-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TfjiRf+NXMceFyUphAIXLVRkfi7Gk69R1SGVtt+q72thcbUIc8EC8oGea9UMQ/KX vbsdm2UmJaZ2HsULkb55Ug== 0000950137-05-005676.txt : 20050510 0000950137-05-005676.hdr.sgml : 20050510 20050510170937 ACCESSION NUMBER: 0000950137-05-005676 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20050331 FILED AS OF DATE: 20050510 DATE AS OF CHANGE: 20050510 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 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-31745 FILM NUMBER: 05817783 BUSINESS ADDRESS: STREET 1: 502 S ROSA RD CITY: MADISON STATE: WI ZIP: 53719-1256 BUSINESS PHONE: 608-663-7036 MAIL ADDRESS: STREET 1: 502 S. ROSA ROAD CITY: MADISON STATE: WI ZIP: 53719 10-Q 1 c94998e10vq.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED March 31, 2005 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD _________ to _________. COMMISSION FILE NUMBER: 000-31745 THIRD WAVE TECHNOLOGIES, INC. (Exact name of Registrant as specified in its charter) DELAWARE 39-1791034 (State or other jurisdiction (I.R.S. Employer of 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) 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 whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2 of the Exchange Act). Yes [X] No [ ] The number of shares outstanding of the registrant's Common Stock, $.001 par value, as of March 31, 2005, was 41,154,491. THIRD WAVE TECHNOLOGIES, INC. QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2005 TABLE OF CONTENTS
PAGE NO. PART I FINANCIAL INFORMATION............................................................................................ 3 Item 1. Financial Statements.......................................................................................... 3 Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004............................................... 3 Consolidated Statements of Operations for the three months ended March 31, 2005 and 2004............................. 4 Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2004............................. 5 Notes to Consolidated Financial Statements........................................................................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................... 9 Item 3. Quantitative and Qualitative Disclosures About Market Risk.................................................... 12 Item 4. Controls and Procedures....................................................................................... 12 PART II OTHER INFORMATION............................................................................................... 14 Item 1. Legal Proceedings............................................................................................. 14 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds................................................... 14 Item 3. Defaults Upon Senior Securities............................................................................... 14 Item 4. Submission Of Matters To A Vote Of Security Holders........................................................... 14 Item 5. Other Information............................................................................................. 14 Item 6. Exhibits...................................................................................................... 14 SIGNATURES.............................................................................................................. 16 EXHIBITS................................................................................................................ 17
2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS THIRD WAVE TECHNOLOGIES, INC. Consolidated Balance Sheets
MARCH 31, DECEMBER 31, 2005 2004 UNAUDITED ASSETS Current assets: Cash and cash equivalents $ 53,460,740 $ 55,619,981 Short-term investments 11,070,000 11,070,000 Receivables, net of allowance for doubtful accounts of $185,000 and $300,000, respectively 4,501,515 5,784,679 Inventories 1,389,075 1,236,392 Prepaid expenses and other 679,558 260,316 ------------- ------------- Total current assets 71,100,888 73,971,368 Equipment and leasehold improvements: Machinery and equipment 15,907,379 15,832,489 Leasehold improvements 2,283,792 2,277,604 ------------- ------------- 18,191,171 18,110,093 Less accumulated depreciation 12,581,644 12,139,423 ------------- ------------- 5,609,527 5,970,670 Assets held for sale 269,000 269,000 Intangible assets, net of accumulated amortization 3,770,184 4,146,372 Indefinite lived intangible assets 1,007,411 1,007,411 Goodwill 489,873 489,873 Other long term assets 2,086,667 2,212,935 ------------- ------------- Total assets $ 84,333,550 $ 88,067,629 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 7,479,046 $ 6,519,005 Accrued payroll and related liabilities 2,130,286 2,873,506 Other accrued liabilities 2,037,426 1,867,361 Deferred revenue 314,333 129,530 Capital lease obligation due within one year 101,378 66,867 Long-term debt due within one year 9,615,428 9,614,127 ------------- ------------- Total current liabilities 21,677,897 21,070,396 Long-term debt 305,650 335,069 Deferred revenue - long term 227,171 254,434 Capital lease obligations - long term 196,315 151,885 Other liabilities 3,910,674 3,520,948 Shareholders' equity: Participating preferred stock, Series A, $.001 par value, 10,000,000 shares authorized, 0 shares issued and outstanding 0 0 Common stock, $.001 par value, 100,000,000 shares authorized, 41,154,491 and 41,102,764 shares issued and outstanding, respectively 41,154 41,103 Additional paid-in capital 198,343,828 198,990,162 Unearned stock compensation (205,671) (554,293) Foreign currency translation adjustment 31,095 31,949 Accumulated deficit (140,194,563) (135,774,024) ------------- ------------- Total shareholders' equity 58,015,843 62,734,897 ------------- ------------- Total liabilities and shareholders' equity $ 84,333,550 $ 88,067,629 ============= =============
