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Filed Pursuant to Rule 424(b)(3)
File No. 333-91155
VISIBLE GENETICS INC.
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED FEBRUARY 14, 2000
Up to 614,204 of the common shares indicated on the Selling Shareholders table
in the Prospectus (page 36) as being sold by Warburg, Pincus Partners LLC may be
sold by Warburg, Pincus & Co. or its direct or indirect transferees, including
each of the Managing Directors of E.M.Warburg, Pincus & Co., LLC. These shares
do not represent additional shares being registered for sale.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE
NUMBER OF COMMON COMMON OF COMMON
SHARES OWNED SHARES OFFERED SHARES SHARES
ADDITIONAL OTHER WARBURG PINCUS FUNDS SELLING BEFORE PURSUANT TO THIS OWNED AFTER OWNED AFTER
SHAREHOLDERS OFFERING (1) PROSPECTUS (2) OFFERING (3) OFFERING (4)
- --------------------------------------------- ------------- ---------------- ------------- -------------
<S> <C> <C> <C> <C>
Warburg, Pincus & Co. (5)(6)............... 614,204 614,204 0 0
</TABLE>
(1) Includes shares issuable upon exercise of warrants and conversion of Series
A preferred shares.
(2) Assumes the exercise of all warrants issued and conversion of all Series A
preferred shares (including accrued interest at 9% per year) outstanding at
exercise prices in effect on January 15, 2000.
(3) Assuming all of the common shares offered by each selling shareholder are
sold in the offering.
(4) Common shares issuable upon exercise of warrants and conversion of Series A
preferred shares are deemed outstanding for computing the percentage
ownership of the person holding the warrants and Series A preferred shares
but are not deemed outstanding for computing the percentage ownership of any
other person. This information is based on 11,623,615 common shares
outstanding on December 31, 1999.
(5) Warburg, Pincus & Co. ("WP") is the sole general partner of each of the
Warburg, Pincus Funds. Each of the Warburg, Pincus Funds is managed by E.M.
Warburg, Pincus & Co., LLC ("EMW LLC"). Lionel I. Pincus is the managing
partner of WP and the managing member of EMW LLC, and may be deemed to
control both entities. Jonathan S. Leff, a director of our company, is a
general partner of WP and a managing director and member of EMW LLC. Mr.
Leff may be deemed to have an indirect pecuniary interest (within the
meaning of Rule 16a-1 under the Securities Exchange Act of 1934, as amended)
in an indeterminate portion of the shares beneficially owned by the selling
shareholders. Mr. Leff disclaims beneficial ownership of all such shares.
(6) Warburg, Pincus Equity Partners, L.P. , Warburg, Pincus Ventures
International , L.P., Warburg, Pincus Netherlands Equity Partners I, C.V.,
Warburg, Pincus Netherlands Equity Partners II, C.V. and Warburg, Pincus
Netherlands Equity Partners III, C.V., which we refer to collectively as the
Warburg Pincus Funds, currently own all of the 3,950,000 common shares being
offered by the Warburg Pincus Funds pursuant to this prospectus. From time
to time, the Warburg Pincus Funds may decide to distribute a portion or all
of the common shares, which they receive upon conversion of their Series A
preferred shares and warrants, to the selling shareholders identified in the
table as "Other Warburg Pincus Funds Selling Shareholders" in connection
with a partnership distribution. The number of common shares shown opposite
the name of each Other Warburg Pincus Funds Selling Shareholder is the
maximum number of common shares that might be distributed to it based on its
ownership interest the Warburg Pincus Funds and the maximum number that may
be offered by it under this prospectus (subject to additional common shares
resulting from accrual of dividends on the Series A preferred shares after
January 15, 2000). In no event will the maximum number of common shares
distributed to or offered by the Other Warburg Pincus Funds Selling
Shareholders as a group, pursuant to this prospectus, exceed 3,950,000
(subject to additional common shares resulting from accrual of dividends on
the Series A preferred shares after January 15, 2000).
Dated February 29, 2000
<PAGE>
SELLING SHAREHOLDERS'
PROSPECTUS
- ---------------------
5,283,758 SHARES
VISIBLE GENETICS INC.
COMMON SHARES
------------------
This is an offering of common shares by certain holders of convertible
preferred shares and warrants of Visible Genetics Inc. The common shares to be
offered by the warrantholders and shareholders through this prospectus will be
issued to the warrantholders, and may be sold by them, upon exercise of their
warrants, and will be issued to the holders of preferred shares, and may be sold
by them, upon conversion of their preferred shares.
The selling shareholders will receive all of the proceeds from the sale of
the common shares, less any commissions or discounts paid to brokers or other
agents. We will not receive any of the proceeds from the sale of the common
shares.
The selling shareholders may offer and sell the common shares on the Nasdaq
National Market at prevailing market prices or in privately negotiated
transactions at prices other than the market price. On February 11, 2000, the
closing sale price for our common shares on the Nasdaq National Market was
$57.00.
------------------------
INVESTING IN OUR SHARES INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 4.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
FEBRUARY 14, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............. 2
PROSPECTUS SUMMARY.......................................... 3
RISK FACTORS................................................ 4
FORWARD-LOOKING STATEMENTS.................................. 18
USE OF PROCEEDS............................................. 19
DIVIDEND POLICY............................................. 19
SELECTED CONSOLIDATED FINANCIAL DATA........................ 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 21
INFORMATION ABOUT OUR COMPANY............................... 29
SELLING SHAREHOLDERS........................................ 35
PLAN OF DISTRIBUTION........................................ 41
DESCRIPTION OF CAPITAL SHARES............................... 42
LEGAL MATTERS............................................... 45
EXPERTS..................................................... 45
WHERE YOU CAN FIND MORE INFORMATION......................... 45
</TABLE>
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which we have filed with the Securities and
Exchange Commission, are incorporated by reference in this prospectus:
1) Our Annual Report on Form 20-F for the year ended December 31, 1998, as
amended by Form 20-F/A-1, which we refer to in this prospectus as our
Annual Report on Form 20-F.
2) Our Report on Form 6-K Filing No. 3 for the Month of July, 1999, dated
July 16, 1999.
3) Our Report on Form 6-K Filing No. 1 for the Month of August, 1999, dated
August 6, 1999.
4) Our Report on Form 6-K Filing No. 1 for the Month of November, 1999,
dated November 10, 1999.
5) Our Report on Form 6-K/A-1 Filing No. 2 for the Month of December, 1999,
dated December 3, 1999.
6) Our Report on Form 6-K Filing No. 3 for the Month of December, 1999,
dated December 16, 1999.
In addition, all documents which we file with the Securities and Exchange
Commission pursuant to Section 13, 14 or 15(d) of the Securities Exchange Act of
1934, as amended after the date of the this prospectus and before termination of
the offering, including all annual reports on Form 20-F or Form 10-K, and all
filings on Forms 10-Q and 8-K, will be deemed to be incorporated by reference in
this prospectus and to be a part of this prospectus from the date those
documents are filed. We may also incorporate in this prospectus any Form 6-K
which we file with the Securities and Exchange Commission by identifying in such
form that it is being incorporated by reference into this prospectus. Any
statement contained in a document which is incorporated, or deemed to be
incorporated, by reference into this prospectus, shall be considered modified or
superseded for purposes of this prospectus to the extent that a statement
contained in this prospectus or in any other subsequently filed document which
also is, or is deemed to be, incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
prospectus.
You may request a copy of any document incorporated by reference in this
prospectus at no cost. To receive a copy, write us at:
Visible Genetics Inc.
700 Bay Street
Suite 1000
Toronto, Ontario, Canada M5G 1Z6
Attention: Mr. Kingsley Thomas
Or you can call us at (416) 813-3240. See "Where You Can Find More Information."
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PROSPECTUS SUMMARY
THIS PROSPECTUS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE
IN THIS PROSPECTUS. YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE
DETAILED INFORMATION REGARDING OUR COMPANY AND THE SHARES BEING SOLD IN THIS
OFFERING, WHICH INFORMATION APPEARS ELSEWHERE IN THIS PROSPECTUS AND IN SELECTED
PORTIONS OF OUR ANNUAL REPORT ON FORM 20-F AND OTHER DOCUMENTS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION THAT WE HAVE INCORPORATED BY REFERENCE INTO
THIS PROSPECTUS. ALL FINANCIAL INFORMATION PROVIDED IN THIS PROSPECTUS IS IN
U.S. DOLLARS.
OUR BUSINESS
We develop, manufacture and sell integrated DNA sequencing systems that
analyze genetic information to improve the treatment of selected diseases. Our
proprietary DNA sequencing system, called the OpenGene System, is designed to
identify mutations, or changes, in the DNA of genes associated with some
infectious diseases, cancers and other medical conditions. We believe that our
DNA sequencing systems will enable clinicians to monitor and customize the
treatment of diseases, initially for Human Immunodeficiency Virus, or HIV, and
later for other selected diseases.
DNA sequencing is generally considered the most thorough and accurate method
for genotyping diseases, such as cancer and certain viruses, including HIV,
which have high rates of mutation or numerous strains. Genotyping is the act of
selecting and reading certain components of the sequence of a specific strand of
DNA in order to understand how mutations in the DNA may influence the onset and
treatment of some diseases and medical conditions. Most existing DNA sequencers
have been developed to meet the needs of the research market and typically do
not address the needs of the clinical diagnostic market. We have designed our
OpenGene System to meet the needs of the clinical diagnostic market.
Our OpenGene System consists of automated DNA sequencers, disposable gel
cassettes, related equipment and software and disease-specific GeneKits. Our
GeneKits contain the necessary chemicals, reagents, third-party licenses and
other consumables and materials required for sequencing specific
disease-associated genes. We have developed GeneKits for HIV, HLA (used for
tissue typing, for example, in organ transplants) and the p53 gene (implicated
in many cancers). We are developing GeneKits for hepatitis B, hepatitis C and
tuberculosis. We began selling our OpenGene System to the research and clinical
research markets in the third quarter of 1996 and began selling GeneKits in the
third quarter of 1997. More than 600 of our DNA sequencers are installed in over
150 laboratories.
The first clinical diagnostic application we are targeting is HIV.We have
developed our HIV GeneKit to enable clinicians to genotype the major HIV species
infecting patients in order to improve the management of patient treatment. HIV
is a highly variable virus with high rates of mutations, which may lead to drug
resistance. One of the central challenges in maintaining HIV patients on
long-term drug therapy is to adjust each patient's medication as drug-resistant
strains of the virus emerge. Two initial clinical trials, including one which we
conducted, have shown that patients whose drug therapy is managed using HIV
genotyping had greater reductions in viral load than HIV patients who were not
genotyped.
We plan to apply to the U.S. Food and Drug Administration, or FDA, for
approval to sell our HIV OpenGene System to the clinical diagnostic market. In
December 1998, the FDA allowed us to initiate human clinical trials of our HIV
OpenGene System under an Investigational Device Exemption application, or IDE.
We intend to use the results of our clinical trials, as well as the results of a
clinical trial conducted by others, in support of our proposed FDA application.
If our HIV OpenGene System is approved by the FDA, we plan to focus our
marketing efforts on selling the HIV OpenGene System to the clinical diagnostic
market.
Our principal executive offices are located at 700 Bay Street, Suite 1000,
Toronto, Ontario, Canada M5G 1Z6. Our telephone number is (416) 813-3240. Our
Web site address is WWW.VISGEN.COM. INFORMATION CONTAINED ON OUR WEBSITE DOES
NOT CONSTITUTE A PART OF THIS PROSPECTUS.
