B) the maximum number and/or class of securities available for issuance over the
remaining term of the Plan, (C) the maximum number and/or class of securities for which any one
person may be granted Options or Stock Awards under the Plan per year, (D) the maximum number
and/or class of securities by which the share reserve is to increase automatically each year and
(E) the number and/or class of securities subject to the Options granted under Section 11.
14
18.
Date of Grant
. The date of grant of a First Option or Subsequent Option shall be
the date on which it was automatically granted pursuant to Section 11 hereof. The date of grant of
any other Award shall be, for all purposes, the date on which the Administrator grants such Award.
Notice of the grant shall be provided to each Participant within a reasonable time after the date
of such grant.
19.
Amendment and Termination of the Plan
. The Board may at any time amend, alter,
suspend or terminate the Plan. However, the Company shall obtain stockholder approval of any Plan
amendment to the extent necessary and desirable to comply with Applicable Laws. In addition, no
amendment, alteration, suspension or termination of the Plan shall impair the rights of any
Participant under any grant theretofore made, unless mutually agreed otherwise between the
Participant and the Administrator, which agreement must be in writing and signed by the Participant
and the Company. Termination of the Plan shall not affect the Administrators ability to exercise
the powers granted to it hereunder with respect to Awards granted under the Plan prior to the date
of such termination. In addition, unless approved by the stockholders of the Company, no amendment
shall be made that would result in a repricing of Options by (x) reducing the exercise price of
outstanding Options or (y) canceling an outstanding Option held by a Participant and re-granting to
the Participant a new Option with a lower exercise price, in either case other than in connection
with a change in the Companys capitalization pursuant to Section 17(a) of the Plan.
20.
Conditions Upon Issuance of Shares
.
(a) Awards shall not be granted and Shares shall not be issued pursuant to the exercise of an
Award unless the grant of the Award, the exercise or settlement of such Award and the issuance and
delivery of such Shares shall comply with Applicable Laws and shall be further subject to the
approval of counsel for the Company with respect to such compliance.
(b) No Shares or other assets shall be issued or delivered under the Plan unless and until
there shall have been compliance with all applicable requirements of Federal and state securities
laws, including the filing and effectiveness of the Form S-8 registration statement for the Shares,
and all applicable listing requirements of any stock exchange (or the Nasdaq National Market, if
applicable) on which Common Stock is then listed for trading.
21.
Inability to Obtain Authority
. The inability of the Company to obtain authority
from any regulatory body having jurisdiction (including under Section 20), which authority is
deemed by the Companys counsel to be necessary to the lawful grant of Awards and issuance and sale
of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to
grant such Awards or issue or sell such Shares as to which such requisite authority shall not have
been obtained.
22.
Reservation of Shares
. The Company, during the term of this Plan, will at all
times reserve and keep available such number of Shares as shall be sufficient to satisfy the
requirements of the Plan.
23.
Stockholder Approval
. If required by Applicable Laws, continuance of the Plan
shall be subject to approval by the stockholders of the Company within twelve (12) months after the
date the Plan is adopted or after any amendment requiring stockholder approval is made. Such
stockholder approval shall be obtained in the manner and to the degree required under Applicable
Laws.
15
EXHIBIT 10.55
INDEMNIFICATION AGREEMENT
THIS AGREEMENT (the Agreement) is made and entered into by and between Illumina, Inc., a
Delaware corporation (the Company), and Gregory F. Heath (Indemnitee). This Agreement shall be
effective as of the date the Indemnitee became a member of the Board of Directors of the Company or
an employee of the Company, as applicable (the Effective Date).
WITNESSETH THAT:
WHEREAS, Indemnitee performs a valuable service for the Company; and
WHEREAS, the Board of Directors of the Company has adopted a Certificate of Incorporation and
Bylaws (the Bylaws) which provide that the Company shall indemnify directors and officers of the
Company and that the Company shall have the power to indemnify employees and agents of the Company,
in each case to the fullest extent permitted by the Delaware General Corporation Law, as amended
(Delaware Law); and
WHEREAS, in recognition of Indemnitees need for protection against personal liability in
order to enhance Indemnitees continued service to the Company in an effective manner, and in part
to provide Indemnitee with specific contractual assurance that the indemnification protection
provided by the Certificate of Incorporation and By-laws of the Company will be available to
Indemnitee (regardless of, among other things, any amendment to or revocation of such Certificate
of Incorporation and By-laws or any change in the composition of the Board of Directors of the
Company or acquisition transaction relating to the Company), and in order to induce Indemnitee to
continue to provide services to the Company as a member of the Board of Directors or as an employee
thereof (as applicable), the Company wishes to provide in this Agreement for the indemnification of
and the advancing of expenses to Indemnitee to the fullest extent (whether partial or complete)
permitted by law and as set forth in this Agreement, and, to the extent insurance is maintained,
for the continued coverage of Indemnitee under the Companys liability insurance policies; and
WHEREAS, in order to induce Indemnitee to provide or continue to provide services to the
Company, the Company has determined and agreed to enter into this Agreement with Indemnitee, which
shall be effective as of the Effective Date;
NOW, THEREFORE, in view of the considerations set forth above the Company and Indemnitee
hereby agree as follows:
1.
Indemnity of Indemnitee
. The Company hereby agrees to hold harmless and indemnify
Indemnitee to the fullest extent authorized or permitted by the provisions of the Delaware Law, as
such may be amended from time to time, and Article VII of the Certificate of
Illumina , Inc.
1
Incorporation and Sections 6.1 and 6.2 of the Bylaws, as such Certificate of Incorporation and
Bylaws are in effect on the date hereof and as such may be amended from time to time to enhance the
rights of Indemnitee. In furtherance of the foregoing indemnification, and without limiting the
generality thereof:
(a)
Proceedings Other Than Proceedings by or in the Right of the Company
. Indemnitee
shall be entitled to the rights of indemnification provided in this Section 1(a) if, by reason of
Indemnitees Corporate Status (as hereinafter defined), the Indemnitee is, or is threatened to be
made, a party to or participant in any Proceeding (as hereinafter defined) other than a Proceeding
by or in the right of the Company. Pursuant to this Section 1(a), Indemnitee shall be indemnified
against all Expenses (as hereinafter defined), judgments, penalties, fines and amounts paid in
settlement actually and reasonably incurred by Indemnitee, or on Indemnitees behalf, in connection
with such Proceeding or any claim, issue or matter therein, if Indemnitee acted in good faith and
in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the
Company, and with respect to any criminal Proceeding, had no reasonable cause to believe
Indemnitees conduct was unlawful.
(b)
Proceedings by or in the Right of the Company
. Indemnitee shall be entitled to
the rights of indemnification provided in this Section 1(b) if, by reason of Indemnitees Corporate
Status, Indemnitee is, or is threatened to be made, a party to or participant in any Proceeding
brought by or in the right of the Company to procure a judgment in its favor. Pursuant to this
Section 1(b), Indemnitee shall be indemnified against all Expenses actually and reasonably incurred
by Indemnitee, or on Indemnitees behalf, in connection with such Proceeding if Indemnitee acted in
good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best
interests of the Company; provided, however, if applicable law so provides, no indemnification
against such Expenses shall be made in respect of any claim, issue or matter in such Proceeding as
to which Indemnitee shall have been adjudged to be liable to the Company unless and to the extent
that the Court of Chancery of the State of Delaware shall determine that such indemnification may
be made.
(c)
Indemnification for Expenses of a Party Who is Wholly or Partly Successful
.
Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, by reason
of Indemnitees Corporate Status, a party to and is successful, on the merits or otherwise, in any
Proceeding, Indemnitee shall be indemnified to the maximum extent permitted by law against all
Expenses actually and reasonably incurred by Indemnitee or on Indemnitees behalf in connection
therewith. If Indemnitee is not wholly successful in such Proceeding but is successful, on the
merits or otherwise, as to one or more but less than all claims, issues or matters in such
Proceeding, the Company shall indemnify Indemnitee against all Expenses actually and reasonably
incurred by Indemnitee or on Indemnitees behalf in connection with each successfully resolved
claim, issue or matter. For purposes of this Section and without limitation, the termination of
any claim, issue or matter in such a Proceeding by dismissal, with or without prejudice, shall be
deemed to be a successful result as to such claim, issue or matter.
2
2.
Contribution in the Event of Joint Liability
.
