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<SEC-DOCUMENT>0000950137-05-003141.txt : 20050316
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<ACCEPTANCE-DATETIME>20050316170449
ACCESSION NUMBER: 0000950137-05-003141
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 13
CONFORMED PERIOD OF REPORT: 20041231
FILED AS OF DATE: 20050316
DATE AS OF CHANGE: 20050316
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: 05686328
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
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<DESCRIPTION>ANNUAL REPORT
<TEXT>
<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004,
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), computed by reference to
the last sale price of the common stock of the registrant on June 30, 2004, as
reported by The Nasdaq Stock Market, was $153,402,137.
As of the close of business on March 10, 2005, the registrant had
41,152,891 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 14,
2005.
<PAGE>
THIRD WAVE TECHNOLOGIES
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2004
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I
Item 1. Business........................................................ 3
Item 2. Properties...................................................... 22
Item 3. Legal Proceedings............................................... 22
Item 4. Submission of Matters to a Vote of Security Holders............. 22
PART II
Item 5. Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities .. 22
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............................................................ 28
Item 8. Financial Statements and Supplementary Data..................... 30
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................. 47
Item 9A. Controls and Procedures......................................... 47
Item 9B. Other Information............................................... 49
PART III
Item 10. Directors and Executive Officers of the Registrant.............. 49
Item 11. Executive Compensation.......................................... 49
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters...................... 49
Item 13. Certain Relationships and Related Transactions.................. 49
Item 14. Principal Accountant Fees and Services.......................... 49
PART IV
Item 15. Exhibits and Financial Statements Schedules..................... 49
Signatures............................................................... 50
</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 management's 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.
2
<PAGE>
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.
In the United States, France and the United Kingdom our registered
trademarks are Cleavase(R) and Invader(R). Cleavase, CFLP and Invader are
registered in Germany. CFLP and Invader are also registered in Japan. A
trademark application for InvaderCreator(TM) is pending in the United States,
France, Germany, the United Kingdom and Japan. A trademark application is
pending in the United States for Third Wave and Invader Plus.
PART I
ITEM 1. BUSINESS
OVERVIEW
Third Wave Technologies, Inc. develops and markets molecular diagnostics
for a variety of DNA and RNA analysis applications, providing clinicians and
researchers with superior molecular solutions. Our products are based on our
proprietary Invader(R) chemistry. It is a novel, chemistry-based platform that
we believe is easier to use, more accurate and cost-effective, and enables
higher throughput compared to other methods of DNA and RNA analysis. Third Wave
was incorporated in California in 1993 and reincorporated in Delaware in 2000.
The market of greatest application and commercial opportunity for Third
Wave's Invader(R) chemistry is molecular diagnostics. We believe this market is
approximately $1.4 billion worldwide today, growing to $2.4 billion by 2008.
Within this market, there are a number of diverse segments, including genetics/
pharmacogenetics, infectious disease/women's health, and oncology/chromosomal
analysis, for which the Company's chemistry is particularly well-suited. In
addition to this market of primary focus, the utility of the Invader(R)
chemistry extends beyond molecular diagnostics to include research,
agriculture/biotechnology ("Agbio") and other applications.
TECHNOLOGY
The Invader(R) Chemistry
The Invader(R) chemistry is a simple, scalable and accurate DNA and RNA
analysis solution designed to enable any size highly-complex laboratory licensed
under the Clinical Laboratory Improvement Amendments of 1988 ("CLIA") to provide
patient results more quickly, increase throughput, and lower costs. The
Invader(R) chemistry is a simple, isothermal, DNA probe-based reaction that
detects specific genomic sequences or variations.
The Company announced during 2004 that it will enhance its product
capabilities through the coupling of the performance and flexibility of the
Invader(R) chemistry with the sensitivity of a rudimentary form of polymerase
chain reaction whose patents expire at the end of March 2005. The Company
believes that the combination of these two fundamental chemistries will bring
the best of both to its customers, enabling them to perform complicated
molecular testing more easily and more rapidly.
Third Wave has developed, and plans to continue to develop, a line of
high-value, molecular diagnostic products based on its Invader chemistry for the
following applications:
Clinical Applications
The Invader(R) chemistry is highly flexible and can be used for a number of
clinical applications:
- Genetics/Pharmacogenetics - Detecting genetic variation associated
with inherited conditions such as cystic fibrosis, hemostasis and
cardiovascular risk factors, and those associated with drug efficacy
and adverse drug reactions.
- Infectious Disease/Women's Health - Confirming diagnosis,
quantifying viral load and genotyping to optimize therapy for
infectious diseases such as hepatitis B and C, HIV and the human
herpes virus family, and for detecting human papilloma virus (HPV)
strains.
3
<PAGE>
- Oncology/Chromosomal Analysis - Prenatal detection of genetic
variation associated with chromosomal disorders and oncology
applications including cancer detection and disease monitoring.
Other Applications
The Invader(R) chemistry is a universal detection and analysis solution
for DNA and RNA. In addition to our growing menu 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.
- 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 provider of superior molecular
solutions. The Company seeks to achieve this mission by continuing to convert
its proprietary Invader(R) molecular chemistry into valuable molecular
diagnostic and research products.
To achieve our mission, we have implemented a strategy to:
- Grow our U.S. clinical molecular diagnostic revenue through our
growing product menu by using our strong U.S. distribution and
thought leader networks.
- Continue to expand our pipeline of molecular diagnostic products and
enhance our product capabilities.
- Assess and, where appropriate, pursue incremental opportunities,
e.g., the European and Japanese markets or additional product
applications, above and beyond our primary focus of growing U.S.
clinical molecular diagnostic revenue.
- Partner where necessary to optimize our opportunities in molecular
diagnostics and in markets where the Invader(R) chemistry can create
unique competitive advantages.
INDUSTRY BACKGROUND
Prior to the late 1990s, many diagnostic testing methods had limited
accuracy and served primarily as guides to analysis. This is changing with the
emergence of nucleic acid testing, also referred to as NAT or molecular
diagnostic testing.
Nucleic acid testing is the direct analysis of DNA or RNA. Nucleic acid
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 and RNA, hereditary
diseases, and pathogens, rather than monitoring antigens or antibodies. NAT was
initially used primarily for HIV and blood screening, but it is rapidly
displacing conventional testing methods as the industry standard for a variety
of applications. For example, the need to perform accurate and 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.
Ongoing scientific research has helped determine that a majority of human
diseases have genetic components. The monumental mapping and sequencing of the
entire human genome, through the Human Genome Project and subsequent research
initiatives, are being translated into precise clinical applications to diagnose
and treat disease. As a result, hundreds of molecular diagnostic tests based on
NAT technology are now 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.
4
<PAGE>
The availability of the human genome sequence, combined with an
ever-growing list of known 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, we believe that a
significant increase in demand for gene-based tests will occur in the coming
years.
LIMITATIONS OF CONVENTIONAL METHODS VERSUS THE THIRD WAVE SOLUTION
A limited number of chemistry platforms are presently 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
Invader Plus(TM) Target/Signal Amplification New capability for widespread applications
</TABLE>
Today, many methods for analyzing genetic variations are based on
hybridization in combination with polymerase chain reaction ("PCR").
We believe the Invader(R) and Invader Plus chemistries offer competitive
advantages compared to the other forms of NAT, including:
- Exceptional Accuracy - The Invader(R) chemistry has demonstrated a
level of accuracy surpassing the accuracy of other genetic analysis
methods in multiple studies (see, e.g., Patnaik et. al. J. Mol
Diagn 2004, 6:137-144).
- Ease of Use - Invader(R) products are extremely easy to use for
technicians of 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. Following setup, the
Invader(R) chemistry is hands-off. During the incubation at a single
temperature, technicians are free to perform additional duties.
- Flexibility/Scalability - The Invader(R) chemistry is highly
scalable, allowing any CLIA-high complexity lab, regardless of size,
to take advantage of its benefits.
- Throughput - The Invader(R) chemistry 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) chemistry to a
number of molecular diagnostic, research and other applications. The Company has
a pipeline of new products under development, which it anticipates releasing
during 2005 and beyond. The Company is assessing the feasibility of a number of
other applications.
Molecular Diagnostics
PRODUCTS ON THE MARKET
- HCV (Hepatitis C virus)
- CFTR (cystic fibrosis gene)
- CYP450 2D6 (drug response variability, adverse drug reactions)
- HPV (human papilloma virus)
- Connexin 26 (congenital hearing loss)
5
<PAGE>
- Factor V Leiden (mutations associated with risk of increased
coagulation)
- Factor II (mutations associated with risk of increased coagulation)
- MTHFR (metabolic enzyme associated with cardiovascular disease)
- ApoE (mutations associated with cardiovascular disease)
PRODUCTS IN DEVELOPMENT OR BEING ASSESSED FOR FEASIBILITY
- CFTR with microfluidic format (2005 release)
- Herpes Simplex Viruses 1 and 2 (2005 release)
- Varicella-Zoster Virus (2005 release)
- Cytomegalovirus (2005 release)
- Epstein-Barr Virus (2005 release)
- HCV Viral Load (quantification of virus multiplication for prognosis
and therapy optimization)
- Chlamydia
- Gonorrhea
- HIV Viral Load
- HBV (strain determination and therapy optimization for Hepatitis B)
- Group B Streptococcus
- Subtelomere Scan (2006-2008 release)
- Microdeletion Syndromes (2006-2008 release)
- UGT1A1
- Fragile X
- Ashkenazi Jewish Mutations
- Various additional CYP450 Products (identification of drug response
variability to minimize adverse drug reactions and optimize therapy)
The Company also has developed a number of DNA and RNA analysis products for the
research and agricultural biotechnology markets.
Incremental Product Application Opportunities
We believe the Invader(R) chemistry has demonstrated potential for a
number of additional applications outside of our primary area of focus. The
Company has strategically chosen to approach each of these applications
opportunistically instead of initiating active programs. These areas of
incremental opportunity include:
- Blood screening
- Bioterrorism
6
<PAGE>
- Food and water safety
- Environmental health and safety
- Wellness
MANUFACTURING
We currently manufacture products at our facility in Madison, Wisconsin.
We also outsource the manufacture of select components intended for research
applications. We work closely with the vendor of these components 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
Company's products.
Our molecular diagnostics products are produced in environmentally
controlled rooms 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
substantial compliance with the FDA's quality system requirements or QSRs. The
Company also has achieved ISO 13485:2003 Certification, a stringent,
globally-recognized standard of quality management for medical device
manufacturers.
MARKETING AND SALES
We currently market and sell our products in the United States through a
combination of direct sales personnel, who are focused primarily on the
clinical market, and through collaborative relationships. Our clinical sales
force is comprised of 31 direct sales representatives and technical support
personnel. We plan to increase our sales force as market demand requires. The
clinical sales force targets high volume clinical and reference laboratories
that meet the criteria for highly-complex CLIA laboratories.
Third Wave has more than 110 clinical testing customers in the United
States. We serve most major clinical laboratories that perform molecular
testing. Third Wave has established a strong and direct presence in Japan. Our
products for the research market are sold primarily through collaborative
relationships with research institutions and pharmaceutical companies focused on
the life sciences in humans, plants, and animals. We also appear at industry
trade shows in connection with our marketing efforts.
During 2004, 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 direct sales,
distribution arrangements and collaborative relationships. In 2002, we
established 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 also may establish direct international
sales organizations in other select major markets. In 2004, Third Wave entered
into a limited-term distribution arrangement for a limited number of its
products in the European market with Innogenetics, N.V.
For a description of our industry segment and our product revenues by
geographic area, see Note 11 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. We
have entered into a number of collaboration agreements and continue to assess
additional relationships for the supply, distribution and development of our
products. The following is a summary of our principal collaborative
relationships.
7
<PAGE>
BML
In December 2000, Third Wave entered into a development and
commercialization agreement with BML, Inc., ("BML"), 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. 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 use the developed assays for providing
clinical testing services in Japan. The term of the agreement is until December
31, 2009.
ACLARA BIOSCIENCES, INC./VIROLOGIC, INC.
In October 2002, Third Wave entered into limited license and supply
agreements with ACLARA BioSciences, Inc. ("Aclara") under which Aclara has
nonexclusive rights to incorporate our proprietary Invader(R) chemistry and
Cleavase(R) enzyme with Aclara's eTag(TM) technology platform for multiplexed
gene expression applications for the research market.
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. On December 10, 2004, Aclara was acquired by Virologic, Inc.
UNIVERSITY OF TOKYO/RIKEN
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 are 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 related research, Third Wave also will support
Dr. Nakamura for other research projects.
INTELLECTUAL PROPERTY
We have implemented a patent strategy designed to provide us with freedom
to operate and facilitate commercialization of our current and future products.
We currently own 34 issued U.S. patents, and hold exclusive licenses to two
issued patents in the United States, own five issued patents in Australia, two
issued patents in Canada and one issued European Cooperative patent. We have
received notices of allowance for 6 additional U.S. patent applications. We have
53 additional U.S. 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. We also 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 U.S. 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 methods also allow multiplexing or analysis of more than one
sample in a single reaction, enabling the system to be easily amenable to a wide
range of automated and non-automated detection methods.
8
<PAGE>
The Company's issued U.S. 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,
however, 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 found 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 U.S. 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 you that third parties will not independently
discover or invent competing technologies or reverse engineer our trade secrets
or other technologies.
In October 2000, we settled a dispute with ID Biomedical Corporation in
which ID Biomedical had claimed that our products and processes infringed their
patents. In the ID Biomedical settlement, we paid $4.0 million in cash and
issued 545,454 shares of common stock and, in exchange, ID Biomedical dismissed
its lawsuit against us and agreed not to sue us, our affiliates, our customers
and certain others for infringement of patents held by ID Biomedical. In
December 2000, we entered into a licensing arrangement with Dade Behring in
order to resolve an intellectual property dispute between us and Dade Behring.
In September 2002, we filed a patent infringement suit against EraGen
Biosciences, Inc. The suit was filed in the U.S. District Court for the Western
District of Wisconsin, located in Madison, Wisconsin. The complaint alleged that
EraGen Biosciences, Inc. was infringing certain claims of two Company patents.
In March 2003, the Court issued a favorable ruling confirming our interpretation
of the patent claims at issue, resulting in a settlement between the two
companies. As part of the EraGen settlement, we agreed to dismiss the lawsuit
and to issue a covenant not to sue under certain of our 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 September 2004, we filed a patent infringement suit against Stratagene
Corporation. This suit was filed in the same court as the EraGen case. The
complaint alleges that Stratagene is infringing certain claims of the same two
patents that the Company asserted against EraGen Biosciences, Inc. Stratagene
counter-claimed for invalidity and non-infringement. Trial is currently
scheduled for August 2005.
In the future, we may become involved in lawsuits in which third parties
file claims asserting that our technologies or products infringe on their
patents. 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. We may also become involved in lawsuits in which third
parties file claims asserting that our technologies or products infringe on
their intellectual property. Certain technologies and product areas may relate
to genes and genetic variations that are the subject of aggressive patent rights
acquisitions by other parties. As a result, certain technologies and product
areas can be characterized by complicated intellectual property considerations
and overlapping rights between multiple independent parties. We are currently
marketing and developing products to which some risk of intellectual property
infringement litigation pertains. We cannot predict whether third parties may
assert claims of infringement against us or against the licensors of
technologies licensed to us.
9
<PAGE>
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.
We compete with many companies in the United States and abroad engaged in
the development, commercialization and distribution of similar products intended
for clinical molecular diagnostic applications. These companies may have or
develop products competitive with the products offered by us. 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 our products.
In the clinical market, we potentially compete with several companies
offering alternative technologies that differ from the Invader(R) chemistry.
These companies include, among others: Abbott Laboratories, Bayer Corporation,
Becton, Dickinson and Company, BioRad Laboratories, Inc., Digene Corp., Roche
Diagnostics Corporation, Gen-Probe, Applera Corporation companies including
Applied Biosystems and Celera, Innogenetics, Inc., TM Bioscience Corporation,
and Ventana Medical Systems Inc.
In the research market, we compete with several companies offering
alternative technologies that differ from the Invader(R) chemistry. These
companies include, among others: Affymetrix, Inc., Illumina, Inc., and Applied
Biosystems.
GOVERNMENT REGULATION
We are subject to regulation by the FDA under the Food, Drug and
Cosmetic Act and other laws. The Food, Drug and Cosmetic Act requires that
medical devices introduced to the U.S. market, unless otherwise exempted, be the
subject of either a premarket notification clearance, known as a 510(k), or a
premarket approval, known as a PMA. Some of our clinical products may require a
PMA, others may require a 510(k). Other products, like analyte specific
reagents, or ASRs, may be exempt from regulatory clearance or approval, but
still subject to restrictions.
With respect to products reviewed through the 510(k) process, we may not
market a product until an order is issued by the FDA finding our product to be
substantially equivalent to a legally marketed product 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. If the FDA determines there is no predicate device, we
may request that the FDA use the process known as de novo classification and
then clear the device through a 510(k) filing, rather than a PMA. De novo
classification is intended to be used for lower-risk products. 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.
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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, most of which are exempt from 510(k) clearance or
PMA approval requirements, the FDA will impose restrictions on marketing. Our
ASR products may be sold only to clinical laboratories certified under 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 be assured 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. 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 research will
be subject to significant government regulation. Our products labeled as 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.
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. Under FDA regulatory requirements, we may not make claims about the
intended clinical use or efficacy of ASR products.
Our manufacturing facility is subject to periodic and unannounced
inspections by the FDA for compliance with quality system regulations.
Additionally, the FDA often will conduct a preapproval inspection for PMA
devices. Although we believe we are in compliance with the FDA's quality system
regulations, 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, seek to
enjoin future violations and assess civil and criminal penalties against us. In
addition, approvals or clearances could be withdrawn under certain
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 U.S. will 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 that 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, 2004, we employed 140 persons, of whom 27 hold
doctorate degrees and 93 hold other advanced degrees. Approximately 41 employees
are engaged in research and development, 42 in business development, sales and
marketing, 26 in operations and manufacturing and 31 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.
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RISK FACTORS
RISKS RELATED TO OUR BUSINESS
WE HAD AN ACCUMULATED DEFICIT OF $135.8 MILLION AT DECEMBER 31, 2004, 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 $1.9 million in 2004, $8.1 million in 2003, and $40.9
million in 2002. 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 expect to incur
annual 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;
- third-party intellectual property that may impede our ability to
sell products;
- 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, including our single-largest
research customer in Japan; 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, 2004, 2003,
and 2002 were $11.6 million, $12.0 million, and $13.9 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 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
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development or that we will be able to develop additional new products. In
addition, for our genetic and pharmacogentic products, 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.
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 the FDA's 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 QSRs, we must verify
that our suppliers of key components are in compliance with all applicable FDA
regulations and meet our standards for quality. The above factors all contribute
to scenarios where we 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.
OUR LIMITED SALES AND MARKETING EXPERIENCE AND CAPACITY MAY ADVERSELY
AFFECT OUR ABILITY TO GROW AND TO COMPETE SUCCESSFULLY IN COMMERCIALIZING
OUR POTENTIAL PRODUCTS.
We currently have a relatively small sales force, consisting of 15
individuals focused on direct sales and 16 individuals focused on service and
support in the clinical market. We 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 may also market our products through collaborations and
distribution agreements with diagnostics, biopharmaceutical and life science
companies. We cannot guarantee 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 U.S. 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 U.S. are subject to foreign regulations typical to the sale and
marketing of our products that may pose an additional risk for us. 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.
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Our clinical customer base is dominated by a small number of large
clinical testing laboratories including Quest Diagnostics, Inc., Mayo Medical
Laboratories, Specialty Laboratories, Inc., and Laboratory Corporation of
America. If we are unable to increase sales, 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 FINANCING FOR OUR FUTURE OPERATING PLANS.
FINANCING 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 in our research and product development and
commercialization activities and to improve production processes, litigate
intellectual property disputes, and seek FDA clearance or approvals. The amount
of additional capital we will need to raise will depend on many factors,
including:
- our progress with our research and development programs;
- 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
that 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. 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
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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.
THE EARLY TERMINATION OF ANY OF OUR STRATEGIC COLLABORATION 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 2005. Accordingly, early termination of these relationships and
supply agreements would seriously harm our revenues, and in turn, our business,
and financial condition.
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 $27.6 million, or 59%, of our revenue in 2004 was derived
from sales to a major Japanese research institute, for use by several end-users.
Sales to that research institute accounted for 69% and 51% of our revenue in
2003 and 2002, 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.
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
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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, to a significant degree, 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. Others may file and, in the
future, may file, patent applications covering improvements to our technologies.
Any such patent application may have priority over our patent applications and
could further restrict our ability to market our products. 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 U.S.
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. We could also become involved in disputes regarding the
ownership of intellectual property rights that relate to our technologies. These
disputes could arise out of collaboration relationships, strategic partnerships
or other relationships. These disputes and proceedings could 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. Although the company has taken steps to respect the
intellectual property of third parties and believes that its products do not
infringe valid claims of other parties' patents, we may nevertheless be forced
to defend against claims of patent infringement. In particular, third parties
own multiple patents relating to the hepatitis C virus and the human papilloma
virus. As a result, we may become involved in patent litigation relating to our
HCV or HPV ASRs.