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RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS AND UNCERTAINTIES DESCRIBED BELOW
BEFORE MAKING AN INVESTMENT DECISION. IF ANY OF THE FOLLOWING RISKS ACTUALLY
OCCUR, OUR BUSINESS, FINANCIAL CONDITION OR OPERATING RESULTS COULD BE
MATERIALLY HARMED. THIS COULD CAUSE THE TRADING PRICE OF OUR COMMON SHARES TO
DECLINE, AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT.
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE KNOWN AND
UNKNOWN RISKS AND UNCERTAINTIES. THESE STATEMENTS RELATE TO OUR PLANS,
OBJECTIVES, EXPECTATIONS AND INTENTIONS. OUR ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE DISCUSSED IN THESE STATEMENTS. FACTORS THAT COULD
CONTRIBUTE TO THESE DIFFERENCES INCLUDE THOSE DISCUSSED BELOW AND ELSEWHERE IN
THIS PROSPECTUS.
OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT TO EVALUATE OUR FUTURE
PROSPECTS AND OUR PROSPECTS MUST BE CONSIDERED IN LIGHT OF THE DIFFICULTIES
FREQUENTLY ENCOUNTERED BY COMPANIES IN THE EARLY STAGES OF COMMERCIAL
MANUFACTURING AND MARKETING.
Although we began operations in 1993, we are only in the early stages of
commercially manufacturing and marketing our products. In late 1996, we began
manufacturing and selling to the research and clinical research markets, the
initial versions of our automated DNA sequencers and related products and
certain GeneKits. Our limited operating history makes it difficult to evaluate
our business and our prospects for future profitability. Our prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in the early stages of commercial manufacturing and
marketing. Sales for our 1998 fiscal year were $10.9 million and for the nine
months ended September 30, 1999 were $8.7 million. In the future, sales may not
increase or they may decrease.
WE HAVE A HISTORY OF LOSSES, WE ANTICIPATE ADDITIONAL LOSSES AND WE MAY NEVER
BECOME PROFITABLE.
We incurred a net loss of $14.9 million in the year ended December 31, 1998
and $18.5 million during the nine months ended September 30, 1999. As of
September 30, 1999, our accumulated deficit was $53.5 million. Our losses have
resulted principally from expenses incurred in research and development of our
technology and products, and from expenses that we have incurred while building
our business infrastructure. We expect to continue to incur significant
operating losses in the future as we continue our research and development
efforts and clinical trials and expand our sales and marketing force and
business infrastructure, in an effort to achieve greater sales and expand our
business. It is uncertain when, if ever, we will become profitable. Our ability
to become profitable will depend on many factors including, among others:
- whether we obtain regulatory approval to sell our HIV OpenGene System and,
in the future, OpenGene Systems for other diseases, to the clinical
diagnostic market in the United States and abroad;
- the decision of third party payors to reimburse clinicians and patients
for use of our HIV GeneKit and, in the future, other products;
- our ability to successfully market and sell our HIV OpenGene System and,
in the future, OpenGene Systems for other diseases, to the clinical
diagnostic market;
- our ability to increase sales of our products to the research and clinical
research markets;
- our ability to effectively manage the growth of our business; and
- our ability to continue to develop advanced versions of our products and
technologies and new products and technologies in a timely manner.
4
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OUR OPERATING RESULTS MAY FLUCTUATE FROM QUARTER TO QUARTER DUE TO MANY FACTORS
AND, THEREFORE, YOU SHOULD NOT RELY ON PERIOD TO PERIOD COMPARISONS OF OUR
OPERATING RESULTS AS AN INDICATION OF FUTURE PERFORMANCE.
Our operating results have varied on a quarterly basis in the past and may
fluctuate significantly in the future as a result of a variety of factors, many
of which are outside our control. Factors that may affect our quarterly
operating results include, among others:
- unanticipated costs or delays in carrying out our clinical trials;
- the amount and timing of operating costs and capital expenditures relating
to research and development, and the expansion of our business, operations
and infrastructure;
- our decision to increase or decrease sales of bundled equipment, GeneKits
and other consumables at reduced prices;
- our decision to reduce prices of our products in response to price
reductions by competitors; and
- general economic conditions, as well as economic conditions specific to
the biotechnology industry.
We believe that period-to-period comparisons of our operating results may
not be meaningful and you should not rely on any such comparisons as an
indication of our future performance. In addition, it is likely that in one or
more future quarters our operating results will fall below the expectations of
securities analysts and investors. In such event, the market price of our common
shares is likely to fall. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview."
WE MAY NOT RECEIVE APPROVAL OF THE FDA OR FOREIGN REGULATORY AUTHORITIES FOR OUR
HIV OPENGENE SYSTEM AND, IN THE FUTURE, OTHER HIV PRODUCTS, AND, THEREFORE, WE
MAY NOT BE ABLE TO SELL OUR HIV PRODUCTS TO THE CLINICAL DIAGNOSTIC MARKET IN
THE UNITED STATES OR ABROAD.
We intend to seek FDA approval to sell our HIV OpenGene System for clinical
diagnostic purposes in the United States. In the future, we may seek FDA
approval to sell other HIV products for clinical diagnostic purposes in the
United States.
In order to obtain FDA approval for our HIV OpenGene System we must submit
an application supported by extensive human test data demonstrating the utility,
reliability and performance of our HIV GeneKit and OpenGene System. The FDA must
also confirm that we maintain good laboratory, clinical and manufacturing
practices. The FDA approval process is lengthy and expensive. You should be
aware of the following possibilities:
- we may never obtain approval from the FDA to sell our HIV products to the
clinical diagnostic market;
- it may be more expensive and time consuming than we anticipate to develop
the test data needed for the FDA;
- the FDA may disagree with us that the data are adequate, and we may
therefore have to do additional testing;
- the testing may show that our product does not work at all or is not safe
enough, and therefore cannot be authorized by the FDA, or the testing may
show that the product does not work as well as it needs to for successful
marketing, even if marketing is authorized by the FDA;
- the testing may be too costly to carry out, either because we lack
adequate funds or because the market potential for the product does not
justify the costs;
- we may choose or be required to discontinue our clinical trials for a
number of reasons, including unanticipated interim trial reports, changes
in regulations or the adoption of new regulations,
5
<PAGE>
unexpected technological developments by our competitors or problems or
delays with patient enrollment in our trials;
- there may be significant delays in the FDA review process;
- the FDA may approve products with conditions that could limit the market
for the product or make it more difficult or expensive to sell than we
anticipate; and
- the FDA can revoke marketing authorization for our products for a variety
of reasons, such as our failure to comply with the FDA's device
requirements or poor product performance in terms of safety and
effectiveness.
If we fail to receive FDA approval, if the FDA approval is significantly
delayed or if the FDA imposes conditions that make it difficult to sell or
market our products, we will be unable to carry out our business plan to sell
our HIV OpenGene System for clinical diagnostic use in the United States and our
business, financial condition and results of operations will be materially
harmed.
We also may be required to obtain approval from some foreign regulatory
authorities to sell our HIV products to the clinical diagnostic market outside
of the United States. In some cases, we will face an approval process similar to
that required by the FDA. We cannot be certain that we will obtain the necessary
approvals to sell our HIV products to the clinical diagnostic market in these
countries. In some cases, the failure to obtain approval could materially harm
our business, financial condition and results of operations.
See "Information About Our Company--Regulation of our Products by the FDA
and Other Government Agencies" and "Item 1. Description of Business--Regulation
by the FDA and Other Government Agencies" in our Annual Report on Form 20-F.
WE MAY NOT RECEIVE REGULATORY APPROVAL FOR OUR OTHER PRODUCTS AND THEREFORE MAY
NOT BE ABLE TO SELL THESE PRODUCTS FOR CLINICAL DIAGNOSTIC PURPOSES IN THE
UNITED STATES OR IN OTHER COUNTRIES.
In addition to our HIV OpenGene System, we have also developed and are
continuing to develop GeneKits for other clinical diagnostic applications. In
order to sell these GeneKits to the clinical diagnostic market, we may be
required to obtain the approval of the FDA and of foreign regulatory authorities
through approval procedures that are the same or similar to those required for
our HIV OpenGene System. Our failure to obtain necessary approvals to sell our
products for clinical diagnostic use in one or more significant markets could
cause material harm to our business, financial condition and results of
operations.
EACH TIME WE MAKE ALTERATIONS TO ANY FDA APPROVED PRODUCTS, WE MAY NEED TO SEEK
ADDITIONAL FDA APPROVAL, WHICH WILL LENGTHEN THE TIME AND INCREASE THE COST OF
BRINGING UPGRADED OR NEW PRODUCTS TO MARKET.
We may need to seek additional FDA approval if we make changes to a product
specifically approved by the FDA. Our HIV GeneKit, as submitted to the FDA, will
contain specific reagents, dyes, enzymes, chemicals, software and other
materials. If this kit is approved through the premarket approval application,
or PMA, process, the FDA would require that we obtain additional approval for
any change to the kit's components that could alter the performance of the kit,
such as changing certain enzymes or reagents. If we obtain approval through the
510(k) premarket notification, or 510(k) process, we will be required to obtain
prior clearance from the FDA for those product changes that could significantly
affect safety or effectiveness. To obtain additional approval, we may have to
conduct additional human clinical trials to demonstrate that the altered GeneKit
will produce at least the same results as the approved GeneKit or will be as
safe and effective as the approved product. Obtaining additional FDA approval is
likely to be time consuming and costly and, as a result, we may experience
delays in bringing these upgraded or new
6
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products to market. See "Information about our Company-Regulation of our
Products by the FDA and other Government Agencies."
OUR BUSINESS IS, AND IN THE FUTURE MAY BECOME, SUBJECT TO ADDITIONAL REGULATIONS
AND IF WE ARE UNABLE TO COMPLY WITH THEM OUR BUSINESS MAY BE MATERIALLY HARMED.
Our reference laboratory in Norcross, Georgia, is subject to the most
stringent level of regulation under the Clinical Laboratory Improvement
Amendments of 1988, known as CLIA. Under CLIA, laboratories must meet various
requirements, including requirements relating to the validation of tests,
training of personnel, and quality assurance procedures. The laboratory must
also be certified by a government agency. Our Norcross laboratory is certified
under CLIA and licensed by the state of Georgia. Our failure to comply with
state or CLIA requirements can result in various penalties, including loss of
certification. The imposition of such penalties could have an adverse impact on
us. In addition, some states regulate out-of-state laboratories. The failure to
comply with these state requirements could also adversely affect us.
We are or may become subject to various other federal, state, provincial and
local laws, regulations and recommendations. If we fail to comply with these
regulations we could be fined, we may not be able to continue to operate certain
of our facilities or certain portions of our business and/or we may suffer other
consequences that could materially harm our business.
We are unable to predict the extent of future government regulations or
industry standards. You should assume that in the future there may be more
government regulations or standards or obtaining permits, delays or fines
resulting from loss of permits or failure to comply with regulations.
See "Information About Our Company--Regulation of Our Products by the FDA
and Other Government Agencies" and "Item 1. Description of Business--Regulation
by the FDA and Other Government Agencies" in our Annual Report on Form 20-F.
THE MARKET FOR GENOTYPING PRODUCTS IS NEW AND GENOTYPING MAY NOT BECOME AN
ACCEPTED METHOD OF MANAGING DRUG TREATMENT.
