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Proc-Type: 2001,MIC-CLEAR
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<SEC-DOCUMENT>0000950137-02-001951.txt : 20020415
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ACCESSION NUMBER: 0000950137-02-001951
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 4
CONFORMED PERIOD OF REPORT: 20011231
FILED AS OF DATE: 20020401
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: THIRD WAVE TECHNOLOGIES INC /WI
CENTRAL INDEX KEY: 0001120438
STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836]
IRS NUMBER: 391791034
STATE OF INCORPORATION: DE
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 000-31745
FILM NUMBER: 02598682
BUSINESS ADDRESS:
STREET 1: 502 S ROSA RD
CITY: MADISON
STATE: WI
ZIP: 53719-1256
BUSINESS PHONE: 608273
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<TYPE>10-K
<SEQUENCE>1
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<DESCRIPTION>ANNUAL REPORT
<TEXT>
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED December 31, 2001, OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM_________________TO______________
COMMISSION FILE NUMBER: 000-31745
THIRD WAVE TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 39-1791034
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
502 S. ROSA ROAD, MADISON, WI 53719
(Address of principal executive offices) (Zip Code)
(888) 898-2357
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $.001 Par Value Per Share
Preferred Stock Purchase Rights
(Title of Class)
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 [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant (without admitting that any person whose shares
are not included in such calculation is an affiliate) on February 28, 2002, was
83,576,253, based on the last sale price on that date as reported by The
Nasdaq Stock Market.
As of December 31, 2001, the registrant had 39,374,014 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents (or parts thereof) are incorporated by reference into
the following parts of this Form 10-K: Certain information required in Part III
of this Annual Report on Form 10-K is incorporated from the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on June 5, 2002.
<PAGE>
THIRD WAVE TECHNOLOGIES
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2001
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON
FORM 8-K
SIGNATURES
FORWARD-LOOKING STATEMENTS
This Form 10-K contains forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the
Securities Act of 1933, as amended. When used in this Form 10-K, the words
"believe," "anticipates," "intends," "plans," "estimates," and similar
expressions are forward-looking statements. Such forward-looking statements
contained in this Form 10-K are based on current expectations. Forward-looking
statements may address the following subjects: results of operations; customer
growth and retention; development of technologies; losses or earnings; operating
expenses, including, without limitation, marketing expense and technology and
development expense; and revenue growth. We caution investors that there can be
no assurance that actual results, outcomes or business conditions will not
differ materially from those projected or suggested in such forward-looking
statements as a result of various factors, including, among others, our limited
operating history, unpredictability of future revenues and operating results,
competitive pressures and also the potential risks and uncertainties set forth
in the "Overview" section of Item 7 hereof and in the "Risk Factors" section of
Item 1 hereof, which factors are specifically incorporated herein by this
reference.
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You should also carefully consider the factors set forth in other reports or
documents that we file from time to time with the Securities and Exchange
Commission. Except as required by law, we undertake no obligation to update any
forward-looking statements.
In this Form 10-K, we refer to information regarding our potential markets and
other industry data. We believe that all such information has been obtained from
reliable sources that are customarily relied upon by companies in our industry.
However, we have not independently verified any such information.
In this Form 10-K, the terms "we," "us," "our," "Company" and "Third Wave" each
refer to Third Wave Technologies, Inc.
In the United States, France and the United Kingdom our registered trademarks
are Cleavase(R) PowerScan(R) and Invader(R). Cleavase, CFLP and Invader are
registered in Germany. CFLP and Invader are also registered in Japan. Trademark
registration for InvaderCreator(TM) is pending in the United States, France,
Germany, the United Kingdom and Japan. Trademark registration is pending in the
United States for Third Wave.
PART I
ITEM 1. BUSINESS
Third Wave Technologies, Inc. is a leading developer, manufacturer and marketer
of genetic analysis products used in the discovery and validation of the genetic
basis of disease and the delivery of personalized medicine. Our patented genetic
analysis platform, the Invader product platform, offers several advantages over
conventional genetic analysis technologies that we believe are making the
Invader platform the technology of choice to address the rapidly growing demand
for such products. Genetic variations are the origin of most differences between
individuals, including differences in disease predisposition and drug therapy
response. The analysis of these millions of variations in up to hundreds of
millions of individuals will require billions of tests. The Invader platform is
highly accurate, sensitive, easy to use, cost-effective and does not require the
copying of the genetic sample using a complex copying technique known as
polymerase chain reaction, or PCR. Additionally, our products are compatible
with existing automation processes and detection platforms and are available in
convenient, ready-to-use formats. These advantages make the Invader platform the
ideal solution for genetic analysis across the health care continuum from
disease discovery to the point of patient care, including large-scale disease
association studies, drug response marker profiling and molecular diagnostics.
Third Wave is a Delaware corporation. The Company's principal executive offices
are located at 502 South Rosa Road, Madison, Wisconsin 53719, and the telephone
number is (888) 898-2357.
INDUSTRY BACKGROUND
Genetic information provides a basis for understanding biological and
medical functions in organisms. In June 2000, public and private efforts,
including the Human Genome Project, jointly announced the completion of the
sequencing of the billions of DNA bases of the human genome. Genomic research is
currently focused on the identification and analysis of genetic variations--
including establishing and validating the association of specific variations
with predisposition to disease or drug response within the genome from person to
person. These variations are differences, or polymorphisms, in DNA sequences.
The most common genetic variations are differences in a single DNA base, or
nucleotide, and are called single nucleotide polymorphisms, or SNPs.
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IMPORTANCE OF GENETIC VARIABILITY
Approximately 99.9% of every individual's genome is identical with that of
every other individual. However, variation in the genome can modify how a gene
functions. These variations can lead to a spectrum of observable differences,
such as eye and hair color. Genetic variations are a major underlying component
of many diseases and disorders, including cancer, inflammation, hypertension and
cardiovascular disease, with many diseases being affected by multiple
variations. Genetic variations are also responsible for many of the differences
in how individuals respond to drug therapies. As a result, analysis of SNPs and
other genetic variations is playing an increasingly important role in the
discovery and development of new drugs, and in a variety of diagnostic,
prognostic, therapeutic and other medical and life science applications.
Industry sources estimate that there are millions of genetic variations in the
human genome, which has created a continuing increase in demand for products
that can quickly and accurately detect and analyze these variations.
GENOTYPING AND SNP ANALYSIS
Genotyping is the process of determining genetic variations, including
SNPs, that are present in an individual. Although some SNPs are known to be a
major cause of inherited diseases and individual differences in drug response,
the vast majority of inherited SNPs have not yet been analyzed. To identify
medically relevant genetic variations, potentially millions of variations are
being analyzed in large numbers of individuals using billions of analysis tests.
Once the medical relevance of particular variations or groups of variations is
determined, tests for that variation may then be performed on hundreds of
millions of individuals.
GENES AND GENE EXPRESSION ANALYSIS
Genes are segments of DNA within the genome that direct the production of
proteins. Cells use these proteins to carry out their functions. It is now
recognized that essentially all stages of disease are caused by changes in the
expression levels of genes. Scientists have, therefore, begun to study the
expression of genes in both disease and non-disease states. Gene expression
analysis determines gene activity by detecting and quantifying the level of
messenger RNA, or mRNA, produced from a gene. Although all genes are present in
all cells, each cell generally expresses only those genes it needs for the
specific functions it performs. By measuring the amounts of the mRNAs in
affected cells, medical professionals can understand how drugs and disease
progression affect cells and, consequently, a patient's health. Gene expression
analysis is being widely adopted as an integral step in drug discovery and
development, as well as in determining appropriate drug therapies and monitoring
their efficacy.
GENETIC ANALYSIS MARKET OPPORTUNITIES
The current worldwide market for genetic analysis products, which consists
of reagents, assays and other consumables used in performing genetic analysis
tests, is estimated to be at $1.0 billion and is expected to grow to $10 billion
by 2005.
The research market includes both genotyping, including SNP analysis, and
gene expression analysis applications. Industry sources estimate that the
current size of the research market is $325 million and is expected to grow to
$2.2 billion by 2010. The research market includes:
- confirmation of new sites of genetic variation in DNA;
- validation of the medical importance of specific genetic variations; and
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- utilization of genetic variation and gene expression analysis in drug
discovery and development, determination of disease predisposition and
clinical test development.
The clinical market also includes both genotyping and gene expression
analysis applications. Industry sources estimate that the current size of the
clinical market is $800 million and is expected to grow to more than $8 billion
by 2005.
The clinical market includes:
- formulation of customized treatments based on genetic profile;
- monitoring of the efficacy of drug therapies;
- diagnosis of infectious and inherited diseases;
- early assessment of emerging disease;
- analysis of viral and bacterial drug resistance; and
- matching of recipients and donors in organ and tissue transplants.
CONVENTIONAL GENETIC ANALYSIS TOOLS AND LIMITATIONS
The initial technique for the analysis of genetic variations was
hybridization, which was first developed in the 1970s. Hybridization relies on
the principle that a unique piece of DNA will bind, or hybridize, most strongly
to its exact complement. In hybridization, short, synthetic segments of DNA,
also known as probes, are used to locate and bind to their counterparts within a
mixture of sample DNA or RNA. Hybridization is often performed using
instrumentation that incorporates a detection medium that provides a signal to
indicate whether the probe has hybridized to the sample DNA or RNA. However,
hybridization used alone has several limitations. In particular, the process in
which the probe binds to its counterpart requires ideal testing conditions to
avoid inaccurate results. Even minute changes in testing conditions, including
temperature and other reaction conditions, can dramatically affect the outcome
of the hybridization reaction and, therefore, the reliability of test results.
Beginning in the 1980s, various techniques were invented with the objective
of improving the reliability of hybridization. However, these methods do not
provide a signal that is sufficient to be generally detectable. Therefore, in
order to use these methods, it is necessary to first copy, or amplify, the
segment of DNA or RNA to be analyzed using a complex technique known as
polymerase chain reaction, or PCR. These techniques, whether involving
hybridization alone or in combination with additional steps, have significant
limitations, including:
- Inability to Directly Analyze Genomic Samples. Conventional methods are
not sensitive enough to directly analyze a particular genetic variation
contained within the 3 billion data points in the human genome. As a
result, these methods require that, for each genetic variation of
interest, the small portion of the genome that contains it must be
amplified using PCR. This amplification process adds time and material
and labor costs, makes automation and quantitative analysis difficult
and is susceptible to errors resulting from sample contamination.
- Highly Complex Product Development Process. Conventional methods
frequently require trial and error testing to validate tests or product
designs. Therefore, with conventional technologies, the process of
developing a test, or product, for analyzing a specific genetic
variation is highly complex and cannot be automated easily. This problem
is exacerbated by the dependence of conventional methods on PCR, which
requires
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specific design and optimization of the PCR process for each new test
being developed. These problems severely limit the ability to use
conventional techniques to develop the large numbers of products that
will be required for comprehensive analysis of human genetic
variations.
- Low Degree of Accuracy. A high degree of accuracy is essential to detect
and quantify genetic variations, which may involve the analysis of
thousands of genetic variations per individual. Conventional methods can
result in one or more tests in 10 being inaccurate. These inaccuracies
are magnified in tests for multiple variations. For example, in a test
panel involving six genetic variations, the overall panel accuracy for a
technology having 95% accuracy per result would be only 74%.
- Difficulty of Use. Many of the conventional analysis methods involve
multiple technical steps requiring human intervention, which make the
analysis difficult to perform and impossible to fully automate. In
addition, while many pharmaceutical companies and research organizations
have already purchased expensive detection instrumentation, many
conventional methods cannot be used on multiple instrument platforms,
requiring customers to purchase additional equipment.
- High Cost Per Test Result. Due to the complexity of the product
development process, the difficulty of use and inability to directly
analyze genomic samples, conventional methods can cost in excess of
$1.00 per test result for research applications. These cost levels can
be prohibitive for pharmaceutical companies and research organizations
contemplating large-scale studies involving up to millions of genetic
variations in millions of patient samples.
- Limited Clinical Viability. Because of the low degree of accuracy and
difficulties associated with product development and use, conventional
methods have not been broadly applicable to clinical settings.
Capturing the expanding market opportunity for genetic analysis will
require technologies and products that address and overcome these significant
limitations to provide cost-effective, highly reliable genetic testing and
analysis.
THE THIRD WAVE SOLUTION
Our proprietary Invader platform offers a highly sensitive technology that
can detect and quantify genetic variations directly from unamplified genomic
DNA, RNA and infectious agents. The advantages of our proprietary technology
include:
- Direct Analysis of Genomic Samples. Our Invader platform is sufficiently
precise to analyze genomic samples directly, eliminating the requirement
for PCR amplification and making the Invader platform well suited to
automation and large-scale genetic analysis. Customers are routinely
performing more than 400,000 genotypes per day with the Invader
platform.
- Rapid, Automated Product Development Process. We have developed a
proprietary software program for the development of our products and
have automated the processes for both the manufacture and quality
control of these products. Using this software and automation, we can
develop and manufacture turnkey products significantly more quickly than
conventional analysis techniques permit. Once we have incorporated a
product into our catalog of developed products, even less production
time is required.
- Highly Accurate. The Invader platform has been found in published,
independent studies to be between 99.6% and 100% accurate in correctly
identifying genomic variations in routine use. Testing conducted
recently by a series of our clinical customers found our genotyping
products to be 99.9% accurate.
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- Ease of Use and Platform Independence. The ability to automate assay
usage allows us to eliminate many of the steps that require human
intervention, reducing the possibility of errors and making the Invader
platform easier to use than conventional methods. We have introduced the
groundbreaking Invader "panel" format, which offers unmatched ease of
use as all the user must do is add genomic DNA, incubate the assay and
read the results. All the necessary components are pre-mixed and dried
in the bottom of each test well. The performance and ease of use of our
one-step, "just add patient sample" format are critical to accelerating
the delivery of DNA-based tests to doctors' offices and other primary
points of care. In addition, because the Invader products can be used on
nearly all major instrumentation systems in place today, our customers
do not need to purchase new instrumentation to adopt our technology.
This flexibility enables us to provide our products to customers who use
different instrument platforms with a configuration tailored to their
unique needs.
- Lower Cost Per Test Result. Due to our automated product development,
increased ease of use and ability to directly analyze genomic samples,
we have been able to reduce the cost per result significantly. These
cost reductions are making large-scale genomic studies more feasible as
a research and development tool for pharmaceutical companies and
research organizations. In addition, the cost advantages associated with
the use of the Invader platform is proving attractive to major health
care providers, who are interested not only in validating the clinical
utility of a genetic markers of interest to them, but who share our
commitment to accelerating the adoption of genetic analysis in clinical
settings.
- Increased Clinical Viability. The accuracy, ease of use and low cost per
test makes the Invader platform well suited for use in clinical settings
and has enabled us to build the broadest menu of clinical genetic
variation analysis products. Our automated product development process
is enabling us to efficiently develop new clinical products and to
market clinical applications products that were originally developed for
research use.
THIRD WAVE STRATEGY
Our strategy for capitalizing on the growing market opportunity in genetic
analysis products and commercializing our products and technologies is to:
- Establish Our Invader Platform as the Standard for Genetic Variation
Analysis Products. We are becoming the leading provider of genetic
analysis products and technologies by being the first to market with the
broadest menu of highly accurate, easy-to-use genetic analysis products
and by leveraging those products into commercial opportunities of
increasing value across the health care continuum from disease discovery
to the point of patient care. We are currently marketing nine clinical
products to address the markets for the genetic analysis of thrombosis
and cardiovascular disease risk. We manufactured and shipped more than
100,000 unique assays and we have successfully designed an additional
1.7 million unique assays for research use applications.
- Optimize Technology and Production Efficiencies. We work continually to
further enhance our technology platform and to enable manufacturing
efficiencies that reduce costs and allow us to commercialize our
products more rapidly. The Invader technology has been successfully used
in a microarray format. A microarray contains thousands of unique
genetic variation analysis targets at discrete sites on a solid surface
or support like microscopic latex beads or a small glass or plastic
chip, allowing researchers to test for each of those variations from the
same genetic sample at the same time. The Invader technology has also
been coupled the high-multiplexing capabilities of ACLARA BioScience's
eTag sequence-labeling technology, which enables customers to profile
many genes simultaneously in a single reaction directly from crude cell
lysates, without the need for sample prep or polymerase chain reaction
(PCR).
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- Establish Additional Collaborative Relationships to Obtain Rights To
Commercialize Discoveries. We intend to establish additional
collaborative relationships with leading research organizations and
pharmaceutical companies that will provide us with rights to
commercialize the discoveries made using the Invader platform. These
relationships will be focused on the discovery of the associations of
specific genetic variations with major disease states, including cancer,
hypertension, inflammation and cardiovascular disease. Our strategy is
to offer our research collaborators early access and lower-cost use of
the Invader platform in exchange for the rights to commercialize the
discoveries they make using it. These rights typically enable us to
offer new genetic products for clinical research and clinical diagnostic
applications.
- Enter into Additional Commercial Alliances To Market Our Products and
Access New Technologies. We intend to enter into strategic commercial
alliances that will allow us to leverage our collaborators' marketing,
sales and new applications development strengths and gain access to
complementary and emerging technologies. Additionally, we plan to enter
into strategic alliances with a number of companies that can provide
proprietary and synergistic technologies to enhance our product
offerings. These alliances can open up new markets and marketing
channels and provide us with rights to use new and emerging detection
and other technologies, such as microfluidics and microarrays, with the
Invader platform. We also intend to leverage the strength of our broad
product menu with major health care providers with a strong tradition of
conducting clinical research. These partnerships will validate the
clinical utility of a variety of genetic markers and accelerate the
implementation of molecular diagnostics as an emerging, new standard of
care.
- Capitalize on Existing and Emerging Opportunities in Clinical Markets.
We intend to rapidly gain market share in the clinical market by
developing and commercializing products to address emerging needs in the
clinical market and expanding our customer base for existing and new
products through aggressive marketing and sales. We have introduced five
clinical products to address the market opportunity for the genetic
analysis of predisposition for blood clotting and four clinical products
to address the market opportunity for the genetic analysis of
cardiovascular disease risk. We plan to introduce additional clinical
products for many other applications, including the diagnosis of many
common and treatable diseases. We currently sell to the clinical market
with our internal sales force, which targets leading clinical reference
laboratories in the United States. Our future sales strategy for the
clinical market will include a combination of building our sales force,
strategic development, and distribution and/or co-marketing
arrangements.
INVADER PLATFORM
INVADER TECHNOLOGY
Our patented Invader platform can be differentiated from conventional
genetic analysis methods in at least two significant ways. First, our technology
uses a patented enzyme, known as a Cleavase enzyme, that only recognizes and
cuts the specific structure formed during the Invader process. The benefits of
using this structure-specific enzyme versus sequence-specific conventional
technologies are enhanced assay specificity, ease of development and use.
Second, our technology relies on linear amplification of the signal generated by
the Invader process rather than exponential amplification of the target sample
resulting from PCR. Linear amplification, which means that a single target
generates a given number of signals over a given period of time, allows for easy
quantification of target concentration and reduces the effects of sample
contamination that may result from exponential target amplification, in which a
single target generates two additional targets and each generated target
generates an additional two targets and so forth.
In its most common configuration, our Invader products detect and/or
quantify a target of interest through two steps. In the first step, two short
synthetic segments of DNA, or probes, hybridize, to the target of interest. One
probe is called the Invader probe and the other is called the Primary probe. The
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Primary probe includes a short portion, known as a flap, which does not
hybridize to the target. The hybridization of the Invader and Primary probes at
a specific location on the target forms the structure recognized by the Cleavase
enzyme, which then cuts the unbound flap off of the Primary probe. When the
target of interest is not present, the structure is not formed and cutting does
not occur. The target of interest, when present, induces the cutting of several
thousand flaps per hour in a linear fashion.
In the second step, each flap generated in the first step hybridizes, or
binds, to a third probe, called a FRET Cassette, forming the structure
recognized by the Cleavase enzyme. The enzyme then cleaves off a portion of the
FRET Cassette causing, in the most common format, the reaction to emit a
detectable fluorescent signal. Consequently, each flap generated in the first
step induces the generation of several thousands of detectable signals per hour.
In this way, an Invader assay produces tens of millions of detectable signals
per target when the target is present, which can be read easily on most existing
detection systems. The result is that the Invader technology produces millions
of target-specific signals without copying the target sample itself.
Our Invader platform is much more precise than conventional technologies
and can produce accurate results over a broad range of temperatures and solution
conditions. In addition, unlike conventional approaches, the Invader platform
operates at a single reaction temperature, making it easier to use by reducing
the level of sophistication and training required for users of the system.
INVADER PRODUCTS
Our Invader products can be configured in a wide variety of formats and
combinations depending on the user's desired applications, detection systems and
other requirements. These formats may include a combination of Invader probes,
Primary probes, FRET Cassettes, Cleavase enzyme, buffers and other components.
All our products for a particular user are designed to use the same reaction
conditions, permitting easy automation of both assay design and test
performance. Since no aspect of the process requires individual optimization for
the user, any combination of reactions may run on a single assay plate, and all
plates are handled in an identical fashion.
The Research Market
- Genotyping Products and Panels. We have developed and manufactured more
than 100,000 Invader DNA Assay products, each designed to analyze a
unique genotype. We have successfully designed more than 1.7 million
additional unique products. We have automated the SNP genotyping product
development and manufacturing process. As a result, we believe that we
will be able to produce hundreds of thousands of new products for
analyzing additional genotypes during the next several years. These
products will be available individually or in combination, including as
panels for disease-specific, chromosome-specific or genome-wide genotype
analysis. We have completed, for example, the development of a panel of
2,000 SNP assays for chromosome 22 and a panel of 10,000 coding SNP
assays for medium resolution genome analysis.
- Plant and Animal Agriculture Products. On December 14, 2001 we acquired
the remaining 50% of the outstanding shares of Third Wave AgBio, Inc.
(please see detailed reference in Note 2 to the Financial Statements and
Supplementary Data found on Page F-14). We have developed products based
on the Invader technology for plant and animal genetic research markets.
In addition, we will create products for applications in plant and
animal molecular diagnostics markets.
- Gene Expression Product and Panels. We have developed Invader RNA Assay
products for quantifying the expression of genes involved in immune
response and drug metabolism. We intend to develop additional products
to address the demand for the accurate quantification of existing and
newly discovered genes involved in immune response, drug development and
metabolism and response or non-response to drug therapy. These products
will be available individually or in combination, including as groups of
tests, or panels, for particular applications.
Clinical Market
- Genotyping Product Catalog and Panels. We have developed nine clinical
products, which are currently being marketed under FDA regulations as
analyte specific reagents, or ASRs, to address market opportunities for
the genetic analysis of deep-vein thrombosis and cardiovascular disease
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risk factors. We are currently developing a number of additional ASR
products for clinical genotyping applications.
INVADER PRODUCT APPLICATIONS
We anticipate that pharmaceutical and biotechnology companies, academic
research centers, government initiatives, clinical reference laboratories and
health care providers will be able to utilize our products in many aspects of
disease discovery, drug development, clinical trials, and patient diagnosis and
treatment applications including those described below.
Genomic Product Applications
- Disease Association Studies. Pharmaceutical companies, academic research
institutions and government initiatives can use our products to discover
and validate the association of specific genetic variations with
predisposition to a particular disease or response to a drug therapy.
Once an association has been validated, the product that detects the
variation may be refined and introduced as a clinical diagnostic.
- Plant and Animal Genetic Research and Molecular Diagnostics. Leading
plant and animal genetic research organizations can use our products for
the purposes of understanding the genetic identity, parentage,
predisposition to or presence of disease, and possession of desirable or
undesirable traits in plant and animal organisms.
- Target Identification and Validation. Pharmaceutical companies and
others can use our products to determine associations between a
particular medical condition or disease and one or more genetic
variation profiles to identify genes that are related to the condition.
These candidate genes may then serve as potential targets for new drug
development. Once a potential target has been identified, pharmaceutical
companies will be able to use our products to confirm the action of
these targets.
- Lead Compound Identification, Validation and Optimization.
Pharmaceutical companies can use our products to identify potential drug
compounds. For example, they can identify compounds that not only act on
the proteins encoded by the target gene, but also on the proteins
encoded by the variants of the gene. In this manner, a pharmaceutical
company can identify potential drug compounds that act on multiple
versions of a target protein. Our products will be able to be used to
validate potential drug candidates by performing biological assays on
these compounds against variants of a given protein. Companies may also
optimize and improve potential drug candidates by seeking to establish
broader efficacy over larger populations through studies on known
variants of targets.
- Preclinical and Clinical Testing. Pharmaceutical companies will be able
to use our products to test model systems, such as mice, and to
correlate therapeutic and metabolic responses to known genetic variation
profiles in the target or in related enzymes to better predict drug
efficacy and safety. Additionally, pharmaceutical companies can use our
products to select patients for clinical trials based on the presence or
absence of genetic variation profiles known to be associated with drug
response.
- Market Extension/Drug Revival. Pharmaceutical companies will be able to
use our products in marketing programs to expand or extend markets of an
existing drug to new patient groups. This may lead to label extensions,
additional patent protection and longer commercial lives for existing
drugs based on patient genetic profiles. Similarly, pharmaceutical
companies will be able to use our products to bring back to market drugs
which were previously removed due to adverse drug response or lack of
therapeutic activity.
Clinical Product Applications
- Clinical Diagnosis. Clinical reference laboratories and health care
providers can use our products to diagnose a number of diseases.
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- Therapy or Treatment Selection. Medical professionals will be able to
use our products to customize treatment regimens specifically to a
particular patient. This could significantly reduce erroneous or
ineffective prescriptions and increase the likelihood that patients
receive the proper dosage of appropriate drugs. Our products can also be
used by managed care systems and other healthcare providers to tailor
patient drug therapy programs for maximum efficacy and avoidance of
adverse drug reactions.
- Therapeutic Monitoring. Medical professionals may use our products to
monitor response to a particular therapeutic regimen, allowing earlier
modulation of treatment, if necessary. This type of therapeutic
monitoring could improve medical outcomes by reducing the time required
to identify the most appropriate types and levels of treatment.
MANUFACTURING
We currently manufacture our products at our three facilities, located in
the Madison, Wisconsin area. Manufacturing is automated from receipt of a
proposed target sequence to shipment of the corresponding product. Additionally,
we have developed and implemented a modular manufacturing process at all of our
manufacturing facilities, which allows easy expansion. Each manufacturing module
consists of the following coordinated stations and computer support:
- proprietary software program for automated product design;
- bar code product tracking system;
- automated probe synthesis and processing system;
- automated probe purification station;
- automated probe quantification and dilution and fill station; and
- on-line robotic product quality control system.
We have designed the manufacturing processes and area at each facility to
optimize material flow and personnel movement with all the manufacturing and
quality control operations. We have fully integrated our manufacturing modules
with our materials, requirements, and planning system to manage and control our
material and product orders and inventories.
Our clinical products are produced in environmentally controlled clean
rooms and are isolated from the rest of the facility consistent with national
and international registration standards. We have registered the facilities used
for manufacturing our clinical products with the United States Food and Drug
Administration, or FDA, as a Device Manufacturer and we believe we are in
compliance with FDA's quality system requirements, or QSRs.
MARKETING AND SALES
We currently market and sell our products through a combination of direct
sales personnel, which are focused primarily on the clinical market, and through
collaborative relationships. Our clinical sales force is currently comprised of
six individuals, and we plan to increase this sales force as market demand
requires. The clinical sales force targets high volume clinical and reference
laboratories that meet the criteria for highly-complex laboratories under the
Clinical Laboratory Improvement Amendments of 1988.
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Our products for the research market are sold primarily through
collaborative relationships with pharmaceutical companies and research
institutions focused on life sciences in humans, plants, and animals. Our
business development group targets leading pharmaceutical companies and research
and academic institutions with the objective of entering into agreements for the
supply of genetic testing products. We also appear at industry trade shows and
advertise in trade publications in connection with our marketing efforts.
During 2001, the majority of our product sales have been to international
end customers, primarily in Japan and the United Kingdom. We intend to continue
to pursue domestic and international market opportunities through a combination
of distribution arrangements and collaborative relationships. We may also
establish a direct international sales organization in selected major markets.
For a description of our industry segment and our product revenues by
geographic area, see Note 13 of the Notes to the Consolidated Financial
Statements included under Item 8 of this Form 10-K.