See accompanying notes to financial statements. 3 THIRD WAVE TECHNOLOGIES, INC. Consolidated Statements of Operations (Unaudited)
THREE MONTHS ENDED --------------------------- MARCH 31, --------------------------- 2005 2004 ------------ ------------ Revenues: Product sales $ 6,914,276 $ 15,214,638 License and royalty revenue 93,083 40,641 Grant revenue 118,884 20,330 ------------ ------------ Total revenues 7,126,243 15,275,609 ------------ ------------ Operating expenses: Cost of goods sold Product cost of goods sold 1,538,676 3,599,760 Intangible and long-term asset amortization 461,395 571,096 ------------ ------------ Total cost of goods sold 2,000,071 4,170,856 Research and development 2,465,380 2,672,876 Selling and marketing 3,364,493 2,624,772 General and administrative 3,779,264 2,357,391 ------------ ------------ Total operating expense 11,609,208 11,825,895 ------------ ------------ Income (loss) from operations (4,482,965) 3,449,714 Other income (expense): Interest income 347,000 127,190 Interest expense (89,387) (56,994) Other (195,187) (671,486) ------------ ------------ Total other income (expense) 62,426 (601,290) ------------ ------------ Net income (loss) $ (4,420,539) $ 2,848,424 ============ ============ Net income (loss) per share - basic $ (0.11) $ 0.07 ============ ============ Net income (loss) per share - diluted $ (0.11) $ 0.07 ============ ============ Weighted average shares outstanding Basic 41,123,521 40,079,040 ============ ============ Diluted 41,123,521 41,566,020 ============ ============
See accompanying notes to financial statements. 4 THIRD WAVE TECHNOLOGIES, INC. Consolidated Statements of Cash Flows (Unaudited)
THREE MONTHS ENDED MARCH 31, --------------------------- 2005 2004 ------------ ------------ OPERATING ACTIVITIES: Net income (loss) $ (4,420,539) $ 2,848,424 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 544,320 788,401 Amortization of intangible assets 376,188 376,188 Noncash stock compensation (414,464) 232,561 Loss on disposal of equipment 8,696 18,474 Changes in operating assets and liabilities: Receivables 1,282,310 (4,122,350) Inventories (152,683) (1,633,800) Prepaid expenses and other assets (378,181) 237,515 Accounts payable 960,041 4,024,998 Accrued expenses and other liabilities (183,429) (1,076,723) Deferred revenue 157,540 49,740 ------------ ------------ Net cash provided by (used in) operating activities (2,220,201) 1,743,428 INVESTING ACTIVITIES: Purchases of equipment and leasehold improvements (10,170) (49,290) ------------ ------------ Net cash used in investing activities (10,170) (49,290) FINANCING ACTIVITIES: Payments on long-term debt (28,118) 0 Payments on capital lease obligations (17,555) 0 Proceeds from common stock, net 116,803 379,214 ------------ ------------ Net cash provided by financing activities 71,130 379,214 ------------ ------------ Net increase (decrease) in cash and cash equivalents (2,159,241) 2,073,352 Cash and cash equivalents at beginning of period 55,619,981 47,015,746 ------------ ------------ Cash and cash equivalents at end of period $ 53,460,740 $ 49,089,098 ============ ============
See accompanying notes to financial statements. 5 THIRD WAVE TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2005 (unaudited) (1) Basis of Presentation The accompanying unaudited consolidated financial statements of Third Wave Technologies, Inc. have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. Interim results are not necessarily indicative of results that may be expected for the year ending December 31, 2005. The balance sheet at December 31, 2004 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited financial statements and footnotes thereto included in our Form 10-K for the fiscal year ended December 31, 2004 filed with the Securities and Exchange Commission. (2) Net Income (Loss) Per Share In accordance with accounting principles generally accepted in the United States, basic net income (loss) per share has been computed using the weighted-average number of shares of common stock outstanding during the respective periods. Diluted net income (loss) per share takes into account the weighted average shares from options that could potentially dilute basic net income per share in the future. Shares associated with stock options are excluded for the three months ended March 31, 2005 because they are anti-dilutive. The following table presents the calculation of basic and diluted net income (loss) per share:
