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ACCESSION NUMBER: 0000950137-04-001886
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 10
CONFORMED PERIOD OF REPORT: 20031231
FILED AS OF DATE: 20040315
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: 04670455
BUSINESS ADDRESS:
STREET 1: 502 S ROSA RD
CITY: MADISON
STATE: WI
ZIP: 53719-1256
BUSINESS PHONE: 608273
</SEC-HEADER>
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<TYPE>10-K
<SEQUENCE>1
<FILENAME>c83528e10vk.txt
<DESCRIPTION>ANNUAL REPORT
<TEXT>
<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003,
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 000-31745
----------------------
THIRD WAVE TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 39-1791034
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
502 S. ROSA ROAD, MADISON, WI 53719
(Address of principal executive offices) (Zip Code)
(888) 898-2357
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE EXCHANGE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE EXCHANGE ACT:
COMMON STOCK, $.001 PAR VALUE PER SHARE
PREFERRED STOCK PURCHASE RIGHTS
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of 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. Yes [ ] No [ X ]
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 12, 2004, was $131,427,749, based on the last sale price on
that date as reported by The Nasdaq Stock Market.
As of the close of business on March 12, 2004, the registrant had
40,131,911 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 22,
2004.
<PAGE>
THIRD WAVE TECHNOLOGIES
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2003
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I
Item 1. Business.............................................. 3
Item 2. Properties............................................ 21
Item 3. Legal Proceedings..................................... 21
Item 4. Submission of Matters to a Vote of Security Holders... 21
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters................................... 21
Item 6. Selected Financial Data............................... 23
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 23
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk.................................................. 29
Item 8. Financial Statements and Supplementary Data........... 30
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures.................. 31
Item 9A. Controls and Procedures............................... 31
PART III
Item 10. Directors and Executive Officers of the Registrant.... 31
Item 11. Executive Compensation................................ 31
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters............ 31
Item 13. Certain Relationships and Related Transactions........ 31
Item 14. Principal Accountant Fees and Services................ 31
PART IV
Item 15. Exhibits, Financial Statements Schedules and Reports
on Form 8-K........................................... 32
Signatures.......................................................... 33
</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.
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. and its subsidiaries, unless the
context requires otherwise.
2
<PAGE>
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
OVERVIEW
Third Wave Technologies, Inc. ("Third Wave", "We", or the "Company")
develops and markets molecular diagnostics for a variety of DNA/RNA analysis
applications, providing physicians and researchers with superior tools to
diagnose and treat disease. Third Wave's products are based on the Company's
proprietary Invader(R) technology platform. The Invader(R) technology is a
novel, chemistry-based platform that is easier to use, more accurate and
cost-effective, and enables higher throughput as compared to other methods of
DNA/RNA analysis. Third Wave was incorporated in Delaware in 2000.
The area of greatest application for Third Wave's Invader(R) platform is
molecular diagnostics. Within this area, there are a number of diverse segments
including genetics, pharmacogenetics, chromosomal analysis, infectious disease,
and women's health/HPV for which this technology is particularly well-suited. In
addition to these primary areas, the utility of the Invader(R) platform extends
beyond molecular diagnostics to include research, agriculture/biotechnology
("Agbio") and other applications.
Based on the Invader(R) platform, Third Wave has developed, and plans to
continue to develop, a line of high value, molecular diagnostic products for the
following applications:
Clinical Applications:
The Invader(R) platform is highly versatile and can be used for a number of
clinical applications:
- Genetic Testing - Detecting genetic variation associated with inherited
conditions such as cystic fibrosis, hemostasis and cardiovascular risk
factors.
- Pharmacogenetics - Detecting genetic variation that may influence drug
efficacy and adverse drug reactions.
- Chromosomal Analysis - Prenatal detection of genetic variation
associated with chromosomal disorders and oncology applications
including cancer detection and disease monitoring.
- Infectious Disease - Confirming diagnosis, quantifying viral load and
genotyping to optimize therapy for infectious diseases such as
hepatitis B and C.
- Women's Health - Detecting human papilloma virus (HPV) strains
contributing to cervical cancer.
Other Applications:
The Invader(R) platform is a universal detection and analysis system for
DNA and RNA. In addition to our suite of clinical products, there are a number
of other Invader(R) applications including:
- Research - Tools and assays to facilitate research in existing and
emerging applications (SNP genotyping, gene expression and miRNA
activity).
- AgBio - Multiple DNA and RNA analysis tools for use in the field of
agriculture.
- Other Applications - Potential application in areas including food and
water testing, bioterrorism and blood screening.
THIRD WAVE MISSION AND CORPORATE STRATEGY
Third Wave's mission is to be a leading developer of superior DNA/RNA
analysis products for the diagnosis and treatment of disease. The Company seeks
to achieve this mission by converting its proprietary Invader(R) molecular
chemistry-based technology into valuable molecular diagnostic and research
products.
To achieve our mission, we are implementing the following strategies in new
and emerging molecular diagnostic markets:
- Building and maintaining strong relationships with key clinical
laboratories.
- Developing a competitive product pipeline to support our leadership
position.
- Leveraging a fast-response product development capability to capture
opportunities.
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<PAGE>
- Partnering where necessary to optimize our opportunities in molecular
diagnostics and in markets where the Invader(R) technology can create
unique competitive advantages.
INDUSTRY BACKGROUND
Prior to the late 1990s, diagnostic testing methods had limited accuracy
and served as guides to analysis and detection rather than stand-alone,
definitive tests. This has changed with the emergence of nucleic acid testing,
or NAT.
Nucleic acid testing, also referred to as molecular diagnostic testing, is
the direct analysis of DNA or RNA. NAT 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.
The accuracy and sensitivity advantages of this testing method allow for the
direct detection of DNA/RNA, hereditary diseases, and pathogens, rather than
monitoring antigens or antibodies. While NAT was initially used primarily for
HIV and blood screening, NAT is rapidly displacing conventional testing methods
as the industry standard for a variety of applications. For example, the need to
perform accurate/high-throughput blood screening and tests for infectious
diseases/viral loads has resulted in NAT replacing immunotechnology (immuno
assays) as the solution of choice among many clinical labs.
Today, ongoing scientific research efforts have helped determine that a
majority of human diseases possess genetic components. The monumental mapping
and sequencing of the entire human genome, discoveries from the Human Genome
Project and subsequent research initiatives are all currently being translated
into precise clinical applications to diagnose and treat disease. As a result,
hundreds of molecular diagnostic tests based on NAT technology are currently
being used to identify variations in DNA sequence to detect disease or highlight
genetic predispositions. Furthermore, researchers' continuing progress in
understanding disease and definitively linking particular diseases to an
individual's DNA and RNA have caused key medical thought-leaders to introduce
new screening guidelines that incorporate NAT.
The availability of the human genome sequence, combined with an
ever-growing list of variations in DNA sequence and advances in our
understanding of the cause and progression of disease, will likely result in the
emergence of additional NAT applications. As a result, Third Wave believes that
a significant increase in demand for gene-based tests will occur in the coming
years.
LIMITATIONS OF CONVENTIONAL METHODS AND THE THIRD WAVE SOLUTION
Presently, a limited number of technology platforms are capable of performing
NAT including the following :
<TABLE>
<CAPTION>
NAME PLATFORM STATUS
- ------------------ ----------------- -----------------------------------
<S> <C> <C>
PCR Target Amplification Most commonly used technology
TMA/NASBA Target Amplification Market leader for blood screening
Hybrid Capture Signal Amplification Currently used primarily for HPV testing
Ligation Signal Amplification Primarily used in Cystic Fibrosis testing
INVADER(R) Signal Amplification Rapid adoption across multiple applications
</TABLE>
Today, almost all methods for analyzing genetic variations are based on
hybridization in combination with polymerase chain reaction (PCR).
We believe the Invader(R) platform offers significant competitive advantages
compared to the other forms of NAT, including:
- Exceptional Accuracy - The Invader(R) platform has demonstrated a level
of accuracy exceeding 99.9%, surpassing the accuracy of other genetic
analysis methods in multiple, independent trials.
- Ease of Use - Invader(R) products are extremely easy to use for
technicians at any skill level. Assays are performed at a single
temperature and require no laborious washing steps or gels. Assay setup
requires a simple addition of the reagents to the sample and can be
completed with minimal hands-on time to set up. Following setup, the
Invader(R) platform is hands-off. During a four-to-five hour incubation
at a single temperature, technicians are free to perform additional
duties.
4
<PAGE>
- Flexibility/Scalability - The Invader(R) platform is highly scalable,
allowing any CLIA-high complexity lab, regardless of size, to utilize
the technology.
- Throughput - Invader(R) offers customers a higher throughput potential
than other methods, providing cost and time-saving benefits.
PRODUCTS AND PRODUCT CANDIDATES
Third Wave has applied the Company's proprietary Invader(R) technology to a
number of molecular diagnostic, research and other applications. The Company
also has a pipeline of new products currently under development, which it
anticipates releasing at various times in 2004.
Molecular Diagnostics
PRODUCTS ON THE MARKET
- Cystic Fibrosis Screen (cystic fibrosis detection)
- Connexin 26 (congenital hearing loss)
- Factor V Leiden (mutations associated with risk of increased
coagulation)
- Factor II (mutations associated with risk of increased coagulation)
- Factor VII (mutations associated with risk of increased coagulation)
- MTHFR (metabolic enzyme associated with cardiovascular disease)
- ApoE (mutations associated with cardiovascular disease)
- PAI-1 (mutations associated with risk of increased coagulation)
- PL A1-A2 (mutations associated with risk of increased coagulation)
- Tay-Sachs Disease (Tay-Sachs detection)
- Glycoprotein IIIa (mutations associated with increased blood clotting
and associated coronary diseases)
PRODUCTS IN DEVELOPMENT
- HCV Genotyping (strain determination and therapy optimization for
Hepatitis C)
- HCV Viral Load (quantification of virus multiplication for prognosis
and therapy optimization)
- HBV Genotyping (strain determination and therapy optimization for
Hepatitis B)
- Prenatal Aneuploidy Assay (detection of fetal chromosomal
abnormalities)
- HPV Detection Assays (detection of human papilloma virus, the most
common cause of cervical cancer)
- Various CYP450 Products (identification of drug response variability to
minimize adverse drug reactions and optimize therapy)
- Various genetic predisposition products (Tay-Sachs, RET, GALT)
Research Applications
PRODUCTS ON THE MARKET
- SNP Genotyping (aid in the understanding and analysis of human disease
and drug response)
- Gene Expression (determine how genes regulate or are regulated in
certain biological processes)
- miRNA (examine micro RNAs, or miRNAs, and their role in the regulation
of gene expression, control of developmental timing, and mediation of
chromosomal functions)
- 2D6 gene variation (associated with variations in drug response)
PRODUCTS IN DEVELOPMENT
- Additional miRNA products
- Various expression products
AgBio
5
<PAGE>
PRODUCTS ON THE MARKET
Third Wave has developed a number of ready-to-use DNA and RNA analysis
products for the following applications in the field of agriculture:
- Mutation detection
- SNP scoring
- High-throughput genotyping
- Marker-assisted selection
- Transgene detection and quantification
- Copy-number determination
- Genetic disease testing
- Gene expression analysis
Other Product Areas
We believe the Invader(R) technology has demonstrated potential in a
number of additional applications outside of Third Wave's specific areas of
focus. The Company has strategically chosen to approach each of these
opportunistically instead of initiating active programs. These areas of
additional application include:
- Food and water safety
- Bioterrorism
- Wellness
- Blood screening
- Environmental health and safety
TECHNOLOGY
The Invader(R) Platform
The Invader(R) platform is a simple, scalable and extremely accurate
DNA/RNA analysis solution designed to enable any size CLIA-high-complexity
laboratory to provide patient results more quickly, increase throughput, and
lower costs.
The Invader(R) platform is a simple isothermal DNA probe-based system for
the detection of specific genomic sequences or variations. Invader(R) technology
relies on DNA or RNA detection and quantitation rather than DNA amplification.
This technology can accurately detect single base changes, insertions, or
deletions in DNA and RNA molecules. Our proprietary Invader(R) platform can be
differentiated from conventional genetic analysis methods in at least two
significant ways. First, our technology uses a patented enzyme, known as the
Cleavase(R) enzyme, that only recognizes and cuts the specific structure formed
during the Invader(R) process. The benefits of using this structure-specific
enzyme versus sequence-specific conventional technologies are enhanced accuracy
and specificity, and ease of use. Second, our technology produces a linear
amplification of the signal generated by the Invader(R) process rather than an
exponential amplification of the target sample as generated with PCR. This
linear signal amplification allows researchers to easily quantify target
concentration and reduces the effects of sample contamination that may result
from the exponential amplification of a target.
MANUFACTURING
We currently manufacture products at the Company's facility in Madison,
Wisconsin. We also outsource the manufacture of select components of assays
intended for research applications. We work closely with the vendor of these
probes to optimize the manufacturing process, monitor quality control and ensure
compliance with our product specifications.
Third Wave has sufficient capacity to meet our customer requirements,
scalable manufacturing systems, and possesses the expertise to manufacture the
specialized components of the Company's assays.
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<PAGE>
Our molecular diagnostics products are produced in environmentally
controlled rooms and are isolated from the rest of the facility. We have
registered the facility used for manufacturing our clinical products with the
U.S. Food and Drug Administration, or FDA, as a Device Manufacturer and we
believe we are in compliance with the FDA's quality system requirements or QSRs.
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. 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.
To date, Third Wave has more than 110 clinical testing customers in the
United States. We serve most major clinical laboratories performing tests within
the molecular testing market. Outside the United States, Third Wave has
established a strong and direct presence in Japan.
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 2003, 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 two employees based in Japan. We may also establish direct
international sales organizations in other select major markets.
For a description of our industry segment and our product revenues by
geographic area, see Note 12 of the Notes to the Consolidated Financial
Statements included under Item 8 of this Form 10-K.
The Company's business is generally not 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, Third Wave entered into a development and
commercialization agreement with BML, Inc., one of the two largest clinical
reference laboratories in Japan. Through this agreement, the companies are
collaborating to develop and commercialize molecular diagnostics for infectious
disease, genetic testing and pharmacogenomics.
Under the agreement, Third Wave develops mutually agreed upon clinical
assays, and BML reimburses development expenses and purchases final product. In
2000, BML paid Third Wave $3.0 million as reimbursement for past development
expenses. The agreement further provided for minimum payments by BML of $2.0
million for calendar year 2001 and $1.0 million for each of 2002 and 2003. In
2003, BML paid Third Wave $1.5 million in development program funding and
product purchase. The agreement provides for an additional payment to Third Wave
in 2004 of $1.5 million for continued product and development.
As provided by the terms of the agreement, Third Wave develops and supplies
BML with clinical assays at preferential prices. Third Wave has certain rights
to commercialize the developed assays worldwide; however, such commercialization
rights are limited in Japan depending on BML's intellectual property surrounding
the specific assay. Further, BML has the right to negotiate the terms and
conditions under which BML would have the right to distribute the developed
assays in Japan.
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<PAGE>
The term of the agreement is until December 31, 2007. The agreement may be
terminated by BML on six months written notice. Additionally, either party may
terminate the agreement on 60 days notice in the event the other party
materially breaches the agreement. In December 2003, Third Wave and BML
announced an extension of this agreement for a minimum of one year.
ACLARA BIOSCIENCES, INC.
In October 2002, Third Wave entered into license and supply agreements with
ACLARA BioSciences, Inc. ("Aclara") under which Aclara has nonexclusive rights
to incorporate our proprietary Invader(R) technology and Cleavase(R) 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 entered into a supply agreement with Aclara under which we supply
Aclara with our proprietary Cleavase(R) enzyme. Finally, the parties have
entered into an agreement that provides Aclara access to our Invader(R) Creator
software product for the design of Invader(R) assays consistent with the terms
of the license agreement.
In exchange for the license, Aclara made up front payments and will make
royalty payments based on sales of the Aclara product. The license, supply and
Invader Creator software access agreements supercede the research, development
and collaboration agreement between the parties that 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 PCR. We believe
that this integration of complementary technologies provides a level of
throughput and multiplexing that is unprecedented among DNA and RNA detection or
quantitation products.
UNIVERSITY OF TOKYO
In 2003 Third Wave entered into a collaboration with the University of
Tokyo to support the genetic research efforts directed by Dr. Yusuke Nakamura,
group director of the Research Group for Personalized Medicine at RIKEN and
director of the Genome Center at the University of Tokyo. Dr. Nakamura is widely
regarded as one of the world's leading genetic researchers and he is the leader
of the Japanese portion of the International HapMap Project as well as other
large-scale genotyping projects.
The HapMap Project is a worldwide initiative intended to create a map of
common patterns of single nucleotide polymorphisms, or SNPs. SNPs are
single-based variations scattered throughout the human genome and believed to be
the cause of most genetic variations from hair color to disease susceptibility.
Researchers believe that mapping SNPs will assist in the understanding and
analysis of human disease and drug response.
In addition to its ongoing support of the HapMap Project, Third Wave will
also support Dr. Nakamura for other research projects primarily related to his
new multi-year BioBank Japan project. As the Project Leader of this initiative,
Dr. Nakamura has agreed to use the Invader(R) platform to genotype approximately
300,000 Japanese individuals over the next five years.
Third Wave supplied Dr. Nakamura with more than 200,000 SNP assays to
support his genetic research in 2003.
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 31 issued patents and hold exclusive licenses
to two issued patents in the United States, own five issued patents in
Australia and one issued patent in Canada. We have received notices of allowance
for six additional United States patent applications. We have 69 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.
Our 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
8
<PAGE>
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.
The Company's issued United States patents will expire between 2012 and
2020. 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, including solicitation of our employees and customers. We
cannot be certain that these agreements will not be breached or invalidated. In
addition, we cannot assure 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 alleged that EraGen Biosciences, Inc. was
infringing certain claims of two Company patents. In March 2003, the court
issued a Markman ruling confirming Third Wave's interpretation of the patent
claims at issue, resulting in a settlement between the two companies. As part of
the EraGen settlement, Third Wave agreed to dismiss the lawsuit and to issue a
covenant not to sue under certain Third Wave patents. In exchange, EraGen agreed
to cease and desist from the development and sale of its Gene Code products 1.0,
1.2 and 1.3 and agreed not to use technologies employing invasive cleavage.
In the future, we may become involved in lawsuits in which third parties
file claims asserting that our technologies or products infringe on their
intellectual property. We cannot predict whether third parties will assert such
claims against us or against the licensors of technologies licensed to us, or
whether those claims will harm our business. We may be forced to defend against
such claims, whether they are with or without any merit or whether they are
resolved in favor of or against us or our licensors, and may face costly
litigation and diversion of management's attention and resources. As a result of
such disputes, we may have to develop costly non-infringing technologies, or
enter into licensing agreements. These agreements, if necessary, may be
unavailable on terms acceptable to us, if 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(R) product platform.
These companies include, among others: Affymetrix, Inc., Amersham Biosciences,
Nuvelo, Inc., Illumina, Inc., Luminex Corporation, Molecular Devices
Corporation, Nanogen, Inc., Applera Corporation, Biotage AB, Qiagen, N.V. and
Sequenom, Inc.
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We compete with many companies in the United States and abroad engaged in
the development, commercialization and distribution of similar products intended
for clinical applications. These companies may have or develop products
competitive with the products offered by the Company. Also, clinical
laboratories may offer testing services that are competitive with our products.
Clinical laboratories may use reagents purchased from us or others to develop
their own diagnostic tests. Such laboratory-developed tests may not be subject
to the same requirements for clinical trials and FDA submission requirements
that may apply to Company products.
In the clinical market, we also potentially compete with several companies
offering alternative technologies which differ from the Invader(R) 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, Applera
Corporation companies including Applied Biosystems and Celera, Innogenetics,
Inc., and TM Bioscience Corporation.
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.
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 or a premarket approval, known as a
PMA. Some of our clinical products may require a PMA, others may require a
510(k). Other products, like ASRs, may be exempt from regulatory clearance or
approval.
With respect to devices reviewed through the 510(k) process, we may not
market a device until an order is issued by the FDA finding our product to be
substantially equivalent to a legally marketed device known as a predicate
device. A 510(k) submission may involve the presentation of a substantial volume
of data, including clinical data, and may require a substantial review. The FDA
may agree that the product is substantially equivalent to a predicate device and
allow the product to be marketed in the United States. The FDA, however, may
determine that the device is not substantially equivalent and require a PMA, or
require further information, such as additional test data, including data from
clinical studies, before it is able to make a determination regarding
substantial equivalence. By requesting additional information, the FDA can
further delay market introduction of our products.
If the FDA indicates that a PMA is required for any of our clinical
products, the application will require extensive clinical studies, manufacturing
information and likely review by a panel of experts outside the FDA. Clinical
studies to support either a 510(k) submission or a PMA application would need to
be conducted in accordance with FDA requirements. Failure to comply with FDA
requirements could result in the FDA's refusal to accept the data or the
imposition of regulatory sanctions. There can be no assurance that we will be
able to meet the FDA's requirements or receive any necessary approval or
clearance.
Once granted, a 510(k) clearance or PMA approval may place substantial
restrictions on how our device is marketed or to whom it may be sold. Even in
the case of devices like ASRs, many of which are exempt from 510(k) clearance or
PMA approval requirements, the FDA may impose restrictions on marketing. Our ASR
products may be sold only to clinical laboratories certified under Clinical
Laboratory Improvement Amendments of 1988, or CLIA, to perform high complexity
testing. In addition to requiring approval or clearance for new products, the
FDA may require approval or clearance prior to marketing products that are
modifications of existing products. We cannot assure you that any necessary
510(k) clearance or PMA approval will be granted on a timely basis, or at all.
Delays in receipt of or failure to receive any necessary 510(k) clearance or PMA
approval or the imposition of stringent restrictions on the labeling and sales
of our products could have a material adverse effect on us. As a medical device
manufacturer, we are also required to register and list our products with the
FDA. In addition, we are required to comply with the FDA's quality systems
regulations, or QSRs, which require that our devices be manufactured and records
be maintained in a prescribed manner with respect to manufacturing, testing and
control activities. Further, we are required to comply with FDA requirements for
labeling and promotion. For example, the FDA prohibits cleared or approved
devices from being promoted for uncleared or unapproved uses. In addition, the
medical device reporting regulation requires that we provide information to the
FDA whenever there is evidence to reasonably suggest that one of our devices may
have caused or contributed to a death or serious 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.
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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 that we will be able to maintain
compliance in the future. If the FDA believes that we are not in compliance with
applicable laws or regulations, it can issue a warning letter, detain or seize
our products, issue a recall notice, enjoin future violations and assess civil
and criminal penalties against us. In addition, approvals or clearances could be
withdrawn in appropriate circumstances. Failure to comply with regulatory
requirements or any adverse regulatory action could have a material adverse
effect on us.
