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<SEC-DOCUMENT>0000950137-03-001878.txt : 20030331
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ACCESSION NUMBER: 0000950137-03-001878
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 7
CONFORMED PERIOD OF REPORT: 20021231
FILED AS OF DATE: 20030331
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: 03628753
BUSINESS ADDRESS:
STREET 1: 502 S ROSA RD
CITY: MADISON
STATE: WI
ZIP: 53719-1256
BUSINESS PHONE: 608273
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<DESCRIPTION>ANNUAL REPORT
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<PAGE>
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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, 2002,
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)
<Table>
<S> <C>
DELAWARE 39-1791034
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
502 S. ROSA ROAD, MADISON, WI 53719
(Address of principal executive offices) (Zip Code)
</Table>
(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 the 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.
Indicate by check whether the Registrant is an accelerated filer (as defined
in Exchange Act Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
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) as of the close of
business on March 27, 2003, was $87,623,715, based on the last sale price on
that date as reported by The Nasdaq Stock Market.
As of the close of business on March 27, 2003, the registrant had 39,566,774
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 10,
2003.
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<PAGE>
THIRD WAVE TECHNOLOGIES
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2002
TABLE OF CONTENTS
<Table>
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PAGE
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PART I
Item 1. Business.................................................... 2
Item 2. Properties.................................................. 21
Item 3. Legal Proceedings........................................... 21
Item 4. Submission of Matters to a Vote of Security Holders......... 22
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 22
Item 6. Selected Financial Data..................................... 23
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 24
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 30
Item 8. Financial Statements and Supplementary Data................. 31
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures................................... 57
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 57
Item 11. Executive Compensation...................................... 57
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.................. 57
Item 13. Certain Relationships and Related Transactions.............. 57
Item 14. Controls and Procedures..................................... 57
PART IV
Item 15. Exhibits, Financial Statements Schedules and Reports on Form
8-K......................................................... 57
Signatures............................................................. 58
Certifications......................................................... 60
</Table>
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.
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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(TM) PowerScan(TM) and Invader(TM). 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 genetic analysis products
company. We believe that our proprietary Invader platform is easier to use, more
accurate and cost-effective, and enables higher testing throughput than
conventional methods based on polymerase chain reaction, or PCR. These and other
advantages conferred by our platform are enabling us to continue to successfully
serve select research customers, while focusing the majority of our commercial
effort on the rapidly growing, high-value clinical molecular diagnostic market.
Third Wave was founded as a Wisconsin corporation in 1993. In 2000, the
Company was reincorporated as a Delaware corporation. In February of 2001, the
Company successfully completed its initial public offering of shares of its
common stock. In December of 2001, the Company completed its two-stage
acquisition of Third Wave Agbio, Inc. The Company's principal executive offices
are located at 502 South Rosa Road, Madison, Wisconsin 53719.
INDUSTRY BACKGROUND
Genetic information is a valuable, fundamental source for understanding the
biological function of any organism. The most notable example of the value of
genetic information is our increasing understanding of how human genetic
variation is associated with disease predisposition and progression, and drug
response, among other medically important functions.
Research aimed at unlocking this vital information and speeding its
application to patient care is continuing at a rapid pace. The sequencing of the
human genome will be completed officially in April 2003. This international
effort has led to the discovery of more than 2.8 million single-base genetic
variations called single nucleotide polymorphisms, or SNPs, the most common form
of human genetic variation.
Only a fraction of these SNPs are medically important, however. Large-scale
disease association studies like the Japanese government's SNP Initiative, the
largest such study in the world, have discovered important associations among
these millions of SNPs with predisposition to a number of common diseases. Some
of these associations have been validated and form the foundations of the
molecular diagnostic tests now being used routinely in patient care.
As genomic research continues to identify and validate these associations,
health care professionals and their patients increasingly will use genetic, or
molecular diagnostic, tests for a wide variety of diagnostic and prognostic
uses. These uses include predictive genetic testing that forms the basis of
individually tailored therapies, screening and diagnosis of inherited disorders,
diagnosis and monitoring of infectious diseases, and the prevention of adverse
drug reactions.