THREE MONTHS ENDED MARCH 31, --------------------------- 2005 2004 ------------ ------------ Numerator: Net income (loss) $ (4,420,539) $ 2,848,424 ============ ============ Denominator: Weighted average shares outstanding - basic 41,123,521 40,079,040 Dilutive securities - stock options N/A 1,486,980 ------------ ------------ Weighted average shares outstanding - diluted 41,123,521 41,566,020 Basic net income (loss) per share $ (0.11) $ 0.07 Dilutive net income (loss) per share $ (0.11) $ 0.07
(3) Stock-Based Compensation Third Wave has stock-based employee compensation plans. Statement of Financial Accounting Standards (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. We have chosen to continue using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations, in accounting for our stock option plans. 6 Had compensation cost been determined based upon the fair value at the grant date for awards under the plans based on the provisions of SFAS No. 123, our SFAS No. 123 pro forma net income (loss) and net income (loss) per share would have been as follows:
THREE MONTHS ENDED MARCH 31, ----------------------------- 2005 2004 ------------- ------------- Net income (loss), as reported $ (4,420,539) $ 2,848,424 Add: Stock based compensation, as reported (414,464) 232,561 Less: Stock-based compensation, using fair value method (1,064,014) (1,053,943) ------------- ------------- Pro forma net income (loss) $ (5,899,017) $ 2,027,042 Net income (loss) per share, basic, as reported $ (0.11) $ 0.07 Net income (loss) per share, diluted, as reported $ (0.11) $ 0.07 Pro forma net income (loss) per share, basic $ (0.14) $ 0.05 Pro forma net income (loss) per share, diluted $ (0.14) $ 0.05
As described in Note 2 of Notes to Consolidated Financial Statements in our Form 10-K for the year ended December 31, 2004, the Financial Accounting Standards Board recently issued SFAS No. 123 (revised 2004), "Share-Based Payment", which is a revision of SFAS No. 123. The Company expects to adopt SFAS No. 123(R) on January 1, 2006. (4) Inventories Inventories, consisting mostly of raw materials, are carried at the lower of cost or market using the first-in, first-out (FIFO) method for determining cost. Inventories consist of the following:
MARCH 31, DECEMBER 31, 2005 2004 ----------- ----------- Raw materials $ 1,471,024 $ 1,318,771 Finished goods and work in process 698,051 567,621 Reserve for excess and obsolete inventory (780,000) (650,000) ----------- ----------- Total inventories $ 1,389,075 $ 1,236,392 =========== ===========
(5) Stock Compensation Included in operating expenses are the following stock compensation charges, net of reversals related to terminated employees:
THREE MONTHS ENDED MARCH 31, --------------------- 2005 2004 --------- --------- Cost of goods sold $ (5,749) $ 5,082 Research and development (259,850) 78,335 Selling and marketing 29,708 68,001 General and administrative (178,573) 81,143 --------- --------- Total stock compensation $(414,464) $ 232,561 --------- ---------
(6) Comprehensive Income (Loss) The components of comprehensive income (loss) are as follows:
THREE MONTHS ENDED MARCH 31, ------------------------- 2005 2004 ----------- ----------- Net income (loss) $(4,420,539) $ 2,848,424 Other comprehensive income (loss): Foreign currency translation adjustments (854) 1,350 ----------- ----------- Comprehensive income (loss) $(4,421,393) $ 2,849,774 =========== ===========
(7) Derivative Instruments We sell products in a number of countries throughout the world. In the quarters ending March 31, 2005 and 2004, we sold certain products with the resulting accounts receivable denominated in Japanese Yen. Simultaneous with such sales and purchase order 7 commitments, we purchased foreign currency forward contracts to manage the risk associated with foreign currency collections 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, which arise when collections in a foreign currency are received after the asset is generated. There were no contracts outstanding at March 31, 2005. 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 in earnings. (8) Amortizable Intangible Assets Amortizable intangible assets consist of the following:
MARCH 31, 2005 DECEMBER 31, 2004 ------------------------- ------------------------- GROSS GROSS CARRYING ACCUMULATED CARRYING ACCUMULATED AMOUNT AMORTIZATION AMOUNT AMORTIZATION ----------- ------------- ----------- ------------ Costs of settling patent litigation $10,533,248 $ 6,763,064 $10,533,248 $ 6,386,876 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 ----------- ------------ ----------- ------------ Total $12,782,359 $ 9,012,175 $12,782,359 $ 8,635,987 =========== ============ =========== ============