COLLABORATIVE RELATIONSHIPS
Our business involves research collaborations with instrument companies,
pharmaceutical companies and academic institutions. Many of these entities have
proven and renowned capabilities in gene-based product discovery and
commercialization. We have entered into a number of collaboration agreements and
are presently in late stage discussions with a select number of other groups to
establish additional relationships. Although to date none of these relationships
have resulted in clinical products, we expect to commercialize clinical products
developed through these collaborative relationships. The following is a summary
of our principal collaborative relationships.
OTSUKA PHARMACEUTICAL COMPANY, LTD.
We entered into a marketing and distribution agreement with Otsuka
Pharmaceutical Company, Ltd. in October 2001. Under the agreement, we appointed
Otsuka as our exclusive distributor for Invader research products in Japan and
other countries in the Far East, Southeast Asia and the Middle East that
together comprise approximately 25 percent of the world market for genome
research tools.
Otsuka is a leading provider of pharmaceuticals, medical devices, genome
research products and other healthcare products. Otsuka Group and its overseas
affiliates have 23,000 employees and had gross sales of approximately $8 billion
in 2000. Otsuka is a prominent member of the Pharma SNP Consortium, created by
the Japanese pharmaceutical industry to fund pharmacogenomic research in close
collaboration with Japan's Millennium Project.
The partnership of Third Wave with Otsuka will further accelerate Third
Wave's market penetration in Japan, which is emerging as the largest and most
robust market for SNP analysis products through its world leadership in
SNP-disease association studies.
The agreement is incremental to Third Wave's existing collaboration with the
Japanese government's Millennium Project. Under that collaboration, Third Wave
is supplying more than 120,000 Invader SNP assay products to the largest
SNP-disease association study in the world.
Otsuka will market, distribute and provide technical support for both
existing catalog and new custom-order Invader products for genotyping and gene
expression analysis.
ACLARA BIOSCIENCES, INC.
In October 2001, we entered a development and commercialization agreement
with ACLARA BioSciences, Inc. focused on multiplexed gene expression research
products. These research products couple the high-multiplexing capabilities of
ACLARA's eTag sequence-labeling technology with the unique performance and
ease-of-use characteristics of Third Wave's Invader platform.
The combination of the ACLARA and Third Wave technologies will enable
customers to profile many genes simultaneously in a single reaction directly
from crude cell lysates, without the need for sample prep or polymerase chain
reaction (PCR). We believe that this integration of complementary technologies
will provide a level of throughput and multiplexing that is unprecedented among
DNA and RNA detection or quantitation products.
The first collaboration multiplex products will detect and quantify the
expression levels of many key, clinically relevant genes, including cytokine
genes, which regulate inflammatory and immune response, and cytochrome P450
genes, which regulate drug metabolism. The products will have immediate
applications in drug discovery and development research.
APPLIED BIOSYSTEMS GROUP, A DIVISION OF APPLERA CORPORATION.
In August 2000, we entered into a development and non-exclusive supply
agreement with the Applied Biosystems Group, a division of Applera Corporation.
Under this agreement, we developed a panel of assays for high resolution genetic
analysis including SNP detection. These assays were developed for use in a SNP
initiative sponsored by various agencies of the Japanese government known as the
"Japanese Millennium Project." Under the agreement, we developed and
manufactured certain components for the assays and Applied Biosystems provided
us with various raw materials. Applied Biosystems also developed an automated
detection instrument for use in performing genomic analysis with the assays. In
connection with the development program, Applied Biosystems also agreed to lend
us various items of equipment used in the manufacture and quality control of the
assays.
Under the agreement with Applied Biosystems, we supplied the Japanese
Millennium Project with assay components and invoiced Applied Biosystems in
accordance with a fee arrangement defined in the agreement. We recorded as
revenue our billings to Applied Biosystems in accordance with SAB 101 and other
guidance; accordingly, no revenue was recognized until the final product was
delivered to the Japanese government (i.e. billings related to shipments to
Applied Biosystems were deferred until the ultimate sale to the outside party
occurs). At the end of each quarter, we and Applied Biosystems each prepared an
analysis of revenues recorded and costs incurred. Our costs included fees for
equipment lent to us by Applied Biosystems under a separate equipment loan
agreement. As a result of the profit analysis by each company, one party would
owe the other an amount to achieve a 50%/50% split of the total profits under
the agreement.
In the second quarter of 2001, we elected to supply our products to the
Japanese Millennium Project through a Japanese distributor. Our final quarterly
reconciliation with Applied Biosystems accounted for shipments of products to
Japan through the second quarter of 2001. In July 2001, we purchased the loaned
manufacturing equipment from Applied Biosystems for approximately $4.8 million.
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NOVARTIS AG
In June 2000, we entered into a collaborative development agreement with
Novartis Pharmaceuticals Corporation to develop a medium-density panel of 10,000
SNP assays spaced across the human genome. We will transfer 10,000 Invader
assays comprising 3,840,000 genotype determinations to Novartis solely for its
internal research and development applications worldwide.
Upon execution of the agreement, Novartis paid a sum creditable against
half of the amounts due upon transfer of the assays. Novartis also paid a
sum for each genotyping determination. In addition, Novartis granted us a
non-exclusive, fully paid-up worldwide license to improvements to the Invader
assays made in the course of its performance under this agreement, as well as a
right of first refusal to obtain an exclusive worldwide license to all patent
applications claiming discoveries and inventions, made by Novartis in the course
of using the assays, for diagnostic applications. This agreement is significant
to us principally because of the value of the technology rights and rights of
first refusal Novartis has granted us under the agreement.
Each party has a right to terminate the agreement upon specified notice in
the event that a breach of the agreement occurs without cure. If a termination
occurs and we are the breaching party, we must refund payment for assays that
have not been transferred.
The agreement expired in August 2001.
SMITHKLINE BEECHAM BIOLOGICALS
In June 2000, we entered into a New Assay Development and Option Agreement
with SmithKline Beecham Biologicals. Under the agreement, we will develop assays
for genotyping and gene expression analysis for use in SmithKline's internal
research and development of therapeutic vaccine applications.
We divided the SmithKline program into three phases. In the first two
phases, we will develop 7,000 assays for mRNA transcripts; in the third, we will
develop 3,000 assays for DNA sequences. SmithKline will pay a development fee
upon the initiation of each phase of the program. SmithKline will also pay for
assays provided under this agreement, an initial support fee for up to 40 hours
of our technical support during the initial phase, and additional payments for
our technical support if needed during subsequent phases of the program.
Upon completion of the program, SmithKline will evaluate the assays and
will have a 90-day option to enter into a subsequent Development and Marketing
Agreement with us to develop and distribute diagnostic assays based on our
Invader platform for use with SmithKline's therapeutic vaccines.
The agreement will expire upon the later of expiration of a 90-day
standstill period beginning upon final delivery of the assays to SmithKline or
the end of the 90-day option period, during which the parties will negotiate a
collaborative development agreement, beginning upon notice from SmithKline,
given before the end of the standstill period, that it desires to enter such an
agreement. SmithKline may terminate the agreement at any time and we may
terminate the agreement if SmithKline fails to cure a breach 30 days after we
have provided written notification of such breach.
BML
In December 2000, we entered into a development and commercialization
agreement with BML, Inc., one of the two largest clinical reference laboratories
in Japan. Under this agreement, we will develop assays in accordance with a
mutually agreed development program for use in clinical applications by BML and
BML will pay us for the development.
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Under the agreement, BML paid us $3.0 million as reimbursement for past
development expenses. Additionally, the agreement includes minimum funding for
the development program by BML of $2.0 million for calendar year 2001 and $1.0
million for each of calendar years 2002 and 2003.
Under the agreement, we agree to supply BML with its requirements of the
developed assays for use in its clinical applications at preferential prices.
Additionally, we will have the right to commercialize the developed assays
worldwide; however, we agree not to commercialize these assays to third parties
for use in Japan for a period between six and 24 months depending on whether the
assay is covered by patents owned by BML. We have also agreed, upon BML's
request, to negotiate the terms and conditions under which BML would have the
right to distribute the developed assays in Japan. Also, BML granted us a
license under all patent rights they own which cover the exploitation of the
developed assays, for which we have agreed to pay them a royalty.
The term of the agreement is until December 31, 2007. The agreement may be
terminated by BML on six months written notice given on or after June 30, 2003.
Additionally, either party may terminate the agreement on 60 days notice in the
event the other party materially breaches the agreement.
PFIZER
In August 1999, we entered into a Research Agreement with Warner-Lambert,
now Pfizer. Under this agreement we agreed to develop and supply assays for SNP
analysis and mRNA assays for gene expression profiling for Warner-Lambert's
research and development efforts. A total of 181 assays will be developed with a
total of 184,000 determinations.
Upon execution of the agreement, Warner-Lambert paid us the sum of $474,000
representing payment for all of the assays. We will own all improvements to the
Invader assay technology made during the course of the program, and
Warner-Lambert will own all other inventions. In addition, Warner-Lambert has
granted us an exclusive, worldwide, royalty-free and irrevocable license under
the inventions developed in the course of the development program to use and
commercialize diagnostic applications. These technology and commercialization
rights represent the principal value to us of this agreement.
The development program may be terminated by Warner Lambert upon 15 days'
prior written notice to us.
STANFORD UNIVERSITY
In September 1999, we entered into a research collaboration agreement with
Stanford University that granted the Stanford Human Genome Center rights and
licenses to use our proprietary technologies for internal research purposes.
Stanford will use these technologies in research and development projects for
the large-scale production of research and clinical assays. The agreement also
provides that we will develop and supply up to 30 assays for the research
projects.
We will jointly own any intellectual property jointly developed with
Stanford under this program. Stanford irrevocably granted us a worldwide,
non-exclusive license to exploit any improvements to the SNP Invader assays. We
also obtained from Stanford an irrevocable, exclusive license to exploit any
discovery, invention, data or materials developed by Stanford from the SNP
Invader assays, for research and diagnostic applications. We will pay Stanford a
royalty on net sales of diagnostic products resulting from this collaboration
sold by us or our sublicensees. We will share revenues from commercial sales of
therapeutic products resulting from this collaboration. We primarily benefit
from the intellectual property rights associated with this agreement.
The term of the agreement is five years, which term may be extended by
mutual agreement. The agreement may be terminated by Stanford, upon 60 days'
prior written notice to us, but will terminate
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automatically, 60 days after written notice of a material breach by a party has
been delivered to such breaching party.
GENOME RESEARCH LIMITED (SANGER CENTRE)
In September 1999, we entered into a collaboration agreement with the
Sanger Centre to utilize our products in the construction of the first SNP map
of a human chromosome and a corresponding SNP test panel. The collaboration
focuses on SNPs located on human chromosome 22, which were identified as part of
the Sanger Centre's chromosome 22 DNA sequence. Under this agreement, we
developed and supplied assays for approximately 2,000 unique SNPs positioned
along chromosome 22. Initially, the Sanger Centre is using this SNP test panel
to type unamplified genomic DNA from a select group of several hundred
individuals. For each of the 2,000 assays, we transferred 350 tests to the
Sanger Centre for its Chromosome 22 linkage study, for a total of 700,000
genotypes. As part of a second phase of the program, the Sanger Centre has an
option to purchase an additional 3,500,000-genotyping tests.
We have access to all data developed over the course of this linkage study
and the Sanger Centre has assigned to us all rights to any improvements
developed under the agreement. The Sanger Centre pays us for each genotyping
test that we supply. The payments that we have received under this agreement
have not been material to our historical results of operations. Rather, the
intellectual property rights that we received under this agreement represent its
primary value to us.
The agreement will terminate automatically, 30 days after written notice of
a material breach by a party has been delivered to such breaching party.
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INTELLECTUAL PROPERTY
We have implemented an aggressive patent strategy designed to provide us
with freedom to operate and facilitate commercialization of our current and
future products. We currently own 23 issued patents and exclusively license two
issued patents in the United States, and own two issued patents in Australia and
two issued patents in Canada. We have received notices of allowance for four
additional United States patent applications and two Australian applications. We
have 71 additional United States patent applications pending. In addition, we
have licensed rights to patent applications pending in the United States, Japan
and other major industrialized nations, covering genetic variations associated
with drug metabolism. Reflecting our international business strategy, we have
foreign filings in major industrialized nations corresponding to each major
technology area represented in our United States patent and application claims.
The issued, allowed and pending patents distinguish us from competitors by
claiming proprietary methods and compositions for analysis of DNA and RNA,
either genomic or amplified, using structure-specific cleavage processes and
compositions. Issued and pending claims are included for assay design methods
and compositions, as well as for use of the technology in various read-out
formats such as fluorescence resonance energy transfer, mass spectrometry or in
conjunction with solid supports such as micro latex beads or chips. We also have
issued and pending claims covering oligonucleotide design production systems and
methods. These methods also allow multiplexing or analysis of more than one
sample in a single reaction, allowing the system to be easily amenable to a wide
range of automated and non-automated detection methods.
Generally, United States patents have a term of 17 years from the date of
issue for patents issued from applications filed with the United States Patent
Office prior to June 8, 1995, and 20 years from the application filing date or
earlier claimed priority date in the case of patents issued from applications
filed on or after June 8, 1995. For applications filed after May 29, 2000, the
term is 20 years from the date of filing. A minimum term of 17 years is assured,
provided that there are no applicant-caused delays during prosecution. Patents
in most other countries have a term of 20 years from the date of filing the
patent application. Our issued United States patents will expire between 2012
and 2016. Our success depends to a significant degree on our ability to develop
proprietary products and technologies. We intend to continue to file patent
applications as we develop new products, technologies and patentable
enhancements. Prosecution practices have been implemented to avoid any applicant
delays that could compromise the guaranteed 17-year minimum term. There can be
no guarantee that such procedures will prevent the loss of a potential patent
term. This is particularly true in the short-term as the patent rules
implementing the most recent patent term changes are largely new and untested.
Complex legal and factual determinations and evolving laws make patent
protection uncertain. As a result, we cannot be certain that patents will be
issued from any of our pending patent applications or from applications licensed
to us or that any issued patents will have sufficient breadth to offer
meaningful protection. In addition, our issued patents or patents licensed to us
may be successfully challenged, invalidated, circumvented or unenforceable so
that our patent rights would not create an effective competitive barrier.
Moreover, the laws of some foreign countries may not protect our proprietary
rights to the same extent as do United States patent laws.
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In addition to patent protection, we rely on copyright and trade secret
protection of our intellectual property. We attempt to protect our trade secrets
by entering into confidentiality agreements with third parties, employees and
consultants. Our employees and consultants are required to sign agreements to
assign to us their interests in discoveries, inventions, patents and copyrights
arising from their work for us. They are also required to maintain the
confidentiality of our intellectual property, and refrain from unfair
competition with us during their employment and for a period of time after their
employment with us, which includes solicitation of our employees and customers.
We cannot be certain that these agreements will not be breached or invalidated.
In addition, we cannot assure you that third parties will not independently
discover or invent competing technologies or reverse engineer our trade secrets
or other technologies.
In October 2000, we settled a dispute with ID Biomedical Corporation in
which ID Biomedical had claimed that our products and processes infringed their
patents. In the ID Biomedical settlement, we paid $4.0 million in cash and
issued 545,454 shares of common stock and, in exchange, ID Biomedical dismissed
its lawsuit against us and agreed not to sue us, our affiliates, our customers
and certain others for infringement of patents held by ID Biomedical. In
December 2000, we entered into a licensing arrangement with Dade Behring in
order to resolve an intellectual property dispute between us and Dade Behring.
In the future, we may become involved in lawsuits in which third parties
file claims asserting that our technologies or products infringe on their
intellectual property. We cannot predict whether third parties will assert such
claims against us or against the licensors of technologies licensed to us, or
whether those claims will harm our business. We may be forced to defend against
such claims, whether they are with or without any merit or whether they are
resolved in favor of or against us or our licensors, and may face costly
litigation and diversion of management's attention and resources. As a result of
such disputes, we may have to develop costly non-infringing technologies, or
enter into licensing agreements. These agreements, if necessary, may be
unavailable on terms acceptable to us, or at all, which could seriously harm our
business and financial condition.
COMPETITION
The markets for our technologies and products are very competitive, and we
expect the intensity of competition to increase. Currently, we compete primarily
with other companies that are pursuing technologies and products that provide
alternatives to our technologies and products. Many of our competitors have
greater financial, operational, sales and marketing resources, and more
experience in research and development than we have. Moreover, competitors may
have greater name recognition than we do, and may offer discounts as a
competitive tactic. These competitors and other companies may have developed or
could in the future develop new technologies that compete with our products or
render our products obsolete.
In the research market, we compete with several companies offering
alternative technologies which differ from the Invader product platform. These
companies include, among others: Affymetrix, Inc., Amersham Pharmacia Biotech
Ltd., Genometrix, Hyseq, Inc., Illumina, Inc., Luminex Corporation, Molecular
Devices, Inc., Nanogen, Inc., Orchid Biosciences, Inc., Applera Corporation,
Protogene Laboratories, Inc., Pyrosequencing AB, Rapigene, Inc., Sequenom, Inc.
and Visible Genetics, Inc.
In the clinical market, we also potentially compete with several companies
offering alternative technologies which differ from the Invader product
platform. These companies include, among others: Abbott Corporation, Bayer
Corporation, Becton Dickinson and Company, BioRad Corporation, Chiron, Dade
Behring, Inc., Digene, Hoffman-La Roche Ltd., Gen-Probe, Luminex Corporation,
Orchid Biosciences, Inc. and Sequenom, Inc.
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GOVERNMENT REGULATION
We do not anticipate that our products that will be labeled for research
use only, or RUO, or those products used in drug discovery or genomics will be
subject to significant government regulation. The manufacture, labeling,
distribution and marketing of our products labeled as analyte specific reagents,
or ASRs, or labeled for clinical use will be regulated as medical devices by the
FDA and in certain other countries. We believe our products currently marketed
pursuant to FDA regulations as ASRs, as well as those products we intend to
market in the future as ASRs, are exempt from the 510(k) premarket notification
and premarket approval requirements. However, certain of our products or their
applications may require that we obtain, or we may choose to obtain, regulatory
clearances or approvals. These products would include, for example, clinical
products that we choose to market as in vitro diagnostic products rather than as
ASRs. We expect that we will apply for FDA clearances or approvals for some of
our future products, and anticipate filing the first of such applications in
calendar year 2002.
The Food, Drug and Cosmetic Act requires that medical devices introduced to
the United States market, unless exempted by regulation, be the subject of
either a premarket notification clearance, known as a 510(k), or a premarket
approval, known as a PMA. Some of our clinical products may require a PMA,
others may require a 510(k). Other products, like ASRs, may be exempt from
regulatory clearance or approval.
With respect to devices reviewed through the 510(k) process, we may not
market a device until an order is issued by the FDA finding our product to be
substantially equivalent to a legally marketed device known as a predicate
device. A 510(k) submission may involve the presentation of a substantial volume
of data, including clinical data, and may require a substantial review. The FDA
may agree that the product is substantially equivalent to a predicate device and
allow the product to be marketed in the United States. The FDA, however, may
determine that the device is not substantially equivalent and require a PMA, or
require further information, such as additional test data, including data from
clinical studies, before it is able to make a determination regarding
substantial equivalence. By requesting additional information, the FDA can
further delay market introduction of our products.
If the FDA indicates that a PMA is required for any of our clinical
products, the application will require extensive clinical studies, manufacturing
information and likely review by a panel of experts outside the FDA. Clinical
studies to support either a 510(k) submission or a PMA application would need to
be conducted in accordance with FDA requirements. Failure to comply with FDA
requirements could result in the FDA's refusal to accept the data or the
imposition of regulatory sanctions. There can be no assurance that we will be
able to meet the FDA's requirements or receive any necessary approval or
clearance.
Once granted, a 510(k) clearance or PMA approval may place substantial
restrictions on how our device is marketed or to whom it may be sold. Even in
the case of devices like ASRs, many of which are exempt from 510(k) clearance or
PMA approval requirements, the FDA may impose restrictions on marketing. Our ASR
products may be sold only to clinical laboratories certified under Clinical
Laboratory Improvement Amendments of 1988, or CLIA, to perform high complexity
testing. In addition to requiring approval or clearance for new products, the
FDA may require approval or clearance prior to marketing products that are
modifications of existing products. We cannot assure you that any necessary
510(k) clearance or PMA approval will be granted on a timely basis, or at all.
Delays in receipt of or failure to receive any necessary 510(k) clearance or PMA
approval, or the imposition of stringent restrictions on the labeling and sales
of our products could have a material adverse effect on us. As a medical device
manufacturer, we are also required to register and list our products with the
FDA. In addition, we are required to comply with the FDA's quality systems
regulations, or QSRs which require that our devices be manufactured and records
be maintained in a prescribed manner with respect to manufacturing, testing and
control activities. Further, we are required to comply with FDA requirements for
labeling and promotion. For example, the FDA prohibits cleared or approved
devices from being promoted for uncleared or unapproved uses. In addition, the
medical device reporting regulation requires that we provide information to the
FDA whenever there is evidence to reasonably suggest that one of our devices may
have caused or contributed to a death or serious
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injury, or that there has occurred a malfunction that would be likely to cause
or contribute to a death or serious injury if the malfunction were to recur.
Our manufacturing facilities are subject to periodic and unannounced
inspections by the FDA and state agencies for compliance with quality system
regulations. Additionally, the FDA will conduct a preapproval inspection for all
PMA devices and in some cases for 510(k) devices. Although we believe we are in
compliance with the FDA's quality system regulations for ASRs, we have never
been inspected by the FDA and cannot assure you that we will be able to maintain
compliance in the future. If the FDA believes that we are not in compliance with
applicable laws or regulations, it can issue a warning letter, detain or seize
our products, issue a recall notice, enjoin future violations and assess civil
and criminal penalties against us. In addition, approvals or clearances could be
withdrawn in appropriate circumstances. Failure to comply with regulatory
requirements or any adverse regulatory action could have a material adverse
effect on us.
Any customers using our products for clinical use in the United States may
be regulated under CLIA. CLIA is intended to ensure the quality and reliability
of clinical laboratories in the United States by mandating specific standards in
the areas of personnel qualifications, administration, participation in
proficiency testing, patient test management, quality control, quality assurance
and inspections. The regulations promulgated under CLIA establish three levels
of diagnostic tests, namely, waived, moderately complex and highly complex, and
the standards applicable to a clinical laboratory depend on the level of the
tests it performs. We cannot assure you that the CLIA regulations and future
administrative interpretations of CLIA will not have a material adverse impact
on us by limiting the potential market for our products.
Medical device laws and regulations are also in effect in many of the
countries in which we may do business outside the United States. These range
from comprehensive device approval requirements for some or all of our medical
device products, to requests for product data or certifications. The number and
scope of these requirements are increasing. Medical device laws and regulations
are also in effect in some states in which we do business. There can be no
assurance that we will obtain regulatory approvals in such countries or that we
will not incur significant costs in obtaining or maintaining foreign regulatory
approvals. In addition, export of certain of our products which have not yet
been cleared or approved for domestic commercial distribution may be subject to
FDA export restrictions.
We are also subject to numerous environmental and safety laws and
regulations, including those governing the use and disposal of hazardous
materials. Any violation of, and the cost of compliance with, these regulations
could have a material adverse effect on our business.
EMPLOYEES
As of December 31, 2001, we employed 294 persons, of whom 36 hold doctorate
degrees and 196 hold other advanced degrees. Approximately 86 employees are
engaged in research and development, 25 in business development, sales and
marketing, 132 in operations and manufacturing and 51 in intellectual property,
finance and other administrative functions. Our success will depend in large
part on our ability to attract and retain qualified employees. We face
competition in this regard from other companies, research and academic
institutions, government entities and other organizations. We believe that we
maintain good relations with our employees.
SCIENTIFIC ADVISORY BOARD
We have established a scientific advisory board made up of leading scholars
in the fields of genetic analysis, enzymology, mass spectrometry, microfluidics,
microarrays, proteomics and molecular medicine. Members of our scientific
advisory board consult with us on matters relating to the development of our
products described elsewhere in this Form 10-K. Members of our scientific
advisory board are reimbursed for the reasonable expenses of such consultations
or attending meetings of the scientific advisory board. All
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of the members hold shares of our common stock or have received options to
purchase shares of our common stock. The members of the scientific advisory
board are as follows:
Lloyd M. Smith, Ph.D., Kellett Professor of Chemistry at the University of
Wisconsin-Madison.
James E. Dahlberg, Ph.D., Frederick Sanger Professor of Biomolecular
Chemistry, University of Wisconsin-Madison.
John Todd, Ph.D., Professor of Medical Genetics, Cambridge Institute for
Medical Research, Cambridge University, Cambridge, UK.
Kenneth Welsh, Ph.D., Director of the Imperial College/Royal Brompton &
Harefield National Health Service Genomics Center and Chairman of the Quality
Control Scheme for Histocompatibility and Immunogenetics for the United Kingdom.
Olke Uhlenbeck, Ph.D., Professor of Chemistry & Biochemistry, University of
Colorado.
Edwin Ullman, Ph.D., former Vice President and Director of Research at
Behring Diagnostics.
RISK FACTORS
RISKS RELATED TO OUR BUSINESS
WE HAD AN ACCUMULATED DEFICIT OF $84.9 MILLION AT DECEMBER 31, 2001, AND EXPECT
TO CONTINUE TO INCUR SUBSTANTIAL OPERATING LOSSES FOR THE FORESEEABLE FUTURE.
We have had substantial operating losses since our inception in 1993, and
we expect our operating losses to continue over the foreseeable future. We
experienced net losses of $9.7 million in 1999, $25.6 million in 2000, and $36.8
million in 2001. In order to further develop our products and technologies for
the detection of genetic variations, including development of new products for
the clinical market, we will need to incur significant expenses in connection
with our internal research and development and commercialization programs. As a
result, we expect to incur operating losses for the foreseeable future. In
addition, there is no assurance that we will ever become profitable or that we
will sustain profitability if we do become profitable. Should we experience
protracted or unforeseen operating losses, our capital requirements would
increase and our stock price would likely decline.
FLUCTUATIONS IN OUR QUARTERLY REVENUES AND OPERATING RESULTS MAY NEGATIVELY
IMPACT OUR STOCK PRICE.
Our revenues and results of operations have fluctuated significantly in the
past and we expect significant fluctuations to continue in the future due to a
variety of factors, many of which are outside of our control. These factors
include:
- the volume and timing of orders for our products;
- changes in the mix of our products offered;
- the timing of payments we receive under collaborative agreements, as
well as our ability to recognize these payments as revenues;
- the number, timing and significance of new products and technologies
introduced by our competitors;
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- our ability to develop, obtain regulatory clearance, market and
introduce new and enhanced products on a timely basis;
- changes in the cost, quality and availability of equipment, reagents
and components required to manufacture or use our products;
- availability of commercial and government funding to researchers who
use our products and services; and
- availability of third-party reimbursement to users of our clinical
products.
Research and development costs associated with our products and
technologies, as well as facilities costs, personnel costs, marketing programs
and overhead account for a substantial portion of our operating expenses. We
cannot adjust these expenses quickly in the short term. If our revenues decline
or do not grow as anticipated, we may not be able to reduce our operating
expenses accordingly. Failure to achieve anticipated levels of revenues could
significantly harm our operating results for one or more fiscal periods. Due to
the possibility of fluctuations in our revenues and expenses, we believe that
quarter-to-quarter comparisons of our operating results are not a good
indication of our future performance. In addition, our operating results in a
future fiscal quarter may not meet the expectations of stock market analysts and
investors. In that case, our stock price would likely decline and investors
would experience a decline in the value of their investment.
OUR TECHNOLOGIES AND INITIAL COMMERCIAL PRODUCTS MAY NOT BE COMMERCIALLY VIABLE
OR SUCCESSFUL, WHICH COULD ADVERSELY AFFECT OUR REVENUES.
We are currently developing and commercializing only a limited number of
products based on our technologies. We plan to develop additional products,
including products for clinical applications. We cannot assure you that we will
be able to complete development of our products that are currently under
development or that we will be able to develop additional new products. In
addition, although data available to date are favorable, we do not have
sufficient experience with broad use of our products in high volume clinical and
research settings to be able to assure you that our customers will be able to
use our products and technologies to successfully detect and quantify genetic
variations. In addition, some of the genetic variations for which we develop our
products may not be useful in assisting therapeutic or diagnostic product
development. In this event, our sales or products for these genetic variations
would diminish significantly or cease, and we would not be able to recoup our
investment in developing these products. Accordingly, if we fail to successfully
further develop our products and technologies, and if our technologies and
products are not useful in the development of commercially successful
therapeutic or diagnostic products, we may not achieve a competitive position in
the market. If we fail to do so, our revenues will be seriously harmed and it is
unlikely that we will ever achieve profitability. In this event, our stock price
would likely decline.