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Molecular diagnostic testing is accomplished through genotyping,
determining whether a variation or series of variations are present in an
individual, or gene expression analysis, determining the level of activity of a
specific gene by quantitating the messenger RNA, or mRNA, it is producing.
We develop and market products for both genotyping and gene expression
analysis that are used in genomic research and clinical molecular diagnostics.
We market these products in significant and rapidly growing markets.
LIMITATIONS OF CONVENTIONAL METHODS AND THE THIRD WAVE SOLUTION
Conventional methods for analyzing genetic variations, almost all of which
are based on hybridization in combination with PCR, have significant
limitations. These limitations include the inability to directly analyze genomic
samples, inaccuracy, and the difficulty and high cost of use.
Our proprietary Invader platform is highly sensitive and can detect and
quantify genetic variations directly from unamplified genomic DNA, RNA and
infectious agents. Its advantages include:
- High accuracy. The Invader platform has been found in independent,
published studies to be between 99.6 percent and 100 percent accurate in
identifying genomic variations in routine use. Additional independent
studies have shown the Invader platform to be 99.9 percent accurate, with
five-fold fewer false positive results than PCR and no false negative
results in those studies compared to 29 with PCR.
- Direct detection from genomic samples. The Invader platform is
sufficiently precise to analyze genomic samples directly, eliminating the
requirement for PCR amplification and its inherently lower accuracy, and
making it well suited to molecular diagnostic use at virtually any scale.
- Ease of Use. The Invader platform is easy to automate, allowing our
customers to eliminate many of the steps in genetic testing that have
traditionally required human intervention, further reducing the
possibility for error.
- Lower Cost per Test Result. The elimination of the requirement for PCR
amplification and the concomitant requirements for specially trained
personnel and specialized, expensive equipment and facilities reduces the
customer's cost per test result.
THIRD WAVE STRATEGY
Our strategy for continuing to capture the growing demand for the
development and clinical application of molecular diagnostic tests and for
building a breakout, growth-oriented company is to:
- Continue building a strong base of recurring revenue from the sale of
high margin, clinical molecular diagnostic products. This recurring
revenue base is being built on increased sales to existing customers and
the expansion of our clinical customer base.
- Leverage the competitive advantages of our Invader platform and its broad
product menu in higher value market opportunities, directly and through
select partnerships that enable greater market penetration and expanded
product distribution in the research, clinical, and plant and animal
application markets.
- Further accelerate customer exposure to and market penetration of the
Invader platform by providing easier, more flexible access to the
platform.
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 accuracy and specificity, and ease of use.
Second, our technology relies on linear amplification of the signal generated by
the
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Invader process rather than exponential amplification of the target sample that
results 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
Primary probe includes a short portion, known as a flap, that 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 thousand 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 platform 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.
INVADER PRODUCT APPLICATIONS
Clinical reference laboratories, health care providers, pharmaceutical and
biotechnology companies, academic research centers and government initiatives
are utilizing our products in many aspects of disease discovery, clinical
trials, and patient diagnosis and treatment applications including those
described below.
Clinical Product Applications
- Clinical Diagnosis. Clinical reference laboratories and health care
providers can use our products to diagnose a number of diseases.
- 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 avoid 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
4
<PAGE>
therapeutic monitoring could improve medical outcomes by reducing the
time required to identify the most appropriate types and levels of
treatment.
Research 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 molecular
diagnostic.
- 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.
MANUFACTURING
We currently manufacture our products at our facility, located in Madison,
Wisconsin. We have developed and implemented a modular manufacturing process
that allows easy expansion. Each manufacturing module consists of the following
coordinated stations and computer support:
- proprietary software program for automated product design;
- product tracking system;
- automated probe synthesis and processing system;
- automated probe purification station;
- automated probe quantification and dilution and fill station; and
- automated product quality control system.