An important part of our business strategy is our plan to sell our products
to the clinical diagnostic market . Our ability to do so will depend on the
widespread acceptance and use by doctors and clinicians of genotyping to manage
the treatment of certain diseases. The use of genotyping by doctors and
clinicians for this purpose is new. Existing DNA sequencing systems have been
designed primarily for research purposes and we are not aware of any DNA
sequencing products that have been approved by the FDA for clinical diagnostic
purposes. We cannot be certain that doctors and clinicians will want to use DNA
sequencing systems designed for these purposes. If genotyping is not accepted by
this market, we will not be able to carry out our business plan and our
business, financial condition and results of operations will be materially
harmed.
IF GENOTYPING IS ACCEPTED AS A METHOD TO MANAGE DRUG TREATMENT, WE CANNOT BE
CERTAIN THAT OUR PRODUCTS WILL BE ACCEPTED IN THE CLINICAL DIAGNOSTIC MARKET.
If genotyping becomes widely accepted in the clinical diagnostic market, we
cannot predict the extent to which doctors and clinicians may be willing to
utilize our OpenGene System to manage drug treatment of selected diseases or
other medical conditions. Doctors and clinicians may prefer competing
technologies and products that can be used for the same purposes as our
products. If our products are not accepted by the clinical diagnostic market,
our business, financial condition and results of operations will be materially
harmed.
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IF INSURANCE COMPANIES AND OTHER THIRD-PARTY PAYORS DO NOT REIMBURSE DOCTORS AND
PATIENTS FOR OUR PRODUCTS, OUR ABILITY TO SELL OUR PRODUCTS TO THE CLINICAL
DIAGNOSTIC MARKET WILL BE IMPAIRED.
Our ability to successfully sell our HIV GeneKit and other GeneKits to the
clinical diagnostic market will depend partly on the willingness of insurance
companies and other third-party payors to reimburse doctors and patients for use
of our products. Physicians' recommendations to use genotyping, as well as
decisions by patients to pursue genotyping, are likely to be influenced by the
availability of reimbursement for genotyping by insurance companies or other
third party-payors. Government and private third party payors are increasingly
attempting to contain health care costs by limiting both the extent of coverage
and the reimbursement rate for testing and treatment products and services. In
particular, services which are determined to be investigational in nature or
which are not considered "reasonable and necessary" for the diagnosis or
treatment may be denied reimbursement coverage. If adequate reimbursement
coverage is not available from insurers or other third-party payors, we expect
that few, if any, patients would be willing to pay for genotyping. In this case,
our anticipated revenues would be substantially reduced, our ability to achieve
profitability would be significantly impaired and our business, financial
condition and results of operations would be materially harmed.
WE DO NOT HAVE MARKETING EXPERIENCE IN THE CLINICAL DIAGNOSTIC MARKET, WE CANNOT
BE CERTAIN WE WILL SUCCESSFULLY DEVELOP THE MARKETING CAPABILITIES REQUIRED TO
SELL OUR PRODUCTS TO THIS MARKET AND IN SOME MARKETS WE WILL BE DEPENDENT ON THE
EFFORTS OF DISTRIBUTORS TO SELL OUR PRODUCTS.
We have no experience marketing products to the clinical diagnostic market.
If the FDA approves the sale of our HIV OpenGene System and, in the future,
other products, to the clinical diagnostic market in the United States, we
intend to expand our internal sales force to sell products to these markets in
North America and selected other countries. It will take significant time, money
and resources to expand our sales force. We cannot be certain that we will be
able to develop the marketing capabilities necessary to successfully market and
sell our products to the clinical diagnostic market.
In selected geographic markets outside North America and certain European
countries, beginning in 1999, we entered into distribution and marketing
arrangements with leading distributors to sell our products to the research and
clinical diagnostic markets. These agreements expire at various times from
April 2000 through April 2003, and in each case, are subject to renewal. Certain
of the agreements may also be terminated by either party upon specified notice
periods and may require us to make termination payments under certain
circumstances. Our ability to successfully sell products to the clinical
diagnostic market in countries in which we rely on distribution agreements will
depend to a great extent on the efforts of the distributors. Failure to
successfully market our products will likely impede our ability to generate
significant revenues and become profitable.
A SIGNIFICANT PORTION OF OUR SALES DURING 1998 AND 1999 HAVE BEEN TO ONE
DISTRIBUTOR AND WE MAY CONTINUE IN THE FUTURE TO RELY HEAVILY ON THAT
DISTRIBUTOR FOR SALES TO THE RESEARCH AND CLINICAL RESEARCH MARKETS.
In February 1996, we granted Amersham International plc an exclusive
worldwide license to use and sell the Seq4x4-TM- DNA sequencer and related
products used and sold with the sequencer, which is designed for the research
market. During 1998, approximately 30% of our revenues resulted from sales of
sequencers and other products to Amersham. During the nine months ended
September 30, 1999, approximately 16% of our sales resulted from sales to
Amersham and sales to Amersham continued to be significant for the remainder of
1999. Our agreement with Amersham expires in February 2000 and is renewable each
year unless either party notifies the other at least six months in advance of
renewal that it wishes to terminate the agreement. We cannot be certain that
Amersham will be successful in selling these products. In addition, we cannot be
certain that the agreement will not be terminated before expiration or that,
upon expiration, it will be renewed on favorable terms or at all.
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IF WE ARE UNABLE TO CONTINUE DEVELOPING ADVANCED TECHNOLOGY, ADVANCED VERSIONS
OF OUR EXISTING PRODUCTS AND NEW PRODUCTS IN A TIMELY AND COST-EFFECTIVE MANNER,
OUR ABILITY TO GENERATE REVENUE AND BECOME AND REMAIN PROFITABLE WILL BE
IMPAIRED.
We believe that if we are to generate additional revenue and become and
remain profitable, we must develop advanced technology, advanced versions of our
current products and new products. New technology and products must be developed
and introduced to the market in a timely and cost-effective manner to meet both
changing customer needs and technological developments. We cannot assure you
that we will be able to successfully or timely develop any technology or
products, or that any new technology or products will achieve acceptance in the
market. If we are unable to successfully develop technology or products in the
future or if those products are not accepted in the market, our ability to
generate significant revenues will be significantly impaired, we could
experience additional significant losses and our business, financial condition
and results of operations would be materially harmed.
MANUFACTURING PROBLEMS COULD HAMPER OR DELAY OUR ABILITY TO INTRODUCE OUR
PRODUCTS TO THE MARKETPLACE.
We have limited experience in large-scale assembly and manufacturing of our
products. Since we started assembling and manufacturing operations in 1996, we
have experienced delays, quality control problems and capacity constraints from
time to time. As production increases and we begin manufacturing and assembling
new products, additional problems may arise. These may include technological,
engineering, quality control and other production difficulties. If we experience
these problems, we could be delayed in filling orders, shipping existing
products and introducing new products to the marketplace. These problems could
also adversely affect customer satisfaction and the market acceptance of our
products.
IF WE ARE UNABLE TO SUCCESSFULLY PROTECT OUR INTELLECTUAL PROPERTY, OUR
COMPETITIVE POSITION WILL BE HARMED.
Our success will partly depend on our ability to obtain patents, and
licenses from third parties and protect our trade secrets. We own or jointly own
27 U.S. patents. We have an additional 34 U.S. patent applications pending, of
which nine have been allowed. We also have filed foreign patent applications
presently pending as PCT applications designating intergovernmental agencies and
multiple countries including the European Patent Office, Canada and Japan. We
cannot assure you that our patent applications will result in patents being
issued in the United States or foreign countries. In addition, the U.S. Patent
and Trademark Office may reverse its decision or delay the issuance of patents
which have been allowed. We also cannot assure you that any technologies or
products that we may develop in the future will be patentable. In addition,
competitors may develop products similar to ours which do not conflict with our
patents. Others may challenge our patents and, as a result, our patents could be
narrowed or invalidated.
To help protect our proprietary rights in unpatented trade secrets, we
require our employees, consultants and advisors to sign confidentiality
agreements. However, we cannot guarantee that these agreements will provide us
with adequate protection if confidential information is used or disclosed
improperly. In addition, in some situations, these agreements may conflict with,
or be limited by, the rights of third parties with whom our employees,
consultants or advisors have prior employment or consulting relationships.
Further, others may independently develop similar proprietary information and
techniques, or otherwise gain access to our trade secrets.
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OTHERS COULD CLAIM THAT WE INFRINGE ON THEIR INTELLECTUAL PROPERTY RIGHTS, WHICH
MAY RESULT IN COSTLY AND TIME CONSUMING LITIGATION.
Our success will also depend partly on our ability to operate without
infringing upon the proprietary rights of others, as well as our ability to
prevent others from infringing on our proprietary rights. We may be required at
times to take legal action in order to protect our proprietary rights. Also,
despite our best efforts, we may be sued for infringing on the patent rights of
others. Patent litigation is costly, and, even if we prevail, the cost of such
litigation could harm us. If we do not prevail, in addition to any damages we
might have to pay, we could be required to stop the infringing activity or
obtain a license. We cannot be certain that any required license would be
available to us on acceptable terms, or at all. If we fail to obtain a license,
or if the terms of a license are burdensome to us, our business, financial
condition and results of operations could be materially harmed.
Perkin-Elmer Corporation, PE Biosystems Group filed a lawsuit against our
company in the United States District Court for the Northern District of
California claiming that our DNA sequencing equipment and products infringe
patents licensed to Perkin-Elmer by the California Institute of Technology. The
suit requests among other remedies that the court enjoin us from continuing to
infringe these patents and an unspecified amount of damages. As of the date of
this prospectus, Perkin-Elmer has not served us with the compliant. If
Perkin-Elmer is successful in this suit, we may be unable to manufacture our DNA
sequencing equipment and products without a license from Perkin-Elmer. There can
be no assurance that we would be able to obtain a license for these patents on
terms acceptable to us, or at all. If we fail to obtain a license, or if the
terms of a license are burdensome to us, our business, financial condition and
results of operations could be materially harmed. In addition, monetary damages
awarded to Perkin-Elmer could be substantial, and if so, our business, financial
condition and results of operations could be materially harmed. See "Information
About Our Company-Litigation."
CERTAIN SUPPLIES AND PARTS THAT WE NEED ARE AVAILABLE ONLY FROM LIMITED SOURCES
AND OUR BUSINESS WOULD SUFFER IF WE CANNOT OBTAIN THESE SPECIALIZED ITEMS USED
IN OUR GENEKITS.
We use dyes, reagents and other chemicals supplied by third parties in our
GeneKits. We believe that some dyes supplied by Amersham under our exclusive
worldwide license to use and sell Amersham dyes within our GeneKits, may not be
available from other suppliers. However, our customers might be able to purchase
some, but not all, of these dyes directly from Amersham. In addition, certain
reagents and other chemicals which we use and include in our GeneKits are
available only under license from their manufacturers. We cannot be certain that
we will be able to renew these licenses upon expiration, on favorable terms or
at all. While we believe that alternative dyes, chemicals and reagents are
available, alternate products may not be as effective as certain of the products
which we presently use. If we switched to an alternative dye, chemical or
reagent, we may also have to adapt the GeneKit's analysis software to the new
product, which could take time. If the GeneKit is FDA approved, we may also be
required to seek FDA approval for the altered GeneKit if the alternative product
were to substantially alter the performance of the GeneKit or if the changes
could significantly affect safety or effectiveness. This could cause delays in
production and in bringing the changed GeneKit to market.