(a) Whether or not the indemnification provided in Section 1 hereof is available, in respect
of any threatened, pending or completed action, suit or proceeding in which the Company is jointly
liable with Indemnitee (or would be if joined in such action, suit or proceeding), the Company
shall contribute to the amount of expenses (including attorneys fees), judgments, fines and
amounts paid in settlement of such action, suit or proceeding actually and reasonably incurred and
paid or payable by Indemnitee in proportion to the relative fault of the Company and all officers,
directors or employees of the Company other than Indemnitee who are jointly liable with Indemnitee
(or would be if joined in such action, suit or proceeding), on the one hand, and Indemnitee, on the
other hand, in connection with the events that resulted in such expenses, judgments, fines or
settlement amounts, as well as any other equitable considerations which the Delaware Law may
require to be considered. The relative fault of the Company and all officers, directors or
employees of the Company, other than Indemnitee, who are jointly liable with Indemnitee (or would
be if joined in such action, suit or proceeding), on the one hand, and Indemnitee, on the other
hand, shall be determined by reference to, among other things, the degree to which their actions
were motivated by intent to gain personal profit or advantage, the degree to which their liability
is primary or secondary and the degree to which their conduct is active or passive.
(b) The Company hereby agrees to fully indemnify and hold Indemnitee harmless from any claims
of contribution which may be brought by officers, directors or employees of the Company, other than
Indemnitee, who may be jointly liable with Indemnitee.
3.
Indemnification for Expenses of a Witness
. Notwithstanding any other provision of
this Agreement, to the extent that Indemnitee is, by reason of Indemnitees Corporate Status, a
witness in any Proceeding to which Indemnitee is not a party, Indemnitee shall be indemnified
against all Expenses actually and reasonably incurred by Indemnitee or on Indemnitees behalf in
connection therewith.
4.
Advancement of Expenses
. Notwithstanding any other provision of this Agreement,
the Company shall advance all Expenses incurred by or on behalf of Indemnitee in connection with
any Proceeding by reason of Indemnitees Corporate Status within ten (10) days after the receipt by
the Company of a statement or statements from Indemnitee requesting such advance or advances from
time to time, whether prior to or after final disposition of such Proceeding. Such statement or
statements shall reasonably evidence the Expenses incurred by Indemnitee and shall include or be
preceded or accompanied by an undertaking by or on behalf of Indemnitee to repay any Expenses
advanced if it shall ultimately be determined that Indemnitee is not entitled to be indemnified
against such Expenses. Any advances and undertakings to repay pursuant to this Section 4 shall be
unsecured and interest free. Notwithstanding the foregoing, the obligation of the Company to
advance Expenses pursuant to this Section 4 shall be subject to the condition that, if, when and to
the extent that the Company determines that Indemnitee would not be permitted to be indemnified
under applicable law, the Company shall be entitled to be reimbursed, within twenty (20) days of
such determination, by Indemnitee (who hereby agrees to reimburse the Company) for all such amounts
theretofore paid;
provided
,
however
, that if Indemnitee has commenced or thereafter
commences legal
3
proceedings in a court of competent jurisdiction to secure a determination that Indemnitee
should be indemnified under applicable law, any determination made by the Company that Indemnitee
would not be permitted to be indemnified under applicable law shall not be binding and Indemnitee
shall not be required to reimburse the Company for any advance of Expenses until a final judicial
determination is made with respect thereto (and as to which all rights of appeal therefrom have
been exhausted or lapsed).
5.
Procedures and Presumptions for Determination of Entitlement to Indemnification
.
It is the intent of this Agreement to secure for Indemnitee rights of indemnity that are as
favorable as may be permitted under the Delaware Law and public policy of the State of Delaware.
Accordingly, the parties agree that the following procedures and presumptions shall apply in the
event of any question as to whether Indemnitee is entitled to indemnification under this Agreement:
(a) To obtain indemnification (including, but not limited to, the advancement of Expenses and
contribution by the Company) under this Agreement, Indemnitee shall submit to the Company a written
request, including therein or therewith such documentation and information as is reasonably
available to Indemnitee and is reasonably necessary to determine whether and to what extent
Indemnitee is entitled to indemnification. The Secretary of the Company shall, promptly upon
receipt of such a request for indemnification, advise the Board of Directors in writing that
Indemnitee has requested indemnification.
(b) In the event the Company shall be obligated hereunder to pay the Expenses of any
Proceeding, the Company shall be entitled to assume the defense of such Proceeding with counsel
approved by Indemnitee, which approval shall not be unreasonably withheld, upon the delivery to
Indemnitee of written notice of its election so to do. After delivery of such notice, approval of
such counsel by Indemnitee and the retention of such counsel by the Company, the Company will not
be liable to Indemnitee under this Agreement for any fees of counsel subsequently incurred by
Indemnitee with respect to the same Proceeding; provided that, (i) Indemnitee shall have the right
to employ Indemnitees counsel in any such Proceeding at Indemnitees expense and (ii) if (A) the
employment of counsel by Indemnitee has been previously authorized by the Company, (B) Indemnitee
shall have reasonably concluded that there is a conflict of interest between the Company and
Indemnitee in the conduct of any such defense, or (C) the Company shall not continue to retain such
counsel to defend such Proceeding, then the fees and expenses of Indemnitee counsel shall be at the
expense of the Company. The Company shall have the right to conduct such defense as it sees fit in
its sole discretion; provided, however, the Company shall not, without the prior written consent of
Indemnitee, consent to the entry of any judgment against Indemnitee or enter into any settlement or
compromise which (i) includes an admission of fault of Indemnitee or (ii) does not include, as an
unconditional term thereof, the full release of Indemnitee from all liability in respect of such
Proceeding, which release shall be in form and substance reasonably satisfactory to Indemnitee.
(c) Upon written request by Indemnitee for indemnification pursuant to the first sentence of
Section 5(a) hereof, a determination, if required by applicable law, with respect to Indemnitees
entitlement thereto shall be made in the specific case by one of the following three methods, which
shall be at the election of Indemnitee: (1) by a majority vote of
4
the Disinterested Directors, even though less than a quorum, (2) by independent legal counsel
in a written opinion or (3) by the stockholders.
(d) If the determination of entitlement to indemnification is to be made by Independent
Counsel pursuant to Section 5(c) hereof, the Independent Counsel shall be selected as provided in
this Section 5(d). The Independent Counsel shall be selected by the Board of Directors and
approved by Indemnitee. Indemnitee may, within 10 days after such written notice of selection
shall have been given, deliver to the Company a written objection to such selection; provided,
however, that such objection may be asserted only on the ground that the Independent Counsel so
selected does not meet the requirements of Independent Counsel as defined in Section 14 of this
Agreement, and the objection shall set forth with particularity the factual basis of such
assertion. Absent a proper and timely objection, the person so selected shall act as Independent
Counsel. If a written objection is made and substantiated, the Independent Counsel selected may
not serve as Independent Counsel unless and until such objection is withdrawn or a court has
determined that such objection is without merit. If, within 20 days after submission by Indemnitee
of a written request for indemnification pursuant to Section 5(a) hereof, no Independent Counsel
shall have been selected and not objected to, either the Company or Indemnitee may petition the
Court of Chancery of the State of Delaware or other court of competent jurisdiction for resolution
of any objection which shall have been made by Indemnitee to the Companys selection of Independent
Counsel and/or for the appointment as Independent Counsel of a person selected by the court or by
such other person as the court shall designate, and the person with respect to whom all objections
are so resolved or the person so appointed shall act as Independent Counsel under Section 5(c)
hereof. The Company shall pay any and all reasonable fees and expenses of Independent Counsel
incurred by such Independent Counsel in connection with acting pursuant to Section 5(c) hereof, and
the Company shall pay all reasonable fees and expenses incident to the procedures of this Section
5(d), regardless of the manner in which such Independent Counsel was selected or appointed.
(e) In making a determination with respect to entitlement to indemnification hereunder, the
person or persons or entity making such determination shall presume that Indemnitee is entitled to
indemnification under this Agreement. Anyone seeking to overcome this presumption shall have the
burden of proof and the burden of persuasion by clear and convincing evidence.
(f) Indemnitee shall be deemed to have acted in good faith if Indemnitees action is based on
the records or books of account of the Enterprise, including financial statements, or on
information supplied to Indemnitee by the officers of the Enterprise (as hereinafter defined) in
the course of their duties, or on the advice of legal counsel for the Enterprise or on information
or records given or reports made to the Enterprise by an independent certified public accountant or
by an appraiser or other expert selected with reasonable care by the Enterprise. In addition, the
knowledge and/or actions, or failure to act, of any director, officer, agent or employee of the
Enterprise shall not be imputed to Indemnitee for purposes of determining the right to
indemnification under this Agreement. Whether or not the foregoing provisions of this Section 5(f)
are satisfied, it shall in any event be presumed that Indemnitee has at all times acted in good
faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests
of the Company. Anyone seeking to overcome this
5
presumption shall have the burden of proof and the burden of persuasion by clear and
convincing evidence.