Any customers using our products for clinical use in the United States may
be regulated under CLIA. CLIA is intended to ensure the quality and reliability
of clinical laboratories in the United States by mandating specific standards in
the areas of personnel qualifications, administration, participation in
proficiency testing, patient test management, quality control, quality assurance
and inspections. The regulations promulgated under CLIA establish three levels
of diagnostic tests, namely, waived, moderately complex and highly complex, and
the standards applicable to a clinical laboratory depend on the level of the
tests it performs. We cannot assure you that the CLIA regulations and future
administrative interpretations of CLIA will not have a material adverse impact
on us by limiting the potential market for our products.
Medical device laws and regulations are also in effect in many of the
countries in which we may do business outside the United States. These range
from comprehensive device approval requirements for some or all of our medical
device products, to requests for product data or certifications. The number and
scope of these requirements are increasing. Medical device laws and regulations
are also in effect in some states in which we do business. There can be no
assurance that we will obtain regulatory approvals in such countries or that we
will not incur significant costs in obtaining or maintaining foreign regulatory
approvals. In addition, export of certain of our products which have not yet
been cleared or approved for domestic commercial distribution may be subject to
FDA export restrictions.
We are also subject to numerous environmental and safety laws and
regulations, including those governing the use and disposal of hazardous
materials. Any violation of and the cost of compliance with these regulations
could have a material adverse effect on our business.
EMPLOYEES
As of December 31, 2003, we employed 156 persons, of whom 27 hold doctorate
degrees and 109 hold other advanced degrees. Approximately 54 employees are
engaged in research and development, 35 in business development, sales and
marketing, 31 in operations and manufacturing and 36 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.
RISK FACTORS
RISKS RELATED TO OUR BUSINESS
WE HAD AN ACCUMULATED DEFICIT OF $133.8 MILLION AT DECEMBER 31, 2003, 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 $36.8 million in 2001, $40.9 million in 2002, and $8.1
million in 2003. In order to further develop our products and technologies,
including development of new products for the clinical market, we will need to
incur significant expenses in connection with our internal research and
development and commercialization programs. As a result, we
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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, 2003, 2002
and 2001 were $12.0 million, $13.9 million and $16.2 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 COMMERCIAL PRODUCTS MAY NOT BE COMMERCIALLY VIABLE OR
SUCCESSFUL, WHICH COULD ADVERSELY AFFECT OUR BUSINESS.
We are currently developing and commercializing only a limited number of
products based on our technologies. We plan to develop additional products. 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 or cost effective in assisting
therapeutic selection, patient monitoring or diagnostic applications. In this
event, our sales of 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 develop our
products and technologies or if our technologies 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.
Market acceptance of our products will depend on widespread acceptance of such
products by doctors and clinicians. The use of products to assess genetic
variation, gene expression or identify infectious diseases is relatively new and
remains uncertain. If clinicians and doctors do not adopt our products, our
business, financial condition and results of operation could be adversely
affected. In these events, 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
and cannot guarantee that our manufacturing and production systems are in
compliance with the QSRs.
Key components of our products may be sourced from single suppliers or a
limited number of suppliers. Specifically, oligonucleotides for many of our
research use only products are sourced from a single supplier. In addition, some
of the components incorporated into our products may be proprietary and
unavailable from secondary sources. Finally, to comply with QSR, we must verify
that our suppliers of key components are in compliance with all applicable FDA
regulations and meet Company standards for quality. The above factors all
contribute to scenarios where the Company may not be able to arrange for
alternative supply sources. If our suppliers are unable or unwilling to supply
us on commercially acceptable terms with these components, we may be unable to
satisfy demand for our product on reasonable terms, if at all, which may have an
adverse effect on our business, financial condition and results of operations.
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 diagnostics, 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 have an adverse effect on our business, financial condition and
results of operations.
With respect to our clinical molecular diagnostics business, we have
limited experience with sales of our products outside of the United States. We
cannot guarantee that we will successfully develop sales, distribution, product
and customer support capabilities internationally that will enable us to
generate significant revenue from sales outside the United States. In addition,
sales made outside the United States are subject to foreign regulations typical
to the sale and marketing of our products which may pose an additional risk for
the Company. If we fail to increase our revenues from sales outside of the
United States, this would have an adverse effect on our business, financial
condition and results of operations.
Our clinical customer base is dominated by a small number of large clinical
testing laboratories including Laboratory Corporation of America, Quest
Diagnostics, Inc. and Specialty Laboratories, Inc. If we are unable to increase
sales to, maintain current pricing levels or if our new product introductions
are not accepted by this small number of large clinical laboratory customers in
the United States, our revenues and business may suffer materially.
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, however, need to raise additional
capital. 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;
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- the needs we may have to pursue FDA clearances or approvals of our
products;
- 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
- 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, our shareholders' 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 an adverse effect on our business, financial condition and
results of operations.
COMMERCIALIZATION OF OUR TECHNOLOGIES MAY DEPEND 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 or may enter
into strategic partnerships and collaborations for the development, marketing,
sales or distribution of our products. We intend to enter into additional
arrangements in the future. These agreements provide us, in some instances, with
distribution of our products, 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 or effectively distribute our
products. In addition, if we do not enter into additional partnership
agreements, or if these agreements are not successful, our ability to develop,
commercialize and distribute 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, commercialization or
distribution 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
clinical laboratories, biotechnology companies, academic institutions and
pharmaceutical companies involved in developing genetic variation analysis for
use in diagnostics, disease association studies and personalized treatment
approaches to medicine. Under these arrangements, we may 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
collaborators as a source of new products and technologies. If these
collaborations are not successful, and do not provide us with
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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 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 2004. 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
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 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, product
development and access to new product applications. In addition, unexpected
termination of collaborations or licenses 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 $25.0 million, or 69%, of our revenue in 2003 was derived
from sales to a major Japanese research institute, for use by several end-users.
Sales to that research institute accounted for 51% and 76% of our revenue in
2002 and 2001, respectively. If we lose this customer, or if it significantly
reduces purchases of our product, our business, financial condition and results
of operations 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 and molecular diagnostics markets 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:
- diagnostic, biotechnology, pharmaceutical, healthcare, chemical and
other companies;
- academic and scientific institutions;
- governmental agencies;
- public and private research organizations; and
- clinical labs.
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Many of our competitors have greater financial, technical, research,
marketing, sales, distribution, service and other resources than we do.
Moreover, our competitors may offer broader product lines and have greater name
recognition than we do, and may offer discounts as a competitive tactic. In
addition, several development stage companies are currently making or developing
technologies, products or services that compete with or are being designed to
compete with our technologies and products. Our competitors may develop or
market technologies, products or services that are more effective or
commercially attractive than our current or future products, or that may render
our technologies or products less competitive or obsolete. Competitors may make
rapid technological developments which may result in our technologies and
products becoming obsolete before we recover the expenses incurred to develop
them or before they generate significant revenue or market acceptance.
Competitors may also obtain regulatory advances or approvals of their diagnostic
products more rapidly than we do. Accordingly, if competitors introduce superior
technologies or products or obtain regulatory approvals or clearances quicker
than we do, 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.
Our existing and potential competitors may be in the process of seeking FDA
or foreign regulatory approval for their respective products or may also enjoy
substantial advantages over us in terms of research and development expertise,
clinical trial expertise, experience in submission of products to regulatory
authorities and the marketing or commercialization of FDA approved or cleared
products. In addition, many of our competitors may have or will establish
third-party reimbursement for their products. We may not be able to compete
effectively against competitors that hold such an advantage which may have a
material adverse effect on our business, financial condition and results of
operations
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 or in the
area of new product development, 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
16
<PAGE>
against EraGen Biosciences, Inc. alleging that certain activities and products
of the defendant infringes upon US Patents issued to the Company. On April 9,
2003, we settled this litigation with EraGen's agreement to cease and desist
from the development and sale of certain products and technologies.
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 and scientific staff.
If a competitor hired members of our senior management staff or scientific
staff, or if for any reason these employees would not continue to work for us,
we would have difficulty hiring employees with equivalent skills.
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.
17
<PAGE>
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 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 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 CLIA to perform high complexity testing. We
currently market our diagnostic products as ASRs. Consequently, these clinical
products will be regulated as medical devices. The FDA has announced previously
its intention to reexamine its ASR rules and definitions. Should the FDA modify
the ASR rules in a fashion that makes the ASR category difficult or impossible
for us to market our products, we may be required to terminate our ASR product
sales, conduct clinical studies and make submissions of our products to the FDA
for clearance or approval. In that event, we could experience significant
revenue loss, additional expenses and loss of our clinical customer base which
would cause the market price of our stock to decline.
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 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
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.
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.
18
<PAGE>
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
convert 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 business, financial condition and results of operations.
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.
RELIANCE ON COMPUTER HARDWARE, SOFTWARE AND APPLICATIONS FOR OPERATIONS
We depend on the continuous, effective, reliable and secure operation of
our computer hardware, software, networks, servers, related infrastructure and
applications for the successful operations of our business. Should we encounter
difficulties with such systems, our business, financial condition and results of
operations could be negatively impacted.
FUTURE ISSUANCE OF OUR PREFERRED STOCK MAY DILUTE THE RIGHTS OF OUR COMMON
STOCKHOLDERS.
Our Board of Directors has the authority to issue up to 10,000,000 shares
of preferred stock and to determine the price, privileges and other terms of
these shares without any further approval of our stockholders. The rights of the
holders of common stock may be adversely affected by the rights of our holders
of our preferred stock that may be issued in the future.
WE HAVE VARIOUS MECHANISMS IN PLACE THAT 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;
19
<PAGE>
- 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 27, 2004, our directors, executive officers and principal
stockholders beneficially own, in the aggregate, approximately 31% of our common
stock. These stockholders, acting together, will have the ability to exert
substantial influence over all matters requiring approval by our stockholders.
These matters include the election and removal of directors and any merger,
consolidation or sale of all or substantially all of our assets. In addition,
they may dictate the management of our business and affairs. This concentration
of ownership could have the effect of delaying, deferring or preventing a change
in control, or impeding a merger or consolidation, takeover or other business
combination of which you might otherwise approve.
RISKS RELATED TO THE BIOTECHNOLOGY INDUSTRY
PUBLIC OPINION REGARDING ETHICAL ISSUES SURROUNDING THE USE OF GENETIC
INFORMATION MAY ADVERSELY AFFECT DEMAND FOR OUR PRODUCTS.
Public opinion regarding ethical issues related to the confidentiality and
appropriate use of genetic testing results may influence governmental
authorities to call for limits on, or regulation of the use of, genetic testing.
In addition, such authorities could prohibit testing for genetic predisposition
to certain conditions, particularly for those that have no known cure.
Furthermore, adverse publicity or public opinion relating to genetic research
and testing, even in the absence of any governmental regulation, could harm our
business. Any of these scenarios could reduce the potential markets for our
products, which could materially and adversely affect our revenues.
GOVERNMENT REGULATION OF GENETIC RESEARCH OR TESTING MAY ADVERSELY AFFECT
THE DEMAND FOR OUR PRODUCTS AND IMPAIR OUR BUSINESS AND OPERATIONS.
Federal, state and local governments may adopt regulations relating to the
conduct of genetic research and genetic testing. These regulations could limit
or restrict genetic research activities as well as genetic testing for research
or clinical purposes. In addition, if state and local regulations are adopted,
these regulations may be inconsistent with, or in conflict with, regulations
adopted by other state or local governments. Regulations relating to genetic
research activities could adversely affect our ability to conduct our research
and development activities. Regulations restricting genetic testing could
adversely affect our ability to market and sell our products. Accordingly, any
regulations of this nature could harm our business.
HEALTH CARE COST CONTAINMENT INITIATIVES COULD LIMIT THE ADOPTION OF
GENETIC TESTING AS A CLINICAL TOOL, WHICH WOULD HARM OUR REVENUES AND
PROSPECTS.
In recent years, health care payors as well as federal and state
governments have focused on containing or reducing health care costs. We cannot
predict the effect that any of these initiatives may have on our business, and
it is possible that they will adversely affect our business. In particular,
gene-based therapeutics, if successfully developed and commercialized, are
likely to be costly compared to currently available drug therapies. Health care
cost containment initiatives focused either on gene-based therapeutics 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-
20
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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.
REIMBURSEMENT FOR USE OF OUR TESTS
Sales of our products will depend, in large part, on the availability of
adequate reimbursement to users of those products from government insurance
plans, managed care organizations and private insurance plans. Physicians'
recommendations to use our products are likely to be influenced by the
availability of reimbursement by insurance companies and other third-party
payors. There can be no assurance that insurance companies or third-party payors
will provide or continue to provide coverage for our products or that
reimbursement levels will be adequate for the reimbursement of the providers of
our products. In addition, outside the United States, reimbursement systems vary
from country to country and there can be no assurances that third-party
reimbursement will be made available at an adequate level, if at all, for our
products under any other reimbursement system. Lack of or inadequate
reimbursement by government or other third-party payors for our products would
have a material adverse effect on our business, financial condition and results
of operations.
AVAILABLE INFORMATION
The Company makes available financial information, news releases and other
information on its Web site at www.twt.com. The Company's annual reports on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934 are available free of charge on its
Web site as soon as reasonably practicable after the Company files such reports
and amendments with, or furnishes them to, the Securities and Exchange
Commission.
ITEM 2. PROPERTIES
Our 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 facility is
leased and described by the following:
<TABLE>
<CAPTION>
APPROX.
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>
Under the terms of the existing lease, we pay rent of approximately
$138,000 per month. We believe that our current facility will be adequate to
meet our near-term space requirements and are currently seeking to sublease
corporate office space. 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. There are no
material legal proceedings pending.
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 2003 and 2002 the high and low sales prices per
share, based on closing prices, for our common stock as reported on the NASDAQ
Stock Market.
21
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
DECEMBER 31, 2003 HIGH LOW
- ------------------- ------- -------
<S> <C> <C>
First Quarter...... $ 3.70 $ 2.64
Second Quarter..... $ 5.30 $ 3.29
Third Quarter...... $ 4.65 $ 3.13
Fourth Quarter..... $ 4.75 $ 3.25
</TABLE>
<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 12, 2004, approximately 380 shareholders of record held our
common stock.
We have never declared or paid any dividends on our capital stock. We
currently expect to retain future earnings, if any, to support the development
of our business and do not anticipate paying any cash dividends in the
foreseeable future.
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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, 2003, 2002, and 2001 and the audited balance sheets as of December
31, 2003 and 2002 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>
FOR YEAR ENDED DECEMBER 31,
(in thousands, except for per share amounts)
-------------------------------------------------------------
1999 2000 2001 2002 2003
-------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues $ 2,574 $ 11,417 $ 34,092 $ 32,355 $ 36,320
Operating expenses:
Cost of goods sold 2,290 11,518 32,746 21,320 12,840
Research and development 4,315 7,337 16,179 13,934 12,035
Selling and marketing 2,408 4,983 9,200 9,578 8,859
General and administrative 3,725 7,408 14,521 11,984 10,363
Restructuring and other charges - - - 11,087 -
Impairment of goodwill and other intangible
assets - 5,789 - 4,810 -
Merger costs 116 833 - - -
------- --------- --------- ---------- ---------
Total operating expenses 12,854 37,868 72,646 72,713 44,097
------- --------- --------- ---------- ---------
Loss from operations (10,280) (26,451) (38,554) (40,358) (7,777)
Other income (expense), net 566 877 1,762 (506) (339)
------- --------- --------- ---------- ---------
Net loss (9,714) (25,574) (36,792) (40,864) (8,116)
Deemed dividend upon issuance of convertible
preferred stock - (17,023) - - -
------- --------- --------- ---------- ---------
Net loss attributable to common shareholders $(9,714) $ (42,597) $ (36,792) $ (40,864) (8,116)
======= ========= ========= ========== =========
Basic and diluted net loss per share $ (0.68) $ (2.83) $ (1.03) $ (1.04) $ (0.20)
======= ========= ========= ========== =========
Shares used in computing basic and diluted net
loss per share 14,183 15,078 35,714 39,457 39,749
Pro forma basic and diluted net loss per share (a) $ (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,
(in thousands)
--------------------------------------------------------------
1999 2000 2001 2002 2003
--------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents, and short term
investments $ 12,919 $ 47,179 $ 73,299 $ 60,315 $ 57,816
Working capital 13,774 29,122 64,834 43,518 42,655
Total assets 20,289 83,193 131,615 89,223 80,422
Long-term obligations, net of current portion 420 12,095 6,694 13 13
Accumulated deficit (22,575) (48,149) (84,852) (125,715) (133,832)
Total shareholders' equity 17,199 47,039 104,753 65,287 59,288
</TABLE>
(a) Pro forma basic and diluted net loss per common share for 2000 and 2001
gives effect to common stock equivalent shares arising, assuming that the
preferred stock and convertible note payable were converted to common
stock upon issuance using the "if converted" method. This pro forma
disclosure has been included because the preferred stock and convertible
note payable automatically converted to common stock upon closing of the
initial public offering in February 2001.
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.
23
<PAGE>
================================================================================
OVERVIEW
Third Wave Technologies, Inc. is a leading molecular diagnostics company.
We believe our proprietary Invader(R) technology, a novel, chemistry-based
platform, is easier to use, more accurate and cost-effective, and enables higher
testing throughput. These and other advantages conferred by our technology
platform are enabling us to provide physicians and researchers with superior
tools to diagnose and treat disease.
More than 110 clinical laboratory customers are using Third Wave's
products. Our customer base also includes the Japanese 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). 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 has developed
or plans to develop a menu of molecular diagnostic products for clinical
applications that include genetic testing, pharmacogenetics, chromosomal
analysis, infectious disease, and women's health. The Company also has a number
of other Invader(R) products including those for research, agricultural and
other applications.
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 was 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)," Staff Accounting Bulletin No. 100, "Restructuring and
Impairment Charges," and FASB Statement No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." The restructuring charge was 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 was 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, and the offsetting
sublease receipts 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, if the sum of the
24
<PAGE>
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.
Goodwill and intangible assets deemed to have indefinite lives are not
amortized, but are subject to annual impairment tests under Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets."
The annual impairment test was completed in the quarters ended September 2002
and 2003.
DERIVATIVE INSTRUMENTS
We sell products in a number of countries throughout the world. During 2003
and 2002, we sold certain products with the resulting accounts receivable
denominated in Japanese Yen. 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. Contracts outstanding at December 31,
2003 represented a combined U.S. dollar equivalent commitment of approximately
$9.5 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, 2003, our
inventory reserves were $750,000, or 35% of our $2.1 million total gross
inventories.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2003 AND 2002
Revenues. Revenues for the year ended December 31, 2003 of $36.3 million
represented an increase of $3.9 million as compared to revenues of $32.4 million
for the year ended December 31, 2002.
Product revenues increased to $35.1 million for the year ended December 31,
2003, from $28.9 million in the year ended December 31, 2002. The increase in
product sales during 2003 resulted from an increase in US molecular diagnostic
sales and higher genomic research product sales to the Japanese government
compared to prior year. We expect our molecular diagnostic revenues to increase
in 2004.
Development revenues decreased to $0.9 million for the year ended December
31, 2003, from $1.6 million for the year ended December 31, 2002. The decrease
was primarily due to a 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. We expect our development revenues to decrease in
2004.
License and royalty revenue decreased to $0.2 million in the year ended
December 31, 2003 from $1.5 million for the corresponding period of 2002. The
decrease is due to a decrease in license revenue from Aclara. In the year ended
December 31, 2003, we received royalty revenue of $0.1 million from Aclara, per
the license and supply agreement, compared to revenue of $1.5 million for the
license granted to Aclara in the year ended December 31, 2002.
Significant Customer. We generated $25.0 million, or 69% of our revenues
from sales to a major Japanese research institute for use by several end-users
during the year ended December 31, 2003. As of December 31, 2003, $1.0 million
of our accounts receivable were attributable to this customer. This customer
will continue to purchase Company products in 2004, however, the timing and
total of such purchases will be influenced by the funding process and amounts
which are unpredictable and unknown to Third Wave.
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, 2003, cost of goods sold
decreased to $12.8 million, compared to $21.3 million for the year ended
December 31, 2002. The decrease was due to lower fixed costs as a result of the
restructuring that occurred in the third quarter of 2002. We expect gross margin
to improve as clinical revenues increase.
25
<PAGE>
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, 2003 were $12.0 million, compared to $13.9 million for
the year ended December 31, 2002. The decrease in research and development
expenses was primarily attributable to decreased material costs for assay and
product development and a decrease in fees paid for consulting, development, and
other services. We will continue to invest in research and development, and
expenditures in this area may increase as we expand our product development
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, commissions, office support and related costs,
and travel and entertainment. Selling and marketing expenses for the year ended
December 31, 2003 were $8.9 million, a decrease of $0.7 million, as compared to
$9.6 million for the year ended December 31, 2002. The decrease is attributable
to a combination of a reduction in distributor commissions and consulting fees
and an increase in personnel related expenses. We anticipate selling and
marketing expenses to be at or above 2003 levels.
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 $10.4 million for
the year ended December 31, 2003, from $12.0 million for the year ended December
31, 2002. The decrease was due to a decrease in personnel related expenses and
consulting fees in 2003 compared to 2002.
Interest Income. Interest income for the year ended December 31, 2003 was
$0.6 million, compared to $1.0 million for the year ended December 31, 2002.
This decrease was primarily due to lower interest rates and lower cash balances
in 2003 compared to 2002.
Interest Expense. Interest expense for the year ended December 31, 2003 was
approximately $0.3 million, compared to $1.1 million in the year ended December
31, 2002. The decrease in interest expense was primarily due to lower interest
rates on debt.
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.
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. Under the agreement, we develop assays
in accordance with a mutually agreed development program for use in clinical
applications by BML.
License and royalty revenue of $1.5 million was from the license and supply
agreement with 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.
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
26
<PAGE>
$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.
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.
27
<PAGE>
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, 2003, we had cash, cash equivalents and short-term
investments of $57.8 million.
Net cash used in operations for the year ended December 31, 2003 was $3.2
million, compared with $14.0 million in 2002 and $30.3 million in 2001. The
decrease was primarily due to lower operating expenses and losses.
Net cash provided by investing activities for the year ended December 31,
2003 was $0.2 million, compared to a cash usage of $8.7 million in 2002 and $4.4
million in 2001. Capital expenditures were $0.2 million in the year ended
December 31, 2003, compared to $2.3 million in 2002 and $21.0 million in 2001.
Capital expenditures in 2001 were higher due to investments in leasehold
improvements to facilities, software, and production and lab equipment.