We have in the past and may in the future become a party to litigation
involving patents and intellectual property rights. In October 2000, we settled
a dispute with ID Biomedical Corporation in which ID Biomedical had claimed that
our products and processes infringed their patents. In the ID Biomedical
settlement, we paid $4.0 million in cash and issued 545,454 shares of common
stock and, in exchange, ID Biomedical dismissed its lawsuit against us and
agreed not to sue us, our affiliates, our customers and certain others for
infringement of patents held by ID Biomedical. In December 2000, we entered into
a licensing arrangement with Dade Behring in order to resolve an intellectual
property dispute between us and Dade Behring. In September 2002, we filed a
patent infringement suit against EraGen Biosciences, Inc. alleging that certain
activities and products of the defendant infringes upon U.S. Patents issued to
us. 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. In September 2004, we filed a patent infringement suit against
Stratagene Corporation. The complaint
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alleges that Stratagene is infringing certain claims on two of the Company's
patents. Trial is scheduled for August 2005. If we do not prevail in this
litigation, Stratagene's products could diminish sales of our products.
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;
- the employees, collaborators, consultants and other third parties
may apply for patents on improvements to our technologies without
assigning ownership rights to us;
- 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, scientific staff, and key employees.
If a competitor hired members of our senior management staff, scientific
staff, or key employees, or if for any reason these employees would not continue
to work for us, we would have difficulty hiring employees with equivalent
skills.
17
<PAGE>
In addition, our researchers, scientists and technicians have significant
experience in research and development related to the analysis of genetic
variations. If we were to lose these employees to our competitors, we could
spend a significant amount of time and resources to replace them, which could
impair our research and development efforts. Further, in order to scale up our
commercialization activity and to further our research and development efforts,
we will need to hire, train and retain additional sales, marketing, research,
scientific, and technical personnel. If we are unable to hire, train and retain
the personnel we need, we may experience delays in the research, development and
commercialization of our technologies and products. This would result in reduced
revenues and would harm our results of operations.
WE PLAN TO CONTINUE TO INTRODUCE PRODUCTS FOR THE CLINICAL MARKET, AND WE
MAY NEED TO OBTAIN FDA CLEARANCES AND APPROVALS AND COMPLY WITH FDA
QUALITY SYSTEM REGULATIONS AND OTHER REGULATIONS RELATING TO THE
MANUFACTURING, MARKETING AND SALE OF CLINICAL PRODUCTS.
We anticipate that the manufacturing, labeling, distribution and marketing
of a number of our clinical diagnostic products will be subject to extensive
regulation in the United States and in certain other countries.
In the United States, the FDA regulates, as medical devices, most
diagnostic tests and in vitro reagents that are marketed as finished test kits.
Some clinical laboratories, however, purchase products that are marketed under
FDA regulations as analyte specific reagents, and develop and prepare their own
finished diagnostic tests. 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 and also restricts the types of
products that can be sold as ASRs. We currently market our diagnostic products
as ASRs. Consequently, these clinical products will be regulated as medical
devices. Should the FDA modify the ASR rules or its interpretation and
enforcement of them in a fashion that makes it difficult or impossible for us to
market some or all of our products, we may be required to terminate those 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. We plan to
seek FDA approvals or clearances for certain products starting in 2005, and we
cannot predict the likelihood of obtaining those approvals or clearances. Also,
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 particular, the FDA may
look closely at our HCV product, our HPV product when released as an ASR and our
CFTR gene ASR when released in a microfluidic card format. 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. Furthermore, in the event that the
regulatory safe-haven provided to ASRs is eliminated by the FDA, 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.
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;
18
<PAGE>
- 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, including those laboratories that do not
comply with those requirements, from using some or all of our products. In
addition, CLIA regulations and future administrative interpretations of CLIA
could harm our business by limiting the potential market for some or all of our
products.
OUR FAILURE TO COMPLY WITH ANY APPLICABLE ENVIRONMENTAL, HEALTH, SAFETY
AND RELATED GOVERNMENT REGULATIONS MAY AFFECT OUR ABILITY TO DEVELOP,
PRODUCE OR MARKET OUR POTENTIAL PRODUCTS AND MAY ADVERSELY AFFECT OUR
RESULTS OF OPERATIONS.
Our research, development and manufacturing activities involve the use,
transportation, storage and disposal of hazardous materials and are subject to
related environmental and health and safety statutes and regulations. As we
expand our operations, our increased use of hazardous substances will lead to
additional and more stringent requirements. This may cause us to incur
substantial costs to maintain compliance with applicable statutes and
regulations. In addition, we are obligated to file a report to the U.S.
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.
19
<PAGE>
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.
AUTHORIZED STOCK BUY BACK PROGRAM MAY DIMINISH OUR CASH RESERVES
Our Board of Directors has authorized the Company to acquire on behalf of
the Company, from time to time, in the open market or through private
transactions, shares of the common stock of the Company at prices approximating
then existing market prices, provided that such repurchase program does not
exceed 5% of the outstanding common stock of the Company. The use of the
Company's cash for such a repurchase program may or may not have a negative
impact on company performance or stock price.
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;
- 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 14, 2005, our directors, executive officers and principal
stockholders beneficially owned, in the aggregate, approximately 21% 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
20
<PAGE>
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 further regulations
relating to the conduct of genetic research and genetic testing. These new
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. Health care cost
containment initiatives focused on genetic testing could cause the growth in the
clinical market for genetic testing to be curtailed or slowed. In addition,
health care cost containment initiatives could also cause pharmaceutical
companies to reduce research and development spending. In either case, our
business and our operating results would be harmed. In addition, genetic testing
in clinical settings is often billed to third-party payors, including private
insurers and governmental organizations. If our current and future clinical
products are not considered cost-effective by these payors, reimbursement may
not be available to users of our products. In this event, potential customers
would be much less likely to use our products, and our business and operating
results would be seriously harmed.
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, its Code of
Business Conduct, 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.
21
<PAGE>
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
$173,000 per month. We believe that our current facility will be adequate to
meet our near-term space requirements and are currently seeking to sublease some
of our existing 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 filed in which we are a defendant as of December 31,
2004.
In September 2004, we filed a patent infringement suit against Stratagene
Corporation in Madison the U. S. District Court for the Western District of
Wisconsin, located in Madison, Wisconsin. The complaint alleges that Stratagene
is infringing certain claims of two of our patents. Trial is currently
scheduled for August 2005.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
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 2004 and 2003 the high and low sales prices per
share, based on closing prices, for our common stock as reported on the NASDAQ
National Market.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
DECEMBER 31, 2004 HIGH LOW
- ------------------------ ------- -------
<S> <C> <C>
First Quarter.......... $ 4.82 $ 3.37
Second Quarter......... $ 5.40 $ 4.21
Third Quarter.......... $ 6.88 $ 3.19
Fourth Quarter......... $ 8.94 $ 6.88
</TABLE>
<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>
As of March 10, 2005, approximately 345 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.
22
<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
Form 10-K. The Company's audited statements of operations for the years ended
December 31, 2004, 2003, and 2002 and the audited balance sheets as of December
31, 2004 and 2003 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)
-----------------------------------------------------------------
2004 2003 2002 2001 2000
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues $ 46,493 $ 36,320 $ 32,355 $ 34,092 $ 11,417
Operating expenses:
Cost of goods sold 12,492 12,840 21,320 32,746 11,518
Research and development 11,637 12,035 13,934 16,179 7,337
Selling and marketing 10,803 8,859 9,578 9,200 4,983
General and administrative 13,262 10,363 11,984 14,521 7,408
Restructuring and other charges (98) - 11,087 - -
Impairment of goodwill and other
intangible assets - - 4,810 - 5,789
Impairment of equipment 795 - - - -
Merger costs - - - - 833
--------- --------- --------- --------- ---------
Total operating expenses 48,891 44,097 72,713 72,646 37,868
--------- --------- --------- --------- ---------
Loss from operations (2,398) (7,777) (40,358) (38,554) (26,451)
Other income (expense), net 513 (339) (506) 1,762 877
--------- --------- --------- --------- ---------
Loss before income taxes (1,885) (8,116) (40,864) (36,792) (25,574)
Provision for income taxes 57 - - - -
--------- --------- --------- --------- ---------
Net loss (1,942) (8,116) (40,864) (36,792) (25,574)
Deemed dividend upon issuance of
convertible preferred stock - - - - (17,023)
--------- --------- --------- --------- ---------
Net loss attributable to common
shareholders $ (1,942) $ (8,116) $ (40,864) $ (36,792) $ (42,597)
========= ========= ========= ========= =========
Basic and diluted net loss per share $ (0.05) $ (0.20) $ (1.04) $ (1.03) $ (2.83)
========= ========= ========= ========= =========
Shares used in computing basic and diluted
net loss per share 40,463 39,749 39,457 35,714 15,078
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 37,483 26,120
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
(IN THOUSANDS)
----------------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents, and short term
investments $ 66,690 $ 57,816 $ 60,315 $ 73,299 $ 47,179
Working capital 52,901 42,655 43,518 64,834 29,122
Total assets 88,068 80,422 89,223 131,615 83,193
Long-term obligations, net of current
portion 487 13 13 6,694 12,095
Accumulated deficit (135,774) (133,832) (125,715) (84,852) (48,149)
Total shareholders' equity 62,735 59,288 65,287 104,753 47,039
</TABLE>
(a) Pro forma basic and diluted net loss per common share for 2001 and 2000
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 our 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) chemistry, a novel, proprietary molecular
chemistry, is easier to use, more accurate and cost-effective, and enables
higher testing throughput. These and other advantages conferred by our chemistry
are enabling us to provide clinicians and researchers with superior molecular
solutions.
More than 110 clinical laboratory customers are using Third Wave's
molecular diagnostic reagents. 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 perform hepatitis C virus genotyping, 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, oncology/chromosomal analysis, and infectious
disease/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 Emerging Issues
Task Force ("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 Financial Accounting Standards Board
("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.
24
<PAGE>
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 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 2004,
2003, and 2002.
DERIVATIVE INSTRUMENTS
We sell products in a number of countries throughout the world. During
2004, 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. There were no contracts
outstanding at December 31, 2004. 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, 2004, our
inventory reserves were $650,000, or 34% of our $1.9 million total gross
inventories.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2004 AND 2003
Revenues. Revenues for the year ended December 31, 2004 of $46.5 million
represented an increase of $10.2 million as compared to revenues of $36.3
million for the year ended December 31, 2003.
Product revenues increased to $46.0 million for the year ended December
31, 2004, from $35.1 million in the year ended December 31, 2003. The increase
in product sales during 2004 resulted from an increase in U.S. molecular
diagnostic sales and higher genomic research product sales to a Japanese
research institute for use by several end users compared to prior year. We
expect our molecular diagnostic revenues to increase in 2005.
There were no development revenues in the year ended December 31, 2004,
compared to $0.9 million for the year ended December 31, 2003. The decrease was
due to the transition from development revenue to product revenue in 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.
License and royalty revenue was $0.2 million in the years ended December
31, 2004 and 2003. In the years ended December 31, 2004 and 2003, we
received royalty revenue of $150,000 and $100,000 respectively, from Aclara, per
the license and supply agreement.
Significant Customer. We generated $27.6 million, or 59% of our revenues,
from sales to a major Japanese research institute for use by several end-users
during the year ended December 31, 2004. As of December 31, 2004, $2.1 million
of our accounts receivable were attributable to this customer. This customer
will continue to purchase our products in 2005; however, the timing and
total of such purchases will be influenced by the funding process and amounts
which are unpredictable and unknown to us.
25
<PAGE>
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, 2004, cost of goods sold
decreased to $12.5 million, compared to $12.8 million for the year ended
December 31, 2003. The decrease was due to improved efficiencies. We expect
gross margin to improve as clinical revenues increase.
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, 2004 were $11.6 million, compared to $12.0 million for
the year ended December 31, 2003. The decrease in research and development
expenses was primarily attributable to decreased material costs for assay and
product development and a decrease in personnel related expenses. 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, 2004 were $10.8 million, an increase of $1.9 million, as compared
to $8.9 million for the year ended December 31, 2003. The increase was
attributable to an increase in personnel related expenses. We anticipate selling
and marketing expenses to be at or above 2004 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 increased to $13.3 million for
the year ended December 31, 2004, from $10.4 million for the year ended December
31, 2003. The increase was due to an increase in personnel related expenses and
professional and consulting fees in 2004 compared to 2003. We anticipate general
and administrative expenses to be at or above 2004 levels.
Impairment Loss. In the year ended December 31, 2004, an impairment charge
of $0.8 million was recorded for equipment written down to fair value.
Restructuring. In the year ended December 31, 2004, a $98,000 reduction to
the restructuring reserve was recorded due to a change in assumptions. The
estimate of the amount of sublease income expected was reduced. In addition, the
estimated lease and operating expenses were also reduced, based on a portion of
the office space being utilized.
Interest Income. Interest income for the year ended December 31, 2004 was
$0.8 million, compared to $0.6 million for the year ended December 31, 2003.
This increase was primarily due to higher interest rates and higher cash
balances in 2004 compared to 2003.
Interest Expense. Interest expense for the years ended December 31, 2004
and 2003 was approximately $0.3 million.
Provision for Income Taxes. Income tax expense for the year ended December
31, 2004 of $57,000 was due to alternative minimum tax.
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 U.S. molecular
diagnostic sales and higher genomic research product sales to the Japanese
government compared to prior year.
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
26
<PAGE>
agreement with BML.
License and royalty revenue decreased to $0.2 million in the year ended
December 31, 2003, from $1.5 million for 2002. The decrease was 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.
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.
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.
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 was attributable
to a combination of a reduction in distributor commissions and consulting fees
and an increase in personnel related expenses.
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.
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, 2004, we had cash, cash equivalents and short-term
investments of $66.7 million.
Net cash provided by operations for the year ended December 31, 2004 was
$6.6 million, compared with net cash used of $3.2 million in 2003 and $14.0
million in 2002. The change was primarily due to lower operating losses.
27
<PAGE>
Net cash used in investing activities for the year ended December 31, 2004
was $0.8 million, compared to cash provided of $0.2 million in 2003 and a cash
usage of $8.7 million in 2002. Capital expenditures were $0.6 million in the
year ended December 31, 2004, compared to $0.2 million in 2003 and $2.3 million
in 2002. Investing activities included proceeds from the sale of equipment of
less than $0.1 million in the year ended December 31, 2004, $0.3 million in the
year ended December 31, 2003 and $4.4 million in 2002. The proceeds from the
sale of equipment in 2002 was primarily in connection with our restructuring. In
the year ended December 31, 2004, the net cash usage from the purchases, sales
and maturities of short-term investments was $0.3 million, compared to net cash
proceeds of $0.2 million in 2003 and a net cash usage of $10.8 million in 2002.
In 2004, 2003 and 2002, we purchased certificates of deposit to collateralize
our term loan with the bank.
Net cash provided by financing activities was $2.8 million in the year
ended December 31, 2004, compared to net cash provided by financing activities
of $0.7 million in the year ended December 31, 2003 and net cash used in
financing activities of $1.1 million in 2002. Cash used in financing activities
in the year ended December 31, 2004 consisted of $34,000 to repay debt, compared
to $15,000 in 2003 and $6.6 million in 2002. Additionally, in 2004 and 2002,
$12,000 and $4.4 million was used for capital lease obligation payments,
respectively. In 2004 and 2002, cash provided by financing activities included
proceeds from long-term debt of $0.5 million and $9.5 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 and 2004, we renewed the term loan for an additional year. The Company
intends to renew this term loan obligation upon expiration in 2005. The term
loan is collateralized with a 12-month certificate of deposit. Proceeds from the
issuance of common stock were $2.4 million in 2004, compared to $0.7 million in
2003 and $0.3 million in 2002.
As of December 31, 2004 and 2003, a valuation allowance equal to 100% of
our net deferred tax assets had been recognized since future realization is not
assured. At December 31, 2004, we had federal and state net operating loss
carryforwards of approximately $113 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 you that our business or operations will not change in a
manner that would consume available resources more rapidly than anticipated. We
also cannot assure you that we will not require substantial additional funding
before we can achieve profitable operations. Our capital requirements depend on
numerous factors, including the following:
- our progress with our research and development programs;
- our level of success in selling our products and technologies;
- our ability to establish and maintain successful collaborative
relationships;
- the costs we incur in enforcing and defending our patent claims and
other intellectual property rights; and
- the timing of purchases of additional capital.
CONTRACTUAL OBLIGATIONS
The following summarizes our contractual obligations at December 31, 2004
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 $ 13,697 $ 1,806 $3,833 $ 4,145 $ 3,913
Capital lease obligations 268 76 128 55 9
Long-term debt 9,949 9,614 228 107 -
-------- --------- ------ ------- -------
Total obligations $ 23,914 $ 11,496 $4,189 $ 4,307 $ 3,922
-------- --------- ------ ------- -------
</TABLE>
We also have an available and unused $1.3 million letter of credit.
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
28
<PAGE>
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, 2004, 2003 and 2002
Third Wave Technologies, Inc.
Index to Consolidated Financial Statements
CONTENTS
<Table>
<S> <C>
Report of Independent Registered Public Accounting Firm......................... 31
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 2004 and 2003.................... 32
Consolidated Statements of Operations for the years ended
December 31, 2004, 2003 and 2002............................................. 33
Consolidated Statements of Shareholders' Equity for the years ended December
31, 2004, 2003 and 2002...................................................... 34
Consolidated Statements of Cash Flows for the years ended December 31, 2004,
2003 and 2002................................................................ 35
Notes to Consolidated Financial Statements...................................... 36
</Table>
30
<PAGE>
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Third Wave Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Third Wave
Technologies, Inc. (the Company) as of December 31, 2004 and 2003, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 2004. 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Third Wave
Technologies, Inc. at December 31, 2004 and 2003, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 2004, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Third Wave
Technologies, Inc.'s internal control over financial reporting as of December
31, 2004, based on criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated March 4, 2005 expressed an unqualified
opinion thereon.
Ernst & Young LLP
Milwaukee, Wisconsin
March 4, 2005
31
<PAGE>
Third Wave Technologies, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
2004 2003
---------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 55,619,981 $ 47,015,746
Short-term investments 11,070,000 10,800,000
Accounts receivable, net of allowance for doubtful
accounts of $300,000 and $140,000 in 2004 and 2003,
respectively 5,784,679 2,061,054
Inventories 1,236,392 1,394,046
Prepaid expenses and other 260,316 485,680
---------------- -----------------
Total current assets 73,971,368 61,756,526
Equipment and leasehold improvements:
Machinery and equipment 15,832,489 18,544,956
Leasehold improvements 2,277,604 2,099,104
---------------- -----------------
18,110,093 20,644,060
Less accumulated depreciation 12,139,423 12,116,813
---------------- -----------------
5,970,670 8,527,247
Assets held for sale 269,000 -
Amortizable intangible assets 4,146,372 5,651,124
Indefinite-lived intangible assets 1,007,411 1,007,411
Goodwill 489,873 489,873
Other assets 2,212,935 2,989,752
---------------- -----------------
Total assets $ 88,067,629 $ 80,421,933
================ =================
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31
2004 2003
---------------- -----------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,519,005 $ 4,955,434
Accrued payroll and related liabilities 2,873,506 2,802,297
Other accrued liabilities 1,867,361 1,776,250
Deferred revenue 129,530 67,760
Long-term debt due within one year 9,614,127 9,500,000
Capital lease obligations due within one year 66,867 -
---------------- -----------------
Total current liabilities 21,070,396 19,101,741
Deferred revenue 254,434 -
Long-term debt 335,069 13,333
Capital lease obligations 151,885 -
Other liabilities 3,520,948 2,019,024
Commitments (Note 6)
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, 41,102,764 and 40,021,244 shares issued
and outstanding in 2004 and 2003, respectively 41,103 40,021
Additional paid-in capital 198,990,162 193,356,121
Unearned stock compensation (554,293) (309,996)
Foreign currency translation adjustment 31,949 33,307
Accumulated deficit (135,774,024) (133,831,618)
---------------- -----------------
Total shareholders' equity 62,734,897 59,287,835
---------------- -----------------
Total liabilities and shareholders' equity $ 88,067,629 $ 80,421,933
================ =================
</TABLE>
See accompanying notes.
32
<PAGE>
Third Wave Technologies, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
2004 2003 2002
----------------- ---------------- -----------------
<S> <C> <C> <C>
Revenues:
Product sales $ 46,016,127 $ 35,148,297 $ 28,880,942
Development revenues - 916,664 1,641,567
Grant revenues 242,032 61,098 332,453
License and royalty revenue 234,841 193,792 1,500,000
----------------- ---------------- -----------------
46,493,000 36,319,851 32,354,962
Operating expenses:
Cost of goods sold (including amortization of capitalized legal
settlement costs and reacquired marketing and distribution
rights of $1,504,752, $1,504,752 and $1,930,557
in 2004, 2003 and 2002, respectively) 12,491,783 12,839,502 21,320,133
Research and development 11,636,620 12,035,375 13,933,864
Selling and marketing 10,803,381 8,858,678 9,577,122
General and administrative 13,262,373 10,363,139 11,984,104
Impairment of goodwill and other intangible
assets - - 4,809,902
Impairment of equipment 794,716 - -
Restructuring and other charges (98,000) - 11,087,233
----------------- ---------------- -----------------
Total operating expenses 48,890,873 44,096,694 72,712,358
----------------- ---------------- -----------------
Loss from operations (2,397,873) (7,776,843) (40,357,396)
Other income (expense):
Interest income 776,295 571,282 1,006,231
Interest expense (283,240) (298,182) (1,089,497)
Other 19,753 (612,493) (423,003)
----------------- ---------------- -----------------
512,808 (339,393) (506,269)
----------------- ---------------- -----------------
Loss before income taxes (1,885,065) (8,116,236) (40,863,665)
Provision for income taxes 57,341 - -
----------------- ---------------- -----------------
Net loss $ (1,942,406) $ (8,116,236) $ (40,863,665)
================= ================ =================
Net loss per share - basic and diluted $ (0.05) $ (0.20) $ (1.04)
</TABLE>
See accompanying notes.