We have attempted to design the manufacturing processes and area to
optimize material flow and personnel movement with all the manufacturing and
quality control operations.
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 facility 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.
Commencing in December 2002, we have outsourced some of our oligonucleotide
probe manufacturing needs. We will work with our vendors of these probes to
optimize the manufacturing process, monitor quality control and ensure
compliance with our product specifications.
MARKETING AND SALES
We currently market and sell our products through a combination of direct
sales personnel, who are focused primarily on the clinical market, and through
collaborative relationships. Our clinical sales force is currently comprised of
nine individuals, and we plan to increase this sales force as market demand
requires.
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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.
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 2002, the majority of our product sales were to international end
customers, primarily in Japan. We intend to continue to pursue domestic and
international market opportunities through a combination of distribution
arrangements and collaborative relationships. In 2002, we established Third
Wave-Japan LLC, a wholly-owned subsidiary, for the purpose of working more
directly with our customers, collaborators, and distributors in the Japanese
market. We have one direct employee based in Japan. We may also establish direct
international sales organizations in other selected major markets.
For a description of our industry segment and our product revenues by
geographic area, see Note 14 of the Notes to the Consolidated Financial
Statements included under Item 8 of this Form 10-K.
The Company's business is generally not considered seasonal.
COLLABORATIVE RELATIONSHIPS
Our business involves collaborations with clinical laboratory companies,
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 for the supply, distribution
and development of our products. The following is a summary of our principal
collaborative relationships.
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.
Under the agreement, BML paid us $3.0 million as reimbursement for past
development expenses. In calendar year 2002, BML paid us $1.7 million in
development program funding and product purchase. 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.
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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 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 our
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.
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 2002, Third Wave and Aclara announced that they have entered
into license and supply agreements under which Aclara will have nonexclusive
rights to incorporate our proprietary Invader technology and Cleavase enzyme
with Aclara's eTag(TM) technology platform for multiplexed gene expression
applications for the research market. In addition to the nonexclusive license
grant, we have entered into a supply agreement with Aclara under which we will
supply Aclara with our proprietary Cleavase enzyme. Finally, the parties have
entered into an agreement which will provide Aclara access to our Invader
Creator software product for the design of Invader assays consistent with the
terms of the license agreement.
In exchange for the license, Aclara has made up front payments and will
make royalty payments based on sales of the Aclara product. In addition, Aclara
will purchase Cleavase enzyme from us. The license, supply and Invader Creator
software access agreements supercede the research, development and collaboration
agreement between the parties which was announced and executed in October 2001.
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.
In October 2001, we entered a development and commercialization agreement
with ACLARA BioSciences, Inc. ("Aclara") 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.
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 27 issued patents and exclusively licensed two
issued patents in the United States, and own five issued patents in Australia
and one issued patent in Canada. We have received notices of allowance for four
additional United States patent applications and two Australian applications. We
have 67 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. In addition, we have licensed rights to patents and/or
patent applications covering genetic variations associated with certain diseases
for which we have designed clinical diagnostic products. 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.
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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 minimum patent term. There can be no
guarantee that such procedures will prevent the loss of a potential patent term.
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.
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 September 2002, we filed a patent infringement suit against Eragen
Biosciences, Inc. The complaint in this suit alleges that Eragen Biosciences,
Inc. infringes certain claims of two Company patents. Eragen has asserted a
counterclaim seeking a declaratory judgment that it has not infringed any valid
claim of the Company patents at issue.
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
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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
Inc., Nuvelo, Inc., Illumina, Inc., Luminex Corporation, Molecular Devices
Corporation, Nanogen, Inc., Applera Corporation, Pyrosequencing Incorporated,
Qiagen, N.V., Sequenom, Inc. and Bayer Diagnostics.
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 Laboratories, Bayer
Corporation, Becton, Dickinson and Company, BioRad Laboratories, Inc., Chiron
Corporation, Dade Behring Inc., Digene Corp., Hoffman-La Roche Ltd., Gen-Probe,
Luminex Corporation, Beckman Coulter, Inc., Sequenom, Inc., Nanogen, Applied
Biosystems, and Innogenetics, Inc.