(g) If the person, persons or entity empowered or selected under Section 5 to determine
whether Indemnitee is entitled to indemnification shall not have made a determination within thirty
(30) days after receipt by the Company of the request therefor, the requisite determination of
entitlement to indemnification shall be deemed to have been made and Indemnitee shall be entitled
to such indemnification absent (i) a misstatement by Indemnitee of a material fact, or an omission
of a material fact necessary to make Indemnitees statement not materially misleading, in
connection with the request for indemnification, or (ii) a prohibition of such indemnification
under applicable law;
provided
,
however
, that such 30-day period may be extended
for a reasonable time, not to exceed an additional fifteen (15) days, if the person, persons or
entity making such determination with respect to entitlement to indemnification in good faith
requires such additional time to obtain or evaluate documentation and/or information relating
thereto; and
provided
,
further
, that the foregoing provisions of this Section 5(g)
shall not apply if the determination of entitlement to indemnification is to be made by the
stockholders pursuant to Section 5(c) of this Agreement and if (A) within fifteen (15) days after
receipt by the Company of the request for such determination, the Board of Directors or the
Disinterested Directors, if appropriate, resolve to submit such determination to the stockholders
for their consideration at an annual meeting thereof to be held within seventy-five (75) days after
such receipt and such determination is made thereat, or (B) a special meeting of stockholders is
called within fifteen (15) days after such receipt for the purpose of making such determination,
such meeting is held for such purpose within sixty (60) days after having been so called and such
determination is made thereat.
(h) Indemnitee shall cooperate with the person, persons or entity making such determination
with respect to Indemnitees entitlement to indemnification, including providing to such person,
persons or entity upon reasonable advance request any documentation or information which is not
privileged or otherwise protected from disclosure and which is reasonably available to Indemnitee
and reasonably necessary to such determination. Any Independent Counsel, member of the Board of
Directors or stockholder of the Company shall act reasonably and in good faith in making a
determination regarding Indemnitees entitlement to indemnification under this Agreement. Any
costs or expenses (including attorneys fees and disbursements) incurred by Indemnitee in so
cooperating with the person, persons or entity making such determination shall be borne by the
Company (irrespective of the determination as to Indemnitees entitlement to indemnification) and
the Company hereby indemnifies and agrees to hold Indemnitee harmless therefrom.
(i) The Company acknowledges that a settlement or other disposition short of final judgment
may be successful if it permits a party to avoid expense, delay, distraction, disruption and
uncertainty. In the event that any action, claim or proceeding to which Indemnitee is a party is
resolved in any manner other than by adverse judgment against Indemnitee (including, without
limitation, settlement of such action, claim or proceeding with or without payment of money or
other consideration) it shall be presumed that Indemnitee has been successful on the merits or
otherwise in such action, suit or proceeding. Anyone seeking to overcome this presumption shall
have the burden of proof and the burden of persuasion by clear and convincing evidence.
6
6.
Remedies of Indemnitee
.
(a) In the event that (i) a determination is made pursuant to Section 5 of this Agreement that
Indemnitee is not entitled to indemnification under this Agreement, (ii) advancement of Expenses is
not timely made pursuant to Section 4 of this Agreement, (iii) no determination of entitlement to
indemnification is made pursuant to Section 5(c) of this Agreement within 90 days after receipt by
the Company of the request for indemnification, (iv) payment of indemnification is not made
pursuant to this Agreement within twenty (20) days after receipt by the Company of a written
request therefor or (v) payment of indemnification is not made within ten (10) days after a
determination has been made that Indemnitee is entitled to indemnification or such determination is
deemed to have been made pursuant to Section 5 of this Agreement, Indemnitee shall be entitled to
an adjudication in an appropriate court of the State of Delaware, or in any other court of
competent jurisdiction, of Indemnitees entitlement to such indemnification. Indemnitee shall
commence such proceeding seeking an adjudication within 180 days following the date on which
Indemnitee first has the right to commence such proceeding pursuant to this Section 6(a). The
Company shall not oppose Indemnitees right to seek any such adjudication.
(b) In the event that a determination shall have been made pursuant to Section 5(c) of this
Agreement that Indemnitee is not entitled to indemnification, any judicial proceeding commenced
pursuant to this Section 6 shall be conducted in all respects as a
de novo
trial on the merits, and
Indemnitee shall not be prejudiced by reason of the adverse determination under Section 5(c).
(c) If a determination shall have been made pursuant to Section 5(c) of this Agreement that
Indemnitee is entitled to indemnification, the Company shall be bound by such determination in any
judicial proceeding commenced pursuant to this Section 6, absent a prohibition of such
indemnification under applicable law.
(d) In the event that Indemnitee, pursuant to this Section 6, seeks a judicial adjudication of
Indemnitees rights under, or to recover damages for breach of, this Agreement, the Company shall
pay on Indemnitees behalf, in advance, any and all expenses (of the types described in the
definition of Expenses in Section 14 of this Agreement) actually and reasonably incurred by
Indemnitee in such judicial adjudication, only if Indemnitee ultimately is determined to be
entitled to such indemnification or advancement of expenses;
provided
,
however
, if
it shall be determined in such judicial adjudication that Indemnitee is entitled to receive part
but not all of the indemnification or advancement of expenses sought, the expenses incurred by
Indemnitee in connection with such judicial adjudication or arbitration shall be appropriately
pro-rated.
(e) The Company shall be precluded from asserting in any judicial proceeding commenced
pursuant to this Section 6 that the procedures and presumptions of this Agreement are not valid,
binding and enforceable and shall stipulate in any such court that the Company is bound by all the
provisions of this Agreement.
(f) Both the Company and Indemnitee acknowledge that in certain instances, federal law or
applicable public policy may prohibit the Company from indemnifying
7
its directors, officers, employees or agents under this Agreement or otherwise. Indemnitee
understands and acknowledges that the Company has undertaken or may be required in the future to
undertake with the Securities and Exchange Commission to submit the question of indemnification to
a court in certain circumstances for a determination of the Companys right under public policy to
indemnify Indemnitee.
7.
Liability Insurance
. To the extent the Company maintains liability insurance
applicable to directors, officers, employees, agents or fiduciaries, Indemnitee shall be covered by
such policies in such a manner as to provide Indemnitee the same rights and benefits as are
provided to the most favorably insured of the Companys directors, if Indemnitee is a director; or
of the Companys officers, if Indemnitee is not a director of the Company but is an officer; or of
the Companys key employees, agents or fiduciaries, if Indemnitee is not a director or officer but
is a key employee, agent or fiduciary.
8.
Exceptions
. Any other provision herein to the contrary notwithstanding, the
Company shall not be obligated pursuant to the terms of this Agreement:
(a)
Excluded Action or Omissions
. To indemnify Indemnitee for Indemnitees acts,
omissions or transactions from which Indemnitee may not be relieved of liability under applicable
law;
(b)
Proceedings Initiated by Indemnitee
. To indemnify or advance expenses to
Indemnitee with respect to Proceedings initiated or brought voluntarily by Indemnitee and not by
way of defense, except (i) with respect to actions or proceedings brought to establish or enforce a
right to indemnification under this Agreement or any other agreement or insurance policy or under
the Companys Certificate of Incorporation or Bylaws now or hereafter in effect relating to
Proceedings, (ii) in specific cases if the Board of Directors has approved the initiation or
bringing of such Proceeding, or (iii) as otherwise required under Section 145 of the Delaware
General Corporation Law, regardless of whether Indemnitee ultimately is determined to be entitled
to such indemnification, advance expense payment or insurance recovery, as the case may be;
(c)
Lack of Good Faith
. To indemnify Indemnitee for any expenses incurred by
Indemnitee with respect to any proceeding instituted by Indemnitee to enforce or interpret this
Agreement, if a court of competent jurisdiction ultimately determines that each of the material
assertions made by Indemnitee in such proceeding was not made in good faith or was frivolous; or
(d)
Claims Under Section 16(b)
. To indemnify Indemnitee for expenses and the payment
of profits arising from the purchase and sale by Indemnitee of securities in violation of Section
16(b) of the Securities Exchange Act of 1934, as amended, or any similar successor statute.
9.
Non-Exclusivity; Survival of Rights; Insurance; Subrogation
.