33
<PAGE>
Third Wave Technologies
Consolidated Statement of Shareholders' Equity
<TABLE>
<CAPTION>
Common Stock
------------------------ Foreign
Additional Currency
Paid in Unearned Stock Translation
Par Capital Compensation Adjustment
------- ------------ -------------- -----------
<S> <C> <C> <C> <C>
Balance at December 31, 2001 $39,374 $191,426,698 $(1,861,566) $ -
Common stock issued for stock options and stock purchase plan
- 185,560 shares 186 300,931 -
Unearned stock compensation - 147,932 (147,932) -
Amortization of unearned stock compensation - - 1,248,154 -
Reversal of unearned stock compensation related to terminated
employees - (294,425) 143,098 -
Net loss and comprehensive loss - - - -
------- ------------ ----------- ---------
Balance at December 31, 2002 39,560 191,581,136 (618,246) -
Common stock issued for stock options and stock purchase plan
- 461,670 shares 461 721,568 -
Unearned stock compensation - 1,162,477 (1,162,477) -
Amortization of unearned stock compensation - - 1,374,377 -
Reversal of unearned stock compensation related to terminated
employees - (109,060) 96,350 -
Net loss - - - -
Foreign currency translation adjustment - - - 33,307
Comprehensive loss
------- ------------ ----------- ---------
Balance at December 31, 2003 40,021 193,356,121 (309,996) 33,307
Common stock issued for stock options and stock purchase plan
- 1,081,520 shares 1,082 2,363,289 - -
Unearned stock compensation - 3,270,752 (3,270,752) -
Amortization of unearned stock compensation - - 3,026,455 -
Net loss - - -
Foreign currency translation adjustment - - - (1,358)
Comprehensive loss
------- ------------ ----------- ---------
Balance at December 31, 2004 $41,103 $198,990,162 $ (554,293) $ 31,949
======= ============ ============ =========
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Deficit Total
------------ ------------
<S> <C> <C>
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 and comprehensive 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
Common stock issued for stock options and stock purchase plan
- 1,081,520 shares - 2,364,371
Unearned stock compensation - -
Amortization of unearned stock compensation - 3,026,455
Net loss (1,942,406) (1,942,406)
Foreign currency translation adjustment - (1,358)
------------
Comprehensive loss (1,943,764)
------------- ------------
Balance at December 31, 2004 $(135,774,024) $ 62,734,897
============= ============
</TABLE>
<PAGE>
Third Wave Technologies, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
2004 2003 2002
--------------- ---------------- ---------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (1,942,406) $ (8,116,236) $ (40,863,665)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation 2,107,466 2,607,096 7,100,496
Amortization of intangible assets 1,504,752 1,504,752 1,968,558
Amortization of licensed technology 623,956 480,633 415,017
Noncash stock compensation 3,026,455 1,361,667 1,096,827
Noncash charge for impairment and restructuring - - 12,151,817
Impairment charge and (gain) loss on disposal of equipment 888,817 (410) (68,898)
Amortization of deferred gain - - (23,871)
Change in operating assets and liabilities:
Receivables (3,724,983) 697,109 (895,734)
Inventories 157,654 266,298 4,788,630
Prepaid expenses and other assets 390,645 809,031 1,554,514
Accounts payable 1,563,571 (2,133,528) (4,187,993)
Accrued expenses and other liabilities 1,664,244 224,512 4,498,178
Deferred revenue 316,204 (877,904) (1,506,954)
--------------- ---------------- ---------------
Net cash provided by (used in) operating activities 6,576,375 (3,176,980) (13,973,078)
INVESTING ACTIVITIES
Purchases of equipment and leasehold improvements (578,472) (249,916) (2,277,114)
Proceeds on sale of equipment 88,320 321,264 4,391,389
Purchases of licensed technology - (100,000) -
Purchases of short-term investments (11,070,000) (10,800,000) (10,941,000)
Sales and maturities of short-term investments 10,800,000 11,013,000 96,000
--------------- ---------------- ---------------
Net cash provided by (used in) investing activities (760,152) 184,348 (8,730,725)
FINANCING ACTIVITIES
Proceeds from long-term debt 470,000 - 9,500,000
Payments on long-term debt (34,137) (15,152) (6,556,494)
Proceeds from issuance of common stock, net 2,364,371 722,029 301,117
Payments on capital lease obligations (12,222) - (4,370,442)
--------------- ---------------- ---------------
Net cash provided by (used in) financing activities 2,788,012 706,877 (1,125,819)
--------------- ---------------- ---------------
Increase (decrease) in cash and cash equivalents 8,604,235 (2,285,755) (23,829,622)
--------------- ---------------- ---------------
Cash and cash equivalents at beginning of year 47,015,746 49,301,501 73,131,123
--------------- ---------------- ---------------
Cash and cash equivalents at end of year $ 55,619,981 $ 47,015,746 $ 49,301,501
=============== ================ ===============
Supplemental disclosure of cash flows information-
Cash paid for interest $ 277,226 $ 301,817 $ 1,075,940
=============== ================ ===============
</TABLE>
Noncash investing and financing activities:
During the year ended December 31, 2004, the Company entered into capital lease
obligations of $230,974.
See accompanying notes.
<PAGE>
Third Wave Technologies, Inc.
Notes to Consolidated Financial Statements
December 31, 2004
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 KK and Third Wave Agbio, Inc. (Agbio). 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 2004, 2003 and 2002 were 59%, 69% and 51% 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.
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, 2004 and 2003.
INVENTORIES
Inventories are carried at the lower of cost or market using the first-in,
first-out method for determining cost and consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
2004 2003
--------------- ----------------
<S> <C> <C>
Raw material $ 1,318,771 $ 1,609,866
Finished goods and work in process 567,621 534,180
Reserve for excess and obsolete inventory (650,000) (750,000)
--------------- ----------------
Total inventories $ 1,236,392 $ 1,394,046
=============== ================
</TABLE>
36
<PAGE>
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising costs were $85,069,
$165,854 and $511,685 in 2004, 2003 and 2002, respectively.
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 and leased
equipment 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 $844,110, $780,959 and $509,598 in 2004, 2003 and 2002,
respectively.
GOODWILL AND OTHER INTANGIBLE ASSETS
Under Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and
Other Intangible Assets" 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, 2004, 2003 and 2002 consist
primarily 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, on January 1, 2002 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.
The Company completed its annual impairment tests in the third quarter of 2002,
2003, and 2004. In addition, an interim impairment test was performed in the
second quarter of 2004 due to a change in the Company's forecast. 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
determined using the income based approach 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). In addition, in 2002, the
Company recognized an impairment charge related to its customer agreements of
$133,000. The Company concluded that no impairment existed at the time of the
annual impairment test in 2003 and 2004 or at the time of the additional
impairment test in the second quarter of 2004.
Identifiable intangible assets with indefinite lives consist of the following at
December 31, 2004 and 2003:
<TABLE>
<S> <C>
Technology license $ 915,828
Trademark 91,583
---------------
$ 1,007,411
===============
</TABLE>
37
<PAGE>
Amortizable intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 2004 DECEMBER 31, 2003
---------------------------------------- --------------------------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
----------------- -------------- ----------------- --------------
<S> <C> <C> <C> <C>
Costs of settling patent litigation $ 10,533,248 $ 6,386,876 $ 10,533,248 $ 4,882,124
Reacquired marketing and distribution
rights 2,211,111 2,211,111 2,211,111 2,211,111
Customer agreements 38,000 38,000 38,000 38,000
----------------- -------------- ----------------- --------------
$ 12,782,359 $ 8,635,987 $ 12,782,359 $ 7,131,235
================= =============== ================= ==============
</TABLE>
The estimated future amortization expense related to intangible assets for the
years subsequent to December 31, 2004 is as follows:
<TABLE>
<S> <C>
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 2004, the Company recorded a charge of
$795,000 to write down certain equipment to its fair value. During 2002, the
Company recorded a charge of approximately $7,176,000 associated with its
restructuring activities (described further in Note 7) to write-off leasehold
improvements related to vacated leased facilities and to write down certain
equipment to its fair value.
PREPAID LICENSE FEES
Other assets at December 31, 2004 and 2003 include $1,223,005 and $1,846,961,
respectively, of prepaid license fees (which is net of $2,072,033 and
$1,448,077, 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).
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company sells its products in a number of countries throughout the world.
During 2004, 2003 and 2002, 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. There were no contracts outstanding at December 31, 2004. Forward
contracts outstanding at December 31, 2003, represented a U.S. dollar equivalent
commitment of approximately $9,500,000. The negative fair value of these
derivative instruments of approximately $631,000 at December 31, 2003 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 ($71,000), $708,000, and $117,000 in 2004, 2003 and 2002,
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.
38
<PAGE>
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. Prior to 2004, no current or
deferred income taxes have been provided because of the net operating losses
incurred by the Company since its inception (see Note 5).
STOCK-BASED COMPENSATION
The Company has stock-based employee compensation plans (see Note 4). 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 method
prescribed by SFAS No. 123 at the grant date for awards under the plans, 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
2004 2003 2002
------------------ ------------------ ------------------
<S> <C> <C> <C>
Net loss:
As reported $ (1,942,406) $ (8,116,236) $ (40,863,665)
Less: Stock-based compensation, as recognized 3,026,455 1,361,667 1,096,827
Add: Stock-based compensation expense related
to stock options determined under SFAS
No. 123 (4,347,817) (4,216,913) (3,373,035)
Add: Stock-based compensation related to the
employee stock purchase plan determined
under SFAS No. 123 (283,898) (172,571) (43,314)
------------------ ------------------ ------------------
SFAS No. 123 Pro forma $ (3,547,666) $ (11,144,053) $ (43,183,187)
================== ================== ==================
Net loss per share:
As reported, basic and diluted $ (0.05) $ (0.20) $ (1.04)
SFAS No. 123 pro forma, basic and diluted $ (0.09) $ (0.28) $ (1.09)
</TABLE>
39
<PAGE>
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.
The following table presents the calculation of basic and diluted net loss per
share.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
2004 2003 2002
----------------- ----------------- ----------------
<S> <C> <C> <C>
Net loss $ (1,942,406) $ (8,116,236) $ (40,863,665)
================= ================= ================
Weighted-average shares of common stock outstanding
- basic and diluted 40,463,000 39,749,000 39,457,000
================= ================= ================
Basic and diluted net loss per share $ (0.05) $ (0.20) $ (1.04)
================= ================= ================
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) 2,091,000 1,213,000 506,000
</TABLE>
NEW ACCOUNTING PRONOUNCEMENTS
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123 (revised 2004), "Share-Based Payment," which is a revision of SFAS
No. 123. SFAS No. 123(R) supersedes APB Opinion No. 25 and amends SFAS No. 95,
"Statement of Cash Flows." Generally, the approach in SFAS No. 123(R) is similar
to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the income statement based on their fair values. Pro forma
disclosure is no longer an alternative.
SFAS No. 123(R) must be adopted no later than July 1, 2005. Early adoption will
be permitted in periods in which financial statements have not yet been issued.
The Company expects to adopt SFAS No. 123(R) on July 1, 2005. SFAS No. 123(R)
permits public companies to adopt its requirements using one of two methods: (1)
a "modified prospective" method in which compensation cost is recognized
beginning with the effective date (a) based on the requirements of SFAS No.
123(R) for all-share based payments granted after the effective date and (b)
based on the requirements of SFAS No. 123 for all awards granted to employees
prior to the effective date of SFAS No. 123(R) that remain unvested on the
effective date; or (2) a "modified retrospective" method which includes the
requirements of the modified prospective method described above, but also
permits entities to restate based on the amounts previously recognized under
SFAS No. 123 for purposes of pro forma disclosures either (a) all prior periods
presented or (b) prior interim periods of the year of adoption. The Company has
not yet determined which method it will adopt.
40
<PAGE>
As permitted by SFAS No. 123, the Company currently accounts for share-based
payments to employees using APB Opinion No. 25's intrinsic value method and, as
such, generally recognizes no compensation cost for employee stock options when
granted as the number of shares is fixed and the exercise price of the stock
options equals the market price of the underlying stock on the date of grant.
Accordingly, the adoption of SFAS No. 123(R)'s fair value method will have a
significant impact on the Company's results of operations, although it will have
no impact on the Company's overall financial position. The impact of adoption of
SFAS No. 123(R) cannot be predicted at this time because it will depend on
levels of share-based payments granted in the future. However, had the Company
adopted SFAS No. 123(R) in prior periods, the impact of that standard would have
approximated the impact of SFAS No. 123 as described in the disclosure of pro
forma net loss and net loss per share earlier in this note. SFAS No. 123(R) also
requires the benefits of tax deductions in excess of recognized compensation
cost to be reported as a financing cash flow, rather than as an operating cash
flow as required under current literature.
3. LONG-TERM DEBT
Long-term debt is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
2004 2003
-------------------- ---------------
<S> <C> <C>
Notes payable $ 9,935,863 $ 9,500,000
Other 13,333 13,333
-------------------- ---------------
9,949,196 9,513,333
Less current portion 9,614,127 9,500,000
-------------------- ---------------
$ 335,069 $ 13,333
==================== ===============
</TABLE>
Future long-term debt payments by year are as follows:
<TABLE>
<S> <C>
2005 $9,614,127
2006 132,878
2007 95,305
2008 57,110
2009 49,776
</TABLE>
The Company has a $9,500,000 note payable with a bank due on August 14, 2005,
bearing annual interest at 3.36%. The Company also entered into two additional
notes payable in the original amounts of $200,000 and $270,000. The notes have a
final maturity date of July 1, 2007 and October 1, 2009, bear annual interest at
4.25% and 4.93%, respectively, and require monthly principal and interest
payments. The borrowings under the notes payable are secured by short-term
investments consisting of certificates of deposit, of $9,770,000. The Company
has an available and unused $1,300,000 letter of credit with the same bank that
expires on September 1, 2005.
4. SHAREHOLDERS' EQUITY
The Board of Directors has authorized a program for the repurchase by the
Company of up to 5% of its outstanding common stock. As of December 31, 2004, no
shares of common stock have been repurchased.
STOCK PURCHASE PLAN
The Company has an Employee Stock Purchase Plan (Purchase Plan) under which an
aggregate of 1,256,800 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 2004, 400,000 additional shares
were authorized for issuance under the plan. During 2004, 2003 and 2002,
306,211, 254,421 and 122,423 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.
41
<PAGE>
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 11,413,183 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 2004 and 2002, 1,500,000 and 1,771,831 additional shares, respectively,
were authorized for grant. There were no additional shares authorized for grant
in 2003. Options under the Plans have a maximum life of ten years. Options vest
at various intervals, as determined by the Board of Directors at the date of
grant.
The rollforward of shares available for grant through December 31, 2004, is as
follows:
<TABLE>
<S> <C>
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
Options granted (2,127,255)
Options forfeited 1,161,928
Increase in options available for grant 1,500,000
----------
Shares available for grant at December 31, 2004 2,013,365
==========
</TABLE>
The Company's option activity is as follows:
<TABLE>
WEIGHTED-AVERAGE
NUMBER OF SHARES EXERCISE PRICE
---------------- --------------
<S> <C> <C>
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
Granted 2,127,255 4.97
Exercised (775,309) 2.42
Forfeited (1,161,928) 5.57
---------- ------
Outstanding at December 31, 2004 7,446,523 4.55
---------- ------
Exercisable at December 31, 2004 3,022,212 $ 5.23
========== ======
</TABLE>
<TABLE>
<CAPTION>
Number of Weighted
Shares Outstanding Average Remaining Number of Shares Weighted
at December 31, Exercise Contractual Exercisable at Average
2004 Price Life December 31, 2004 Exercise Price
------------------ -------- ----------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
Options granted between $0.27 and $1.11 148,150 $ 1.00 1.1 148,150 $ 1.00
Options granted between $1.11 and $2.21 979,370 $ 1.88 6.8 447,395 $ 1.90
Options granted between $2.21 and $3.32 1,493,907 $ 2.77 6.9 472,094 $ 2.64
Options granted between $3.32 and $4.42 2,156,057 $ 3.73 7.8 540,860 $ 3.74
Options granted between $4.42 and $5.53 348,750 $ 4.62 8.9 10,187 $ 4.56
Options granted between $5.53 and $6.64 575,514 $ 6.37 6.6 429,030 $ 6.37
Options granted between $6.64 and $7.74 491,375 $ 6.90 9.7 8,937 $ 7.37
Options granted between $7.74 and $8.85 1,134,800 $ 8.61 6.1 854,223 $ 8.78
Options granted between $8.85 and $9.96 10,800 $ 9.69 5.3 9,900 $ 9.73
Options granted between $9.96 and $11.06 107,800 $10.93 2.4 101,436 $10.94
--------- ---------
7,446,523 3,022,212
========= =========
</TABLE>
42
<PAGE>
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 $80,791 in 2004, $387,709 in
2003 and $994,078 in 2002 using an accelerated vesting method whereby each of
the years' vesting components is amortized over its own vesting period. During
2004, 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. Option expense related to such terminations in 2004, 2003
and 2002 was $2,945,664, $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
2004 2003 2002
--------------- --------------- ---------------
<S> <C> <C> <C>
Cost of goods sold $ 155,275 $ 86,793 $ 163,590
Research and development 1,133,617 504,477 98,753
Selling and marketing 144,519 215,935 31,781
General and administrative 1,593,044 554,462 802,703
--------------- --------------- ---------------
$ 3,026,455 $ 1,361,667 $ 1,096,827
=============== =============== ===============
</TABLE>
The weighted-average fair value of options granted in 2004, 2003, and 2002 was
$3.49, $2.50 and $1.73, respectively, using the Black-Scholes option-pricing
model. 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 4.1%, 4.0% and 4.0% in 2004, 2003 and 2002,
respectively. The volatility factor used in the Black-Scholes method for 2004,
2003 and 2002 was .84, .89 and .97, respectively.
5. INCOME TAXES
The provision for income taxes in 2004 represents the amount computed under the
alternative minimum tax (AMT) requirements.
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
2004 2003
------------------ ------------------
<S> <C> <C>
Deferred tax assets:
Patent expense $ 1,563,000 $ 1,223,000
Stock compensation expense 609,000 806,000
Deferred revenue 154,000 27,000
Inventory obsolescence 260,000 300,000
Equipment and leasehold improvements - 478,000
Accrued liabilities 1,945,000 1,452,000
Other 168,000 85,000
AMT credit carryforward 57,000 -
Net operating loss carryforwards 45,321,000 45,899,000
------------------ ------------------
Total deferred tax assets 50,077,000 50,270,000
Valuation allowance (48,369,000) (48,010,000)
------------------ ------------------
Net deferred tax assets 1,708,000 2,260,000
------------------ ------------------
Deferred tax liabilities:
Equipment and leasehold improvements (49,000) -
Intangibles (1,659,000) (2,260,000)
------------------ ------------------
Deferred tax liabilities (1,708,000) (2,260,000)
------------------ ------------------
Net deferred tax assets / (liabilities) $ - $ -
================== ==================
</TABLE>
At December 31, 2004, the Company had net operating loss carryforwards of
approximately $113 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.
43
<PAGE>
At December 31, 2004, the Company had $57,000 of AMT credits which do not
expire. The valuation allowance at December 31, 2004 and 2003 was provided
because of the Company's history of net losses and uncertainty as to the
realization of the deferred tax assets. Through December 31, 2004, the Company's
foreign subsidiary has operated at a loss, and accordingly, no provision for
U.S. deferred taxes has been provided. Any earnings of the foreign subsidiary
would be considered to be permanently invested.
6. 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, 2004 and 2003,
long-term other assets includes approximately $938,000 and $1,078,000,
respectively, of prepaid rent. In addition, at December 31, 2004 and 2003, other
long-term liabilities includes approximately $1,099,000 and $728,000,
respectively, of deferred rent.
In 2004, the Company entered into multiple capital leases for computer
equipment, office equipment and furniture, totaling approximately $230,000.
Future minimum lease payments by year are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
<S> <C> <C>
2005 $ 76,076 $ 1,806,000
2006 75,715 1,879,000
2007 52,057 1,954,000
2008 27,505 2,032,000
2009 27,505 2,113,000
Thereafter 9,126 3,913,000
-------- ------------
Total minimum lease obligations 267,984 $ 13,697,000
======== ============
Less amounts representing interest 49,232
--------
Present value of minimum lease payments 218,752
Less current portion of long-term
lease obligations 66,867
--------
$151,885
========
</TABLE>
Rent expense was approximately $2,114,000, $2,097,000 and $2,473,000 in 2004,
2003 and 2002, respectively.
7. 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.
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.
44
<PAGE>
The Company continues to offer corporate office space for sublease, but it has
been unable to sublease the space. Accordingly, in the fourth quarter of 2003
and 2004, the Company changed the amount it expects to receive from the sublease
of the space. In 2004, the estimated lease and operating expenses were also
reduced, based on a portion of the office space being utilized.
The following table shows the components of the restructuring and other charges
and changes in the restructuring accrual through December 31, 2004. The
remaining restructuring balance of $1.1 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
$162,043 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
Payments made (199,196) - - - (199,196)
Revision to estimate (98,000) - - - (98,000)
------------ ----------- --------- --------- -----------
Accrued restructuring balance at December 31,
2004 $ 1,116,848 $ - $ - $ - $ 1,116,848
============ =========== ========= ========= ===========
</TABLE>
8. LICENSE AGREEMENTS
The Company entered into an exclusive license agreement (research license) in
March 1994 to make, use and sell products utilizing the licensed patents in the
research market. Under the research license, the Company is required to pay a
royalty at a rate not to exceed a certain percentage of the selling price on
licensed component sales. There have been no sales of licensed components
through December 31, 2004. 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,
2004, 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
45
<PAGE>
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.