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 2003.
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.
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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 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 facility is 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.
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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, 2002, we employed 168 persons, of whom 31 hold doctorate
degrees and 116 hold other advanced degrees. Approximately 59 employees are
engaged in research and development, 28 in business development, sales and
marketing, 44 in operations and manufacturing and 37 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 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:
James E. Dahlberg, Ph.D., Frederick Sanger Professor of Biomolecular
Chemistry, University of Wisconsin-Madison. Chair of the Scientific
Advisory Board.
Lloyd M. Smith, Ph.D., Kellett Professor of Chemistry at the
University of Wisconsin-Madison.
John Todd, Ph.D., Professor of Medical Genetics, Cambridge Institute
for Medical Research, Cambridge University, Cambridge, UK.
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.
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.
AVAILABLE INFORMATION
The Company maintains an Internet website at http://www.twt.com that
includes a hypertext link to a website maintained by a third-party where the
Company's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K and all amendments to those reports are available without
charge as soon as reasonably practicable following the time that they are filed
with or furnished to the Securities and Exchange Commission. The information on
our website is not a part of this Form 10-K.
RISK FACTORS
RISKS RELATED TO OUR BUSINESS
WE HAD AN ACCUMULATED DEFICIT OF $125.7 MILLION AT DECEMBER 31, 2002, 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 $25.6 million in 2000, $36.8 million in 2001, and
$40.9 million in 2002. 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
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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;
- 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.
Research and development expenses for the years ended December 31, 2002, 2001
and 2000 were $13.9 million, $16.2 million and $7.3 million, respectively. 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, 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 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.
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WE HAVE LIMITED MANUFACTURING EXPERIENCE AND MAY NEED TO MODIFY, 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, modify existing facilities and processes,
or outsource product component manufacturing. Facilities expansion and
development, process improvements, and outsourcing manufacturing 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 incorporating new processes and
vendor supply issues associated with component outsourcing. If we fail to meet
our manufacturing 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 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 nine 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 MAY 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. We may need to raise additional capital. We
expect our capital and operating expenses to be significant and continue in the
calendar year 2003 and possibly beyond. We have expended significant resources
and expect to continue to expend significant resources to improve production
processes and in our research and product development and commercialization
activities. 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;
- the costs we incur in enforcing and defending our patent claims and other
intellectual property rights; and
- the timing of purchases of additional capital.
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
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- 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 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 the entities for which
these consultants provide services 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
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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.
THE EARLY TERMINATION OF ANY OF OUR LICENSES, OUR RESEARCH OR STRATEGIC
COLLABORATIONS, OR CUSTOMER SUPPLY AGREEMENTS COULD SERIOUSLY HARM OUR
BUSINESS AND FINANCIAL CONDITION.
Certain of our strategic, research collaboration, customer supply
agreements may be terminated with little or no notice. In particular, the supply
of products to Japanese customers may be terminated upon specified notice at any
time. These customers will likely account for a significant portion of our
revenues for 2003. Accordingly, early termination of these relationships and
supply agreements 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 a 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. 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 RELY ON A SINGLE CUSTOMER FOR A MAJORITY OF OUR BUSINESS AND THE LOSS OF
THAT CUSTOMER, OR A REDUCTION OR CANCELLATION OF A SIGNIFICANT ORDER, COULD
HARM OUR FINANCIAL CONDITION.
Approximately $16.6 million, or 51%, of our revenue in fiscal year 2002 was
derived from sales to a major Japanese research institute, for use by several
end-users. Sales to that research institute accounted for 76% and 67% of our
revenue in fiscal years 2001 and 2000, respectively. If we lose this customer,
or if it significantly reduces purchases of our product, our financial condition
could be 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
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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.