We also use certain custom-designed components supplied by third parties in
our DNA sequencers and other equipment. We believe that there are alternative
suppliers for these custom-designed parts. However, we would incur costs in
switching to alternative suppliers and would likely experience delays in
production of the products that use any of these parts until such time as we
were able to locate alternate suppliers or parts on acceptable terms.
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WE ARE DEPENDENT ON OUR LICENSE FOR THE POLYMERAZE CHAIN REACTION TECHNOLOGY WE
USE IN OUR GENEKITS AND OUR BUSINESS WOULD SUFFER IF THE LICENSE WAS TERMINATED
OR NOT RENEWED.
We license the polymerase chain reaction technology that we use in our
GeneKits from Roche Molecular Systems, Inc. and F. Hoffmann La Roche Ltd. These
licenses are not exclusive, and, therefore, may be granted by the Roche
companies to our competitors and others. We are required to pay royalties to the
Roche companies for these licenses. One license is for the life of the patents
included within the licensing agreement, which expire at various times
commencing July 2004. The second license expires in February 2003 but will be
automatically extended until July 2004, unless the Roche companies elect not to
renew the license. After the expiration of the initial term of this license, the
Roche companies may terminate the license at any time by giving us a one-year
notice. The termination of either of these licenses would have a material
adverse effect on our ability to produce or sell GeneKits. Consequently, we
could experience a deterioration of anticipated future sales of our GeneKits and
further losses.
WE FACE SUBSTANTIAL COMPETITION FROM MANY COMPANIES, AND WE MAY NOT BE ABLE TO
EFFECTIVELY COMPETE.
The biotechnology industry is highly competitive. We compete with entities
in the United States and abroad that are engaged in the development and
production of products that analyze genetic information. They include:
- manufacturers and distributors of DNA sequencers such as the PE Biosystems
Group of the Perkin-Elmer Corporation, Amersham and its Molecular Dynamics
subsidiary, LI-COR, Inc., Hitachi, Ltd. and Molecular and Genetic
BioSystems, Inc.;
- manufacturers and distributors of DNA probe-based diagnostic systems such
as Abbott Laboratories, Chiron Corp., Hoffmann-La Roche Inc., Gene Probe
Inc., Digene Corporation and Johnson & Johnson; and
- manufacturers of new technologies used to analyze genetic information,
such as chip-based and assay-based technologies, including, Hyseq Inc.,
Affymetrix Inc., ChemCore Inc., CuraGen Corp., Nanogen, Inc., ViroLogic,
Inc. and VIRCO.
Many of our competitors have much greater financial, technical research and
development resources and production and marketing capabilities than we do.
Smaller companies may also prove to be significant competitors, particularly
through collaborative arrangements with large pharmaceutical and biotechnology
companies. If any of our competitors were to devote significant resources to
developing an integrated solution for genotyping, we would experience
significantly more competitive pressure. We cannot predict whether we could
successfully compete with these pressures and, if we are unable to do so, our
business could suffer.
WE MAY NOT BE ABLE TO HIRE OR RETAIN THE QUALIFIED SCIENTIFIC, TECHNICAL AND
MANAGEMENT PERSONNEL WE REQUIRE.
Because of the specialized scientific nature of our business, we are highly
dependent upon our ability to attract and retain qualified scientific and
technical personnel. We also must hire additional qualified management and sales
and marketing personnel as our business expands. Competition in our industry for
scientific, sales and marketing and management personnel is intense and we
cannot assure you that we will be able to hire a sufficient number of qualified
personnel. Loss of the services of our key personnel in these areas could
adversely affect our research and development and sales and marketing programs
and could impede the achievement of our goals. We do not maintain key man life
insurance on any of our personnel.
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IF WE ARE UNABLE TO MANAGE OUR ANTICIPATED FUTURE GROWTH WE MAY NOT BE ABLE TO
IMPLEMENT OUR BUSINESS PLAN.
If we are successful in increasing sales and expanding our markets, there
will be additional demands on our management, marketing, distribution, customer
support and other operational and administrative resources and systems. To
accommodate future growth, we may add information and other systems. We cannot
guarantee that we will be able to do so or that, if we do so, we will be able to
effectively integrate them to our existing staff and systems. In addition, our
current and future expense levels are based largely on our investment plans and
estimates of future revenues and are, to a large extent, fixed. We may be unable
to adjust spending in a timely manner to compensate for any unexpected revenue
shortfall. Therefore, any significant shortfall in revenues as compared to our
planned expenditures would materially harm our business, financial condition,
and results of operations. If we are unable to manage our growth, we may not be
able to implement our business plan and our business, financial condition and
results of operations would be materially harmed.
IF WE ARE UNABLE TO EFFECTIVELY INTEGRATE FUTURE ACQUISITIONS OF NEW OR
COMPLIMENTARY BUSINESSES, PRODUCTS OR TECHNOLOGY, OUR BUSINESS MAY BE HARMED.
We have made and in the future may make acquisitions of complementary
businesses, products, services or technologies. We have limited experience in
integrating newly acquired organizations into our operations. Acquisitions
expose us to many risks, including:
- difficulty in assimilating technologies, products, personnel and
operations;
- diversion of management's attention from other business concerns;
- large write-offs and amortization expenses related to goodwill and other
intangible assets;
- entering markets in which we have no or limited experience; and
- incurrence of debt or assumption of other liabilities.
The occurrence of one or more of these factors could materially harm our
business, financial condition and results of operations.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL IN THE FUTURE AND WE CANNOT BE CERTAIN
THAT WE WILL BE ABLE TO RAISE CAPITAL WHEN NECESSARY ON ACCEPTABLE TERMS.
At this time, our sales are not sufficient to meet our anticipated financing
requirements. Based on our current plans, we believe that current cash balances,
including proceeds from our recently completed equity financings, and
anticipated funds from operations will be sufficient to enable us to meet our
operating needs for the next 24 months. However, the actual amount of funds that
we will need during the next 24 months will be determined by many factors, some
of which are beyond control. These factors include:
- our success in selling our products in the research and clinical research
markets during this period;
- the cost and length of time required to complete the clinical trials
needed for our application to FDA for approval to sell our HIV OpenGene
System to the clinical diagnostic market;
- the timing of our submission of an application to the FDA for approval of
our HIV OpenGene System and the length of time it takes the FDA to
complete its review;
- our success in introducing new products during the period;
- our incurring significant fixed overhead and other expenses prior to
increasing our revenues; and
- the costs of acquiring and integrating any new business or technologies
during the period.
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We may need to obtain additional funds sooner or in greater amounts than we
currently anticipate and we may need to obtain additional funds at the end of
this 24 month period. If we need to obtain funds at the end of 24 months, or
earlier, potential sources of financing include strategic relationships, public
or private sales of our shares or debt or other arrangements. Because of our
potential long term capital requirements, we may seek to access the public or
private equity markets whenever conditions are favorable, even if we do not have
an immediate need for additional capital at that time. We do not have any
committed sources of financing at this time and it is uncertain whether
additional funding will be available when we need it on terms that will be
acceptable to us or at all. If we raise funds by selling additional common
shares or other securities convertible into common shares, the ownership
interest of our existing shareholders will be diluted. If we are not able to
obtain financing when needed, we would be unable to carry out our business plan,
we would have to significantly limit our operations and our business, financial
condition and results of operations would be materially harmed.
WE MAY REQUIRE APPROVAL OF THE HOLDERS OF OUR SERIES A PREFERRED SHARES IN ORDER
TO OBTAIN CERTAIN TYPES OF FINANCING AND WE MAY BE PREVENTED FROM OBTAINING
THESE TYPES OF FINANCING BY THE HOLDERS OF OUR SERIES A PREFERRED SHARES.
We will be required to obtain the consent of the holders of a majority of
our then outstanding Series A preferred shares prior to issuing any equity
security that has rights as to dividends and liquidation that are senior or
equal to those of the Series A preferred shares. Also, under certain
circumstances, if we propose to sell equity securities, including debt
securities convertible into equity securities, certain holders of our Series A
preferred shares will be entitled to preemptive rights which allow them to
purchase a proportional amount of the securities being offered. We will also be
required to obtain the consent of the holders of a majority of our then
outstanding Series A preferred shares if we wish to borrow money and at such
time or as a result of such loans, the total principal amount of our
indebtedness and capitalized lease obligations exceeds $15.0 million. In
addition, if we were to enter into a credit facility with a financial
institution, we may be subject to additional limitations on our ability to incur
additional indebtedness. As a result, we may be delayed in, or prohibited from,
obtaining certain types of financing. See "Description of Capital Shares."
WE MAY BE SUED BY CLINICIANS AND/OR PATIENTS USING OUR PRODUCTS OR SERVICES AND
OUR INSURANCE MAY NOT SUFFICIENTLY COVER ALL CLAIMS BROUGHT AGAINST US.
The testing, manufacturing, sale and marketing of our products exposes us to
the risk of product liability claims. In addition, clinicians, patients and
others may at times seek damages for the misdiagnosis of a patient's disease
based on testing errors, for the erroneous recommendation of drug treatment
based on a technician's misreading of the sequencing results, mishandling of the
patient samples or similar claims. Although we have obtained liability insurance
coverage, we cannot guarantee that liability insurance will continue to be
available to us on acceptable terms or that our coverage will be sufficient to
protect us against all claims that may be brought against us. A liability claim,
even one without merit or for which we have substantial coverage, could result
in significant legal defense costs, thereby increasing our expenses, lowering
our earnings and, depending on revenues, potentially resulting in additional
losses.
OUR INTERNATIONAL OPERATIONS MAY BE ADVERSELY AFFECTED BY RISKS ASSOCIATED WITH
INTERNATIONAL BUSINESS.
We sell our products in Europe, Asia and South America and operate offices
in Europe. Therefore, we are subject to certain risks that are inherent in an
international business. These include:
- varying regulatory restrictions on sales of our products to certain
markets and unexpected changes in regulatory requirements;
- tariffs, customs, duties and other trade barriers;
- difficulties in managing foreign operations and foreign distribution
partners;
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- longer payment cycles and problems in collecting accounts receivable;
- fluctuations in currency exchange rates;
- political risks;
- foreign exchange controls which may restrict or prohibit repatriation of
funds;
- export and import restrictions or prohibitions, and delays from customs
brokers or government agencies;
- seasonal reductions in business activity in certain parts of the world;
and
- potentially adverse tax consequences.
Depending on the countries involved, any or all of the foregoing factors
could materially harm our business, financial condition and results of
operations.
U.S. INVESTORS IN OUR COMPANY COULD SUFFER ADVERSE TAX CONSEQUENCES IF WE ARE
CHARACTERIZED AS A PASSIVE FOREIGN INVESTMENT COMPANY
Although we do not believe that we were a passive foreign investment company
(or PFIC) for United States federal income tax purposes during 1998 or 1999
there can be no assurance that we will not be treated as a PFIC in 2000 or
thereafter. We would be a PFIC if 75% or more of our gross income in a taxable
year is passive income. We would also be a PFIC if at least 50% of our assets
averaged over the taxable year produce, or are held for the production of,
passive income. Passive income includes, among other items, interest, dividends,
royalties, rents and annuities.
For the 1998 taxable year and for the nine months ended September 30, 1999,
approximately 36% and 35%, respectively, of our assets averaged over the taxable
year and period produced, or were held for the production of, passive income and
approximately 2% and 4%, respectively, of our gross income was passive income.