9. 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 and $1,000,000 in 2003 and 2002,
respectively. Additionally, in 2004, 2003 and 2002, BML paid the Company
$1,915,000, $1,500,000 and $1,683,000, 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 $150,000 and $100,000 in
2004 and 2003, respectively. In December 2004, Aclara was acquired by
Virologics, Inc.
10. 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 $329,000, $311,000 and $331,000 in 2004, 2003 and 2002,
respectively.
11. SEGMENT DISCLOSURE
The Company operates in one industry segment. Product revenues to international
end-users accounted for 70%, 78% and 70% of product revenues in 2004, 2003 and
2002, respectively. At December 31, 2004 and 2003, approximately $2,681,000 and
$1,011,000, respectively, of receivables are denominated in Yen. Product
revenues by geographic area in 2004, 2003 and 2002, were as follows:
<TABLE>
<CAPTION>
2004 2003 2002
----------------- ---------------- -----------------
<S> <C> <C> <C>
United States $ 13,759,367 $ 7,668,573 $ 8,700,680
Japan 31,361,485 26,983,342 19,865,716
Other 895,275 496,382 314,546
----------------- ---------------- -----------------
$ 46,016,127 $ 35,148,297 $ 28,880,942
================= ================ =================
</TABLE>
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following sets forth selected quarterly financial and stock price
information for the years ended December 31, 2004 and 2003 (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>
2004:
Net revenues $ 15,276 $ 12,632 $ 10,479 $ 8,106
Gross margin (1) 11,105 8,939 8,144 5,813
Net income (loss) 2,848 (106) 24 (4,708)
Basic and diluted net income (loss)
per share $ 0.07 $ (0.00) $ 0.00 $ (0.12)
2003:
Net revenues $ 8,492 $ 8,817 $ 9,354 $ 9,657
</TABLE>
46
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
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)
</TABLE>
(1) Previously reported 2004 quarterly gross margin amounts have been adjusted
for reclassifications of manufacturing costs between cost of goods sold
and research and development expense. For the first, second and third
quarters of 2004, gross margins were previously reported as $11,204,
$9,142 and $7,838, respectively.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE 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 Rules 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.
EVALUATION OF INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Third Wave Technologies is responsible for establishing
and maintaining adequate internal control over financial reporting. Third
Wave's internal control system was designed to provide reasonable assurance to
the Company's management and board of directors regarding the preparation and
fair presentation of published financial statements.
All internal control systems, no matter how well designed, have inherent
limitations. Even those systems determined to be effective can provide only
reasonable assurance with respect to financial statement preparation and
presentation.
Third Wave's management assessed the effectiveness of the Company's
internal control over financial reporting as of December 31, 2004, using the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control - Integrated Framework. Based on
management's assessment, management believes that, as of December 31, 2004, the
Company's internal control over financial reporting is effective.
Third Wave's independent auditors have issued an audit report on
management assessment of the Company's internal control over financial
reporting, which is included herein.
47
<PAGE>
Report of Independent Registered Public Accounting Firm on
Internal Control over Financial Reporting
To the Board of Directors
Third Wave Technologies, Inc.
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting, that Third
Wave Technologies, Inc. maintained effective internal control over financial
reporting as of December 31, 2004, based on criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). Third Wave
Technologies, Inc.'s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express an opinion on management's assessment and an opinion on the
effectiveness of the company's internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that Third Wave Technologies, Inc.
maintained effective internal control over financial reporting as of December
31, 2004, is fairly stated, in all material respects, based on the COSO
criteria. Also, in our opinion, Third Wave Technologies, Inc. maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2004, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheets of Third Wave Technologies, Inc. as of December 31, 2004 and 2003, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 2004 and our
report dated March 4, 2005 expressed an unqualified opinion thereon.
Ernst & Young LLP
Milwaukee, Wisconsin
March 4, 2005
48
<PAGE>
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company incorporates by reference the information required by this
Item from the Company's definitive proxy statement for its annual meeting of
shareholders scheduled to be held on June 14, 2005 (the "Proxy Statement"),
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.
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.
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
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company incorporates by reference the information required by this
Item from the Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The Company incorporates by reference the information required by this
Item from the Proxy Statement.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(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 32.
2. Financial Statement Schedules. The following financial statement
schedule required to be filed as part of this Report is included on
page 53.
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.
49
<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 16, 2005.
THIRD WAVE TECHNOLOGIES, INC.
By: /s/ John J. Puisis
-----------------------------
John J. Puisis
Chief Executive Officer
POWER OF ATTORNEY
We, the undersigned directors and executive officers of Third Wave
Technologies, Inc., hereby severally constitute and appoint of Kevin T. Conroy
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.
SIGNATURE TITLE DATE
/s/ Lance Fors Chairman of the Board March 13, 2005
-----------------------
Lance Fors
Chief Executive Officer
President, and Director
/s/ John Puisis (Principal Executive Officer) March 15, 2005
-----------------------
John Puisis
/s/ James J. Herrmann Vice President of
----------------------- Finance
James J. Herrmann (Principal Financial
Officer) March 15, 2005
/s/ Gordon F. Brunner Director March 14, 2005
-----------------------
Gordon F. Brunner
Director
-----------------------
G. Steven Burrill
----------------------- Director
Sam Eletr
/s/ John Neis Director March 14, 2005
-----------------------
John Neis
/s/ Lloyd M. Smith Director March 12, 2005
-----------------------
Lloyd M. Smith
/s/ Lionel Sterling Director March 12, 2005
-----------------------
Lionel Sterling
/s/ David A. Thompson Director March 14, 2005
-----------------------
David A. Thompson
50
<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
</TABLE>
51
<PAGE>
<TABLE>
<S> <C> <C>
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>
<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 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
10.13 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
10.14 Employment Agreement between Lance Exhibit 10.16 to Registrant's
Fors and Third Wave Technologies, Inc. Annual Report on From 10-K for the
dated October 16, 2003 fiscal year ended on December 31, 2003
10.15 Employment Agreement between John Exhibit 10.17 to Registrant's Annual
Puisis and Third Wave Technologies, Inc. Report on Form 10-K for the fiscal
dated September 19, 2001 and Amendment year ended December 31, 2003
dated July 17, 2003
10.16 Amendment No. 2 to Employment Agreement Exhibit 10.2 to Registrant's Quarterly Report
between John Pulsis and Third Wave on Form 10-Q for the quarter ended June 30,
Technologies, Inc. effective June 14,2004 2004
10.17 Code of Business Conduct Third Wave Technology's website,
www.twt.com
10.18 Third Wave Technologies, Inc.
Amended LTIP 1
10.19 Third Wave Technologies, Inc.
LTIP 2
10.20 Separation Agreement between Registrant and
John Comerford
10.21 Separation Agreement between Registrant and
David Nuti and Amendment dated October 21, 2004
10.22 Employment Agreement between Kevin T. Conroy
and Third Wave Technologies, Inc.
dated March 14, 2005
10.23 Employment Agreement between James J. Herrmann
and Third Wave Technologies, Inc.
dated March 14, 2005
21 List of Subsidiaries
23 Consent of Independent Registered Public
Accounting Firm
24 Powers of Attorney (contained in the
signature page hereto)
31.1 CEO's Certification Pursuant to Section
302 of the Sarbanes Oxley Act of 2002
31.2 Principal Financial Officer Certification
pursuant to Section 302 of the Sarbanes
Oxley Act of 2002.
32.1 CEO's Certification pursuant to 18 U.S.C.
Section 1350, of Chapter 63 of Title 18
of the United States Code
32.2 Principal Financial Officer's Certification
pursuant to 18 U.S.C Section 1350, of Chapter
63 of Title 18 of the United States Code
</TABLE>
52
<PAGE>
SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS
BEGINNING CHARGED (1) BALANCE AT
DESCRIPTION OF YEAR TO EXPENSE DEDUCTIONS END OF YEAR
- -------------------------------------------- ---------- ---------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Allowance for doubtful accounts receivable:
2002 ..................................... $ 175 $ 455 $ 165 $ 465
2003 ..................................... $ 465 $ 402 $ 727 $ 140
2004 ..................................... $ 140 $ 177 $ 17 $ 300
========= ========= ========= =========
Allowance for excess and obsolete inventory:
2002 ..................................... $ 2,680 $ 2,015 $ 1,645 $ 3,050
2003 ..................................... $ 3,050 $ 1,308 $ 3,608 $ 750
2004 ..................................... $ 750 $ 805 $ 905 $ 650
========= ========= ========= =========
</TABLE>
- ----------
(1) Represents amounts written off or disposed, net of recoveries.
53
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.17
<SEQUENCE>2
<FILENAME>c92830exv10w17.txt
<DESCRIPTION>AMENDED LTIP 1
<TEXT>
<PAGE>
EXHIBIT 10.17
THIRD WAVE TECHNOLOGIES, INC. LONG TERM INCENTIVE PLAN NO. 1
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. The Plan, as amended and restated effective as of
January 1, 2004, provides as follows:
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.
The Administrator may adjust the performance goals to take into account
corporate transactions that take into account new revenue associated with
mergers and/or acquisitions or other corporate transactions in an equitable
manner that does not make it more difficult for the Company to achieve the
original performance goals.
(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).
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<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. The performance goals are attached as Exhibit A and are
hereby fully incorporated into and shall be considered as part of this Plan.
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 three-year period beginning on January 1, 2004 and ending on December
31, 2007.
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.
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<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 set forth on Exhibit A. 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 a
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 commencement of the performance period, or, if applicable,
such later date on which the Participant became eligible to participate for the
performance period as established by the Administrator, to the date of the
Participant's death. The Company shall pay the prorated award to the
beneficiary(ies) after end of the performance period pursuant to Section 8
below.
(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 commencement of the performance
period, or, if applicable, such later date on which the Participant became
eligible to participate for the performance period as established by the
Administrator, to the date of the Participant's normal retirement. The Company
shall pay the prorated award to the Participant after the end of the performance
period pursuant to Section 8 below. 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 commencement of the performance period, or, if applicable,
such later date on which the Participant became eligible to participate for the
performance period as established by the Administrator, to the date the
Participant is disabled. The Company shall pay the prorated award to the
Participant after the end of the performance period pursuant to Section 8 below.
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 (as defined below) of the Company
during the performance period, all performance goals pertaining to awards during
such performance period shall be deemed to have been met 100 percent as of the
effective date of the Change in Control and the maximum award for such
performance period shall be deemed immediately earned, and such maximum award
shall vest and be paid as described in Section 6(d). The Company shall credit
the maximum award to a book account established for the Participant as soon as
practicable after the Change of Control.
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<PAGE>
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) consummation of a merger or consolidation of the Company
with any other corporation 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 80 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; (iv) the stockholders of the Company approve a plan of complete
liquidation of the Company; or (v) the Company consummates a sale or disposition
of (in one transaction or a series of related transactions) all or substantially
all of its assets.
(d) In the event this Plan is terminated or suspended before the last day
of a performance period, Participants who are employed by the Company on the day
of such termination period shall receive an award based upon the Company's
performance through the end of such performance period as if no such termination
had occurred. The award shall be calculated from the commencement of the
performance period, or, if applicable, such later date on which the Participant
became eligible to participate for the performance period as established by the
Administrator, to the end of the performance period. The Company shall credit
the award to a book account established for the Participant as soon as
practicable after the end of the performance period. Awards made pursuant to
this subsection shall vest and be paid in accordance with the terms of the Plan
as though the Plan had not been terminated or suspended.
(e) The Administrator may establish appropriate terms and conditions to
accommodate newly hired and transferred employees. For example, upon a
Participant's being designated to participate in the Plan, the Administrator may
establish, in its discretion, the effective commencement date for such
Participant for each performance period that has commenced but not then ended,
and if such effective commencement date is established as a date later than the
commencement of a particular pending performance period, any award for that
performance period may be prorated based on such later effective commencement
date. Absent any action to the contrary, new employees that become Participants
shall be entitled to a commencement date effective as of the beginning of the
plan period.
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<PAGE>
6. VESTING OF INCENTIVE AWARDS
(a) If a Participant earns an award as described in Section 5 for a
performance period, except as provided below in this Section 6, 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.
(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) Unless otherwise specified elsewhere in this agreement or any valid
employment or other agreement between the Participant and the Company, if a
Participant's employment with the Company and its affiliates terminates for any
reason, 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 during any performance period,
Participants who are employed by the Company on the effective date of the Change
in Control shall be eligible to receive, and shall be deemed vested in, the
maximum award payout for each such performance period as follows: (A) fifty
percent (50%) of the maximum award payout shall be deemed vested and shall be
paid upon the effective date of the Change in Control, and (B) fifty percent
(50%) of the maximum award payout shall be deemed vested and shall be paid on
the earliest date at either (x) six (6) months after the effective date of the
Change in Control, (y) upon Participant's termination without Cause, or
resignation for Good Reason (applicable only if "Good Reason" concept is defined
in a valid employment agreement between Company and Participant), occurring
prior to the six (6) month anniversary of the effective date of the Change in
Control, or (z) the date on which such portion of the award would have vested in
the absence of a Change in Control pursuant to Section 6(a) or (b) above. For
purposes of the Plan, the term "Cause" shall mean any of the following grounds
for termination of the Participant's employment:
(i) any willful refusal to perform essential job duties which
continues for more than ten (10) days after notice from the Company;
(ii) any intentional act of fraud or embezzlement by the Employee in
connection with the Employee's duties or committed in the course of Employee's
employment;
(iii) any gross negligence or willful misconduct of the Employee with
regard to the Company or any of its subsidiaries resulting in a material
economic loss to the Company;
(iv) the Participant is convicted of a felony;
(v) the Participant is convicted of a misdemeanor the circumstances
of which involve fraud, dishonesty or moral turpitude and which is substantially
related to the circumstances of Participant's job with the Company;
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<PAGE>
(vii) any willful and material violation by the Employee of any
statutory or common law duty of loyalty to the Company or any of its
subsidiaries resulting in a material economic loss; or
(vii) any material breach by the Employee of his or her employment or
non-compete agreements, if any exist.
For purposes of the Plan, the term "Good Reason" shall mean, and shall be deemed
to have the meaning set forth in any valid employment agreement being
Participant and Company.
(e) If a Participant earns an award as described in Section 5 for a
performance period, and thereafter there is a Change in Control, Participants
who are employed by the Company on the effective date of the Change in Control
shall be eligible to receive, and shall be deemed vested in, the unvested
portion of the award as of the effective date of the Change in Control as
follows: (A) fifty percent (50%) of such unvested portion of the award shall be
deemed immediately vested and shall be paid on the effective date of the Change
in Control, and (B) fifty percent (50%) of such unvested portion of the award
shall be deemed vested and shall be paid on the earliest date of (x) six (6)
months after the effective date of the Change in Control, (y) upon the
Participant's termination without Cause, or resignation for Good Reason,
occurring prior to the six (6) month anniversary of the effective date of the
Change in Control, or (z) the date on which such portion of the award would have
vested in the absence of a Change in Control pursuant to Sections 6(a) or 6(b)
above.
(f) A transfer of employment between the Company and an affiliate shall
not be considered a termination of employment for purposes of the Plan.
(g) The Administrator reserves the right to accelerate vesting whenever
the Administrator deems such action appropriate.
(h) Prior to a Change in Control, the Company shall deposit in a separate
bank account sufficient funds to cover both the vested and unvested cumulative
award amounts so that funding of vested awards can take place upon the Change in
Control closing.
(i) In the event of a Change in Control whereby the Company's Compensation
Committee of the Board of Directors no longer exists, the Administrator shall be
deemed to be the individual who at the time of the Change of Control are the
Company's General Counsel and principal financial officer.
7. CHANGES TO PERFORMANCE GOALS AND TARGET AWARDS
At any time prior to the final determination of awards pursuant to Section
5, 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 due to any merger,
consolidation, acquisition, reorganization, stock split, stock
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<PAGE>
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, (ii) shares of the Company's common stock valued as of
the day that is five business days before the date of distribution, or (iii) a
combination. Except as provided in subsection (b), payment shall be made as soon
as administratively possible following the vesting of an award. 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 otherwise to be 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, or the comparable
provisions of any successor stock plan adopted by the Company.
(b) Unless the Administrator determines otherwise, a Participant who is
eligible to participate in the Company's deferred compensation program, if one
exists, may make an irrevocable written election to defer all or any part of the
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 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) Neither the establishment of this Plan, nor any action taken
hereunder, shall be construed as giving any 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
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<PAGE>
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. Notwithstanding the foregoing, the Company acknowledges that
certain Participants may have separate employment or other agreements with the
Company and those agreements may include terms and conditions affecting the
terms and conditions of awards that may be made under this 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.
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<PAGE>
EXHIBIT A
THIRD WAVE LONG TERM INCENTIVE MATRIX (1/1/04 - 12/31/06)
Payout as a Percent of Target
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TWT STOCK >$ 12 25.0% 35.0% 40.0% 45.0% 50.0% 62.5% 75.0% 87.5% 100.0%
PRICE
$9-12 12.5% 20.0% 25.0% 32.5% 40.0% 50.0% 62.5% 75.0% 87.5%
$ 6-9 0.0% 5.0% 10.0% 17.5% 25.0% 32.5% 40.0% 50.0% 62.5%
$ 4-6 0.0% 0.0% 0.0% 5.0% 10.0% 17.5% 25.0% 35.0% 45.0%
<$ 32 $ 32 $ 33.5 $ 39 $ 43 $ 47 $ 51 $ 55 $ 60
2006 Clinical
Revenue ($M)
CAGR <50% 50-54% 55-59% 60-64% 65-69% 70-74% 75-79% 80-84% 85+%
</TABLE>
3 YEAR COMPOUNDED ANNUAL GROWTH RATE (CAGR)
FOR CLINICAL MOLECULAR DIAGNOSTICS REVENUE
-1-
<PAGE>
EXHIBIT A (CONT'D)
THIRD WAVE LONG TERM INCENTIVE MATRIX (1/1/04 - 12/31/06)
Payout as a Percent of Target
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
3 Year 1st 25.0% 35.0% 40.0% 45.0% 50.0% 62.5% 75.0% 87.5% 100.0%
Quartile Quartile
Ranking
Total
Shareholder
Return vs.
Peer Group
2nd 12.5% 20.0% 25.0% 32.5% 40.0% 50.0% 62.5% 75.0% 87.5%
Quartile
3rd 0.0% 5.0% 10.0% 17.5% 25.0% 32.5% 40.0% 50.0% 62.5%
Quartile
4th 0.0% 0.0% 0.0% 5.0% 10.0% 16.5% 25.0% 35.0% 45.0%
Quartile
<$ 32 $ 32 $ 33.5 $ 39 $ 43 $ 47 $ 51 $ 55 $ 60
2006 Clinical
Revenue ($M)
CAGR <50% 50-54% 55-59% 60-64% 65-69% 70-74% 75-79% 80-84% 85+%
</TABLE>
3 YEAR COMPOUNDED ANNUAL GROWTH RATE (CAGR)
FOR CLINICAL MOLECULAR DIAGNOSTICS REVENUE
- - CAGR for 2004-2006 period calculated on 2003 clinical revenue of $9.5M.
- - Peer group is targeted at 8 companies which would include GenProbe,
Digene, Celera, Ventana, BioRad, Abbott, Roche, Bayer
- - Total payout equals the combined total of the two matrix charts above.
Maximum payout after properly combining the two matrix charts equals 200%
of target award.
-2-
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.18
<SEQUENCE>3
<FILENAME>c92830exv10w18.txt
<DESCRIPTION>LTIP 2
<TEXT>
<PAGE>
EXHIBIT 10.18
THIRD WAVE TECHNOLOGIES, INC. LONG TERM INCENTIVE PLAN NO. 2
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. The Plan, as amended and restated effective as of
January 1, 2005, provides as follows:
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.
The Administrator may adjust the performance goals to take into account
corporate transactions that take into account new revenue associated with
mergers and/or acquisitions or other corporate transactions in an equitable
manner that does not make it more difficult for the Company to achieve the
original performance goals.
(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).
-1-
<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 four
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
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.
(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. The performance goals are attached as Exhibit A and are
hereby fully incorporated into and shall be considered as part of this Plan.
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 three-year period beginning on January 1, 2005 and ending on
December 31, 2008.
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.
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<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 set forth on Exhibit A. 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 a
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 commencement of the performance period, or, if applicable,
such later date on which the Participant became eligible to participate for the
performance period as established by the Administrator, to the date of the
Participant's death. The Company shall pay the prorated award to the
beneficiary(ies) after end of the performance period pursuant to Section 8
below.
(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 commencement of the
performance period, or, if applicable, such later date on which the Participant
became eligible to participate for the performance period as established by the
Administrator, to the date of the Participant's normal retirement. The Company
shall pay the prorated award to the Participant after the end of the performance
period pursuant to Section 8 below. 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 commencement of the performance period, or, if applicable,
such later date on which the Participant became eligible to participate for the
performance period as established by the Administrator, to the date the
Participant is disabled. The Company shall pay the prorated award to the
Participant after the end of the performance period pursuant to Section 8 below.