(a) The rights of indemnification as provided by this Agreement shall not be deemed exclusive
of any other rights to which Indemnitee may at any time be entitled under applicable law, the
Certificate of Incorporation of the Company, the Bylaws, any
8
agreement, a vote of stockholders, a resolution of directors or otherwise. No amendment,
alteration or repeal of this Agreement or of any provision hereof shall limit or restrict any right
of Indemnitee under this Agreement in respect of any action taken or omitted by such Indemnitee in
Indemnitees Corporate Status prior to such amendment, alteration or repeal. To the extent that a
change in the Delaware Law, whether by statute or judicial decision, permits greater
indemnification than would be afforded currently under the Bylaws and this Agreement, it is the
intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits so
afforded by such change. No right or remedy herein conferred is intended to be exclusive of any
other right or remedy, and every other right and remedy shall be cumulative and in addition to
every other right and remedy given hereunder or now or hereafter existing at law or in equity or
otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not
prevent the concurrent assertion or employment of any other right or remedy.
(b) To the extent that the Company maintains an insurance policy or policies providing
liability insurance for directors, officers, employees, or agents or fiduciaries of the Company or
of any other corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise that such person serves at the request of the Company, Indemnitee shall be covered by
such policy or policies in accordance with its or their terms to the maximum extent of the coverage
available for any director, officer, employee, agent or fiduciary under such policy or policies.
(c) In the event of any payment under this Agreement, the Company shall be subrogated to the
extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers
required and take all action necessary to secure such rights, including execution of such documents
as are necessary to enable the Company to bring suit to enforce such rights.
(d) The Company shall not be liable under this Agreement to make any payment of amounts
otherwise indemnifiable hereunder if and to the extent that Indemnitee has otherwise actually
received such payment under any insurance policy, contract, agreement or otherwise.
(e) No legal action shall be brought and no cause of action shall be asserted by or in the
right of the Company against Indemnitee, Indemnitees estate, spouse, heirs, executors or personal
or legal representatives after the expiration of two (2) years from the date of accrual of such
cause of action, and any claim or cause of action of the Company shall be extinguished and deemed
released unless asserted by the timely filing of a legal action within such two-year period;
provided
,
however
, that if any shorter period of limitations is otherwise
applicable to any such cause of action, such shorter period shall govern.
10.
Exception to Right of Indemnification
. Notwithstanding any other provision of
this Agreement, Indemnitee shall not be entitled to indemnification under this Agreement with
respect to any Proceeding brought by Indemnitee, or any claim therein, unless (a) the bringing of
such Proceeding or making of such claim shall have been approved by the Board of Directors of the
Company or (b) such Proceeding is being brought by Indemnitee to assert, interpret or enforce
Indemnitees rights under this Agreement.
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11.
Duration of Agreement
. All agreements and obligations of the Company contained
herein shall continue during the period Indemnitee is a director, officer, employee or agent of the
Company (or is or was serving at the request of the Company as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other enterprise) and shall
continue thereafter so long as Indemnitee shall be subject to any Proceeding (or any proceeding
commenced under Section 6 hereof) by reason of Indemnitees Corporate Status, whether or not
Indemnitee is acting or serving in any such capacity at the time any liability or expense is
incurred for which indemnification can be provided under this Agreement.
12.
Security
. To the extent requested by Indemnitee and approved by the Board of
Directors of the Company, the Company may at any time and from time to time provide security to
Indemnitee for the Companys obligations hereunder through an irrevocable bank line of credit,
funded trust or other collateral. Any such security, once provided to Indemnitee, may not be
revoked or released without the prior written consent of Indemnitee, which consent may not be
unreasonably withheld.
13.
Enforcement
.
(a) The Company expressly confirms and agrees that it has entered into this Agreement and
assumes the obligations imposed on it hereby in order to induce Indemnitee to serve as a director,
officer, employee or agent or of the Company, and the Company acknowledges that Indemnitee is
relying upon this Agreement in serving as a director, officer, employee or agent of the Company.
(b) This Agreement constitutes the entire agreement between the parties hereto with respect to
the subject matter hereof and supersedes all prior agreements and understandings, oral, written and
implied, between the parties hereto with respect to the subject matter hereof.
14.
Definitions
. For purposes of this Agreement:
(a) Corporate Status describes the status, either prior or subsequent to the date of this
agreement, of a person who is or was a director, officer, employee, agent or fiduciary of the
Company or of any other corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise that such person is or was serving at the express written request of the Company.
(b) Disinterested Director means a director of the Company who is not and was not a party to
the Proceeding in respect of which indemnification is sought by Indemnitee.
(c) Enterprise shall mean the Company and any other corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise that Indemnitee is or was serving at the express
written request of the Company as a director, officer, employee, agent or fiduciary.
(d) Expenses shall include all reasonable attorneys fees, retainers, court costs,
transcript costs, fees of experts, witness fees, travel expenses, duplicating costs,
10
printing and binding costs, telephone charges, postage, delivery service fees and all other
disbursements or expenses of the types customarily incurred in connection with prosecuting,
defending, preparing to prosecute or defend, investigating, participating, or being or preparing to
be a witness in a Proceeding.
(e) Independent Counsel means a law firm, or a member of a law firm, that is experienced in
matters of corporation law and neither presently is, nor in the past three (3) years has been,
retained to represent: (i) the Company or Indemnitee in any matter material to either such party
(other than with respect to matters concerning Indemnitee under this Agreement, or of other
indemnitees under similar indemnification agreements), or (ii) any other party to the Proceeding
giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term
Independent Counsel shall not include any person who, under the applicable standards of
professional conduct then prevailing, would have a conflict of interest in representing either the
Company or Indemnitee in an action to determine Indemnitees rights under this Agreement. The
Company agrees to pay the reasonable fees of the Independent Counsel referred to above and to fully
indemnify such counsel against any and all Expenses, claims, liabilities and damages arising out of
or relating to this Agreement or its engagement pursuant hereto.
(f) Proceeding includes any threatened, pending or completed action, suit, arbitration,
alternate dispute resolution mechanism, investigation, inquiry, administrative hearing or any other
actual, threatened or completed proceeding, whether brought by or in the right of the Company or
otherwise and whether civil, criminal, administrative or investigative, in which Indemnitee was, is
or will be involved as a party or otherwise, by reason of the fact that Indemnitee is or was a
director, officer, employee or agent of the Company, by reason of any action taken by Indemnitee or
of any inaction on Indemnitees part while acting as a director, officer, employee or agent of the
Company, or by reason of the fact that Indemnitee is or was serving at the request of the Company
as a director, officer, employee, agent or fiduciary of another corporation, partnership, joint
venture, trust or other Enterprise; in each case whether or not Indemnitee is acting or serving in
any such capacity at the time any liability or expense is incurred for which indemnification can be
provided under this Agreement; including one pending on or before the date of this Agreement, but
excluding one initiated by an Indemnitee pursuant to Section 6 of this Agreement to enforce
Indemnitees rights under this Agreement.
15.
Severability
. If any provision or provisions of this Agreement shall be held by a
court of competent jurisdiction to be invalid, void, illegal or otherwise unenforceable for any
reason whatsoever: (a) the validity, legality and enforceability of the remaining provisions of
this Agreement (including without limitation, each portion of any section of this Agreement
containing any such provision held to be invalid, illegal or unenforceable that is not itself
invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby and shall
remain enforceable to the fullest extent permitted by law; and (b) to the fullest extent possible,
the provisions of this Agreement (including, without limitation, each portion of any section of
this Agreement containing any such provision held to be invalid, illegal or unenforceable that is
not itself invalid, illegal or unenforceable) shall be construed so as to give effect to the intent
manifested thereby. Without limiting the generality of the foregoing, this Agreement is intended to
confer upon Indemnitee indemnification rights to the fullest extent permitted by applicable laws.
In the event any provision hereof conflicts with any applicable
11
law, such provision shall be deemed modified, consistent with the aforementioned intent, to
the extent necessary to resolve such conflict.
16.
Modification and Waiver
. No supplement, modification, termination or amendment of
this Agreement shall be binding unless executed in writing by both of the parties hereto. No
waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of
any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing
waiver.
17.
Notice By Indemnitee
. Indemnitee agrees promptly to notify the Company in writing
upon being served with or otherwise receiving any summons, citation, subpoena, complaint,
indictment, information or other document relating to any Proceeding or matter which may be subject
to indemnification covered hereunder. The failure to so notify the Company shall not relieve the
Company of any obligation which it may have to Indemnitee under this Agreement or otherwise unless
and only to the extent that such failure or delay materially prejudices the Company.
18.