During the third and fourth quarter of 1999, we raised a total of approximately
$58.0 million in private financings to be used for general working capital
purposes. Since a significant portion of these funds will be invested until
needed, the percentage of assets which are likely to produce passive income
during 2000 is likely to increase. If we raise additional funds during 2000 that
percentage is likely to increase further.
If we are or become a PFIC, many of our U.S. shareholders will be subject to
the following adverse tax consequences:
- they will be taxed at the highest ordinary income tax rates in effect
during their holding period on certain distributions on our common shares,
and gain from the sale or other disposition of our common shares;
- they will be required to pay interest on taxes allocable to prior periods;
and
- the tax basis of our common shares will not be increased to fair market
value at the date of their death.
If we are or become a PFIC, our U.S. shareholders could avoid these tax
consequences by making a qualified electing fund election or a mark-to-market
election (a mark-to-market election, however, will not provide for an increase
of our common shares to fair market value at the date of their death). These
elections would need to be in effect for all taxable years during which we were
a PFIC and during which our U.S. shareholders held our common shares. If a U.S.
shareholder makes a qualified electing fund election, he will be taxed currently
on our ordinary income and net capital gain (unless a deferral election is in
effect). If a U.S. shareholder makes a mark-to-market election, he will include
as ordinary income each year an amount equal to the excess of the fair market
value of our common shares over his adjusted tax basis as of the close of each
year (with certain adjustments for prior years).
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If we are or become a PFIC, our U.S. shareholders will generally be unable
to exchange our common shares for common shares of an acquiring corporation on a
tax-deferred basis under the reorganization rules of the Internal Revenue Code,
and many other nonrecognition provisions of the Internal Revenue Code will not
apply to transfers of our common shares. In addition, if we are or become a
PFIC, pledges of our common shares will be treated as sales for federal income
tax purposes. Our U.S. shareholders should note that state and local taxes may
also apply if amounts are included in federal taxable income under the PFIC
rules of the Internal Revenue Code. The PFIC rules are very complex. Our U.S.
shareholders are strongly encouraged to consult with their tax advisor
concerning all of the tax consequences of investing in our common shares and the
possible benefits of making a tax election given their circumstances.
Additionally, our U.S. shareholders should review the section entitled "U.S.
Federal Income Tax Considerations" contained in our Annual Report on Form 20-F
for a more detailed description of the PFIC rules and how they may affect their
ownership of our common shares.
OUR AMENDED ARTICLES OF INCORPORATION CONTAIN CERTAIN PROVISIONS THAT MAKE IT
DIFFICULT FOR A THIRD PARTY TO ACQUIRE OUR COMPANY EVEN IF DOING SO WOULD BE
BENEFICIAL TO OUR SHAREHOLDERS, AND, THEREFORE, OUR SHAREHOLDERS MAY NOT BE ABLE
TO MAXIMIZE THE RETURN ON THEIR INVESTMENT.
Our authorized capital consists of an unlimited number of preferred shares.
The Board of Directors, without any further vote by the shareholders, has the
authority to issue preferred shares and to determine the price, preferences,
rights and restrictions, including voting and dividend rights, of these shares.
The rights of the holders of common shares are subject to the rights of holders
of any preferred shares that the Board of Directors may issue in the future.
That means, for example, that we can issue preferred shares with more voting
rights, higher dividend payments or more favorable rights upon dissolution, than
the common shares. If we issued certain types of preferred shares in the future,
it may also be more difficult for a third party to acquire a majority of our
outstanding voting shares.
In addition, we have a "classified" Board of Directors, which means that
only one-third of our directors are eligible for election each year. Therefore,
if shareholders wish to change the composition of the Board of Directors, it
would take at least two years to remove a majority of the existing directors,
and three years to change all directors. Also, the holders of our Series A
preferred shares are entitled to vote as a class for one director. Each
Series A Director serves for a one year term and any vacancy may be filled only
by a vote of the holders of Series A preferred shares. If we do not redeem our
Series A preferred shares as required during 2006, 2007, and 2008, then our
Series A shareholders will be entitled to special voting rights enabling them to
elect a majority of our Board of Directors, who will continue to serve as
directors until we have redeemed our Series A preferred shares as required. See
"Description of Capital Shares."
Having a classified Board of Directors and these special rights of the
Series A preferred shareholders may, in some circumstances, deter or delay
mergers, tender offers or other possible transactions which may be favored by
some or a majority of our shareholders.
BECAUSE OUR PREFERRED SHAREHOLDERS ARE ENTITLED TO CERTAIN PREFERENCES OVER OUR
COMMON SHAREHOLDERS, UNDER CERTAIN CIRCUMSTANCES, OUR COMMON SHAREHOLDERS MAY
NOT RECEIVE A RETURN OF THE FULL AMOUNT THEY HAVE INVESTED IN OUR COMPANY.
In July 1999, we issued 33,948 Series A preferred shares. Our Series A
preferred shares entitle the holders to certain preferences over our common
shares (in addition to those described above), including the following:
- we may not issue any securities that rank senior to, or in parity with,
the Series A preferred shares without obtaining the approval of the
holders of a majority of the Series A preferred shares;
- we may not issue dividends to holders of common shares until all accrued
and unpaid dividends on the Series A preferred shares are paid in full;
and
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- if we liquidate or wind-up our company or if we sell our company or in
certain other circumstances, holders of Series A preferred shares are
entitled to receive an amount equal to $1,000 per Series A preferred
share, or approximately $34.0 million in the aggregate, plus accrued and
unpaid dividends, before holders of common shares would be entitled to
receive any distribution. See "Description of Capital Shares."
THE VOLATILITY OF THE STOCK MARKET COULD DRIVE DOWN THE PRICE OF OUR COMMON
SHARES WHICH COULD RESULT IN SUBSTANTIAL LOSSES TO OUR SHAREHOLDERS.
The market prices for securities of life sciences companies, particularly
those that are not profitable, have been highly volatile, especially recently.
Publicized events and announcements may have a significant impact on the market
price of our common shares.
In addition, the stock market from time to time experiences extreme price
and volume fluctuations which particularly affect the market prices for emerging
and life sciences companies, such as ours, and which are often unrelated to the
operating performance of the affected companies. These broad market fluctuations
may make it difficult for a shareholder to sell shares at a price equal to or
above the price at which the shares were purchased.
FUTURE SALES BY EXISTING SHAREHOLDERS MAY LOWER THE PRICE OF OUR COMMON SHARES
WHICH COULD RESULT IN LOSSES TO OUR SHAREHOLDERS.
As of December 31, 1999, we had outstanding 11,623,615 common shares, not
including the shares covered by this prospectus. Of those shares 9,707,615 are
eligible for sale under Rule 144, or are otherwise freely tradable, except for
those common shares held by our affiliates.
The common shares covered by this prospectus will be issued upon exercise of
the warrants and/or conversion of the Series A preferred shares and will be
freely tradable for as long as this Registration Statement remains effective.
In addition:
- Our affiliates own 2,021,325 shares which may be sold subject to volume
restrictions imposed by Rule 144. Our affiliates also own options to
acquire an additional 1,160,816 shares. The shares to be issued upon
exercise of these options have been registered and may be freely sold when
issued.
- Our employees and consultants (who are not deemed affiliates) hold options
to buy a total of 1,024,739 shares. The shares to be issued upon exercise
of these options have been registered and may be freely sold when issued.
- 76,734 shares issuable upon exercise of outstanding warrants, are
registered for sale pursuant to a registration statement filed with the
Securities and Exchange Commission, and may be freely sold.
- We may issue options to purchase up to an additional 577,221 shares under
our stock option plans. The shares to be issued upon exercise of these
options have been registered and may be freely sold when issued.
- 1,916,000 shares are being registered for sale pursuant to a registration
statement filed with the Securities and Exchange Commission and those
shares may be freely sold when that registration statement is declared
effective.
Sales of substantial amounts of common shares into the public market could
lower the market price of our common shares.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are required to be aggregated) who has owned shares for at least
one year would be entitled to sell within any three-month period a number of
shares that does not exceed the greater of (i) 1% of the number of our common
shares
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then outstanding (which will equal approximately 116,236 shares immediately upon
the effective date of this prospectus) or (ii) the average weekly trading volume
of our common shares during the four calendar weeks preceding the filing of a
Form 144 with respect to such sale. Sales under Rule 144 are also subject to
certain manner of sale provisions and notice requirements and to the
availability of current public information about our company. Under
Rule 144(k), a person who is not deemed to have been our affiliate at any time
during the three months preceding a sale, and who has owned the shares proposed
to be sold for at least two years, is entitled to sell his shares without
complying with the manner of sale, public information, volume limitation or
notice provisions of Rule 144.
WE MAY SUFFER LOSSES AS RESULT OF FLUCTUATIONS IN EXCHANGE RATES BETWEEN THE
U.S. DOLLAR AND FOREIGN CURRENCIES.
Our financial statements are prepared in U.S. dollars and much of our
business is conducted in U.S. dollars. However, we do incur expenses in Canadian
dollars and in other foreign currencies. We also sell products to customers in
foreign countries and bill those customers in local currencies at predetermined
exchange rates. As our business expands, we anticipate that we will increasingly
incur expenses and bill and receive payments in local currencies at prevailing
exchange rates. As a result, we may suffer losses due to fluctuations in the
exchange rates between the U.S. dollar and the Canadian dollar and the U.S.
dollar and the currencies of such other countries. We currently engage in
limited foreign exchange hedging activities by sometimes purchasing Canadian
funds before they are actually required to protect ourselves against the risk of
losses due to fluctuations in exchange rates. We do not currently engage in
hedging activities for any other foreign currencies.
OUR BUSINESS COULD BE HARMED IF THE SOFTWARE, COMPUTER TECHNOLOGY AND OTHER
SYSTEMS WE USE ARE NOT YEAR 2000 COMPLIANT.
Failure of our internal computer systems or third-party equipment or
software, or systems maintained by our users and third parties with whom we have
marketing or distribution agreements, to operate properly with regard to the
Year 2000 issues could require us to incur significant unanticipated expenses to
remedy any problems and could cause system interruptions and loss of data. Any
of these events could harm our reputation and materially and adversely affect
our ability to gain market acceptance for our products and services. As of the
date of this prospectus, none of our information technology systems or the
software applications sold with our products have experienced year 2000
problems. Also, as of the date of this prospectus, we are not aware of any year
2000 problems affecting any of our material customers, suppliers or third party
service providers that might materially disrupt our business. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Year
2000."
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FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. You can identify these
forward-looking statements when you see us using words such as "expect,"
"anticipate," "estimate," "believe," "intend," "may," "predict," and other
similar expressions. These forward looking statements cover, among other items:
- acceptance of our products in the clinical diagnostic market;
- acceptance of genotyping in the clinical diagnostic market;
- our marketing and sales plans;
- our expectations about the markets for our products;
- the performance of our products;
- our intention to introduce new products;
- our future capital needs;
- FDA and other regulatory approval for certain of our products;
- our proposed clinical trials;
- reimbursement of our products by insurance companies and other third-party
payors;
- our ability to compete in the research, clinical research and clinical
diagnostic markets;
- our patent applications; and
- the status of year 2000 compliance efforts of our company, and our
material customers and suppliers.