WE HAVE LIMITED MANUFACTURING EXPERIENCE AND MAY LIKELY NEED TO EXPAND OR
ESTABLISH NEW MANUFACTURING FACILITIES AS WE COMMERCIALIZE OUR PRODUCTS.
We have limited experience manufacturing our products, and have limited
experience manufacturing our products in the volumes that will be necessary for
us to achieve significant commercial sales. We may need to establish new
manufacturing processes or facilities. Facilities expansion and development or
process improvements can be delayed by unforeseen circumstances, including
inability to obtain needed manufacturing equipment on a timely basis,
difficulties with facility construction and completion of improvements and
difficulties associated with moving from small-scale, pilot production to higher
volumes. If we fail to meet our facilities needs, we may not be able to provide
our customers with the quantity of products they require, which would damage
customer relations and result in reduced revenues. Additionally, some of our
products must be manufactured in accordance with FDA's quality system
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regulations, known as QSRs. We have limited experience in manufacturing our
products in compliance with QSRs.
WE HAVE LIMITED SALES AND MARKETING EXPERIENCE, AND AS A RESULT, MAY BE UNABLE
TO COMPETE SUCCESSFULLY WITH OUR COMPETITORS IN COMMERCIALIZING OUR POTENTIAL
PRODUCTS.
We currently have a small sales force, consisting of six individuals
focused on the clinical market, and will need to increase the size of our sales
force as we further commercialize our products. In particular, as we introduce
new clinical products, we will need to increase our clinical applications sales
force. We are not currently able to estimate the number of new sales personnel
we will require. However, this number could be significant and we may not be
able to recruit, hire and train a sufficient number of sales personnel in a
short time frame. We also intend to market our products through collaborations
and distribution agreements with biopharmaceutical and life science companies.
We cannot assure you that we will be able to establish a successful sales force
or to establish collaboration or distribution arrangements to market our
products. If we are unable to implement an effective marketing and sales
strategy, we will be unable to grow our revenues and execute our business plan.
This would harm our financial condition and our stock price would likely
decline.
WE WILL REQUIRE ADDITIONAL FUNDING FOR OUR FUTURE OPERATING PLANS. THESE FUNDS
MAY NOT BE AVAILABLE ON ACCEPTABLE TERMS, IF AT ALL.
We anticipate that our existing capital resources together with cash from
product sales will be sufficient to fund our operating and capital requirements
for at least the next 12 months. Thereafter, we will likely need to raise
significant additional capital. We expect our capital and operating expenses to
be significant for the foreseeable future. We have expended significant
resources in developing our manufacturing facilities and expect to continue to
expend significant resources to develop these facilities and improve production
processes, increase our research and development and commercialization
activities and acquire additional manufacturing facilities. The amount of
additional capital we will need to raise will depend on many factors, including:
- our progress with our research and development programs;
- our level of success in selling our products and technologies;
- our ability to establish and maintain successful collaborations; and
- the costs we incur in enforcing and defending our patent claims and
other intellectual property rights.
In addition, we may require additional financing in less than 12 months if
we:
- decide to expand faster than planned;
- develop new or enhanced products ahead of schedule;
- need to respond to competitive pressures; or
- decide to acquire complementary products, businesses or technologies.
If we raise additional funds through the sale of equity, convertible debt
or other equity-linked securities, your percentage ownership in the company will
be reduced. In addition, these transactions may dilute the value of our
outstanding stock. We may issue securities that have rights, preferences and
privileges senior to our common stock. If we raise additional funds through
collaborations or licensing arrangements, we may relinquish rights to certain of
our technologies or products, or grant licenses to third parties on terms
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that are unfavorable to us. If future financing is not available to us or is not
available on terms acceptable to us, we may not be able to fund our future needs
which would have a material adverse effect on our results of operations and
financial condition.
COMMERCIALIZATION OF OUR TECHNOLOGIES DEPENDS ON STRATEGIC PARTNERSHIPS AND
COLLABORATIONS WITH OTHER COMPANIES, AND IF OUR CURRENT OR FUTURE PARTNERSHIPS
AND COLLABORATIONS ARE NOT SUCCESSFUL, WE MAY EXPERIENCE DIFFICULTY
COMMERCIALIZING OUR TECHNOLOGIES AND PRODUCTS.
In order to augment our internal sales and marketing efforts and to reach
additional product and geographic markets, we have entered into strategic
partnerships and collaborations for marketing of our products. We intend to
enter into additional arrangements in the future. These agreements provide us,
in some instances, with access to products and technologies that are
complementary to ours and funding for development of our products. We may also
be dependent on collaborators for regulatory approvals and clearances, and
manufacturing in particular geographic and product markets. If our strategic
partnerships and collaborations are not successful, we may not be able to
develop or successfully commercialize the products that are the subject of the
collaborations on a timely basis, if at all. In addition, if we do not enter
into additional partnership agreements, or if these agreements are not
successful, our ability to develop and commercialize new products will be
negatively affected which will harm our future operating results.
We have no control over the resources that any partner or collaborator may
devote to our products. Any of our present or future partners or collaborators
may not perform their obligations as expected. These partners or collaborators
may breach or terminate their agreements with us or otherwise fail to meet their
obligations or perform their collaborative activities successfully and in a
timely manner. Further, any of our partners or collaborators may elect not to
develop products arising out of our partnerships or collaborations or devote
sufficient resources to the development, manufacture or commercialization of
these products. If any of these events occur, we may not be able to develop our
products and technologies and our ability to generate revenues will decrease.
OUR STRATEGY FOR DEVELOPING AND COMMERCIALIZING PRODUCTS DEPENDS IN PART ON OUR
ABILITY TO FORM RESEARCH COLLABORATIONS AND LICENSING ARRANGEMENTS. IF WE ARE
NOT ABLE TO ENTER INTO THESE COLLABORATIONS AND ARRANGEMENTS ON ACCEPTABLE TERMS
OUR RESULTS WILL SUFFER.
Our strategy involves the formation of research collaborations with
academic institutions and pharmaceutical companies involved in developing
genetic variation analysis for use in disease association studies and
personalized treatment approaches to medicine. Under these arrangements, we
intend to offer our products and technologies at a reduced cost in exchange for
rights to commercialize discoveries made using our technologies. As a result, we
may be dependent on our research collaborators as a source of new products and
technologies. If these research collaborations are not successful, and do not
provide us with new products and technologies, our results of operations would
suffer and our future prospects and revenue growth would be impaired.
In addition, we have historically maintained relationships with consultants
and scientific advisors at academic and other institutions who have conducted
research on our behalf critical to the development of our products and
technologies. The majority of these individuals have commitments to other
entities and have limited time available for us. Some of these entities may also
compete with us. We will need to establish additional relationships with
consultants and scientific advisors related to our business. We will have
little, if any, control over the activities of any new consultants and
scientific advisors and can expect only limited amounts of their time to be
dedicated to our activities. Our ability to identify and develop new products
and technologies may depend in part on continued collaborations with researchers
at academic and other institutions. We cannot be certain that any of our
existing relationships with scientific advisors will be successful. Further, we
may not be able to negotiate acceptable collaborations in the future with
additional consultants or scientific advisors at academic and other
institutions.
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THE EARLY TERMINATION OF ANY OF OUR LICENSES OR OUR RESEARCH OR STRATEGIC
COLLABORATIONS COULD SERIOUSLY HARM OUR BUSINESS AND FINANCIAL CONDITION.
Certain of our strategic and research collaboration agreements may be
terminated with little or no notice. In particular, the supply of products to
the Japanese Millennium Project may be terminated upon specified notice at any
time. This agreement will likely account for a significant portion of our
revenues for 2002. Accordingly, early termination of this agreement would
seriously harm our revenues, and in turn our business and financial condition.
In addition, we intend to seek additional strategic and research collaborations
and licenses with third parties, who may negotiate provisions with us that allow
them to terminate their agreements with us prior to the expiration of the
negotiated term. It is likely that, as a result of the prevalence of such
provisions in collaboration agreements involving biotechnology companies, we
will enter into agreements that give either or both parties the right to
terminate prior to expiration of the stated term of the agreement.
If any third party strategic or research collaborator or licensee were to
unexpectedly terminate its agreement with us or otherwise fail to perform its
obligations under our collaboration agreement or to complete them in a timely
manner, we could lose significant revenues. This situation would be particularly
serious if it related to the Japanese Millennium Project. In particular, early
termination of any of our strategic collaborations or partnerships could harm
our financial condition and operating results because we rely on these
agreements for product sales, development funding and access to new product
applications. In addition, unexpected termination of collaborations could also
result in our loss of important intellectual property or other rights which we
had intended to obtain under these agreements. If any of these events were to
occur, our business and our financial condition could be seriously harmed.
WE ARE IN A HIGHLY COMPETITIVE INDUSTRY AND MARKETPLACE. COMPETITIVE
DEVELOPMENTS, INCLUDING NEW TECHNOLOGIES THAT RENDER OURS LESS COMPETITIVE OR
OBSOLETE, COULD SERIOUSLY HARM OUR BUSINESS.
The biotechnology and life sciences industries generally and the genetic
analysis market specifically are highly competitive, and we expect the intensity
of competition to increase. We compete with organizations in the United States
and abroad that develop and manufacture products and provide services for the
analysis of genetic information for research and/or clinical applications. These
organizations include:
- biotechnology, pharmaceutical, chemical and other companies;
- academic and scientific institutions;
- governmental agencies; and
- public and private research organizations.
Many of our competitors have greater financial, technical, research,
marketing, sales, distribution, service and other resources than we do.
Moreover, our competitors may offer broader product lines and have greater name
recognition than we do, and may offer discounts as a competitive tactic. In
addition, several development stage companies are currently making or developing
technologies, products or services that compete with or are being designed to
compete with our technologies and products. Our competitors may develop or
market technologies, products or services that are more effective or
commercially attractive than our current or future products, or that may render
our technologies or products less competitive or obsolete. Competitors may make
rapid technological developments which may result in our technologies and
products becoming obsolete before we recover the expenses incurred to develop
them or before they generate significant revenue or market acceptance.
Accordingly, if competitors introduce superior technologies or products and we
cannot make enhancements to our technologies and products necessary for them to
remain competitive, our competitive position, and in turn our business, revenues
and financial condition, will be seriously harmed. This, in turn, would likely
cause our stock price to decline.
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IF WE ARE UNABLE TO PROTECT OUR PROPRIETARY METHODS AND TECHNOLOGIES, WE MAY NOT
BE ABLE TO COMMERCIALIZE PRODUCTS.
Our commercial success will depend, in large part, on our ability to obtain
patent protection on many aspects of our business, including the products,
methods and services we develop. Patents issued to us may not provide us with
substantial protection or be commercially beneficial to us. The issuance of a
patent is not conclusive as to its validity or its enforceability.
In addition, our patent applications or those we have licensed, may not
result in issued patents. If our patent applications do not result in issued
patents, our competitors may obtain rights to commercialize our discoveries
which would harm our competitive position.
We also may apply for patent protection on novel genetic variations in
known genes and their uses, as well as novel uses for previously identified
genetic variations discovered by third parties. In the latter cases, we may need
a license from the holder of the patent with respect to such genetic variations
in order to make, use or sell any related products. We may not be able to
acquire such licenses on terms acceptable to us, if at all.
Certain parties are attempting to rapidly identify and characterize genes
and genetic variations through the use of sequencing and other technologies. To
the extent any patents are issued to other parties on such partial or
full-length genes or genetic variations or uses for such genes or genetic
variations, the risk increases that the sale of products developed by us or our
collaborators may give rise to claims of patent infringement against us. Others
may have filed and, in the future, are likely to file patent applications
covering many genetic variations and their uses. Any such patent application may
have priority over our patent applications and could further require us to
obtain rights to previously issued patents covering genetic variations. We
cannot assure you that any license that we may require under any such patent
will be made available to us on commercially acceptable terms, if at all.
We may be sued for infringing on the intellectual property rights of
others. We could also become involved in interference proceedings in the United
States Patent and Trademark Office to determine the relative priority of our
patents or patent applications and those of the other parties involved in the
interference proceeding. Intellectual property proceedings are costly, and could
affect our results of operations. These proceedings can also divert the
attention of managerial and technical personnel. If we do not prevail in any
intellectual property proceeding, in addition to any damages we might have to
pay, we could be required to stop the infringing activity, or obtain a license
to or design around the intellectual property in question. In interference
proceedings, our patent rights could be invalidated and the scope of our patents
could be limited. If we are unable to obtain licenses to intellectual property
rights that we need to conduct our business, or are unable to design around any
third party patent, we may be unable to sell some of our products, which will
result in reduced revenue.
We have in the past and may in the future become a party to litigation
involving patents and intellectual property rights. In October 2000, we settled
a dispute with ID Biomedical Corporation in which ID Biomedical had claimed that
our products and processes infringed their patents. In the ID Biomedical
settlement, we paid $4.0 million in cash and issued 545,454 shares of common
stock and, in exchange, ID Biomedical dismissed its lawsuit against us and
agreed not to sue us, our affiliates, our customers and certain others for
infringement of patents held by ID Biomedical. In December 2000, we entered into
a licensing arrangement with Dade Behring in order to resolve an intellectual
property dispute between us and Dade Behring.
We may in the future receive claims of infringement of intellectual
property rights from other parties. If we do not prevail in any future legal
proceedings, we may be required to pay significant monetary damages. In
addition, we could also be enjoined from use of certain processes or prevented
from selling certain configurations of our products that were found to be within
the scope of the patent claims. In the event we did not prevail in any future
proceeding, we would either have to obtain licenses from the other party, avoid
certain product configurations or modify some of our products and processes to
design around
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the patents. Licenses could be costly or unavailable on commercially reasonable
terms. Designing around patents or focusing efforts on different configurations
could be time consuming, and we would have to remove some of our products from
the market while we were completing redesigns. Accordingly, if we are unable to
settle future intellectual property disputes through licensing or similar
arrangements, or if any such future disputes are determined adversely to us, our
ability to market and sell our products could be seriously harmed. This would in
turn harm our business, financial condition and results of operations.
In addition, in order to protect or enforce our patent rights or to protect
our ability to operate our business, we may need to initiate other patent
litigation against third parties. These lawsuits could be expensive, take
significant time, and could divert management's attention from other business
concerns. These lawsuits could result in the invalidation or limitation in the
scope of our patents or forfeiture of the rights associated with our patents. We
cannot assure you that we would prevail in any such proceedings or that a court
will not find damages or award other remedies in favor of our opposing party in
any of these suits. During the course of any future proceedings, there may be
public announcements of the results of hearings, motions and other interim
proceedings or developments in the litigation. Securities analysts or investors
may perceive these announcements to be negative, which could cause the market
price of our stock to decline.
OTHER RIGHTS AND MEASURES THAT WE RELY UPON TO PROTECT OUR INTELLECTUAL PROPERTY
MAY NOT BE ADEQUATE TO PROTECT OUR PRODUCTS AND COULD REDUCE OUR ABILITY TO
COMPETE IN THE MARKET.
In addition to patents, we rely on a combination of trade secrets,
copyright and trademark laws, nondisclosure agreements and other contractual
provisions and technical measures to protect our intellectual property rights.
While we require employees, collaborators, consultants and other third parties
to enter into confidentiality and/or non-disclosure agreements where
appropriate, any of the following could still occur:
- the agreements may be breached;
- we may have inadequate remedies for any breach;
- proprietary information could be disclosed to our competitors; or
- others may independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to our trade secrets
or disclose such technologies.
If for any of the above reasons our intellectual property is disclosed,
invalidated or misappropriated, it would harm our ability to protect our rights
and our competitive position.
IF WE FAIL TO RETAIN OUR KEY PERSONNEL AND HIRE, TRAIN AND RETAIN QUALIFIED
EMPLOYEES, WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY, WHICH COULD RESULT IN
REDUCED REVENUES.
Our future success will depend on the continued services and on the
performance of our senior management, in particular the services of Lance Fors,
Ph.D., our Chief Executive Officer and Chairman of the Board.
If a competitor hired Dr. Fors away from us, or if for any reason he could
not continue to work for us, we would have difficulty hiring officers with
equivalent skills in general and financial management. We do not currently carry
"key person" life insurance, so the loss of the services of Dr. Fors could
seriously impair our ability to operate in our industry.
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In addition, our researchers, scientists and technicians have significant
experience in research and development related to the analysis of genetic
variations. If we were to lose these employees to our competitors, we could
spend a significant amount of time and resources to replace them, which could
impair our research and development efforts. Further, in order to scale up our
manufacturing capability and to further our research and development efforts, we
will need to hire, train and retain additional manufacturing, research,
scientific and technical personnel. The low level of unemployment in the
Madison, Wisconsin area may make it difficult for us to hire and retain
qualified manufacturing and other personnel. If we are unable to hire, train and
retain the personnel we need, we may experience delays in the research,
development and commercialization of our technologies and products. This would
result in reduced revenues and would harm our results of operations.
WE PLAN TO CONTINUE TO INTRODUCE PRODUCTS FOR THE CLINICAL MARKET, AND WE MAY
NEED TO OBTAIN FDA CLEARANCES AND APPROVALS AND COMPLY WITH FDA QUALITY SYSTEM
REGULATIONS AND OTHER REGULATIONS RELATING TO THE MANUFACTURING, MARKETING AND
SALE OF CLINICAL PRODUCTS.
We anticipate that the manufacturing, labeling, distribution and marketing
of a number of our clinical diagnostic products will be subject to extensive
regulation in the United States and in certain other countries.
In the United States, the Food and Drug Administration, or the FDA,
regulates, as medical devices, most diagnostic tests and in vitro reagents that
are marketed as finished test kits. Some clinical laboratories, however,
purchase clinical products which are marketed under FDA regulations as analyte
specific reagents, or ASRs, and develop and prepare their own finished
diagnostic tests called "home brews." FDA also considers ASRs to be medical
devices. The FDA restricts the sale of these products to clinical laboratories
certified under the Clinical Laboratory Improvement Amendments of 1988, known as
CLIA, to perform high complexity testing. We intend to market some diagnostic
products as finished test kits and others as individual reagents. Consequently,
these clinical products will be regulated as medical devices.
Unless otherwise exempt, medical devices require FDA approval or clearance
prior to marketing in the United States. Although we believe our currently
marketed products, as well as those ASRs we intend to market in the future, are
exempt from 510(k) premarket notification and premarket approval requirements,
the process of obtaining approvals and clearances necessary to market our
proposed clinical products can be time-consuming, expensive and uncertain. To
date, we have not applied for FDA or any other regulatory approvals or
clearances with respect to any of our clinical diagnostic products. However,
clinical products that we may seek to introduce in the future may require FDA
approvals or clearances prior to commercial sale in the United States. We may
experience difficulties that could delay or prevent the successful development,
introduction and marketing of new clinical products. In addition, we cannot
assure you that regulatory approval or clearance of any clinical products for
which we seek such approvals will be granted by the FDA or foreign regulatory
authorities on a timely basis, if at all.
If approval or clearance is obtained we will be subject to continuing FDA
obligations. When manufacturing medical devices, including ASRs, we will be
required to adhere to Quality System regulations, which will require us to
manufacture our products and maintain records in a prescribed manner. We have
never been subject to an FDA Quality System inspection, and we cannot assure you
that we can pass an FDA audit or maintain compliance in the future. Further, the
FDA may place substantial restrictions on the indications for which our products
may be marketed or to whom they may be marketed. Additionally, there can be no
assurance that FDA will not require us to conduct clinical studies as a
condition of approval or clearance. Failure to comply with applicable FDA
requirements can result in, among other things:
- administrative or judicially imposed sanctions;
- injunctions, civil penalties, recall or seizure of our products;
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- total or partial suspension of production;
- failure of the government to grant premarket clearance or premarket
approval for our products;
- withdrawal of marketing clearances or approvals; and
- criminal prosecution.
Any of our customers using our products for clinical use in the United
States may be regulated under CLIA. CLIA is intended to ensure the quality and
reliability of clinical laboratories in the United States by mandating specific
standards in the areas of personnel qualification, administration, participation
in proficiency testing, patient test management, quality control, quality
assurance and inspections. The regulations promulgated under CLIA establish
three levels of clinical tests and the standards applicable to a clinical
laboratory depend on the level of the tests it performs. CLIA requirements may
prevent some clinical laboratories from using our products. Therefore, CLIA
regulations and future administrative interpretations of CLIA could harm our
business by limiting the potential market for our products.
DIFFICULTIES WE MAY ENCOUNTER MANAGING OUR GROWTH COULD ADVERSELY AFFECT OUR
RESULTS OF OPERATIONS.
We have experienced a period of rapid and substantial growth that has
placed and, if such growth continues, will continue to place a strain on our
administrative and operational infrastructure. If we are unable to manage this
growth effectively, our business, results of operations or financial condition
may be materially adversely affected. We increased the number of our employees
from 49 at December 31, 1996, to 294 at December 31, 2001. We have at times
experienced difficulties in filling orders on schedule as well as production
delays and have encountered problems with our reporting and management systems
as the number of our employees has grown and our levels of business activity
have increased. To date, none of these problems has materially harmed our
business. We cannot assure you, however, that our business would not be harmed
if these problems continued. Our ability to manage our operations and growth
effectively requires us to continue to improve our operational, financial and
management controls, reporting systems and procedures and hiring programs. We
may not be able to successfully implement improvements to our management
information and control systems in an efficient or timely manner and may
discover deficiencies in existing systems and controls. If we are unable to
improve our controls and systems to meet the needs of an expanding enterprise,
we could experience production delays and problems with our reporting systems,
and these problems could harm our business.
OUR FAILURE TO COMPLY WITH ANY APPLICABLE ENVIRONMENTAL, HEALTH, SAFETY AND
RELATED GOVERNMENT REGULATIONS MAY AFFECT OUR ABILITY TO DEVELOP, PRODUCE OR
MARKET OUR POTENTIAL PRODUCTS AND MAY ADVERSELY AFFECT OUR RESULTS OF
OPERATIONS.
Our research, development and manufacturing activities involve the use,
transportation, storage and disposal of hazardous materials and are subject to
related environmental and health and safety statutes and regulations. As we
expand our operations, our increased use of hazardous substances will lead to
additional and more stringent requirements. This may cause us to incur
substantial costs to maintain compliance with applicable statutes and
regulations. In particular, we are obligated to file a report to the United
States Environmental Protection Agency, or EPA, regarding specified types of
microorganisms we use in our operations. We have filed the required reports.
However, one of the microorganisms we use is not currently on the EPA list of
approved microorganisms. The EPA could, upon review of our use of this
microorganism, require us to discontinue its use. If this were to occur, we
would have to substitute a different microorganism from the EPA's approved list.
We could experience delays or disruptions in production while we converted to
the new microorganism. In addition, any failure to comply with laws and
regulations and any costs associated with unexpected and unintended releases of
hazardous substances by us into the environment, or at disposal sites used by
us, could expose us to substantial liability in the form of fines, penalties,
remediation costs or other damages and could require us to shut down our
operations. Any of these events would seriously harm our business and operating
results.
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WE MAY BE HELD LIABLE FOR ANY INACCURACIES ASSOCIATED WITH GENETIC ANALYSIS
TESTS PERFORMED USING OUR PRODUCTS, WHICH MAY REQUIRE US TO DEFEND OURSELVES IN
COSTLY LITIGATION.
We may be subject to claims resulting from incorrect results of analysis of
genetic variations or other screening tests performed using our products.
Litigation of these claims can be costly. We could expend significant funds
during any litigation proceeding brought against us. Further, if a court were to
require us to pay damages to a plaintiff, the amount of such damages could
significantly harm our financial condition.
IF OUR VENDORS FAIL TO SUPPLY US WITH COMPONENTS FOR WHICH AVAILABILITY IS
LIMITED, WE MAY EXPERIENCE DELAYS IN OUR PRODUCT DEVELOPMENT AND
COMMERCIALIZATION.
Certain key components of our manufacturing equipment and products are
currently available only from a single source or a limited number of sources. We
currently rely on outside vendors to manufacture certain components of our
products and certain reagents we provide in our products. Some or all of these
key components may not continue to be available in commercial quantities at
acceptable costs. It could be time consuming and expensive for us to seek
alternative sources of supply. Consequently, if any events cause delays or
interruptions in the supply of our components, we may not be able to supply our
customers with our products on a timely basis which would adversely affect our
results of operations.
FUTURE ISSUANCE OF OUR PREFERRED STOCK MAY DILUTE THE RIGHTS OF OUR COMMON
STOCKHOLDERS.
Our Board of Directors has the authority to issue up to 10,000,000 shares
of preferred stock and to determine the price, privileges and other terms of
these shares without any further approval of our stockholders. The rights of the
holders of common stock may be adversely affected by the rights of our holders
of our preferred stock that may be issued in the future.
WE HAVE VARIOUS MECHANISMS IN PLACE THAT YOU AS A STOCKHOLDER MAY NOT CONSIDER
FAVORABLE AND WHICH MAY DISCOURAGE UNSOLICITED TAKEOVER ATTEMPTS.
Certain provisions of our certificate of incorporation and bylaws, as well
as Section 203 of the Delaware General Corporation Law, may discourage, delay or
prevent changes in our board of directors, executive officers or other senior
management. These provisions may also be used by incumbent management to delay a
change of control or acquisition of our company. These provisions include:
- authorizing our Board of Directors to issue preferred stock and to
determine the price, privileges and other terms of these shares without
any further approval of our stockholders, which could increase the
number of outstanding shares or thwart an unsolicited takeover attempt;
- establishing a classified Board of Directors with staggered, three-year
terms, which may lengthen the time required to gain control of our Board
of Directors;
- prohibiting cumulative voting in the election of directors, which would
allow a majority of stockholders to control the election of all
directors;
- requiring super-majority voting to effect certain amendments to our
certificate of incorporation and bylaws;
- limiting who may call special meetings of stockholders;
- prohibiting stockholder action by written consent, which requires all
actions to be taken at a meeting of stockholders; and
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- establishing advance notice requirements for nominations of candidates
for election to the Board of Directors or for proposing matters that can
be acted upon by stockholders at stockholder meetings.
A change of control could be beneficial to stockholders in a situation in
which the acquisition price being paid by the party seeking to acquire us
represented a substantial premium over the prevailing market price of our common
stock. If our board of directors were not in favor of such a transaction, the
provisions of our certificate of incorporation and bylaws described above could
be used by our board of directors to delay or reduce the likelihood of
completion of the acquisition.
OUR DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL STOCKHOLDERS WILL HAVE
SUBSTANTIAL CONTROL OVER OUR AFFAIRS.
As of February 28, 2002, our directors, executive officers and principal
stockholders beneficially own, in the aggregate, approximately 30.6% of our
common stock. These stockholders, acting together, will have the ability to
exert substantial influence over all matters requiring approval by our
stockholders. These matters include the election and removal of directors and
any merger, consolidation or sale of all or substantially all of our assets. In
addition, they may dictate the management of our business and affairs. This
concentration of ownership could have the effect of delaying, deferring or
preventing a change in control, or impeding a merger or consolidation, takeover
or other business combination of which you might otherwise approve.
RISKS RELATED TO THE BIOTECHNOLOGY INDUSTRY
PUBLIC OPINION REGARDING ETHICAL ISSUES SURROUNDING THE USE OF GENETIC
INFORMATION MAY ADVERSELY AFFECT DEMAND FOR OUR PRODUCTS.
Public opinion regarding ethical issues related to the confidentiality and
appropriate use of genetic testing results may influence governmental
authorities to call for limits on, or regulation of the use of, genetic testing.
In addition, such authorities could prohibit testing for genetic predisposition
to certain conditions, particularly for those that have no known cure.
Furthermore, adverse publicity or public opinion relating to genetic research
and testing, even in the absence of any governmental regulation, could harm our
business. Any of these scenarios could reduce the potential markets for our
products, which could materially and adversely affect our revenues.
GOVERNMENT REGULATION OF GENETIC RESEARCH OR TESTING MAY ADVERSELY AFFECT THE
DEMAND FOR OUR PRODUCTS AND IMPAIR OUR BUSINESS AND OPERATIONS.
Federal, state and local governments may adopt regulations relating to the
conduct of genetic research and genetic testing. These regulations could limit
or restrict genetic research activities as well as genetic testing for research
or clinical purposes. In addition, if state and local regulations are adopted,
these regulations may be inconsistent with, or in conflict with, regulations
adopted by other state or local governments. Regulations relating to genetic
research activities could adversely affect our ability to conduct our research
and development activities. Regulations restricting genetic testing could
adversely affect our ability to market and sell our products. Accordingly, any
regulations of this nature could harm our business.