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 (as defined below) of the Company
during the performance period, all performance goals pertaining to awards during
such performance period shall be deemed to have been met 100 percent as of the
effective date of the Change in Control and the maximum award for such
performance period shall be deemed immediately earned, and such maximum award
shall vest and be paid as described in Section 6(d); provided, however, that if
the Change of Control is an acquisition or merger and such transaction occurs
for less than $200 million in total value, the Company shall not have been
deemed to have met 100 percent as of the performance goals, rather the
performance goals shall be measured by the Matrix in Exhibit
-3-
<PAGE>
A as reconfigured to take into account a shortened period within which to
achieve such targets by reducing the TWT Stock Price Column and 2007 Clinical
Revenue Targets on a straight-line method based on the percentage of the
performance period that has occurred. For example, if 1/2 of the performance
period has expired, then the Stock Price and Clinical Revenue targets shall be
revised based on 1/2 of the expected growth. The Company shall credit the
maximum award to a book account established for the Participant as soon as
practicable after the Change of Control.
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) consummation of a merger or consolidation of the Company
with any other corporation 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 80 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; (iv) the stockholders of the Company approve a plan of complete
liquidation of the Company; or (v) the Company consummates a sale or disposition
of (in one transaction or a series of related transactions) all or substantially
all of its assets.
(d) In the event this Plan is terminated or suspended before the last
day of a performance period, Participants who are employed by the Company on the
day of such termination period shall receive an award based upon the Company's
performance through the end of such performance period as if no such termination
had occurred. The award shall be calculated from the commencement of the
performance period, or, if applicable, such later date on which the Participant
became eligible to participate for the performance period as established by the
Administrator, to the end of the performance period. The Company shall credit
the award to a book account established for the Participant as soon as
practicable after the end of the performance period. Awards made pursuant to
this subsection shall vest and be paid in accordance with the terms of the Plan
as though the Plan had not been terminated or suspended.
(e) The Administrator may establish appropriate terms and conditions to
accommodate newly hired and transferred employees. For example, upon a
Participant's being designated to participate in the Plan, the Administrator may
establish, in its discretion, the effective commencement date for such
Participant for each performance period that has commenced but not then ended,
and if such effective commencement date is established as a date later than the
-4-
<PAGE>
commencement of a particular pending performance period, any award for that
performance period may be prorated based on such later effective commencement
date. Absent any action to the contrary, new employees that become Participants
shall be entitled to a commencement date effective as of the beginning of the
plan period.
6. VESTING OF INCENTIVE AWARDS
(a) If a Participant earns an award as described in Section 5 for a
performance period, except as provided below in this Section 6, 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.
(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) Unless otherwise specified elsewhere in this agreement or any valid
employment or other agreement between the Participant and the Company, if a
Participant's employment with the Company and its affiliates terminates for any
reason, 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 during any performance period,
Participants who are employed by the Company on the effective date of the Change
in Control shall be eligible to receive, and shall be deemed vested in, the
maximum award payout for each such performance period as follows: (A) fifty
percent (50%) of the maximum award payout shall be deemed vested and shall be
paid upon the effective date of the Change in Control, and (B) fifty percent
(50%) of the maximum award payout shall be deemed vested and shall be paid on
the earliest date at either (x) six (6) months after the effective date of the
Change in Control, (y) upon Participant's termination without Cause, or
resignation for Good Reason (applicable only if "Good Reason" concept is defined
in a valid employment agreement between Company and Participant), occurring
prior to the six (6) month anniversary of the effective date of the Change in
Control, or (z) the date on which such portion of the award would have vested in
the absence of a Change in Control pursuant to Section 6(a) or (b) above. For
purposes of the Plan, the term "Cause" shall mean any of the following grounds
for termination of the Participant's employment:
(i) any willful refusal to perform essential job duties which
continues for more than ten (10) days after notice from the Company;
(ii) any intentional act of fraud or embezzlement by the Employee
in connection with the Employee's duties or committed in the course of
Employee's employment;
(iii) any gross negligence or willful misconduct of the Employee
with regard to the Company or any of its subsidiaries resulting in a material
economic loss to the Company;
(iv) the Participant is convicted of a felony;
-5-
<PAGE>
(v) the Participant is convicted of a misdemeanor the
circumstances of which involve fraud, dishonesty or moral turpitude and which is
substantially related to the circumstances of Participant's job with the
Company;
(vi) any willful and material violation by the Employee of any
statutory or common law duty of loyalty to the Company or any of its
subsidiaries resulting in a material economic loss; or
(vii) any material breach by the Employee of his or her employment
or non-compete agreements, if any exist.
For purposes of the Plan, the term "Good Reason" shall mean, and shall be deemed
to have the meaning set forth in any valid employment agreement being
Participant and Company.
(e) If a Participant earns an award as described in Section 5 for a
performance period, and thereafter there is a Change in Control, Participants
who are employed by the Company on the effective date of the Change in Control
shall be eligible to receive, and shall be deemed vested in, the unvested
portion of the award as of the effective date of the Change in Control as
follows: (A) fifty percent (50%) of such unvested portion of the award shall be
deemed immediately vested and shall be paid on the effective date of the Change
in Control, and (B) fifty percent (50%) of such unvested portion of the award
shall be deemed vested and shall be paid on the earliest date of (x) six (6)
months after the effective date of the Change in Control, (y) upon the
Participant's termination without Cause, or resignation for Good Reason,
occurring prior to the six (6) month anniversary of the effective date of the
Change in Control, or (z) the date on which such portion of the award would have
vested in the absence of a Change in Control pursuant to Sections 6(a) or 6(b)
above.
(f) A transfer of employment between the Company and an affiliate shall
not be considered a termination of employment for purposes of the Plan.
(g) The Administrator reserves the right to accelerate vesting whenever
the Administrator deems such action appropriate.
(h) Prior to a Change in Control, the Company shall deposit in a
separate bank account sufficient funds to cover both the vested and unvested
cumulative award amounts so that funding of vested awards can take place upon
the Change in Control closing.
(i) In the event of a Change in Control whereby the Company's
Compensation Committee of the Board of Directors no longer exists, the
Administrator shall be deemed to be the individual who at the time of the Change
of Control are the Company's General Counsel and principal financial officer.
7. CHANGES TO PERFORMANCE GOALS AND TARGET AWARDS
At any time prior to the final determination of awards pursuant to Section
5, 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
-6-
<PAGE>
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 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, (ii) shares of the Company's common stock valued as of
the day that is five business days before the date of distribution, or (iii) a
combination. Except as provided in subsection (b), payment shall be made as soon
as administratively possible following the vesting of an award. 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 otherwise to be 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, or the comparable
provisions of any successor stock plan adopted by the Company.
(b) Unless the Administrator determines otherwise, a Participant who is
eligible to participate in the Company's deferred compensation program, if one
exists, may make an irrevocable written election to defer all or any part of the
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 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.
-7-
<PAGE>
10. MISCELLANEOUS PROVISIONS
(a) Neither the establishment of this Plan, nor any action taken
hereunder, shall be construed as giving any 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.
Notwithstanding the foregoing, the Company acknowledges that certain
Participants may have separate employment or other agreements with the Company
and those agreements may include terms and conditions affecting the terms and
conditions of awards that may be made under this 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.
-8-
<PAGE>
EXHIBIT A
THIRD WAVE LONG TERM INCENTIVE MATRIX - 2 (1/1/05 - 12/31/07)
Payout as a Percent of Target (Target = 4x target bonus for Tier 1; 3x target
bonus for Tier 2)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
>$14 25.0% 35.0% 40.0% 45.0% 50.0% 62.5% 75.0% 87.5% 100.0%
TWT STOCK $11-14 12.5% 20.0% 25.0% 32.5% 40.0% 50.0% 62.5% 75.0% 87.5%
PRICE
$ 8-11 0.0% 5.0% 10.0% 17.5% 25.0% 32.5% 40.0% 50.0% 62.5%
$ 6-8 0.0% 0.0% 0.0% 5.0% 10.0% 17.5% 25.0% 35.0% 45.0%
2007 CLINICAL <$ 48 $ 48 $52.3 $64.4 $ 71 $ 80 $89.3 $99.0 $111.0
REVENUE ($M)
CAGR <47% 47.3% 51.6% 62.5% 67.8% 74.6% 81.1% 87.5% 94.7%
</TABLE>
3 YEAR COMPOUNDED ANNUAL GROWTH RATE (CAGR)
FOR CLINICAL MOLECULAR DIAGNOSTICS REVENUE
THIRD WAVE LONG TERM INCENTIVE MATRIX - 2 (1/1/05 - 12/31/07)
Payout as a Percent of Target (Target = 4x target bonus for Tier 1; 3x target
bonus for Tier 2)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1(st) 25.0% 35.0% 40.0% 45.0% 50.0% 62.5% 75.0% 87.5% 100.0%
Quartile
3 Year Quartile 2(nd) 12.5% 20.0% 25.0% 32.5% 40.0% 50.0% 62.5% 75.0% 87.5%
Ranking Quartile
Total
Shareholder 3(rd) 0.0% 5.0% 10.0% 17.5% 25.0% 32.5% 40.0% 50.0% 62.5%
Return vs. Peer Quartile
Group
4(th) 0.0% 0.0% 0.0% 5.0% 10.0% 17.5% 25.0% 35.0% 45.0%
Quartile
2007 Clinical <$ 48 $ 48 $52.3 $64.4 $ 71 $ 80 $89.3 $99.0 $111.0
Revenue ($M)
CAGR <47% 47.3% 51.6% 62.5% 67.8% 74.6% 81.1% 87.5% 94.7%
</TABLE>
3 YEAR COMPOUNDED ANNUAL GROWTH RATE (CAGR)
FOR CLINICAL MOLECULAR DIAGNOSTICS REVENUE
<PAGE>
- - CAGR for three-year period calculated on 2004 clinical revenue of $15M.
- - Peer group is targeted at 8 companies which would include GenProbe,
Digene, Celera, Ventana, BioRad, Abbott, Roche, Bayer
Total payout equals the combined total of the two matrix charts above. Maximum
payout after properly combining the two matrix charts equals 200% of target
award.
-2-
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.20
<SEQUENCE>4
<FILENAME>c92830exv10w20.txt
<DESCRIPTION>SEPARATION AGREEMENT
<TEXT>
<PAGE>
EXHIBIT 10.20
October 19, 2004
John Comerford
7755 Summerfield Drive
Verona, WI 53593
Dear John:
Third Wave Technologies, Inc. (TWT), is terminating your employment effective
November 1, 2004. In consideration of the services you have provided to TWT
during your employment, your agreement with and commitment to the obligations in
the transition plan in the attached Agreement, and your agreement to the terms
of the attached Agreement, TWT will pay you eight (8) months of severance at a
rate of $18,750 per month. If you agree to its terms after you have read and
considered the Agreement that follows, please sign it in the space provided at
the end of the Agreement and return it to TWT. Please note that Section 8 of the
Agreement requires you to represent that, up until the time you sign this
Agreement and as part of this Agreement, you have not and agree that you will
not (1) violate your confidentiality obligations described in Section 5 of this
Agreement, (2) made or make disparaging comments or remarks about TWT or about
any of the Releasees as described in Section 6 of the Agreement, or (3)
discussed or disclosed the terms of this Agreement with any person outside of
TWT Senior Management, except for your immediate family members, personal
attorney, or financial advisor consulted in connection with a review of the
Agreement as described in Section 7 of the Agreement. Also, the Agreement will
be null and void if any handwritten changes are made to it. If you have any
questions about this or any other provision, please call me at 608-273-8933.
<PAGE>
October 19, 2004
John Comerford
Page 2 of 8
AGREEMENT
1. TRANSITION PERIOD. You agree that the transition period for your
orderly departure from TWT will commence today, and will conclude November 1,
2004 ("Transition Period"). You agree you will come to the work site as
requested and make yourself available to work during the Transition Period.
During the Transition Period that TWT will make severance payments to you, and
assuming you do not commence a new full-time job, you agree to provide up to
eight (8) hours per week of consulting at the request of Kevin Conroy.
2. SEVERANCE PAY. If you agree to the terms described in this letter
(the "Agreement"), and if you have satisfied all of your obligations hereunder
and you have satisfied your obligations during the Transition Period, TWT will
begin paying you, effective November 1, 2004, severance in the pre-tax amount of
$150,000 ($9,375/paycheck * 2 paychecks/month * 8 months) (the "Payment").
Subject to Section 4 and 5 below, this Payment will be payable in installments
on TWT's regular payroll dates until the amount has been paid in full. Each
installment of the Payment will occur in the amount stated above each payroll
period, except that the final installment may be adjusted so that the total
Payment equals $150,000. Each portion of the Payment will be subject to
deductions for income and payroll taxes. The period during which you continue to
receive the Payment is the "Payment Period."
If you receive compensation from any other employer or if you receive fees
for any consulting services, you are required to notify TWT immediately. Failure
to notify TWT, could jeopardize the benefits received by you in this Agreement
and TWT, in its sole discretion may terminate further Payment and other
considerations immediately. TWT reserves the right to terminate immediately any
future Payments and other considerations following receipt of notice of
compensation from another employer or fees for any consulting services;
provided, however, that in any case, TWT will pay three (3) months severance
payments following your notice, unless fewer than three (3) payments remain due,
in which case TWT will pay you just those remaining. TWT assumes you will
cooperate with John Puisis and others as designated during the transition period
and that you will comply with the terms of your Agreement with TWT. Failure to
comply with the above mentioned could jeopardize the Payment and benefits
received by you in this Agreement.
If you have not secured a new position by the end of the eight month
Payment Period, provided you have complied with this Agreement, TWT is open to
discussing the possibility of extending the Payment Period.
You understand that TWT has offered you this Agreement with the intent
that you will not receive unemployment compensation until after the Payment
Period ends and you agree not to apply for unemployment benefits until after the
Payment Period ends. TWT agrees it will not affirmatively challenge your
entitlement to unemployment compensation benefits after the Payment Period ends.
<PAGE>
October 19, 2004
John Comerford
Page 3 of 8
TWT will, on your termination date, pay you $5,000 for outplacement
services. TWT will payout 100% of your accrued and unused PTO balance.
3. SPECIAL EQUITY. TWT will, at its discretion, provide a special
equity privilege whereby if you are deemed by TWT to cooperate and support the
best interests of TWT, then TWT will give you accelerated vesting on select
unvested stock options as identified in the attached Exhibit A, which is
incorporated herein by this reference. Options on the accelerated vesting
schedule, as identified on Exhibit A, will vest 12 months after the termination
date or on November 1, 2005, and may be exercised within two years upon vesting.
Additionally, for stock options already vested on the termination date, TWT will
provide an extended exercise date beyond the ninety (90) day limitation up to
two years from the termination date of November 1, 2004. TWT may revoke extended
exercise provisions provided within this Section at any time at TWT's sole
discretion for your failure, in TWT's sole judgment, to act in accordance with
your obligations hereunder or to act in the best interests of TWT. In the event
of such revocation, you will receive written notice from TWT and you will be
able to exercise only those options that were vested per their original vesting
schedule as of November 1, 2004 provided such exercise is completed within
ninety (90) calendar days of the date of TWT's notice of revocation.
4. RELEASE OF CLAIMS. In exchange for the Payment and other
consideration described in this Agreement, you agree--for yourself, your heirs,
your beneficiaries and all other representatives--to waive and release and, with
this Agreement, you do waive and release all past or present claims of any
nature against TWT. Further, you agree not to institute or cause to be
instituted in any state or federal court any such action or claim. This waiver
and release of claims applies to any claims against TWT or anyone associated
with or representing TWT--including, but not limited to, its officers,
directors, partners, employees, attorneys, or agents (the "Releasees").
a. Claims Released. The claims you are waiving in exchange for
the Payment and other consideration described in this Agreement include, but are
not limited to, claims under federal, state or local law including but not
limited to, the Civil Rights Act of 1964, as amended; the Family Medical Leave
Act, the Americans with Disabilities Act; the Wisconsin Fair Employment
Practices Act and if applicable, the Age Discrimination in Employment Act, for
discrimination of any kind, tort, breach of contract, wrongful discharge, lost
wages, compensatory damages, punitive damages, attorneys' fees, and all other
claims of any type or nature, whether known or unknown, matured or unmatured,
direct or indirect. Other claims you are waiving are those that relate to
ownership of any intellectual property or trade secrets developed during the
term of your employment. You acknowledge if you have lab books that your
notebooks and those of individuals who have worked for or with you are complete
and you acknowledge that all intellectual property and trade secrets conceived
or developed by you during the term of your employment are solely the property
of TWT.
b. Your Representation and Waiver. You represent that you have
not filed any such action or claim in any court or before any state, federal or
other governmental agency. You forever waive any right to recover money damages
or any
<PAGE>
October 19, 2004
John Comerford
Page 4 of 8
other form of relief for any and all claims waived under this Agreement.
You further agree to waive your rights to and not accept any benefits, which
might be conferred upon you in any administrative court or other legal
proceeding concerning any claim released by this Section 4. You understand and
agree that this release forever bars you from suing, arbitrating or otherwise
asserting a claim against TWT on any released claim.
c. ADEA Release and Waiver. In exchange for the amounts paid to
you under this Agreement, you specifically waive any claims you may have under
the Age Discrimination in Employment Act of 1967, the Older Workers Benefit
Protection Act, or any similar law. You are not waiving any rights or claims
that may arise after the date of this Agreement. You further acknowledge that
you have been advised by this writing (i) to consult with an attorney prior to
executing this Agreement; (ii) that you have up to twenty-one (21) days to
review this Agreement and to decide whether to accept it;
d. Consideration for the Release of Claims. You acknowledge that
the Payment and any other consideration TWT has agreed to give under this
Agreement are benefits to which you would not have been entitled if you did not
sign this Agreement and that TWT has agreed to provide the consideration only if
you sign this Agreement and give up the claims described in it.
5. YOUR CONTINUING OBLIGATIONS.
a. Your Employee Agreement with Third Wave Technologies, Inc.
With Respect to Confidential Information and Invention Assignment ("Employment
Agreement") dated August 9, 2004 is hereby incorporated by reference and any
provision of said Agreement not superceded by a specific provision of this
Agreement shall remain in effect and be binding on the parties with respect to
your post employment obligations. A copy is included with this letter Agreement.
b. Confidentiality: You acknowledge and agree that while employed
at TWT you have been privy to substantial confidential business and technology
information relating to TWT and its business as well as current and potential
business partners and third parties in both commercial as well as academic
organizations, some of which is extremely sensitive and proprietary. You
expressly covenant as follows:
(i) You agree that you have not and will not disclose to others or
use any Trade Secret owned or possessed by TWT or any other Releasee, or
that any Trade Secret that was created by you or anyone related to TWT, or
was disclosed to you, whether you have such Trade Secret in your memory or
embodied in writing or other physical form, for as long as the information
remains a Trade Secret. "Trade Secret" means all information which derives
independent economic value, actual or potential, from not being generally
known to, and not being readily ascertainable by proper means, by other
persons who can obtain economic or personal value from its disclosure or
use and is subject to TWT's or any other Releasee's efforts to maintain
its secrecy that are reasonable under the circumstances.
<PAGE>
October 19, 2004
John Comerford
Page 5 of 8
(ii) In addition to the foregoing, you agree not disclose or use
for (2) years following your termination date any Confidential Information
which is possessed by or developed for TWT which relates to TWT's existing
or potential business or technology, and either was created by you or was
disclosed to you. Confidential Information is information or technology,
product development plans or strategies, market adoption plans and
business plans that are generally not known to the public and which
information or technology TWT seeks to protect from disclosure to its
existing or potential competitors or others, including, without
limitation, for example: non-public business plans, strategies, existing
or proposed bids, costs, technical and engineering developments, existing
or proposed research or development projects, financial or business
projections, marketing plans, investments, negotiation strategies, and
information received by TWT from others which TWT has an obligation to
treat as confidential.
You understand your obligations under this Section apply to,
and are intended to prevent, the direct or indirect disclosure of
Confidential Information to others where such disclosure of Confidential
Information would reasonably be considered to be useful to TWT's
competitors or to a third party to become a competitor based in whole or
in part on such disclosure of Confidential Information.
(iii) You acknowledge that damages for the violation of this
Section entitled "Confidentiality" will be inadequate and will not give
full sufficient relief to TWT, and that a breach of this Section will
constitute irreparable harm to TWT. Therefore, you agree that in the event
of any violation of any covenant contained in this Section, TWT shall be
entitled to injunctive relief against the continued violation thereof in
any court (federal or state) located in Dane County, Wisconsin.
Such remedy, however, shall be cumulative and nonexclusive and shall
be in addition to any other remedy to which TWT may be entitled.
6. NON-DISPARAGEMENT. You agree that you will refrain from making
disparaging comments or remarks about TWT or about or to any of the Releasees,
except that you may provide truthful information about TWT or the Releasees to
the extent required by law.
7. NON-DISCLOSURE. You agree not to disclose the terms of this
Agreement to any person outside of TWT Senior Management, except for your
immediate family members, attorney, or financial advisor consulted in connection
with review of this Agreement. You assure us that no family member, attorney, or
financial advisor will disclose the terms of this Agreement to any other person
except as required by law.
8. VIOLATION OF THIS AGREEMENT. You represent that up until the time
you sign this Agreement, you have not violated your Employment Agreement, the
confidentiality obligations described in Section 5 above, made disparaging
comments or remarks about TWT or about any of the Releasees as described in
Section 6 above, or discussed or disclosed the existence or terms of this
Agreement as described in Section
<PAGE>
October 19, 2004
John Comerford
Page 6 of 8
7 above. Any exceptions to this representation must be disclosed by you in
writing to TWT on or before the final execution of this Agreement with
sufficient detail to allow TWT to fully understand such action.