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. In September 2002, we filed a
patent infringement suit against Eragen Biosciences, Inc. alleging that
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certain activities and products of the defendant infringes upon US Patents
issued to the Company. Eragen has asserted a counterclaim seeking a declaratory
judgment that it has not infringed any valid claims of the Company patents at
issue.
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 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.
17
<PAGE>
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
commercialization activity and to further our research and development efforts,
we will need to hire, train and retain additional sales, marketing, research,
scientific, and technical 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;
- 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.
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<PAGE>
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.
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 addition, 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. The EPA could, upon review of our use
of these microorganisms, 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.
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.
19
<PAGE>
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
- 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, 2003, our directors, executive officers and principal
stockholders beneficially own, in the aggregate, 31.23% 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.
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<PAGE>
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 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 primary facility consists of space for research and development,
manufacturing, product support operations, marketing and corporate headquarters
and administration. Our facility is located in Madison, Wisconsin. Our primary
facility is leased and consists of the following:
<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.
</Table>
In addition to our primary facility, we have a lease on a facility of
33,000 square feet located in Middleton, Wisconsin. This lease is due to expire
in October of 2003 and the Company has no intention to extend the lease or
secure additional facility space.
Under the terms of the existing leases, we pay rent of approximately
$153,000 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. With the
exception of the matters identified below, there are no material legal
proceedings pending. From time to time, we may be involved in litigation related
to claims arising out of our operations in the usual course of business.
21
<PAGE>
On September 6, 2002 the Company filed a patent infringement action against
Eragen Biosciences, Inc. in the United States District Court for the Western
District of Wisconsin. The complaint alleges that the defendant is infringing
certain claims of the Company's U.S. Patent No. 6,348,314 entitled "Invasive
cleavage of nucleic acids" and U.S. Patent No. 6,090,543 entitled "Cleavage of
nucleic acids" based on Eragen's development and sale of products known as
"Gene-Code" or similar technologies or products. The defendants answered the
complaint on October 8, 2002 and asserted a counterclaim seeking declaratory
judgment that Eragen has not infringed any valid claims of the company patents
at issue. The trial of this case is currently scheduled for September 8, 2003.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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 2002 and 2001 the high and low sales prices per
share, based on closing prices, for our common stock as reported on the NASDAQ
Stock Market.
<Table>
<Caption>
FISCAL YEAR ENDED
DECEMBER 31, 2002 HIGH LOW
- ----------------- ----- -----
<S> <C> <C>
First Quarter............................................... $7.65 $3.09
Second Quarter.............................................. $4.31 $2.13
Third Quarter............................................... $2.35 $1.35
Fourth Quarter.............................................. $3.11 $1.32
</Table>
As of March 27, 2003, approximately 387 shareholders of record held our
common stock.
<Table>
<Caption>
FISCAL YEAR ENDED
DECEMBER 31, 2001 HIGH LOW
- ----------------- ------ -----
<S> <C> <C>
First Quarter............................................... $11.00 $5.38
Second Quarter.............................................. $11.00 $5.10
Third Quarter............................................... $10.19 $5.01
Fourth Quarter.............................................. $ 8.85 $6.26
</Table>
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.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain selected financial data that is
derived from the Company's audited financial statements. All the information
should be read in conjunction with the Company's audited financial statements
and notes thereto and with Management's Discussion and Analysis of Financial
Condition and Results of Operations, which are included elsewhere in this
filing. The Company's audited statements of operations for the years ended
December 31, 2002, 2001, and 2000 and the audited balance sheets as of December
31, 2002 and 2001 are included elsewhere in this filing. The corresponding
selected financial data set forth below should be read in conjunction with such
audited financial statements.