We have based these forward-looking statements largely on our current
expectations. However, forward-looking statements are subject to a number of
risks and uncertainties, certain of which are beyond our control. Actual results
could differ materially from those anticipated as a result of the factors
described under "Risk Factors" including, among others:
- delays in obtaining, or our inability to obtain, approval by the FDA and
other regulatory authorities for our HIV OpenGene System and, in the
future, certain of our other products for the clinical diagnostic market;
- refusal of insurance companies and other third-party payors to reimburse
patients and clinicians for our products;
- uncertainty of acceptance of genotyping, in general, and of our products,
in particular, in the clinical diagnostic market;
- problems, delays and expenses we may face with our proposed clinical
trials;
- problems that we may face in manufacturing, marketing and distributing our
products;
- delays in the issuance of, or the failure to obtain, patents or licenses
for certain of our products and technologies;
- problems with important suppliers and business partners;
- delays in developing, or the failure to develop, new products and enhanced
versions of existing products; and
- the timing of our future capital needs or our inability to raise
additional capital when needed.
We do not undertake any obligation to publicly update or revise any
forward-looking statements contained in this prospectus or incorporated by
reference, whether as a result of new information, future events or otherwise.
Because of these risks and uncertainties, the forward-looking statements and
circumstances discussed in this prospectus might not transpire.
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USE OF PROCEEDS
All of the common shares offered by this prospectus are being offered by the
selling shareholders. We will not receive any proceeds from sales of common
shares by the selling shareholders.
DIVIDEND POLICY
SERIES A PREFERRED SHARES. Dividends on our Series A preferred shares
accrue at the rate of 9% per year during the first three years after issuance,
and 4% per year thereafter. Dividends may not be paid for the first three years.
After three years, at our option, we may pay dividends in cash. If dividends are
not paid in cash, they will continue to accrue and will be convertible into
additional common shares upon conversion of the preferred shares. See
"Description of Capital Shares."
COMMON SHARES. We have not declared or paid any cash dividends on our
common shares. We currently intend to retain any future earnings for use in the
operation and expansion of our business. We do not anticipate paying any cash
dividends on our common shares in the foreseeable future.
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SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data set forth below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our Consolidated Financial Statements
and the Notes thereto included in our Annual Report on Form 20-F, incorporated
into this prospectus by reference. The Consolidated Statement of Operations data
for fiscal years 1996, 1997 and 1998 and the Consolidated Balance Sheet data as
of December 31, 1997 and 1998, as set forth below, have been derived from our
consolidated financial statements included in our Annual Report on Form 20-F,
which have been audited by PricewaterhouseCoopers LLP, Chartered Accountants in
Canada, whose report with respect to such financial statements appears in our
Annual Report on Form 20-F. The Consolidated Statement of Operations data for
fiscal years 1994 and 1995 and the Consolidated Balance Sheet data as of
December 31, 1994, 1995 and 1996, as set forth below, have been derived from
audited consolidated financial statements not included in this prospectus. The
Consolidated Statement of Operations data for the nine-month periods ended
September 30, 1998 and 1999 and the Consolidated Balance Sheet data as of
September 30, 1999 are derived from unaudited consolidated financial statements
included in our Report on Form 6-K dated November 10, 1999, and incorporated
into this prospectus by reference, which in the opinion of our management,
reflect all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the financial data for such period. Historical
results are not necessarily indicative of results to be expected for any future
period.
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT NUMBER OF COMMON SHARES OUTSTANDING
AND NET LOSS PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------------------- --------------------------
1994 1995 1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
Sales............................. $ -- $ -- $ 978 $ 3,033 $ 10,875 $ 6,797 $ 8,672
Cost of Sales..................... -- -- 561 1,995 6,673 4,406 6,318
Gross margin...................... -- -- 417 1,038 4,202 2,391 2,354
Sales, general and administrative
expense......................... 450 1,476 3,377 7,448 11,516 7,655 13,409
Research and development.......... 482 1,241 2,745 4,123 6,289 5,005 5,986
Other............................. -- -- -- 654 420 -- --
Loss from operations before
interest........................ (932) (2,717) (5,705) (11,187) (14,023) (10,269) (17,041)
Interest income................... 9 12 609 774 264 200 351
Interest and financing expense.... -- (19) (69) (3) (1,132) (434) (1,783)
Net (loss)........................ (923) (2,724) (5,165) (10,416) (14,891) (10,503) (18,473)
Cumulative preferred dividends and
accretion of discount
attributable to preferred
shares.......................... -- -- -- -- -- -- (832)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net (loss) attributable to common
shareholders.................... $ (923) $ (2,724) $ (5,165) $ (10,416) $ (14,891) $ (10,503) $ (19,305)
Net (loss) per share.............. $ (0.32) $ (0.65) $ (0.89) $ (1.48) $ (1.91) $ (1.42) $ (2.03)
Weighted average number of common
shares outstanding.............. 2,902,735 4,181,599 5,791,367 7,059,578 7,782,094 7,416,393 9,508,358
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
---------------------------------------------------- SEPTEMBER 30,
1994 1995 1996 1997 1998 1999
-------- -------- -------- -------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and short-term investments............... $ 633 $ 403 $18,928 $ 7,588 $11,274 $18,956
Working capital............................... $ 869 $ 418 $20,061 $ 9,561 $ 8,432 $24,656
Indebtedness.................................. -- $ 500 -- -- $ 7,495 --
Redeemable convertible preferred shares....... -- -- -- -- -- 26,677
Total assets.................................. $1,217 $ 1,791 $22,606 $13,936 $27,783 $36,315
Shareholders' equity.......................... $1,040 $ 841 $21,795 $12,610 $14,579 $ 4,723
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with
"Selected Consolidated Financial Data" and our Consolidated Financial Statements
and Notes, included in our Annual Report on Form 20-F, incorporated into this
prospectus by reference. In addition to historical information, the following
discussion contains certain forward-looking statements that involve known and
unknown risks and uncertainties, such as statements of our plans, objectives,
expectations and intentions. Our actual results could differ materially from
those discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
below and in the section entitled "Risk Factors," and "Forward Looking
Statements" as well as those discussed elsewhere herein.
OVERVIEW
We began operations in 1993. Until 1996, we devoted substantially all of our
resources to the research and development of our technology and products. In
late 1996, we began manufacturing and selling our products to the research and
clinical research markets.
Our products and services are described below.
- SEQUENCING SYSTEMS. Sequencing systems consist of automated DNA sequencers
and related equipment, and our proprietary DNA analysis and data
management software.
- GENEKITS AND OTHER CONSUMABLES. GeneKits consist of various reagents,
enzymes, primers and other chemicals, and other consumables consist of
disposable gel cassettes, acrylamide and other materials.
- TESTING, SEQUENCING AND OTHER SERVICES. We provide services, such as viral
load testing, genotyping and other molecular services, through our
wholly-owned subsidiaries, Applied Sciences, Inc., which we acquired in
1997, and Visible Genetics Europe S.A. (formerly known as ACT Gene S.A.),
which we acquired in 1998.
During 1996 and 1997, we generated revenues primarily by selling sequencing
systems. During this period, our business strategy focused on installing our DNA
sequencers and related equipment in research and clinical research facilities.
During 1998, we began to shift our strategy to target the clinical diagnostic
market and to place greater emphasis on generating recurring revenues from sales
of GeneKits and other consumables initially to the research and clinical
research markets and, subject to FDA approval, to the clinical diagnostic
market. As part of this strategy, we may sell our DNA sequencers at reduced
prices to customers who commit to purchase significant quantities of GeneKits
and other consumables, or we may bundle the sequencers and GeneKits for sale at
favorable prices. This strategy may result, initially, in reduced gross margins
and additional losses as we attempt to expand our installed base of DNA
sequencers. However, we believe that this strategy, over the long term, will
help us maximize recurring sales of our HIV GeneKit and other GeneKits to the
clinical diagnostic market, should we receive FDA approval.
OUR OPERATIONS
SALES. Sales consist of revenues from the sale of sequencing systems,
GeneKits and other consumables as well as from the sale of testing services.
Sales include shipping charges, but exclude sales and excise taxes. Revenue from
the sale of our products is recognized when shipment occurs and title passes to
the customer. Revenue from the sale of testing and other services is recognized
when the service is provided and there is a reasonable assurance of
collectibility. Sales of bundled sequencing systems and GeneKits are recognized
proportionately as the components of the bundle are shipped to customers. The
total sales price of the bundle is allocated to the components proportionately
based on the retail prices
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typically charged for such components if they were sold individually rather than
as part of the bundle. For an analysis of sales by product segment and
geographic market, see Note 12 to our Consolidated Financial Statements.
COST OF SALES. Cost of sales consists of manufacturing costs including
materials, labor and overhead chargeable to inventory. The gross margin from
sales of our products and services varies depending on product category,
distribution channel and geographic market. Gross margin is calculated by
subtracting cost of sales from sales. We sell our products in North America,
Europe, Asia, Australia and South America. In the United States, Canada and many
countries in Europe, we sell our products directly through our own sales force.
In selected geographic and product markets, we seek to sell our products through
distribution, marketing or agency agreements with leading distributors.
Currently, we have entered into agreements with distributors or agents in Spain,
Portugal, Japan, Australia, New Zealand, Argentina and Brazil.
SALES, GENERAL AND ADMINISTRATIVE EXPENSES. Sales, general and
administrative expenses consist primarily of salaries and related expenses,
occupancy costs, utilities, professional fees, consulting fees, travel costs,
capital taxes, depreciation of fixed assets and amortization of costs paid to
patent counsel.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
consist primarily of salaries and related expenses for employees engaged in
research and development, occupancy costs, consulting fees, travel costs,
depreciation and amortization of fixed assets and costs related to FDA clinical
trials for our HIV OpenGene System.
INTEREST INCOME. Interest income consists of income earned on cash, cash
equivalents and marketable securities.
INTEREST AND FINANCING EXPENSE. Interest and finance expense consists of
interest paid or accrued, and amortization of warrant costs and other financing
expenses.
Our financial statements are presented in U.S. dollars and are prepared in
accordance with generally accepted accounting principles in the United States.
RESULTS OF OPERATIONS
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1999 TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
SALES. Sales increased 28% to $8.7 million for the nine months ended
September 30, 1999, compared with $6.8 million for the same period of the prior
year. This increase resulted primarily from increased sales of our GeneKits and
other consumables. In the nine months ended September 30, 1999, automated DNA
sequencing systems accounted for 57% of total sales, compared to approximately
73% of total sales in the same period of the prior year. GeneKits and other
consumables accounted for 33% of total sales, compared to approximately 13% of
total sales in the same period of the prior year. Testing services accounted for
10% of total sales, compared to 14% of total sales in the same period of the
prior year. Sales in North America, Europe, and Asia and South America were $3.9
million, $3.4 million and $1.4 million, respectively, during the nine months
ended September 30, 1999, as compared to $5.6 million, $1.0 million and $0.2
million, respectively, during the nine months ended September 30, 1998. During
the nine months ended September, 1999, one customer accounted for approximately
16% of sales, of which 14% comprised DNA sequencing systems and 2% comprised
GeneKits and other consumables. During the nine months ended September, 1998,
one customer accounted for 43% of sales, of which 42% comprised DNA sequencing
systems and 1% comprised Gene Kits and other consumables. The sales to this
customer were made on the same general terms and conditions as the majority of
other sales during the respective periods.
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COST OF SALES. Cost of sales increased to $6.3 million for the nine months
ended September 30, 1999, from $4.4 million in the same period of the prior
year. In the nine months ended September 30, 1999, cost of sales aggregated 73%
of sales, compared to 65% of sales in the same period of the prior year. This
increase in cost of sales was primarily related to the increase in sales and a
write-off of obsolete and discontinued instruments and related parts totaling
$0.62 million recorded in the second quarter of 1999.