HEALTH CARE COST CONTAINMENT INITIATIVES COULD LIMIT THE ADOPTION OF GENETIC
TESTING AS A CLINICAL TOOL, WHICH WOULD HARM OUR REVENUES AND PROSPECTS.
In recent years, health care payors as well as federal and state
governments have focused on containing or reducing health care costs. We cannot
predict the effect that any of these initiatives may have on our business, and
it is possible that they will adversely affect our business. In particular,
gene-based therapeutics, if successfully developed and commercialized, are
likely to be costly compared to currently available drug therapies. Health care
cost containment initiatives focused either on gene-based therapeutics
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or on genetic testing could cause the growth in the clinical market for genetic
testing to be curtailed or slowed. In addition, health care cost containment
initiatives could also cause pharmaceutical companies to reduce research and
development spending. In either case, our business and our operating results
would be harmed. In addition, genetic testing in clinical settings is often
billed to third-party payors, including private insurers and governmental
organizations. If our current and future clinical products are not considered
cost-effective by these payors, reimbursement may not be available to users of
our products. In this event, potential customers would be much less likely to
use our products, and our business and operating results would be seriously
harmed.
ITEM 2. PROPERTIES
Our facilities consist of space for research and development,
manufacturing, product support operations, marketing and corporate headquarters
and administration. All of our facilities are located in the greater Madison,
Wisconsin area. Our facilities are all leased and consist of the following
buildings:
<TABLE>
<CAPTION>
SQUARE
TYPE OF FACILITY FOOTAGE LEASE EXPIRATION
- ---------------- ------- ----------------
<S> <C> <C>
Headquarters, research and development,
manufacturing, selling, marketing, and administration 95,000 September 2011, with option to extend
for three 5 year periods.
Oligonucleotide and SNP manufacturing 36,000 May 2003, with option to extend to
May 2006
Oligonucleotide and SNP manufacturing 33,000 October 2003, with option to extend to
October 2008
</TABLE>
We have custom-designed and equipped our oligonucleotide synthesis and SNP
manufacturing facilities and we believe that these facilities comprise the
world's largest oligonucleotide synthesis and SNP assay manufacturing centers.
Under the terms of the existing leases, we pay rent of approximately
$241,000 per month. We believe that our current facilities will be adequate to
meet our near-term space requirements. We also believe that suitable additional
space will be available to us, when needed, on commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we may be involved in litigation relating to claims
arising out of our operations in the usual course of business. We are not
currently a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 2001 annual meeting of the shareholders of the Company was held on
October 24, 2001. The Company solicited proxies for the annual meeting pursuant
to Section 14 of the Securities Exchange Act of 1934, as amended, and Regulation
14A thereunder. The following directors were elected by the shareholders at the
annual meeting for a term expiring at the annual meeting in 2004: Lance Fors by
a vote of 26,778,340 shares for, 0 shares against, 1,021,587 shares withhold
authority and 0 broker non-vote shares; David A. Thompson by a vote of
27,782,327 shares for, 0 shares against, 17,600 shares withhold authority and 0
30
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broker non-vote shares; and Kenneth R. McGuire by a vote of 27,780,647 shares
for, 0 shares against, 19,280 shares withhold authority and 0 broker non-vote
shares.
The shareholders approved the appointment of Ernst & Young LLP as the
independent auditors of the Company by a vote of 27,697,689 shares for, 89,830
shares against, 12,408 shares withhold authority and 0 broker non-vote shares.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the NASDAQ National Market under the symbol
"TWTI" and has been publicly traded since February 2001. The following table
sets forth for each quarter in 2001 the high and low sales prices per share,
based on closing prices, for our common stock as reported on the NASDAQ Stock
Market.
Fiscal Year Ended High Low
December 31, 2001 ---- ---
-----------------
First Quarter..................... $ 11.00 $ 5.38
Second Quarter.................... $ 11.00 $ 5.10
Third Quarter..................... $ 10.19 $ 5.01
Fourth Quarter.................... $ 8.85 $ 6.26
As of December 31, 2001, approximately 265 shareholders of record held our
common stock.
We have never declared or paid any dividends on our capital stock. We
currently expect to retain future earnings, if any, to support the development
of our business and do not anticipate paying any cash dividends in the
foreseeable future. Covenants in our capital lease facilities prohibit the
payment of cash dividends.
ITEM 6. SELECTED FINANCIAL DATA
The statement of operations data set forth below for the years ended
December 31, 1999, 2000 and 2001, and the balance sheet data at December 31,
2000 and 2001 are derived from our financial statements, which have been audited
by Ernst & Young LLP, independent auditors, and are included elsewhere in this
Form 10-K. The statement of operations data for the years ended December 31,
1997 and 1998 and the balance sheet data at December 31, 1997, 1998 and 1999 are
derived from our audited financial statements that are not included in this Form
10-K. When you read these selected financial data, it is important that you also
read our financial statements and related notes included elsewhere in this Form
10-K, as well as Item 7 of this Form 10-K related to "Management's Discussion
and Analysis of Financial Condition and Results of Operations." Historical
results are not necessarily indicative of future results. See note 2 to our
financial statements included elsewhere in this Form 10-K for an explanation of
the method used to determine the number of shares used in computing pro forma
net loss per share.
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<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Revenues $ 1,119 $ 4,382 $ 2,574 $ 11,417 $ 34,092
Operating expenses:
Cost of goods sold 670 1,223 2,290 11,518 32,930
Research and development 2,425 3,669 4,315 7,337 15,995
Selling and marketing 1,301 1,712 2,408 4,983 9,200
General and administrative 1,839 3,357 3,725 7,408 14,521
Impairment loss - - - 5,789 -
Merger costs - - 116 833 -
----------------------------------------------------------------------------
Total operating expenses 6,235 9,961 12,854 37,868 72,646
----------------------------------------------------------------------------
Loss from operations (5,116) (5,579) (10,280) (26,451) (38,554)
Other income (expense), net 217 147 566 877 1,762
----------------------------------------------------------------------------
Net loss (4,899) (5,432) (9,714) (25,574) (36,792)
Deemed dividend upon issuance of
Convertible preferred stock - - - (17,023) -
----------------------------------------------------------------------------
Net loss attributable to common shareholders $ (4,899) $ (5,432) $ (9,714) $ (42,597) $(36,792)
============================================================================
Basic and diluted net loss per share $ (0.40) $ (0.43) $ (0.68) $ (2.83) $ (1.03)
Shares used in computing basic and diluted
net loss per share 12,191 12,772 14,183 15,078 35,714
Pro forma basic and diluted net loss per share $ (0.98) $ (0.98)
Shares used in computing pro forma basic
and diluted net loss per share 26,120 37,483
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------
---------------------------------------------------------
1997 1998 1999 2000 2001
---------------------------------------------------------
(IN THOUSANDS)
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents and short-term investments $4,075 $ 5,614 $12,919 $47,179 $73,299
Working capital 2,584 4,099 13,774 29,122 64,834
Total assets 5,901 8,283 20,289 83,193 131,615
Long-term obligations, net of current portion 147 96 420 12,095 6,694
Accumulated deficit (7,429) (12,860) (22,575) (48,149) (84,852)
Total stockholders' equity 3,311 5,776 17,199 47,039 104,753
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations as of December 31, 2001, and for the years ended December 31, 2001
and 2000 should be read in conjunction with "Selected Financial Data" and our
financial statements, including the notes thereto, included elsewhere in this
Form 10-K.
OVERVIEW
Third Wave Technologies develops, manufactures and markets genetic analysis
products used in the discovery and validation of the genetic basis of disease
and the delivery of personalized medicine.
The company's patented Invader product platform is highly accurate, sensitive,
easy to use and cost-effective, enabling the acceleration of genome and
pharmaceutical research and clinical patient analysis.
The Company has established strategic collaborations in the U.S. and abroad with
government initiatives, pharmaceutical and biotechnology companies, academic
research centers, clinical reference labs and major healthcare providers. The
Company is focused on high-volume opportunities with customers and collaborators
in large-scale disease association studies, drug response marker profiling and
molecular diagnostics.
A large suite of Third Wave's turnkey Invader platform products are or will be
available, in a variety of formats to meet the needs of our customers including
analyte specific reagents for routine clinical use and a large number of
products for research use. The Company has also introduced its first series of
Invader RNA Assay products for measuring the expression levels of genes with
proven clinical relevance. We will launch additional products for genotyping and
gene expression analysis. These products will be available in flexible formats
and include various densities of chromosome-specific panels, expanded
genome-wide screening and medically associated panels including disease-specific
panels, microsatellite replacement panels and assays for quantitating a number
of infectious diseases and mRNA transcripts, including drug metabolizing
enzymes, cytokines, chemokines, growth factors and housekeeping and reporter
genes.
Invader products are compatible with existing automation processes and detection
platforms and are available in convenient, ready-to-use formats. These
advantages make Invader products ideally suited for both small-scale and
large-scale genetic analysis in research and clinical applications, including
drug discovery and development and patient diagnosis and treatment. Third Wave's
proprietary products and technologies position the Company to exploit the
growing market opportunity for genetic analysis products.
Our financial results may vary significantly from quarter to quarter due to
fluctuations in the demand for our products, timing of new product introductions
and deliveries made during the quarter, the timing of research, development and
grant revenues, and increases in spending, including expenses related to our
ongoing scale up of product development and manufacturing capabilities.
CRITICAL ACCOUNTING POLICIES
Management's discussion and analysis of our financial condition and results
of operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting
33
<PAGE>
principles generally accepted in the United States. We review the accounting
policies we use in reporting our financial results on a regular basis. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses and related disclosure of contingent assets and liabilities. On an
ongoing basis, we evaluate our estimates, including those related to accounts
receivable, inventories, equipment and leasehold improvements and intangible
assets. We base our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying value of
assets and liabilities that are not readily apparent from other sources. Results
may differ from these estimates due to actual outcomes being different from
those on which we based our assumptions. These estimates and judgments are
reviewed by management on an ongoing basis, and by the Audit Committee at the
end of each quarter prior to the public release of our financial results. We
believe the following critical accounting policies affect our more significant
judgments and estimates used in the preparation of our consolidated financial
statements.
LONG-LIVED ASSETS - IMPAIRMENT
Equipment, leasehold improvements and intangible assets are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. For assets held and used, the sum of the
expected undiscounted cash flows is less than the carrying value of the related
asset or group of assets, a loss is recognized for the difference between the
fair value and carrying value of the asset or group of assets. For assets
removed from service and held for sale or abandoned we estimate the fair market
value of such assets and record an adjustment if fair market value is lower than
carrying value. Such analyses necessarily involve significant judgment. During
2001, we recorded a charge of approximately $2,970,000 classified in general and
administrative expenses to write down certain equipment to its net realizable
value.
DERIVATIVE INSTRUMENTS
We sell products in a number of countries throughout the world. During 2001, we
sold certain products with the resulting accounts receivable denominated in
Japanese Yen. Simultaneous with such sales, we purchased foreign currency
forward contracts to manage the risk associated with collections of receivables
denominated in foreign currencies in the normal course of business. These
derivative instruments have maturities of less than one year and are intended to
offset the effect of transaction gains and losses. There were no contracts
outstanding at December 31, 2001. The changes in the fair value of the
derivatives and the loss or gain on the hedged asset relating to the risk being
hedged are recorded currently in earnings.
SIGNIFICANT CUSTOMER
We generated approximately 76% of our revenues from sales to one end-user
customer in the Japanese government. As of December 31, 2001, none of our
accounts receivable were attributable to this customer. If our primary customer
would experience significant adverse conditions, they may not be able to
complete the purchase of additional products from us under the terms of our
existing firm sale commitments.
INVENTORIES - SLOW MOVING AND OBSOLESCENCE
Significant management judgment is required to determine the reserve for
obsolete or excess inventory. Inventory on hand may exceed future demand either
because of process improvements or technology advancements, the amount on hand
is more than can be used to meet future need, or estimates of shelf lives may
change. We currently consider all inventory that we expect will have no activity
within one year as well as any additional specifically identified inventory to
be subject to a provision for excess inventory. We also provide for the total
value of inventories that we determine to be obsolete based on criteria such as
changing manufacturing processes and technologies. At December 31, 2001, our
inventory reserves were $2.7 million, or 29% of our $9.1 million total gross
inventories.
34
<PAGE>
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2001 AND 2000
REVENUES. Revenues for the year ended December 31, 2001, of $34.1 million
represents an increase of $22.7 million as compared to revenues of $11.4 million
for the year ended December 31, 2000.
Product revenues increased to $30.4 million for the year ended December 31,
2001, from $10.9 million in the year ended December 31, 2000. The increase in
product sales was the result of increasing sales of the Invader products, which
are consumable tests and reagents used for DNA and RNA analysis in research and
clinical applications. Product sales during 2001 were above our original
expectations because our largest customer accelerated its purchases of our
proprietary Cleavase enzyme. The customer will use the enzyme in conjunction
with previously delivered Invader SNP probes sets, as well as those planned to
be delivered over the remainder of the project.
Development revenues increased to $3.1 million for the year ended December 31,
2001, from $0.1 million for the year ended December 31, 2000. The increase is
primarily due to development work being done on a development and
commercialization agreement with BML, Inc (BML). Under the agreement, we are
developing assays in accordance with a mutually agreed development program for
use in clinical applications by BML. This development is expected to be
completed by the end of 2003.
COST OF GOODS SOLD. Cost of goods sold consists of materials used in the
manufacture of product, depreciation on manufacturing capital equipment,
salaries and related expenses for management and personnel associated with our
manufacturing and quality control departments and amortization of licenses and
litigation settlement fees. For the year ended December 31, 2001, cost of goods
sold increased to $32.9 million compared to $11.5 million for the year ended
December 31, 2000. The increase was due to the increased material expenses as a
result of higher product sales and costs incurred as we put in place additional
manufacturing capacity to meet accelerating demand for our Invader products. The
increase in cost of goods sold is also attributable to an increase in a non-cash
charge for amortization of litigation settlement costs and reacquired marketing
and distribution rights. Also, due to process improvements and technology
advancements, we incurred a non-cash charge of $2.4 million to increase the
reserve for obsolete and excess inventory on our raw materials.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses consist
primarily of salaries and related personnel costs, material costs for assays and
product development, fees paid to consultants, depreciation and facilities costs
and other expenses related to the design, development, testing and enhancement
of our products and acquisition of technologies used or to be used in our
products. Research and development costs are expensed as they are incurred.
Research and development expenses for the year ended December 31, 2001, were
$16.0 million, compared to $7.3 million for the year ended December 31, 2000.
The increase in research and development expenses of $8.7 was primarily
attributable to increased expenses associated with additional research and
development personnel, increased purchases of laboratory supplies, increased
equipment depreciation, deferred compensation amortization and increased
facilities expenses in connection with the expansion of our internal and
collaborative research efforts.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses consist primarily
of salaries and related personnel costs for our sales and marketing management
and field sales force, office support and related costs, and travel costs.
Selling and marketing expenses for the year ended December 31, 2001, were $9.2
million, an increase of $4.2 million, as compared to $5.0 million for the year
ended December 31, 2000. We attribute this increase to the hiring of additional
personnel and increased costs associated with establishing and expanding our
clinical and research businesses.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses consist
primarily of salaries and related expenses for executive, finance and other
administrative personnel, legal and professional fees, office support and
depreciation. General and administrative expenses increased to $14.5 million in
the year ended December 31, 2001, from $7.4 million for the year ended December
31, 2000. In 2001, a fixed asset impairment charge of $3.0 million was recorded
in general and administrative expense related to a write-
35
<PAGE>
down of equipment to its net realizable value. The increase is also due to the
hiring of additional personnel to support our growing business activities.
IMPAIRMENT LOSS. In the year ended December 31, 2000, an impairment charge of
$5.8 million was recognized. The impairment charge pertained to intangible
assets recorded in connection with terminating a distribution agreement.
MERGER COSTS. In January 2000, we entered into an agreement to merge with
another company. In May 2000, we and the other company mutually agreed to
terminate the merger agreement. During the year ended December 31, 2000, we
incurred expenses related to the proposed merger of $0.8 million.
INTEREST INCOME. Interest income for the year ended December 31, 2001, was $3.3
million, compared to $1.5 million for the year ended December 31, 2000. This
increase was primarily due to interest received on larger cash, cash equivalent
and short-term investment balances, which we held as a result of our initial
public offering in February 2001, offset by amounts used to fund operating
activities and a decrease in interest rates realized on our investments.
INTEREST EXPENSE. Interest expense for the year ended December 31, 2001, was
approximately $1.3 million compared to $0.7 million in the year ended December
31, 2000. The increase in interest expense was mainly due to additional debt
related to capital equipment financings completed in September 2000, May 2001,
and September 2001.
EQUITY IN LOSSES FROM JOINT VENTURES. On December 14, 2001, we acquired the
remaining 50% of Third Wave Agbio (Agbio). Accordingly, we recorded 50% of
Agbio's net losses from January 1, 2001 through December 14, 2001, which
amounted to $0.2 million, as a credit to equity in losses from joint ventures.
YEARS ENDED DECEMBER 31, 2000 AND 1999
REVENUES. Revenues for the year ended December 31, 2000, of $11.4 million
represents an increase of $8.8 million as compared to revenues of $2.6 million
for the year ended December 31, 1999.
Product revenues increased to $10.9 million for the year ended December 31,
2000, from $0.5 million in the year ended December 31, 1999. The increase in
product sales was due to the introduction of clinical products and contracts to
provide products to customers in the research market.
Development revenues declined to $0.1 million for the year ended December 31,
2000, from $1.1 million for the year ended December 31, 1999 due to the
termination of development agreements with Endogen and IRC.
COST OF GOODS SOLD. Cost of goods sold consists of materials used in the
manufacture of product, depreciation on manufacturing capital equipment,
salaries and related expenses for management and personnel associated with our
manufacturing and quality control departments and amortization of licenses and
settlement fees. For the year ending December 31, 2000, cost of goods sold
increased to $11.5 million compared to $2.3 million for the year ended December
31, 1999. The increase was primarily due to the increased material expenses as a
result of higher product sales and costs incurred as we put in place additional
manufacturing capacity to meet accelerating demand for our Invader products.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses consist
primarily of salaries and related personnel costs, material costs for assays and
product development, fees paid to consultants, depreciation and facilities costs
and other expenses related to the design, development, testing and enhancement
of our products and acquisition of technologies used or to be used in our
products. Research and development costs are expensed as they are incurred.
Research and development expenses for the year ended December 31, 2000, were
$7.3 million, compared to $4.3 million for the year ended December 31, 1999.
36
<PAGE>
The increase in research and development expenses of $3.0 million was primarily
attributable to increased expenses associated with additional research and
development personnel, increased purchases of laboratory supplies, increased
equipment depreciation, deferred compensation amortization and increased
facilities expenses in connection with the expansion of our internal and
collaborative research efforts.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses consist primarily
of salaries and related personnel costs for our sales and marketing management
and field sales force, office support and related costs, and travel costs.
Selling and marketing expenses for the year ended December 31, 2000, were $5.0
million, an increase of $2.6 million, as compared to $2.4 million for the year
ended December 31, 1999. We attribute this increase to the hiring of additional
personnel and increased costs associated with establishing and expanding our
clinical business.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses consist
primarily of salaries and related expenses for executive, finance and other
administrative personnel, legal and professional fees, office support and
depreciation. General and administrative expenses increased to $7.4 million in
the year ended December 31, 2000, from $3.7 million for the year ended December
31, 1999. The increase is due to the hiring of additional personnel to support
our growing business activities.
IMPAIRMENT LOSS. In the year ended December 31, 2000, an impairment charge of
$5.8 million was recognized. The impairment charge pertains to intangible assets
recorded in connection with terminating a distribution agreement.
MERGER COSTS. In January 2000, we entered into an agreement to merge with
another company. In May 2000, we and the other company mutually agreed to
terminate the merger agreement. During the year ended December 31, 2000, we
incurred expenses related to the proposed merger of $0.8 million compared to
$0.1 million for the year ended December 31, 1999.
INTEREST INCOME. Interest income for the year ended December 31, 2000, was $1.5
million, compared to approximately $0.6 million for the year ended December 31,
1999. This increase was primarily due to interest received on larger cash, cash
equivalent and short-term investment balances, which we held as a result of our
Series F financing in July 2000, offset by amounts used to fund operating
activities.
INTEREST EXPENSE. Interest expense for the year ended December 31, 2000, was
approximately $0.7 million compared to less than $0.1 million in the year ended
December 31, 1999. The increase in interest expense was due to additional debt
related to the capital equipment financing completed in September 2000, and the
convertible note payable from December 2000.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations primarily through private
placements of equity securities, research grants from federal and state
government agencies, payments from strategic collaborators, equipment loans,
capital leases, sale of products, a convertible note and an initial public
offering in February 2001. As of December 31, 2001, we had cash and cash
equivalents and short-term investments of $73.3 million.
In February 2001, we completed our initial public offering of 7,500,000 shares
of common stock at a price of $11.00 per share (excluding underwriters'
discounts and commissions), generating net proceeds of approximately $74.8
million.
Net cash used in operations for the year ended December 31, 2001, was
approximately $30.3 million, compared with approximately $0.6 million for the
comparable period in 2000. Non-cash charges in the year ended December 31, 2001,
included stock compensation expense of $2.8 million, depreciation and
amortization expense of $10.2 million, an equipment impairment charge of $3.0
million and deferred gain on the sale of fixed assets of $0.2 million. The
change in operating assets and liabilities for the year ended December 31, 2001,
included an increase in accounts receivable of $0.9 million, an increase in
inventory of
37
<PAGE>
$5.7 million, an increase in prepaid expenses and other assets of $1.6 million,
a decrease in accounts payable of $0.2 million, a decrease in accrued
liabilities of less than $0.1 million and a decrease in deferred revenue of $1.2
million. Investing activities included $21.0 million for purchases of capital
equipment, proceeds of $5.1 million from the sale of equipment during the year
ended December 31, 2001, and $38.4 million used for the net purchases of
short-term investments. Financing activities for the year included the use of
$8.4 million to repay debt and capital lease obligations, proceeds of $5.4
million from capital equipment financing and net proceeds from the issuance of
common stock of $75.4 million, which was primarily from our initial public
offering.
As of December 31, 2001, a valuation allowance equal to 100% of our net deferred
tax assets has been recognized since our future realization is not assured. At
December 31, 2001, we had federal and state net operating loss carryforwards of
approximately $77.9 million. The net operating loss carryforwards will expire at
various dates beginning in 2008, if not utilized. Utilization of the net
operating losses and credits to offset future taxable income may be subject to
an annual limitation due to the change of ownership provisions of federal tax
laws and similar state provisions as a result of our initial public offering.
We cannot assure you that our business or operations will not change in a manner
that would consume available resources more rapidly than anticipated. We also
cannot assure you that we will not require substantial additional funding before
we can achieve profitable operations. Our capital requirements depend on
numerous factors, including the following:
- our progress with our research and development programs;
- our level of success in selling our products and technologies;
- our ability to establish and maintain successful collaborative
relationships;
- the costs we incur in enforcing and defending our patent claims and
other intellectual property rights; and
- the timing of purchases of additional capital.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk is currently confined to changes in foreign exchange
and interest rates. The securities in our investment portfolio are not leveraged
and due to their short-term nature, are subject to minimal interest rate risk.
We currently do not hedge interest rate exposure. Due to the short-term
maturities of our investments, we do not believe that an increase in market
rates would have any negative impact on the realized value of our investment
portfolio.
To reduce foreign exchange risk, we selectively use financial instruments. Our
earnings are affected by fluctuations in the value of the U.S. dollar against
foreign currencies as a result of the sales of our products in foreign markets.
Forward foreign exchange contracts are used to hedge against the effects of such
fluctuations. Our policy prohibits the trading of financial instruments for
profit. A discussion of our accounting policies for derivative financial
instruments is included in the notes to the financial statements included
elsewhere in this Form 10-K.
38
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Third Wave Technologies, Inc.
Index to Consolidated Financial Statements
CONTENTS
Report of Ernst & Young LLP, Independent Auditors............................F-1
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 2000 and 2001.................F-2
Consolidated Statements of Operations for the years ended
December 31, 1999, 2000 and 2001..........................................F-4
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1999, 2000 and 2001..........................................F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 2000 and 2001..........................................F-6
Notes to Consolidated Financial Statements...................................F-8
39
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
To the Board of Directors
Third Wave Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Third Wave
Technologies, Inc. (the Company) as of December 31, 2000 and 2001, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 2001. Our
audits also included the financial statement schedule listed in the index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Company at
December 31, 2000 and 2001, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
2001, in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedule, when
considered in relation to the financial statements taken as a whole, presents
fairly in all material respects the information set forth therein.
Ernst & Young LLP
Milwaukee, Wisconsin
January 18, 2002
F-1
<PAGE>
Third Wave Technologies, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
2000 2001
-----------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 14,046,484 $ 1,807,372
Short-term investments 33,132,144 71,491,751
Receivables:
Trade, net of allowance for doubtful accounts of $59,000 and
$175,000 at December 31, 2000 and 2001, respectively 1,371,553 1,829,122
Accounts receivable from related party 22,290 -
Inventories 760,851 6,448,974
Prepaid expenses and other 1,731,004 2,308,003
-----------------------------
Total current assets 51,064,326 83,885,222
Equipment and leasehold improvements:
Machinery and equipment 19,194,828 30,848,712
Leasehold improvements 2,481,222 7,597,235
-----------------------------
21,676,050 38,445,947
Less accumulated depreciation 4,430,927 10,864,634
-----------------------------
17,245,123 27,581,313
Intangible assets, net 11,071,371 15,431,620
Other assets 3,812,190 4,716,427
-----------------------------
Total assets $ 83,193,010 $131,614,582
=============================
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31
2000 2001
--------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 11,439,002 $ 11,276,955
Accrued expenses and other liabilities 1,995,258 1,976,799
Deferred revenue 1,711,450 1,535,951
Long-term debt due within one year 6,796,234 2,618,359
Capital lease obligations due within one year - 1,643,372
--------------------------------
Total current liabilities 21,941,944 19,051,436
Deferred revenue 1,916,667 916,667
Long-term debt 2,095,211 3,966,620
Capital lease obligations - 2,727,070
Convertible note payable 10,000,000 -
Other 200,000 200,000
Shareholders' equity:
Participating preferred stock, Series A, $.001 par value,
100,000 shares authorized, 0 shares issued and outstanding - -
Convertible preferred stock, $.001 par value, 14,780,400
shares authorized:
Series A, 1,131,600 issued and outstanding in 2000 1,132 -
Series B, 600,000 issued and outstanding in 2000 600 -
Series C, 560,400 issued and outstanding in 2000 560 -
Series D, 1,185,600 issued and outstanding in 2000 1,186 -
Series E, 5,190,000 issued and outstanding in 2000 5,190 -
Series F, 5,444,400 issued and outstanding in 2000 5,444 -
Common stock, $.001 par value, 100,000,000 shares authorized,
15,633,800 and 39,374,014 shares issued and outstanding,
respectively 15,634 39,374
Common stock to be issued, 116,855 shares in 2000 856,800 -
Additional paid-in capital 98,871,975 191,426,698
Unearned stock compensation (4,570,364) (1,861,566)
Accumulated deficit (48,148,969) (84,851,717)
--------------------------------
Total shareholders' equity 47,039,188 104,752,789
--------------------------------
Total liabilities and shareholders' equity $ 83,193,010 $ 131,614,582
================================
</TABLE>
See accompanying notes.