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1998 1999 2000 2001 2002
------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................. $ 4,382 $ 2,574 $ 11,417 $ 34,092 $ 32,355
Operating expenses:
Cost of goods sold..................... 1,223 2,290 11,518 32,746 21,320
Research and development............... 3,669 4,315 7,337 16,179 13,934
Selling and marketing.................. 1,712 2,408 4,983 9,200 9,578
General and administrative............. 3,357 3,725 7,408 14,521 11,984
Restructuring and other charges........ -- -- -- -- 11,087
Impairment of goodwill & other
intangible assets................... -- -- 5,789 -- 4,810
Merger costs........................... -- 116 833 -- --
------- -------- -------- -------- --------
Total operating expenses............ 9,961 12,854 37,868 72,646 72,713
------- -------- -------- -------- --------
Loss from operations..................... (5,579) (10,280) (26,451) (38,554) (40,358)
Other income (expense), net.............. 147 566 877 1,762 (506)
------- -------- -------- -------- --------
Net loss................................. (5,432) (9,714) (25,574) (36,792) (40,864)
Deemed dividend upon issuance of
convertible preferred stock............ -- -- (17,023) -- --
------- -------- -------- -------- --------
Net loss attributable to common
shareholders........................... $(5,432) $ (9,714) $(42,597) $(36,792) $(40,864)
======= ======== ======== ======== ========
Basic and diluted net loss per share..... $ (0.43) $ (0.68) $ (2.83) $ (1.03) $ (1.04)
Shares used in computing basic and
diluted net loss per share............. 12,772 14,183 15,078 35,714 39,457
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,
-----------------------------------------------------
1998 1999 2000 2001 2002
-------- -------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments.......................... $ 5,614 $ 12,919 $ 47,179 $ 73,299 $ 60,315
Working capital........................ 4,099 13,774 29,122 64,834 43,518
Total assets........................... 8,283 20,289 83,193 131,615 89,223
Long-term obligations, net of current
portion.............................. 96 420 12,095 6,694 13
Accumulated deficit.................... (12,860) (22,575) (48,149) (84,852) (125,715)
Total shareholders' equity............. 5,776 17,199 47,039 104,753 65,287
</Table>
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<PAGE>
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 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, Inc. is a leading genetic analysis products
company. The Company believes that its proprietary Invader technology platform
is easier to use, more accurate and cost-effective, and enables higher testing
throughput than conventional methods based on polymerase chain reaction, or PCR.
These and other advantages conferred by Third Wave's technology platform are
enabling the Company to continue to successfully serve select research
customers, while focusing the majority of its commercial effort on the rapidly
growing, high-value clinical molecular diagnostic market.
More than 100 clinical molecular diagnostic laboratory customers are using
Third Wave's products in routine patient care. The Company's research customer
base includes the most notable genome research projects in the world, including
the Japanese government's SNP Initiative and that government's share of the
International Haplotype Map Project. Other customers include pharmaceutical and
biotechnology companies, academic research centers and major health care
providers.
Third Wave markets a growing number of products including analyte-specific
reagents (ASRs) for routine clinical use. These ASRs allow certified clinical
reference laboratories to create assays to screen for cystic fibrosis and other
inherited disorders, and to test for the Factor V Leiden and a host of other
mutations associated with predisposition to cardiovascular and other diseases.
The Company also markets a series of Invader RNA Assays for measuring expression
levels of an extensive number of genes with proven clinical relevance.
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
product development.
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 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.
RESTRUCTURING AND OTHER CHARGES.
The restructuring and other charges resulting from the restructuring plan
in the third quarter of 2002 has been recorded in accordance with EITF Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)"
and Staff Accounting Bulletin No. 100, "Restructuring and Impairment Charges."
The restructuring
24
<PAGE>
charge is comprised primarily of costs to consolidate facilities, impairment
charges for abandoned leasehold improvements and equipment to be sold or
abandoned, prepayment penalties related mainly to capital lease obligations on
equipment to be sold or abandoned, and other costs related to the restructuring.