Investing activities included proceeds from the sale of equipment, primarily in
connection with our restructuring in 2002 of $0.3 million in the year ended
December 31, 2003 and $4.4 million in 2002. In 2001, we sold and leased back
$5.1 million of certain equipment. In the year ended December 31, 2003, the net
cash received from the purchases, sales and maturities of short-term investments
was $0.2 million, compared to a net cash usage of $10.8 million in 2002, and net
cash proceeds of $11.6 million in 2001. In 2002, we purchased certificates of
deposit to collateralize our term loan with the bank.
Net cash provided by financing activities was $0.7 million in the year
ended December 31, 2003, compared to net cash used in financing activities of
$1.1 million in the year ended December 31, 2002 and net cash proceeds of $72.4
million in 2001. Cash used in financing activities in the year ended December
31, 2003 consisted of $15,000 to repay debt, compared to $6.6 million in 2002
and $7.7 million in 2001. Additionally, in 2002 and 2001, $4.4 million and $0.7
million was used for capital lease obligation payments, respectively. In 2002
and 2001, cash provided by financing activities included proceeds from long-term
debt of $9.5 million and $5.4 million, respectively. During 2002, we entered
into a term loan agreement due on July 31, 2003 to pay off the then existing
debt and capital lease obligations. Upon expiration in 2003, we renewed the term
loan for an additional year. The term loan is collateralized with a 12-month
certificate of deposit. Proceeds from the issuance of common stock were $0.7
million in 2003, compared to $0.3 million in 2002 and $75.4 million in 2001. In
2001, the proceeds from the issuance of common stock was primarily the result of
our initial public offering of 7,500,000 shares of common stock in February
2001.
As of December 31, 2003 and December 31, 2002, a valuation allowance equal
to 100% of our net deferred tax assets had been recognized since our future
realization is not assured. At December 31, 2003, we had federal and state net
operating loss carryforwards of approximately $114 million. The net operating
loss carryforwards will expire at various dates beginning in 2008, if not
utilized. Utilization of the net operating losses to offset future taxable
income may be subject to an annual limitation due to the change of ownership
provisions of federal tax laws and similar state provisions as a result of the
initial public offering in February 2001.
We cannot assure that our business or operations will not change in a
manner that would consume available resources more rapidly than anticipated. We
also cannot assure that we will not require substantial additional funding
before we can achieve profitable operations. Our capital requirements depend on
numerous factors, including the following:
- our progress with our research and development programs;
- our level of success in selling our products and technologies;
- our ability to establish and maintain successful collaborative
relationships;
- the costs we incur in enforcing and defending our patent claims and
other intellectual property rights; and
- the timing of purchases of additional capital.
CONTRACTUAL OBLIGATIONS
The following summarizes our contractual obligations at December 31, 2003
and the effect those obligations are expected to have on our liquidity and cash
flow in future periods (in thousands):
<TABLE>
<CAPTION>
LESS THAN YEARS YEARS OVER
TOTAL 1 YEAR 2 - 3 4 - 5 5 YEARS
---------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
CONTRACTUAL OBLIGATIONS
Non-cancelable operating
lease obligation $ 15,192 $ 1,495 $ 3,685 $ 3,986 $ 6,026
Term loan 9,513 9,500 13 -- --
--------- -------- -------- ------- -------
Total obligations $ 24,705 $ 10,995 $ 3,698 $ 3,986 $ 6,026
--------- -------- -------- ------- -------
</TABLE>
28
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk is currently confined to changes in foreign
exchange and interest rates. The securities in our investment portfolio are not
leveraged and, due to their short-term nature, are subject to minimal interest
rate risk. We currently do not hedge interest rate exposure. Due to the
short-term maturities of our investments, we do not believe that an increase in
market rates would have any negative impact on the realized value of our
investment portfolio.
To reduce foreign exchange risk, we selectively use financial instruments.
Our earnings are affected by fluctuations in the value of the U.S. Dollar
against foreign currencies as a result of the sales of our products in foreign
markets. Forward foreign exchange contracts are used to hedge against the
effects of such fluctuations. Our policy prohibits the trading of financial
instruments for profit. A discussion of our accounting policies for derivative
financial instruments is included in the notes to the financial statements.
29
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED FINANCIAL STATEMENTS
Third Wave Technologies, Inc.
Years ended December 31, 2003, 2002 and 2001
<PAGE>
Third Wave Technologies, Inc.
Index to Consolidated Financial Statements
CONTENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors...................................................... F-1
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 2003 and 2002........................................... F-2
Consolidated Statements of Operations for the years ended
December 31, 2003, 2002 and 2001.................................................................... F-4
Consolidated Statements of Shareholders' Equity for the years ended December 31, 2003, 2002 and 2001... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001............. F-6
Notes to Consolidated Financial Statements............................................................. F-7
</TABLE>
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
To the Board of Directors
Third Wave Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Third Wave
Technologies, Inc. (the Company) as of December 31, 2003 and 2002, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 2003. Our
audits also included the financial statement schedule listed in the index at
Item 15(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Company at
December 31, 2003 and 2002, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
2003, in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedule, when
considered in relation to the financial statements taken as a whole, presents
fairly in all material respects the information set forth therein.
As discussed in Note 2 to the financial statements, effective January 1, 2002,
the Company changed its method of accounting for goodwill and identifiable
intangible assets with indefinite lives.
Ernst & Young LLP
Milwaukee, Wisconsin
January 29, 2004
F-1
<PAGE>
Third Wave Technologies, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
2003 2002
----------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $47,015,746 $49,301,501
Short-term investments 10,800,000 11,013,000
Accounts receivable, net of allowance for doubtful
accounts of $140,000 and $465,000 in 2003 and 2002,
respectively 2,061,054 2,724,856
Inventories 1,394,046 1,660,344
Prepaid expenses and other 485,680 1,145,687
----------------------------
Total current assets 61,756,526 65,845,388
Equipment and leasehold improvements:
Machinery and equipment 18,544,956 18,449,319
Leasehold improvements 2,099,104 2,091,457
----------------------------
20,644,060 20,540,776
Less accumulated depreciation 12,116,813 9,617,330
----------------------------
8,527,247 10,923,446
Assets held for sale - 336,000
Amortizable intangible assets 5,651,124 7,155,876
Indefinite-lived intangible assets 1,007,411 1,007,411
Goodwill 489,873 489,873
Other assets 2,989,752 3,465,244
----------------------------
Total assets $80,421,933 $89,223,238
============================
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31
2003 2002
------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,955,434 $ 7,088,962
Accrued payroll and related liabilities 2,802,297 2,260,563
Other accrued liabilities 1,776,250 2,517,315
Deferred revenue 67,760 945,664
Long-term debt due within one year 9,500,000 9,515,152
------------------------------
Total current liabilities 19,101,741 22,327,656
Long-term debt 13,333 13,333
Other liabilities 2,019,024 1,595,181
Commitments (Note 7)
Shareholders' equity:
Participating preferred stock, Series A, $.001 par value, 100,000
shares authorized, 0 shares issued and outstanding - -
Common stock, $.001 par value, 100,000,000 shares authorized,
40,021,244 and 39,559,574 shares issued and outstanding in
2003 and 2002, respectively 40,021 39,560
Additional paid-in capital 193,356,121 191,581,136
Unearned stock compensation (309,996) (618,246)
Foreign currency translation adjustment 33,307 -
Accumulated deficit (133,831,618) (125,715,382)
------------------------------
Total shareholders' equity 59,287,835 65,287,068
------------------------------
Total liabilities and shareholders' equity $ 80,421,933 $ 89,223,238
==============================
</TABLE>
See accompanying notes.
F-3
<PAGE>
Third Wave Technologies, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
2003 2002 2001
------------------------------------------------
<S> <C> <C> <C>
Revenues:
Product sales $ 35,148,297 $ 28,880,942 $ 30,405,055
Development revenues 916,664 1,641,567 3,110,004
Grant revenues 61,098 332,453 576,690
License and royalty revenue 193,792 1,500,000 -
------------------------------------------------
36,319,851 32,354,962 34,091,749
Operating expenses:
Cost of goods sold (including amortization of
capitalized legal settlement costs and
reacquired marketing and distribution
rights of $1,504,752, $1,930,557 and $1,930,560
in 2003, 2002 and 2001, respectively) 12,839,502 21,320,133 32,745,672
Research and development 12,035,375 13,933,864 16,179,251
Selling and marketing 8,858,678 9,577,122 9,199,622
General and administrative 10,363,139 11,984,104 14,520,855
Impairment of goodwill and other intangible
assets - 4,809,902 -
Restructuring and other charges - 11,087,233 -
------------------------------------------------
Total operating expenses 44,096,694 72,712,358 72,645,400
------------------------------------------------
Loss from operations (7,776,843) (40,357,396) (38,553,651)
Other income (expense):
Interest income 571,282 1,006,231 3,349,617
Interest expense (298,182) (1,089,497) (1,346,876)
Equity in losses from joint ventures - - (241,282)
Other (612,493) (423,003) (16)
------------------------------------------------
(339,393) (506,269) 1,761,443
------------------------------------------------
Net loss $ (8,116,236) $(40,863,665) $(36,792,208)
================================================
Net loss per share - basic and diluted $ (0.20) $ (1.04) $ (1.03)
</TABLE>
See accompanying notes.
F-4
<PAGE>
Third Wave Technologies, Inc.
Consolidated Statements of Shareholders' Equity
Years ended December 31, 2001, 2002 and 2003
<TABLE>
<CAPTION>
Convertible
Preferred Stock Common Stock
----------------------------------------------------
Additional Additional
Par Paid-In Par Paid-In
Value Capital Value Capital
----------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 2000 $ 14,112 $ 68,136,800 $15,634 $ 30,735,175
Common stock issued in initial public offering - 7,500,000 shares - - 7,500 74,831,549
Common stock issued for conversion of note payable - 909,091 shares - - 909 9,999,091
Common stock issued related to a litigation settlement - 116,854 shares - - 117 856,683
Common stock issued for acquisition - 925,000 shares - - 925 6,192,440
Common stock issued for stock options and stock purchase plan - 177,269
shares - - 177 571,482
Conversion of preferred stock to common stock - 14,112,000 shares (14,112) (68,136,800) 14,112 68,136,800
Unearned stock compensation - - - 103,478
Amortization of unearned stock compensation - - - -
Net loss - - - -
----------------------------------------------------
Balance at December 31, 2001 - - 39,374 191,426,698
Common stock issued for stock options and stock purchase plan - 185,560
shares - - 186 300,931
Unearned stock compensation - - - 147,932
Amortization of unearned stock compensation - - - -
Reversal of unearned stock compensation related to terminated employees - - - (294,425)
Net loss - - - -
----------------------------------------------------
Balance at December 31, 2002 - - 39,560 191,581,136
Common stock issued for stock options and stock purchase plan - 461,670
shares - - 461 721,568
Unearned stock compensation - - - 1,162,477
Amortization of unearned stock compensation - - - -
Reversal of unearned stock compensation related to terminated employees - - - (109,060)
Net loss - - - -
Foreign currency translation adjustment - - - -
Comprehensive loss
----------------------------------------------------
Balance at December 31, 2003 $ - $ - $40,021 $193,356,121
====================================================
<CAPTION>
Common Unearned Foreign Currency
Stock to Be Stock Translation
Issued Compensation Adjustment
----------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 2000 $ 856,800 $ (4,570,364) $ -
Common stock issued in initial public offering - 7,500,000 shares - - -
Common stock issued for conversion of note payable - 909,091 shares - - -
Common stock issued related to a litigation settlement - 116,854 shares (856,800) - -
Common stock issued for acquisition - 925,000 shares - - -
Common stock issued for stock options and stock purchase plan - 177,269
shares - - -
Conversion of preferred stock to common stock - 14,112,000 shares - - -
Unearned stock compensation - (103,478) -
Amortization of unearned stock compensation - 2,812,276 -
Net loss - - -
----------------------------------------------
Balance at December 31, 2001 - (1,861,566) -
Common stock issued for stock options and stock purchase plan - 185,560
shares - - -
Unearned stock compensation - (147,932) -
Amortization of unearned stock compensation - 1,248,154 -
Reversal of unearned stock compensation related to terminated employees - 143,098 -
Net loss - - -
----------------------------------------------
Balance at December 31, 2002 - (618,246) -
Common stock issued for stock options and stock purchase plan - 461,670
shares - - -
Unearned stock compensation - (1,162,477) -
Amortization of unearned stock compensation - 1,374,377 -
Reversal of unearned stock compensation related to terminated employees - 96,350 -
Net loss - - -
Foreign currency translation adjustment - - 33,307
Comprehensive loss
----------------------------------------------
Balance at December 31, 2003 $ - $ (309,996) $ 33,307
==============================================
<CAPTION>
Accumulated
Deficit Total
--------------------------------
<S> <C> <C>
Balance at December 31, 2000 $ (48,148,969) $ 47,039,188
Common stock issued in initial public offering - 7,500,000 shares - 74,839,049
Common stock issued for conversion of note payable - 909,091 shares - 10,000,000
Common stock issued related to a litigation settlement - 116,854 shares - -
Common stock issued for acquisition - 925,000 shares 89,460 6,282,825
Common stock issued for stock options and stock purchase plan - 177,269
shares - 571,659
Conversion of preferred stock to common stock - 14,112,000 shares - -
Unearned stock compensation - -
Amortization of unearned stock compensation - 2,812,276
Net loss (36,792,208) (36,792,208)
--------------------------------
Balance at December 31, 2001 (84,851,717) 104,752,789
Common stock issued for stock options and stock purchase plan - 185,560
shares - 301,117
Unearned stock compensation - -
Amortization of unearned stock compensation - 1,248,154
Reversal of unearned stock compensation related to terminated employees - (151,327)
Net loss (40,863,665) (40,863,665)
--------------------------------
Balance at December 31, 2002 (125,715,382) 65,287,068
Common stock issued for stock options and stock purchase plan - 461,670
shares - 722,029
Unearned stock compensation - -
Amortization of unearned stock compensation - 1,374,377
Reversal of unearned stock compensation related to terminated employees - (12,710)
Net loss (8,116,236) (8,116,236)
Foreign currency translation adjustment - 33,307
--------------------------------
Comprehensive loss (8,082,929)
--------------------------------
Balance at December 31, 2003 $ (133,831,618) $ 59,287,835
================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
Third Wave Technologies, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
2003 2002 2001
----------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (8,116,236) $(40,863,665) $(36,792,208)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 2,607,096 7,100,496 7,805,943
Amortization of intangible assets 1,504,752 1,968,558 1,984,937
Amortization of licensed technology 480,633 415,017 433,223
Noncash stock compensation 1,361,667 1,096,827 2,812,276
Noncash charge for impairment and restructuring - 12,151,817 2,970,257
(Gain) loss on disposal of equipment (410) (68,898) 75,656
Deferred gain on sale of assets - - (179,024)
Amortization of deferred gain - (23,871) (25,724)
Equity in losses from joint ventures - - 241,282
Change in operating assets and liabilities:
Receivables 697,109 (895,734) (853,614)
Inventories 266,298 4,788,630 (5,688,123)
Prepaid expenses and other assets 809,031 1,554,514 (1,639,567)
Accounts payable (2,133,528) (4,187,993) (162,076)
Accrued expenses and other liabilities 224,512 4,498,178 (18,459)
Deferred revenue (877,904) (1,506,954) (1,227,999)
----------------------------------------------
Net cash used in operating activities (3,176,980) (13,973,078) (30,263,220)
INVESTING ACTIVITIES
Purchases of equipment and leasehold improvements (249,916) (2,277,114) (21,011,245)
Proceeds on sale of equipment 321,264 4,391,389 5,070,000
Purchases of licensed technology (100,000) - (245,038)
Cash received in acquisition - - 165,314
Purchases of short-term investments (10,800,000) (10,941,000) -
Sales and maturities of short-term investments 11,013,000 96,000 11,582,000
----------------------------------------------
Net cash provided by (used in) investing activities 184,348 (8,730,725) (4,438,969)
FINANCING ACTIVITIES
Proceeds from long-term debt - 9,500,000 5,399,879
Payments on long-term debt (15,152) (6,556,494) (7,706,345)
Proceeds from issuance of common stock, net 722,029 301,117 75,410,708
Payments on capital lease obligations - (4,370,442) (699,558)
----------------------------------------------
Net cash provided by (used in) financing activities 706,877 (1,125,819) 72,404,684
----------------------------------------------
Increase (decrease) in cash and cash equivalents (2,285,755) (23,829,622) 37,702,495
----------------------------------------------
Cash and cash equivalents at beginning of year 49,301,501 73,131,123 35,428,628
----------------------------------------------
Cash and cash equivalents at end of year $ 47,015,746 $ 49,301,501 $ 73,131,123
==============================================
Supplemental disclosure of cash flows information-
Cash paid for interest $ 301,817 $ 1,075,940 $ 1,760,161
==============================================
</TABLE>
Noncash investing and financing activities:
During the year ended December 31, 2001, the Company:
- converted $10,000,000 of notes payable into 909,091 shares of common
stock
- issued 925,000 shares of common stock in acquisition
- entered into capital lease obligations of $5,070,000
See accompanying notes.
F-6
<PAGE>
Third Wave Technologies, Inc.
Notes to Consolidated Financial Statements
December 31, 2003
1. NATURE OF OPERATIONS AND PRINCIPLES OF CONSOLIDATION
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of Third
Wave Technologies, Inc. (the Company) and its wholly owned subsidiaries, Third
Wave-Japan LLC and Third Wave Agbio, Inc. (Agbio) which became wholly owned in
December 2001. All significant intercompany balances and transactions are
eliminated in consolidation.
NATURE OF OPERATIONS
The Company is a leading molecular diagnostics company. The Company believes its
proprietary Invader(R) technology platform is easier to use, more accurate and
cost-effective, and enables higher testing throughput than conventional methods.
These and other advantages conferred by the Company's technology platform are
enabling the Company to provide physicians and researchers with superior
molecular solutions for the analysis and treatment of disease.
The Company currently markets products domestically and internationally to
clinical and research markets using an internal sales force as well as
collaborative relationships with pharmaceutical companies and research
institutions. Revenues to a major Japanese research institute for use by several
end users during 2003, 2002 and 2001 were 69%, 51% and 76% of total revenues,
respectively. The Company performs periodic credit evaluations of its customers'
financial condition and generally does not require collateral. The Company
evaluates the collectibility of its accounts receivable based on a combination
of factors. For accounts greater than 60 days past due, an allowance for
doubtful accounts is recorded based on a customer's ability and likelihood to
pay based on management's review of the facts. For all other accounts, the
Company recognizes an allowance based on the length of time the receivable is
past due and the anticipated future write offs based on historical experience.
F-7
<PAGE>
Notes To Consolidated Financial Statements
December 31, 2003
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the preparation of
the accompanying financial statements follows.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers highly liquid money market investments and short-term
investments with maturities of 90 days or less from the date of purchase to be
cash equivalents.
Short-term investments consist of certificates of deposit with maturities less
than one year. The cost of these securities, which are considered
"available-for-sale" for financial reporting purposes, approximates fair value
at December 31, 2003 and 2002.
INVENTORIES
Inventories, consisting mostly of raw materials, are carried at the lower of
cost or market using the first-in, first-out method for determining cost.
Inventories consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
2003 2002
-----------------------------
<S> <C> <C>
Raw material $1,609,866 $ 4,253,090
Finished goods and work in process 534,180 457,254
Reserve for excess and obsolete inventory (750,000) (3,050,000)
-----------------------------
Total inventories $1,394,046 $ 1,660,344
=============================
</TABLE>
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising costs were $165,854,
$511,685 and $675,624 in 2003, 2002 and 2001, respectively.
F-8
<PAGE>
Third Wave Technologies, Inc.
Notes to Consolidated Financial Statements
December 31, 2003
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION
The Company's Japanese subsidiary uses the local currency as its functional
currency. Accordingly, assets and liabilities are translated into U.S. dollars
at year-end exchange rates, and revenues and expenses are translated at
weighted-average exchange rates. The resulting translation adjustment is
recorded as a separate component of shareholders' equity.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are recorded at cost less accumulated
depreciation. Depreciation of purchased equipment is computed by the
straight-line method over the estimated useful lives of the assets which are
generally three to ten years. Depreciation of leasehold improvements is computed
by the straight-line method over the shorter of the estimated useful lives of
the assets or the remaining lease term.
PATENTS
Patent-related development costs are expensed in the period incurred and are
included in general and administrative expenses in the statements of operations.
These costs were $780,959, $509,598 and $546,776 in 2003, 2002 and 2001,
respectively.
GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets." Under SFAS No.
142, goodwill and intangible assets deemed to have indefinite lives are no
longer amortized, but are subject to annual impairment tests. Remaining
intangible assets at December 31, 2003 and 2002 consist solely of costs of
settling patent litigation, which are amortized over their estimated useful life
of seven years.
In connection with the adoption of SFAS No. 142, the Company completed the first
step of the transitional impairment test of goodwill. Based on this analysis,
the Company concluded that no impairment existed at the time of adoption, and
accordingly, the Company did not recognize any transitional impairment loss for
goodwill. For intangible assets with indefinite lives, the fair values of these
assets were compared to their carrying values as of January 1, 2002, also
resulting in no transitional impairment.
F-9
<PAGE>
Third Wave Technologies, Inc.
Notes to Consolidated Financial Statements
December 31, 2003
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company completed its annual impairment tests in the third quarter of 2002
and 2003. For goodwill, this analysis is based on the comparison of the fair
value of its reporting units to the carrying value of the net assets of the
respective reporting units. The fair value of the reporting units was determined
using a combination of discounted cash flows method and other common valuation
methodologies. For intangible assets with indefinite lives, the fair values of
these assets were compared to their carrying values.
Based on the analyses, in 2002 the Company determined that goodwill and
intangible assets deemed to have indefinite lives were impaired and accordingly,
recognized an impairment charge of $4,676,902 (Goodwill - $4,210,313,
Indefinite-lived intangible assets - $466,589). The Company concluded that no
impairment existed at the time of the annual impairment test in 2003.
Identifiable intangible assets with indefinite lives consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
2003 2002
---------------------------
<S> <C> <C>
Technology license $ 915,828 $1,053,000
Impairment charge - (137,172)
Trademark 91,583 421,000
Impairment charge - (329,417)
---------------------------
$1,007,411 $1,007,411
===========================
</TABLE>
Amortizable intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 2003 DECEMBER 31, 2002
-------------------------------------------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Costs of settling patent litigation $10,533,248 $4,882,124 $10,533,248 $3,377,372
Reacquired marketing and distribution
rights 2,211,111 2,211,111 2,211,111 2,211,111
Customer agreements 38,000 38,000 171,000 38,000
Impairment charge - customer
agreements - - (133,000) -
-------------------------------------------------------------
$12,782,359 $7,131,235 $12,782,359 $5,626,483
=============================================================
</TABLE>
F-10
<PAGE>
Third Wave Technologies, Inc.