Notices
. All notices, requests, demands and other communications hereunder shall
be in writing and shall be deemed to have been duly given if (i) delivered by hand and receipted
for by the party to whom said notice or other communication shall have been directed, or (ii)
mailed by certified or registered mail with postage prepaid, on the third business day after the
date on which it is so mailed:
(a) If to Indemnitee, to the address set forth below Indemnitee signature hereto.
(b) If to the Company, to:
Illumina, Inc.
9885 Towne Centre Drive
San Diego, California 92121
Attn: President
or to such other address as may have been furnished to Indemnitee by the Company or to the Company
by Indemnitee, as the case may be.
19.
Identical Counterparts
. This Agreement may be executed in one or more
counterparts, each of which shall for all purposes be deemed to be an original but all of which
together shall constitute one and the same Agreement. Only one such counterpart signed by the
party against whom enforceability is sought needs to be produced to evidence the existence of this
Agreement.
20.
Headings
. The headings of the paragraphs of this Agreement are inserted for
convenience only and shall not be deemed to constitute part of this Agreement or to affect the
construction thereof.
12
21.
Governing Law
. The parties agree that this Agreement shall be governed by, and
construed and enforced in accordance with, the laws of the State of Delaware without application of
the conflict of laws principles thereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and as of the day and
year first above written.
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ILLUMINA, INC.
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/s/ Jay T. Flatley
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By: Jay T. Flatley
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Its: President & Chief Executive Officer
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Date: June 23, 2008
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INDEMNITEE
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/s/ Gregory F. Heath
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Name: Gregory F. Heath
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Date: June 24, 2008
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Address:
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13
EXHIBIT 10.56
INDEMNIFICATION AGREEMENT
THIS AGREEMENT (the Agreement) is made and entered into by and between Illumina, Inc., a
Delaware corporation (the Company), and Joel McComb (Indemnitee). This Agreement shall be
effective as of the date the Indemnitee became a member of the Board of Directors of the Company or
an employee of the Company, as applicable (the Effective Date).
WITNESSETH THAT:
WHEREAS, Indemnitee performs a valuable service for the Company; and
WHEREAS, the Board of Directors of the Company has adopted a Certificate of Incorporation and
Bylaws (the Bylaws) which provide that the Company shall indemnify directors and officers of the
Company and that the Company shall have the power to indemnify employees and agents of the Company,
in each case to the fullest extent permitted by the Delaware General Corporation Law, as amended
(Delaware Law); and
WHEREAS, in recognition of Indemnitees need for protection against personal liability in
order to enhance Indemnitees continued service to the Company in an effective manner, and in part
to provide Indemnitee with specific contractual assurance that the indemnification protection
provided by the Certificate of Incorporation and By-laws of the Company will be available to
Indemnitee (regardless of, among other things, any amendment to or revocation of such Certificate
of Incorporation and By-laws or any change in the composition of the Board of Directors of the
Company or acquisition transaction relating to the Company), and in order to induce Indemnitee to
continue to provide services to the Company as a member of the Board of Directors or as an employee
thereof (as applicable), the Company wishes to provide in this Agreement for the indemnification of
and the advancing of expenses to Indemnitee to the fullest extent (whether partial or complete)
permitted by law and as set forth in this Agreement, and, to the extent insurance is maintained,
for the continued coverage of Indemnitee under the Companys liability insurance policies; and
WHEREAS, in order to induce Indemnitee to provide or continue to provide services to the
Company, the Company has determined and agreed to enter into this Agreement with Indemnitee, which
shall be effective as of the Effective Date;
NOW, THEREFORE, in view of the considerations set forth above the Company and Indemnitee
hereby agree as follows:
1.
Indemnity of Indemnitee
. The Company hereby agrees to hold harmless and indemnify
Indemnitee to the fullest extent authorized or permitted by the provisions of the Delaware Law, as
such may be amended from time to time, and Article VII of the Certificate of
Illumina , Inc.
1
Incorporation and Sections 6.1 and 6.2 of the Bylaws, as such Certificate of Incorporation and
Bylaws are in effect on the date hereof and as such may be amended from time to time to enhance the
rights of Indemnitee. In furtherance of the foregoing indemnification, and without limiting the
generality thereof:
(a)
Proceedings Other Than Proceedings by or in the Right of the Company
. Indemnitee
shall be entitled to the rights of indemnification provided in this Section 1(a) if, by reason of
Indemnitees Corporate Status (as hereinafter defined), the Indemnitee is, or is threatened to be
made, a party to or participant in any Proceeding (as hereinafter defined) other than a Proceeding
by or in the right of the Company. Pursuant to this Section 1(a), Indemnitee shall be indemnified
against all Expenses (as hereinafter defined), judgments, penalties, fines and amounts paid in
settlement actually and reasonably incurred by Indemnitee, or on Indemnitees behalf, in connection
with such Proceeding or any claim, issue or matter therein, if Indemnitee acted in good faith and
in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the
Company, and with respect to any criminal Proceeding, had no reasonable cause to believe
Indemnitees conduct was unlawful.
(b)
Proceedings by or in the Right of the Company
. Indemnitee shall be entitled to
the rights of indemnification provided in this Section 1(b) if, by reason of Indemnitees Corporate
Status, Indemnitee is, or is threatened to be made, a party to or participant in any Proceeding
brought by or in the right of the Company to procure a judgment in its favor. Pursuant to this
Section 1(b), Indemnitee shall be indemnified against all Expenses actually and reasonably incurred
by Indemnitee, or on Indemnitees behalf, in connection with such Proceeding if Indemnitee acted in
good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best
interests of the Company; provided, however, if applicable law so provides, no indemnification
against such Expenses shall be made in respect of any claim, issue or matter in such Proceeding as
to which Indemnitee shall have been adjudged to be liable to the Company unless and to the extent
that the Court of Chancery of the State of Delaware shall determine that such indemnification may
be made.
(c)
Indemnification for Expenses of a Party Who is Wholly or Partly Successful
.
Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, by reason
of Indemnitees Corporate Status, a party to and is successful, on the merits or otherwise, in any
Proceeding, Indemnitee shall be indemnified to the maximum extent permitted by law against all
Expenses actually and reasonably incurred by Indemnitee or on Indemnitees behalf in connection
therewith. If Indemnitee is not wholly successful in such Proceeding but is successful, on the
merits or otherwise, as to one or more but less than all claims, issues or matters in such
Proceeding, the Company shall indemnify Indemnitee against all Expenses actually and reasonably
incurred by Indemnitee or on Indemnitees behalf in connection with each successfully resolved
claim, issue or matter. For purposes of this Section and without limitation, the termination of
any claim, issue or matter in such a Proceeding by dismissal, with or without prejudice, shall be
deemed to be a successful result as to such claim, issue or matter.
2
2.
Contribution in the Event of Joint Liability
.
(a) Whether or not the indemnification provided in Section 1 hereof is available, in respect
of any threatened, pending or completed action, suit or proceeding in which the Company is jointly
liable with Indemnitee (or would be if joined in such action, suit or proceeding), the Company
shall contribute to the amount of expenses (including attorneys fees), judgments, fines and
amounts paid in settlement of such action, suit or proceeding actually and reasonably incurred and
paid or payable by Indemnitee in proportion to the relative fault of the Company and all officers,
directors or employees of the Company other than Indemnitee who are jointly liable with Indemnitee
(or would be if joined in such action, suit or proceeding), on the one hand, and Indemnitee, on the
other hand, in connection with the events that resulted in such expenses, judgments, fines or
settlement amounts, as well as any other equitable considerations which the Delaware Law may
require to be considered. The relative fault of the Company and all officers, directors or
employees of the Company, other than Indemnitee, who are jointly liable with Indemnitee (or would
be if joined in such action, suit or proceeding), on the one hand, and Indemnitee, on the other
hand, shall be determined by reference to, among other things, the degree to which their actions
were motivated by intent to gain personal profit or advantage, the degree to which their liability
is primary or secondary and the degree to which their conduct is active or passive.
(b) The Company hereby agrees to fully indemnify and hold Indemnitee harmless from any claims
of contribution which may be brought by officers, directors or employees of the Company, other than
Indemnitee, who may be jointly liable with Indemnitee.
3.
Indemnification for Expenses of a Witness
. Notwithstanding any other provision of
this Agreement, to the extent that Indemnitee is, by reason of Indemnitees Corporate Status, a
witness in any Proceeding to which Indemnitee is not a party, Indemnitee shall be indemnified
against all Expenses actually and reasonably incurred by Indemnitee or on Indemnitees behalf in
connection therewith.
4.