SALES, GENERAL AND ADMINISTRATIVE EXPENSES. Sales, general and
administrative expenses increased 75% to $13.4 million for the nine months ended
September 30, 1999, compared with $7.7 million for the same period of the prior
year. This increase resulted primarily from increased payroll and personnel
costs due to the continued growth of our business, costs of quality control and
regulatory departments established in 1998 and the continued expansion of our
sales force in North America and Europe. Sales and marketing expenses included
in sales, general and administrative expenses increased 93% to $7.0 million for
the nine months ended September 30, 1999, compared with $3.6 million for the
same period of the prior year.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased 20% to $6.0 million for the nine months ended September 30, 1999,
compared with $5.0 million for the same period of the prior year. This increase
resulted from increased payroll and personnel costs, along with increased
purchases of laboratory supplies, as we developed additional GeneKits and
continued our research programs. Additionally, we incurred costs for
pre-clinical and clinical trials related to our FDA submission for our HIV
OpenGene System.
INTEREST INCOME. Interest income was $0.4 million for the nine months ended
September 30, 1999, compared with $0.2 million for the same period of the prior
year.
INTEREST AND FINANCING EXPENSE. Interest and financing expense increased to
$1.8 million for the nine months ended September 30, 1999, compared with $0.4
million for the same period of the prior year. This increase was due to interest
and financing costs on our term loan agreements entered into in April and
September 1998 and the Warburg Pincus financing in July 1999. Of the total
interest and financing expense, $1.3 million was a non-cash charge due to the
amortization of costs attributable to warrants issued in connection with our
term loans and the Warburg Pincus financing, compared to $0.2 million for the
same period of the prior year. See "Liquidity and Capital Resources."
COMPARISON OF FISCAL YEAR ENDED DECEMBER 31, 1998 TO FISCAL YEAR ENDED DECEMBER
31, 1997
SALES. Sales increased 259% to $10.9 million in 1998 from $3.0 million in
1997. This increase resulted from increased sales of our automated DNA
sequencers, GeneKits and other consumables and testing services. In 1998, 412
automated DNA sequencing systems were sold, an increase of 353% from the 91
systems sold in 1997. In 1998, automated DNA sequencing systems accounted for
74% of sales, compared to 90% of sales in 1997. GeneKits and other consumables
accounted for 13% of sales in 1998, compared to 8% in 1997. Testing services
accounted for 13% of sales in 1998 compared to 2% of sales in 1997 as a result
of our acquisition in 1998 of a DNA diagnostic testing company. Sales during
1998 in North America, Europe, and Asia and South America were $7.4 million,
$3.0 million and $0.5 million, respectively, as compared to $2.8 million, $0.2
million and $0.05 million, respectively, during 1997. During 1998, one customer
accounted for 30% of sales, of which 29% comprised DNA sequencing systems and 1%
comprised GeneKits and other consumables. The sales to this customer were made
on the same general terms and conditions as the majority of other sales during
the year. During 1997, no customer accounted for more than 10% of sales.
COST OF SALES. Cost of sales increased to $6.7 million in 1998 from $2.0
million in 1997. In 1998, cost of sales aggregated 61% of sales, a decrease from
66% of sales in 1997. Cost of sales decreased in 1998 as a percentage of sales
due to improvements in our manufacturing processes, as well as economies of
scale as
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production of automated DNA sequencing systems, GeneKits and other consumables
increased compared to the previous year.
SALES, GENERAL AND ADMINISTRATIVE EXPENSES. Sales, general and
administrative expenses increased 55% to $11.5 million in 1998 from $7.4 million
in 1997. This increase resulted primarily from increased payroll and personnel
costs due to the growth of our business, establishment of quality control and
regulatory departments and development of a sales force in North America and in
certain countries in Europe. Sales and marketing expenses included in sales,
general and administrative expenses increased 126% to $6.1 million in 1998 from
$2.7 million in 1997.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased 53% to $6.3 million in 1998 from $4.1 million in 1997. This increase
in research and development expenses resulted from increased payroll and
personnel costs along with increased purchases of laboratory supplies as we
continued to develop GeneKits and expanded our research programs.
In April 1998, we acquired 100% of the shares of ACT Gene S.A., a DNA
diagnostic testing company, for 85,000 common shares and cash payable of $0.7
million. This acquisition was accounted for as a purchase, and resulted in the
recording of an excess of purchase price over tangible net assets of $0.5
million, of which $0.4 million was determined to be in-process research and
development, and reflected as an expense in 1998. The in-process research and
development related to the cost and time pertaining to the development of a test
kit and research clinical samples necessary for the development of several kits
designed for use with DNA sequencing systems. As of April, 1998, the test kit
was approximately 80% completed, with an estimated cost to complete the kit of
approximately $650,000. At that time we expected to complete the kit during
1999. We currently expect development of the kit to be completed during 2000. We
currently estimate the costs incurred to date plus additional costs to complete
the kit will total approximately $900,000. The variance between our original
estimated cost to complete the kit and our current estimate results primarily
from the increased personnel costs we expect to incur over the longer
development period. At the date of acquisition, the test kit had not yet reached
technological feasibility and had no alternative future uses in the clinical
diagnostic market.
INTEREST INCOME. Interest income declined to $0.3 million in 1998 from $0.8
million in 1997.
INTEREST AND FINANCING EXPENSE. Interest and financing expense increased to
$1.1 million in 1998 from approximately nil in 1997 due to interest paid or
accrued and the amortization of costs attributable to warrants issued in
connection with term loans entered into in April and September 1998.
COMPARISON OF FISCAL YEAR ENDED DECEMBER 31, 1997 TO FISCAL YEAR ENDED DECEMBER
31, 1996
SALES. Sales increased 210% to $3.0 million in 1997 from $1.0 million in
1996. This increase resulted from increased sales of our automated DNA
sequencers and GeneKits and other consumables. In 1997, 91 automated DNA
sequencing systems were sold, an increase of 112% from the 43 systems sold in
1996. In 1997, automated DNA sequencing systems accounted for 89% of total
sales, compared to 95% of total sales in 1996. GeneKits and other consumables
accounted for 9% of total sales in 1997, compared to 5% of total sales in 1996.
Sales during 1997 in North America, Europe, and Asia and South America were $2.8
million, $0.2 million and $0.05 million, respectively, as compared to $0.8
million, $0.1 million and nil, respectively, during 1996. During 1997, no
customer accounted for more than 10% of sales. During 1996, two customers each
accounted for approximately 15% of sales, all which were comprised of DNA
sequencing systems. The sales to these two customers were made on the same
general terms and conditions as the majority of other sales during the year.
COST OF SALES. Cost of sales increased to $2.0 million in 1997 from $0.6
million in 1996. In 1997, cost of sales aggregated 66% of sales as compared to
57% of sales in 1996. Cost of sales increased in 1997 as a percentage of sales
due to capacity constraints and various manufacturing challenges as production
increased to meet demand.
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SALES, GENERAL AND ADMINISTRATIVE EXPENSES. Sales, general and
administrative expenses increased 121% to $7.4 million in 1997 from $3.4 million
in 1996. This increase primarily resulted from increased payroll and personnel
costs as we hired additional selling, marketing, administrative and management
personnel due to our growth, and the costs of developing a sales force in North
America and certain countries in Europe. Sales and marketing costs included in
sales, general and administrative expenses increased to $2.7 million in 1997
from $0.7 million in 1996.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased 50% to $4.1 million in 1997 from $2.7 million in 1996. This increase
resulted from increased payroll and personnel costs along with increased
purchases of laboratory supplies as we established a research facility in
Pittsburgh, the continued development of GeneKits at our main lab in Toronto and
with outside researchers and increased design and development costs associated
with our OpenGene System.
Effective October 1997, we acquired Applied Sciences, Inc., a Georgia-based
diagnostics company specializing in HIV genotyping. This acquisition was
accounted for as a purchase and resulted in the recording of an excess of
purchase price over tangible assets of $0.7 million. This amount was determined
to be in-process research and development and was reflected as an expense in
1997. The in-process research and development related to the cost and time
pertaining to the development of certain test kits designed for use with DNA
sequencing systems. As of October 1997, these kits were approximately 20% to 50%
completed, with an original estimated cost to complete the kits of $1.5 million
to $2.0 million. Development of one kit was completed in the fourth quarter of
1998, and the remaining kits are expected to be completed during 2000. We
currently estimate the costs incurred to date plus additional costs to complete
the kits will total approximately $2.0 million to $2.5 million. The variance
between our original estimated cost to complete the kits and our current
estimate results primarily from delays related to development of one of the
kits. At the date of acquisition, the test kits had not reached technological
feasability and had no alternative future uses in the clinical diagnostic
market.
INTEREST INCOME. Interest income increased to $0.8 million in 1997 from
$0.6 million in 1996. This increase resulted because in 1996 we earned only six
months' interest following our initial public offering in June 1996.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through private
placements of equity, and an initial public offering in June 1996. We have also
borrowed funds from institutional lenders and in the past utilized a bank credit
facility.
BANK CREDIT FACILITY. In 1997, we obtained a bank line of credit for up to
$1.1 million from the Royal Bank of Canada. The loan was secured by a lien on
our accounts receivable, inventory and fixed assets. In April 1998, the bank
line was repaid and the line was cancelled.
INSTITUTIONAL LOANS. On April 30, 1998, our subsidiary, Visible Genetics
Corp., or VGC, borrowed $7.0 million from various funds for which Hilal Capital
Management LLC serves as general partner, investment advisor or management
company. We refer to these funds in this prospectus as our "institutional
lenders" or the "Hilal funds." In September 1998, VGC borrowed an additional
$1.0 million from these lenders. The interest rate of the loans was 10% per
year. Interest and principal on the $7.0 million loan were payable on or about
April 29, 1999, and, on the $1.0 million loan, were payable on December 28,
1999.
On April 30, 1999, we and the institutional lenders agreed to delay the
payment date of the $7.0 million loan to December 31, 1999, and to move up the
payment date of the $1.0 million loan to July 1, 1999. The institutional lenders
later extended the payment date to the earlier of July 22, 1999, or the
completion of the Warburg Pincus financing (described below). In addition, the
institutional lenders
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agreed to permit us to borrow up to an additional $5.0 million of loans from
other lenders which would be senior to the $7.0 million loan and junior to the
$1.0 million loan.
We guaranteed VGC's obligations under both loans. We gave the institutional
lenders a security interest in most of our assets to secure our obligations
under the guaranty, including a pledge of the outstanding stock of VGC. Both the
loan agreements and the guaranty imposed certain restrictions on us and our
subsidiaries, including limitations on loans and other obligations which we may
incur.
As part of the loan arrangements, we granted the institutional lenders
warrants to purchase our common shares. Initially, we granted the institutional
lenders warrants to purchase 420,000 common shares which may be exercised until
April 2003, at a price of $10.00 per share. When we borrowed an additional $1.0
million from the institutional lenders in September 1998, we granted them
warrants for an additional 120,000 common shares which may be exercised until
September 2003, at a price of $10.00 per share. The warrants were valued using
the Black-Scholes option valuation model. The total proceeds received from the
institutional lenders were allocated between the warrants and term loans based
on the relative fair value of each component, resulting in $0.9 million and $0.2
million of the total proceeds from the April 1998 and September 1998 term loans,
respectively, being allocated to warrants. The value of the term loans were to
be increased to their face value at their respective maturity dates, resulting
in a charge to financing expense and warrants, by their pro rata share, over the
remaining term of the loans. As a result, non-cash charges of $0.6 million were
recorded as financing expenses in 1998. The remaining $0.4 million will be
recorded as non-cash financing expenses in 1999.