Notes to Consolidated Financial Statements
December 31, 2003
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
As required by SFAS No. 142, the results of operations for periods prior to its
adoption have not been restated. Because goodwill and the intangible assets with
indefinite lives were acquired in December 2001, and no amortization expense was
recognized in 2001, there would have been no impact on the consolidated
statements of operations in 2001 if SFAS No. 142 had been adopted effective
January 1, 2001.
The estimated future amortization expense related to intangible assets for the
years subsequent to December 31, 2003 is as follows:
<TABLE>
<C> <C>
2004 $1,504,752
2005 1,504,752
2006 1,504,752
2007 1,136,868
</TABLE>
IMPAIRMENT OF LONG-LIVED ASSETS
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. If the sum of the expected
undiscounted cash flows is less than the carrying value of the related asset or
group of assets, a loss is recognized for the difference between the fair value
and carrying value of the asset or group of assets. Such analyses necessarily
involve significant judgment. During 2002, the Company recorded a charge of
approximately $7,176,000 associated with its restructuring activities (described
further in Note 8) to write-off leasehold improvements related to vacated leased
facilities and to write down certain equipment to its fair value. During 2001,
the Company recorded a charge of approximately $2,970,000 classified in general
and administrative expenses to write down certain equipment to its fair value.
PREPAID LICENSE FEES
Other assets at December 31, 2003 and 2002 include $1,846,961 and $2,227,593,
respectively, of prepaid license fees (which is net of $1,448,077 and $967,444,
respectively, of accumulated amortization) paid to third parties for the use of
patented technology. The assets are being amortized to expense over the shorter
of the term of the license or the estimated useful lives of the assets
(generally three to ten years).
F-11
<PAGE>
Third Wave Technologies, Inc.
Notes to Consolidated Financial Statements
December 31, 2003
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended, which requires that
all derivative instruments be recorded in the balance sheet at fair value and
that changes in fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. There was no cumulative effect of adoption
because the Company did not have any derivative financial instruments on January
1, 2001.
The Company sells its products in a number of countries throughout the world.
During 2003, 2002 and 2001, the Company sold certain products with the resulting
accounts receivable denominated in Japanese Yen. The Company purchases 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 currency gains and losses on the underlying Yen
receivables. Forward contracts outstanding at December 31, 2003 and 2002,
represented a U.S. dollar equivalent commitment of approximately $9,500,000 and
$629,000, respectively. The negative fair value of these derivative instruments
of approximately $631,000 and $12,000 at December 31, 2003 and 2002,
respectively, is included in accrued liabilities in the accompanying balance
sheets. The changes in the fair value of the Company's derivatives and the loss
or gain on the hedged asset relating to the risk being hedged both are recorded
currently in operations. Aggregate losses (gains) from foreign currency
transactions were approximately $708,000, $117,000 and $(4,000) in 2003, 2002
and 2001, respectively.
REVENUE RECOGNITION
Revenue from product sales is recognized upon delivery which is generally when
the title passes to the customer, provided that the Company has completed all
performance obligations and the customer has accepted the products. Customers
have no contractual rights of return or refunds associated with product sales.
F-12
<PAGE>
Third Wave Technologies, Inc.
Notes to Consolidated Financial Statements
December 31, 2003
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Grant and development revenues consist primarily of research grants from
agencies of the federal government and revenue from companies with which the
Company has established strategic alliances, the revenue from which is
recognized as research is performed. Payments received which are related to
future performance are deferred and recorded as revenue when earned. Grant
payments designated to purchase specific assets to be used in the performance of
a contract are recognized as revenue over the shorter of the useful life of the
asset acquired or the contract.
License and royalty revenue includes amounts earned from third parties for
licenses of the Company's intellectual property and are recognized when earned
under the terms of the related agreements. License revenues are generally
recognized upon receipt unless the Company has continuing performance
obligations, in which case the license revenue is recognized ratably over the
period of expected performance. Consideration received in multiple element
arrangements is allocated to the separate units based upon their relative fair
values. Royalty revenues are recognized under the terms of the related
agreements, generally upon manufacture or shipment of a product by a licensee.
RESEARCH AND DEVELOPMENT
All costs for research and development activities are expensed in the period
incurred.
SHIPPING AND HANDLING COSTS
Shipping and handling costs incurred are classified as cost of goods sold in the
accompanying statements of operations.
INCOME TAXES
Deferred income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their financial
reporting amounts at each year-end based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense is
the current tax payable for the period plus or minus the change during the
period in deferred tax assets and liabilities. No current or deferred income
taxes have been provided through December 31, 2003, because of the net operating
losses incurred by the Company since its inception.
F-13
<PAGE>
Third Wave Technologies, Inc.
Notes to Consolidated Financial Statements
December 31, 2003
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
The Company has stock-based employee compensation plans (see Note 5). SFAS No.
123, "Accounting for Stock-Based Compensation," encourages, but does not require
companies to record compensation cost for stock-based employee compensation
plans at fair value. The Company has chosen to continue using the intrinsic
value method prescribed in Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations, in
accounting for its stock option plans.
Had compensation cost been determined based upon the fair value at the grant
date for awards under the plans based on the provisions of SFAS No. 123, the
Company's SFAS No. 123 pro forma net loss and net loss per share would have been
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
2003 2002 2001
------------------------------------------------
<S> <C> <C> <C>
Net loss:
As reported $ (8,116,236) $(40,863,665) $(36,792,208)
Less: Stock-based compensation, as recognized 1,361,667 1,096,827 2,812,276
Add: Stock-based compensation expense related
to stock options determined under SFAS
No. 123 (5,168,099) (4,000,783) (3,719,037)
Add: Stock-based compensation related to the
employee stock purchase plan determined
under SFAS No. 123 (172,571) (43,314) (35,515)
------------------------------------------------
SFAS No. 123 Pro forma $ (12,095,239) $(43,810,935) $(37,734,484)
================================================
Net loss per share:
As reported, basic and diluted $ (0.20) $ (1.04) $ (1.03)
SFAS No. 123 pro forma, basic and diluted $ (0.30) $ (1.11) $ (1.06)
</TABLE>
F-14
<PAGE>
Third Wave Technologies, Inc.
Notes to Consolidated Financial Statements
December 31, 2003
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock compensation expense for options granted to nonemployees has been
determined in accordance with SFAS No. 123 and Emerging Issues Task Force (EITF)
Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services," and represents the fair value of the consideration received or the
fair value of the equity instruments issued, whichever may be more reliably
measured. For options that vest over future periods, the fair value of options
granted to nonemployees is periodically remeasured as the underlying options
vest.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments, which include cash
and cash equivalents, short-term investments, accounts receivable, foreign
currency forward contracts, accounts payable and long-term debt are considered
to approximate their respective fair values.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NET LOSS PER SHARE
Basic and diluted net loss per share has been computed using the
weighted-average number of shares of common stock outstanding during the
respective periods. The effect of stock options is antidilutive for all periods
presented due to the existence of net losses.
F-15
<PAGE>
Third Wave Technologies, Inc.
Notes to Consolidated Financial Statements
December 31, 2003
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table presents the calculation of basic and diluted net loss per
share.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
2003 2002 2001
-------------------------------------------------
<S> <C> <C> <C>
Net loss $ (8,116,236) $(40,863,665) $(36,792,208)
=================================================
Weighted-average shares of common stock outstanding
- basic and diluted 39,749,000 39,457,000 35,714,000
=================================================
Basic and diluted net loss per share $ (0.20) $ (1.04) $ (1.03)
=================================================
Weighted-average shares from options that could
potentially dilute basic earnings per share
in the future that are not included in the
computation of diluted loss per share as their
impact is antidilutive (computed under the
treasury stock method) 1,213,000 506,000 974,000
</TABLE>
COMPREHENSIVE LOSS
Net loss for 2002 and 2001 is the same as comprehensive loss defined pursuant to
SFAS No. 130, "Reporting Comprehensive Income."
NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board issued FIN No. 46,
"Consolidation of Variable Interest Entities," which requires the consolidation
of variable interest entities (VIEs). VIEs are entities for which control is
achieved through means other than voting rights. The consolidation requirements
of FIN No. 46 were applicable immediately to all VIEs in which an interest was
acquired after January 31, 2003. For VIEs in which an interest was acquired
before February 1, 2003, the consolidation requirements of FIN No. 46 are
generally effective in 2004. FIN No. 46 has not had, and is not expected to
have, a significant impact on the Company's financial statements.
F-16
<PAGE>
Third Wave Technologies, Inc.
Notes to Consolidated Financial Statements
December 31, 2003
3. ACQUISITION
On October 16, 1998, the Company and a venture capital fund managed by a
director of the Company closed a transaction at which time the Company received
1,000 shares of common stock, representing 50% of the total voting stock of
AgBio in exchange for the Company's contribution to AgBio of an exclusive
worldwide license in the field of agriculture to all of the Company's
technology, which had a $2,000,000 fair value when contributed. The Company's
investment in AgBio was recorded initially at zero because the contributed
technology was in the development phase and thus had no book value. AgBio also
recorded the Company's nonmonetary contribution at zero; however, the other
investor's $2,000,000 contribution was in cash, which created a difference
between the Company's investment balance ($0) and its share of AgBio's beginning
equity ($1,000,000). This difference was being amortized by the Company over the
estimated life of the contributed technology (5 years) as a reduction to its
share of AgBio's net losses.
On December 14, 2001, the Company purchased the remaining 50% of AgBio from the
other investor for an aggregate of 925,000 shares of the Company's common stock
valued at $6.53 per share. In addition, 25,391 options to purchase the Company's
common stock were issued to replace existing AgBio options.
The acquisition of the remaining shares was accounted for as a purchase.
Accordingly, the results of operations of AgBio have been included in the
consolidated financial statements since December 14, 2001, the effective date of
the acquisition. Additionally, 50% of AgBio's losses from January 1, 2001
through December 14, 2001, have been included as a credit to equity in losses
from joint ventures. A credit was also recorded directly to retained earnings
for 50% of the net worth of AgBio through December 31, 2000.
The purchase price of $6.2 million was allocated to the acquired assets and
assumed liabilities on the basis of their estimated fair values as of the date
of the acquisition, as determined by an independent appraisal. The majority of
the purchase price was allocated to identifiable intangible assets ($1,645,000)
and goodwill ($4,700,186).
F-17
<PAGE>
Third Wave Technologies, Inc.
Notes to Consolidated Financial Statements
December 31, 2003
3. ACQUISITION (CONTINUED)
Based on unaudited data, the following table presents selected financial
information for the Company for the year ended December 31, 2001 on a pro forma
basis, assuming AgBio had been 100% owned and consolidated since January 1,
2001:
<TABLE>
<S> <C>
Net revenues $ 34,473,491
Net loss (37,933,490)
Net loss per share $ (1.04)
</TABLE>
The pro forma net loss includes an estimation of amortization of identifiable
intangible assets that would have been recorded had the transaction taken place
at the beginning of the period being reported using a useful life of 7 years.
4. LONG-TERM DEBT
Long-term debt is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
2003 2002
------------------------------
<S> <C> <C>
Note payable $ 9,500,000 $9,500,000
Other 13,333 28,485
------------------------------
9,513,333 9,528,485
Less current portion 9,500,000 9,515,152
------------------------------
$ 13,333 $ 13,333
==============================
</TABLE>
The Company has a $9,500,000 note payable with a bank due on August 14, 2004,
bearing annual interest at 2.35%. The borrowings under the note payable are
secured by short-term investments consisting of certificates of deposit, of
$9,500,000. The Company has an unused $1,300,000 letter of credit with the same
bank that expires on September 1, 2004.
F-18
<PAGE>
Third Wave Technologies, Inc.
Notes to Consolidated Financial Statements
December 31, 2003
5. SHAREHOLDERS' EQUITY
INITIAL PUBLIC OFFERING
In February 2001, the Company completed an initial public offering of 7,500,000
shares of common stock at a price of $11.00 per share (excluding underwriters'
discounts and commissions), generating gross proceeds of approximately $82.5
million and net proceeds of $74.8 million, after deducting an aggregate of $7.7
million in underwriting discounts, commissions, and other offering related
expenses. All shares of Convertible Preferred Stock outstanding as of the
closing date of the offering were automatically converted into shares of common
stock. No dividends were paid on any of the Convertible Preferred Stock.
STOCK PURCHASE PLAN
The Company has an Employee Stock Purchase Plan (Purchase Plan) under which an
aggregate of 856,800 common shares may be issued. The Purchase Plan also
provides for annual increases in the number of shares available for issuance,
beginning in 2001, equal to the lesser of 1% of the outstanding shares of common
stock on the first day of the fiscal year, 428,400 shares or an amount
determined by the Board of Directors. During 2003, 2002 and 2001, 254,421,
122,423 and 28,069 shares, respectively, were issued. Employees are eligible to
participate in the Purchase Plan if they work at least 20 hours per week and
more than five months in any calendar year. Eligible employees may make
contributions through payroll deductions of up to 10% of their compensation. The
price of common stock purchased under the Purchase Plan is 85% of the lower of
the fair market value of the common stock at the beginning or end of the
offering period. The Plan is considered noncompensatory under APB Opinion No. 25
and, therefore, no expense is recorded for the 15% discount.
STOCK OPTION PLANS
The Company has Incentive Stock Option Plans for its employees and Nonqualified
Stock Option Plans (the Plans) for employees and non-employees under which an
aggregate of 9,913,183 options may be granted. Annual increases in the number of
shares available for issuance are allowed beginning in 2001, limited to the
lesser of 4.5% of the outstanding shares of common stock on the first day of the
fiscal year, 2,571,600 shares or an amount determined by the Board of Directors.
During 2002 and 2001, 1,771,831 and 1,338,552 additional shares, respectively,
were authorized for grant. Options under the Plans have a maximum life of ten
years. Options vest at various intervals, as determined by the Board of
Directors at the date of grant.
F-19
<PAGE>
Third Wave Technologies, Inc.
Notes to Consolidated Financial Statements
December 31, 2003
5. SHAREHOLDERS' EQUITY (CONTINUED)
The rollforward of shares available for grant through December 31, 2003, is as
follows:
<TABLE>
<S> <C>
Shares available for grant at December 31, 2000 2,744,100
Options granted (1,486,890)
Options forfeited 100,260
Increase in options available for grant 1,338,552
Options issued in Agbio acquisition (25,391)
----------
Shares available for grant at December 31, 2001 2,670,631
Options granted (2,307,950)
Options forfeited 1,064,075
Increase in options available for grant 1,771,831
----------
Shares available for grant at December 31, 2002 3,198,587
Options granted (2,813,300)
Options forfeited 1,093,405
----------
Shares available for grant at December 31, 2003 1,478,692
==========
</TABLE>
The Company's option activity is as follows:
<TABLE>
<CAPTION>
Weighted-average
Number of Shares Exercise Price
----------------------------------------------
<S> <C> <C>
Outstanding at December 31, 2000 3,300,300 $5.96
Granted 1,486,890 8.48
Options assumed in Agbio acquisition 25,391 1.10
Exercised (149,200) 2.48
Forfeited (100,260) 7.92
----------------------------------------------
Outstanding at December 31, 2001 4,563,121 6.85
Granted 2,307,950 2.31
Exercised (63,137) 0.84
Forfeited (1,064,075) 5.63
----------------------------------------------
Outstanding at December 31, 2002 5,743,859 5.29
Granted 2,813,300 3.42
Exercised (207,249) 1.75
Forfeited (1,093,405) 7.32
----------------------------------------------
Outstanding at December 31, 2003 7,256,505 4.37
----------------------------------------------
Exercisable at December 31, 2003 2,845,136 $5.41
==============================================
</TABLE>
F-20
<PAGE>
Third Wave Technologies, Inc.
Notes to Consolidated Financial Statements
December 31, 2003
5. SHAREHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
Number of
Shares Number of Shares
Outstanding at Remaining Exercisable at
December 31, Contractual December 31,
2003 Life 2003
---------------------------------------------------
<S> <C> <C> <C>
Options granted between $0.27 and $1.11 300,605 1.5 years 300,605
Options granted between $1.11 and $2.21 1,300,450 8.1 380,799
Options granted between $2.21 and $3.32 1,470,200 8.2 259,075
Options granted between $3.32 and $4.42 2,120,350 8.5 474,774
Options granted between $4.42 and $5.53 51,500 9.7 -
Options granted between $5.53 and $6.64 606,050 7.7 306,025
Options granted between $6.64 and $7.74 18,500 7.8 6,999
Options granted between $7.74 and $8.85 1,147,400 6.2 970,409
Options granted between $8.85 and $9.96 13,550 6.5 10,375
Options granted between $9.96 and $11.06 227,900 6.0 136,075
--------------- ------------------
7,256,505 2,845,136
=============== ==================
</TABLE>
Prior to February 9, 2001, the Company granted certain options to employees
having exercise prices below what was considered the fair value of the
underlying stock. The Company amortized to expense $387,709 in 2003, $994,078 in
2002 and $2,812,276 in 2001 using an accelerated vesting method whereby each of
the years' vesting components is amortized over its own vesting period. During
2003 and 2002, in connection with employee terminations, the Company extended
the exercise period and accelerated vesting for certain option grants.
Accordingly, the options had a new measurement date and were expensed based upon
their new intrinsic value. Also, options granted to non-employee consultants are
measured based upon their fair value as calculated using the Black-Scholes
option pricing model. Expense recorded in 2003 and 2002 was $973,958 and
$102,749, respectively.
Included in operating expenses are the following stock compensation charges, net
of reversals related to terminated employees:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
2003 2002 2001
-------------------------------------------------
<S> <C> <C> <C>
Cost of goods sold $ 86,793 $ 163,590 $ 540,076
Research and development 504,477 98,753 270,920
Selling and marketing 215,935 31,781 123,529
General and administrative 554,462 802,703 1,877,751
-------------------------------------------------
$ 1,361,667 $1,096,827 $2,812,276
=================================================
</TABLE>
F-21
<PAGE>
Third Wave Technologies, Inc.
Notes to Consolidated Financial Statements
December 31, 2003
5. SHAREHOLDERS' EQUITY (CONTINUED)
The weighted-average fair value of options granted in 2003, 2002 and 2001 was
$2.50, $1.73 and $5.73, respectively, using the minimum value option-pricing
model for option grants made prior to the Company's initial public offering in
February 2001 and the Black-Scholes option-pricing model for grants made
subsequent to such offering. The calculations were made assuming a dividend
yield of 0%, a weighted-average expected option life of five years and a
weighted-average risk-free interest rate of 4.0%, 4.0% and 5.5% in 2003, 2002
and 2001, respectively. The volatility factor used in the Black-Scholes method
for 2003 and 2002 and the period subsequent to the initial public offering in
2001 was .89, .97 and .90, respectively.
6. INCOME TAXES
The types of temporary differences between tax bases of assets and liabilities
and their financial reporting amounts that give rise to the deferred tax asset
(liability) and their approximate tax effects are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
2003 2002
-------------------------------
<S> <C> <C>
Deferred tax assets:
Patent expense $ 1,223,000 $ 952,000
Stock compensation expense 806,000 887,000
Deferred revenue 27,000 378,000
Inventory obsolescence 300,000 1,220,000
Accrued liabilities 1,452,000 1,939,000
Equipment and leasehold improvements 478,000 924,000
Other 85,000 196,000
Net operating loss carryforwards 45,899,000 41,187,000
-------------------------------
50,270,000 47,683,000
Deferred tax liability - intangible assets (2,260,000) (2,862,000)
-------------------------------
Net deferred tax asset 48,010,000 44,821,000
Valuation allowance (48,010,000) (44,821,000)
-------------------------------
$ - $ -
===============================
</TABLE>
At December 31, 2003, the Company had net operating loss carryforwards of
approximately $114 million for U.S. federal and state income tax purposes, which
expire beginning in 2008. In the event of a change in ownership greater than 50%
in a three-year period, utilization of the net operating losses may be subject
to a substantial annual limitation due to the ownership change limitations
provided by the Internal Revenue Code of 1986 and similar state provisions.
F-22
<PAGE>
Third Wave Technologies, Inc.
Notes to Consolidated Financial Statements
December 31, 2003
7. LEASE OBLIGATIONS
The Company leases its corporate facility under an operating lease effective
through September 2011. The Company has the option to extend the lease for three
additional five-year periods. The lease agreement required a $1,000,000 upfront
payment and requires the Company to provide the landlord an irrevocable standby
letter of credit of $1,300,000, which is collateralized by a certificate of
deposit included in short-term investments. Ongoing rent payments increase
during the lease term. Rent expense is being recorded by the Company on a
straight-line basis over the amended lease term. At December 31, 2003 and 2002,
long-term other assets includes approximately $1,078,000 and $1,218,000,
respectively, of prepaid rent and at December 31, 2003 and 2002, other long-term
liabilities includes approximately $728,000 and $174,000, respectively, of
deferred rent.
Future minimum lease payments by year are as follows:
<TABLE>
<C> <C>
2004 $ 1,495,000
2005 1,806,000
2006 1,879,000
2007 1,954,000
2008 2,032,000
Thereafter 6,026,000
------------
Total minimum lease obligations $ 15,192,000
============
</TABLE>
Rent expense was approximately $2,097,000, $2,473,000 and $1,713,000 in 2003,
2002 and 2001, respectively.
8. RESTRUCTURING AND OTHER CHARGES
During the third quarter of 2002, the Company announced a restructuring plan
designed to simplify product development and manufacturing operations and reduce
operating expenses. The restructuring charges recorded were determined based
upon plans submitted by the Company's management and approved by the Board of
Directors using information available at the time. The third quarter 2002
restructuring charge included $2.2 million for the consolidation of facilities,
$500,000 for prepayment penalties mainly under capital lease arrangements, an
impairment charge of $10.8 million for abandoned leasehold improvements and
equipment to be sold and $900,000 of other costs related to the restructuring.
The Company also recorded a $1.1 million charge within cost of goods sold
related to inventory that was considered obsolete based upon the restructuring
plan.
F-23
<PAGE>
Third Wave Technologies, Inc.
Notes to Consolidated Financial Statements
December 31, 2003
8. RESTRUCTURING AND OTHER CHARGES (CONTINUED)
During the fourth quarter of 2002, the Company completed an auction to sell
equipment held for sale resulting from the restructuring. The auction resulted
in significantly higher proceeds than the Company had anticipated in the third
quarter of 2002. Accordingly, a credit of $3.6 million was recorded as an offset
to the restructuring charge in the fourth quarter of 2002. The Company also
amended its corporate lease agreement during the fourth quarter of 2002, which
resulted in an increase to the facilities charge of $300,000. The facilities
charge contained estimates based upon the Company's potential to sublease a
portion of its corporate office beginning in 2004.