Advancement of Expenses
. Notwithstanding any other provision of this Agreement,
the Company shall advance all Expenses incurred by or on behalf of Indemnitee in connection with
any Proceeding by reason of Indemnitees Corporate Status within ten (10) days after the receipt by
the Company of a statement or statements from Indemnitee requesting such advance or advances from
time to time, whether prior to or after final disposition of such Proceeding. Such statement or
statements shall reasonably evidence the Expenses incurred by Indemnitee and shall include or be
preceded or accompanied by an undertaking by or on behalf of Indemnitee to repay any Expenses
advanced if it shall ultimately be determined that Indemnitee is not entitled to be indemnified
against such Expenses. Any advances and undertakings to repay pursuant to this Section 4 shall be
unsecured and interest free. Notwithstanding the foregoing, the obligation of the Company to
advance Expenses pursuant to this Section 4 shall be subject to the condition that, if, when and to
the extent that the Company determines that Indemnitee would not be permitted to be indemnified
under applicable law, the Company shall be entitled to be reimbursed, within twenty (20) days of
such determination, by Indemnitee (who hereby agrees to reimburse the Company) for all such amounts
theretofore paid;
provided
,
however
, that if Indemnitee has commenced or thereafter
commences legal
3
proceedings in a court of competent jurisdiction to secure a determination that Indemnitee
should be indemnified under applicable law, any determination made by the Company that Indemnitee
would not be permitted to be indemnified under applicable law shall not be binding and Indemnitee
shall not be required to reimburse the Company for any advance of Expenses until a final judicial
determination is made with respect thereto (and as to which all rights of appeal therefrom have
been exhausted or lapsed).
5.
Procedures and Presumptions for Determination of Entitlement to Indemnification
.
It is the intent of this Agreement to secure for Indemnitee rights of indemnity that are as
favorable as may be permitted under the Delaware Law and public policy of the State of Delaware.
Accordingly, the parties agree that the following procedures and presumptions shall apply in the
event of any question as to whether Indemnitee is entitled to indemnification under this Agreement:
(a) To obtain indemnification (including, but not limited to, the advancement of Expenses and
contribution by the Company) under this Agreement, Indemnitee shall submit to the Company a written
request, including therein or therewith such documentation and information as is reasonably
available to Indemnitee and is reasonably necessary to determine whether and to what extent
Indemnitee is entitled to indemnification. The Secretary of the Company shall, promptly upon
receipt of such a request for indemnification, advise the Board of Directors in writing that
Indemnitee has requested indemnification.
(b) In the event the Company shall be obligated hereunder to pay the Expenses of any
Proceeding, the Company shall be entitled to assume the defense of such Proceeding with counsel
approved by Indemnitee, which approval shall not be unreasonably withheld, upon the delivery to
Indemnitee of written notice of its election so to do. After delivery of such notice, approval of
such counsel by Indemnitee and the retention of such counsel by the Company, the Company will not
be liable to Indemnitee under this Agreement for any fees of counsel subsequently incurred by
Indemnitee with respect to the same Proceeding; provided that, (i) Indemnitee shall have the right
to employ Indemnitees counsel in any such Proceeding at Indemnitees expense and (ii) if (A) the
employment of counsel by Indemnitee has been previously authorized by the Company, (B) Indemnitee
shall have reasonably concluded that there is a conflict of interest between the Company and
Indemnitee in the conduct of any such defense, or (C) the Company shall not continue to retain such
counsel to defend such Proceeding, then the fees and expenses of Indemnitee counsel shall be at the
expense of the Company. The Company shall have the right to conduct such defense as it sees fit in
its sole discretion; provided, however, the Company shall not, without the prior written consent of
Indemnitee, consent to the entry of any judgment against Indemnitee or enter into any settlement or
compromise which (i) includes an admission of fault of Indemnitee or (ii) does not include, as an
unconditional term thereof, the full release of Indemnitee from all liability in respect of such
Proceeding, which release shall be in form and substance reasonably satisfactory to Indemnitee.
(c) Upon written request by Indemnitee for indemnification pursuant to the first sentence of
Section 5(a) hereof, a determination, if required by applicable law, with respect to Indemnitees
entitlement thereto shall be made in the specific case by one of the following three methods, which
shall be at the election of Indemnitee: (1) by a majority vote of
4
the Disinterested Directors, even though less than a quorum, (2) by independent legal counsel
in a written opinion or (3) by the stockholders.
(d) If the determination of entitlement to indemnification is to be made by Independent
Counsel pursuant to Section 5(c) hereof, the Independent Counsel shall be selected as provided in
this Section 5(d). The Independent Counsel shall be selected by the Board of Directors and
approved by Indemnitee. Indemnitee may, within 10 days after such written notice of selection
shall have been given, deliver to the Company a written objection to such selection; provided,
however, that such objection may be asserted only on the ground that the Independent Counsel so
selected does not meet the requirements of Independent Counsel as defined in Section 14 of this
Agreement, and the objection shall set forth with particularity the factual basis of such
assertion. Absent a proper and timely objection, the person so selected shall act as Independent
Counsel. If a written objection is made and substantiated, the Independent Counsel selected may
not serve as Independent Counsel unless and until such objection is withdrawn or a court has
determined that such objection is without merit. If, within 20 days after submission by Indemnitee
of a written request for indemnification pursuant to Section 5(a) hereof, no Independent Counsel
shall have been selected and not objected to, either the Company or Indemnitee may petition the
Court of Chancery of the State of Delaware or other court of competent jurisdiction for resolution
of any objection which shall have been made by Indemnitee to the Companys selection of Independent
Counsel and/or for the appointment as Independent Counsel of a person selected by the court or by
such other person as the court shall designate, and the person with respect to whom all objections
are so resolved or the person so appointed shall act as Independent Counsel under Section 5(c)
hereof. The Company shall pay any and all reasonable fees and expenses of Independent Counsel
incurred by such Independent Counsel in connection with acting pursuant to Section 5(c) hereof, and
the Company shall pay all reasonable fees and expenses incident to the procedures of this Section
5(d), regardless of the manner in which such Independent Counsel was selected or appointed.
(e) In making a determination with respect to entitlement to indemnification hereunder, the
person or persons or entity making such determination shall presume that Indemnitee is entitled to
indemnification under this Agreement. Anyone seeking to overcome this presumption shall have the
burden of proof and the burden of persuasion by clear and convincing evidence.
(f) Indemnitee shall be deemed to have acted in good faith if Indemnitees action is based on
the records or books of account of the Enterprise, including financial statements, or on
information supplied to Indemnitee by the officers of the Enterprise (as hereinafter defined) in
the course of their duties, or on the advice of legal counsel for the Enterprise or on information
or records given or reports made to the Enterprise by an independent certified public accountant or
by an appraiser or other expert selected with reasonable care by the Enterprise. In addition, the
knowledge and/or actions, or failure to act, of any director, officer, agent or employee of the
Enterprise shall not be imputed to Indemnitee for purposes of determining the right to
indemnification under this Agreement. Whether or not the foregoing provisions of this Section 5(f)
are satisfied, it shall in any event be presumed that Indemnitee has at all times acted in good
faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests
of the Company. Anyone seeking to overcome this
5
presumption shall have the burden of proof and the burden of persuasion by clear and
convincing evidence.
(g) If the person, persons or entity empowered or selected under Section 5 to determine
whether Indemnitee is entitled to indemnification shall not have made a determination within thirty
(30) days after receipt by the Company of the request therefor, the requisite determination of
entitlement to indemnification shall be deemed to have been made and Indemnitee shall be entitled
to such indemnification absent (i) a misstatement by Indemnitee of a material fact, or an omission
of a material fact necessary to make Indemnitees statement not materially misleading, in
connection with the request for indemnification, or (ii) a prohibition of such indemnification
under applicable law;
provided
,
however
, that such 30-day period may be extended
for a reasonable time, not to exceed an additional fifteen (15) days, if the person, persons or
entity making such determination with respect to entitlement to indemnification in good faith
requires such additional time to obtain or evaluate documentation and/or information relating
thereto; and
provided
,
further
, that the foregoing provisions of this Section 5(g)
shall not apply if the determination of entitlement to indemnification is to be made by the
stockholders pursuant to Section 5(c) of this Agreement and if (A) within fifteen (15) days after
receipt by the Company of the request for such determination, the Board of Directors or the
Disinterested Directors, if appropriate, resolve to submit such determination to the stockholders
for their consideration at an annual meeting thereof to be held within seventy-five (75) days after
such receipt and such determination is made thereat, or (B) a special meeting of stockholders is
called within fifteen (15) days after such receipt for the purpose of making such determination,
such meeting is held for such purpose within sixty (60) days after having been so called and such
determination is made thereat.