In calculating the cost to consolidate the facilities, we estimated the future
lease and operating costs to be paid until the leases are terminated and the
amount, if any, of sublease receipts for each location. This required us to
estimate the timing and costs of each lease to be terminated, the amount of
operating costs, and the timing and rate at which we might be able to sublease
the site. To form our estimates for these costs, we performed an assessment of
the affected facilities and considered the current market conditions for each
site. Estimates were also used in our calculation of the estimated realizable
value on equipment that is being held for sale. These estimates were formed
based on recent history of sales of similar equipment and market conditions. Our
assumptions on the lease termination payments, operating costs until terminated,
the offsetting sublease receipts and estimated realizable value of equipment
held for sale may turn out to be incorrect and our actual cost may be materially
different from our estimates.
LONG-LIVED ASSETS -- IMPAIRMENT
Equipment, leasehold improvements and amortizable identifiable 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, we estimate the fair
market value of such assets and record an adjustment if fair value less costs to
sell is lower than carrying value.
DERIVATIVE INSTRUMENTS
We sell products in a number of countries throughout the world. During 2002
and 2001, we sold certain products with the resulting accounts receivable
denominated in Japanese Yen. Simultaneous with such sales and purchase order
commitments, 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 contracts outstanding at December 31, 2002 amounting to
$0.6 million. 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.
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, 2002, our
inventory reserves were $3.1 million, or 65% of our $4.7 million total gross
inventories.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2002 AND 2001
Revenues. Revenues for the year ended December 31, 2002 of $32.4 million
represented a decrease of $1.7 million as compared to revenues of $34.1 million
for the year ended December 31, 2001.
Product revenues decreased to $28.9 million for the year ended December 31,
2002, from $30.4 million for the year ended December 31, 2001. Product sales
during the year were lower than prior year due to the conclusion of the initial
phase of the Japanese Millennium Project.
25
<PAGE>
Development revenues decreased to $1.6 million for the year ended December
31, 2002, from $3.1 million for the year ended December 31, 2001. The decrease
is primarily due to a scheduled decrease in funding amounts per our development
and commercialization agreement with BML, Inc (BML). Under the agreement, we
develop 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.
License and royalty revenue of $1.5 million was from the license and supply
agreement with Aclara Biosciences, Inc. ("Aclara"). In October 2002, we and
Aclara announced that we have entered into license and supply agreements under
which Aclara will have nonexclusive rights to incorporate our proprietary
Invader technology and Cleavase enzyme with Aclara's eTag(TM) technology
platform for multiplexed gene expression applications for the research market.
In exchange for the license, Aclara has made up front payments and will make
royalty payments to the Company based on sales of the Aclara product. We also
recognized revenue of $2.8 million for product shipped during 2002.
Significant Customer. We generated $16.6 million, or 51%, of our revenues
from sales to a major Japanese research institute for use by several end-users
during the year ended December 31, 2002. As of December 31, 2002, $0.7 million
of our accounts receivable were attributable to this customer. There is no
guarantee that this significant customer will continue to purchase our products
at current levels.
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 ended December 31, 2002, cost of goods sold
decreased to $21.3 million compared to $32.7 million for 2001. The decrease was
due to lower volume and lower variable costs achieved by improved operational
efficiencies.
Research and Development Expenses. Our research activities are focused on
moving our technology into broader markets. Our development activities are
focused on new products to expand our molecular diagnostics menu. 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, 2002 were $13.9 million, compared to $16.2 million for
2001. The decrease in research and development expenses was primarily
attributable to decreased material costs for assay and product development.
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, commissions, office support and related costs,
and travel and entertainment. Selling and marketing expenses for the year ended
December 31, 2002 were $9.6 million, an increase of $0.4 million, as compared to
$9.2 million for 2001. We attribute the change to a combination of a reduction
in the supply of complimentary product, and the hiring of additional personnel
and increased costs associated with establishing and commercializing our
business units.
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 decreased to $12.0 million in
the twelve months ended December 31, 2002, from $14.5 million for 2001. The
decrease is due to the fixed asset impairment of $3.0 million that occurred in
the year ending December 31, 2001.