The Company continues to offer corporate office space for sublease, but it has
not yet sublet the space. Accordingly, in the fourth quarter of 2003, the
Company changed its estimate of when it expects to sublease the space from 2004
to 2006.
The following table shows the components of the restructuring and other charges
and changes in the restructuring accrual through December 31, 2003. The
remaining restructuring balance of $1.4 million is for rent payments on a
non-cancelable lease, net of estimated sublease income, which will continue to
be paid over the lease term through 2011. The current portion of the accrual of
$323,146 is included in other accrued liabilities on the balance sheet and the
remainder is included in other long-term liabilities.
<TABLE>
<CAPTION>
Equipment and
Leasehold
Improvements Prepayment
Facilities Disposals Penalties Other Total
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Charge in 2002 $ 2,470,438 $ 7,175,995 $ 494,930 $ 945,870 $ 11,087,233
Payments made (312,400) - (469,300) - (781,700)
Non-cash charges - (7,175,995) (25,630) (140,290) (7,341,915)
------------------------------------------------------------------------------
Accrued
restructuring
balance at
December 31, 2002 2,158,038 - - 805,580 2,963,618
Payments made (674,809) - - (874,765) (1,549,574)
Revision to estimate (69,185) - - 69,185 -
------------------------------------------------------------------------------
Accrued
restructuring
balance at
December 31, 2003 $ 1,414,044 $ - $ - $ - $ 1,414,044
==============================================================================
</TABLE>
F-24
<PAGE>
Third Wave Technologies, Inc.
Notes to Consolidated Financial Statements
December 31, 2003
9. LICENSE AGREEMENTS
The Company entered into an exclusive license agreement (research license) in
March 1994 to make, use and sell products utilizing the licensed patents in the
research market. Under the research license, the Company is required to pay a
royalty at a rate not to exceed a certain percentage of the selling price on
licensed component sales. There have been no sales of licensed components
through December 31, 2003. The research license will continue until the licensed
patents expire or until the agreement is terminated by either party, whichever
is earlier, as defined in the agreement. The Company also entered into an equity
agreement with the licensor in March 1994 whereby it issued 115,200 shares of
common stock in exchange for the research license and diagnostic market option,
which is an exclusive license agreement to make, use and sell products utilizing
the licensed patents in the diagnostic market. In October 1998, the Company
issued 103,200 shares to the licensor to exercise the diagnostic market option.
The shares issued in 1994 and 1998 were valued at amounts considered to
approximate the fair value of common stock at the time of each issuance.
Under this agreement, the Company granted the licensor a put option to sell a
specified number of shares back to the Company anytime after March 1, 1998. The
total number of shares that can be put to the Company cannot exceed the number
of shares necessary to achieve a purchase price of $200,000. At December 31,
2003, the price per share to be paid if the put option is exercised is $3.37.
Accordingly, the Company has classified $200,000 of additional paid-in capital
outside of shareholders' equity in the accompanying balance sheets.
In October 2001, the Company entered into a development, license and supply
agreement with RIKEN, Inc. (RIKEN). The Company licensed certain patent rights
relating to polymorphism in genes that encode drug metabolizing enzymes from
RIKEN for a nonrefundable fee which is being amortized over its estimated useful
life (7.5 years). In 2003, the Company and RIKEN entered into an additional
license for similar content. The Company also pays royalties based upon net
sales of licensed products in exclusive and nonexclusive territories.
In addition, the Company licensed rights to patents and/or patent applications
covering genetic variations associated with certain diseases for which the
Company has designed clinical diagnostic products.
F-25
<PAGE>
Third Wave Technologies, Inc.
Notes to Consolidated Financial Statements
December 31, 2003
10. COLLABORATIVE AGREEMENTS
In December 2000, the Company entered into a development and commercialization
agreement with BML, Inc. (BML). Under this agreement, the Company developed
assays in accordance with a mutually agreed development program for use in
clinical applications by BML. In 2000, BML paid the Company a nonrefundable fee
of $3 million, which was recognized as revenue on a straight-line basis over the
expected term of development services being performed by the Company. The
Company recorded revenue from BML of $917,000, $1,000,000 and $1,000,000 in
2003, 2002 and 2001, respectively. Additionally, in 2003, 2002 and 2001, BML
paid the Company $1,500,000, $1,683,000 and $2,000,000, respectively, for
product and specified services performed in these respective years, which was
recognized as revenue as the product was shipped and services were performed.
On October 16, 2002, the Company entered into a license and supply agreement
with Aclara Biosciences, Inc. (Aclara) under which Aclara has the non-exclusive
right to incorporate the Company's Invader(TM) technology and Cleavase(R) enzyme
with Aclara's eTag(TM) technology to offer the eTag Assay System for multiplexed
gene expression applications for the research market. In exchange, Aclara made
certain upfront payments and will make royalty payments to the Company on sales
of eTag-Invader gene expression assays. The Company has also provided Aclara
with certain manufacturing materials for use in manufacturing Invader products.
In connection with this agreement, the Company recorded revenue of $1,500,000
related to the license granted and $2,780,000 for product shipped to Aclara
during 2002. The Company received royalty revenue of $100,000 in 2003.
11. 401(k) PLAN
The Company has a 401(k) savings plan (the Plan) which covers substantially all
employees. The Plan provides for Company contributions of 50% of employee
contributions up to 6% of their compensation. Company contributions to the plan
were approximately $311,000, $331,000 and $316,000 in 2003, 2002 and 2001,
respectively.
F-26
<PAGE>
Third Wave Technologies, Inc.
Notes to Consolidated Financial Statements
December 31, 2003
12. SEGMENT DISCLOSURE
The Company operates in one industry segment. Product revenues to international
end-users accounted for 78%, 70% and 87% of product revenues in 2003, 2002 and
2001, respectively. At December 31, 2003 and 2002, approximately $1,011,000 and
$695,000, respectively, of receivables are denominated in Yen. Product revenues
by geographic area in 2003, 2002 and 2001, were as follows:
<TABLE>
<CAPTION>
2003 2002 2001
----------------------------------------------
<S> <C> <C> <C>
United States $ 7,668,573 $ 8,700,680 $ 3,868,909
Japan 26,983,342 19,865,716 26,386,919
Other 496,382 314,546 149,227
----------------------------------------------
$ 35,148,297 $28,880,942 $30,405,055
==============================================
</TABLE>
F-27
<PAGE>
Third Wave Technologies, Inc.
Notes to Consolidated Financial Statements
December 31, 2003
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following sets forth selected quarterly financial and stock price
information for the years ended December 31, 2003 and 2002 (in thousands, except
per share data). The operating results are not necessarily indicative of results
for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------------------------------------------------------------
<S> <C> <C> <C> <C>
2003:
Net revenues $ 8,492 $ 8,817 $ 9,354 $ 9,657
Gross margin 5,403 5,442 6,094 6,541
Net loss (2,924) (2,161) (1,435) (1,596)
Basic and diluted net loss per
share $ (0.07) $ (0.05) $ (0.04) (0.04)
Common stock price per share:
High $ 3.70 $ 5.30 $ 4.65 4.75
Low 2.64 3.29 3.13 3.25
2002:
Net revenues $ 10,127 $ 9,588 $ 5,023 $ 7,617
Gross margin 2,450 2,986 603 4,996
Net loss (7,318) (6,128) (26,932)(1) (486)(2)
Basic and diluted net loss
per share $ (0.19) $ (0.16) $ (0.68) $ (0.01)
Common stock price per share:
High $ 7.65 $ 4.31 $ 2.35 $ 3.11
Low 3.09 2.13 1.35 1.32
</TABLE>
(1) Net loss during the quarter ended September 30, 2002, included an increase
in the reserve for excess and obsolete inventory of $1,134,000 (see Note 8)
(classified in cost of goods sold); a restructuring charge of $14,309,000
(see Note 8) and an impairment loss of $4,810,000 (see Note 2).
(2) Net loss during the quarter ended December 31, 2002, included a reduction
in the restructuring charge recorded in the quarter ended September 30,
2002 of $3,222,000 (see Note 8).
F-28
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
As required by Rule 13a-15(b) under the Securities Exchange Act of 1934,
the Company's management, including the Company's Chief Executive Officer and
Chief Financial Officer, conducted an evaluation as of the end of the period
covered by this report, of the effectiveness of the Company's disclosure
controls and procedures as defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934. Based on that evaluation, the Company's Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures were effective as of the end of the period covered by
this report. There have been no significant changes during the period covered by
this report in the Company's internal control over financial reporting or in
other factors that could significantly affect internal control over financial
reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company incorporates by reference the information required by this Item
from the sections captioned "Section 16(a) Beneficial Ownership Reporting
Compliance," "Executive Compensation -- Executive Officers of the Company,"
"Proposal 1 Election of Directors -- Nominees for Election at the Annual Meeting
for Terms Ending in 2007 and -- Directors Whose Terms Extend Beyond the Annual
Meeting," and "Proposal 1 Election of Directors -- Board Meetings, Committees
and Director Compensation" from the Company's definitive proxy statement for its
annual meeting of shareholders scheduled to be held on June 22, 2004 (the "Proxy
Settlement"), which will be filed with the Securities and Exchange Commission
pursuant to Regulation 14A not later than 120 days after the end of the
Company's fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The Company incorporates by reference the information required by this Item
from the Proxy Statement section captioned "Equity Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The Company incorporates by reference the information required by this Item
from the Proxy Statement section captioned "Security Ownership of Certain
Beneficial Owners, Directors and Management."
Information required with respect to the securities authorized for issuance
under the Company's equity compensation plans, including plans that have
previously been approved by the Company's stockholders and plans that have not
previously been approved by the Company's stockholders, will be set forth in the
Proxy Statement, and such information is incorporated by reference from the
section of the Proxy Statement captioned "Executive Compensation -- Equity
Compensation Plan Information."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company incorporates by reference the information required by this Item
from the Proxy Statement section captioned "Executive Compensation -- Employment
Agreements with Executive Officers and Certain Transactions and Business
Relationships."
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The Company incorporates by reference the information required by this Item
from the Proxy Statement section captioned "Proposal 2 Ratification of
Appointment of Auditors."
- 31 -
<PAGE>
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents Filed as a Part of this Report.
1. Financial Statements. The financial statements required to be filed as
part of this Report are listed on page F-2.
2. Financial Statement Schedules. The following financial statement
schedule required to be filed as part of this Report is included on
page 35.
Schedule II--Valuation and Qualifying Accounts.
Schedules not included have been omitted because they are not
applicable.
3. Exhibits. The exhibits required to be filed as a part of this Report are
listed in the Exhibit Index.
(b) Reports on Form 8-K.
The Company filed a Form 8-K dated October 23, 2003 furnishing under Items
7 and 9 of Form 8-K the Company's press release dated October 23, 2003
announcing the Company's third quarter results.
32
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 12, 2004.
THIRD WAVE TECHNOLOGIES, INC.
By: /s/ LANCE FORS
------------------------------
Lance Fors
Chief Executive Officer
POWER OF ATTORNEY
We, the undersigned directors and executive officers of Third Wave
Technologies, Inc., hereby severally constitute and appoint of John A. Comerford
our true and lawful attorney and agent, with full power to him to sign for us,
and in our names in the capacities indicated below, any and all amendments to
the Annual Report on Form 10-K of Third Wave Technologies, Inc. filed with the
Securities and Exchange Commission, hereby ratifying and confirming our
signatures as they may be signed by our said attorney to any and all amendments
to said Annual Report on Form 10-K.
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------- ----------------------------- --------------
<S> <C> <C>
/s/ LANCE FORS Chief Executive Officer March 12, 2004
- ------------------------------- and Director
Lance Fors
/s/ JOHN PUISIS President, Chief March 12, 2004
- ------------------------------- Operating Officer,
John Puisis and Director
/s/ DAVID M. NUTI Chief Financial Officer March 12, 2004
- ------------------------------- (Principal Financial
David M. Nuti Officer)
/s/ GORDON F. BRUNNER Director March 12, 2004
- -------------------------------
Gordon F. Brunner
/s/ G. STEVEN BURRILL Director March 15, 2004
- -------------------------------
G. Steven Burrill
/s/ TOM DANIEL Director March 10, 2004
- -------------------------------
Tom Daniel
/s/ SAM ELETR Director March 13, 2004
- -------------------------------
Sam Eletr
/s/ KENNETH R. MCGUIRE Director March 10, 2004
- -------------------------------
Kenneth R. McGuire
/s/ JOHN NEIS Director March 12, 2004
- -------------------------------
John Neis
/s/ LLOYD M. SMITH Director March 15, 2004
- -------------------------------
Lloyd M. Smith
/s/ DAVID A. THOMPSON Director March 12, 2004
- -------------------------------
David A. Thompson
</TABLE>
33
<PAGE>
EXHIBIT INDEX
Certain of the following exhibits, as indicated parenthetically, were
previously filed as exhibits to registration statements filed by the Company
under the Securities Act of 1933, as amended (the "Securities Act"), or to
reports or registration statements filed by the Company under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and are hereby
incorporated by reference to such statements or reports. The Company's Exchange
Act file number is 000-31745.
Exhibits marked with an asterisk (*) indicate portions of the exhibit have
received confidential treatment. Exhibits marked with a double asterisk (**)
indicate a management contract or compensatory plan or arrangement.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION INCORPORATED BY REFERENCE TO
- ------- ------------------------------------ -------------------------------------
<S> <C> <C>
3.1 Amended and Restated Certificate of Exhibit 3.1(b) to the Registrant's
Incorporation of the Registrant, Registration Statement on Form S-1,
dated as of August 16, 2000 Registration No. 333-42694, filed on
July 31, 2000, as amended
3.2 Amended and Restated Bylaws of the Exhibit 3.2(b) to the Registrant's
Registrant, dated as of February 9, Registration Statement on Form
2001 8-A, File No. 000-31745, filed on
November 30, 2001
4.1 Investors' Rights Agreement, dated Exhibit 4.2 to the Registrant's
as of July 24, 2000 Registration Statement on Form S-1,
Registration No. 333-42694, filed
on July 31, 2000, as amended
4.2 Rights Agreement between the Exhibit 4.9 to the Registrant's
Registrant and EquiServe Trust Company Registration Statement on Form
N.A., dated as of October 24, 2001 8-A, File No. 000-31745, filed on
November 30, 2001
4.3 Amendment No. 1 to the Rights Exhibit 4.2 to the Registrant's
Agreement between the Registrant and Registration Statement on Form 8-A/A,
EquiServe Trust Company N.A., File No. 000-31745, filed on
dated February 18, 2003 February 19, 2003
10.1** Incentive Stock Option Plan Exhibit 10.1 to the Registrant's
Registration Statement on Form S-1,
Registration No. 333-42694, filed
on July 31, 2000, as amended
10.2** 1997 Incentive Stock Option Plan Exhibit 10.2 to the Registrant's
Registration Statement on Form S-1,
Registration No. 333-42694, filed
on July 31, 2000, as amended
10.3** 1997 Nonqualified Stock Option Plan Exhibit 10.3 to the Registrant's
Registration Statement on Form S-1,
Registration No. 333-42694, filed
on July 31, 2000, as amended
10.4** 1998 Incentive Stock Option Plan Exhibit 10.4 to the Registrant's
Registration Statement on Form S-1,
Registration No. 333-42694, filed
on July 31, 2000, as amended
10.5** 1999 Incentive Stock Option Plan Exhibit 10.5 to the Registrant's
Registration Statement on Form S-1,
Registration No. 333-42694, filed
on July 31, 2000, as amended
10.6** 1999 Nonqualified Stock Option Plan Exhibit 10.6 to the Registrant's
Registration Statement on Form S-1,
Registration No. 333-42694, filed
on July 31, 2000, as amended
10.7** 2000 Stock Plan Exhibit 10.7 to the Registrant's
Registration Statement on Form S-1,
Registration No. 333-42694, filed
on July 31, 2000, as amended
10.8** 2000 Employee Stock Purchase Plan Exhibit 10.8 to the Registrant's
Registration Statement on Form S-1,
Registration No. 333-42694, filed
on July 31, 2000, as amended
10.9** Form of Director and Executive Officer Exhibit 10.9 to the Registrant's
Indemnification Agreement Registration Statement on Form S-1,
Registration No. 333-42694, filed
on July 31, 2000, as amended
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION INCORPORATED BY REFERENCE TO
- ------- ------------------------------------ -------------------------------------
<S> <C> <C>
10.10 Lease Agreement, dated as of April Exhibit 10.18 to the Registrant's
1, 1997, between the Registrant and Registration Statement on Form S-1,
University Research Park Facilities Registration No. 333-42694, filed
Corp. and amendment, dated as of on July 31, 2000, as amended
September 1, 2001
10.11 Amendment to Lease between Registrant Exhibit 10.11 to the Registrant's
and University Research Park Facilities Annual Report on Form 10-K for the
Corp. dated as of September 1, 2002 fiscal year ended December 31, 2002
10.12 Lease, dated as of October 30, 2000, Exhibit 10.25 to the Registrant's
between the Registrant and LCB, LLC Registration Statement on Form S-1,
Registration No. 333-42694, filed
on July 31, 2000, as amended
10.13 Development and Commercialization Exhibit 10.26 to the Registrant's
Agreement, dated as of December 29, Registration Statement on Form S-1,
2000, between the Registrant and BML, Registration No. 333-42694, filed
on Inc. July 31, 2000, as amended
10.14 License Agreement dated as of October Exhibit 10-14 to the Registrant's
15, 2002 between Registrant and Annual Report on Form 10-K for the
Aclara Biosciences, Inc. fiscal year ended December 31, 2002
10.15 Third Wave Technologies, Inc.
Long-Term Incentive Plan
10.16 Employment Agreement between Lance
Fors and Third Wave Technologies, Inc.
dated October 16, 2003
10.17 Employment Agreement between John
Puisis and Third Wave Technologies, Inc.
dated September 19, 2001 and Amendment
dated July 17, 2003
21 List of Subsidiaries
23 Consent of Ernst & Young LLP
24 Powers of Attorney (contained in the
signature page hereto)
31.1 Certification Pursuant to Section
302 of the Sarbanes Oxley Act of
2002.
31.2 Certification pursuant to Section
302 of the Sarbanes Oxley Act of
2002.
32.1 Certification pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley
Act of 2002
32.2 Certification pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley
Act of 2002
</TABLE>
35
<PAGE>
SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED
BEGINNING (CREDITED) TO (1) BALANCE AT
DESCRIPTION OF YEAR EXPENSE DEDUCTIONS END OF YEAR
- ------------------------------------------ ---------- ------------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Allowance for doubtful accounts receivable:
2001................................. $ 59 $ 116 $ 0 $ 175
====== ====== ====== ======
2002................................. $ 175 $ 455 $ 165 $ 465
====== ====== ====== ======
2003................................. $ 465 $ 402 $ 727 $ 140
====== ====== ====== ======
Allowance for excess and obsolete inventory:
2001................................. $ 260 $2,420 $ 0 $2,680
====== ====== ====== ======
2002................................. $2,680 $2,015 $1,645 $3,050
====== ====== ====== ======
2003................................. $3,050 $1,308 $3,608 $ 750
====== ====== ====== ======
</TABLE>
- ----------
(1) Represents amounts written off or disposed, net of recoveries.
36
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.15
<SEQUENCE>3
<FILENAME>c83528exv10w15.txt
<DESCRIPTION>X
<TEXT>
<PAGE>
EXHIBIT 10.15
THIRD WAVE TECHNOLOGIES, INC. LONG TERM INCENTIVE PLAN
1. PLAN OBJECTIVE
The Third Wave Technologies, Inc. Long Term Incentive Plan (referred to as
the "Plan") is designed to encourage results-oriented actions on the part of
members of the executive management team and other key employees of Third Wave
Technologies, Inc. (the "Company"). The Plan is intended to align closely
financial rewards for the employees with the achievement of specific performance
objectives by the Company.
2. ELIGIBILITY
Members of the executive management team of the Company ("Tier 1
Employees") and other key employees of the Company ("Tier 2 Employees") are
eligible to participate in the Plan. The Administrator (as defined in Section 3
below) shall select the Tier 1 Employees and Tier 2 Employees who may
participate in the Plan (a "Participant").
3. ADMINISTRATION
(a) The Plan shall be administered by the Compensation Committee of the
Company's Board of Directors (the "Administrator"). The Administrator may
delegate its authority to administer the Plan to an individual or committee. The
term "Administrator" shall mean the Compensation Committee or such individual or
committee to which authority has been delegated.
(b) The Administrator shall have full power and authority to establish the
rules and regulations relating to the Plan, to interpret the Plan and those
rules and regulations, to select each Participant for the Plan, to determine the
Participant's target award, performance goals and final award, to make all
factual and other determinations in connection with the Plan, and to take all
other actions necessary or appropriate for the proper administration of the
Plan, including the delegation of such authority or power, where appropriate.
(c) All powers of the Administrator shall be executed in its sole
discretion, in the best interest of the Company, not as a fiduciary, and in
keeping with the objectives of the Plan and need not be uniform as to similarly
situated individuals. The Administrator's administration of the Plan, including
all such rules and regulations, interpretations, selections, determinations,
approvals, decisions, delegations, amendments, terminations, and other actions,
shall be final and binding upon the Company and all employees of the Company,
including each Participant and his or her respective beneficiary(ies).
<PAGE>
4. TARGET AWARDS AND PERFORMANCE GOALS
(a) The Administrator shall establish for each Participant who completes
and returns an enrollment agreement, in a form designated by the Administrator,
a target award that shall be payable if and to the extent the Company attains
the performance goals set by the Administrator for a specified performance
period. The executed enrollment agreement shall constitute a Participant's
consent to be subject to the terms of the Plan and to be bound by the authority
of the Administrator as set forth in Section 3.
(i) Unless the Administrator determines otherwise, the target award
for a Participant who is a Tier 1 Employee shall be an amount equal to three
times the highest annual incentive target amount established for the Participant
during the performance period under the Company's annual incentive plan
applicable to the Participant.
(ii) Unless the Administrator determines otherwise, the target award
for a Participant who is a Tier 2 Employee shall be an amount equal to two times
the highest annual incentive target amount established for the Participant
during the performance period under the Company's annual incentive plan
applicable to the Participant.
(b) The Administrator shall establish the performance goals and related
calculation matrices for each performance period and shall promptly provide this
information to each Participant who is eligible for an award for that
performance period. Unless the Administrator determines otherwise, the
performance goals shall be based upon (i) the Company's total shareholder return
ranking as compared to its peer group, (ii) the Company's stock price growth,
and (iii) the growth in the Company's Clinical Molecular Diagnostics revenue.