F-3
<PAGE>
Third Wave Technologies, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 2000 2001
------------------------------------------------
<S> <C> <C> <C>
Revenues:
Product sales $ 520,880 $ 10,891,439 $ 30,405,055
Development revenues 1,081,956 102,355 3,110,004
Grant revenues 971,537 423,624 576,690
------------------------------------------------
2,574,373 11,417,418 34,091,749
Operating expenses:
Cost of goods sold (including amortization of
capitalized legal settlement costs and
reacquired marketing and distribution rights
of $1,672,988 and $1,930,560 in 2000 and 2001,
respectively.) 2,289,655 11,518,439 32,930,411
Research and development 4,314,774 7,336,694 15,994,512
Selling and marketing 2,408,254 4,983,323 9,199,622
General and administrative 3,725,368 7,407,934 14,520,855
Impairment loss - 5,788,889 -
Merger costs 116,501 833,254 -
------------------------------------------------
Total operating expenses 12,854,552 37,868,533 72,645,400
------------------------------------------------
Loss from operations (10,280,179) (26,451,115) (38,553,651)
Other income (expense):
Interest income 585,412 1,500,142 3,349,617
Interest expense (45,366) (673,818) (1,346,876)
Equity in losses from joint ventures - - (241,282)
Other 25,752 50,645 (16)
------------------------------------------------
565,798 876,969 1,761,443
------------------------------------------------
Net loss (9,714,381) (25,574,146) (36,792,208)
Deemed dividend upon issuance of convertible
preferred stock - (17,022,824) -
------------------------------------------------
Net loss attributable to common stockholders $ (9,714,381) $(42,596,970) $(36,792,208)
================================================
Net loss per share - basic and diluted $ (0.68) $ (2.83) $ (1.03)
Pro forma, net loss per share (unaudited) - basic
and diluted $ (0.98) $ (0.98)
</TABLE>
See accompanying notes.
F-4
<PAGE>
Third Wave Technologies, Inc.
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1999, 2000 and 2001
<TABLE>
<CAPTION>
Preferred Stock Common Stock
-----------------------------------------------------
Additional Additional Common
Par Paid-In Par Paid-In Stock to be
Value Capital Value Capital Issued
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1998 $ 3,478 $ 5,353,395 $ 13,610 $ 13,265,637 $ -
Common stock issued - 1,105,200 shares - - 1,106 3,312,310 -
Preferred stock issued - 5,190,000 shares 5,190 17,332,702 - - -
Unearned stock compensation - - - 1,021,108 -
Amortization of unearned stock compensation - - - - -
Net loss - - - - -
------------------------------------------------------------------------
Balance at December 31, 1999 8,668 22,686,097 14,716 17,599,055 -
Common stock issued - 918,000 shares - - 918 5,525,263 -
Preferred stock issued -5,444,400 shares 5,444 45,450,703 - - -
Unearned stock compensation - - - 7,610,857 -
Amortization of unearned stock compensation - - - - -
Common stock to be issued - - - - 856,800
Net loss - - - - -
------------------------------------------------------------------------
Balance at December 31, 2000 14,112 68,136,800 15,634 30,735,175 856,800
Common stock issued in initial public
offering - 7,500,000 shares - - 7,500 74,831,549 -
Common stock issued for conversion of
note payable - 909,091 shares - - 909 9,999,091 -
Common stock issued related to a
litigation settlement - 116,854 shares - - 117 856,683 (856,800)
Common stock issued for acquisition - 925,000 - - 925 6,192,440 -
Common stock issued for stock options
and stock purchase plan - 177,269 shares - - 177 571,482 -
Conversion of preferred stock to common
stock - 14,112,000 shares (14,112) (68,136,800) 14,112 68,136,800 -
Unearned stock compensation - - - 103,478 -
Amortization of unearned stock compensation - - - - -
Net loss - - - - -
------------------------------------------------------------------------
Balance at December 31, 2001 $ - $ - $ 39,374 $ 191,426,698 $ -
========================================================================
<CAPTION>
Unearned
Stock Accumulated
Compensation Deficit Total
----------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1998 $ - $ (12,860,442) $ 5,775,678
Common stock issued - 1,105,200 shares - - 3,313,416
Preferred stock issued - 5,190,000 shares - - 17,337,892
Unearned stock compensation (1,021,108) - -
Amortization of unearned stock compensation 485,924 - 485,924
Net loss - (9,714,381) (9,714,381)
----------------------------------------------
Balance at December 31, 1999 (535,184) (22,574,823) 17,198,529
Common stock issued - 918,000 shares - - 5,526,181
Preferred stock issued -5,444,400 shares - - 45,456,147
Unearned stock compensation (7,610,857) - -
Amortization of unearned stock compensation 3,575,677 - 3,575,677
Common stock to be issued - - 856,800
Net loss - (25,574,146) (25,574,146)
----------------------------------------------
Balance at December 31, 2000 (4,570,364) (48,148,969) 47,039,188
Common stock issued in initial public
offering - 7,500,000 shares - - 74,839,049
Common stock issued for conversion of
note payable - 909,091 shares - - 10,000,000
Common stock issued related to a
litigation settlement - 116,854 shares - - -
Common stock issued for acquisition - 925,000 - 89,460 6,282,825
Common stock issued for stock options
and stock purchase plan - 177,269 shares - - 571,659
Conversion of preferred stock to common
stock - 14,112,000 shares - - -
Unearned stock compensation (103,478) - -
Amortization of unearned stock compensation 2,812,276 - 2,812,276
Net loss - (36,792,208) (36,792,208)
----------------------------------------------
Balance at December 31, 2001 $(1,861,566) $ (84,851,717) $ 104,752,789
==============================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
Third Wave Technologies, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 2000 2001
---------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (9,714,381) $ (25,574,146) $ (36,792,208)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 732,130 4,435,589 10,224,103
Noncash stock compensation 485,924 3,575,677 2,812,276
Noncash charge for impairment - 5,788,889 2,970,257
(Gain) loss on disposal of equipment (13,362) - 75,656
Deferred gain on sale of assets - - (179,024)
Amortization of deferred gain - - (25,724)
Equity in losses from joint ventures - - 241,282
Change in operating assets and liabilities:
Receivables (600,536) (428,617) (853,614)
Inventories (67,933) (561,231) (5,688,123)
Prepaid expenses and other assets (50,963) (2,568,037) (1,639,567)
Accounts payable 85,655 8,390,550 (162,076)
Accrued expenses and other liabilities 476,485 3,200,324 (18,459)
Deferred revenue (264,759) 3,143,095 (1,227,999)
---------------------------------------------------
Net cash used in operating activities (8,931,740) (597,907) (30,263,220)
INVESTING ACTIVITIES
Purchases of equipment and leasehold improvements (2,788,782) (15,925,325) (21,011,245)
Proceeds on sale of equipment 85,423 - 5,070,000
Purchases of licensed technology - (9,383,248) (245,038)
Cash received in acquisition 165,314
Purchases of short-term investments (7,069,181) (61,831,044) (106,690,686)
Sales of short-term investments 8,979,181 31,488,900 68,331,079
---------------------------------------------------
Net cash used in investing activities (793,359) (55,650,717) (54,380,576)
FINANCING ACTIVITIES
Proceeds from long-term debt 626,454 2,742,443 5,399,879
Payments on long-term debt (178,634) (412,878) (7,706,345)
Proceeds from convertible note payable - 10,000,000 -
Proceeds from notes receivable - 1,997,736 -
Proceeds from issuance of common stock, net 1,225,680 382,981 75,410,708
Proceeds from issuance of preferred stock, net 17,337,892 45,456,147 -
Payments on capital lease obligations (71,943) - (699,558)
---------------------------------------------------
Net cash provided by financing activities 18,939,449 60,166,429 72,404,684
---------------------------------------------------
Increase (decrease) in cash and cash equivalents 9,214,350 3,917,805 (12,239,112)
Cash and cash equivalents at beginning of period 914,329 10,128,679 14,046,484
---------------------------------------------------
Cash and cash equivalents at end of period $ 10,128,679 $ 14,046,484 $ 1,807,372
===================================================
Supplemental disclosures of cash flow information -
Cash paid for interest $ 45,366 $ 260,533 $ 1,760,161
===================================================
</TABLE>
See accompanying notes.
F-6
<PAGE>
Third Wave Technologies, Inc.
Consolidated Statements of Cash Flows (continued)
Noncash investing and financing activities: During the year ended December 31,
2001, the Company:
- - converted $10,000,000 of notes payable into 909,091 shares of common stock
- - issued 925,000 shares of common stock in acquisition
- - entered into capital lease obligations of $5,070,000
During the year ended December 31, 2000, the Company:
- - issued 545,454 shares of common stock valued at $11.00 per share as a cost for
defending certain patents
- - issued notes payable of $6,000,000 for purchased intangible assets
During the year ended December 31, 1999, the Company:
- - issued 592,800 shares of common stock in exchange for notes receivable of
$1,997,736 (see Note 6)
- - converted $90,000 of notes payable into 60,000 shares of common stock
See accompanying notes.
F-7
<PAGE>
Third Wave Technologies, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
1. NATURE OF OPERATIONS AND PRINCIPLES OF CONSOLIDATION
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of Third
Wave Technologies, Inc. (the Company) and its wholly-owned subsidiary, Third
Wave Agbio, Inc. (Agbio) which became wholly-owned in 2001. All significant
intercompany balances and transactions are eliminated in consolidation.
NATURE OF OPERATIONS
The Company is a leading provider of products for analyzing genetic variations.
The Company's patented genetic analysis platform, the Invader platform, offers
several advantages over conventional genetic analysis technologies. The
Company's technologies produce highly accurate results, are easy to use and
eliminate the requirement for copying the genetic sample using polymerase chain
reaction, or PCR, saving the user time and money while eliminating the risk of
sample contamination. Additionally, the Company's technologies are automatable,
compatible with existing detection platforms and available in convenient assay
formats. These advantages make the Company's technologies ideally suited for
large-scale genetic analysis in both clinical and research applications
including drug discovery and development and patient diagnosis and treatment.
The Company currently markets products domestically and internationally to
clinical and research markets using an internal sales force as well as
collaborative relationships with pharmaceutical companies and research
institutions. Revenues to one end-user customer during 2000 and 2001 were 67%
and 76% of total revenues, respectively. The Company performs periodic credit
evaluations of its customers' financial condition and generally does not require
collateral.
A summary of the significant accounting policies applied in the preparation of
the accompanying financial statements follows.
F-8
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers highly liquid money market investments and short-term
investments with maturities of 90 days or less from the date of purchase to be
cash equivalents.
Short-term investments consist of certificates of deposit and commercial paper.
The cost of these securities, which are considered "available-for-sale" for
financial reporting purposes, approximates fair value at December 31, 2000 and
2001.
INVENTORIES
Inventories, consisting mostly of raw materials, are carried at the lower of
cost or market using the first-in, first-out (FIFO) method for determining cost.
Inventories consisted of the following:
DECEMBER 31
2000 2001
----------------------------
Raw material $ 839,075 $ 6,963,240
Finished goods and work in process 181,776 2,165,734
Reserve for excess and obsolete inventory (260,000) (2,680,000)
----------------------------
Total inventories $ 760,851 $ 6,448,974
============================
ADVERTISING COSTS
Advertising costs are expensed at the time the advertising takes place.
Advertising costs were $1,511, $158,033 and $675,624 in 1999, 2000 and 2001,
respectively.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are recorded at cost less accumulated
depreciation. Depreciation of purchased equipment is computed by the
straight-line method over the estimated useful lives of the assets which are
generally three to ten years. Depreciation of leasehold improvements is computed
by the straight-line method over the shorter of the estimated useful lives of
the assets or the lease term.
F-9
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PATENTS
Patent-related development costs are expensed in the period incurred and are
included in general and administrative expenses in the statements of operations.
These costs were $287,014, $311,992 and $546,776 for the years ended December
31, 1999, 2000 and 2001, respectively.
INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
Original
Amortization
Period DECEMBER 31
(Years) 2000 2001
-----------------------------------------------
<S> <C> <C> <C>
Acquisition of remaining outstanding shares
of Agbio (see Note 3) * $ - $ 6,345,186
Costs of settling patent litigation (see
Note 12) 7 10,533,248 10,533,248
Reacquired marketing and distribution rights (see
Note 9) 3 8,000,000 2,211,111
2000 impairment write-off (5,788,889) -
------------------------------
12,744,359 19,089,545
Less:
Accumulated amortization (1,672,988) (3,657,925)
------------------------------
$ 11,071,371 $ 15,431,620
==============================
</TABLE>
*Valuation to be performed during 2002 for the purpose of allocating the
purchase price in accordance with FAS 142 and assigning useful lives.
PREPAID LICENSE FEES
Other assets for the years ended December 31, 2000 and 2001, include $2,812,190
and $2,642,610 of prepaid license fees (which is net of $37,810 and $452,427,
respectively of accumulated amortization) paid to third parties for the use of
patented technology. The assets are being amortized to expense over the shorter
of the term of the license or the estimated useful lives of the assets
(generally three to ten years).
IMPAIRMENT OF LONG-LIVED AND INTANGIBLE ASSETS
Equipment, leasehold improvements and intangible assets are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. If the sum of the expected undiscounted
cash flows is less than the carrying value of the related asset or group of
assets, a loss is recognized for the difference between the fair value and
carrying value of the asset or group of assets. Such analyses necessarily
involve significant judgment. During 2001, the Company recorded a charge of
approximately $2,970,000 classified in general and administrative expenses to
write down certain equipment to its net realizable value.
F-10
<PAGE>
As described in Note 9, a $5,788,889 impairment loss was recognized in 2000
pertaining to intangible assets recorded in connection with terminating the
Endogen agreement. The fair value of the intangible assets was determined using
a discounted cash flow calculation.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended,
which was adopted by the Company on January 1, 2001. This Statement requires
that all derivatives be recorded in the balance sheet at fair value and that
changes in fair value be recognized currently in earnings unless specific hedge
accounting criteria are met. There was no cumulative effect of adoption because
the Company did not have any derivative financial instruments on January 1,
2001.
The Company sells its products in a number of countries throughout the world.
During 2001, the Company sold certain products with the resulting accounts
receivable denominated in Japanese Yen. Simultaneous with such sales, the
Company purchased foreign currency forward contracts to manage the risk
associated with collections of receivables denominated in foreign currencies in
the normal course of business. These derivative instruments have maturities of
less than one year and are intended to offset the effect of transaction gains
and losses. There were no contracts outstanding at December 31, 2001. The
changes in the fair value of the Company's derivatives and the loss or gain on
the hedged asset relating to the risk being hedged are recorded currently in
earnings.
REVENUE RECOGNITION
Revenue from product sales is recognized upon delivery which is generally when
the title passes to the customer, provided that the Company has completed all
performance obligations and the customer has accepted the products. Customers
have no contractual rights of return or refunds associated with product sales.
Grant and development revenues consist primarily of research grants from
agencies of the Federal government and revenue from companies with which the
Company has established strategic alliances, the revenue from which is
recognized as research is performed. Payments received which are related to
future performance are deferred and recorded as revenue when earned. Grant
payments designated to purchase specific assets to be used in the performance of
a contract are recognized as revenue over the shorter of the useful life of the
asset acquired or the contract.
RESEARCH AND DEVELOPMENT
All costs for research and development activities are expensed in the period
incurred.
INCOME TAXES
Deferred income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their financial
reporting amounts at each year-end based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense is
the current tax payable for the period plus or minus the change during the
period in deferred tax assets and liabilities. No current or deferred income
taxes have been provided through December 31, 2001, because of the net operating
losses incurred by the Company since its inception.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation for awards to employees using
the intrinsic value method prescribed in Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to
F-11
<PAGE>
Employees," and has adopted the disclosure only alternative of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (FAS 123).
Included in operating expenses are the following stock compensation charges:
YEAR ENDED DECEMBER 31
1999 2000 2001
----------------------------------------
Cost of goods sold $ 163,605 $ 890,995 $ 540,076
Research and development 34,205 228,990 270,920
Selling and marketing 14,336 469,453 123,529
General and administrative 273,778 1,986,239 1,877,751
----------------------------------------
$ 485,924 $3,575,677 $2,812,276
========================================
Stock compensation expense for options granted to nonemployees has been
determined in accordance with FAS 123 and EITF 96-18, "Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services," and represents the fair value of
the consideration received or the fair value of the equity instruments issued,
whichever may be more reliably measured. For options that vest over future
periods, the fair value of options granted to nonemployees is periodically
remeasured as the underlying options vest.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Accounting principles generally accepted in the United States require that fair
values be disclosed for most of the Company's financial instruments. The
carrying amounts of the Company's financial instruments, which include cash and
cash equivalents, short-term investments, accounts receivable, capital lease
obligations, current liabilities, long-term debt and notes payable are
considered to be representative of their respective fair values.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NET LOSS PER SHARE
In accordance with accounting principles generally accepted in the United
States, basic and diluted net loss per share has been computed using the
weighted-average number of shares of common stock outstanding during the
respective periods. The effect of stock options, convertible preferred stock and
convertible note payable is antidilutive for all periods presented.
Unaudited pro forma basic and diluted net loss per common share, as presented,
gives effect to common stock equivalent shares arising assuming that the
preferred stock and convertible note payable were converted to common stock upon
issuance using the if-converted method. This pro forma disclosure has been
included because the preferred stock and convertible note payable automatically
converted upon the closing of the initial public offering.
The following table presents the calculation of basic, diluted and pro forma
basic and diluted net loss per share.
F-12
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 2000 2001
------------------------------------------------
<S> <C> <C> <C>
Net loss attributable to common stockholders $ (9,714,381) $(42,596,970) $(36,792,208)
================================================
Weighted-average shares of common stock
outstanding - basic and diluted 14,182,800 15,078,100 35,714,000
================================================
Basic and diluted net loss per share $ (0.68) $ (2.83) $ (1.03)
================================================
Pro forma (unaudited):
Net loss $(25,574,146) $(36,792,208)
Interest on convertible note payable 74,000 164,000
------------------------------
Net loss used in computing pro forma basic and
diluted net loss per share $(25,500,146) $(36,628,208)
==============================
Shares used above 15,078,100 35,714,000
Pro forma adjustment to reflect weighted effect
of conversion of convertible preferred stock
and convertible note payable 11,041,900 1,769,000
------------------------------
Shares used in computing pro forma basic and
diluted net loss per share 26,120,000 37,483,000
==============================
Pro forma basic and diluted net loss per share $ (0.98) $ (0.98)
==============================
Weighted-average shares from options that could
potentially dilute basic earnings per share in the
future that are not included in the computation
of diluted loss per share as their impact is
antidilutive (treasury stock method) 752,400 1,034,000 974,000
</TABLE>
RECLASSIFICATIONS
Certain reclassifications have been made to the 1999 and 2000 financial
statements to conform to the 2001 presentation.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations," and No. 142, "Goodwill and Other Intangible Assets."
SFAS No. 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. Use of the
pooling-of-interests method is no longer permitted. SFAS No. 141 also includes
guidance on the initial recognition and measurement of goodwill and other
intangible assets acquired in a business combination that is completed after
June 30, 2001.
SFAS No. 142 no longer permits the amortization of goodwill and indefinite-lived
intangible assets. Instead, these assets must be reviewed annually (or more
frequently under certain conditions) for impairment in accordance with this
Statement. This impairment test uses a fair value approach rather than
F-13
<PAGE>
the undiscounted cash flows approach previously required by SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." Intangible assets that do not have indefinite lives will
continue to be amortized over their useful lives and reviewed for impairment.
The Company will apply SFAS No. 142 beginning January 1, 2002 and does not
expect any significant impact on the Company's results of operations.
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" (FAS 144),
which addresses financial accounting and reporting for the impairment or
disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
and the accounting and reporting provisions of APB Opinion No. 30, "Reporting
the Results of Operations for a Disposal of a Segment of a Business." FAS 144 is
effective for fiscal years beginning after December 15, 2001, with earlier
application encouraged. The Company expects to adopt FAS 144 as of January 1,
2002 and is currently evaluating the impact of FAS 144 to its financial
statements.
3. ACQUISITION
On October 16, 1998, the Company and a venture capital fund managed by a
director of the Company closed a transaction at which time the Company received
1,000 shares of common stock, representing 50 percent of the total voting stock
of Agbio in exchange for the Company's contribution to Agbio of an exclusive
worldwide license in the field of agriculture to all of the Company's
technology, which had a $2,000,000 fair value when contributed. The Company's
investment in Agbio was recorded initially at zero because the contributed
technology was in the development phase and thus had no book value. Agbio also
recorded the Company's nonmonetary contribution at zero; however, the other
investor's $2,000,000 million contribution was in cash, which created a
difference between the Company's investment balance ($0) and its share of
Agbio's beginning equity ($1,000,000). This difference was being amortized by
the Company over the estimated life of the contributed technology (5 years) as a
reduction to its share of Agbio's net losses. The investment balance remained at
zero throughout 1999 and 2000.
On December 14, 2001, the Company purchased the remaining 50% of Agbio from the
other investor for an aggregate of 925,000 shares of the Company's common stock
valued at $6.53 per share. In addition, 25,391 options to purchase the Company's
common stock were issued to replace existing Agbio options.
The acquisition of the remaining shares was accounted for as a purchase.
Accordingly, the results of operations of Agbio have been included in the
consolidated financial statements since December 14, 2001, the effective date of
the acquisition. Additionally, 50% of Agbio's losses from January 1, 2001
through December 14, 2001 have been included as a credit to equity in losses
from joint ventures. A credit was also recorded directly to retained earnings
for 50% of the net worth of Agbio through December 31, 2000.
The purchase price of $6.2 million will be allocated to the acquired assets and
assumed liabilities on the basis of their estimated fair values as of the date
of the acquisition, as determined by an independent appraisal during the first
half of 2002. The portion of the purchase price to be allocated to intangible
assets will be amortized based upon the useful lives determined in the
appraisal. Any excess purchase price over the fair value of the net assets and
identifiable intangibles acquired will be allocated to goodwill. On January 1,
2002, the Company will adopt SFAS No. 142, which changes the accounting for
goodwill from an amortization method to an impairment-only approach.
F-14
<PAGE>
3. ACQUISITION (CONTINUED)
Based on unaudited data, the following table presents selected financial
information for the Company on a pro forma basis, assuming Agbio had been 100%
owned and consolidated since January 1, 2000:
Years ended December 31
-----------------------
2000 2001
-------------------------------
Net revenues $ 11,531,181 $ 34,473,491
Net loss applicable to common shareholders (44,426,818) (37,933,490)
Net loss per share $ (2.95) $ (1.04)
The pro forma net loss includes an estimation of amortization of identifiable
intangibles and goodwill that would have been recorded had the transaction taken
place at the beginning of the period being reported using a useful life of 7
years.
4. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt are as follows:
DECEMBER 31
2000 2001
------------------------------
Equipment loans $ 2,816,922 $ 6,532,386
Convertible note 10,000,000 -
Note payable to Endogen 6,000,000 -
Other 74,523 52,593
------------------------------
18,891,445 6,584,979
Less current portion 6,796,234 2,618,359
------------------------------
$12,095,211 $ 3,966,620
==============================
The Company has entered into several equipment loans with financial institutions
for the purchase of equipment, with borrowings secured by the equipment
purchased. The loans are repayable in 36 to 42 monthly installments, which
commence upon the delivery of equipment. These equipment loans have interest
rates that vary from 11.3% to 13.5%.
In December 2000, the Company entered into a convertible note which provided the
Company with a $10 million loan bearing interest at 15% per annum. The note
automatically converted into 909,091 shares of common stock at $11 per share
upon the initial public offering on February 9, 2001.
On January 21, 2000, the Company terminated a product development and marketing
agreement with Endogen Corporation (see Note 9), agreeing to pay $2,000,000 in
cash and $6,000,000 in a note bearing interest at 6% per annum due within three
months of an effective initial public offering or in three equal annual
installments beginning January 2001. The note was paid in full during 2001.
Maturities of long-term debt for each of the years succeeding December 31, 2001,
are as follows:
2002 $2,618,359
2003 2,812,401
2004 1,154,219
----------
$6,584,979
==========
F-15
<PAGE>
5. SHAREHOLDERS' EQUITY
INITIAL PUBLIC OFFERING
In February 2001, the Company completed an initial public offering of 7,500,000
shares of common stock at a price of $11.00 per share (excluding underwriters'
discounts and commissions), generating gross proceeds of approximately $82.5
million and net proceeds of $74.8 million, after deducting an aggregate of $7.7
million in underwriting discounts, commissions, and other offering related
expenses. All shares of Series A Convertible Preferred Stock, Series B
Convertible Preferred Stock, Series C Convertible Preferred Stock, Series D
Convertible Preferred Stock, Series E Convertible Preferred Stock, and Series F
Convertible Preferred Stock outstanding as of the closing date of the offering
were automatically converted into shares of common stock. No dividends were paid
on any of the Series A, B, C, D, E, or F Convertible Preferred Stock.
Subsequent to the commencement of the Company's initial public offering process,
the Company reevaluated the deemed fair market value of its common stock as of
July 2000 and determined it to be $11.90 per share. The Series F convertible
preferred stock was issued at about the same time for $8.78 per share. The
$17,022,824 aggregate excess of the fair value of the "if-converted" stock over
the preferred common stock conversion price was allocated to paid-in capital and
created a discount on the preferred stock. That discount was immediately
amortized to paid in capital (due to a lack of retained earnings) and was
considered a deemed dividend for loss-per-share purposes. For all other classes
of preferred stock, the conversion price was greater than or equal to the fair
value of the "if-converted" common stock.
STOCK PURCHASE PLAN
The Company has an Employee Stock Purchase Plan (Purchase Plan) under which an
aggregate of 856,800 common shares may be issued. The Purchase Plan also
provides for annual increases in the number of shares available for issuance,
beginning in 2001, equal to the lesser of 1% of the outstanding shares of common
stock on the first day of the fiscal year, 428,400 shares or an amount
determined by the Board of Directors. During the year ended December 31, 2001,
28,069 shares were issued. Employees are eligible to participate in the Purchase
Plan if they work at least 20 hours per week and more than five months in any
calendar year. Eligible employees may make contributions through payroll
deductions of up to 10% of their compensation. The price of common stock
purchased under the Purchase Plan is 85% of the lower of the fair market value
of the common stock at the beginning or end of the offering period.
STOCK OPTION PLANS
The Company has Incentive Stock Option Plans for its employees and Nonqualified
Stock Option Plans (the Plans) under which an aggregate of 6,802,800 options may
be granted. Annual increases in the number of shares available for issuance are
allowed beginning in 2001, limited to the lesser of 4.5% of the outstanding
shares of common stock on the first day of the fiscal year, 2,571,600 shares or
an amount determined by the Board of Directors. During 2001, 1,338,552
additional shares were authorized for grant. Options under the Plans have a
maximum life of ten years. Options vest at various intervals, as determined by
the Board of Directors at the date of grant.
The rollforward of shares available for grant through December 31, 2001, is as
follows:
Shares available for grant at December 31, 2000 2,744,100
Options granted (1,486,890)
Options forfeited 100,260
Increase in options available for grant 1,338,552
Options assumed in Agbio acquisition (25,391)
----------
Shares available for grant at December 31, 2001 2,670,631
==========
F-16
<PAGE>
The Company's option activity is as follows:
Weighted-average
Number of Shares Exercise Price
----------------------------------
Outstanding at December 31, 1998 1,617,600 $1.46
Granted 452,400 3.77
Exercised (156,000) 1.66
Forfeited (62,400) 2.32
----------------------------------
Outstanding at December 31, 1999 1,851,600 1.97
Granted 1,998,000 8.30
Exercised (489,600) 0.79
Forfeited (59,700) 2.92
----------------------------------
Outstanding at December 31, 2000 3,300,300 5.96
Granted 1,486,890 8.48
Options assumed in Agbio acquisition 25,391 1.10
Exercised (149,200) 2.48
Forfeited (100,260) 7.92
----------------------------------
Outstanding at December 31, 2001 4,563,121 $6.85
----------------------------------
Exercisable at December 31, 2001 1,785,091 $4.64
==================================
<TABLE>
<CAPTION>
Number of
Shares
Outstanding at Remaining Number of Shares
December 31, Contractual Exercisable at
2001 Life December 31, 2001
----------------------------------------------
<S> <C> <C> <C>
Options granted between $0.27 and $1.11 452,291 4.2 452,291
Options granted between $2.20 and $3.31 272,300 5.8 272,300
Options granted between $3.32 and $4.45 587,700 7.6 406,500
Options granted between $5.53 and $6.63 714,150 9.8 -
Options granted between $6.64 and $7.74 43,500 9.6 -
Options granted between $7.75 and $8.85 1,854,050 8.7 637,800
Options granted between $8.86 and $9.95 31,350 7.9 16,200
Options granted between $9.96 and $11.06 607,780 9.4 -
-------------- -----------------
4,563,121 1,785,091
============== =================
</TABLE>
From August 1, 1999 through December 31, 1999, and from January 1, 2000 to
December 31, 2000, options to purchase 238,800 and 165,600 shares of common
stock, respectively, were granted to employees with an exercise price of $3.37
per share. From January 1, 2000 to December 31, 2000 and from January 1, 2001 to
February 9, 2001, options to purchase 1,818,000 and 56,400 shares of common
stock were granted to employees with an exercise price of $8.78 per share. As a
result of these option grants having exercise prices below what was considered
the fair value of the underlying stock, the Company recorded deferred
compensation of $1,021,108, $7,610,857 and $103,478 in 1999, 2000 and 2001,
respectively. The Company amortized to expense $485,924 in 1999, $3,575,677 in
2000 and $2,812,276 in 2001 using an accelerated vesting method whereby each of
the years' vesting components is amortized over its own vesting period.