(9) Restructuring and Impairment of Long Lived Assets During the third quarter of 2002, we 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 restructuring charge included $2.5 million for the consolidation of facilities, $500,000 for prepayment penalties mainly under capital lease arrangements, an impairment charge of $7.2 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. The facilities charge contained estimates based on the Company's potential to sublease a portion of its corporate office. The Company has offered the corporate office space for sublease, but has been unable to sublease the space. Accordingly, the Company decreased its estimate of the amount of sublease income it expects to receive. The estimated lease and operating expenses were also reduced, based on a portion of the office space being utilized. The following table shows the changes in the restructuring accrual since 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 is included in other accrued liabilities on the balance sheets and the remainder is included in other long-term liabilities. Accrued restructuring balance at December 31, 2004 $ 1,116,848 Payments made (38,638) ----------- Accrued restructuring balance at March 31, 2005 $ 1,078,210 -----------
(10) Reclassifications Certain reclassifications have been made to the 2004 financial statements to conform to the 2005 presentation. 8 THIRD WAVE TECHNOLOGIES, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Management's Discussion and Analysis of Financial Condition and Results of Operations as of March 31, 2005 and for the three months ended March 31, 2005 and 2004 should be read in conjunction with our Form 10-K for the fiscal year ended December 31, 2004 filed with the Securities and Exchange Commission. In this Form 10-Q, the terms "we," "us," "our," "Company," and "Third Wave" each refer to Third Wave Technologies, Inc. The following discussion of our financial condition and results of our operations should be read in conjunction with our Financial Statements, including the Notes thereto, included elsewhere in this Form 10-Q. This Form 10-Q 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. For a more detailed discussion of such forward-looking statements and the potential risks and uncertainties that may affect their accuracy, see the "Forward-Looking Statements" section of this Form 10-Q. 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 has been recorded in accordance with EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)", Staff Accounting Bulletin No. 100, "Restructuring and Impairment Charges," and Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of 9 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. The remaining accrued restructuring balance is for rent payments on a non-cancelable lease, net of estimated sublease income. 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. Our assumptions on the lease termination payments, operating costs until terminated, and the offsetting sublease receipts may turn out to be incorrect and our actual cost may be materially different from our estimates. LONG-LIVED ASSETS--IMPAIRMENT Equipment, leasehold improvements and amortizable identifiable intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. For assets held and used, if the sum of the 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 SFAS No. 142, "Goodwill and Other Intangible Assets." The annual impairment tests are completed in the quarter ended September 30. DERIVATIVE INSTRUMENTS We sell products in a number of countries throughout the world. During 2005 and 2004, we sold certain products with the resulting accounts receivable denominated in Japanese Yen. Simultaneous with such sales and purchase order commitments, we purchased foreign currency forward contracts to manage the risk associated with collections of receivables denominated in foreign currencies in the normal course of business. These derivative instruments have maturities of less than one year and are intended to offset the effect of transaction gains and losses. There were no contracts outstanding at March 31, 2005. 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 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 March 31, 2005, our inventory reserves were $0.8 million, or 36% of our $2.2 million total gross inventories. RESULTS OF OPERATIONS Three Months Ended March 31, 2005 and 2004 REVENUES. Revenues for the three months ended March 31, 2005 of $7.1 million represented a decrease of $8.2 million, compared to revenues of $15.3 million for the corresponding period of 2004. Product revenues decreased to $6.9 million for the quarter ended March 31, 2005, from $15.2 million in the quarter ended March 31, 2004. The decrease in product sales during the three months ending March 31, 2005 was due to a decline in orders from a major Japanese research institute. We expect our molecular diagnostic revenues to increase throughout 2005, as we continue to launch new products. 10 Significant Customer. We generated $3.1 million, or 44% of our revenues, from sales to a major Japanese research institute for use by several end-users during the three months ended March 31, 2005. We believe this customer will continue to purchase Company products, however, the timing and total of such purchases will be influenced by the Japanese government funding process, which is unpredictable. 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 three months ended March 31, 2005, cost of goods sold decreased to $2.0 million, compared to $4.2 million for the corresponding period of 2004. The decrease in the three month period was primarily due to the decrease in sales volume. Cost of goods sold as a percentage of revenue remained relatively flat for the three months ended March 31, 2005, compared to 2004. We expect gross margin to improve as molecular diagnostic revenues increase. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses consist primarily of salaries and related personnel costs, material costs for assays and product development, fees paid to consultants, depreciation and facilities costs and other expenses related to the design, development, testing and enhancement of our products and acquisition of technologies used or to be used in our products. Research and development costs are expensed as they are incurred. Research and development expenses for the three months ended March 31, 2005, were $2.5 million, compared to $2.7 million for the three months ended March 31, 2004. The research and development expenses remained relatively constant for the comparative periods. 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 three months ended March 31, 2005, were $3.4 million, an increase of $0.8 million, compared to $2.6 million for the corresponding period of 2004. The increase in the three months ended March 31, 2005 was due to an increase in personnel related expenses compared to the same period in 2004. With the expansion of our clinical sales force, we anticipate selling and marketing expenses to continue to be at or above expense levels in 2004. 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 $3.8 million in the three months ended March 31, 2005, from $2.4 million for the corresponding period in 2004. The increase in the three months ended March 31, 2005, was due to an increase in personnel related expenses, legal expenses related to litigation, and consulting fees compared to the corresponding period of 2004. The Company anticipates increased legal expenses as a result of its patent infringement lawsuit against Stratagene. As the Company moves towards consideration of FDA cleared or approved products, there will be increased expenses attributed to those activities. INTEREST INCOME. Interest income for the three months ended March 31, 2005 was $0.3 million, compared to $0.1 million for the corresponding period of 2004. The increase in the three months ended March 31, 2005 was due to higher interest rates compared to 2004. INTEREST EXPENSE. Interest expense for the three months ended March 31, 2005 and 2004 was approximately $0.1 million. OTHER INCOME (EXPENSE): Other expense for the three months ended March 31, 2005 was $0.2 million, compared to other expense of $0.7 million for the three months ended March 31, 2004. The decrease in other expense was primarily due to the adjustment of foreign currency contracts and the related hedged asset to fair value at March 31, 2004. 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 March 31, 2005, we had cash and cash equivalents and short-term investments of $64.5 million. Net cash utilized by operations for the three months ended March 31, 2005 was $2.2 million, compared to net cash provided by operations of $1.7 million in the corresponding period in 2004. The decrease in cash from operations was due to an increase in operating losses. 11 Net cash used in investing activities for the three months ended March 31, 2005 was $10,170, compared to net cash used by investing of $49,290, in the same period in 2004. The cash utilized during both comparative periods resulted from the purchase of equipment. Net cash provided by financing activities was $0.1 million in the three months ended March 31, 2005, compared to $0.4 million in the three months ended March 31, 2004. Cash provided by financing activities for the period ended March 31, 2005 consisted of proceeds from the sale of common stock of $0.1 million compared to $0.4 million in the corresponding period of 2004. There have been no significant changes in our contractual obligations since December 31, 2004. As of December 31, 2004 and March 31, 2005, a valuation allowance equal to 100% of our net deferred tax assets had been recognized since our future realization is not assured. At December 31, 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 and credits to offset future taxable income may be subject to an annual limitation due to the change of ownership provisions of federal tax laws and similar state provisions as a result of 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our exposure to market risk is currently confined to changes in foreign exchange and interest rates. The securities in our investment portfolio are not leveraged and, due to their short-term nature, are subject to minimal interest rate risk. We currently do not hedge interest rate exposure. Due to the short-term maturities of our investments, we do not believe that an increase in market rates would have any negative impact on the realized value of our investment portfolio. To reduce foreign exchange risk, we selectively use financial instruments. Our earnings are affected by fluctuations in the value of the U.S. dollar against foreign currencies as a result of the sales of our products in foreign markets. Forward foreign exchange contracts are used to hedge against the effects of such fluctuations. Our policy prohibits the trading of financial instruments for profit. A discussion of our accounting policies for derivative financial instruments is included in the notes to the annual financial statements. ITEM 4. CONTROLS AND PROCEDURES As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, conducted an evaluation as of the end of the period covered by this report, of the effectiveness of the Company's disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by this report. As required by Rule 13a-15(d) under the Securities Exchange Act of 1934 the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of the company's internal control over financial reporting to determine whether any changes occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. Based on that evaluation, there has been no such change during the quarter covered by this report. 