(h) Indemnitee shall cooperate with the person, persons or entity making such determination
with respect to Indemnitees entitlement to indemnification, including providing to such person,
persons or entity upon reasonable advance request any documentation or information which is not
privileged or otherwise protected from disclosure and which is reasonably available to Indemnitee
and reasonably necessary to such determination. Any Independent Counsel, member of the Board of
Directors or stockholder of the Company shall act reasonably and in good faith in making a
determination regarding Indemnitees entitlement to indemnification under this Agreement. Any
costs or expenses (including attorneys fees and disbursements) incurred by Indemnitee in so
cooperating with the person, persons or entity making such determination shall be borne by the
Company (irrespective of the determination as to Indemnitees entitlement to indemnification) and
the Company hereby indemnifies and agrees to hold Indemnitee harmless therefrom.
(i) The Company acknowledges that a settlement or other disposition short of final judgment
may be successful if it permits a party to avoid expense, delay, distraction, disruption and
uncertainty. In the event that any action, claim or proceeding to which Indemnitee is a party is
resolved in any manner other than by adverse judgment against Indemnitee (including, without
limitation, settlement of such action, claim or proceeding with or without payment of money or
other consideration) it shall be presumed that Indemnitee has been successful on the merits or
otherwise in such action, suit or proceeding. Anyone seeking to overcome this presumption shall
have the burden of proof and the burden of persuasion by clear and convincing evidence.
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6.
Remedies of Indemnitee
.
(a) In the event that (i) a determination is made pursuant to Section 5 of this Agreement that
Indemnitee is not entitled to indemnification under this Agreement, (ii) advancement of Expenses is
not timely made pursuant to Section 4 of this Agreement, (iii) no determination of entitlement to
indemnification is made pursuant to Section 5(c) of this Agreement within 90 days after receipt by
the Company of the request for indemnification, (iv) payment of indemnification is not made
pursuant to this Agreement within twenty (20) days after receipt by the Company of a written
request therefor or (v) payment of indemnification is not made within ten (10) days after a
determination has been made that Indemnitee is entitled to indemnification or such determination is
deemed to have been made pursuant to Section 5 of this Agreement, Indemnitee shall be entitled to
an adjudication in an appropriate court of the State of Delaware, or in any other court of
competent jurisdiction, of Indemnitees entitlement to such indemnification. Indemnitee shall
commence such proceeding seeking an adjudication within 180 days following the date on which
Indemnitee first has the right to commence such proceeding pursuant to this Section 6(a). The
Company shall not oppose Indemnitees right to seek any such adjudication.
(b) In the event that a determination shall have been made pursuant to Section 5(c) of this
Agreement that Indemnitee is not entitled to indemnification, any judicial proceeding commenced
pursuant to this Section 6 shall be conducted in all respects as a
de novo
trial on the merits, and
Indemnitee shall not be prejudiced by reason of the adverse determination under Section 5(c).
(c) If a determination shall have been made pursuant to Section 5(c) of this Agreement that
Indemnitee is entitled to indemnification, the Company shall be bound by such determination in any
judicial proceeding commenced pursuant to this Section 6, absent a prohibition of such
indemnification under applicable law.
(d) In the event that Indemnitee, pursuant to this Section 6, seeks a judicial adjudication of
Indemnitees rights under, or to recover damages for breach of, this Agreement, the Company shall
pay on Indemnitees behalf, in advance, any and all expenses (of the types described in the
definition of Expenses in Section 14 of this Agreement) actually and reasonably incurred by
Indemnitee in such judicial adjudication, only if Indemnitee ultimately is determined to be
entitled to such indemnification or advancement of expenses;
provided
,
however
, if
it shall be determined in such judicial adjudication that Indemnitee is entitled to receive part
but not all of the indemnification or advancement of expenses sought, the expenses incurred by
Indemnitee in connection with such judicial adjudication or arbitration shall be appropriately
pro-rated.
(e) The Company shall be precluded from asserting in any judicial proceeding commenced
pursuant to this Section 6 that the procedures and presumptions of this Agreement are not valid,
binding and enforceable and shall stipulate in any such court that the Company is bound by all the
provisions of this Agreement.
(f) Both the Company and Indemnitee acknowledge that in certain instances, federal law or
applicable public policy may prohibit the Company from indemnifying
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its directors, officers, employees or agents under this Agreement or otherwise. Indemnitee
understands and acknowledges that the Company has undertaken or may be required in the future to
undertake with the Securities and Exchange Commission to submit the question of indemnification to
a court in certain circumstances for a determination of the Companys right under public policy to
indemnify Indemnitee.
7.
Liability Insurance
. To the extent the Company maintains liability insurance
applicable to directors, officers, employees, agents or fiduciaries, Indemnitee shall be covered by
such policies in such a manner as to provide Indemnitee the same rights and benefits as are
provided to the most favorably insured of the Companys directors, if Indemnitee is a director; or
of the Companys officers, if Indemnitee is not a director of the Company but is an officer; or of
the Companys key employees, agents or fiduciaries, if Indemnitee is not a director or officer but
is a key employee, agent or fiduciary.
8.
Exceptions
. Any other provision herein to the contrary notwithstanding, the
Company shall not be obligated pursuant to the terms of this Agreement:
(a)
Excluded Action or Omissions
. To indemnify Indemnitee for Indemnitees acts,
omissions or transactions from which Indemnitee may not be relieved of liability under applicable
law;
(b)
Proceedings Initiated by Indemnitee
. To indemnify or advance expenses to
Indemnitee with respect to Proceedings initiated or brought voluntarily by Indemnitee and not by
way of defense, except (i) with respect to actions or proceedings brought to establish or enforce a
right to indemnification under this Agreement or any other agreement or insurance policy or under
the Companys Certificate of Incorporation or Bylaws now or hereafter in effect relating to
Proceedings, (ii) in specific cases if the Board of Directors has approved the initiation or
bringing of such Proceeding, or (iii) as otherwise required under Section 145 of the Delaware
General Corporation Law, regardless of whether Indemnitee ultimately is determined to be entitled
to such indemnification, advance expense payment or insurance recovery, as the case may be;
(c)
Lack of Good Faith
. To indemnify Indemnitee for any expenses incurred by
Indemnitee with respect to any proceeding instituted by Indemnitee to enforce or interpret this
Agreement, if a court of competent jurisdiction ultimately determines that each of the material
assertions made by Indemnitee in such proceeding was not made in good faith or was frivolous; or
(d)
Claims Under Section 16(b)
. To indemnify Indemnitee for expenses and the payment
of profits arising from the purchase and sale by Indemnitee of securities in violation of Section
16(b) of the Securities Exchange Act of 1934, as amended, or any similar successor statute.
9.
Non-Exclusivity; Survival of Rights; Insurance; Subrogation
.
(a) The rights of indemnification as provided by this Agreement shall not be deemed exclusive
of any other rights to which Indemnitee may at any time be entitled under applicable law, the
Certificate of Incorporation of the Company, the Bylaws, any
8
agreement, a vote of stockholders, a resolution of directors or otherwise. No amendment,
alteration or repeal of this Agreement or of any provision hereof shall limit or restrict any right
of Indemnitee under this Agreement in respect of any action taken or omitted by such Indemnitee in
Indemnitees Corporate Status prior to such amendment, alteration or repeal. To the extent that a
change in the Delaware Law, whether by statute or judicial decision, permits greater
indemnification than would be afforded currently under the Bylaws and this Agreement, it is the
intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits so
afforded by such change. No right or remedy herein conferred is intended to be exclusive of any
other right or remedy, and every other right and remedy shall be cumulative and in addition to
every other right and remedy given hereunder or now or hereafter existing at law or in equity or
otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not
prevent the concurrent assertion or employment of any other right or remedy.
(b) To the extent that the Company maintains an insurance policy or policies providing
liability insurance for directors, officers, employees, or agents or fiduciaries of the Company or
of any other corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise that such person serves at the request of the Company, Indemnitee shall be covered by
such policy or policies in accordance with its or their terms to the maximum extent of the coverage
available for any director, officer, employee, agent or fiduciary under such policy or policies.
(c) In the event of any payment under this Agreement, the Company shall be subrogated to the
extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers
required and take all action necessary to secure such rights, including execution of such documents
as are necessary to enable the Company to bring suit to enforce such rights.