F-17
<PAGE>
Pro forma information regarding net loss and net loss per share is required by
FAS No. 123, and has been determined as if the Company had accounted for its
employee stock options under the minimum value method of that Statement for
option grants made prior to the Company's initial public offering and the
Black-Scholes method for grants made subsequent to such offering. The
calculations were made assuming a dividend yield of 0%, a weighted-average
expected option life of five years and a weighted-average risk-free interest
rate of 5.00%, 5.50% and 5.50% for the years ended December 31, 1999, 2000 and
2001, respectively. The volatility factor used in the Black-Scholes method for
the period subsequent to the initial public offering in 2001 was .90. The
weighted-average fair value of options granted in 1999, 2000 and 2001 was $0.66,
$2.34 and $5.73, respectively.
For purposes of pro forma disclosures, the estimated fair value of the options
are amortized to expense over the options vesting period. The Company's pro
forma information is as follows (i.e., if FAS 123 method had been followed):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 2000 2001
--------------------------------------------
<S> <C> <C> <C>
FAS 123 pro forma net loss attributable to
common shareholders $(9,877,694) $(43,146,317) $(39,204,421)
FAS 123 pro forma loss per share - basic
and diluted $ (0.70) $ (2.86) $ (1.10)
</TABLE>
6. INCOME TAXES
The types of temporary differences between tax bases of assets and liabilities
and their financial reporting amounts that give rise to the deferred tax asset
(liability) and their approximate tax effects are as follows:
DECEMBER 31
2000 2001
------------------------------
Deferred tax assets:
Patent expense $ 523,000 $ 732,000
Deferred revenue 1,451,000 981,000
Inventory obsolescence 104,000 1,072,000
Depreciation expense - 924,000
Other 294,000 486,000
Net operating loss carryforwards 19,407,000 31,146,000
------------------------------
21,779,000 35,341,000
Deferred tax liabilities:
Intangible assets (4,429,000) (3,635,000)
Depreciation expense (100,000) -
------------------------------
Net deferred tax asset 17,250,000 31,706,000
Valuation allowance (17,250,000) (31,706,000)
------------------------------
$ - $ -
==============================
At December 31, 2001, the Company had net operating loss carryforwards of
approximately $77.9 million for U.S. federal and state tax purposes, which
expire beginning in 2008. In the event of a change in ownership greater than 50%
in a three-year period, utilization of the net operating losses may be subject
to a substantial annual limitation due to the ownership change limitations
provided by the Internal Revenue Code of 1986 and similar state provisions.
F-18
<PAGE>
7. LEASE OBLIGATIONS
The Company leases its corporate facilities under an operating lease effective
through September 2011. The Company has the option to extend the lease for three
additional five-year periods. The lease agreement requires the Company to
provide the landlord an irrevocable standby letter of credit. The standby letter
of credit has a balance of $96,000 at December 31, 2001, and is reduced by
$8,000 per month. The lessor completed construction of a 65,000 square foot
addition to the corporate facilities in September 2001. The Company's monthly
rent payment will be approximately $176,000 per month until September 2006 and
$105,000 per month from October 2006 through September 2011. The Company also
pays the landlord approximately $30,000 per month for pass-through expenses.
During fiscal 2000, the Company prepaid $1 million of rent payments, which was
included in long-term other assets. The prepaid rent will be utilized over the
remaining life of the lease. Rent expense is being recorded by the Company on a
straight-line basis over the amended lease term. Long-term other assets include
$1,086,000 of prepaid rent at December 31, 2001.
The Company has two other leased operating facilities. The first operating
facility has a three-year lease term commencing May 2000 with the option to
extend the lease for an additional three-year period. The second operating
facility has a three-year term with the option to extend the lease for an
additional five-year period. All facility leases are classified as operating for
accounting purposes.
Rent expense was approximately $517,000, $779,000 and $1,713,000 for the years
ended December 31, 1999, 2000 and 2001, respectively.
The Company entered into two capital leases during 2001 for the sale and
leaseback of certain equipment totaling approximately $5 million. The first
lease requires monthly payments of $135,976 through June of 2004. The second
lease requires monthly payments of $40,292 through March of 2003, decreasing to
$25,102 through September 2004.
Future minimum lease payments, by year and in the aggregate are as follows:
Capital Operating
Leases Leases
----------------------------
2002 $2,115,211 $ 2,926,591
2003 1,978,501 2,655,502
2004 1,041,771 2,441,579
2005 - 2,539,242
2006 - 2,455,009
Thereafter - 8,131,749
----------------------------
Total minimum lease obligations 5,135,483 $21,149,672
=============
Less amounts representing interest 765,041
---------------
Present value of minimum lease payments 4,370,442
Less current portion of long-term lease
obligations $2,727,070
===============
1,643,372
---------------
Equipment includes $5,070,000 of assets under capitalized leases, with
accumulated depreciation of $380,537 as of December 31, 2001.
F-19
<PAGE>
8. LICENSE AGREEMENTS
The Company entered into an exclusive license agreement (research license) in
March 1994 to make, use and sell products utilizing the licensed patents in the
research market. Under the research license, the Company is required to pay a
royalty at a rate not to exceed a certain percentage of the selling price on
licensed component sales. There have been no sales of licensed components
through December 31, 2001. The research license will continue until the licensed
patents expire or until the agreement is terminated by either party, whichever
is earlier, as defined in the agreement. The Company also entered into an equity
agreement with the licensor in March 1994 whereby it issued 115,200 shares of
common stock in exchange for the research license and diagnostic market option,
which is an exclusive license agreement to make, use and sell products utilizing
the licensed patents in the diagnostic market. In October 1998, the Company
issued 103,200 shares to the licensor to exercise the diagnostic market option.
The shares issued in 1994 and 1998 were valued at amounts considered to
approximate the fair value of common stock at the time of each issuance. Under
this agreement, the Company granted the licensor a put option to sell a
specified number of shares back to the Company anytime after March 1, 1998. The
total number of shares that can be put to the Company cannot exceed the number
of shares necessary to achieve a purchase price of $200,000. At December 31,
2001, the price per share to be paid if the put option is exercised is $3.37.
Accordingly, the Company has classified $200,000 of additional paid-in capital
outside of shareholders' equity in the accompanying balance sheets.
In October 2001, the Company entered into a development, license and supply
agreement with RIKEN, Inc. (RIKEN). The Company licensed certain patent rights
relating to polymorphism genes that encode drug metabolizing enzymes from RIKEN
for a nonrefundable fee which is being amortized over its estimated useful life
(7.5 years). The Company also pays royalties based upon net sales of licensed
products in exclusive and non-exclusive territories.
9. COLLABORATIVE AGREEMENTS
In August 1997, the Company entered into a product development and marketing
agreement with Endogen Corporation (Endogen), a leading manufacturer and
distributor of reagents supplied to the research market. The Company will
develop gene expression monitoring tests for human cytokines and chemokines
utilizing the Company's Invader(TM) product platform. Cytokines and chemokines
are proteins secreted by cells in the immune system to transfer information
between cells and have broad implications in disease detection, monitoring and
intervention. Endogen received from the Company an exclusive license to develop
and market unregulated nonhuman cytokine and chemokine tests to the life science
research and pharmacogenomics markets. The Company retained all rights to
regulated product applications which are developed as a result of the agreement.
Initial products were shipped to Endogen in 1999. In addition to the retained
rights to regulated product applications, the Company obtained a commitment to
receive funding of 50 percent of expenditures incurred in the development of the
gene expression monitoring tests, to a maximum of $1,050,000, paid over a
36-month period which commenced December 1, 1997, based upon a predetermined
schedule of employment and workload sharing. The Company recorded revenue of
$350,000 in 1999 and deferred revenue recognition of $19,022 until 2000 on cash
received under this contract. The Company terminated the product development and
marketing agreement on January 21, 2000, agreeing to pay $8,000,000 to Endogen,
consisting of $2,000,000 in cash and $6,000,000 payable under a three-year note
bearing interest at 6% (see Note 2). The $8,000,000 was initially capitalized as
an intangible asset (i.e., reacquired marketing and distribution rights) in
connection with a pending merger with another company. However, the pending
merger transaction was terminated in May 2000, which triggered an impairment
evaluation of the intangible asset. The impairment evaluation resulted in the
recognition of a $5,788,889 impairment loss.
Additionally, the Company's warrant to purchase 125,000 shares of common stock
of Endogen, which was received upon execution of the agreement in 1997 but had a
carrying value of $0, was canceled.
In August 1999, the Company entered into a Research Agreement with
Warner-Lambert, which is now part of Pfizer. Under this agreement the Company
agreed to develop and supply assays for SNP analysis
F-20
<PAGE>
and mRNA assays for gene expression profiling for Warner-Lambert's research and
development efforts. A total of 181 assays will be developed, with a total of
184,000 determinations. The Company will own all improvements to the Invader
assay technology made during the course of the program. In addition,
Warner-Lambert has granted the Company an exclusive, worldwide, royalty-free and
irrevocable license under the inventions developed in the course of the
development program to use and commercialize diagnostic applications. Upon
execution of the agreement, Warner-Lambert paid the Company $474,100 for all the
assays. The Company recorded revenue from Warner-Lambert of $23,100, $318,350
and $33,650 in 1999, 2000 and 2001, respectively.
In June 2000, the Company entered into a collaborative development agreement
with Novartis Pharmaceuticals Corporation (Novartis) to develop a high-density
panel of 10,000 SNP assays spaced across the human genome. The Company is
required to transfer 10,000 Invader assays comprising 3,840,000 genotype
determinations to Novartis solely for its internal research and development
applications. Novartis has granted the Company a non-exclusive, fully paid-up
worldwide license to improvements to the Invader assays made in the course of
its performance under this agreement, as well as the right of first refusal to
obtain an exclusive worldwide license to all patent applications claiming
discoveries and inventions, made by Novartis in the course of using the assays,
for diagnostic applications. The total amount received from the agreement was
$950,000, half of which was received in July 2000 upon transfer of assays with
the remainder was received upon shipment of each additional genotyping
determination. The Company recorded revenue from Novartis of $19,346 in 2000 and
$930,654 in 2001.
In August 2000, the Company entered into a collaboration agreement with Applied
Biosystems Group, a division of Applera Corporation (Applied Biosystems), for
the development and manufacture of certain genotyping assays for the Japanese
"Millennium" Project to examine 150,000 unique single nucleotide polymorphisms
(SNPs) in 1,000 individuals and thereafter to examine those same 150,000 SNPs in
an additional 4,000 individuals. The Company provided products to Applied
Biosystems and received payment in accordance with quantities and prices stated
in the supply agreement with Applied Biosystems. Applied Biosystems sold such
products together with certain of their own products to the Japanese government.
The Company recorded revenue from Applied Biosystems once products were
delivered to the end user in Japan. At the end of each quarter, each Company
prepared an analysis of revenues recorded and costs incurred to date. The
Company's costs included fees for equipment borrowed from Applied Biosystems.
The Company and Applied Biosystems established an equal profit sharing
arrangement that required a reconciliation of revenues and costs between Applied
Biosystems and the Company within 30 days of each three-month period, as defined
in the agreement. The Company currently sells products through a Japanese
distributor for use in the Japanese Millennium Project.
In December 2000, the Company entered into a development and commercialization
agreement with BML, Inc. (BML). Under this agreement, the Company will develop
assays in accordance with a mutually agreed development program for use in
clinical applications by BML; such development is expected to be complete by the
end of 2003. The agreement may be terminated by BML on six months written notice
given on or after June 30, 2003. In 2000 and 2001, BML paid the Company $3
million and $2 million, respectively, which is being recognized as revenue on a
straight-line basis over the expected term of development services being
performed by the Company. Additional funding commitments of $1 million per year
are to be received in 2002 and 2003. The Company recorded revenue from BML of
$83,333 and $3,000,000 in 2000 and 2001, respectively. The Company deferred
revenue recognition of $1,916,667 at December 31, 2001.
In October 2001, the Company entered into a collaborative development agreement
with Aclara BioSciences, Inc. (Aclara) for the development and commercialization
of multiplexed gene expression research products using Aclara's eTag Technology
and the Company's Invader platform. The agreement expires ten years after the
first commercial launch of an approved product under the agreement, unless
extended by mutual written agreement of Aclara and the Company. The Company and
Aclara established an equal cost sharing arrangement that requires a
reconciliation of costs between Aclara and the Company within 30 days of each
three-month period, as defined in the agreement. There were no material costs
incurred by the Company during the year ended December 31, 2001.
F-21
<PAGE>
In December 2001, the Company entered into an agreement with Daiichi Pure
Chemicals Company to develop genotyping assays that detect and/or quantify
certain genetic mutations for the purpose of evaluating patients for such
mutations. No revenue was recognized during 2001 related to this agreement.
10. 401(k) PLAN
The Company has a 401(k) savings plan (the Plan) which covers substantially all
employees. Through September 30, 2000, the Plan did not allow for Company
contributions. Effective October 1, 2000, the Plan provides for Company
contributions of 50% on up to 6% of employee contributions. Company
contributions to the plan were approximately $64,000 and $316,000 in 2000 and
2001, respectively.
11. TERMINATION OF MERGER
In January 2000, the Company entered into an agreement to merge with Applied
Biosystems. In May 2000, the Company and Applied Biosystems agreed to
terminate the merger agreement. Merger related costs charged to expense were
$116,501 and $833,254 in 1999 and 2000, respectively.
12. LITIGATION SETTLEMENT
In October 2000, the Company entered into a settlement and release agreement
with ID Biomedical Corporation (ID) related to a patent infringement lawsuit
filed by ID in September 2000. In return for a cash payment to ID of $4,000,000
and 545,454 shares of common stock issued to ID valued at the initial public
offering price of $11 per share, the patent infringement lawsuit was dismissed
and ID agreed not to sue the Company, its affiliates, distributors, customers
and any others for patent infringement or otherwise with respect to the
manufacture, use or sale of the Company's Invader products. Legal costs
associated with the settlement of this case were $533,248. Total litigation
settlement costs of $10,533,248 were capitalized as an intangible asset and are
being amortized to cost of goods sold over seven years, the period during which
the benefits are expected to be realized.
13. SEGMENT DISCLOSURE
The Company operates in one industry segment. Product revenues to international
end-users accounted for 82% and 87% of total revenues in 2000 and 2001 (product
revenues were not significant in 1999). All customers were billed in U.S.
dollars during 2000. At December 31, 2001, $91,907 of receivables are
denominated in Yen. Product revenues by geographic area for the years ended
December 31, 2000 and 2001, were as follows:
2000 2001
--------------------------------
United States $ 1,936,738 $ 3,868,909
Japan 7,848,699 26,386,919
Other 1,106,002 149,227
--------------------------------
$10,891,439 $30,405,055
================================
F-22
<PAGE>
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following sets forth selected quarterly financial and stock price
information for the years ended December 31, 2000 and 2001 (in thousands). The
operating results are not necessarily indicative of results for any future
period.
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
<S> <C> <C> <C> <C>
2001:
Net revenues $ 11,173 $ 8,694 $ 8,188 $ 6,038
Gross margins 1,086 1,836 1,823 (3,584)
Net loss applicable to common
shareholders (5,865) (6,632) (7,418) (16,877)*
Basic and diluted net loss per
share $ (0.20) $ (0.17) $ (0.19) $ (0.44)
Common stock per share:
High 11.00 11.00 10.19 8.85
Low 5.38 5.10 5.01 6.26
2000:
Net revenues $ 614 $ 760 $ 3,562 $ 6,481
Gross margins (988) (1,191) 658 1,420
Net loss applicable to common
shareholders (4,344) (11,512) (21,040) (5,701)
Basic and diluted net loss per
share $ (0.29) $ (0.77) $ (1.40) $ (0.37)
</TABLE>
Common stock price per share is not presented from January 1, 2000 to February
8, 2001 because the common stock was not yet publicly traded.
* Net loss applicable to common shareholders during the quarter ended December
31, 2001 included an increase in the reserve for excess and obsolete
inventory of $2,180,000 (classified in cost of sales) and an equipment
impairment charge of $2,970,000 (classified in general and administrative
expenses).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company incorporates by reference the information required by this Item from
the Company's definitive proxy statement for its 2001 annual meeting of
shareholders scheduled to be held on June 5, 2002 ("Proxy Statement"), which
will be filed with the Securities and Exchange Commission not later than 120
days after the end of our fiscal year.
F-23
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The Company incorporates by reference the information required by this Item from
the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company incorporates by reference the information required by this Item from
the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company incorporates by reference the information required by this Item from
the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS A PART OF THIS REPORT.
1. Financial Statements. The financial statement required to be filed
as a part of this Report are listed on page 39.
2. Financial Statement Schedules. The financial statement schedules
required to be filed as a part of this Report are listed on page 39.
3. Exhibits. The exhibits required to be filed as a part of this
Report are listed in the Exhibit Index.
(b) REPORTS ON FORM 8-K. A Current Report on Form 8-K, dated November 28, 2001,
was filed with the Securities and Exchange Commission reporting under Items
5 and 7 in connection with the announcement that the board of directors of
the company approved the adoption of a Preferred Stock Rights Agreement.
F-24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on April 1, 2002.
THIRD WAVE TECHNOLOGIES, INC.
(Registrant)
By: Lance Fors
-------------------------------------
President and Chief Executive Officer
<PAGE>
POWER OF ATTORNEY
We, the undersigned directors and executive officers of Third Wave Technologies,
Inc., hereby severally constitute and appoint each of John C. Comerford and Alex
M. Kasper our true and lawful attorney and agent, with full power to them and
each of them to sign for us, and in our names in the capacities indicated below,
any and all amendments to the Annual Report on Form 10-K of Third Wave
Technologies, Inc. filed with the Securities and Exchange Commission, hereby
ratifying and confirming our signatures as they may be signed by our said
attorneys to any and all amendments to said Annual Report on Form 10-K.
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on dates indicated.
Signature Title Date
- --------- ----- ----
Lance Fors President, Chief Executive April 1, 2002
- ------------------------- Officer and Director
Lance Fors
John Puisis Chief Financial Officer April 1, 2002
- ------------------------- (Principal Financial Officer)
John Puisis
Alex M. Kasper Vice President, Finance March 29, 2002
- ------------------------- (Principal Accounting Officer)
Alex M. Kasper
G. Steven Burrill Director April 1, 2002
- -------------------------
G. Steven Burrill
Director
- -------------------------
Tom Daniel
Kenneth R. McGuire Director March 28, 2002
- -------------------------
Kenneth R. McGuire
John Neis Director March 31, 2002
- -------------------------
John Neis
Director
- -------------------------
Lloyd M. Smith
David A. Thompson Director March 29, 2002
- -------------------------
David A. Thompson
Preston Tsao Director March 28, 2002
- -------------------------
Preston Tsao
<PAGE>
EXHIBIT INDEX
Certain of the following exhibits, as indicated parenthetically, were previously
filed as exhibits to registration statements filed by the Company under the
Securities Act of 1933, as amended (the "Securities Act"), or to reports or
registration statements filed by the company under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and are hereby incorporated by
reference to such statements or reports. The Company's Exchange Act file number
is 000-31745.
Exhibits marked with an asterisk (*) indicate portions of the exhibit have
received confidential treatment. Exhibits marked with a double asterisk (**) are
filed herewith. Exhibits marked with a triple asterisk (***) indicate a
management contract or compensatory plan or arrangement.
<TABLE>
<CAPTION>
Exhibit
No. Description Incorporated By Reference To
- ------- ----------- ----------------------------
<S> <C> <C>
3.1 Amended and Restated Certificate of Incorporation of Exhibit 3.1(b) to the Registrant's
the Registrant, dated as of August 16, 2000 Registration Statement on Form S-1,
Registration No. 333-42694, filed on July
31, 2000, as amended
3.2 Amended and Restated Bylaws of the Registrant, dated Exhibit 3.2(b) to the Registrant's
as of February 9, 2001 Registration Statement on Form 8-A, File No.
000-31745, filed on November 30, 2001
4.1 Investors' Rights Agreement, dated as of July 24, 2000 Exhibit 4.2 to the Registrant's Registration
Statement on Form S-1, Registration No.
333-42694, filed on July 31, 2000, as amended
4.2 Rights Agreement between the Registrant and EquiServe Exhibit 4.9 to the Registrant's Registration
Trust Company N.A., dated as of October 24, 2001 Statement on Form 8-A, File No. 000-31745,
filed on November 30, 2001
10.1*** Incentive Stock Option Plan Exhibit 10.1 to the Registrant's
Registration Statement on Form S-1,
Registration No. 333-42694, filed on July
31, 2000, as amended
10.2*** 1997 Incentive Stock Option Plan Exhibit 10.2 to the Registrant's
Registration Statement on Form S-1,
Registration No. 333-42694, filed on July
31, 2000, as amended
10.3*** 1997 Nonqualified Stock Option Plan Exhibit 10.3 to the Registrant's
Registration Statement on Form S-1,
Registration No. 333-42694, filed on July
31, 2000, as amended
10.4*** 1998 Incentive Stock Option Plan Exhibit 10.4 to the Registrant's
Registration Statement on Form S-1,
Registration No. 333-42694, filed on July
31, 2000, as amended
10.5*** 1999 Incentive Stock Option Plan Exhibit 10.5 to the Registrant's
Registration Statement on Form S-1,
Registration No. 333-42694, filed on July
31, 2000, as amended
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
10.6*** 1999 Nonqualified Stock Option Plan Exhibit 10.6 to the Registrant's
Registration Statement on Form S-1,
Registration No. 333-42694, filed on July
31, 2000, as amended
10.7*** 2000 Stock Plan Exhibit 10.7 to the Registrant's
Registration Statement on Form S-1,
Registration No. 333-42694, filed on July
31, 2000, as amended
10.8*** 2000 Employee Stock Purchase Plan Exhibit 10.8 to the Registrant's
Registration Statement on Form S-1,
Registration No. 333-42694, filed on July
31, 2000, as amended
10.9*** Form of Director and Executive Officer Indemnification Exhibit 10.9 to the Registrant's
Agreement Registration Statement on Form S-1,
Registration No. 333-42694, filed on July
31, 2000, as amended
10.10 Master Loan and Security Agreement, dated as of June Exhibit 10.10 to the Registrant's
22, 1999, between the Registrant and Transamerica Registration Statement on Form S-1,
Business Credit Corporation and amendment, dated as of Registration No. 333-42694, filed on July
September 1999, thereto 31, 2000, as amended
10.11* Research Collaboration Agreement, dated as of Exhibit 10.11 to the Registrant's
September 30, 1999, between the Registrant and The Registration Statement on Form S-1,
Board of Trustees of Leland Stanford Junior University Registration No. 333-42694, filed on July
31, 2000, as amended
10.12* Collaborative Development Agreement, dated as of June Exhibit 10.12 to the Registrant's
21, 2000, between the Registrant and Novartis Registration Statement on Form S-1,
Pharmaceuticals Corporation and affiliates Registration No. 333-42694, filed on July
31, 2000, as amended
10.13* New Assay Development and Option Agreement, dated as Exhibit 10.13 to the Registrant's
of June 20, 2000, between the Registrant and SmithKline Registration Statement on Form S-1,
Beechman Biologicals SA Registration No. 333-42694, filed on July
31, 2000, as amended
10.14* Memorandum of Understanding, dated as of September 17, Exhibit 10.14 to the Registrant's
1999, by the Registrant and approved and accepted by Registration Statement on Form S-1,
Genome Research Limited at September 21, 1999 Registration No. 333-42694, filed on July
31, 2000, as amended
10.15* Research Agreement, dated as of August 20, 1999, Exhibit 10.16 to the Registrant's
between the Registrant and Pfizer Inc. (as successor in Registration Statement on Form S-1,
interest to Warner Lambert Company) Registration No. 333-42694, filed on July
31, 2000, as amended, amendment dated
September 1, 2001 filed herewith
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
10.16** Lease Agreement, dated as of April 1, 1997, between Exhibit 10.18 to the Registrant's
the Registrant and University Research Park Facilities Registration Statement on Form S-1,
Corp. and amendment, dated as of September 1, 2001 Registration No. 333-42694, filed on July
31, 2000, as amended
10.17 Lease, dated as of April 10, 2000, between the Exhibit 10.19 to the Registrant's
Registrant and Prairie Warehousing LLP Registration Statement on Form S-1,
Registration No. 333-42694, filed on July
31, 2000, as amended
10.18 Development and Supply Agreement, dated as of August Exhibit 10.20 to the Registrant's
1, 2000, between the Registrant and the Applied Registration Statement on Form S-1,
Biosystems Unit of Applera Corporation Registration No. 333-42694, filed on July
31, 2000, as amended
10.19 Equipment Loan Agreement, dated as of August 1, 2000, Exhibit 10.21 to the Registrant's
between the Registrant and the Applied Biosystems Unit Registration Statement on Form S-1,
of Applera Corporation Registration No. 333-42694, filed on July
31, 2000, as amended
10.20 Promissory Note, dated as of January 21, 2000, issued Exhibit 10.23 to the Registrant's
by the Registrant to Endogen Corporation Registration Statement on Form S-1,
Registration No. 333-42694, filed on July
31, 2000, as amended
10.21 Convertible Note Purchase Agreement, dated as of Exhibit 10.24 to the Registrant's
December 15, 2000, between the Registrant and The Registration Statement on Form S-1,
Endeavors Group LLC, and the related convertible Registration No. 333-42694, filed on July
subordinated promissory note 31, 2000, as amended
10.22 Lease, dated as of October 30, 2000, between the Exhibit 10.25 to the Registrant's
Registrant and LCB, LLC Registration Statement on Form S-1,
Registration No. 333-42694, filed on July
31, 2000, as amended
10.23 Development and Commercialization Agreement, dated as Exhibit 10.26 to the Registrant's
of December 29, 2000, between the Registrant and BML, Registration Statement on Form S-1,
Inc. Registration No. 333-42694, filed on July
31, 2000, as amended
21** List of Subsidiaries
23** Consent of Ernst & Young LLP
24** Powers of Attorney (contained in the signature page
hereto)
</TABLE>
<PAGE>
SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 2001, 2000, and 1999
(Dollars in Thousands)
ADDITIONS
BALANCE AT CHARGED
BEGINNING (CREDITED) TO BALANCE AT
DESCRIPTION OF YEAR EXPENSE DEDUCTIONS END OF YEAR
- --------------------------------------------------------------------------------
Allowance for doubtful
accounts receivable:
1999 $ 1 $ 55 $ 0 $ 56
====== ====== ====== ======
2000 $ 56 $ 3 $ 0 $ 59
====== ====== ====== ======
2001 $ 59 $ 116 $ 0 $ 175
====== ====== ====== ======
Allowance for excess and
obsolete inventory:
1999 $ 0 $ 155 $ 0 $ 155
====== ====== ====== ======
2000 $ 155 $ 105 $ 0 $ 260
====== ====== ====== ======
2001 $ 260 $2,420 $ 0 $2,680
====== ====== ====== ======
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.16
<SEQUENCE>3
<FILENAME>c67864ex10-16.txt
<DESCRIPTION>LEASE AGREEMENT, DATED AS OF 4/1/97
<TEXT>
<PAGE>
EXHIBIT 10.16
AMENDED AND RESTATED LEASE AGREEMENT
LANDLORD: UNIVERSITY RESEARCH PARK FACILITIES CORP.
TENANT: THIRD WAVE TECHNOLOGIES, INC.