12 FORWARD-LOOKING STATEMENTS This Form 10-Q 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-Q the words "believe," "anticipates," "intends," "plans," "estimates," and similar expressions are forward-looking statements. Such forward-looking statements contained in this Form 10-Q are based on current expectations. Forward-looking statements may address the following subjects: results of operations; customer growth and retention; development of technologies; losses or earnings; operating expenses, including, without limitation, marketing expense and technology and development expense; and revenue growth. We caution investors that there can be no assurance that actual results, outcomes or business conditions will not differ materially from those projected or suggested in such forward-looking statements as a result of various factors, including, among others, our limited operating history, unpredictability of future revenues and operating results, competitive pressures and also the potential risks and uncertainties set forth in the "Overview" section hereof and in the "Overview" and "Risk Factors" sections of our annual report on Form 10-K for the fiscal year ended December 31, 2004 filed with the Securities and Exchange Commission, which factors are specifically incorporated herein by this reference. 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. 13 PART II - OTHER INFORMATION ITEM 1. 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. On September 15, 2004, Third Wave filed suit against Stratagene Corporation in the United States District Court for the Western District of Wisconsin. The complaint alleges patent infringement by Stratagene Corporation of at least several claims in each of the two Third Wave asserted patents concerning the Company's proprietary Invader technology. Discovery is currently underway and trial is scheduled for August 22, 2005. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. (a) None (b) Use of Proceeds. Pursuant to our Registration Statement on Form S-1, as amended, filed with the Securities and Exchange Commission and declared effective February 9, 2001, (Registration No. 333-42694), we commenced our initial public offering of 7,500,000 registered shares of common stock, $0.001 par value, on February 9, 2001, at a price of $11.00 per share (the "Offering"). The Offering was completed on February 14, 2001, and all of the 7,500,000 shares were sold, generating gross proceeds of approximately $82,500,000. The managing underwriters for the Offering were Lehman Brothers Inc., CIBC World Markets, Dain Rauscher Incorporated, Robert W. Baird & Co. Incorporated, and Fidelity Capital Markets. In connection with the Offering, we incurred approximately $5.8 million in underwriting discounts and commissions, and approximately $1.9 million in other related expenses. The net offering proceeds to us, after deducting the foregoing expenses, were approximately $74.8 million. From the time of receipt through March 31, 2005, we have invested the net proceeds from the Offering in investment-grade, interest-bearing securities. We used $4.0 million of the proceeds to satisfy a cancellation fee for the termination of a distribution agreement with Endogen Corporation. We used approximately $14.0 million for general corporate purposes, including working capital and research and development activities. We expect to use the remainder of the net proceeds for general corporate purposes, including working capital and expanding research and development and sales and marketing efforts to accelerate the commercialization of new products and the development of new partnerships. A portion of the net proceeds may also be used to acquire or invest in complementary businesses or products to obtain the right to use complementary technologies. From time to time, in the ordinary course of business, we may evaluate potential acquisitions of these businesses, products, or technologies. We have no current agreements or commitments regarding any such transaction. (c) None ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS: None ITEM 5. OTHER INFORMATION - None. ITEM 6. EXHIBITS. 14 Exhibits. 10.1 Employment Agreement between Maneesh Arora and Third Wave Technologies, Inc. dated May 10, 2005 10.2 Employment Agreement between Lander R. Brown and Third Wave Technologies, Inc. dated May 10, 2005. 10.3 Employment Agreement between Vecheslav A. Elagin and Third Wave Technologies, Inc. dated May 10, 2005. 