(d) The Company shall not be liable under this Agreement to make any payment of amounts
otherwise indemnifiable hereunder if and to the extent that Indemnitee has otherwise actually
received such payment under any insurance policy, contract, agreement or otherwise.
(e) No legal action shall be brought and no cause of action shall be asserted by or in the
right of the Company against Indemnitee, Indemnitees estate, spouse, heirs, executors or personal
or legal representatives after the expiration of two (2) years from the date of accrual of such
cause of action, and any claim or cause of action of the Company shall be extinguished and deemed
released unless asserted by the timely filing of a legal action within such two-year period;
provided
,
however
, that if any shorter period of limitations is otherwise
applicable to any such cause of action, such shorter period shall govern.
10.
Exception to Right of Indemnification
. Notwithstanding any other provision of
this Agreement, Indemnitee shall not be entitled to indemnification under this Agreement with
respect to any Proceeding brought by Indemnitee, or any claim therein, unless (a) the bringing of
such Proceeding or making of such claim shall have been approved by the Board of Directors of the
Company or (b) such Proceeding is being brought by Indemnitee to assert, interpret or enforce
Indemnitees rights under this Agreement.
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11.
Duration of Agreement
. All agreements and obligations of the Company contained
herein shall continue during the period Indemnitee is a director, officer, employee or agent of the
Company (or is or was serving at the request of the Company as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other enterprise) and shall
continue thereafter so long as Indemnitee shall be subject to any Proceeding (or any proceeding
commenced under Section 6 hereof) by reason of Indemnitees Corporate Status, whether or not
Indemnitee is acting or serving in any such capacity at the time any liability or expense is
incurred for which indemnification can be provided under this Agreement.
12.
Security
. To the extent requested by Indemnitee and approved by the Board of
Directors of the Company, the Company may at any time and from time to time provide security to
Indemnitee for the Companys obligations hereunder through an irrevocable bank line of credit,
funded trust or other collateral. Any such security, once provided to Indemnitee, may not be
revoked or released without the prior written consent of Indemnitee, which consent may not be
unreasonably withheld.
13.
Enforcement
.
(a) The Company expressly confirms and agrees that it has entered into this Agreement and
assumes the obligations imposed on it hereby in order to induce Indemnitee to serve as a director,
officer, employee or agent or of the Company, and the Company acknowledges that Indemnitee is
relying upon this Agreement in serving as a director, officer, employee or agent of the Company.
(b) This Agreement constitutes the entire agreement between the parties hereto with respect to
the subject matter hereof and supersedes all prior agreements and understandings, oral, written and
implied, between the parties hereto with respect to the subject matter hereof.
14.
Definitions
. For purposes of this Agreement:
(a) Corporate Status describes the status, either prior or subsequent to the date of this
agreement, of a person who is or was a director, officer, employee, agent or fiduciary of the
Company or of any other corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise that such person is or was serving at the express written request of the Company.
(b) Disinterested Director means a director of the Company who is not and was not a party to
the Proceeding in respect of which indemnification is sought by Indemnitee.
(c) Enterprise shall mean the Company and any other corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise that Indemnitee is or was serving at the express
written request of the Company as a director, officer, employee, agent or fiduciary.
(d) Expenses shall include all reasonable attorneys fees, retainers, court costs,
transcript costs, fees of experts, witness fees, travel expenses, duplicating costs,
10
printing and binding costs, telephone charges, postage, delivery service fees and all other
disbursements or expenses of the types customarily incurred in connection with prosecuting,
defending, preparing to prosecute or defend, investigating, participating, or being or preparing to
be a witness in a Proceeding.
(e) Independent Counsel means a law firm, or a member of a law firm, that is experienced in
matters of corporation law and neither presently is, nor in the past three (3) years has been,
retained to represent: (i) the Company or Indemnitee in any matter material to either such party
(other than with respect to matters concerning Indemnitee under this Agreement, or of other
indemnitees under similar indemnification agreements), or (ii) any other party to the Proceeding
giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term
Independent Counsel shall not include any person who, under the applicable standards of
professional conduct then prevailing, would have a conflict of interest in representing either the
Company or Indemnitee in an action to determine Indemnitees rights under this Agreement. The
Company agrees to pay the reasonable fees of the Independent Counsel referred to above and to fully
indemnify such counsel against any and all Expenses, claims, liabilities and damages arising out of
or relating to this Agreement or its engagement pursuant hereto.
(f) Proceeding includes any threatened, pending or completed action, suit, arbitration,
alternate dispute resolution mechanism, investigation, inquiry, administrative hearing or any other
actual, threatened or completed proceeding, whether brought by or in the right of the Company or
otherwise and whether civil, criminal, administrative or investigative, in which Indemnitee was, is
or will be involved as a party or otherwise, by reason of the fact that Indemnitee is or was a
director, officer, employee or agent of the Company, by reason of any action taken by Indemnitee or
of any inaction on Indemnitees part while acting as a director, officer, employee or agent of the
Company, or by reason of the fact that Indemnitee is or was serving at the request of the Company
as a director, officer, employee, agent or fiduciary of another corporation, partnership, joint
venture, trust or other Enterprise; in each case whether or not Indemnitee is acting or serving in
any such capacity at the time any liability or expense is incurred for which indemnification can be
provided under this Agreement; including one pending on or before the date of this Agreement, but
excluding one initiated by an Indemnitee pursuant to Section 6 of this Agreement to enforce
Indemnitees rights under this Agreement.
15.
Severability
. If any provision or provisions of this Agreement shall be held by a
court of competent jurisdiction to be invalid, void, illegal or otherwise unenforceable for any
reason whatsoever: (a) the validity, legality and enforceability of the remaining provisions of
this Agreement (including without limitation, each portion of any section of this Agreement
containing any such provision held to be invalid, illegal or unenforceable that is not itself
invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby and shall
remain enforceable to the fullest extent permitted by law; and (b) to the fullest extent possible,
the provisions of this Agreement (including, without limitation, each portion of any section of
this Agreement containing any such provision held to be invalid, illegal or unenforceable that is
not itself invalid, illegal or unenforceable) shall be construed so as to give effect to the intent
manifested thereby. Without limiting the generality of the foregoing, this Agreement is intended to
confer upon Indemnitee indemnification rights to the fullest extent permitted by applicable laws.
In the event any provision hereof conflicts with any applicable
11
law, such provision shall be deemed modified, consistent with the aforementioned intent, to
the extent necessary to resolve such conflict.
16.
Modification and Waiver
. No supplement, modification, termination or amendment of
this Agreement shall be binding unless executed in writing by both of the parties hereto. No
waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of
any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing
waiver.
17.
Notice By Indemnitee
. Indemnitee agrees promptly to notify the Company in writing
upon being served with or otherwise receiving any summons, citation, subpoena, complaint,
indictment, information or other document relating to any Proceeding or matter which may be subject
to indemnification covered hereunder. The failure to so notify the Company shall not relieve the
Company of any obligation which it may have to Indemnitee under this Agreement or otherwise unless
and only to the extent that such failure or delay materially prejudices the Company.
18.
Notices
. All notices, requests, demands and other communications hereunder shall
be in writing and shall be deemed to have been duly given if (i) delivered by hand and receipted
for by the party to whom said notice or other communication shall have been directed, or (ii)
mailed by certified or registered mail with postage prepaid, on the third business day after the
date on which it is so mailed:
(a) If to Indemnitee, to the address set forth below Indemnitee signature hereto.
(b) If to the Company, to:
Illumina, Inc.
9885 Towne Centre Drive
San Diego, California 92121
Attn: President
or to such other address as may have been furnished to Indemnitee by the Company or to the Company
by Indemnitee, as the case may be.
19.
Identical Counterparts
. This Agreement may be executed in one or more
counterparts, each of which shall for all purposes be deemed to be an original but all of which
together shall constitute one and the same Agreement. Only one such counterpart signed by the
party against whom enforceability is sought needs to be produced to evidence the existence of this
Agreement.
20.
Headings
. The headings of the paragraphs of this Agreement are inserted for
convenience only and shall not be deemed to constitute part of this Agreement or to affect the
construction thereof.
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21.
Governing Law
. The parties agree that this Agreement shall be governed by, and
construed and enforced in accordance with, the laws of the State of Delaware without application of
the conflict of laws principles thereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and as of the day and
year first above written.
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ILLUMINA, INC.
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/s/ Jay T. Flatley
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By: Jay T. Flatley
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Its: President & Chief Executive Officer
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Date: June 23, 2008
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INDEMNITEE
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/s/ Joel McComb
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Name:
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Joel McComb
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Date: June 23, 2008
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Address:
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