PROPERTY: 502 SOUTH ROSA ROAD
MADISON, WISCONSIN
DATE: SEPTEMBER 1, 2001
<PAGE>
AMENDED AND RESTATED LEASE AGREEMENT
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
<S> <C>
ARTICLE 1
PREMISES AND TERM............................................................................................... 1
Section 1.1 Leased Premises........................................................................... 1
Section 1.2 Term of Lease............................................................................. 2
Section 1.3 Option to Extend Term..................................................................... 2
Section 1.4 First Option To Lease Additional Buildings................................................ 2
Section 1.5 Security Deposit.......................................................................... 3
ARTICLE 2
RENT............................................................................................................ 3
Section 2.1 Base Rent................................................................................. 3
Section 2.2 Additional Rent........................................................................... 4
Section 2.3 Past Due Rent............................................................................. 4
Section 2.4 Real Estate Taxes......................................................................... 4
ARTICLE 3
INSTALLATIONS, REPAIRS AND MAINTENANCE OF LEASE PREMISES........................................................ 5
Section 3.1 Maintenance by Tenant..................................................................... 5
Section 3.2 Maintenance by Landlord................................................................... 6
Section 3.3 Exterior Signs............................................................................ 6
Section 3.4 Alterations, Changes and Installations by Tenant.......................................... 7
Section 3.5 Fixtures and Equipment.................................................................... 7
Section 3.6 Liens and Obligations..................................................................... 7
ARTICLE 4
CONDUCT OF BUSINESS............................................................................................. 8
Section 4.1 Business Use.............................................................................. 8
Section 4.2 Utility Charges........................................................................... 8
Section 4.3 Assignment or Subletting.................................................................. 9
Section 4.4 Rules and Regulations..................................................................... 9
Section 4.5 ADA Compliance............................................................................. 9
Section 4.6 Surrender................................................................................. 11
ARTICLE 5
COMMON USE AREAS AND FACILITIES................................................................................. 12
Section 5.1 Common Area............................................................................... 12
Section 5.2 Use of Common Area........................................................................ 13
Section 5.3 Operation and Maintenance................................................................. 13
Section 5.4 Preventing Public Rights.................................................................. 14
Section 5.5 Charge for Common Area and Facilities..................................................... 14
Section 5.6 Formula For Pro Rata Share................................................................ 14
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Section 5.7 Basis For Changes......................................................................... 15
ARTICLE 6
INSURANCE....................................................................................................... 15
Section 6.1 Casualty Insurance........................................................................ 15
Section 6.2 Public Liability Insurance................................................................ 16
Section 6.3 Tenant's Contents......................................................................... 17
Section 6.4 Increase in Fire Insurance................................................................ 17
Section 6.5 Hold Harmless............................................................................. 17
Section 6.6 Waiver of Subrogation..................................................................... 19
ARTICLE 7
DESTRUCTION OF LEASED PREMISES.................................................................................. 19
Section 7.1 Destruction of Leased Premises............................................................ 19
Section 7.2 Rebuilding by Landlord.................................................................... 20
Section 7.3 Abatement of Rent Upon Destruction of Premises............................................ 20
ARTICLE 8
EFFECT OF CONDEMNATION.......................................................................................... 20
Section 8.1 Total Condemnation........................................................................ 20
Section 8.2 Partial Condemnation...................................................................... 20
Section 8.3 Landlord's Damages........................................................................ 21
Section 8.4 Tenant's Damages.......................................................................... 21
ARTICLE 9
REMEDIES........................................................................................................ 21
Section 9.1 Events of Default by Tenant............................................................... 21
Section 9.2 Re-Entry by Landlord...................................................................... 22
Section 9.3 Right to Relet............................................................................ 22
Section 9.4 Parties May Remedy Defaults............................................................... 23
Section 9.5 Landlord's Remedies: Liquidated Damages................................................... 24
Section 9.6 Expenses of Landlord...................................................................... 25
Section 9.7 Waiver of Redemption...................................................................... 25
Section 9.8 Defaults of Landlord...................................................................... 25
Section 9.9 Rights Cumulative......................................................................... 26
ARTICLE 10
MISCELLANEOUS................................................................................................... 26
Section 10.1 Subordination............................................................................ 26
Section 10.2 Sale of Landlord's Interest.............................................................. 26
Section 10.3 Offset Statement......................................................................... 28
Section 10.4 Attornment............................................................................... 28
Section 10.5 Recording................................................................................ 29
Section 10.6 Excavations.............................................................................. 29
Section 10.7 Access to Premises....................................................................... 29
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Section 10.8 Quiet Enjoyment.......................................................................... 30
Section 10.9 Notices.................................................................................. 30
Section 10.10 Holding Over............................................................................ 30
Section 10.11 Consents by Landlord.................................................................... 30
Section 10.12 Successors and Assigns.................................................................. 30
Section 10.13 Governmental Regulations................................................................ 30
Section 10.14 Certain Expenses of Landlord............................................................ 31
Section 10.15 Force Majeure........................................................................... 31
Section 10.16 General................................................................................. 31
Section 10.17 Effect of Ground Lease.................................................................. 32
ARTICLE 11
ATTACHMENTS..................................................................................................... 33
Section 11.1 Attachments.............................................................................. 33
</TABLE>
<PAGE>
UNIVERSITY RESEARCH PARK
AMENDED AND RESTATED LEASE AGREEMENT
This Amended and Restated Lease is made as of September 1, 2001, by and
between University Research Park Facilities Corp., a Wisconsin corporation
(hereinafter referred to as "Landlord") and Third Wave Technologies, Inc., a
Wisconsin corporation (hereinafter referred to as "Tenant") and amends and
restates in its entirety the Lease dated April 1, 1997, by and between Landlord
and Tenant, as amended (the "Lease").
W I T N E S S E T H :
IT IS HEREBY AGREED, by and between the parties hereto, in
consideration of the covenants and agreements set forth in this Lease, as
follows:
ARTICLE 1
PREMISES AND TERM
SECTION 1.1 LEASED PREMISES. Landlord hereby leases to Tenant and
Tenant hereby leases from Landlord on the terms and provisions and subject to
the conditions hereinafter set forth in this Lease, the following described
premises:
502 South Rosa Road, Madison, Dane County, Wisconsin, (herein referred
to as the "Leased Premises") consisting of approximately 94,726 square
feet of space and all necessary parking, landscaped and common areas
located in and around that certain building (the "Building") situated
upon the property described in Exhibit A attached hereto (the property
described in Exhibit A is referred to herein as the "Landlord's
Property"). The location of the Building on Landlord's Property is
indicated on the site plan attached hereto as Exhibit B.
It is understood and acknowledged by both parties that Landlord, at the
time of execution of this Lease, holds all or a portion of the Leased Premises
as a tenant under a ground lease described in Section 10.17.
<PAGE>
SECTION 1.2 TERM OF LEASE. The term of this Lease ("the term") shall
begin on September 1, 2001 ("the commencement date"). Subject to the provisions
of Section 1.3 below, the term shall end at midnight on September 30, 2011.
SECTION 1.3 OPTION TO EXTEND TERM. Tenant is hereby granted an option
to extend the term of this Lease for three (3) five- (5) year periods, each such
extended term to begin upon the expiration of the original term or prior
extended term, as the case may be; and all terms, covenants and provisions of
this Lease shall apply to the extended terms with the exception that after the
exercise of such options Tenant shall not have any further options to extend. If
Tenant elects to exercise any option to extend, Tenant shall do so only by
giving Landlord notice in writing of its intention to do so not later than
twelve (12) months prior to the expiration of the original term, or the then
current extended term, as the case may be.
SECTION 1.4 FIRST OPTION TO LEASE ADDITIONAL BUILDINGS. Similarly,
Tenant shall have the first option to lease space in any buildings constructed
on the Expansion Property. Construction of such additional buildings shall
proceed on a schedule determined by Landlord. Prior to entering into any binding
obligation to lease space in any building located on any part of the Expansion
Property, Landlord shall first offer such space to Tenant in writing on
Landlord's then current lease terms. Tenant shall have sixty (60) days to accept
such offer; provided occupancy of any such additional building shall
2
<PAGE>
not be prior to December 31, 2002. Prior to entering into any binding obligation
to lease space in any such additional buildings, Landlord shall first offer such
space to Tenant in writing on Landlord's then current lease terms. Tenant shall
have sixty (60) days to accept such offer. If Tenant does not accept such offer
in writing within such time period, Tenant shall have no further rights with
respect to the space thus offered. Landlord shall not be required to ground
lease any part of the Expansion Property until Tenant has executed a lease with
respect to any additional space in the buildings to be built thereon on
Landlord's then current lease terms.
SECTION 1.5 SECURITY DEPOSIT. Tenant has provided to Landlord an
irrevocable letter of credit in the sum of issued by a financial institution and
on a form acceptable to Landlord as security for the performance of the
obligations hereof by Tenant. This letter of credit may provide for a reduction
of the face amount on a schedule corresponding to the remaining amount of unpaid
rent relating to additional improvements constructed by Landlord for Tenant's
use and shall be released as of the end of the initial term of this Lease,
provided Tenant is not then in default.
ARTICLE 2
RENT
SECTION 2.1 BASE RENT. Tenant shall pay to Landlord at its office in
Madison, Wisconsin, or such other place as Landlord may designate in writing,
and without any deduction or offset whatsoever, as base rent, the following
amounts on or in advance of the first day of each calendar month as shown on the
rent schedule attached hereto as Exhibit C.
If the term of this Lease does not commence on the first day of a
calendar month, the base rent for such fractional month shall be computed pro
rata on the basis of thirty (30) days per month
3
<PAGE>
and paid to Landlord on the first day of the next succeeding calendar month
along with the rent for such succeeding month.
SECTION 2.2 ADDITIONAL RENT. In addition to base rent, Tenant shall pay
as part of the consideration for this Lease and as additional rent, hereinafter
designated "additional rent," all additional amounts hereinafter provided for
and the same shall be payable upon Landlord's demand except as otherwise
expressly provided.
SECTION 2.3 PAST DUE RENT. If Tenant shall fail to pay when due any
base rent or additional rent and such amount shall not be paid within ten (10)
days after the date when due, such unpaid amounts shall bear interest from the
due date thereof to the date of payment at the rate of ten (10%) percent per
annum or the prime interest rate then charged by the Firstar Bank Wisconsin or
its successors or assigns, whichever is greater.
SECTION 2.4 REAL ESTATE TAXES. Landlord shall pay all real estate taxes
on Landlord's Property, including all general real estate
taxes, personal property taxes on Landlord's Property and installments for
special assessments arising during the term of the Lease. Tenant agrees to
reimburse Landlord for Tenant's pro rata share of such taxes. Until substantial
completion of additional buildings on the Expansion Property, Tenant's pro rata
share of such taxes shall be 100%.
Tenant's obligation for each tax described in this section shall be
further prorated for the first year of this Lease between Landlord and Tenant as
of the commencement date of this Lease.
Along with Tenant's monthly rent, Tenant shall pay to Landlord an
amount equal to one-twelfth (1/12) of its pro rata share of the estimated annual
real estate taxes, personal property taxes and installments for special
assessments for Landlord's Property. Such payment shall be applied by Landlord
to the payment of the taxes on the Landlord's Property. Tenant shall be
responsible for
4
<PAGE>
the prompt payment of its pro rata share of any deficiency so that all such
taxes shall be paid before the same become delinquent. At the termination of
this Lease, Tenant shall promptly pay Landlord for Tenant's pro rata share of
the estimated taxes for that portion of the termination year during which the
Lease is in effect. Such estimate shall be based upon the taxes for the
preceding year.
Tenant's pro rata share of taxes shall be adjusted from time to time as
additional buildings are included in the Project as substantially completed
described in Article 5 hereof.
ARTICLE 3
INSTALLATIONS, REPAIRS AND MAINTENANCE OF LEASE PREMISES
SECTION 3.1 MAINTENANCE BY TENANT. Tenant shall at all times keep the
Leased Premises and all tenant improvements, partitions, doors, fixtures,
electrical and lighting fixtures, equipment and appurtenances thereof (including
but not limited to lighting, electrical and plumbing equipment, fixtures and
lines located outside the Leased Premises, but excluding such equipment,
fixtures and lines to the extent they serve the entire Building or areas in
addition to the Leased Premises) in good order, condition and repair, including
periodic painting as determined by Landlord. If Tenant refuses or neglects to
repair property as required hereunder and to the reasonable satisfaction of
Landlord as soon as reasonably possible after written demand, Landlord may make
such repairs without liability to Tenant for any loss or damage that may accrue
to Tenant's property or to Tenant's business by reason thereof, and upon
completion thereof, Tenant shall pay Landlord's costs for making such repairs
plus twenty (20%) percent for overhead, upon presentation of bill therefor, as
additional rent. When used in this paragraph, the term "repairs" shall include
replacements and renewals when necessary and all such repairs shall be equal in
quality and class of original work.
5
<PAGE>
SECTION 3.2 MAINTENANCE BY LANDLORD. Landlord shall keep foundations,
exterior walls, roof and all other structural members, both interior and
exterior, of the Leased Premises and all common areas in good repair and shall
have access to the Leased Premises for such purpose, but Landlord shall not be
required to make any such repairs which become necessary or desirable by reason
of the negligence of Tenant, its agents, servants, employees or customers.
Landlord shall also keep and maintain heating, ventilating, air conditioning,
plumbing and electrical lines, fixtures and equipment (except those which are
the responsibility of Tenant) and Landlord's cost therefor shall be reimbursed
by Tenant along with common area charges pursuant to Section 5.5 below. When
used in this paragraph, the term "repairs" shall include replacements and
renewals when necessary and all such repairs shall be equal in quality and class
of original work. Landlord shall not be required to make any such repairs which
become necessary or desirable by reason of the negligence of Tenant, its agents,
servants, employees or customers.
SECTION 3.3 EXTERIOR SIGNS. All signs to be installed by Tenant shall
be approved in advance in writing by the Design Review Board appointed by the
Board of Regents of the University of Wisconsin System. All signs to be
installed by Landlord shall be approved in advance in writing by the Design
Review Board.
Tenant shall remove all signs installed by Tenant at the termination of
this Lease. Such installations and removals shall be made in such a manner as to
avoid injury, defacement or any other damages to the buildings and improvements.
The cost of repairing any damage to the building caused by the installation,
removal, or maintenance of the sign shall be borne by the Tenant.
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The cost of all signs, other than those furnished by Landlord,
including the installation, maintenance, and removal thereof, shall be the
responsibility of the Tenant.
SECTION 3.4 ALTERATIONS, CHANGES AND INSTALLATIONS BY TENANT. Tenant
shall not make or cause to be made any alterations, additions or improvements to
the Leased Premises, or cause to be installed any fixtures, interior or exterior
lighting, plumbing equipment or mechanical equipment, without the prior written
consent of Landlord.
SECTION 3.5 FIXTURES AND EQUIPMENT. Subject to Section 3.4, Tenant may,
at its own expense, furnish and install such equipment and business and trade
fixtures in and on the Premises as may be necessary or desirable for Tenant's
business. Any such equipment and fixtures shall remain the personal property of
Tenant and may be removed by Tenant during or at the expiration of the term of
this Lease provided Tenant shall repair damage caused by such removal and
restore the Leased Premises to the condition existing prior to installation of
such equipment or fixtures, reasonable wear and tear excepted.
SECTION 3.6 LIENS AND OBLIGATIONS. Tenant agrees not to create or to
permit others to create any lien or obligations against Landlord or the Leased
Premises in making alterations, repairs or in installing materials, fixtures or
equipment, agrees to cause any claim for such lien to be released, and further
agrees to hold Landlord harmless from all claims and demands by any third party
in any manner connected with such alterations, repairs or installations or with
Tenant's occupancy for such purpose. Tenant shall comply with all laws and all
directions, rules and regulations of all governmental regulatory bodies or
officials having jurisdiction over such alterations, repairs or installations,
except that Tenant shall not be required to comply with any laws, regulations or
orders by governmental authority necessitating structural alterations, changes,
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repairs or additions, unless made necessary by the act or work performed by
Tenant, in which case Tenant shall so comply, at its own expense, after first
procuring the written consent of Landlord.
ARTICLE 4
CONDUCT OF BUSINESS
SECTION 4.1 BUSINESS USE. It is understood and agreed that the Leased
Premises shall be used and occupied by Tenant as an office, laboratory and light
manufacturing. Tenant shall not use the Leased Premises for any use not
identified as a permitted use by any zoning ordinance or other governmental
regulation relating to the Leased Premises or approved as a conditional use by
the governmental bodies having zoning authority. No use shall be permitted, or
acts done, which will cause a cancellation of any insurance policy covering the
Leased Premises. Tenant shall not sell, permit to be kept, used or sold in or
about the Leased Premises any article which may be prohibited by the standard
form of fire insurance policy. In the event Tenant's use of the Leased Premises
results in an increase in the cost of any insurance relating to the Landlord's
Property, Tenant shall pay such additional cost to Landlord upon demand. Tenant
shall comply with all applicable laws, ordinances, regulations and/or deed and
plat restrictions affecting the use and occupancy of the Leased Premises. Tenant
shall not commit, or permit to be committed, any waste or nuisance on the Leased
Premises.
SECTION 4.2 UTILITY CHARGES. Tenant shall be responsible for all
charges for heat, water, gas, sewer, electricity or any other utility used or
consumed in the Leased Premises including supplemental heating and charges for
operation of heating, ventilating and air conditioning equipment. If Tenant is
not the sole occupant of the Building and if utilities are not separately
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metered, utility costs shall be prorated on a reasonable basis. In no event
shall Landlord be liable for an interruption or failure in the supply of any
such utilities to the Leased Premises.
SECTION 4.3 ASSIGNMENT OR SUBLETTING. Tenant agrees not to sell,
assign, mortgage, pledge or in any manner transfer this Lease or any estate or
interest thereunder and not to sublet the Leased Premises or any part or parts
thereof without the prior written consent of Landlord in each instance which
consent shall not be unreasonably withheld. Consent by Landlord to one
assignment of this Lease or to one licensing or subletting of the Leased
Premises shall not be a waiver of Landlord's rights hereunder as to subsequent
assignment or subletting. Landlord's rights to assign this Lease are and shall
remain unqualified.
SECTION 4.4 RULES AND REGULATIONS. The rules and regulations appended
to this Lease as Exhibit D are hereby made a part of this Lease, and Tenant
agrees to comply with and observe the same. Tenant's failure to keep and observe
said rules and regulations shall constitute a breach of the terms of this Lease
in the manner as if the same were contained herein as covenants. Landlord
reserves the right from time to time to amend or supplement said rules and
regulations and to adopt and promulgate additional rules and regulations
applicable to Leased Premises and the Expansion Property, provided that such
additional rules and regulations do not unreasonably interfere with Tenant's use
and enjoyment of the Leased Premises. Notice of such additional rules and
regulations, and amendments and supplements, if any, shall be given to Tenant,
and Tenant agrees thereupon to comply with and observe all such rules and
regulations and amendments thereto and supplements thereof.
SECTION 4.5 ADA COMPLIANCE. In the event the Building, or any portion
thereof, shall be deemed a "public accommodation" under Title III of the
Americans With Disabilities Act ("ADA",
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42 U.S.C.Section 12181-12213, 47 U.S.C.Section 225,611) the responsibilities of
Landlord with Tenant with respect to compliance with provisions of Title III of
the ADA shall be as follows:
(a) Initial Construction. Landlord hereby certifies that the
common areas of the Building and all interior doorways
(including door hardware), passageways, aisles, and exits as
initially constructed, comply with the Accessibility
Guidelines under the ADA.
(b) Barrier Removal. Tenant shall be responsible for complying
with the "barrier removal" provisions of the ADA with respect
to the Leased Premises. In addition, to the extent such
barrier removal would require actions by Tenant, which actions
are subject to Landlord's approval, Landlord shall provide
such approval upon presentation by Tenant of evidence
reasonably satisfactory to Landlord that such barrier removal
is reasonable in scope and nature in order for Tenant to
fulfill its obligations under the ADA. To the extent any
modifications or alternations by Tenant within the Leased
Premises creates an obligation by Landlord to provide a "path
of travel," the cost of creating such path of travel shall be
paid entirely by Tenant.
(c) Auxiliary Aids and Services. Landlord shall be responsible for
providing any required "auxiliary aids and services" in the
common areas of the Building. Tenant shall be responsible for
providing any required auxiliary aids and services in the
Leased Premises.
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(d) Nondiscrimination. Tenant shall comply with all of the
nondiscrimination provisions of the ADA with respect to the
Leased Premises and its business operations.
SECTION 4.6 SURRENDER. On the last day of the term of this Lease,
including any option term, or upon the sooner termination thereof, Tenant shall
peaceably and quietly surrender the Leased Premises and all improvements thereon
in the same condition as at the commencement of this Lease, in good order,
condition and repair, fire and other unavoidable casualty, and reasonable wear
and tear excepted. Except as provided in Section 3.5, all alterations,
additions, improvements and fixtures which may be made or installed by either
Landlord or Tenant upon the Leased Premises shall remain the property of
Landlord and shall remain upon and be surrendered with the Leased Premises as a
part thereof, without disturbance, molestation or injury at the termination of
the term of this Lease, whether by the elapse of time or otherwise, all without
compensation or credit to Tenant. Any personal property not removed shall be
deemed abandoned and shall become the property of Landlord; provided, that the
Landlord shall have the option to effect said removals and Tenant shall pay
Landlord, on demand, the cost thereof, with interest at the rate of ten (10%)
percent per annum from the date of such removal by Landlord, or the prime
interest rate established by the Firstar Bank, N.A. or its successors or
assigns, whichever is higher.
If, prior to surrender of the premises or within twenty (20) days
thereafter, Landlord so directs by written notice to Tenant, Tenant shall repair
any damage occasioned by such removals or Tenant will pay to Landlord, on
demand, the cost thereof with interest from the date of completion of such
repairs by Landlord, at the rate specified in the immediately preceding
paragraph of this Lease.
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The delivery to Landlord at the place then fixed for the payment of
rent of the keys to the Leased Premises shall constitute surrender of the
premises by Tenant and acceptance of the keys by Landlord shall constitute
acceptance by Landlord of such surrender. Such acceptance by Landlord shall not
constitute a waiver of any rights to recover damages under terms of this Lease.
This method of surrender shall not be exclusive and shall be in addition to all
other methods of surrender.
Anything in this section to the contrary notwithstanding, at any
termination of this Lease, Landlord shall have a lien upon all of the property
of Tenant then located in or upon the Leased Premises to secure the payment of
any amounts due from Tenant to Landlord by reason of this Lease or to secure the
payment of damages, and Landlord may retain possession of such property until
payment in full of said amounts. Said lien shall not be defeated by placing such
property in storage. If Tenant has not redeemed said property within ninety (90)
days after the termination of said Lease, Landlord may sell such property at
public or private sale without further notice to Tenant, and shall apply in a
reasonable manner determined by Landlord the proceeds of sale to reduce the
amounts then owed from Tenant to Landlord.
ARTICLE 5
COMMON USE AREAS AND FACILITIES
SECTION 5.1 COMMON AREA. The Building is part of a planned
multi-building development including Landlord's Property and the Expansion
Property. This multi-building development is referred to herein as the
"Project." As used herein, "common area" shall include all of those portions of
the Building and Landlord's Property and portions of additional buildings and
areas located on the Expansion Property and designated by Landlord as part of
the Project which are
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designed for common use and benefit, exclusive of space designed for rental to
Tenants for commercial purposes as the same may exist from time to time.
Landlord reserves the right to construct additional buildings on the Expansion
Property as part of the Project and include the costs of maintaining the common
area of such buildings and property with the costs of the Building. Landlord
also reserves the right to develop such additional buildings on the Expansion
Property independent of the Building and not include the costs of maintaining
the common area of such buildings with the costs of maintaining the common area
of the Building. In the event Landlord does include the cost of maintaining the
common area of one or more other buildings with the cost of maintaining the
common area of the Building, the tenants of all buildings for which costs are
included shall contribute to the costs of such maintenance on the same basis.
The foregoing notwithstanding, reasonable and adequate access and parking shall
be provided for the Leased Premises and Tenant's use and enjoyment of the Leased
Premises shall not be materially adversely affected at all times.
SECTION 5.2 USE OF COMMON AREA. Landlord hereby grants to Tenant, its
employees, agents, customers and invitees, the nonexclusive right during the
term of this Lease to use the common area, as such may from time to time be
constituted, such use to be in common with Landlord and all tenants of the
Project from time to time, their employees, agents, customers and invitees,
except when the same are being repaired.
SECTION 5.3 OPERATION AND MAINTENANCE. The common area shall at all
times be subject to the exclusive control and management of Landlord and
Landlord shall manage, operate, repair and maintain the common area and its
facilities in a clean and sightly condition. The manner in
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which such area and facilities shall be maintained and the expenditures therefor
shall be at the Landlord's sole discretion.
SECTION 5.4 PREVENTING PUBLIC RIGHTS. If Landlord deems it necessary in
order to prevent the acquisition of special rights, Landlord may from time to
time close all or any portion of the common area or take such action as shall be
reasonably appropriate for that purpose.
SECTION 5.5 CHARGE FOR COMMON AREA AND FACILITIES. During the term of
this Lease Tenant shall pay to Landlord an annual charge which shall be Tenant's
pro rata share of the Landlord's actual cost of operating, repairing, and
maintaining the common area and its facilities which shall include, but is not
limited to parking areas, landscaped and vacant areas, area-ways, drives, walks,
curbs, corridors, stairwells, gardens, sanitary and storm sewers, signs, public
facilities (such as washrooms, drinking fountains and toilets), the cost of
operating and repairing common area lighting, heating, ventilating and air
conditioning systems, cleaning, painting, removing of snow, ice and debris,
policing and inspecting, insurance for hazards and other risks, maintenance,
including but not limited to such repair of paving, curbs, walkways, driveways,
landscaping and drainage and lighting facilities as may be necessary from time
to time to keep the same in good condition and repair, a reasonable allowance
for the depreciation of maintenance equipment, a reasonable allowance for
Landlord's overhead costs in conjunction with the foregoing, and all costs and
expenses other than those of a capital nature, but excluding legal fees
recovered by Tenant from Landlord in any litigation relating to this Lease.
Landlord shall provide Tenant with an itemized statement of such costs upon
request.
SECTION 5.6 FORMULA FOR PRO RATA SHARE. The annual charge for common
area maintenance and facilities shall be computed on the basis of twelve (12)
consecutive calendar
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months commencing and ending on dates designated by the Landlord and shall be
paid in advance in monthly installments on the first day of each calendar month
in an amount estimated by Landlord. Within sixty (60) days after the end of each
such twelve (12) month period, Landlord shall determine and furnish to Tenant a
computation of the actual amount charged for such period; and the amounts so
estimated and paid during such period shall be adjusted promptly (including
adjustments on a pro rata basis for any partial such period at either end of the
Lease term) by one party's paying to the other whatever amount is necessary to
effectuate such adjustment.
As of the commencement date, the Tenant's pro rata share of the
Landlord's actual costs defined in this Article shall be that portion which the
area in the Leased Premises bears to the total leasable area in the Building.
After substantial completion of such additional buildings in the Project, or the
Tenant's pro rata share of the Landlord's actual costs defined in this Article
shall be that portion which the area in the Leased Premises bears to the total
leasable area in all such buildings substantially completed.
SECTION 5.7 BASIS FOR CHANGES. Changes in any particular floor area
occurring during any calendar month shall be effective on the first day of the
next succeeding calendar month and the amounts of any floor area in effect for
the whole of any year shall be the average of the total amounts in effect on the
first day of each calendar month in such year.
ARTICLE 6
INSURANCE
SECTION 6.1 CASUALTY INSURANCE. Landlord shall at all times during the
term of this Lease keep all improvements which are now or hereafter located on
the Landlord's Property insured against loss or damage by fire and the extended
coverage hazards at full insurance value with loss
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payable to Landlord, Landlord's mortgagee and such other parties as Landlord may
designate, as their interests may appear.
Tenant agrees to reimburse Landlord for its pro rata share of the cost
of such insurance based upon that portion of the policy year during which this
Lease is in effect. As of the commencement date, the Tenant's pro rata share of
the Landlord's actual costs shall be that portion which the area in the Leased
Premises bears to the total leasable area in the Building. After substantial
completion of any such additional buildings in the Project, or the Tenant's pro
rata share of the Landlord's actual costs shall be that portion which the area
in the Leased Premises bears to the total leasable area in all such buildings
substantially completed. Each month Tenant shall pay to Landlord an amount equal
to one-twelfth (1/12) of its pro rata share of the estimated annual casualty
insurance premium. Upon Landlord's receipt of any premium notice, Tenant shall
upon demand make up any deficiency to the extent of its pro rata share.
SECTION 6.2 PUBLIC LIABILITY INSURANCE. Landlord shall at all times
during the term of this Lease keep in full force and effect a policy of public
liability and property damage insurance with respect to the Landlord's Property
and all business operated thereon, with limits of public liability not less than
Dollars for injury or death in any one occurrence, and property damage liability
insurance in the amount of Dollars. The policies shall name Landlord, Tenant and
Landlord's mortgagees and the lessor on the underlying ground lease as
co-insureds as their interests may appear. Upon written request by Tenant,
Landlord shall provide the Tenant with evidence of such insurance, including
identification of the Tenant as a co-insured. Landlord may from time to time
during the term of this Lease increase the above stated coverage in its
discretion. Tenant shall
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reimburse Landlord for its pro rata share of the cost of such insurance in the
same manner as provided in Section 6.1 regarding casualty insurance.