In the event that TWT finds that the representation in the previous
sentence is inaccurate or untrue, or if you violate the provisions or your
Employment Agreement or this Agreement hereof, you agree that TWT will be
entitled to immediately stop paying the Payments and revoke any other benefits
received under this Agreement to which you are otherwise entitled under this
Agreement and TWT will have no further obligation to continue any payments. In
addition, should TWT determine that a violation of this Agreement or the
Employment Agreement has occurred, TWT will be entitled to a complete recovery
of all Payments previously made during the Payment Period. Finally, at any time,
TWT may pursue whatever other legal remedies are available to it including, but
not limited to, the right to seek temporary and permanent injunctions, which you
agree are appropriate additional remedies to prevent irreparable harm to the
Company in the event of a breach of this Agreement or your Employment Agreement.
9. NON-SOLICITATION. You acknowledge and confirm that you continue to
be bound by section seven (7) of your Employee Agreement with Third Wave
Technologies, Inc. with Respect to Confidential Information and Invention dated
August 9, 2004 regarding non-solicitation of employees. In addition, you shall
not, prior to the expiration of one (1) year following the end of the Payment
Period, solicit, encourage or otherwise aid any employee of TWT to leave TWT for
the purpose of becoming associated in any manner whatsoever with any business
with which you intend to be or are then associated in any manner whatsoever. You
further agree you shall not, prior to the expiration of one (1) year following
Payment Period solicit, encourage or otherwise induce any suppliers,
collaborators, customers or third parties, with whom TWT has established
relationships to discontinue their relationships with TWT.
10. ACCEPTANCE PROCEDURES. TWT wishes to ensure that you voluntarily
agree to the terms contained in this document and do so only after you fully
understand them. Accordingly, the following procedures will apply:
a. You may accept this document's terms by signing and dating it
and returning the signed and dated document so that it is postmarked or faxed to
TWT on or before the twenty first (21st) day following your receipt of this
document. The signed and dated document must be directed to Katie Zingg,
Director of Human Resources, in an envelope marked "Personal and Confidential"
at Third Wave Technologies, Inc., 502 South Rosa Road, Madison, WI 53719.
b. You will have seven (7) calendar days from the date you sign
this Agreement in which to withdraw or revoke your acceptance (the "Revocation
Period"). If you choose to revoke your acceptance, you must do so in writing,
and the written notice must be received before the end of the first regular
business day following the Revocation Period by Katie Zingg, Director of Human
Resources, in an envelope marked "Personal and Confidential" at Third Wave
Technologies, Inc., 502 South Rosa Road,
<PAGE>
October 19, 2004
John Comerford
Page 7 of 8
Madison, WI 53719. In the event you take any steps to revoke your acceptance
during the revocation period, this Agreement shall be null and void.
c. TWT ENCOURAGES YOU TO REVIEW THIS DOCUMENT WITH AN ATTORNEY
PRIOR TO SIGNING IT.
11. MISCELLANEOUS. Should you accept this Agreement, its terms will be
governed by the following:
a. Except as provided in Section 3 above, this document
constitutes the complete understanding between you and TWT concerning all
matters affecting your employment with TWT and the termination of that
employment. If you accept this Agreement, it supersedes all prior agreements,
understandings and practices concerning such matters, including, but not limited
to, any TWT personnel documents, handbooks, or policies and any prior customs or
practices of TWT except for your Employment Agreement.
b. Nothing in the releases contained in this Agreement should be
construed as an admission of wrongdoing or liability on the part of either TWT
or you. Both of us deny any liability to the other.
c. This Agreement and its interpretation will be governed and
construed in accordance with the laws of Wisconsin and will be binding upon the
parties to the Agreement and their respective successors and assigns.
d. Each provision of this Agreement is severable and intended to
be construed independently. The unenforceability of any provision shall not
affect the validity or enforceability of any other provision.
e. You represent and warrant that you have read and understand
all terms of this Agreement, executed knowingly and voluntarily with full
knowledge of its significance and with the intent to be bound by it. You
represent and warrant that you
<PAGE>
October 19, 2004
John Comerford
Page 8 of 8
have been or have the opportunity to be represented by legal counsel of your
choice in connection with this agreement who has explained it and advised that
it is a legally binding contract. This Agreement contains the entire Agreement
between TWT and you and the terms of the Agreement cannot be modified except in
writing signed by both TWT and you.
Very truly yours,
THIRD WAVE TECHNOLOGIES
By: /s/ John Puisis
-----------------------------------
John Puisis
President & Chief Executive Officer
I agree with and accept the terms contained in this document and agree to be
bound by them.
Dated this 25th day of October, 2004. /s/ John Comerford
-----------------------------------
John Comerford
<PAGE>
John Comerford
Exhibit A
Total vested options as of termination date = 189,100
Number of options under two-year exercise period = 40,000
<Table>
<Caption>
STOCK OPTIONS # OPTIONS VESTED OPTIONS UNDER ACCELERATED VESTING
GRANT DATE # OPTIONS GRANT PRICE ON 11/1/04 GRANT DATE # OPTIONS GRANT PRICE
- -------------------------------------------------------------------- --------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
9/11/2000 30,000 $8.78 30,000 9/11/2000 0 $8.78
10/3/2000 9,600 $8.78 9,600 10/3/2000 0 $8.78
6/12/2001 81,000 $11.00 60,750 6/12/2001 0 $11.00
6/12/2002 140,000 $2.13 70,000 6/12/2002 10,000 $2.13
7/17/2003 75,000 $4.00 18,750 7/17/2003 30,000 $4.00
2/25/2004 16,500 $3.37 0 2/25/2004 0 $3.37
- -------------------------------------------------------------------- --------------------------------------------
Totals 352,100 189,100 40,000
</Table>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.21
<SEQUENCE>5
<FILENAME>c92830exv10w21.txt
<DESCRIPTION>SEPARATION AGREEMENT
<TEXT>
<PAGE>
EXHIBIT 10.21
October 20, 2004
Dave Nuti
5764 Auburn Drive
Madison, WI 53711
Dear Dave:
The following are the terms of an agreement between you and Third Wave
Technologies, Inc.
AGREEMENT
1. TRANSITION PERIOD.
a. You agree that you will continue serving as TWT's Chief
Financial Officer through the end of business October 29, 2004, and that,
without limiting the foregoing, you will participate in TWT's earnings call
scheduled for October 27, 2004 and if completed, sign required lawful and
appropriate SEC filings for TWT's third quarter financial results by October 29,
2004. Effective October 30, 2004, you will cease serving as TWT's Chief
Financial Officer. TWT agrees that it will pay you 100% of your accrued and
unused PTO through October 31, 2004 in your pay check for the period ending
October 31, 2004. You will not accrue additional PTO after October 30, 2004.
b. You agree that the transition period for your orderly
departure from TWT will commence October 30, 2004, and will conclude December
31, 2004 ("Transition Period"), subject to termination of the Transition Period
after October 30, 2004 and prior to December 31, 2004 if you start a new job
during that period. During the Transition Period, you will be employed as a
full-time financial advisor to TWT with respect to non-forward-looking financial
data. You agree you will come to the work site and make yourself available to
work during the Transition Period, as directed by John Puisis or his designee,
on financial advisory projects specified by John Puisis or his designee
consistent with the prior sentence. You will be paid your current salary of
$220,000 per year on a prorata basis during the Transition Period, to be paid in
accordance with TWT's regular payroll schedule and less all deductions currently
in place and for taxes required by law. Your existing benefits will continue
through December 31, 2004 (unless you obtain alternative employment and
terminate the Transition Period earlier).
2. SEVERANCE PAY. TWT will pay you non-cancelable severance payments
for six (6) months in the pre-tax amount of $15,000 per month ($7,500/paycheck *
2 paychecks/month * 6 months). Non-cancelable severance payments will commence
on the earlier of (i) January 1, 2005 or (ii) the date between October 30, 2004
and December 31, 2004 that you terminate the Transition Period as a result of
you starting a new job, and will end six months thereafter (the "Severance
Period"). Subject to Paragraph 4 below, severance will be payable in
installments on TWT's regular payroll dates. Each installment will occur in the
amount stated above each payroll period. Each severance payment will be subject
to deductions for income and payroll taxes. You understand that TWT has made
this offer with the intent that you will not receive unemployment compensation
until after the Severance Period ends and you agree not to apply for
unemployment benefits until after the Severance Period ends. TWT agrees it will
not affirmatively challenge your entitlement to unemployment compensation
benefits after the Severance Period ends.
<PAGE>
October 20, 2004
Page 2 of 8
TWT may, in its sole discretion, elect to make cancelable severance
payments for an additional six (6) months commencing on July 1, 2005 or at the
end of the six (6) month severance period, if you have not secured alternative
employment by that date. Any such payments shall not be deemed to extend the
"Severance Period" for purposes of TWT's obligation to pay family health and
dental insurance premiums as described in the immediately following paragraph.
TWT also agrees to pay 100% of the insurance premiums for family health
and dental coverage during the Severance Period, subject to the same insurance
policy co-payments currently in place, if you elect continuation coverage
through TWT's group health policy pursuant to COBRA (the "Insurance Payment").
You are responsible for paying the premiums for any insurance coverage for you
or your family after the Severance Period for health and dental, whether through
TWT's group health policy pursuant to COBRA continuation rights or through any
other employer or individual plan. You understand that your COBRA continuation
rights begin on the first day of the Severance Period for health and dental
insurance, even though TWT agrees to pay the premiums through the end of the
Severance Period for health and dental insurance. You agree that TWT will in no
way be responsible for damages resulting from any lapse in such coverage.
3. SPECIAL EQUITY. TWT will give you accelerated vesting on select
unvested stock options as identified in the attached Exhibit A, which is
incorporated herein by this reference. Additionally, for stock options already
vested on October 30, 2004, TWT will provide an extended exercise date beyond
the ninety (90) day limitation up to two years from October 30, 2004. The 10,000
options on the accelerated vesting schedule, as identified on Exhibit A, will
vest on October 30, 2004, and may be exercised within two years upon vesting.
Except for the 10,000 options, TWT may revoke extended exercise provisions
provided within this paragraph at any time at TWT's sole discretion for your
failure, in TWT's sole judgment, to act in accordance with your obligations
hereunder or to act in the best interests of TWT. In the event of such
revocation, you will receive written notice from TWT and you will be able to
exercise only those options that were vested per their original vesting schedule
as of October 30, 2004 provided such exercise is completed within ninety (90)
calendar days of the date of TWT's notice of revocation. You agree that you will
not trade any TWT security in violation of any insider trading laws.
4. RELEASE OF CLAIMS. In exchange for the severance payments and other
consideration described in this Agreement, you agree--for yourself, your heirs,
your beneficiaries and all other representatives--to waive and release and, with
this Agreement, you do waive and release all past or present claims of any
nature against TWT. Further, you agree not to institute or cause to be
instituted in any state or federal court any such action or claim. This waiver
and release of claims applies to any claims against TWT or anyone associated
with or representing TWT--including, but not limited to, its officers,
directors, partners, employees, attorneys, or agents (the "Releasees").
a. Claims Released. The claims you are waiving in exchange for
the payments and other consideration described in this Agreement include, but
are not limited to, claims under federal, state or local law including but not
limited to, the Civil Rights Act of 1964, as amended; the Family Medical Leave
Act, the Americans with Disabilities Act; the Wisconsin Fair Employment
Practices Act and if applicable, the Age Discrimination in Employment Act, for
discrimination of any kind, tort, breach of contract, wrongful discharge, lost
wages, compensatory damages, punitive damages, attorneys' fees, and all other
claims of any type or nature, whether known or unknown, matured or unmatured,
direct or indirect. Other claims you
<PAGE>
October 20, 2004
Page 3 of 8
are waiving are those that relate to ownership of any intellectual property or
trade secrets developed during the term of your employment. You acknowledge your
lab books and those of individuals who have worked for or with you are complete
and you acknowledge that all intellectual property and trade secrets conceived
or developed by you during the term of your employment are solely the property
of TWT.
b. Your Representation and Waiver. You represent that you have
not filed any such action or claim in any court or before any state, federal or
other governmental agency. You forever waive any right to recover money damages
or any other form of relief for any and all claims waived under this Agreement.
You further agree to waive your rights to and not accept any benefits which
might be conferred upon you in any administrative court or other legal
proceeding concerning any claim released by this Paragraph 4. You understand and
agree that this release forever bars you from suing, arbitrating or otherwise
asserting a claim against TWT on any released claim.
c. ADEA Release and Waiver. In exchange for the amounts paid to
you under this Agreement, you specifically waive any claims you may have under
the Age Discrimination in Employment Act of 1967, the Older Workers Benefit
Protection Act, or any similar law. You are not waiving any rights or claims
that may arise after the date of this Agreement. You further acknowledge that
you have been advised by this writing (i) to consult with an attorney prior to
executing this Agreement; (ii) that you have up to twenty-one (21) days to
review this Agreement and to decide whether to accept it; (iii) that you have
seven (7) days after signing it to cancel and revoke this Agreement; and (iv)
that this Agreement will not become effective until the seven-day time period
has passed. If you give notice of revocation before the end of the seven (7) day
period, this Agreement will become null and void. TWT is not required to provide
any portion of any payment or other benefit described in the Agreement before
the seven-day time period has passed.
d. Consideration for the Release of Claims. You acknowledge that
the payments and other consideration TWT has agreed to give under this Agreement
are benefits to which you would not have been entitled if you did not sign this
Agreement and that TWT has agreed to provide the consideration only if you sign
this Agreement and give up the claims described in it.
5. YOUR CONTINUING OBLIGATIONS.
a. Your Employment Agreement dated April 10, 2002 is hereby
incorporated by reference and any provision of said Agreement not superceded by
a specific provision of this Agreement shall remain in effect and be binding on
the parties with respect to your post employment obligations. A copy is included
with this Agreement.
b. You agree, in exchange for severance payments, Insurance
Payment, and special equity described in Paragraph 3 to substitute the following
in place of the arbitration and confidentiality provisions of the Employment
Agreement:
Arbitration: You further acknowledge and agree that the parties may
enforce the terms of this Agreement in state or federal court in Dane County,
Wisconsin. You expressly consent to jurisdiction in Dane County, Wisconsin to
resolve any controversy involving this Agreement.
<PAGE>
October 20, 2004
Page 4 of 8
Confidentiality: You acknowledge and agree that while employed at
TWT you have been privy to substantial confidential business, financial and
technology information relating to TWT and its business as well as current and
potential business partners and third parties in both commercial as well as
academic organizations, some of which is extremely sensitive and proprietary.
You expressly covenant as follows:
(i) You agree that you have not and will not disclose to others or
use any Trade Secret owned or possessed by TWT or any other Releasee, or
that any Trade Secret that was created by you or anyone related to TWT, or
was disclosed to you, whether you have such Trade Secret in your memory or
embodied in writing or other physical form, for as long as the information
remains a Trade Secret. "Trade Secret" means all information which derives
independent economic value, actual or potential, from not being generally
known to, and not being readily ascertainable by proper means, by other
persons who can obtain economic or personal value from its disclosure or
use and is subject to TWT's or any other Releasee's efforts to maintain
its secrecy that are reasonable under the circumstances.
(ii) In addition to the foregoing, you agree not to disclose or use
between the date of this Agreement and two (2) years following the end of
the Transition Period any Confidential Information which is possessed by
or developed for TWT which relates to TWT's existing or potential business
or technology, and either was created by you or was disclosed to you.
Confidential Information is information or technology, product development
plans or strategies, market adoption plans and business plans that are
generally not known to the public and which information or technology TWT
seeks to protect from disclosure to its existing or potential competitors
or others, including, without limitation, for example: non-public business
plans, strategies, existing or proposed bids, costs, technical and
engineering developments, existing or proposed research or development
projects, financial or business projections, marketing plans, investments,
negotiation strategies, and information received by TWT from others which
TWT has an obligation to treat as confidential.
You understand your obligations under this paragraph apply to,
and are intended to prevent, the direct or indirect disclosure of
Confidential Information to others where such disclosure of Confidential
Information would reasonably be considered to be useful to TWT's
competitors or to a third party to become a competitor based in whole or
in part on such disclosure of Confidential Information.
(iii) You acknowledge that damages for the violation of this
paragraph entitled "Confidentiality" will be inadequate and will not give
full sufficient relief to TWT, and that a breach of this paragraph will
constitute irreparable harm to TWT. Therefore, you agree that in the event
of any violation of any covenant contained in this Paragraph, TWT shall be
entitled to injunctive relief against the continued violation thereof in
any court (federal or state) located in Dane County, Wisconsin.
Such remedy, however, shall be cumulative and nonexclusive and shall
be in addition to any other remedy to which TWT may be entitled.
6. NON-DISPARAGEMENT. You agree that you will refrain from making
disparaging comments or remarks about TWT or about or to any of the Releasees,
except that you may provide truthful information about TWT or the Releasees to
the extent required by law.
<PAGE>
October 20, 2004
Page 5 of 8
TWT agrees that it will refrain from making disparaging comments or
remarks about you, except that TWT may provide truthful information about you to
the extent required by law.
7. NON-DISCLOSURE. You agree not to disclose the terms of this
Agreement to any person except for your immediate family members, attorney, or
financial advisor consulted in connection with review of this Agreement. You
assure us that no family member, attorney, or financial advisor will disclose
the terms of this Agreement to any other person except as required by law.
TWT agrees not to disclose the terms of this Agreement to any person
except for its officers, directors, attorneys, accountants and other
professional advisors, and except to the extent disclosure may be required, or
deemed advisable in the opinion of TWT's attorneys, under applicable laws, rules
or regulations, including without limitation federal or state securities laws,
rules or regulations. TWT assures you that no officer, director, attorney,
accountant or other professional advisor will disclose the terms of this
Agreement to any other person except as required by law.
8. REPRESENTATIONS AND WARRANTIES. You represent and warrant that to
the best of your actual knowledge: (i) up until the time you sign this
Agreement, you have not violated your legal obligations relating to TWT or the
confidentiality obligations described in Paragraph 5 above, made disparaging
comments or remarks about TWT or about any of the Releasees as described in
Paragraph 6 above, or discussed or disclosed the existence or terms of this
Agreement as described in Paragraph 7 above; (ii) you are not aware of any
actual, alleged or suspected accounting issues, violations, or improprieties
relating to TWT that could have a material adverse effect on TWT; and (iii) you
are not aware of any actual, alleged or suspected (x) violation of any law, rule
or regulation (including without limitation securities laws, rules or
regulations, the Sarbanes-Oxley Act, or any regulation promulgated thereunder),
(y) violation of any applicable securities exchange listing requirement, or (z)
violation of any TWT rule, regulation, policy or code (including without
limitation the TWT Code of Business Conduct), by TWT or any of its directors,
officers, employees or representatives that could have a material adverse effect
on TWT. Any exceptions to this representation must be disclosed by you in
writing to TWT on or before the final execution of this Agreement with
sufficient detail to allow TWT to fully understand such action. In addition, you
agree that if you become aware during the Transition Period or the Severance
Period of any matter described in Section 8(ii) or (iii), you will immediately
report such matter to an executive officer of TWT.
In the event that TWT finds that the any representation or warranty set
forth in the previous paragraph is inaccurate or untrue, or if you violate the
provisions or your Employment Agreement or Paragraphs 1, 2, 3, 4, 5, 6, 7,8 or 9
hereof, you agree that TWT will be entitled to immediately stop paying the
cancelable severance payments and Insurance Payment and revoke any other
benefits received under this Agreement to which you are otherwise entitled under
this Agreement and TWT will have no further obligation to continue any payments.
In addition, should TWT determine that a violation of Paragraphs 1, 2, 3, 4, 5,
6, 7,8 or 9 hereof or the Employment Agreement has occurred, TWT will be
entitled to a complete recovery of all cancelable severance payments and
Insurance Payment previously made during the Severance Period. Finally, at any
time, TWT may pursue whatever other legal remedies are available to it
including, but not limited to, the right to seek temporary and permanent
injunctions, which you agree are appropriate additional remedies to prevent
irreparable harm to the Company in the event of a breach of this Agreement or
your Employment Agreement.
<PAGE>
October 20, 2004
Page 6 of 8
IN THE EVENT TWT FINDS YOU HAVE BREACHED ANY OBLIGATIONS HEREUNDER, YOU
AGREE TO IMMEDIATELY TENDER BACK TO TWT ALL CANCELABLE SEVERANCE AND BENEFITS
PAID AS WELL AS THE NET VALUE OF THE 10,000 STOCK OPTIONS ISSUED TO YOU AS PART
OF THIS AGREEMENT, PROVIDED THEY HAVE BEEN EXERCISED.
9. NON-SOLICITATION. You acknowledge and confirm that you continue to
be bound by section 7 of your Employment Agreement dated April 10, 2002
regarding non-solicitation of employees. In addition, you shall not, prior to
the expiration of one (1) year following the expiration of the Severance Period,
solicit, encourage or otherwise aid any employee of TWT to leave TWT for the
purpose of becoming associated in any manner whatsoever with any business with
which you intend to be or are then associated in any manner whatsoever. You
further agree you shall not, prior to the expiration of one (1) year following
the expiration of the Severance Period, solicit, encourage or otherwise induce
any suppliers, collaborators, customers or third parties, with whom TWT has
established relationships to discontinue their relationships with TWT.