The Administrator may adjust the performance goals as it deems appropriate to
take into account corporate transactions or other extraordinary events that
occur during the performance period.
(c) For the purposes of subsection (b), the Administrator shall have the
discretion to determine which companies are included in the peer group. The
Administrator may adjust the peer group from time to time as it deems
appropriate, including by adding, deleting, or replacing companies, to take into
account mergers and other changes in the companies comprising the peer group.
(d) Unless the Administrator determines otherwise, each performance period
shall be a period of three calendar years beginning on January 1 of the first
calendar year of the performance period and ending on December 31 of the third
year of the performance period.
5. CALCULATION OF INCENTIVE AWARDS
(a) At the end of the performance period, the Administrator shall
determine for each participant whether and to what extent the performance goals
have been met and the percentage of the target award that is earned. The
Administrator shall rely upon the audited financial statements of the Company
and its subsidiaries to determine whether and to what extent the performance
goals are met.
-2-
<PAGE>
(b) The Administrator shall compute each Participant's award for the
performance period based upon the Company's achievement of the performance goals
and the matrices provided to the Participant in accordance with Section 4(b). On
or around March 15 of the year following the end of the applicable performance
period, the Company shall credit each Participant's award to a book account
established for the Participant. All amounts credited to a Participant's book
account shall be administered according to the vesting provisions of Section 6
below.
(c) Participants must be employed on the last day of the applicable
performance period to be eligible for an incentive award under the Plan, except
as described below or except as the Administrator may otherwise determine.
(i) The beneficiary(ies) of a Participant who dies during the
performance period shall receive a prorated award based upon the Company's
performance at the end of such performance period. The prorated award shall be
calculated from the date on which the Participant became eligible to participate
for the current performance period to the date of the Participant's death. The
Company shall credit the prorated award to a book account established for the
beneficiary(ies) as soon as practicable after the Participant's death.
(ii) Participants who retire on or after their normal retirement age
(as defined below) during the performance period shall receive a prorated award
based upon the Company's performance at the end of such performance period. The
prorated award shall be calculated from the date on which the Participant became
eligible to participate for the current performance period to the date of the
Participant's normal retirement. The Company shall credit the prorated award to
a book account established for the Participant as soon as practicable after the
Participant's retirement. For purposes of this Plan, "normal retirement age" is
age 65, or, if the Participant has at least five years of service, age 55.
(iii) Participants who become disabled (as defined below) during the
performance period shall receive a prorated award based upon the Company's
performance at the end of such performance period. The prorated award shall be
calculated from the date on which the Participant became eligible to participate
for the current performance period to the date the Participant is disabled. The
Company shall credit the prorated award to a book account established for the
Participant as soon as practicable after the Participant becomes disabled. For
purposes of this Plan, "disabled" means eligible for long term disability
benefits as determined under a Company-sponsored disability plan.
(iv) Upon a Change in Control of the Company during the performance
period,
(1) all performance goals pertaining to awards during such
performance period shall be deemed to have been met 100 percent at the end of
such performance period and Participants who are then employed by the Company on
the date of the Change in Control shall be eligible to receive the maximum award
payout (the maximum award payout equals 200% of the target award).
-3-
<PAGE>
(2) In the event a Participant voluntarily terminates his or her
employment within two years of a Change in Control, such Participant's award
shall be prorated as of the date of the Change in Control and based upon
whichever of the following generates the greatest award:
(A) the maximum target achievements for such performance
period prorated as of the date of the Change in Control, or
(B) the actual target achievements determined as of the date
of the Change in Control.
(3) For purposes of the Plan, the term Change in Control shall mean,
and shall be deemed to have occurred if, (i) any "person" (as such term is used
in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended)
or group acting in concert, other than a trustee or other fiduciary holding
securities under an employee benefit plan of the Company acting in such capacity
or a corporation owned directly or indirectly by the stockholders of the Company
in substantially the same proportions as their ownership of stock of the
Company, becomes the "beneficial owner" (as defined in Rule 13d-3 under said
Act), directly or indirectly, of securities of the Company representing more
than 50 percent of the total voting power represented by the Company's then
outstanding voting securities; (ii) during any period of two consecutive years,
individuals who at the beginning of such period constitute the Board of
Directors of the Company and any new director whose election by the Board of
Directors or nomination for election by the Company's stockholders was approved
by a vote of at least two thirds (2/3) of the directors then still in office who
either were directors at the beginning of the period or whose election or
nomination for election was previously so approved, cease for any reason to
constitute a majority thereof; (iii) a merger or consolidation of the Company
with any other corporation is consummated, other than a merger or consolidation
which would result in the voting securities of the Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity) at least 50 percent of the total voting power represented by the voting
securities of the Company or such surviving entity outstanding immediately after
such merger or consolidation; or (iv) the stockholders of the Company approve an
agreement for the sale or disposition by the Company of (in one transaction or a
series of related transactions) all or substantially all of the Company's assets
which is consummated.
(d) The Administrator may establish appropriate terms and conditions to
accommodate newly hired, promoted or transferred employees.
6. VESTING OF INCENTIVE AWARDS
(a) If a Participant earns an award as described in Section 5 for a
performance period, unless the Administrator determines otherwise, 25 percent of
the award shall vest on the last day of the performance period, 50 percent of
the award shall vest on the last day of the year following the end of such
performance period, and the remaining 25 percent of the award shall vest on the
last day of the second year following the end of such performance period,
provided the Participant continues to be employed by the Company or an affiliate
through such applicable vesting date.
-4-
<PAGE>
(b) If a Participant retires at or after his or her normal retirement age,
becomes disabled, or dies while employed by the Company, the Participant's award
shall be fully vested at the end of the performance period or at the time such
event occurs, whichever is later.
(c) If a Participant's employment with the Company and its affiliates
terminates prior to a Change in Control for any reason other than as set forth
in subsection (b), any unvested award shall be forfeited to the Company as of
his or her termination date.
(d) In the event of a Change in Control, each Participant's incentive
award shall become fully vested upon the second year anniversary of the
effective date of a Change in Control. In the event a Participant's employment
with the Company is terminated for Good Reason or involuntary terminated other
than for Cause (as those terms are defined in employment agreements between
Company and Participant) within two years following a Change in Control, the
Participant's award shall automatically vest as of the date of termination of
employment. For the purposes hereof and provided the Participant has no
employment agreement with Company, the term Cause shall mean any of the
following grounds for termination of the Participant's employment:
(i) the Participant is convicted of a felony;
(ii) the Participant intentionally and continually fails
substantially to perform his or her reasonably assigned material duties to the
Company (other than a failure resulting from the Participant's incapacity due to
physical or mental illness), which failure has been materially and demonstrably
detrimental to the Company and has continued for a period of at least 30 days
after a written notice of demand for substantial performance, signed by a duly
authorized officer of the Company, has been delivered to the Participant
specifying the manner in which he or she has failed substantially to perform;
(iii) the Participant engages in willful misconduct in the
performance of his or her duties; or
(iv) the Participant breaches any non-competition, non-disclosure,
or non-solicitation agreement in effect with the Company.
(e) A transfer of employment between the Company and an affiliate
(affiliate defined as any business entity controlled by, controlling or under
common control with Company) shall not be considered a termination of employment
for purposes of the Plan.
7. CHANGES TO PERFORMANCE GOALS AND TARGET AWARDS
At any time prior to the final determination of awards, the Administrator
may adjust the performance goals and target awards to reflect a change in
corporate capitalization (such as a stock split or stock dividend), or a
corporate transaction (such as a merger, consolidation, separation,
reorganization, or partial or complete liquidation), or to reflect equitably the
occurrence of any extraordinary event, any change in applicable accounting rules
or principles, any change in the Company's method of accounting, any change in
applicable law, any change
-5-
<PAGE>
due to any merger, consolidation, acquisition, reorganization, stock split,
stock dividend, combination of shares, or other changes in the Company's
corporate structure or shares, or any other change of a similar nature.
8. PAYMENT OF AWARDS
(a) Unless determined otherwise by the Administrator, a Participant may
elect, in the manner specified by the Administrator, to receive payment of his
or her award in (i) cash or (ii) shares of the Company's common stock valued as
of the day that is five business days before the date of distribution. Except as
provided in subsection (b), payment shall be made as soon as administratively
possible following the vesting of an award for any reason. Participants who
elect to take a distribution of their award in the form of the Company's stock,
rather than in cash, shall receive a 10 percent increase in the number of shares
of the Company's stock distributed. The distribution of the Company's stock
shall be made in accordance with the Third Wave Technologies, Inc. 2000 Stock
Plan, pursuant to Section 11 of such plan.
(b) Unless the Administrator determines otherwise, a Participant who is a
Tier 1 Employee may make an irrevocable election by September 30th of the year
that immediately precedes the year in which his or her award would vest to defer
payment of such award pursuant to a separate deferred compensation arrangement
sponsored by the Company.
(c) Subject to applicable state law and the notification to, or consent
of, a Participant's spouse, as required, each Participant may designate a
beneficiary or beneficiaries (which beneficiary may be an entity other than a
natural person) to receive any payments which are to be made following the
Participant's death. Such designation may be changed or canceled at any time
without the consent of any such beneficiary but again subject to applicable
state law and the notification to, or consent of, a Participant's spouse, as
required. Any such designation, change, or cancellation must be made on a form
approved by the Administrator and shall not be effective until received by the
Administrator or its designee. If no beneficiary has been named, or the
designated beneficiary or beneficiaries shall have predeceased the Participant,
the beneficiary shall be the Participant's surviving spouse or, if none, the
Participant's estate. If a Participant designates more than one beneficiary, the
interests of such beneficiaries shall be paid in equal shares, unless the
Participant has specifically designated otherwise.
9. AMENDMENTS AND TERMINATION
The Company may at any time amend, suspend, or terminate the Plan or any
portion thereof; provided that no amendment that would adversely affect the
rights of a Participant under an outstanding award may take effect without such
Participant's prior written consent. Notwithstanding the foregoing, the Company
shall have the right to modify the terms of the Plan as may be necessary or
desirable to comply with applicable laws.
10. MISCELLANEOUS PROVISIONS
(a) This Plan is not a contract between the Company and any Participant.
Neither the establishment of this Plan, nor any action taken hereunder, shall be
construed as giving any
-6-
<PAGE>
Participant any right to be retained in the employ of the Company or any of its
subsidiaries. Nothing in the Plan, and no action taken pursuant to the Plan,
shall affect the right of the Company or a subsidiary to terminate a
Participant's employment at any time and for any or no reason. The Company is
under no obligation to continue the Plan.
(b) A Participant's right and interest under the Plan may not be assigned
or transferred, except as provided in Section 5(c)(i) of the Plan upon death,
and any attempted assignment or transfer shall be null and void and shall
extinguish, in the Company's sole discretion, the Company's obligation under the
Plan to pay award(s) with respect to the Participant. The Company's obligations
under the Plan may be assigned to any corporation which acquires all or
substantially all of the Company's assets or any corporation into which the
Company may be merged or consolidated.
(c) The Plan shall be unfunded. The Company shall not be required to
establish any special or separate fund, or to make any other segregation of
assets, to assure payment of awards. The Company's obligations hereunder shall
constitute a general, unsecured obligation of the Company, and awards shall be
paid solely from the Company's general assets. No Participant shall have any
right to any specific assets of the Company.
(d) The Company shall have the right to deduct from awards any and all
federal, state, and local taxes or other amounts required by law to be withheld.
(e) The Company's obligation to pay compensation as herein provided is
subject to any applicable orders, rules, or regulations of any government agency
or office having authority to regulate the payment of wages, salaries, and other
forms of compensation.
(f) The validity, construction, interpretation, and effect of the Plan
shall exclusively be governed by and determined in accordance with the laws of
the State of Wisconsin.
-7-
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.16
<SEQUENCE>4
<FILENAME>c83528exv10w16.txt
<DESCRIPTION>EXHIBIT 10.16
<TEXT>
<PAGE>
EXHIBIT 10.16
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into as of October 16,
2003 (the "Commencement Date") by and between Lance Fors ("Employee") and Third
Wave Technologies, Inc., a Delaware corporation (the "Company").
WHEREAS, the Company has employed Employee without a written employment
agreement, and they now wish to have the benefit of a written agreement that
sets forth their understandings concerning Employee's employment;
NOW, THEREFORE, in consideration of the mutual covenants and conditions
hereinafter set forth, and other good and valuable consideration, the parties
agree as follows:
1. Employment. The Company hereby agrees to employ Employee as its
Chairman and Chief Executive Officer, and Employee hereby agrees to serve the
Company in such positions, all subject to the terms and provisions of this
Agreement. Employee agrees (a) to devote his full-time professional efforts,
attention and energies to the business of the Company, and (b) to perform such
reasonable responsibilities and duties customarily attendant to the positions of
Chairman and CEO. At all times during the employment term under this Agreement,
Employee shall be nominated by the Company as a member of the Board of
Directors.
Nothing in this Agreement will prevent Employee from engaging in
additional activities in connection with (i) serving on corporate, civic and
charitable boards and committees, (ii) delivering lectures and fulfilling
speaking engagements, and (iii) managing personal investments; provided,
however, that such activities do not interfere with and are consistent with the
performance of Employee's responsibilities hereunder. For clarity it is hereby
acknowledged and agreed that Employee currently serves and may continue to serve
on the Boards of the Madison Repertory Theatre and Lance Construction Supplies.
2. Term of Employment. Subject to an earlier termination as provided in
Section 6, Employee shall be employed hereunder for an original term of three
years from the Commencement Date. The Agreement shall automatically expire at
the conclusion of the three year period unless the Company and Employee agree in
writing at least six months prior to the expiration of the term to renew the
Agreement for an extended term of one year. The parties may thereafter extend
the Agreement for additional one year terms by agreeing in writing to such
extensions at least six months prior to the expiration of each successive term.
3. Compensation.
3.1 Base Salary. Employee's annual base salary on the Commencement
Date is $400,000, payable in accordance with the normal payroll practices of the
Company ("Base Salary"). Employee's Base Salary will be subject to annual review
by the Compensation Committee and the Board of Directors of the Company. During
the Employment Term, on each
<PAGE>
anniversary date of this Agreement, the Company shall review the Base Salary
amount to determine any increases; provided however, in no event shall the Base
Salary be less than the Base Salary amount for the immediately preceding
12-month period other than as permitted in Section 6.1(d) hereunder.
3.2 Bonus Compensation. Employee shall be eligible to receive an
annual cash bonus as determined by the Board of Directors each year, based upon
the recommendation of the Company's Compensation Committee. Any such bonus will
be based upon the compensation principles of the Company then in effect.
3.3 Equity Incentives. The Board of Directors, upon the
recommendation of the Compensation Committee, may grant Employee from time to
time options to purchase shares of the Company's common stock, both as a reward
for past individual and corporate performance, and as an incentive for future
performance. Such options, if awarded, will be pursuant to the Company's then
current stock option plan. Such options will provide an exercise price not less
than the fair market value of such stock on the date of the grant, and may
provide for vesting over a period of time at the discretion of the Board. In the
event Employee's employment is terminated by the Company without Cause pursuant
to Section 6.2(c) or by notice of non-renewal pursuant to Section 6.2(d), any
portion of any stock options previously granted to Employee that is vested as of
Employee's last date of employment shall be exercisable until the expiration
date of each such respective option. Employee understands and agrees that any
such extended exercise period shall convert any incentive stock option into a
non-qualified stock option.
4. Benefits.
4.1 General Benefits. Employee will be entitled to participate in
the sick leave, insurance (including medical, life and long-term disability),
profit-sharing, retirement, and other benefit programs that are generally
provided to employees of the Company similarly situated, all in accordance with
the rules and policies of the Company as to such matters and the plans
established therefore.
4.2 Paid Time Off (PTO). The Company will provide Employee with 30
days of paid PTO each year Employee is employed by the Company, in accordance
with Company policy. The foregoing PTO days shall be in addition to standard
paid holiday days for employees of the Company. Employee shall be credited for
any unused PTO not used during such year.
4.3 Indemnification/Liability Insurance.
(a) Indemnification. To the fullest extent permitted by
applicable law and as provided for in the Company's articles of incorporation
and bylaws in effect as of the Commencement Date, the Company will during and
after termination of employment, indemnify Employee (including providing
advancement of expenses) for any judgments, fines, amounts paid in settlement
and reasonable expenses, including attorneys' fees, incurred by Employee in
connection with the defense of any lawsuit or other claim or investigation to
which Employee is
2
<PAGE>
made, or threatened to be made, a party or witness by reason of being or having
been an officer, director or employee of the Company or any of its subsidiaries
or affiliates or a fiduciary of any of their benefit plans.
(b) Liability Insurance. In addition, both during and after
termination of employment, Employee will be covered under a directors and
officers' liability insurance policy for his acts (or non-acts) as an officer or
director of the Company or any of its subsidiaries under and pursuant to a
policy maintained by the Company in an amount not less than $5 million in
coverage (on at least the same basis as other senior executive officers of the
Company). The obligation to continue coverage shall expire seven years after the
termination of Employee's employment for any reason.
5. Business Expenses. Upon submission of a satisfactory accounting by
Employee, consistent with current policies of the Company, the Company will
reimburse Employee for any out-of-pocket expenses reasonably incurred by
Employee in the furtherance of the business of the Company. In addition, during
Employee's employment hereunder, the Company shall reimburse Employee (i) for
all travel expenses incurred by Employee in connection with commuting between
Employee's residence in California and the Company, (ii) for all travel expenses
of Employee's spouse when accompanying Employee between Employee's residence in
California and the Company or on select business trips, and (iii) all housing
expenses in Wisconsin, up to a collective cap on items (i) through (iii) above
of thirty-five thousand dollars ($35,000.00) per year.
6. Termination. Employee's employment under this Agreement may be
terminated as set forth in this Section.
6.1 By Employee.
(a) Without Good Reason. Employee may terminate his employment
pursuant to this Agreement at any time without Good Reason (as defined below)
with at least ten (10) business days written notice (the "Employee Notice
Period") to the Company. Upon termination by Employee under this section, the
Company may, in its sole discretion and at any time during the Employee Notice
Period, suspend Employee's duties for the remainder of the Employee Notice
Period, as long as the Company continues to pay compensation to Employee,
including benefits, throughout the Employee Notice Period. Employee shall not
take any vacations during the Employee Notice Period without the prior consent
of the Company.
(b) Intentionally Omitted.
(c) With Good Reason. Employee may terminate his employment
pursuant to this Agreement with Good Reason (as defined below) at any time
within thirty days after the occurrence of an event constituting Good Reason.
3
<PAGE>
(d) Good Reason. "Good Reason" shall mean any of the
following: (i) Employee's Base Salary is reduced in a manner that is not applied
proportionately to other senior executive officers of the Company, provided any
such reduction shall not exceed thirty percent (30%) of Employee's then current
Base Salary and provided such reduction is not in effect for more than 180 days
in duration; (ii) Employee's duties, authority or responsibilities are
materially reduced or are inconsistent with the scope of authority, duties and
responsibilities of Employee's position; (iii) Employee is assigned duties
materially inconsistent with duties of a chief executive officer of similarly
situated companies; or (iv) the occurrence of a material breach by the Company
of any of its obligations to Employee under this Agreement.
6.2. By the Company.
(a) With Cause. The Company may terminate Employee's
employment pursuant to this Agreement for Cause, as defined below, immediately
upon written notice to Employee.
(b) Cause. "Cause" shall mean any of the following: (i) any
conviction of the Employee of (A) a felony, or (B) a misdemeanor involving moral
turpitude, fraud, theft, embezzlement, misappropriation or conversion; (ii) the
willful and continued failure of Employee to perform substantially his duties
for the Company, which failure remains uncured thirty (30) days after written
notice from the Company to the Employee of the failure; (iii) theft or fraud by
Employee; (iv) the violation of any state or federal securities laws; (v) any
material misconduct by the Employee relating to or involving the Company or his
duties thereto; or (vi) any material breach by the Employee of this Agreement or
any of the Agreements referenced in Section 6.4 hereof.
(c) Without Cause. Subject to Section 7.1, the Company may
terminate Employee's employment pursuant to this Agreement without Cause upon at
least thirty days written notice ("Company Notice Period") to Employee. Upon any
termination by the Company under this Section 6.2(c), the Company may, in its
sole discretion and at any time during the Company Notice Period, suspend
Employee's duties for the remainder of the Company Notice Period, as long as the
Company continues to pay compensation to Employee, including benefits,
throughout the Company Notice Period. Employee shall not take any vacations
during the Company Notice Period without the prior consent of the Company.
(d) Notice of Non-Renewal. Subject to Section 7.1, the Company
may, pursuant to Section 2 hereof, elect not to renew Employee's term of
employment hereunder, by providing written notice of such election to Employee
at least six months prior to the expiration of the term. If such notice is
provided, the term and Employee's employment shall expire at the conclusion of
the applicable term. Upon any notice of non-renewal by the Company under this
Section 6.2(d), the Company may, in its sole discretion and for any or all of
the six-month notice period, suspend Employee's duties, as long as the Company
continues to pay compensation to Employee, including benefits, throughout such
period. Employee shall not take any vacations during such notice period without
the prior consent of the Company.
4
<PAGE>
6.3 Death or Disability. Notwithstanding Section 2, in the event of
the death or Disability (defined herein) of Employee during the term of this
Agreement, Employee's employment and this Agreement shall immediately and
automatically terminate and the Company shall pay Employee (or in the case of
death, Employee's designated beneficiary) Base Salary up to the date of
termination, accrued PTO and accrued but unpaid bonuses. Neither Employee, his
beneficiary nor estate shall be entitled to the severance benefits set forth in
Section 7 if terminated pursuant to this section. "Disability" shall mean any
physical incapacity or mental incompetence as a result of which Employee is
unable to perform the essential functions of his job for an aggregate of more
than 90 days during any twelve-month period. Employee acknowledges and agrees
that given the nature of Employee's position with the Company it would cause the
Company to suffer an undue hardship if required to accommodate a Disability
beyond the 90-day period.
6.4 Survival. The two agreements described in Section 8 hereof and
attached hereto as Schedules A and B shall survive the termination or expiration
of this Agreement and Employee's employment for any reason and remain in effect
in accordance with their respective terms.