10.4 Employment Agreement between Jacob Orville and Third Wave Technologies, Inc. dated May 10, 2005 31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer 31.2 Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer 32 Section 1350 Certifications 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THIRD WAVE TECHNOLOGIES, INC. Date: May 10, 2005 /s/ John Puisis ------------------------------------------- John Puisis, CEO Date: May 10, 2005 /s/ James Herrmann ------------------------------------------- James Herrmann, Principal Financial Officer 16 EX-10.1 2 c94998exv10w1.txt EMPLOYMENT AGREEMENT EXHIBIT 10.1 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into as of the 10th day of May 2005, by and between Maneesh Arora ("Employee") and THIRD WAVE TECHNOLOGIES, INC., a Delaware corporation (the "Company"). WHEREAS, the Company desires to employ Employee as its Senior Vice President, Commercial Operations 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 Senior Vice President, Commercial Operations 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 Senior Vice President, Commercial Operations. 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 $290,000, 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 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 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 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. 2 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; 3 (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. 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: 4 (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. 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) 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 5 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 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 6 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 Section 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 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. 7 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. 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 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, 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. 9 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. The parties hereto have executed this Employment Agreement as of the date first written above. /s/ Maneesh Arora -------------------------------------------- Maneesh Arora ("Employee") Notice Address: 6408 Bobby Jones Lane Woodridge, IL 60517 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 10 EX-10.2 3 c94998exv10w2.txt EMPLOYMENT AGREEMENT EXHIBIT 10.2 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into as of the 10th day of May 2005, by and between Lander R. Brown ("Employee") and THIRD WAVE TECHNOLOGIES, INC., a Delaware corporation (the "Company"). WHEREAS, the Company desires to employ Employee as its Vice President, Human Resources 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, Human Resources 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, Human Resources. 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 $224,000, 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. 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. 2 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; 3 (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: 4 (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. 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) 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 5 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 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 6 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 Section 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 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. 7 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. 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 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, 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. 9 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. The parties hereto have executed this Employment Agreement as of the date first written above. /s/ Lander R. Brown ------------------------------------------ Lander R. Brown ("Employee") Notice Address: 930 Michigan Evanston, IL 60202 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 10 EX-10.3 4 c94998exv10w3.txt EMPLOYMENT AGREEMENT EXHIBIT 10.3 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into as of the 10th day of May 2005, by and between Vecheslav A. Elagin ("Employee") and THIRD WAVE TECHNOLOGIES, INC., a Delaware corporation (the "Company"). WHEREAS, the Company desires to employ Employee as its Vice President, Research & Development 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, Research & Development 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, Research & Development. 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 $200,000, 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 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 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 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. 2 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; 3 (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. 