10. ACCEPTANCE PROCEDURES. TWT wishes to ensure that you voluntarily
agree to the terms contained in this document and do so only after you fully
understand them. Accordingly, the following procedures will apply:
a. You may accept this document's terms by signing and dating it
and returning the signed and dated document so that it is postmarked or faxed to
TWT on or before the twenty first (21st) day following your receipt of this
document. The signed and dated document must be directed to Katie Zingg,
Director of Human Resources, in an envelope marked "Personal and Confidential"
at Third Wave Technologies, Inc., 502 South Rosa Road, Madison, WI 53719.
b. You will have seven (7) calendar days from the date you sign
this Agreement in which to withdraw or revoke your acceptance (the "Revocation
Period"). If you choose to revoke your acceptance, you must do so in writing,
and the written notice must be received before the end of the first regular
business day following the Revocation Period by Katie Zingg, Director of Human
Resources, in an envelope marked "Personal and Confidential" at Third Wave
Technologies, Inc., 502 South Rosa Road, Madison, WI 53719. In the event you
take any steps to revoke your acceptance during the revocation period, this
Agreement shall be null and void.
c. TWT ENCOURAGES YOU TO REVIEW THIS DOCUMENT WITH AN ATTORNEY
PRIOR TO SIGNING IT.
11. MISCELLANEOUS. Should you accept this Agreement, its terms will be
governed by the following:
a. Except as provided in Paragraph 5 above, this document
constitutes the complete understanding between you and TWT concerning all
matters affecting your employment with TWT and the termination of that
employment. If you accept this Agreement, it supersedes all prior agreements,
understandings and practices concerning such matters, including, but not limited
to, any TWT personnel documents, handbooks, or policies and any prior customs or
practices of TWT except for your Employment Agreement.
b. Nothing in the releases contained in this Agreement should be
construed as an admission of wrongdoing or liability on the part of either TWT
or you. Both of us deny any liability to the other.
<PAGE>
October 20, 2004
Page 7 of 8
c. This Agreement and its interpretation will be governed and
construed in accordance with the laws of Wisconsin and will be binding upon the
parties to the Agreement and their respective successors and assigns.
d. Each provision of this Agreement is severable and intended to
be construed independently. The unenforceability of any provision shall not
affect the validity or enforceability of any other provision.
You represent and warrant that you have read and understand all terms of this
Agreement, executed knowingly and voluntarily with full knowledge of its
significance and with the intent to be bound by it. You represent and warrant
that you have been or have the opportunity to be represented by legal counsel of
your choice in connection with this agreement who has explained it and advised
that it is a legally binding contract. This Agreement contains the entire
Agreement between TWT and you and the terms of the Agreement cannot be modified
except in writing signed by both TWT and you.
Very truly yours,
THIRD WAVE TECHNOLOGIES
By: /s/ John J. Puisis
---------------------------------
John J. Puisis
Chief Executive Officer
I agree with and accept the terms contained in this document and agree to be
bound by them.
Dated this 20th day of October, 2004. /s/ David M. Nuti
-------------------------------------
Dave Nuti
<PAGE>
Exhibit A
DAVE NUTI
Number of options for
which vesting is
accelerated to
October 31, 2004 =
10,000
<TABLE>
<CAPTION>
OPTIONS UNDER
ACCELERATED
# OPTIONS VESTED VESTING
GRANT DATE # OPTIONS GRANT PRICE ON 10/31/04 GRANT DATE # OPTIONS GRANT PRICE
<S> <C> <C> <C> <C> <C> <C>
4/22/2002 20,000 $ 4.10 10,000 $ 4.10
10/8/2002 20,000 $ 1.40 10,000 10/8/2002 10,000 $ 1.40
1/3/2003 40,000 $ 2.64 10,000 $ 2.64
4/28/2003 50,000 $ 3.97 12,500 $ 3.97
7/17/2003 120,000 $ 4.00 30,000
2/24/2004 16,133 $ 3.37 0 ** ** **
------- -------- ------ --------- ------ -------
TOTAL 266,133 72,500 10,000
</TABLE>
<PAGE>
October 21, 2004
David Nuti
5764 Auburn Drive
Madison, WI 53711
Re: Amendment to Separation Letter Agreement
Dear Dave:
In consideration for your assistance to Third Wave Technologies in your
transition through December 2004, you will receive 20,000 additional stock
options at a $2.64 strike price, to vest on October 31, 2004 with a 2-year
exercise period. Such assistance will include occasional phone conversations,
not to exceed ten hours per month, that do not impede any other employment.
Sincerely,
/s/ John Puisis
- ----------------------------------
John Puisis
Chief Executive Officer
Accepted and Agreed:
/s/ David Nuti
- ---------------------------------
David Nuti
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.22
<SEQUENCE>6
<FILENAME>c92830exv10w22.txt
<DESCRIPTION>EMPLOYMENT AGREEMENT - KEVIN T. CONROY
<TEXT>
<PAGE>
EXHIBIT 10.22
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into as of the 14th
day of March 2005, by and between Kevin T. Conroy ("Employee") and THIRD WAVE
TECHNOLOGIES, INC., a Delaware corporation (the "Company").
WHEREAS, the Company desires to employ Employee as its Vice President,
General Counsel & Secretary, and Employee desires to accept such employment
pursuant to the terms and conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and conditions
hereinafter set forth, and other good and valuable consideration, receipt of
which is hereby acknowledged, the parties agree as follows:
1. Employment. The Company hereby agrees to employ Employee as its Vice
President, General Counsel & Secretary and Employee hereby agrees to serve the
Company in such position, 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 position of
Vice President, General Counsel & Secretary. 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, (iii) managing personal
investments; and (iv) engaging in charitable activities and community affairs.
2. Term of Employment. Employee's employment will continue until
terminated as provided in Section 6 below (the "Employment Term").
3. Compensation. During the Employment Term, Employee shall receive the
following compensation.
3.1 Base Salary. Employee's annual base salary on the date of
this Agreement is $225,000.00, 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 anniversary date of this Agreement, the Company shall review
the Base Salary amount to determine any increases. In no event shall
the Base Salary be less than the Base Salary amount for the immediately
preceding twelve (12) month period other than as permitted in Section
6.1(c) hereunder.
3.2 Annual Bonus Compensation. Employee shall be eligible to
receive an annual cash bonus as determined by the Company's CEO and
approved by the Compensation Committee in its sole discretion each
calendar year. Employee's target annual bonus percentage that he is
eligible to earn for each calendar year shall be forty percent (40%) of
his Base Salary as of January 1 of the applicable new calendar year.
Any such bonus shall be based upon the compensation principles of the
Company in effect at the time the CEO determines and the Compensation
Committee approves the amount of any bonus to be awarded, and except as
set forth in Section 7 hereof, Employee shall not be entitled to
receive an annual bonus for any
<PAGE>
calendar year (including the bonus referenced above) unless he remains
employed with the Company through December 31 of the applicable
calendar year; provided, however, that if Employee is terminated with
Cause or resigns without Good Reason, no bonus will be due.
3.3 Long Term Incentive Plan. Employee shall participate in
the Company's Long Term Incentive Plans ("LTIP") and shall be deemed a
"Tier 1 Employee" thereunder. Employee's benefits under the LTIP shall
be determined pursuant to the terms of the LTIP, and such benefits may
not be terminated or diminished without the written consent of the
Employee.
3.4 Equity Incentives and Other Long Term Compensation. The
Company upon the approval of the Compensation Committee, may grant
Employee from time to time options to purchase shares of the Company's
common stock, or other form of equity, 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. All options granted to
Employee shall vest in equal installments over the four-year period
commencing with the date of grant of such options, subject to the
acceleration of vesting (i) as described in Section 7.1(d) and 7.2(b)
hereof and (ii) as may be set forth in the option grant agreements
issued by the Company, as amended, provided, that in the event of a
conflict between any option grant agreement and this Agreement, this
Agreement shall control.
4. Benefits.
4.1 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 Vacation and Personal Time. The Company will provide
Employee with four (4) weeks of paid vacation each calendar year
Employee is employed by the Company, in accordance with Company policy.
The foregoing vacation days shall be in addition to standard paid
holiday days for employees of the Company.
4.3 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 date of this Agreement,
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 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 as defined under the
Securities and Exchange Act of 1934 ("Affiliates") or a fiduciary of
any of their benefit plans.
4.4 Liability Insurance. Both during and after termination
(for any reason) of Employee's employment, the Company shall cause
Employee to 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 Affiliates. Such policy shall be
maintained by the Company, at its expense, in an amount and on terms
(including the time period of coverage after the Employee's
2
<PAGE>
employment terminates) at least as favorable to the Employee as
policies covering the Company's Board of Directors.
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.
6. Termination.
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.
(b) With Good Reason. Employee may terminate his
employment pursuant to this Agreement with Good Reason (as
defined below) at any time within ninety (90) days after the
occurrence of an event constituting Good Reason.
(c) 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; (ii) Employee's duties, authority or responsibilities
are materially reduced or are materially inconsistent with the
scope of authority, duties and responsibilities of Employee's
position; (iii) the occurrence of a material breach by the
Company of any of its obligations to Employee under this
Agreement or (iv) the Company materially violates or continues
to materially violate any law or regulation contrary to the
written advice of Employee and the Company's outside counsel
to both the CEO and the Board of Directors and the Company
fails to rectify such violation within thirty (30) days of the
written advice that such violations are taking place.
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 willful refusal to perform essential
job duties which continues for more than ten
(10) days after notice from the Company;
3
<PAGE>
(ii) any intentional act of fraud or
embezzlement by the Employee in connection
with the Employee's duties or committed in
the course of Employee's employment;
(iii) any gross negligence or willful
misconduct of the Employee with regard to
the Company or any of its subsidiaries
resulting in a material economic loss to the
Company;
(iv) the Participant is convicted of a
felony;
(v) the Participant is convicted of a
misdemeanor the circumstances of which
involve fraud, dishonesty or moral turpitude
and which is substantially related to the
circumstances of Participant's job with the
Company;
(iv) any willful and material violation by
the Employee of any statutory or common law
duty of loyalty to the Company or any of its
subsidiaries resulting in a material
economic loss; or
(v) any material breach by the Employee of
this Agreement or any of the Agreements
referenced in Section 8 of this Agreement.
(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.
6.3 Death or Disability. Notwithstanding Section 2, in the
event of the death or Disability (defined herein) of Employee during
the Employment Term, 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, accrued, unpaid bonuses, in each case up to the date of
termination. Neither Employee, his beneficiary nor estate shall be
entitled to any severance benefits set forth in Section 7 if terminated
pursuant to this section. For purposes of this Agreement, "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 six (6) months 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 retain Employee
beyond the six (6) month period if Employee remains unable to perform
the essential functions of his job, with or without a reasonable
accommodation.
6.4 Survival. The agreement described in Section 8 hereof and
attached hereto as Schedule A shall survive the termination of this
Agreement.
4
<PAGE>
7. Severance and Other Rights Relating to Termination and Change of
Control.
7.1 Termination of Agreement Pursuant to Section 6.1(b) or
6.2(c). If the Employee terminates his employment for Good Reason
pursuant to Section 6.1(b), 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 provide
Employee the following payments and other benefits:
(a) The Company shall immediately pay to Employee a
lump-sum amount equal to the sum of (i) twelve (12) months of
Employee's then current Base Salary, (ii) any accrued but
unpaid Base Salary as of the termination date; and (iii) shall
pay Employee any accrued but unpaid bonus as of the
termination date, on the same terms and at the same times as
would have applied had Employee's employment not terminated;
provided, that, if such termination occurs on or within the
one year period following a Change of Control (as defined in
Section 7.2(a)), the Company shall also pay to Employee a pro
rata portion of his target bonus.
(b) If Employee elects COBRA coverage for health
and/or dental insurance in a timely manner, the Company shall
pay the monthly premium payments for such timely elected
coverage when each premium is due until the earlier of: (i)
twelve months from the date of termination; (ii) the date
Employee obtains new employment which offers health and/or
dental insurance that is reasonably comparable to that offered
by the Company; or (iii) the date COBRA continuation coverage
would otherwise terminate in accordance with the provisions of
COBRA. Thereafter, health and dental insurance coverage shall
be continued only to the extent required by COBRA and only to
the extent Employee timely pays the premium payments himself.
(c) The Company shall provide Employee an
outplacement consulting package up to a maximum value of Ten
Thousand Dollars ($10,000), which shall be selected at the
sole discretion of the Employee. Any payments made for such
outplacement consulting shall be made by the Company directly
to the consulting company.
(d) Employee will receive any awards under the LTIP
that are earned (as defined in any LTIP document), whether
vested or unvested, as of the termination date, on terms and
at the times set forth in the LTIP.
(e) Fifty percent (50%) percent of stock options
granted to Employee shall immediately become fully vested and
exercisable upon such termination or resignation. Executive
will be entitled to exercise such stock options in accordance
with Section 7.7.
7.2 Change of Control. The Board of Directors of the Company
has determined that it is in the best interests of the Company and its
stockholders to assure that the Company will have the continued
dedication of the Employee, notwithstanding the possibility, threat or
occurrence of a Change of Control (defined in Section 7.2(a) below).
The Board believes it is imperative to diminish the inevitable
distraction of the Employee by virtue of the personal uncertainties and
risks created by a pending or threatened Change of Control and to
encourage the
5
<PAGE>
Employee's full attention and dedication to the Company currently and
in the event of any threatened or pending Change of Control, and to
provide the Employee with compensation and benefits arrangements upon a
Change of Control which ensure that the compensation and benefits
expectations of the Employee will be satisfied and which are
competitive with those of other similarly-situated companies.
Therefore, in order to accomplish these objectives, the Board has
caused the Company to include the provisions set forth in this Section
7.2.
(a) Change of Control. "Change of Control" shall
mean, and shall be deemed to have occurred if, on or after the
date of this Agreement, (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% 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) the stockholders of the Company approve a
merger or consolidation of the Company with any other
corporation 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 80% 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 a plan of complete liquidation of the Company
or 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.
(b) Acceleration of Vesting of Stock Options. Vesting
of stock options granted to Employee shall be accelerated upon
any Change of Control to the extent set forth in the
applicable stock option agreement(s) between the Company and
Employee. Employee will be entitled to exercise such stock
options in accordance with such option agreements.
(c) LTIP Awards. Any awards granted to Employee under
the LTIP as of the Change of Control shall be treated as
described in the LTIP.
(d) If, within six (6) months before or after the
effective date of a Change of Control, the Employee terminates
his employment for Good Reason pursuant to Section 6.1(b) 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 termination shall be
treated for purposes of Section 7.2(b) and (c) as if it
occurred on the effective date of the Change of Control.
6
<PAGE>
(e) Payments and benefits that trigger Sections 280G
and 4999 of the Internal Revenue Code of 1986, as amended,
will be reduced to the extent necessary so that no excise tax
would be imposed if doing so would result in the employee
retaining a larger after-tax amount, taking into account the
income, excise and employment taxes imposed on the payments
and benefits.
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 signed waiver
and release, in the form attached hereto as Exhibit 7.3, of all claims
he may have against the Company up to the date of the termination of
his employment with the Company, and (if applicable) his not revoking
such release. Moreover, the Employee's rights to receive payments and
benefits pursuant to Sections 7.1 and 7.2 are conditioned on the
Employee's ongoing compliance with his obligations as described in
Section 8 hereof. Any cessation by the Company of any such payments and
benefits shall be in addition to, and not in lieu of, any and all other
remedies available to the Company for Employee's breach of his
obligations described in Section 8 hereof.
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 7.6,
below).
..
7.5 Benefits Required by Law and Plans; Vacation Time Pay. 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.
7.6 Exercise Period of Stock Options after Termination. Unless
it would subject the employee to adverse tax consequences under Section
885 of the recently enacted American Jobs Creation Act of 2004, Pub.
Law No. 108-357, 118 Stat. 1418 (the Act), added ss. 409A to the
Internal Revenue Code (Code), notwithstanding anything contained herein
or in the option grant agreements to the contrary, in the event of
Employee's termination after his first anniversary with the Company,
Employee's vested stock options shall be open for exercise until the
earlier of (i) two years from the date of termination or (ii) the
latest date on which those options expire or are eligible to be
exercised under the option grant agreements, determined without regard
to such termination or resignation; provided further that such extended
exercise period shall not apply in the event the Employee resigns
without Good Reason or is terminated by the Company for Cause, in which
case, the exercise periods shall continue to be governed by the terms
of the option grant agreements.
7
<PAGE>
8. Restrictions.
8.1 The Confidential Information Agreement. 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 (the
"Confidential Information Agreement").
8.2 Agreement Not to Compete. In consideration for all of the
payments and benefits that may become due to Employee under this
Agreement, Employee agrees that for a period of twelve (12) months
after termination of his employment for any reason, he will not,
directly or indirectly, without the Company's prior written consent,
(a) perform for a Competing Entity in any Restricted Area any of the
same services or substantially the same services that he performed for
the Company; (b) in any Restricted Area, advise, assist, participate
in, perform services for, or consult with a Competing Entity regarding
the management, operations, business or financial strategy, marketing
or sales functions or products of the Competing Entity (the activities
in clauses (a) and (b) collectively are, the "Restricted Activities");
or (c) solicit or divert the business of any Restricted Customer.
Employee acknowledges that in his position with the Company he has had
and will have access to knowledge of confidential information about all
aspects of the Company that would be of significant value to the
Company's competitors.
8.3 Additional Definitions.
(a) Customer. "Customer" means any individual or
entity for whom the Company has provided services or products
or made a proposal to perform services or provide products.
(b) Restricted Customer. "Restricted Customer" means
any Customer with whom/which Employee had contact on behalf of
the Company during the 12 months preceding the end, for
whatever reason, of his employment.
(c) Competing Entity. "Competing Entity" means any
business entity engaged in the development, design,
manufacture, marketing, distribution or sale of molecular
diagnostics.
(d) Restricted Area. "Restricted Area" means any
geographic location where if Employee were to perform any
Restricted Activities for a Competing Entity in such a
location, the effect of such performance would be competitive
to the Company.
8.4 Reasonable Restrictions on Competition Are Necessary.
Employee acknowledges that reasonable restrictions on competition are
necessary to protect the interests of the Company. Employee also
acknowledges that he has certain skills necessary to the success of the
Company, and that the Company has provided and will provide to him
certain confidential information that it would not otherwise provide
because he has agreed not to compete with the business of the Company
as set forth in this Agreement.
8.5 Restrictions Against Solicitations. Employee further
covenants and agrees that during Employee's employment by the Company
and for a period of twelve months following the termination of his
employment with the Company for any reason, he will not, except with
the prior consent of the Company's Chief Executive Officer, directly or
indirectly, solicit or hire, or encourage the solicitation or hiring
of, any person who is an employee of the Company for any
8
<PAGE>
position as an employee, independent contractor, consultant or
otherwise, provided that the foregoing shall not prevent Employee from
serving as a reference.
8.6 Affiliates. For purposes of this Section 8, the term
"Company" will be deemed to include the Company and its Affiliates.
8.7 Ability to Obtain Other Employment. Employee hereby
represents that his experience and capabilities are such that in the
event his employment with the Company is terminated, he will be able to
obtain employment if he so chooses during the period of non-competition
following the termination of employment described above without
violating the terms of this Agreement, and that the enforcement of this
Agreement by injunction, as described below, will not prevent him from
becoming so employed.
8.8 Injunctive Relief. Employee understands and agrees that if
he violates any provision of this Section 8, then in any suit that the
Company may bring for that violation, an order may be made enjoining
him from such violation, and an order to that effect may be made
pending litigation or as a final determination of the litigation.
Employee further agrees that the Company's application for an
injunction will be without prejudice to any other right of action that
may accrue to the Company by reason of the breach of this Section 8.
8.9 Section 8 Survives Termination. The provisions of this
Section 8 will survive termination of this Agreement.
8.10 Condition of Payments. The provisions of this Section 8
regarding the restrictions on Employee shall be conditioned on Company
making the payments to Employee as contemplated by Section 7.1 above.
If Employee is terminated due to a disability pursuant to Section 6.3
or if Employee voluntarily resigns without Good Reason, in which case
Employee will not be eligible to receive the severance payments set
forth in Section 7.1, Employee shall not be bound by the agreement not
to compete in Section 8.2. Employee, will, however, remain bound at all
times by the Confidential Information Agreement and the restriction on
solicitation in Section 8.5.
9. Arbitration. Unless other arrangements are agreed to by Employee 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 Agreement for Arbitration Procedure of Certain Employment
Disputes attached as Schedule B hereof.
10. Assignments; Transfers; Effect of Merger. 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. 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. 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
9
<PAGE>
the Employee. This Agreement will inure to the benefit of, and be enforceable by
or against, Employee or Employee's personal or legal representatives, executors,
administrators, successors, heirs, distributees, designees and legatees. None of
Employee's rights or obligations under this Agreement may be assigned or
transferred by Employee other than Employee's rights to compensation and
benefits, which may be transferred only by will or operation of law. If Employee
should die while any amounts or benefits have been accrued by Employee but not
yet paid as of the date of Employee's death and which would be payable to
Employee hereunder had Employee 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 such person or persons appointed in writing by
Employee to receive such amounts or, if no such person is so appointed, to
Employee's estate.
11. No Set-off, No Mitigation Required. Except as expressly provided
otherwise in this Agreement, 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 Employee or others. In
no event will Employee be obligated to seek other employment or take other
action by way of mitigation of the amounts payable to Employee under any of the
provisions of this Agreement, and such amounts will not be reduced (except as
otherwise specifically provided herein) whether or not Employee obtains other
employment.
12. Taxes. The Company shall have the right to deduct from any payments
made pursuant to this Agreement any and all federal, state, and local taxes or
other amounts required by law to be withheld.
13. Miscellaneous. 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. This Agreement 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. Nothing
herein shall affect any terms in the Confidential Information Agreement, the
Noncompetition Agreement, the LTIP, and any stock option plans or agreements
between Employee and the Company now and hereafter in effect from time to time.