Restructuring and Other Charges. During the third quarter of 2002, we
announced a restructuring plan designed to simplify our product development and
manufacturing operations, increase gross margin, reduce operating expenses and
move the Company more aggressively towards profitability. During the year ending
December 31, 2002, we recorded a restructuring charge of $11.1 million
associated primarily with our consolidation of facilities and the write down of
certain equipment and leasehold improvements. Some of the equipment and
leasehold improvements were sold in an auction on November 14, 2002.
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The restructuring charge included $2.5 million of expense related to the
consolidation of facilities, $0.5 million for the prepayment penalties mainly on
capital leases related to assets to be sold, and a net charge of $7.2 million
for the write down of equipment and leasehold improvements. The equipment and
leaseholds that were not sold in the auction were written down to their fair
value less costs to sell.
Impairment Loss. During the third quarter of 2002, we completed the annual
impairment tests required by Statement of Financial Accounting Standards (SFAS)
No. 142 for goodwill and intangible assets with indefinite lives, using the
assistance of an independent valuation expert.
For the goodwill analysis, the fair value of the Agbio reporting unit was
compared to the carrying value of the net assets of the reporting unit. The fair
value of the reporting unit was determined using a combination of discounted
cash flows method and other common valuation methodologies. For indefinite lived
intangible assets, the fair values of these assets were compared to their
carrying values. Based on the analyses, it was determined that goodwill and
indefinite lived intangible assets were impaired and consequently an impairment
charge of $4.8 million for the impairment of goodwill and other intangible
assets was recorded during the year ended December 31, 2002.
Interest Income. Interest income for the year ended December 31, 2002 was
$1.0 million, compared to $3.3 million for 2001. This decrease was primarily due
to lower interest rates and decreased cash and cash equivalents compared to the
year ending December 31, 2001.
Interest Expense. Interest expense for the year ended December 31, 2002
was $1.1 million compared to $1.3 million in 2001. The decrease in interest
expense was due to lower interest rates on new debt and decreasing debt
balances.
Other Items. As previously announced, part of our operational
consolidation plan included a reduction in the Company work force. A plan for
work force reductions was implemented in the June 2002 through August 2002
timeframe. A majority of the workforce reductions occurred in the oligo
synthesis production and operations support functions and the remainder spread
throughout the organization. As of December 31, 2002, we employed 168 persons.
New Accounting Pronouncements: During 2002, the Financial Accounting
Standards Board issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities," and SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure." SFAS No. 143 will become effective
for the Company on January 1, 2003, and adoption of this statement is not
expected to have a material impact on the Company's consolidated financial
statements. The provisions of SFAS No. 144, which was adopted on January 1,
2002, were applied by the Company in the determination of certain components of
the restructuring charge described in Note 8. SFAS No. 146 will be effective for
exit or disposal activities initiated after December 31, 2002. Adoption of this
statement is not expected to have a material impact on the Company's
consolidated financial statements. Effective December 31, 2002, the Company made
the disclosures required under SFAS No. 148.
YEARS ENDED DECEMBER 31, 2001 AND 2000
Revenues. Revenues for the year ended December 31, 2001, of $34.1 million
represented 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.
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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
was 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 $32.7 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 $16.2 million, compared to $7.3 million for the year ended December
31, 2000. The increase in research and development expenses of $8.9 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, 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-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
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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 $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.
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. As of December 31, 2002, we had cash and cash equivalents and
short-term investments of $60.3 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 $74.8 million.
Net cash used in operations for the year ended December 31, 2002 was $14.0
million, compared with $30.3 million in 2001 and $0.6 million in 2000. The cash
used in operations was primarily to fund our operating losses as well as working
capital requirements.
Net cash used in investing activities for the year ended December 31, 2002
was $8.7 million, compared to $4.4 million in 2001 and $34.3 million in 2000.
Excluding the impact of purchases, sales and maturities of short-term
investments, cash provided by investing activities for the year ended December
31, 2002 was $2.1 million, compared to cash usage of $16.0 million in 2001 and
cash usage of $25.3 million in 2000. Investing activities included capital
expenditures