SECTION 6.3 TENANT'S CONTENTS. Tenant shall be responsible for
obtaining such insurance as it may deem advisable for all property located in
the Leased Premises. It is understood that the insurance carried by Landlord
does not cover the risk of loss or damage to Tenant's property. Tenant waives
any claim against Landlord and shall save Landlord harmless from any claim for
loss or damage to contents, merchandise, fixtures, equipment or work done by
Tenant regardless of the cause of any such damage or loss.
SECTION 6.4 INCREASE IN FIRE INSURANCE. Tenant agrees that it will not
keep or use, in or upon the Leased Premises any article which may be prohibited
by the standard form fire insurance policy. If Tenant's use or occupancy causes
any increase in premiums for fire or casualty insurance on the Landlord's
Property, or the Leased Premises, or any part thereof, above the rate of the
least hazardous type of occupancy legally permitted in the Leased Premises,
Tenant shall pay the additional premium on such insurance. No part of such
additional premium resulting from the use or occupancy of another tenant shall
be charged to Tenant under Sections 6.1 and/or 6.2 of this Lease. The Tenant
shall also pay in such event any additional premium on any rent insurance policy
that may be carried by the Landlord for its protection against rent loss through
fire or other casualty. Bills for such additional premiums shall be rendered by
Landlord to Tenant at such times as Landlord may elect, and shall be due and
payable by Tenant when rendered, and the amount thereof shall be deemed to be,
and be paid as, additional rent.
SECTION 6.5 HOLD HARMLESS. Landlord shall not be liable for any loss,
injury, death, or damage to persons or property which at any time may be
suffered or sustained by Tenant or by any
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person whosoever may at an time be using or occupying or visiting the Leased
Premises or be in, on, or about the same, whether such loss, injury, death, or
damage shall be caused by or in any way result from or arise out of any act,
omission, or negligence of Tenant or of any occupant, subtenant, visitor, or
user of any portion of the Leased Premises, or shall result from or be caused by
any other matter or thing whether of the same kind as or of a different kind
than the matters or things above set forth, and Tenant shall indemnify Landlord
against all claims, liability, loss or damage whatsoever on account of any such
loss, injury, death, or damage. Tenant shall indemnify Landlord against all
claims, liability, loss or damage arising by reason of the negligence or
misconduct of Tenant, its agents or employees. Tenant hereby waives all claims
against Landlord for damages to the building and improvements that are now on or
hereafter placed or built on the Landlord's Property and to the property of
Tenant in, on, or about the Landlord's Property, and for injuries to persons or
property in or about the Landlord's Property, from any cause arising at any
time. The preceding sentences shall not apply to loss, injury, death, or damage
arising by reason of the negligence or misconduct of Landlord, its agents, or
employees.
Tenant shall not be liable for any loss, injury, death, or damage to
persons or property which at any time may be suffered or sustained by third
parties, including Landlord's agents, employees or contractors, or whosoever may
at any time be using or occupy or visiting portions of the Landlord's Property
other than the Leased Premises, or be in, on, or about the same, to the extent
such loss, injury, death, or damage shall be caused by or in any way result from
or arise out of any act, omission, or negligence of Landlord, its agents,
employees or contractors, or of any occupant, tenant, visitor, or user of any
portion of the Landlord's Property, other than the Leased Premises, and Landlord
shall indemnify Tenant against all claims, liability, loss, or damage whatsoever
on
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account of any such loss, injury, death or damage. The preceding sentence shall
not apply to loss, injury, death or damage to the extent caused by the
negligence or misconduct of Tenant or its agents, employees or contractors.
SECTION 6.6 WAIVER OF SUBROGATION. Landlord and Tenant hereby release
each other from any and all liability or responsibility to the other (or to
anyone claiming through or under them by way of subrogation or otherwise) for
any loss or damage to property caused by fire or any of the extended coverage or
supplementary insurance contract casualties, even if such fire or other casualty
shall have been caused by the fault or negligence of the party or anyone for
whom such party may be responsible, provided, however, that this release shall
be applicable and in force and effect only in respect to loss or damage
occurring during such time as the releaser's policies shall contain a clause or
endorsement to the effect that any such release shall not adversely effect or
impair or prejudice the right of the releaser to recover thereunder. Landlord
and Tenant each agree that their policies will include such a clause or
endorsement so long as the same is obtainable and if not obtainable, shall so
advise the other in writing and such notice shall release both parties from the
obligation to obtain such a clause or endorsement.
ARTICLE 7
DESTRUCTION OF LEASED PREMISES
SECTION 7.1 DESTRUCTION OF LEASED PREMISES. If the Building is damaged
or partially destroyed by fire or other casualty to the extent of less than
one-quarter (1/4) of the then cost of replacement thereof above foundation, the
same shall be repaired as quickly as is practicable, by Landlord, except that
the obligation of Landlord to rebuild shall be limited to repairing or
rebuilding of Landlord's improvements. If the Building is so destroyed or
damaged to the extent of
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one-quarter (1/4) or more of the then replacement cost thereof, then Landlord
may elect not to repair or rebuild by giving notice in writing terminating this
Lease, in which event this Lease shall be terminated as of the date of such
notice.
SECTION 7.2 REBUILDING BY LANDLORD. If Landlord shall undertake to
restore or repair the Building, it shall initiate and pursue the necessary work
with all reasonable dispatch, in a manner consistent with sound construction
methods.
SECTION 7.3 ABATEMENT OF RENT UPON DESTRUCTION OF PREMISES. If such
damage or partial destruction renders the Leased Premises wholly untenantable,
the base rent shall abate until the Leased Premises have been restored and
rendered tenantable. If such damage or partial destruction renders the premises
untenantable only in part, the base rent shall abate proportionately as to the
portion of the Leased Premises rendered untenantable. Rent shall not abate under
this section if the damage or destruction is caused by the negligence or
misconduct of Tenant, its agents, employees, customers or invitees.
ARTICLE 8
EFFECT OF CONDEMNATION
SECTION 8.1 TOTAL CONDEMNATION. In the event that the Leased Premises
or such part of the Leased Premises as will render the remainder untenantable,
shall be appropriated or taken under the power of eminent domain by any public
or quasi-public authority, this Lease shall terminate and expire as of the date
of taking.
SECTION 8.2 PARTIAL CONDEMNATION. In the event of partial condemnation,
not rendering the remainder of the Leased Premises untenantable or significantly
impairing the operation of
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Tenant's business, this Lease shall remain in full force and effect, with the
exception that the base rent shall be reduced in proportion to the area of the
Leased Premises lost by condemnation.
SECTION 8.3 LANDLORD'S DAMAGES. In the event of any condemnation or
taking, whether whole or partial, the Tenant shall not be entitled to any part
of the award paid for such condemnation and Landlord is to receive the full
amount of such award, the Tenant hereby expressly waiving any rights or claim to
any part thereof.
SECTION 8.4 TENANT'S DAMAGES. Although all damages in the event of any
condemnation are to belong to the Landlord whether such damages are awarded as
compensation for diminution in value of the leasehold or to the fee of the
Leased Premises, Tenant shall have the right to claim and recover from the
condemning authority, but not from Landlord, such compensation as may be
separately awarded or recoverable by Tenant in Tenant's own right on account of
any and all damage to Tenant's business by reason of the condemnation, and for
or on account of any cost or loss to which Tenant might be put in removing
Tenant's property.
ARTICLE 9
REMEDIES
SECTION 9.1 EVENTS OF DEFAULT BY TENANT. Upon the failure by Tenant to
pay rent when due, Landlord may terminate this Lease or Tenant's right to use
and occupy the Leased Premises by ten (10) days' written notice to Tenant unless
Tenant within such ten (10) days pays all rent due. Upon the happening of any
one or more of the following events: (a) the levying of a writ of execution or
attachment on or against the property of Tenant; (b) the taking of any action
for the voluntary dissolution of Tenant; (c) the commencement of a mechanic's
lien foreclosure action against Tenant as a result of a mechanic's lien or claim
therefor against the land or Building of
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which the Leased Premises are a part; and (d) the failure of Tenant to perform
any other of the terms, provisions, and covenants of this Lease, Landlord may
terminate this Lease or Tenant's right to use and occupy the Leased Premises by
thirty (30) days' written notice to Tenant unless Tenant, within such thirty
(30) day period, cures the specified default or, if the default is of a
character which cannot be cured within thirty (30) days, the Tenant commences
and diligently pursues the cure of such default within thirty (30) days.
SECTION 9.2 RE-ENTRY BY LANDLORD. Upon such termination of the Lease or
termination of Tenant's right to use and occupy the Leased Premises as
aforesaid, or if Tenant at any time during the term of this Lease vacates the
premises or ceases operating said business in the entire or any appreciable part
of the Leased Premises, except for causes beyond its control, Landlord may
reenter the Leased Premises.
SECTION 9.3 RIGHT TO RELET. Should Landlord elect to reenter, as herein
provided, or should it take possession pursuant to legal proceedings or pursuant
to any notice provided for by law, it may either terminate this Lease or it may
from time to time without terminating this Lease, make such alterations and
repairs as may be necessary in order to relet the Leased Premises, and relet the
Leased Premises or any part thereof for such term or terms (which may be for a
term extending beyond the term of this Lease) and at such rental or rentals upon
such other terms and conditions as Landlord in its sole discretion may deem
advisable upon each such reletting. All rentals received by the Landlord from
such reletting shall be applied, first, to the payment of any indebtedness other
than rent due hereunder from Tenant to Landlord; second, to the payment of any
costs of such alterations and repairs; third, to the payment of rent due and
unpaid future rent as the same may become due and payable hereunder. If such
rentals received from such reletting during the month
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be less than that to be paid during that month by Tenant hereunder, Tenant shall
pay any such deficiency to Landlord. Such deficiency shall be calculated and
paid monthly. No such re-entry or taking possession of said premises by Landlord
shall be construed as an election in its part to terminate this Lease unless a
written notice of such intention be given to Tenant or unless the termination
thereof be decreed by a court of competent jurisdiction. Notwithstanding any
such reletting without termination, Landlord may at any time thereafter elect to
terminate this Lease for such previous breach. Should Landlord at any time
reenter or terminate this Lease for any breach, in addition to any other
remedies it may have, it may recover from Tenant all damages it may incur by
reason of such breach, including the cost of recovering the Leased Premises and
reasonable attorney's fees. All of which amounts shall be immediately due and
payable from Tenant to Landlord.
SECTION 9.4 PARTIES MAY REMEDY DEFAULTS. In the event of any breach
hereunder by either party, and in lieu of Landlord's terminating this Lease as
herein provided, Landlord or Tenant respectively may immediately or at any time
thereafter, after having given the other party the requisite notice to correct
the same and that time for such correction having elapsed, cure such breach for
the account and at the expense of the other party. If Landlord or Tenant at any
time, by reason of such breach, is compelled to pay, or elects to pay, any sum
of money or do any act which will require the payment of any sum of money, or
incurs any expense, including reasonable attorney's fees, in instituting or
prosecuting any action or proceeding to enforce such party's rights hereunder,
the sum or sums so paid or incurred by such party, if paid or incurred by
Landlord, shall be deemed to be additional rent hereunder and shall be due from
Tenant to Landlord on the first day of the month following the payment of such
respective sums, and if paid or incurred by Tenant,
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<PAGE>
shall be due and payable by Landlord on demand without interest. This option
given to the parties is intended for their protection and its existence shall
not release the parties from the obligation to perform the terms and covenants
herein provided to be performed by the respective parties or deprive Landlord of
any legal rights which it may have by reason of any default of Tenant.
SECTION 9.5 LANDLORD'S REMEDIES: LIQUIDATED DAMAGES. In the event that
at any time, whether before or after the commencement of the term hereof, a
bankruptcy petition shall be filed by Tenant or against Tenant and Tenant shall
thereafter be adjudicated a bankrupt, or such petition shall be approved by the
court, in any court or pursuant to any statute either of the United States or of
any State, whether in bankruptcy, insolvency, for reorganization under Chapter
XI or XIII of the Bankruptcy Act or under any other provisions of the Bankruptcy
Act, or under the provisions of any law of like impact, for the appointment of a
receiver or trustee of Tenant or for the property of Tenant, or if Tenant shall
make an assignment of Tenant's property for the benefit of its creditors, or if
proceedings are instituted in a court of competent jurisdiction for the
reorganization, liquidation or involuntary dissolution of Tenant, then
immediately upon the happening of any such event, and without any entry or other
act by Landlord, this Lease and the term and estate hereby granted (whether or
not the term shall therefore have commenced) shall expire, terminate and come to
an end in the same manner and with the same force and effect as if the date of
such occurrence were the date hereinbefore fixed for the expiration of the term
hereof. In the event of the termination of the term hereof by the happening of
any such event, Landlord shall forthwith upon such termination, and any other
provisions of this Lease to the contrary notwithstanding, become entitled to
recover as and for liquidated damages caused by such breach of the provisions of
this Lease an amount equal to the difference between the then cash value of the
rent reserved hereunder for the
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<PAGE>
unexpired portion of the demised term and the then cash rental value of the
Leased Premises for such unexpired portion of the term hereby demised unless the
statute which governs or shall govern the proceeding in which such damages are
to be provided limits or shall be entitled to prove as and for liquidated
damages an amount equal to that allowed by or under such statute. The provision
of this paragraph shall be without prejudice to Landlord's right to prove in
full damages for rent accrued prior to the termination of this Lease but not
paid. This provision of this Lease shall be without prejudice of any rights
given Landlord by any pertinent statute to prove any amounts allowed thereby. In
making such computation, the then cash rental value of the Leased Premises shall
be deemed prima facie to be the rent realized upon any reletting, if such
reletting can be accomplished by Landlord within a reasonable time after such a
termination of this Lease.
SECTION 9.6 EXPENSES OF LANDLORD. Upon the occurrence of an event of
default, notwithstanding anything herein to the contrary and whether or not
Landlord terminates this Lease, Tenant shall promptly, upon request, reimburse
Landlord for all costs and expenses reasonably incurred in enforcing this Lease,
including reasonable attorneys' fees.
SECTION 9.7 WAIVER OF REDEMPTION. Tenant hereby expressly waives any
and all rights of redemption granted by or under any present or future laws in
the event of Tenant's being evicted or dispossessed for any cause, or in the
event of Landlord's obtaining possession of the Leased Premises, by reason for
the violation by Tenant of any of the covenants or conditions of this Lease, or
otherwise.
SECTION 9.8 DEFAULTS OF LANDLORD. Should Landlord be in default under
the terms of this Lease, Landlord shall cure such default within thirty (30)
days after written notice of such default
25
<PAGE>
from Tenant, or in the event such default is of such a character as to require
more than thirty (30) days to cure, Landlord shall use due diligence to cure
such default.
SECTION 9.9 RIGHTS CUMULATIVE. All rights and remedies of Landlord and
Tenant herein enumerated shall be cumulative and none shall exclude any other
right or remedy allowed by Law, and said rights and remedies may be exercised
and enforced concurrently and whenever and as often as occasion therefor arises.
ARTICLE 10
MISCELLANEOUS
SECTION 10.1 SUBORDINATION. At Landlord's option, this Lease shall be
subordinated to any existing mortgages covering the Leased Premises, any
extension or renewal thereof, or to any new mortgages which may be placed
thereon from time to time, provided, however, anything to the contrary contained
herein notwithstanding, every such mortgage shall contain a provision that the
mortgagee shall recognize the validity of this Lease in the event of foreclosure
of the Landlord's interest so long as Tenant shall not be in default under the
terms of this Lease. Tenant shall execute whatever instruments may be required
to effect such subordination.
SECTION 10.2 SALE OF LANDLORD'S INTEREST. Prior to a transfer by
Landlord of its interest in the Premises and this Lease, the following shall
occur:
(a) First Right. In the event Landlord determines to dispose of
its interest in the Premises and this Lease, Landlord shall
notify Tenant in writing of its intention and shall offer to
sell the Premises to Tenant at the price and on terms stated
in such notice. Tenant shall have sixty (60) days in which to
accept or decline such offer. If
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<PAGE>
Tenant fails to accept Landlord's offer in writing within such
period, Landlord may then sell the Premises, subject to (b)
below, to a third party.
(b) Right of First Refusal. In the event Landlord shall receive
from a third party at any time during the term of this Lease,
or any extension thereof, a bona fide offer to purchase the
Building or Landlord's Property, which offer Landlord desires
to accept, Landlord shall promptly give to Tenant notice
thereof accompanied by an affidavit setting out the full terms
of such offer and Landlord's desire to sell for the price and
on the terms offered. Tenant shall have the right of first
refusal to purchase the property described in such offer at
such price and on such terms. Tenant may exercise said right
of first refusal by giving Landlord written notice of Tenant's
election to do so within sixty (60) days of Tenant's receipt
of said notice and affidavit. If Tenant shall not so elect
within said period of sixty (60) days, Landlord may then sell
the property described in the offer, subject to this Lease,
but excluding this right of first refusal, to such third party
on the terms and conditions and for the price set forth in the
said notice and affidavit to Tenant. Landlord shall complete
such sale within 180 days of the date of the notice and
affidavit or the terms of this paragraph (b) shall apply again
to such sale.
(c) Scope and Limitations. The rights of Tenant in this Section
10.2 shall be cumulative and consecutive. Tenant's first right
and right of first refusal shall only apply to a separate and
individual transfer of the Building to an unrelated third
party not affiliated or in anyway benefiting the University of
Wisconsin. Tenant's right of first refusal and first right
shall not apply to a transfer necessary to maintain
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<PAGE>
Landlord's tax exempt status, or as part of a transfer of all
or substantially all of Landlord's interest in all land in the
University Research Park. However, any subsequent transfer not
to such an entity or not for a similar purpose shall be
subject to Tenant's rights.
(d) Effect of Sale. Upon any sale, transfer or conveyances,
Landlord shall cease to be liable under any covenant,
condition or obligation imposed upon it by this Lease, or any
of the terms and provisions thereof; provided, however, that
any such sale, transfer or conveyance not to Tenant shall be
subject to this Lease and that all of the Landlord's covenants
and obligations contained herein shall be binding upon the
subsequent owner or owners thereof; and provided further that
such transferee from Landlord shall in writing assume the
obligations of Landlord hereunder.
SECTION 10.3 OFFSET STATEMENT. Within ten (10) days after request
therefor by Landlord, or in the event that upon any sale, assignment or
hypothecation of the Leased Premises and/or all or any portion(s) of the
Landlord's Property by Landlord an offset statement shall be required by Tenant;
Tenant agrees to deliver in recordable form a certificate to any proposed
mortgagee or purchaser, or to Landlord, certifying (if such be the case) that
this Lease is in full force and effect and that there are no defenses or offsets
thereto, or stating those claimed by Tenant.
SECTION 10.4 ATTORNMENT. Tenant shall, in the event any proceedings are
brought for the foreclosure of, or in the event of exercise of the power or sale
under any mortgage made by the Landlord covering the Leased Premises, attorn to
the purchaser upon any such foreclosure or sale and recognize such purchaser as
the Landlord under this Lease.
28
<PAGE>
SECTION 10.5 RECORDING. Tenant shall not record this Lease without the
written consent of Landlord; however, upon the request of either party hereto
the other party shall join in the execution of memorandum or so called "short
form" of this Lease for the purpose of recordation. Said memorandum or short
form of this Lease shall describe the parties, the Leased Premises and the term
of this Lease and shall incorporate this Lease by reference.
SECTION 10.6 EXCAVATIONS. In case any excavation shall be made for
buildings or improvements or for any other purpose upon the land adjacent to or
near the Leased Premises, Tenant will afford to Landlord, or the person or
persons, firms or corporations causing or making such excavation, license to
enter upon the Leased Premises for the purpose of doing such work as Landlord or
such person or persons, firms or corporations shall deem to be necessary to
preserve the walls or structures of the building from injury, and to protect the
building by proper securing of foundations. Insofar as Landlord may have control
over the same, all such work shall be done in a manner as will not materially
interfere with the operation of Tenant's business in the Leased Premises.
SECTION 10.7 ACCESS TO PREMISES. . Landlord reserves for itself and the
landlord under the underlying ground lease, the right to enter upon the Leased
Premises at all reasonable hours, upon reasonable advance notice, for the
purpose of inspecting the same, or of making repairs, additions or alterations
to the building in which the Leased Premises are located, to exhibit the Leased
Premises to prospective tenants, purchasers or others, to display during the
last ninety (90) days of the term, without hindrance or molestation by Tenant,
"For Rent" or similar signs on the exterior of the Leased Premises. The exercise
by Landlord of any of its rights under this provision shall not be deemed an
eviction or disturbance of Tenant's use and possession of the Leased Premises.
29
<PAGE>
SECTION 10.8 QUIET ENJOYMENT. If and so long as Tenant pays the rent
reserved by this Lease and performs and observes all of the covenants and
provisions hereof, Tenant shall quietly enjoy the Leased Premises, subject,
however, to the terms of this Lease.
SECTION 10.9 NOTICES. Any notice required or permitted under this Lease
shall be deemed sufficiently given or served if sent by certified mail to Tenant
at the address of the Leased Premises, and to Landlord at its office or such
other place as it may designate in writing, and either party may by like written
notice at any time and from time to time designate a different address to which
notices shall subsequently be sent. Notices given in accordance with these
provisions shall be deemed received when mailed.
SECTION 10.10 HOLDING OVER. In the event Tenant remains in possession
of the Leased Premises after the expiration of this Lease and without the
execution of a new Lease, it shall be deemed to be occupying said premises as a
Tenant from month-to-month, subject to all conditions, provisions and
obligations of this Lease insofar as the same are applicable to a month-to-month
tenancy. Nothing in this section shall operate to preclude Landlord from
removing Tenant from the Leased Premises upon the expiration of this Lease.
SECTION 10.11 CONSENTS BY LANDLORD. Whenever under this Lease provision
is made for Tenant securing the written consent or approval of Landlord, such
consent or approval will not be unreasonably withheld.
SECTION 10.12 SUCCESSORS AND ASSIGNS. The terms, covenants and
conditions hereof shall be binding upon and inure to the successors in interest
and assigns of the parties hereto.
SECTION 10.13 GOVERNMENTAL REGULATIONS. Tenant shall, at Tenant's sole
cost and expense, comply with all of the requirements of all city, county,
municipal, state, federal and other
30
<PAGE>
applicable governmental authorities, now in force, or which may hereafter be in
force, pertaining to signs, installations, repairs and business operations in
the Leased Premises and shall faithfully observe all statutes now in force or
which may hereafter be in force.
SECTION 10.14 CERTAIN EXPENSES OF LANDLORD. Any out-of-pocket expenses
reasonably incurred by Landlord for purposes of considering or acting upon any
request for consent or waiver under, or modification of, any of the provisions
of this Lease, including reasonable attorney's fees, shall be promptly
reimbursed by Tenant upon Landlord's request.
SECTION 10.15 FORCE MAJEURE. In the event that either Landlord or
Tenant shall be delayed or hindered in or prevented from the performance of any
act required hereunder by reason of strikes, lock outs, labor disputes,
inability to procure materials, failure of power, restrictive governmental laws
or regulations, riots, insurrection, war or other reason of a like nature not
attributable to the negligence or fault of the party delayed in performing work
or doing acts required under the terms of this Lease, then performance of such
act shall be excused for the period of the unavoidable delay and the period for
the performance of any such act shall be extended for an equivalent period.
Provided, however, that this provision shall not operate to excuse Tenant from
the timely payment of rent and other payments required by the terms of this
Lease.
SECTION 10.16 GENERAL. Nothing contained in this Lease shall be deemed
or construed by the parties hereto or by any third party to create the
relationship of principal and agent or of partnership or of joint venture or of
any association between Landlord and Tenant, it being expressly understood and
agreed that neither the method of computation of rent nor any other provisions
contained in this Lease nor any acts of the parties hereto shall be deemed to
create any relationship between Landlord and Tenant other than the relationship
of landlord and tenant. No
31
<PAGE>
waiver of any default of Tenant or Landlord hereunder shall be implied from any
omission by Landlord or Tenant any action on account of such default if such
default persists or is repeated, and no express waiver shall affect any default
other than the default specified in the express waiver and that only for the
time and to the extent therein stated. One or more waivers of any covenant, term
or condition of this Lease by Landlord or Tenant shall not be construed as a
waiver of a subsequent breach of the same covenant, term or conditions. The
consent or approval by Landlord to or of any act by Tenant requiring the
Landlord's consent or approval shall not be deemed to waive or render
unnecessary Landlord's consent or approval to or of any subsequent similar act
by Tenant. The invalidity or unenforceability of any provision hereof shall not
affect or impair any provision. The plural sense where there is more than one
tenant and to either corporations, associations, partnership or individuals,
male or females, shall in all instances be assumed as though in each case fully
expressed. The laws of the State of Wisconsin shall govern the validity,
performance and enforcement of this Lease. The submission of this Lease for
examination does not constitute a reservation of or option for the Leased
Premises and this Lease becomes effective as a Lease only upon execution and
delivery thereof by Landlord and by Tenant. The headings contained herein are
for convenience only and do not define, limit or construe the contents of the
provisions hereof. All negotiations, representations and understandings between
the parties are incorporated herein and may be modified or altered only by
agreement in writing between the parties.
SECTION 10.17 EFFECT OF GROUND LEASE. Tenant acknowledges that Landlord
is presently leasing Landlord's Property under a ground lease having a term
equal to or greater than the term of this Lease. Tenant further acknowledges
that all of its rights under this Lease are specifically subordinate to the
rights of the landlord named in said ground lease and its successors and
assigns.
32
<PAGE>
ARTICLE 11
ATTACHMENTS
SECTION 11.1 ATTACHMENTS. The following are attached hereto and made a
part hereof with the same force and effect as if set forth in full herein:
Exhibit A: Legal Description of Landlord's Property.
Exhibit A-1: Legal Description of Expansion Property
Exhibit B: Location of Building
Exhibit C: Rent Schedule
Exhibit D: Rules and Regulations.
LANDLORD: TENANT:
UNIVERSITY RESEARCH PARK THIRD WAVE TECHNOLOGIES, INC.
FACILITIES CORP.
By: By:
------------------------------------- -------------------------------
Mark D. Bugher,
Assistant Secretary/Treasurer Title:
----------------------------
Date: Dated:
----------------------------------- ----------------------------
33
<PAGE>
EXHIBIT A
LEGAL DESCRIPTION OF LANDLORD'S PROPERTY
Lots 32, 33 and 34, University Research Park University of Wisconsin-Madison
Second Addition recorded in Volume 57-39B of Plats Pages 146-150 Dane County
Registry located in the NW 1/4 of Section 30, T7N, R9E, City of Madison, Dane
County, Wisconsin, (Containing 498,733 square feet)
<PAGE>
EXHIBIT A-1
LEGAL DESCRIPTION OF EXPANSION PROPERTY
Up to 5 acres of Parcel E as shown on Attachment A.
<PAGE>
EXHIBIT B
LOCATION
Please see attached.
<PAGE>
EXHIBIT C
RENT SCHEDULE
Please see attached.
<PAGE>
EXHIBIT D
RULES AND REGULATIONS
None adopted.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21
<SEQUENCE>4
<FILENAME>c67864ex21.txt
<DESCRIPTION>LIST OF SUBSIDIAIRIES
<TEXT>
<PAGE>
* Exhibit 21
List of Subsidiaries:
- ---------------------
Third Wave Agbio, Inc.
Third Wave Limited
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23.1
<SEQUENCE>5
<FILENAME>c67864ex23-1.txt
<DESCRIPTION>CONSENT OF INDEPENDENT ACCOUNTANTS
<TEXT>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-57664) pertaining to the 1995 Incentive Stock Option Plan, 1997
Incentive Stock Option Plan, 1997 Nonqualified Stock Option Plan, 1998 Incentive
Stock Option Plan, 1999 Incentive Stock Option Plan, 1999 Nonqualified Stock
Option Plan, 2000 Stock Plan and 2000 Employee Stock Purchase Plan of our report
dated January 18, 2002, with respect to the consolidated financial statements
and schedule of Third Wave Technologies, Inc. included in the Annual Report
(Form 10-K) for the year ended December 31, 2001.
/s/ Ernst & Young LLP
Milwaukee, Wisconsin
March 27, 2002
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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