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. 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. This Agreement is made in the State of Wisconsin and shall be
governed by and construed in accordance with the laws of said State. 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. 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 to the address set forth below each party's signature. 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.
10
<PAGE>
The parties hereto have executed this Employment Agreement as of the
date first written above.
/s/ Kevin T. Conroy
---------------------------------------------
Kevin T. Conroy ("Employee")
Notice Address:
4059 N. Richland Ct.
Shorewood, WI 53211
THIRD WAVE TECHNOLOGIES, INC. ("Company")
By: /s/ John J. Puisis
------------------------------------
John J. Puisis, President and CEO
Notice Address:
502 South Rosa Road
Madison, Wisconsin 53719-1256
Attn: Chief Executive Officer
11
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.23
<SEQUENCE>7
<FILENAME>c92830exv10w23.txt
<DESCRIPTION>EMPLOYMENT AGREEMENT - JAMES J. HERRMAN
<TEXT>
<PAGE>
EXHIBIT 10.23
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into as of the 14th
day of March 2005, by and between James J. Herrmann ("Employee") and THIRD WAVE
TECHNOLOGIES, INC., a Delaware corporation (the "Company").
WHEREAS, the Company desires to employ Employee as its Vice President,
Finance and Principal Financial Officer and Employee desires to accept such
employment pursuant to the terms and conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and conditions
hereinafter set forth, and other good and valuable consideration, receipt of
which is hereby acknowledged, the parties agree as follows:
1. Employment. The Company hereby agrees to employ Employee as its Vice
President, Finance and Principal Financial Officer and Employee hereby agrees to
serve the Company in such position, 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
position of Vice President, Finance and Principal Financial Officer. 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, (iii)
managing personal investments; and (iv) engaging in charitable activities and
community affairs.
2. Term of Employment. Employee's employment will continue until
terminated as provided in Section 6 below (the "Employment Term").
3. Compensation. During the Employment Term, Employee shall receive the
following compensation.
3.1 Base Salary. Employee's annual base salary on the date of
this Agreement is $190,000, 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 anniversary date of this Agreement, the Company shall review
the Base Salary amount to determine any increases. In no event shall
the Base Salary be less than the Base Salary amount for the immediately
preceding twelve (12) month period other than as permitted in Section
6.1(c) hereunder.
3.2 Annual Bonus Compensation. Employee shall be eligible to
receive an annual cash bonus as determined by the Company's CEO and
approved by the Compensation Committee in its sole discretion each
calendar year. Employee's target annual bonus percentage that he is
eligible to earn for each calendar year shall be thirty-five percent
(35%) of his Base Salary as of January 1 of the applicable new calendar
year. Any such bonus shall be based upon the compensation principles of
the Company in effect at the time the CEO determines and the
Compensation Committee approves the amount of any bonus to be awarded,
and except as set forth in Section 7 hereof, Employee shall not be
entitled to receive an annual bonus for any calendar year (including
the bonus referenced above) unless he remains employed with the Company
through December 31 of the applicable calendar year; provided, however,
that if Employee is terminated with Cause or resigns without Good
Reason, no bonus will be due.
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3.3 Long Term Incentive Plan. Employee shall participate in
the Company's Long Term Incentive Plans ("LTIP") and shall be deemed a
"Tier 1 Employee" thereunder. Employee's benefits under the LTIP shall
be determined pursuant to the terms of the LTIP, and such benefits may
not be terminated or diminished without the written consent of the
Employee.
3.4 Equity Incentives and Other Long Term Compensation. The
Company, upon the approval of the Compensation Committee, may grant
Employee from time to time options to purchase shares of the Company's
common stock, or other forms of equity, 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. All options granted to
Employee shall vest in equal installments over the four-year period
commencing with the date of grant of such options, subject to the
acceleration of vesting (i) as described in Section 7.1(d) and 7.2(b)
hereof and (ii) as may be set forth in the option grant agreements
issued by the Company, as amended, provided, that in the event of a
conflict between any option grant agreement and this Agreement, this
Agreement shall control.
4. Benefits.
4.1 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 Vacation and Personal Time. The Company will provide
Employee with four (4) weeks of paid vacation each calendar year
Employee is employed by the Company, in accordance with Company policy.
The foregoing vacation days shall be in addition to standard paid
holiday days for employees of the Company.
4.3 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 date of this Agreement,
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 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 as defined under the
Securities and Exchange Act of 1934 ("Affiliates") or a fiduciary of
any of their benefit plans.
4.4 Liability Insurance. Both during and after termination
(for any reason) of Employee's employment, the Company shall cause
Employee to 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 Affiliates. Such policy shall be
maintained by the Company, at its expense, in an amount and on terms
(including the time period of coverage after the Employee's employment
terminates) at least as favorable to the Employee as policies covering
the Company's Board of Directors.
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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.
6. Termination.
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.
(b) With Good Reason. Employee may terminate his
employment pursuant to this Agreement with Good Reason (as
defined below) at any time within ninety (90) days after the
occurrence of an event constituting Good Reason.
(c) 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; (ii) Employee's duties, authority or responsibilities
are materially reduced or are materially inconsistent with the
scope of authority, duties and responsibilities of Employee's
position; or (iii) 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 willful refusal to perform essential
job duties which continues for more than ten
(10) days after notice from the Company;
(ii) any intentional act of fraud or
embezzlement by the Employee in connection
with the Employee's duties or committed in
the course of Employee's employment;
(iii) any gross negligence or willful
misconduct of the Employee with regard to
the Company or any of its subsidiaries
resulting in a material economic loss to the
Company;
(iv) the Participant is convicted of a
felony;
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(v) the Participant is convicted of a
misdemeanor the circumstances of which
involve fraud, dishonesty or moral turpitude
and which is substantially related to the
circumstances of Participant's job with the
Company;
(iv) any willful and material violation by
the Employee of any statutory or common law
duty of loyalty to the Company or any of its
subsidiaries resulting in a material
economic loss; or
(v) any material breach by the Employee of
this Agreement or any of the Agreements
referenced in Section 8 of this Agreement.
(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.
6.3 Death or Disability. Notwithstanding Section 2, in the
event of the death or Disability (defined herein) of Employee during
the Employment Term, 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, accrued, unpaid bonuses, in each case up to the date of
termination. Neither Employee, his beneficiary nor estate shall be
entitled to any severance benefits set forth in Section 7 if terminated
pursuant to this section. For purposes of this Agreement, "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 six (6) months 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 retain Employee
beyond the six (6) month period if Employee remains unable to perform
the essential functions of his job, with or without a reasonable
accommodation.
6.4 Survival. The agreement described in Section 8 hereof and
attached hereto as Schedule A shall survive the termination of this
Agreement.
7. Severance and Other Rights Relating to Termination and Change of
Control.
7.1 Termination of Agreement Pursuant to Section 6.1(b) or
6.2(c). If the Employee terminates his employment for Good Reason
pursuant to Section 6.1(b), 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 provide
Employee the following payments and other benefits:
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(a) The Company shall immediately pay to Employee a
lump-sum amount equal to the sum of (i) twelve (12) months of
Employee's then current Base Salary, (ii) any accrued but
unpaid Base Salary as of the termination date; and (iii) shall
pay Employee any accrued but unpaid bonus as of the
termination date, on the same terms and at the same times as
would have applied had Employee's employment not terminated;
provided, that, if such termination occurs on or within the
one year period following a Change of Control (as defined in
Section 7.2(a)), the Company shall also pay to Employee a pro
rata portion of his target bonus.
(b) If Employee elects COBRA coverage for health
and/or dental insurance in a timely manner, the Company shall
pay the monthly premium payments for such timely elected
coverage when each premium is due until the earlier of: (i)
twelve months from the date of termination; (ii) the date
Employee obtains new employment which offers health and/or
dental insurance that is reasonably comparable to that offered
by the Company; or (iii) the date COBRA continuation coverage
would otherwise terminate in accordance with the provisions of
COBRA. Thereafter, health and dental insurance coverage shall
be continued only to the extent required by COBRA and only to
the extent Employee timely pays the premium payments himself.
(c) The Company shall provide Employee an
outplacement consulting package up to a maximum value of Ten
Thousand Dollars ($10,000), which shall be selected at the
sole discretion of the Employee. Any payments made for such
outplacement consulting shall be made by the Company directly
to the consulting company.
(d) Employee will receive any awards under the LTIP
that are earned (as defined in any LTIP document), whether
vested or unvested, as of the termination date, on terms and
at the times set forth in the LTIP.
(e) Fifty percent (50%) percent of stock options
granted to Employee shall immediately become fully vested and
exercisable upon such termination or resignation. Executive
will be entitled to exercise such stock options in accordance
with Section 7.7.
7.2 Change of Control. The Board of Directors of the Company
has determined that it is in the best interests of the Company and its
stockholders to assure that the Company will have the continued
dedication of the Employee, notwithstanding the possibility, threat or
occurrence of a Change of Control (defined in Section 7.2(a) below).
The Board believes it is imperative to diminish the inevitable
distraction of the Employee by virtue of the personal uncertainties and
risks created by a pending or threatened Change of Control and to
encourage the Employee's full attention and dedication to the Company
currently and in the event of any threatened or pending Change of
Control, and to provide the Employee with compensation and benefits
arrangements upon a Change of Control which ensure that the
compensation and benefits expectations of the Employee will be
satisfied and which are competitive with those of other
similarly-situated companies. Therefore, in order to accomplish these
objectives, the Board has caused the Company to include the provisions
set forth in this Section 7.2.
(a) Change of Control. "Change of Control" shall
mean, and shall be deemed to have occurred if, on or after the
date of this Agreement, (i) any "person" (as such term is used
in Sections 13(d) and 14(d) of the Securities Exchange Act of
1934, as amended)
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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% 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) the stockholders of
the Company approve a merger or consolidation of the Company
with any other corporation 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 80% 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 a plan of complete
liquidation of the Company or 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.
(b) Acceleration of Vesting of Stock Options. Vesting
of stock options granted to Employee shall be accelerated upon
any Change of Control to the extent set forth in the
applicable stock option agreement(s) between the Company and
Employee. Employee will be entitled to exercise such stock
options in accordance with such option agreements.
(c) LTIP Awards. Any awards granted to Employee under
the LTIP as of the Change of Control shall be treated as
described in the LTIP.
(d) If, within six (6) months before or after the
effective date of a Change of Control, the Employee terminates
his employment for Good Reason pursuant to Section 6.1(b) 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 termination shall be
treated for purposes of Section 7.2(b) and (c) as if it
occurred on the effective date of the Change of Control.
(e) Payments and benefits that trigger Sections 280G
and 4999 of the Internal Revenue Code of 1986, as amended,
will be reduced to the extent necessary so that no excise tax
would be imposed if doing so would result in the employee
retaining a larger after-tax amount, taking into account the
income, excise and employment taxes imposed on the payments
and benefits.
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 signed waiver
and release, in the form attached hereto as Exhibit 7.3, of all claims
he may have against the Company up to the date of the termination of
his employment
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with the Company, and (if applicable) his not revoking such release.
Moreover, the Employee's rights to receive payments and benefits
pursuant to Sections 7.1 and 7.2 are conditioned on the Employee's
ongoing compliance with his obligations as described in Section 8
hereof. Any cessation by the Company of any such payments and benefits
shall be in addition to, and not in lieu of, any and all other remedies
available to the Company for Employee's breach of his obligations
described in Section 8 hereof.
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 7.6,
below).
..
7.5 Benefits Required by Law and Plans; Vacation Time Pay. 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.
7.6 Exercise Period of Stock Options after Termination. Unless
it would subject the employee to adverse tax consequences under Section
885 of the recently enacted American Jobs Creation Act of 2004, Pub.
Law No. 108-357, 118 Stat. 1418 (the Act), added ss. 409A to the
Internal Revenue Code (Code), notwithstanding anything contained herein
or in the option grant agreements to the contrary, in the event of
Employee's termination after his first anniversary with the Company,
Employee's vested stock options shall be open for exercise until the
earlier of (i) two years from the date of termination or (ii) the
latest date on which those options expire or are eligible to be
exercised under the option grant agreements, determined without regard
to such termination or resignation; provided further that such extended
exercise period shall not apply in the event the Employee resigns
without Good Reason or is terminated by the Company for Cause, in which
case, the exercise periods shall continue to be governed by the terms
of the option grant agreements.
8. Restrictions.
8.1 The Confidential Information Agreement. 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 (the
"Confidential Information Agreement").
8.2 Agreement Not to Compete. In consideration for all of the
payments and benefits that may become due to Employee under this
Agreement, Employee agrees that for a period of twelve (12) months
after termination of his employment for any reason, he will not,
directly or indirectly, without the Company's prior written consent,
(a) perform for a Competing Entity in any Restricted Area any of the
same services or substantially the same services that he performed for
the Company; (b) in any Restricted Area, advise, assist, participate
in, perform services for, or
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consult with a Competing Entity regarding the management, operations,
business or financial strategy, marketing or sales functions or
products of the Competing Entity (the activities in clauses (a) and (b)
collectively are, the "Restricted Activities"); or (c) solicit or
divert the business of any Restricted Customer. Employee acknowledges
that in his position with the Company he has had and will have access
to knowledge of confidential information about all aspects of the
Company that would be of significant value to the Company's
competitors.
8.3 Additional Definitions.
(a) Customer. "Customer" means any individual or
entity for whom the Company has provided services or products
or made a proposal to perform services or provide products.
(b) Restricted Customer. "Restricted Customer" means
any Customer with whom/which Employee had contact on behalf of
the Company during the 12 months preceding the end, for
whatever reason, of his employment.
(c) Competing Entity. "Competing Entity" means any
business entity engaged in the development, design,
manufacture, marketing, distribution or sale of molecular
diagnostics.
(d) Restricted Area. "Restricted Area" means any
geographic location where if Employee were to perform any
Restricted Activities for a Competing Entity in such a
location, the effect of such performance would be competitive
to the Company.
8.4 Reasonable Restrictions on Competition Are Necessary.
Employee acknowledges that reasonable restrictions on competition are
necessary to protect the interests of the Company. Employee also
acknowledges that he has certain skills necessary to the success of the
Company, and that the Company has provided and will provide to him
certain confidential information that it would not otherwise provide
because he has agreed not to compete with the business of the Company
as set forth in this Agreement.
8.5 Restrictions Against Solicitations. Employee further
covenants and agrees that during Employee's employment by the Company
and for a period of twelve months following the termination of his
employment with the Company for any reason, he will not, except with
the prior consent of the Company's Chief Executive Officer, 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 Employee from serving as a
reference.
8.6 Affiliates. For purposes of this Section 8, the term
"Company" will be deemed to include the Company and its Affiliates.
8.7 Ability to Obtain Other Employment. Employee hereby
represents that his experience and capabilities are such that in the
event his employment with the Company is terminated, he will be able to
obtain employment if he so chooses during the period of non-competition
following the termination of employment described above without
violating the terms of this Agreement, and that the enforcement of this
Agreement by injunction, as described below, will not prevent him from
becoming so employed.
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8.8 Injunctive Relief. Employee understands and agrees that if
he violates any provision of this Section 8, then in any suit that the
Company may bring for that violation, an order may be made enjoining
him from such violation, and an order to that effect may be made
pending litigation or as a final determination of the litigation.
Employee further agrees that the Company's application for an
injunction will be without prejudice to any other right of action that
may accrue to the Company by reason of the breach of this Section 8.
8.9 Section 8 Survives Termination. The provisions of this
Section 8 will survive termination of this Agreement.
8.10 Condition of Payments. The provisions of this Section 8
regarding the restrictions on Employee shall be conditioned on Company
making the payments to Employee as contemplated by Section 7.1 above.
If Employee is terminated due to a disability pursuant to Section 6.3
or if Employee voluntarily resigns without Good Reason, in which case
Employee will not be eligible to receive the severance payments set
forth in Section 7.1, Employee shall not be bound by the agreement not
to compete in Section 8.2. Employee, will, however, remain bound at all
times by the Confidential Information Agreement and the restriction on
solicitation in Section 8.5.
9. Arbitration. Unless other arrangements are agreed to by Employee 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 Agreement for Arbitration Procedure of Certain Employment
Disputes attached as Schedule B hereof.
10. Assignments; Transfers; Effect of Merger. 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. 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. 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 Employee. This
Agreement will inure to the benefit of, and be enforceable by or against,
Employee or Employee's personal or legal representatives, executors,
administrators, successors, heirs, distributees, designees and legatees. None of
Employee's rights or obligations under this Agreement may be assigned or
transferred by Employee other than Employee's rights to compensation and
benefits, which may be transferred only by will or operation of law. If Employee
should die while any amounts or benefits have been accrued by Employee but not
yet paid as of the date of Employee's death and which would be payable to
Employee hereunder had Employee 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 such person or persons appointed in writing by
Employee to receive such amounts or, if no such person is so appointed, to
Employee's estate.
11. No Set-off, No Mitigation Required. Except as expressly provided
otherwise in this Agreement, 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,
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defense or other claim, right or action which the Company may have against
Employee or others. In no event will Employee be obligated to seek other
employment or take other action by way of mitigation of the amounts payable to
Employee under any of the provisions of this Agreement, and such amounts will
not be reduced (except as otherwise specifically provided herein) whether or not
Employee obtains other employment.
12. Taxes. The Company shall have the right to deduct from any payments
made pursuant to this Agreement any and all federal, state, and local taxes or
other amounts required by law to be withheld.
13. Miscellaneous. 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. This Agreement 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. Nothing
herein shall affect any terms in the Confidential Information Agreement, the
Noncompetition Agreement, the LTIP, and any stock option plans or agreements
between Employee and the Company now and hereafter in effect from time to time.
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. 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. This Agreement is made in the State of Wisconsin and shall be
governed by and construed in accordance with the laws of said State. 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. 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 to the address set forth below each party's signature. 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.
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The parties hereto have executed this Employment Agreement as of the
date first written above.
/s/ James J. Herrman
---------------------------------------------
James J. Herrman ("Employee")
Notice Address:
428 Hillside Avenue
Elmhurst, IL 60126
THIRD WAVE TECHNOLOGIES, INC. ("Company")
By: /s/ John J. Puisis
------------------------------------
John J. Puisis, President and CEO
Notice Address:
502 South Rosa Road
Madison, Wisconsin 53719-1256
Attn: Chief Executive Officer
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</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21
<SEQUENCE>8
<FILENAME>c92830exv21.txt
<DESCRIPTION>LIST OF SUBSIDIARIES
<TEXT>
<PAGE>
Exhibit 21
List of Subsidiaries:
Third Wave Agbio, Inc.
Third Wave-Japan KK
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23
<SEQUENCE>9
<FILENAME>c92830exv23.txt
<DESCRIPTION>CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
<TEXT>
<PAGE>
Exhibit 23
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 33-57664 and 333-120169) 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 and in the related prospectuses
of our reports dated March 4, 2005, with respect to the consolidated financial
statements and schedule of Third Wave Technologies, Inc., Third Wave
Technologies, Inc. management's assessment of the effectiveness of internal
control over financial reporting, and the effectiveness of internal control over
financial reporting of Third Wave Technologies, Inc., included in this Annual
Report (Form 10-K) for the year ended December 31, 2004.
Ernst & Young LLP
Milwaukee, Wisconsin
March 14, 2005
54
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31.1
<SEQUENCE>10
<FILENAME>c92830exv31w1.txt
<DESCRIPTION>SECTION 302 CERTIFICATION OF CEO
<TEXT>
<PAGE>
EXHIBIT 31.1
CERTIFICATION
I, John J. Puisis, President and 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 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)) and internal
control over financial reporting as defined in Exchange Act Rules
13a-15(f) and 15d-15(f) 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 report is being prepared;
b. designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles;
c. evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report, based on such
evaluation; and
d. 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 data; 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.
Date: March 15, 2005
/s/ John J. Puisis
------------------------
John J. Puisis
55
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31.2
<SEQUENCE>11
<FILENAME>c92830exv31w2.txt
<DESCRIPTION>SECTION 302 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
<TEXT>
<PAGE>
EXHIBIT 31.2
CERTIFICATION
I, James J. Herrmann, Vice President of Finance and principal 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 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)) and internal
control over financial reporting as defined in Exchange Act Rules
13a-15(f) and 15d-15(f) 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 report is being prepared;
b. designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles;
c. evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report, based on such
evaluation; and
d. 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 data; 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.
Date: March 15, 2005
/s/ James J. Herrmann
--------------------------
James J. Herrmann
56
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32.1
<SEQUENCE>12
<FILENAME>c92830exv32w1.txt
<DESCRIPTION>CEO CERTIFICATION
<TEXT>
<PAGE>
EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 U.S.C SECTION 1350,
OF CHAPTER 63 OF TITLE 18
OF THE UNITED STATES CODE
I, John J. Puisis, President 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, 2004, (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.
Date: March 15, 2005
/s/ John J. Puisis
------------------------
John J. Puisis
57
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32.2
<SEQUENCE>13
<FILENAME>c92830exv32w2.txt
<DESCRIPTION>PRINCIPAL FINANCIAL OFFICER CERTIFICATION
<TEXT>
<PAGE>
EXHIBIT 32.2
CERTIFICATION PURSUANT TO 18 U.S.C SECTION 1350,
OF CHAPTER 63 OF TITLE 18
OF THE UNITED STATES CODE
I, James J. Herrmann, Vice President of Finance and principal 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, 2004, (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.
Date: March 15, 2005
/s/ James J. Herrmann
--------------------------
James J. Herrmann
58
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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