7. Severance.
7.1 Termination of Agreement Pursuant to Section 6.1(c) or 6.2(c).
If the Employee terminates his employment for Good Reason pursuant to Section
6.1(c), or the Company terminates Employee's employment without Cause pursuant
to Section 6.2(c), subject to the conditions described in Section 7.3 below, the
Company will pay to Employee the following severance: (i) eighteen (18) months
of Employee's then current Base Salary, six months of which will be paid up
front in a lump sum, and the balance to be paid over the eighteen month period
in accordance with the Company's then current payroll practices; (ii) any
accrued but unpaid bonuses as of the termination date; (iii) up to twelve (12)
months of COBRA premium payments if Employee elects to continue medical
insurance coverage in accordance with the provisions of COBRA; and (iv) the
purchase of an outplacement consulting package for Employee, up to a maximum
value of Fifteen Thousand Dollars ($15,000), which shall be selected at the
discretion of the Employee. If Employee elects COBRA coverage in a timely
manner, the Company shall pay the monthly premium payments until the earlier of:
(x) twelve months from the date of termination; (y) the date Employee obtains
new employment; or (z) the date COBRA continuation coverage would otherwise
terminate in accordance with the provisions of COBRA. Thereafter, medical
insurance coverage shall be continued only to the extent required by COBRA and
only to the extent Employee timely pays the premium payments himself.
7.2 Expiration of Agreement Pursuant to Section 6.2(d). If the
Employee's employment expires pursuant to Section 6.2(d), subject to the
conditions described in Section 7.3 below, the Company will pay to Employee the
following severance: (i) an aggregate amount of six (6) months of Employee's
then current Base Salary, payable in equal installments over a period of twelve
(12) months in accordance with the Company's then current payroll practices; and
(ii) any accrued but unpaid bonuses as of the termination date.
5
<PAGE>
7.3 Conditions Precedent to Payment of Severance. The Company's
obligations to Employee described in Sections 7.1 and 7.2 are contingent on
Employee's delivery to the Company of his written waiver and release of all
claims he may have against the Company and its affiliates, directors, officers,
employees and agents on the date of the termination of his employment with the
Company.
7.4 No Severance Benefits. Employee is not entitled to any severance
benefits if this Agreement is terminated pursuant to Sections 6.1(a) or 6.2(a)
of this Agreement; provided however, Employee shall be entitled to (i) Base
Salary prorated through the effective date of such termination; (ii) Bonuses for
which the payment date occurs prior to the effective date of such termination;
and (iii) medical coverage and other benefits required by law and plans (as
provided in Section 7.7, below).
7.5 Death or Disability Benefit.
(a) Life Insurance. The Company agrees to purchase a term life
insurance policy on the life of the Employee for an amount equal to one and one
half (1 1/2) times the Employee's Base Salary (rounded up to the nearest $50,000
increment) as of the Commencement Date in which the Employee may designate the
beneficiary of his choice. In the event of the termination of Employee's
employment pursuant to Sections 6.1(c) or 6.2(c), the Company shall be required
to transfer or assign to Employee any life insurance policies held, owned or
maintained by the Company on the life of Employee; provided however, such
transfer or assignment is permitted by the applicable policy and/or plan and
further that any premiums owed or due subsequent to the termination of
Employee's employment shall be the responsibility of Employee. If the policy
cannot be transferred or assigned to Employee, or if Employee's employment
terminates pursuant to Sections 2, 6.1(a), 6.2(a), 6.2(d) or 6.3, the Company
shall have no obligation to make further premium payments.
(b) Disability Insurance. The Company agrees to purchase a long-term
disability ("LTD") insurance policy in Employee's name that would provide
coverage during the term of this Agreement. Subject to the eligibility
requirements of any such policy, the LTD policy will provide coverage of up to
sixty (60) percent of employee's Base Salary during the period of a covered
disability. The Company's obligation to pay the LTD insurance premiums on
Employee's behalf shall cease upon Employee's termination for any reason or upon
the expiration of this Agreement pursuant to Sections 2 and/or 6.2(d).
7.7 Required by Law and Plans; PTO. In the event of the termination
of Employee's employment, Employee will be entitled to medical and other
insurance coverage, if any, as is required by law and, to the extent not
inconsistent with this Agreement, to receive such additional benefits as
Employee may be entitled under the express terms of applicable benefit plans
(other than bonus or severance plans) of the Company, its subsidiaries and
affiliates. Further, Employee will be entitled to receive Base Salary pro rated
to equal the number of PTO days for the current year that Employee accrued but
did not use at the time of termination.
6
<PAGE>
8. Other Agreements. Simultaneously with the execution of this Agreement,
Employee will sign the Employee Agreement with Respect to Confidential
Information, Invention Assignment and Arbitration attached hereto as Schedule A,
and the Noncompetition and Nonsolicitation Agreement, attached hereto as
Schedule B.
9. Amendment. No amendment, modification or waiver of any provisions of
this Agreement or consent to any departure thereof shall be effective unless in
writing signed by the party against whom it is sought to be enforced.
10. Entire Agreement. This Agreement, including the agreements attached
hereto as Schedules A and B, contains the entire Agreement that exists between
Employee and the Company with respect to the subjects herein contained and
replaces and supercedes all prior agreements, oral or written, between the
Company and Employee with respect to the subjects herein contained, except any
prior stock option plans or agreements between Employee and the Company, as may
be amended thereto and hereby, which shall remain in full force and effect in
accordance with their respective terms.
11. Severability. If any provision of this Agreement is held for any
reason to be unenforceable, the remainder of this Agreement shall remain in full
force and effect. Each section is intended to be a severable and independent
section within this Agreement. Moreover, if one or more of the provisions
contained in this Agreement shall for any reason be held to be excessively broad
as to scope, activity, subject or otherwise so as to be unenforceable at law,
such provision or provisions shall be construed by the appropriate judicial body
by limiting or reducing it or them, so as to be enforceable to the maximum
extent compatible with the applicable law as it shall then appear. The language
of all parts of this Agreement shall in all cases be construed as a whole
according to its fair meaning and not strictly for or against either of the
parties.
12. Headings. The headings in this Agreement are intended solely for
convenience of reference and shall be given no effect in the construction or
interpretation of this Agreement.
13. Governing Law. This Agreement is made in the State of Wisconsin and
Employee acknowledges that he is employed in and works in the State of
Wisconsin. This Agreement, and the relationship between the parties, shall be
governed by and construed in accordance with the laws of Wisconsin without
giving effect to the principles of conflicts of laws of such state.
14. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
15. Arbitration. Unless other arrangements are agreed to by Employee and
the Company, in writing, any disputes arising under or in connection with this
Agreement or the parties' relationship, other than a dispute in which the
primary relief sought is an equitable remedy such as an injunction, will be
resolved by binding arbitration to be conducted pursuant to
7
<PAGE>
the Agreement for Arbitration Procedure of Certain Employment Disputes attached
as Exhibit D to Schedule A hereof. The parties agree that the arbitration of any
disputes shall take place in Madison, Wisconsin.
16. Notices. All notices and all other communications provided for in this
Agreement shall be in writing and shall be considered duly given upon personal
delivery, delivery by nationally reputable overnight courier, or on the third
business day after mailing from within the United States by first class
certified or registered mail, return receipt requested, postage prepaid, all
addressed as follows:
If to Employee: Lance Fors
If to the Company: Third Wave Technologies, Inc.
502 South Rosa Road
Madison, Wisconsin 53719-1256
Attn: John Comerford
Any party may change its address by furnishing notice of its new address to the
other party in writing in accordance herewith, except that any notice of change
of address shall be effective only upon receipt.
The parties hereto have executed this Employment Agreement as of the date
first written above.
/s/ Lance Fors
------------------------------------------
Lance Fors ("Employee")
THIRD WAVE TECHNOLOGIES, INC. ("Company")
By: /s/ Lance Fors
---------------------------------
Title: Chairman and CEO
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.17
<SEQUENCE>5
<FILENAME>c83528exv10w17.txt
<DESCRIPTION>EXHIBIT 10.17
<TEXT>
<PAGE>
Exhibit 10.17
EMPLOYMENT AGREEMENT
This Agreement is made by and between Third Wave Technologies, a Delaware
Corporation (the "Company" or "TWT"), and John Puisis (the "Executive").
1. Duties and Scope of Employment.
(a) Position; Duties. During the Employment Term (as defined in paragraph 2),
the Company will employ Executive as Senior Vice President, Chief Financial
Officer of the Company. Executive will serve as an Officer of the Company in
such capacity, and will report directly to Lance Fors the Company's Chief
Executive Officer (the "CEO").
(b) Obligations. During the Employment Term, Executive will devote substantially
all of his business efforts and time to the Company. Executive agrees, during
the Employment Term, not to actively engage in any other employment, occupation
or consulting activity for any direct or indirect remuneration without the prior
approval of the CEO; provided, however, that Executive may (i) serve on the
board of directors or advisors of other for profit companies (subject to the
reasonable approval of the CEO) and boards of trade associations or charitable
organizations; (ii) engage in charitable activities and community affairs; or
(iii) manage Executive's personal investments and affairs, as long as such
activities do not materially interfere with Executive's duties and
responsibilities with the Company. Service on the board of directors of
PeopleFlow Inc. is hereby approved.
2. Employment Term. The Company hereby agrees to employ Executive and Executive
hereby accepts employment, in accordance with the terms and conditions of this
Agreement, commencing on Monday, September 24, 2001 (the "Employment
Commencement Date"). The period of Executive's employment under this Agreement
will be referred to as the "Employment Term." Subject to the Company's
obligation to provide severance benefits as may be specified in this Agreement,
Executive and the Company acknowledge that this employment relationship may be
terminated at any time and for any or no cause or reason, at the option of
either the Company or Executive.
3. Cash Compensation. During the Employment Term, the Company will pay
Executive the following as cash compensation for services to the Company:
<PAGE>
(a) Base Salary. As of the Employment Commencement Date, Executive's annualized
base salary will be $225,000 and will be subject to annual review pursuant to
the Company's normal review policy for other similarly situated senior
executives of the Company; as in effect from time to time, "Base Salary."
(b) Variable Compensation. Executive will be eligible for incentive compensation
commensurate with that of the other senior executive officers of the Company,
but in any event will have a target annual bonus of no less than 22.5 percent of
Base Salary.
4. Equity Compensation. During the Employment Term, Executive will be eligible
to participate in the Company's equity compensation plan, in accordance with the
terms of such plan and any applicable grants (except as provided herein), at a
level commensurate with Executive's position as determined by the Compensation
Committee in good faith to be appropriate based on the Company's equity
compensation policy. Executive will receive an initial grant of 275,000 stock
options to purchase shares of the Company's common stock pursuant to the
Company's long-term incentive plan upon commencement of employment. The price of
the stock option grant will be not greater than the Fair Market Value per share
on the date of grant and will have a term of ten years. The options shall vest
in equal installments over the four-year period commencing with the Employment
Commencement Date.
5. Employee Benefits and Fringes. During the Employment Term, Executive will be
entitled to participate in all employee welfare and benefit plans and programs
and fringes provided by the Company to its senior executives in accordance with
the terms of those plans or programs as they may be modified from time to time.
6. Sign-on Bonus. To partially cover Executive for bonuses earned but lost at
his present employer, Executive shall receive a sign-on bonus of $1,200,000
payable on October 25, 2001, however should Employment Commencement Date be
delayed, then the sign-on bonus shall be paid within 30 days of commencement of
Executive's employment. In addition, the Company will pay all taxes due on such
bonus payment (including taxes due on such and successive tax payments) so that
the net after tax payment to Executive equals $1,200,000. Company will pay these
tax obligations in the form of a tax payment to the IRS or Executive on or
before January 15, 2002 for taxes due including gross ups. The
<PAGE>
amount of taxes due and related gross ups is expected to be approximately
$900,000. Executive agrees to cooperate with Company in computing and submitting
the tax.
7. Business Expenses. Upon submission of appropriate documentation, the
Company will pay or reimburse Executive in accordance with its policies in
effect from time to time, for all reasonable business expenses that Executive
incurs in performing Executive's duties under and during the term of this
Agreement, including, but not limited to, travel, professional dues and
subscriptions.
8. Relocation. The company will reimburse Executive for all customary and
reasonable costs (e.g., sales agents commissions, moving costs, legal fees)
related to his relocation to Madison. The Executive will have the flexibility to
commute to Madison, Wisconsin from, and work on occasion at, Executive's current
home located in Northbrook, Illinois as long as Executive's duties performed to
the reasonable standards set by the Company's Chief Executive Officer. The
Company will also provide for temporary housing (if needed). To the extent not
tax deductible by Executive, such amounts shall be fully grossed up for taxes.
(Relocation and temporary housing expense reimbursement shall)not, prior to
gross up, exceed $60,000 in total.
9. Termination of Employment.
(a) Death or Disability. Executive's employment will terminate automatically
upon Executive's death. The Company may terminate Executive's employment for
Disability, while Executive is disabled, in the event Executive has been unable,
due to physical or mental incapacity, to perform Executive's material duties
under this Agreement for six consecutive months (or such longer period that may
be required by applicable law). In the event Executive's employment terminates
as a result of death or Disability, then:
(i) All vested and exercisable stock options may be exercised after Executive's
termination of employment in accordance with the terms and conditions of the
Stock Option Plan and applicable option grant documentation;
(ii) Except as otherwise provided herein or in any grant or program, Executive
will forfeit Executive's right to receive any salary, incentive compensation,
equity compensation, or other compensation that has not been fully earned at the
time Executive's employment terminates; provided, however, Executive will be
entitled to receive any benefits or amounts accrued but not yet paid as of the
date of termination, including but not limited to any earned bonus for any
completed fiscal year (the "Prior Year Bonus"), and a Pro Rata Bonus, as defined
in (c)(iii) below, for the year of his termination;
<PAGE>
(iii) Executive will receive any other amounts earned, accrued or owing to
Executive under the plans and programs of the Company.
(iv) Executive agrees to cooperate with and assist Company in obtaining and
renewing a death and or disability insurance policy on the Executive naming the
Company as the sole beneficiary.
(b) Involuntary Termination for Cause or Voluntary Termination Other Than for
Good Reason. If Executive is involuntarily terminated by the Company for Cause
or Executive voluntarily terminates his employment other than for Good Reason,
then:
(i) All unvested or unexercisable equity compensation will be cancelled upon
Executive's termination of employment;
(ii) Executive will forfeit Executive's right to receive any salary, incentive
compensation, equity compensation, or other compensation that has not been fully
earned at the time Executive's employment terminates; provided, however,
Executive will be entitled to receive any benefits or amounts accrued but not
yet paid as of the date of termination; and
(iii) Executive will receive any other amounts earned, accrued or owing to
Executive under the plans and programs of the Company.
(iv) Should Executive be involuntarily terminated by the Company for Cause or
Executive voluntarily terminates his employment other than for Good Reason
within the first twelve (12) months measured from the Commencement Date,
Executive shall repay the Company $1,400,000 of the sign-on bonus. Should such
termination take place within the period which is between twelve (12) to
twenty-four (24) months following the Commencement Date, Executive shall repay
to the Company $700,000 of the sign-on bonus.
(c) Involuntary Termination Other Than for Cause or Voluntary Termination for
Good Reason. If Executive is involuntarily terminated by the Company other than
for Cause or Executive voluntarily terminates his employment for Good Reason
within six months after learning of the event constituting Good Reason; then, as
liquidated damages and in lieu of any other damages or compensation under this
Agreement or otherwise, Executive will receive the payments or other benefits
described in this paragraph; provided (A) Executive does not enter into
Competition (as defined below) with the Company
<PAGE>
for a period of one year following the termination of Executive's employment and
(b) Executive executes, and does not revoke, a written waiver and release,
comprised of standard and customary terms which terms and final form of
agreement shall be negotiated and agreed to by Executive and Company within ten
calendar days after execution of this Agreement.
(i) Executive will receive a lump sum severance payment, payable within 60 days
after termination of Executive's employment, equal to one-year base salary.
(ii) Executive will be entitled to exercise, in accordance with their terms, any
remaining vested stock options that had been granted prior to Executive's
termination. Consistent with the terms of the Company's 2000 Stock Plan, such
exercise must be completed within three months of the date of termination.
(iii) Executive will receive a pro-rated portion of his target annual incentive
compensation award in or around March of the year following Executive's
termination based on the number of months (rounded to the next highest number
for a partial month) of the year elapsed prior to Executive's termination (the
"Pro Rata Bonus");
(iv) Executive and Executive's dependents will continue to receive (with the
same level of coverage) for one year all medical, dental, hospitalization,
accident, disability, life insurance and any other benefit plans of the Company
on the same terms as in effect immediately prior to Executive's termination
unless changed for senior executives generally; provided, however, that such
benefits will be offset to the extent that Executive or Executive's dependents
receive comparable benefits from another Employer of Executive (in such event,
Executive agrees to provide reasonable notice of the receipt of benefits from
another source); and, provided that in the event adverse tax consequences may
result if medical benefits are provided to Executive directly, the Company will
pay Executive the amount necessary to purchase the coverage, adjusted for taxes,
on an after-tax basis; and
(v) Executive will receive any other amounts earned, accrued or owing to
Executive under the plans and programs of the Company, including the Prior Year
Bonus, if not previously paid.
(vi) Executive will not be required to pay back to the Company the sign-on bonus
or any portion thereof.
<PAGE>
10. Cause; Good Reason.
(a) For purposes of this Agreement, "Cause" means:
Any continual and willful refusal by the Executive to perform the Executive's
essential duties under this Agreement which continues for more than (10)
business days after written notice from the Company;
(i) Any intentional act of fraud, embezzlement or theft by the Executive in
connection with the Executive's duties hereunder or in the course of the
Executive's employment hereunder, or any prior employment, or the Executive's
direct admission or conviction of a felony; or any crime involving gross
depravity, fraud, embezzlement, theft or misrepresentation;
(iii) Any gross negligence or willful misconduct of the Executive with regard to
the Company resulting in a material economic loss to the Company or its
subsidiaries (no action or inaction shall be deemed willful or grossly negligent
if Executive exercised his best professional judgement, in keeping with
reasonable professional standards of a chief financial officer, or if taken with
the advice of Company counsel);
(iv) Any material breach by the Executive of any one or more of the covenants
contained in Section 12 or 13 hereof resulting in a material economic loss to
the Company or its subsidiaries;
(v) Any willful and material violation of any statutory or common law duty of
loyalty to the Company or any of its subsidiaries resulting in a material
economic loss to the Company or its subsidiaries (no action or inaction shall be
deemed willful if Executive was exercising his best professional judgement, in
keeping with reasonable professional standards of a chief financial officer, or
if taken with the advice of Company counsel);
The exercise of the right of the Company to terminate this Agreement pursuant to
this Section 10 shall not abrogate the rights or remedies of the Company in
respect of the breach giving rise to such termination. Any termination by the
Company for Cause shall only be permitted if taken within 18 months of the CEO
becoming aware of the Cause event.
(b) For purposes of this Agreement, "Good Reason" means:
<PAGE>
(i) Executive's rate of annual Base Salary or the target amount of Executive's
annual cash incentive bonus is reduced; in a manner that is not applied
proportionately to all other senior executive officers of the Company, including
the Chief Executive Officer; provided that any such reduction shall not exceed
30 percent or twelve months in duration.
(ii) The Company fails to retain Executive as its Chief Financial Officer of the
Company, reporting directly to the CEO;
(iii) A successor to the Company fails to assume this Agreement, in writing,
delivered to the Executive;
(iv) Any sustained material diminution in Executive's duties, authority or
responsibilities or any assignment to Executive of duties inconsistent with his
position;
(v) Relocation of the Executive from the Company's executive offices or
relocation of the Company's executive offices by more than one hundred (100)
miles from its current location;
(vi) Any material breach by the Company of its obligations hereunder that are
not cured within 30 days of written notice thereof;
(vii) If within eighteen (18) months from the Commencement Date, Lance Fors
voluntarily ceases to be the CEO or Chairman of the Company's Board of
Directors;
(viii) A resignation by Executive following the occurrence of a Change in
Control (as defined in the the Indemnification Agreement attached hereto as
Exhibit A), but not earlier than six months after the occurrence of the Change
in Control. If the Executive is terminated without Cause during such six month
period, the benefits of Section 9 (c) shall apply. Notwithstanding anything to
the contrary herein, during such six month period, Executive shall be entitled
to resign for Good Reason under the other provisions of this Section 10 (b).
11. Directorships, Other Offices. In the event of termination of employment,
Executive will immediately, unless otherwise requested by the Company's Board of
Directors, resign from all directorships, trusteeships, other offices and
employment held at that time with the Company or any of its Affiliates.
<PAGE>
12. Confidentiality. Executive recognizes and acknowledges that by reason of
Executive's employment by and service to the Company, Executive will have access
to proprietary or confidential information, technical data, trade secrets or
know-how relating to the Company, which may include, but is not limited to,
market and product research and plans, markets, products, services, customer
lists and customers, advertising, software, developments, inventions, processes,
formulas, technology, designs, drawings, engineering, marketing and sales
techniques, strategies and programs, distribution methods and systems, sales and
profit figures, pricing and discount plans, financial and other business
information (hereafter, "Confidential Information"). Executive acknowledges that
such Confidential Information is a valuable and unique asset of the Company and
covenants that Executive will not, either during employment or after the
termination of employment, disclose any such Confidential Information to any
person for any reason whatsoever (except as Executive's duties as an employee of
the Company may require as determined in Executive's good faith judgment)
without the prior written authorization of the CEO, unless such information is
in the public domain through no fault of Executive or except as may be required
by law or in a judicial or administrative proceeding, in which case Executive
will promptly inform the Company in writing of such required disclosure, but in
any event at least ten business days prior to the disclosure. All written
Confidential Information (including, without limitation, in any computer or
other electronic format) which comes into Executive's possession during the
course of Executive's employment will remain the property of the Company. Unless
expressly authorized in writing by the CEO, Executive will not remove any
written Confidential Information from the Company's premises, except in
connection with the performance of Executive's duties for the Company and in a
manner consistent with the Company's policies regarding Confidential
Information. Upon termination of employment, Executive agrees immediately to
return to the Company all written Confidential Information in Executive's
possession.
For the purposes of this paragraph, the term "Company" will be deemed to include
the Company and its Affiliates. For purposes of this Agreement, "Affiliate" will
mean an "affiliate" as defined in Rule 12b-2 of the General Rules and
Regulations under the Exchange Act. Confidential Information shall not include
(a) information that enters the public domain by other than Executive's wrongful
disclosure, (b) information possessed by Executive prior to the date of this
Agreement and (c) Executive's general knowledge and skill.
13. Non-Compete; Non-Solicit.
<PAGE>
(a) The amounts paid by the Company under this Agreement are partially in
consideration of Executive's undertakings under this paragraph as well as under
paragraph 12 above. Executive agrees that during the term of Executive's
employment with the Company and for a period of one year after Executive's
termination of employment for any reason, Executive will not, except with the
prior written consent of the CEO, directly or indirectly, engage in Competition.