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: 4 (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. 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) 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 5 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 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 6 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 Section 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 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. 7 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. 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 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, 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. 9 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. The parties hereto have executed this Employment Agreement as of the date first written above. /s/ Vecheslav A. Elagin ---------------------------------------- Vecheslav A. Elagin ("Employee") Notice Address: 1208 Wenzel Way Waunakee, WI 53597 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 10 EX-10.4 5 c94998exv10w4.txt EMPLOYMENT AGREEMENT EXHIBIT 10.4 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into as of the 10th day of May 2005, by and between Jacob Orville ("Employee") and THIRD WAVE TECHNOLOGIES, INC., a Delaware corporation (the "Company"). WHEREAS, the Company desires to employ Employee as its Vice President, Global Sales 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, Global Sales 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, Global Sales. 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 $198,000, 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 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 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 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. 2 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; 3 (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: 4 (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. 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) 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 5 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 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 6 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 Section 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 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. 7 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. 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 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, 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. 9 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. The parties hereto have executed this Employment Agreement as of the date first written above. /s/ Jacob Orville ----------------------------------------- Jacob Orville ("Employee") Notice Address: 4633 Tonyawatha Trail Monona, WI 53716 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 10 EX-31.1 6 c94998exv31w1.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER EXHIBIT 31.1 CERTIFICATION I, John Puisis, CEO of Third Wave Technologies, Inc. (the "registrant"), certify that: 1. I have reviewed this Quarterly Report on Form 10-Q (the "Report") of the registrant; 2. Based on my knowledge, this 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 the 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 Rule 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 the Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by the Report, based on such evaluation; and (d) disclosed in the 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: May 10, 2005 /s/ John Puisis ------------------------ John Puisis, CEO 17 EX-31.2 7 c94998exv31w2.txt CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER EXHIBIT 31.2 CERTIFICATION I, James Herrmann, Principal Financial Officer of Third Wave Technologies, Inc. (the "registrant"), certify that: 1. I have reviewed this Quarterly Report on Form 10-Q (the "Report") of the registrant; 2. Based on my knowledge, this 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 the Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by the Report, based on such evaluation; and (d) disclosed in the 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: May 10, 2005 /s/ James Herrmann ------------------------------------------- James Herrmann, Principal Financial Officer 18 EX-32 8 c94998exv32.txt SECTION 1350 CERTIFICATIONS EXHIBIT 32 CERTIFICATION PURSUANT TO 18 U.S.C SECTION 1350, AS ENACTED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with Third Wave Technologies, Inc. (the "Company) Form 10-Q for the period ended March 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), John Puisis, Chief Executive Officer of the Company, and James Herrmann, Principal Financial Officer of 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 Quarterly Report on Form 10-Q (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 this Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ John Puisis ------------------------------------------- John Puisis Chief Executive Officer May 10, 2005 /s/ James Herrmann ------------------------------------------- James Herrmann Principal Financial Officer May 10, 2005 19 -----END PRIVACY-ENHANCED MESSAGE-----