For purposes of this Agreement, Competition means that Executive engages in
substantially the same work as he had been engaged in while employed by the
Company with another genomics and/or molecular diagnostics company.
(b) The foregoing restrictions will not be construed to prohibit Executive's
ownership of less than five percent of any class of securities of any
corporation which is engaged in any business having a class of securities
registered pursuant to the Securities Exchange Act of 1934 (the "Exchange Act")
or of an interest in a mutual fund, private equity fund or other pooled account,
provided that such ownership represents a passive investment and that Executive,
either directly or indirectly, manages or exercises control of any such
corporation, guarantee any of its financial obligations, otherwise take any part
in its business, other than exercising Executive's rights as a shareholder, or
seek to do any of the foregoing.
(c) Executive further covenants and agrees that during Executive's employment by
the Company and for the period of one year thereafter, Executive will not,
except with the prior written consent of the CEO, directly or indirectly,
solicit or hire, or encourage the solicitation or hiring of, any person who is
an employee of the Company for any position as an employee, independent
contractor, consultant or otherwise, provided that the foregoing shall not
prevent Executive from serving as a reference.
(d) For the purposes of this paragraph 13, the term "Company" will be deemed to
include the Company and its Affiliates.
(e) The provisions of this Section 13 regarding the restrictions on Executive
shall be conditioned on Company making the payments to Executive as contemplated
by Section 9 (c), above.
14. Remedies; Injunction.
(a) Executive acknowledges and agrees that the restrictions contained in
paragraphs 12 and 13 are reasonable and necessary to protect and preserve the
legitimate interests, properties, goodwill and business of the Company, that the
Company would not have entered into this Agreement in the absence of such
restrictions and that irreparable injury will be suffered by the Company should
Executive breach any of the provisions of those paragraphs. Executive represents
and acknowledges that (i) Executive has been advised by the Company to consult
legal counsel with respect to this Agreement, and (ii) that Executive
<PAGE>
has had full opportunity, prior to execution of this Agreement, to review
thoroughly this Agreement with counsel.
(b) Executive further acknowledges and agrees that a breach of any of the
restrictions in paragraphs 12 and 13 cannot be adequately compensated by
monetary damages. Executive agrees that the Company will be entitled to a return
of all non-salary and bonus cash consideration set forth in this Agreement as
being conditioned on the covenants contained in paragraph 13 and that all
remaining stock options will be forfeited if Executive breaches the provisions
of that paragraph and that, in any event, the Company will be entitled to
preliminary and permanent injunctive relief, without the necessity of proving
actual damages, as well as provable damages and an equitable accounting of all
earnings, profits and other benefits arising from any violation of paragraphs 12
or 13, which rights will be cumulative and in addition to any other rights or
remedies to which the Company may be entitled. In the event that any of the
provisions of paragraphs 12 or 13 should ever be adjudicated to exceed the time,
geographic, service, or other limitations permitted by applicable law in any
jurisdiction, it is the intention of the parties that the provision will be
amended to the extent of the maximum time, geographic, service, or other
limitations permitted by applicable law, that such amendment will apply only
within the jurisdiction of the court that made such adjudication and that the
provision otherwise be enforced to the maximum extent permitted by law.
(c) Executive irrevocably and unconditionally (i) agrees that any suit, action
or other legal proceeding arising out of paragraphs 12 or 13, including without
limitation, any action commenced by the Company for the preliminary and
permanent injunctive relief and other equitable relief, may be brought in the
United States District Court for the Western District of Wisconsin, or if such
court does not have jurisdiction or will not accept jurisdiction, in any court
of general jurisdiction in the State of Wisconsin, (ii) consents to the
objection which Executive may have to the laying of venue of any such suit,
action or proceeding in any such court, (iii) waives any objection which
Executive may have to the laying of venue of any such suit, action or proceeding
in any such court.
(d) For the purposes of this paragraph 14, the term "Company" will be deemed to
include the Company and its Affiliates.
15. Intellectual Property. To the fullest extent permitted by applicable law,
all intellectual property (including patents, trademarks, and copyrights) which
are made, developed or acquired by Executive in the course of Executive's
employment with the Company will be and remain the absolute
<PAGE>
property of the Company, and Executive at Company expense shall assist the
Company in perfecting and defending its rights to such intellectual property
16. Indemnification. To the fullest extent permitted by applicable law, the
Company will, during and after termination of employment, indemnify Executive
(including providing advancement of expenses) for any judgments, fines, amounts
paid in settlement and reasonable expenses, including attorneys' fees, incurred
by Executive in connection with the defense of any lawsuit or other claim or
investigation to which Executive is made, or threatened to be made, a party or
witness by reason of being or having been an officer, director or employee of
the Company or any of its subsidiaries or affiliates or a fiduciary of any of
their benefit plans. The Company shall also enter into an agreement of
indemnification with the Executive in the form annexed hereto as Exhibit A. In
addition both during and after termination of employment, Executive will be
covered under any directors and officers' liability insurance policy for his
acts (or non-acts) as an officer or director of the Company or any of its
subsidiaries or affiliates to the extent the Company provides such coverage for
its senior executive officers.
17. Arbitration. Unless other arrangements are agreed to by Executive and the
Company, any disputes arising under or in connection with this Agreement, other
than a dispute in which the primary relief sought is an equitable remedy such as
an injunction, will be resolved by binding arbitration to be conducted pursuant
to the Employment Dispute Arbitration Rules of the American Arbitration
Association. Costs of the arbitration, including (but not by way of limitation)
reasonable attorney's fees of both parties, will be borne by the party which
does not prevail in the proceedings. In the event that each party prevails as to
certain aspects of the proceedings, the arbitrator(s) or the court will
determine an appropriate allocation of costs between the parties. In no event,
however, shall Executive be obligated for the Company's attorney's fees unless
his position is found to be frivolous or taken in bad faith.
18. Gross-Up Payment. The Executive shall have the benefit of Exhibit B.
19. No Set-off, No Mitigation Required. Except as otherwise provided in Section
14 hereof, the obligation of the Company to make any payments provided for
hereunder and otherwise to perform its obligations hereunder will not be
affected by any set-off, counterclaim, recoupment, defense or other claim, right
or action which the Company may have against Executive or others. In no event
will Executive be obligated to seek other employment or take other action by way
of mitigation of the amounts payable to Executive under any of the provisions of
this Agreement, and such amounts will not
<PAGE>
be reduced (except as otherwise specifically provided herein) whether or not
Executive obtain other employment.
20. Payment of Legal Fees. The Company will pay Executive's reasonable legal and
financial consulting fees and costs associated with entering into this Agreement
up to a maximum of $6,000.
21. Governing Law. This Agreement shall be governed and construed by the laws of
the State of Wisconsin without regard to conflict of law provisions.
22. Assignments; Transfers; Effect of Merger.
(a) No rights or obligations of the Company under this Agreement may be assigned
or transferred by the Company except that such rights or obligations may be
assigned or transferred pursuant to a merger or consolidation, or pursuant to
the sale or transfer of all or substantially all of the assets of the Company,
provided that the assignee or transferee is the successor to all or
substantially all of the assets of the Company.
(b) This Agreement will not be terminated by any merger, consolidation or
transfer of assets of the Company referred to above. In the event of any such
merger, consolidation or transfer of assets, the provisions of this Agreement
will be binding upon the surviving or resulting corporation or the person or
entity to which such assets are transferred.
(c) The Company agrees that concurrently with any merger, consolidation or
transfer of assets referred to above, it will cause any successor or transferee
unconditionally to assume, either contractually or as a matter of law, all of
the obligations of the Company hereunder in a writing promptly delivered to the
Executive.
(d) This Agreement will inure to the benefit of, and be enforceable by or
against, Executive or Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributes, designees and legatees. None of
Executive's rights or obligations under this Agreement may be assigned or
transferred by Executive other than Executive's rights to compensation and
benefits, which may be transferred only by will or operation of law. If
Executive should die while any amounts or benefits have been accrued by
Executive but not yet paid as of the date of Executive's death and which would
be payable to Executive hereunder had Executive continued to live, all such
amounts and benefits unless otherwise provided herein will be paid or provided
in accordance with the terms of this Agreement to
<PAGE>
such person or persons appointed in writing by Executive to receive such amounts
or, if no such person is so appointed, to Executive's estate.
23. Modification. No provisions of this Agreement may be waived, modified or
discharged unless such waiver, modification or discharge is agreed to in writing
signed by both Executive and a duly authorized Company officer. No waiver by any
party hereto at any time of any breach by any other party hereto of, or
compliance with, any condition or provision of this Agreement to be performed by
such other party will be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time.
24. Representations. The Executive represents and warrants to the Company that
(a) the execution, delivery and performance of this Agreement by the Executive
does not and will not conflict with, breach, violate or cause a default under
any contract, agreement, instrument, order, judgment or decree to which the
Executive is a party or by which the Executive is bound, and (b) upon the
execution and delivery of this Agreement by the Company, this Agreement shall be
the valid and binding obligation of the Executive, enforceable in accordance
with its terms.
25. Entire Agreement. This Agreement sets forth the entire agreement of the
parties hereto in respect of the subject matter contained herein and supersedes
all prior agreements, promises, covenants, arrangements, communications,
representations or warranties, whether oral or written, by any officer, employee
or representative of any party hereto in respect of the subject matter contained
herein.
Executive Third Wave. Technologies, Inc-
/s/ John Puisis /s/ Lance Fors
- ----------------------------- -------------------------
By: John Puisis By: Lance Fors
Title: Chief Executive Officer
Date: 9-19-01 Date: 9-19-01
<PAGE>
EXHIBIT B
Parachute Gross-Up
(a) In the event that the Executive shall become entitled to payments
and/or benefits provided by this Agreement or any other amounts in the "nature
of compensation" (whether pursuant to the terms of this Agreement or any other
plan, arrangement or agreement with the Company, any person (whose actions
result in a change of ownership or effective control covered by
Section 280G(b)(2) of the Internal Revenue Code of 1986, as amended (the "Code")
or any person affiliated with the Company or such person) as a result of such
change in ownership or effective control (collectively the "Company Payments"),
and if such Company Payments will be subject to the tax (the "Excise Tax")
imposed by Section 4999 of the Code (and any similar tax that may hereafter be
imposed by any taxing authority) the Company shall pay to the Executive at the
time specified in subsection (d) below an additional amount (the "Gross-up
Payment") such that the net amount retained by the Executive, after deduction of
any Excise Tax (including interest and penalties, if any) on the Company
Payments and any U.S. federal, state, and local income or payroll tax upon the
Gross-up Payment provided for by this paragraph (a), shall be equal to the
Company Payments. For the avoidance of doubt, it is understood that the
foregoing formula contemplates a Gross-Up Payment on the original and all
successive Gross-Up Payments.
(b) For purposes of determining whether any of the Company Payments and
Gross-up Payments (collectively the "Total Payments") will be subject to the
Excise Tax and the amount of such Excise Tax, (x) the Total Payments shall be
treated as "parachute payments" within the meaning of Section 280G(b)(2) of the
Code, and all "parachute payments" in excess of the "base amount" (as defined
under Code Section 280G(b)(3) of the Code) shall be treated as subject to the
Excise Tax, unless and except to the extent that, in the opinion of the
Company's independent certified public accountants appointed prior to any change
in ownership (as defined under Code Section 280G(b)(2)) or tax counsel selected
by such accountants (the "Accountants") such Total Payments (in whole or in
part) either do not constitute "parachute payments," represent reasonable
compensation for services actually rendered within the meaning of Section
280G(b)(4) of the Code in excess of the "base amount" or are otherwise not
subject to the Excise Tax, and (y) the value of any non-cash benefits or any
deferred payment or benefit shall be determined by the Accountants in accordance
with the principles of Section 280G of the Code.
(c) For purposes of determining the amount of the Gross-up Payment, the
Executive shall be deemed to pay U.S. federal income taxes at the highest
marginal rate of U.S. federal income
15
<PAGE>
taxation in the calendar year in which the Gross-up Payment is to be made and
state and local income taxes at the highest marginal rate of taxation in the
state and locality of the Executive's residence (or the states and localities in
which the payments are subject to tax, if different) for the calendar year in
which the Company Payment is to be made, net of the maximum reduction in U.S.
federal income taxes which could be obtained from deduction of such state and
local taxes if paid in such year. In the event that the Excise Tax is
subsequently determined by the Accountants to be less than the amount taken into
account hereunder at the time the Gross-up Payment is made, the Executive shall
repay to the Company, at the time that the amount of such reduction in Excise
Tax is finally determined, the portion of the prior Gross-up Payment
attributable to such reduction (plus the portion of the Gross-up Payment
attributable to the Excise Tax and U.S. federal, state and local income tax
imposed on the portion of the Gross-up Payment being repaid by the Executive if
such repayment results in a reduction in Excise Tax or a U.S. federal, state and
local income tax deduction), plus interest on the amount of such repayment at
the rate provided in Section 1274(b)(2)(B) of the Code. Notwithstanding the
foregoing, in the event any portion of the Gross-up Payment to be refunded to
the Company has been paid to any U.S. federal, state and local tax authority,
repayment thereof (and related amounts) shall not be required until actual
refund or credit of such portion has been made to the Executive, and interest
payable to the Company shall not exceed the interest received or credited to the
Executive by such tax authority for the period it held such portion. The
Employee and the Company shall mutually agree upon the course of action to be
pursued (and the method of allocating the expense thereof) if the Executive's
claim for refund or credit is denied.
In the event that the Excise Tax is later determined by the Accountant or
the Internal Revenue Service to exceed the amount taken into account hereunder
at the time the Gross-up Payment is made (including by reason of any payment the
existence or amount of which cannot be determined at the time of the Gross-up
Payment), the Company shall make an additional Gross-up Payment in respect of
such excess (plus any interest or penalties payable with respect to such excess)
at the time that the amount of such excess is finally determined.
(d) The Gross-up Payment or portion thereof provided for in subsection (c)
above shall be paid not later than the thirtieth (30th) day following an event
occurring which subjects the Executive to the Excise Tax; provided, however,
that if the amount of such Gross-up Payment or portion thereof cannot be finally
determined on or before such day, the Company shall pay to the Executive on such
day an estimate, as determined in good faith by the Accountant, of the minimum
amount of such payments and shall pay the remainder of such payments (together
with interest at the rate provided in Section 1274(b)(2)(B) of the Code),
subject to further payments pursuant to subsection (c) hereof, as soon as the
amount thereof can reasonably be determined, but in no event later than the
ninetieth day after the
16
<PAGE>
occurrence of the event subjecting the Employee to the Excise Tax. In the event
that the amount of the estimated payments exceeds the amount subsequently
determined to have been due, such excess shall constitute a loan by the Company
to the Employee, payable on the fifth day after demand by the Company (together
with interest at the rate provided in Section 1274(b)(2)(B) of the Code).
(e) In the event of any controversy with the Internal Revenue Service (or
other taxing authority) with regard to the Excise Tax, the Executive shall
permit the Company to control issues related to the Excise Tax (at its expense),
provided that such issues do not potentially materially adversely affect the
Executive, but the Employee shall control any other issues. In the event the
issues are interrelated, the Employee and the Company shall in good faith
cooperate so as not to jeopardize resolution of either issue, but if the parties
cannot agree the Employee shall make the final determination with regard to the
issues. In the event of any conference with any taxing authority as to the
Excise Tax or associated income taxes, the Employee shall permit the
representative of the Company to accompany the Employee, and the Employee and
the Executive's representative shall cooperate with the Company and its
representative. Any determination by the accountant shall not be binding in the
face of any inconsistent determination by a taxing authority.
(f) The Company shall be responsible for all charges of the Accountant.
(g) The Company and the Employee shall promptly deliver to each other
copies of any written communications, and summaries of any verbal
communications, with any taxing authority regarding the Excise Tax covered by
this Exhibit B.
<PAGE>
EXHIBIT 10.17
AMENDMENT TO EMPLOYMENT AGREEMENT
The purpose of this Amendment ("Amendment") to the Employment Agreement by
and between John Puisis (the "Executive") and Third Wave Technologies, Inc.
("TWT") dated September 24, 2001 ("Employment Agreement") is to document the
Compensation Committee of TWT's Board of Directors ("Compensation Committee")
approved modifications to the Employment Agreement as it concerns Executive's
Stock Option Grant Agreement terms.
DRAFT RECITALS
A. TWT's Compensation Committee has met and agreed to amend Executive's
Employment Agreement and Stock Option Grant Agreements dated September 24,
2001; June 12, 2002; and January 1, 2003 (hereinafter referred to as the
"Option Grant Agreements") to extend the exercise period for stock options
beyond the date of termination of Executive should Executive be terminated
without Cause; and
B. The TWT Compensation Committee has also agreed to amend the Employment
Agreement and Option Grant Agreements to provide for accelerated vesting
of all options in the event of termination of Executive's employment
without Cause, resignation for Good Reason or in the event which TWT's
current CEO is terminated, resigns or in any way fails to continue as CEO
and the CEO position is not offered to Executive; and
C. TWT and Executive wish to modify certain terms of the Employment Agreement
to confirm the actions of the TWT Compensation Committee identified above.
NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt and sufficiency of which are acknowledged by
each party, the following amendments of the Employment Agreement are hereby
agreed to, effective July 17, 2003.
1. Paragraph 9(c)(ii) shall be deleted in its entirety and replaced with the
following:
"(ii) In the event Executive is terminated without Cause or should the
Executive resign employment for Good Reason or in the event Lance
Fors is no longer the CEO of TWT and the CEO position is not offered
to Executive and further conditioned upon Executive's resignation
not becoming effective until the six-month anniversary date of the
announcement of the Fors termination (the "CEO Turnover Event") the
vesting of stock options issued in the Stock Option Agreements
(700,000 options in total) shall be accelerated and shall be
considered fully vested upon such termination without Cause,
resignation for Good Reason, or the CEO Turnover Event. Executive
will be entitled to exercise, in the event of termination of the
Executive without Cause, resignation for Good Reason, or the CEO
Turnover Event, any remaining vested stock options granted prior to
Executive's termination. In the event of termination without Cause,
resignation for Good Reason or the CEO Turnover Event, the exercise
period for those vested stock options shall not be limited to three
(3) months but shall be extended throughout the option
term/expiration date as identified in the Option Grant Agreements."
2. All other terms and conditions of the Employment Agreement shall remain
unchanged and are hereby ratified and confirmed.
3. The Compensation Committee authorizes TWT management to make all necessary
amendments to Option Grant Agreements previously issued to Executive in
order to be consistent with this Amendment.
4. Should any terms and conditions of any other agreements between Executive,
TWT and/or the Compensation Committee conflict with the terms of this
Amendment, the terms and conditions of this Amendment shall control.
THIRD WAVE TECHNOLOGIES, INC.
<TABLE>
<S> <C>
/s/ Lance Fors /s/ John Neis
- ------------------------- ---------------------------
Lance Fors John Neis
Chairman and Chief Executive Officer Chairman, Third Wave Technologies, Inc.
Compensation Committee of the Board of Directors
/s/ John Puisis
- -------------------------
John Puisis
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21
<SEQUENCE>6
<FILENAME>c83528exv21.txt
<DESCRIPTION>EXHIBIT 21
<TEXT>
<PAGE>
Exhibit 21
List of Subsidiaries:
Third Wave Agbio, Inc.
Third Wave-Japan LLC
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23
<SEQUENCE>7
<FILENAME>c83528exv23.txt
<DESCRIPTION>EXHIBIT 23
<TEXT>
<PAGE>
Exhibit 23
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-57664) of Third Wave Technologies, Inc. pertaining to the 1995
Incentive Stock Option Plan, 1997 Incentive Stock Option Plan, 1997 Nonqualified
Stock Option Plan, 1998 Incentive Stock Option Plan, 1999 Incentive Stock Option
Plan, 1999 Nonqualified Stock Option Plan, 2000 Stock Plan and 2000 Employee
Stock Purchase Plan of our report dated January 29, 2004, with respect to the
consolidated financial statements and schedule of Third Wave Technologies, Inc.
included in this Annual Report (Form 10-K) for the year ended December 31, 2003.
Milwaukee, Wisconsin
March 12, 2004 /s/ Ernst & Young LLP
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31.1
<SEQUENCE>8
<FILENAME>c83528exv31w1.txt
<DESCRIPTION>SECTION 302 CERTIFICATION
<TEXT>
<PAGE>
EXHIBIT 31.1
CERTIFICATIONS
I, Lance Fors, Chief Executive Officer of Third Wave Technologies, Inc. (the
"registrant") certify that:
1. I have reviewed this Annual Report on Form 10-K of the registrant;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures [as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)] for the registrant and have:
(a) designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this annual report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this annual report,
based on such evaluation; and
(c) disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
By: /s/ LANCE FORS
--------------------------------
Lance Fors,
Chief Executive Officer
Date: March 12, 2004
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31.2
<SEQUENCE>9
<FILENAME>c83528exv31w2.txt
<DESCRIPTION>SECTION 302 CERTIFICATION
<TEXT>
<PAGE>
EXHIBIT 31.2
CERTIFICATIONS
I, David M. Nuti, Chief Financial Officer of Third Wave Technologies, Inc. (the
"registrant") certify that:
1. I have reviewed this Annual Report on Form 10-K of the registrant;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures [as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)] for the registrant and have:
(a) designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this annual report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this annual report,
based on such evaluation; and
(c) disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
By: /s/ DAVID M. NUTI
--------------------------------
David M. Nuti
Chief Financial Officer
Date: March 12, 2004
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32.1
<SEQUENCE>10
<FILENAME>c83528exv32w1.txt
<DESCRIPTION>CERTIFICATION
<TEXT>
<PAGE>
EXHIBIT 32.1
CERTIFICATION OF PERIODIC REPORT
I, Lance Fors, Chairman and Chief Executive Officer of Third Wave Technologies,
Inc. (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, 18 U.S.C. Section 1350, that on the date of this Certification:
1. the Annual Report on Form 10-K of the Company for the annual period ended
December 31, 2003, (the "Report") fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Dated: March 12, 2004
/s/ Lance Fors
------------------------------------
Lance Fors, Ph.D.
Chairman and Chief Executive Officer
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32.2
<SEQUENCE>11
<FILENAME>c83528exv32w2.txt
<DESCRIPTION>CERTIFICATION
<TEXT>
<PAGE>
EXHIBIT 32.2
CERTIFICATION OF PERIODIC REPORT
I, David M. Nuti, Chief Financial Officer of Third Wave Technologies, Inc. (the
"Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
18 U.S.C. Section 1350, that on the date of this Certification:
1. the Annual Report on Form 10-K of the Company for the annual period ended
December 31, 2003, (the "Report") fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Dated: March 12, 2004
/s/ David M. Nuti
--------------------------
David M. Nuti
Chief Financial Officer
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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