On April 30, 1999, we granted the institutional lenders warrants to purchase
an additional 140,000 common shares which may be exercised until April 30, 2006,
at a price of $17.00 per share. The warrants were valued using the Black-Scholes
option valuation model, resulting in a value being attributed to these warrants
of $0.9 million. This amount was recorded as a deferred charge on the balance
sheet and was to be amortized to financing expense over the remaining term of
the loan maturing on December 31, 1999. As a result, the entire amount will be
recorded as a non-cash charge to financing expense in 1999.
On July 15, 1999, we repaid all of the loans made to us by the Hilal Funds.
Of the $8.0 million principal amount of the loans, we paid $4.1 million of
principal plus accrued interest on the loan in cash. The Hilal Funds converted
the remaining $3.9 million principal amount plus accrued interest into 3,948
Series A preferred shares and 147,098 warrants to purchase our common shares.
The warrants were valued using the Black-Scholes option valuation model. The
value of the net proceeds was allocated between convertible preferred shares and
warrants based on the relative fair value of each instrument. The total amount
allocated to warrants and preferred shares, was $0.9 million and $3.0 million,
respectively. The value of the warrants is treated as a discount to the
preferred shares and will be charged directly to retained earnings or, in the
absence of retained earnings, against other equity over seven years, the time
period when redemption of the preferred shares first becomes mandatory. The
increase in value of the preferred shares to their mandatory redemption price as
well as the accrual of dividends on the preferred shares will reduce earnings
attributable to common shareholders. See "Description of Capital Shares." The
Series A preferred shares and warrants have the same terms as those granted to
Warburg Pincus (as described below).
WARBURG PINCUS FINANCING. On July 15, 1999, certain affiliated funds
managed by E.M. Warburg, Pincus & Co., LLC, invested $30.0 million in our
company. In consideration for this investment, we issued to the Warburg Pincus
Funds 30,000 Series A preferred shares convertible at the holders' option into
common shares at $11.00 per share, and warrants to purchase 1,100,000 common
shares exercisable for four years at a purchase price of $12.60 per share. The
warrants were valued using the Black-Scholes option valuation model. The value
of the net proceeds was allocated between convertible preferred shares and
warrants based on the relative fair value of each instrument. The total amount
allocated to warrants and preferred shares was $6.4 million and $22.8 million,
respectively. The value of the warrants is treated as a discount to the
preferred shares and will be charged directly to retained earnings or, in the
absence of
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retained earnings, by a charge against other equity over seven years, the time
period when redemption of the preferred shares first becomes mandatory. The
increase in value of the preferred shares to their mandatory redemption price as
well as the accrual of dividends on the preferred shares will reduce earnings
attributable to common shareholders. For a description of the Series A preferred
shares and the warrants, see "Description of Capital Shares."
DECEMBER 1999 PRIVATE PLACEMENT. In December 1999, various institutional
investors purchased 1,916,000 common shares of our company in a private
placement. The investors paid $15 per share and we received total proceeds of
$28.74 million from the private placement. The institutional investors included
the Warburg Pincus Funds, the Hilal funds, certain investors who had purchased
our common shares in a November 1998 private placement and certain new
institutional investors.
CAPITAL EXPENDITURES. Additions to fixed assets were approximately $0.8
million, $1.1 million and $3.3 million for the years ended December 31, 1996,
1997 and 1998, respectively and $1.5 million for the nine months ended September
30, 1999. We expect capital expenditures to increase over the next several years
as we expand our facilities and acquire additional manufacturing and scientific
equipment.
CURRENT AND FUTURE FINANCING NEEDS. We have incurred negative cash flow
from operations since we started our business. We have spent, and expect to
continue to spend, substantial amounts to complete our planned product
development efforts, expand our sales and marketing activities, conduct our
clinical trials, conduct research, build our business infrastructure and expand
our manufacturing capabilities. At this time, funds from operations are not
sufficient to meet our operating needs and other anticipated financial
requirements.
We believe, based on our current plans, that our cash on hand and
anticipated funds from operations will be sufficient to enable us to meet our
operating needs for the next 24 months. However, the actual amount of funds we
will need to operate for the next 24 months is subject to many factors, some
which are beyond are control. We may need to obtain additional funds sooner or
in greater amounts than we currently anticipate and we may need to obtain
additional funds at the end of the 24 month period. If we need to obtain funds
at the end of 24 months, or earlier, potential sources of financing include
strategic relationships, public or private sales of our shares or debt or other
arrangements. Because of our potential long term capital requirements, we may
seek to access the public or private equity markets whenever conditions are
favorable, even if we do not have an immediate need for additional capital at
that time. We do not have any committed sources of financing at this time and it
is uncertain whether additional funding will be available when we need it on
terms that will be acceptable to us or at all. If we raise funds by selling
additional common shares or other securities convertible into common shares, the
ownership interest of our existing shareholders will be diluted. If we are not
able to obtain financing when needed, we would be unable to carry out our
business plan, we would have to significantly limit our operations and our
business, financial condition and results of operations would be materially
harmed.
If we wish to issue equity securities or obtain additional financing, we
will need the consent of the Series A preferred shareholders under certain
circumstances. We will be required to obtain the consent of the holders of a
majority of the then outstanding Series A preferred shares prior to issuing any
equity security that has rights as to dividends and liquidation that are senior
or equal to those of the Series A preferred shares. We will also be required to
obtain the consent of the holders of a majority of the then outstanding
Series A preferred shares if we wish to borrow money and at such time or as a
result of such loans, the total principal amount of our indebtedness and
capitalized lease obligations exceeds $15.0 million. As a result, we may be
delayed in, or prohibited from, obtaining certain types of financing.
See "Risk Factors--We may need to raise additional capital in the future and
we cannot be certain that we will be able to raise capital when necessary on
acceptable terms," and "Risk Factors--We may require approval of the holders of
our Series A Preferred Shares in order to obtain certain types of
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financing and we may be prevented from obtaining these types of financing by the
holders of our Series A Preferred Shares."
YEAR 2000
Many computer software applications and programs may not properly recognize
calendar dates beginning in the year 2000, because of the computer industry's
past practice of using two digits rather than four digits to identify the
applicable year. If not corrected, these applications and programs could fail or
create erroneous results.
We have conducted a comprehensive examination of our information technology
systems and the software applications sold with our products to determine year
2000 compliance. Based on our examination, we believe that these systems and
software applications are year 2000 compliant. As of the date of this
prospectus, none of these systems or applications have experienced year 2000
problems.
We have spent approximately $470,000 on our year 2000 compliance efforts, of
which $450,000 was for a new enterprise system purchased in 1998. While we did
not purchase the new system specifically in response to year 2000 issues, our
efforts at compliance accelerated the timetable for purchasing the system.
We have contacted our material customers, suppliers and third-party service
providers to identify year 2000 problems and provide solutions to prevent any
disruption of business activities. We completed a review of the compliance
efforts by these parties in the third quarter of 1999. Based on the information
we have received, our most significant year 2000 risk would involve disruption
of our material supply and distribution channels, and in particular the supply
of certain instrument parts and supplies from single-source suppliers. This
would likely lead to material interruption in product development and sales of
our products. In addition, we could encounter significant expenses in remedying
any problems or switching to year 2000 compliant vendors and suppliers. As of
the date of this prospectus, we are not aware of any year 2000 problems
affecting any of our material customers, suppliers or third party service
providers that might materially disrupt our business. See "Risk Factors--Our
business could be harmed if the software, computer technology and other systems
we use are not year 2000 compliant."
EURO CONVERSION
Effective January 1, 1999, 11 of the 15 member countries of the European
Union adopted the euro as their common legal currency and each participant
established fixed conversion rates between their sovereign, or legacy,
currencies and the common euro currency. The legacy currencies of the individual
countries are scheduled to remain legal tender as denominations of the euro
until January 1, 2002, when euro-denominated bills and coins will be introduced.
During this transition period, public and private parties may choose to pay for
goods and services using either the euro or the participating country's legacy
currency. By July 1, 2002, the legacy currencies will be phased out entirely as
legal tender.
We currently conduct business operations in U.S. and Canadian dollars and
several other currencies. Since our information systems and processes generally
accommodate multiple currencies, we anticipate that any necessary modification
to our information systems, equipment and processes to accommodate euro
transactions will be made on a timely basis and do not expect any failures that
would have a material adverse effect on our financial position or results of
operations.
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INFORMATION ABOUT OUR COMPANY
For a detailed description of our business and information about our
management, see our Annual Report on Form 20-F which is incorporated into this
prospectus by reference. The following information supplements or supercedes, as
appropriate, the information contained in our Annual Report on Form 20-F.
REGULATION OF OUR PRODUCTS BY THE FDA AND OTHER GOVERNMENT AGENCIES
We currently sell our products for research and clinical research purposes.
In the future, we intend to sell products for clinical diagnostic purposes. We
do not believe we need authorization from the FDA or health authorities in
foreign countries to sell our products for research purposes, as long as they
are properly labeled. We will, however, require authorization to sell our
products for clinical diagnostic purposes.
FDA APPROVAL PROCESS. Products that are used to diagnose diseases in people
are considered medical devices, which are regulated by the FDA. To obtain FDA
authorization for a new medical device, a company may have to submit data
relating to safety and efficacy based on extensive testing. This testing, and
the preparation of necessary applications and the processing of those
applications by the FDA, are expensive and may take several years to complete.
The following describes several important aspects of the FDA authorization
process.
The FDA has three classes for medical devices:
- Class I devices (for example, bandages, manual wheelchairs and ice bags)
are the least regulated, but they must still comply with the FDA's
labeling, manufacturing, recordkeeping, and other basic requirements. Most
Class I devices do not require premarket authorization from the FDA.
- Class II devices (for example, portable oxygen generators and hypodermic
needles) may be subject to additional regulatory controls, such as
performance standards and postmarket surveillance.
- Class III devices (for example, cardiac pacemakers) require specific FDA
approval prior to marketing and distribution, and are, as well, subject to
the FDA's basic requirements.
To sell a Class II or Class III device, a company must first either obtain
permission of the FDA by submitting a 510(k) premarket notification, commonly
known as a 510(k), showing that the device is similar to a device already on the
market, or get specific approval for the device by submitting a premarket
approval application, commonly known as a PMA application. A company may have to
include test data in the notification, including human test data. It will almost
always have to include such test data in a PMA application.
If human test data are required for either a 510(k) or a PMA application,
and if the device presents a significant risk, the manufacturer must first file
an Investigational Device Exemption submission, or IDE, with the FDA. The IDE
must contain data, such as animal and laboratory testing, showing that the
device is safe for human testing. If the IDE is granted, human testing may
begin.
Generally, a 510(k) notification to the FDA that a new device is similar to
an existing device requires less data and takes less time for the FDA to process
than a PMA. The FDA is supposed to act on a 510(k) notification within 90 days.
According to the most recent FDA data available, the FDA completes its review of
more than 70% of 510(k)s within 90 days. By contrast, a PMA application must be
supported by more extensive data to prove the safety and efficacy of the device,
and review of a PMA application involves a lengthier FDA process. The FDA
conducts a preliminary review of the PMA application. If complete, the PMA
application is filed by the FDA. Officially, the FDA then has 180 days to review
the PMA application, however, as a practical matter, PMA reviews usually take
much longer, up to one-and-a-half years or more from filing. The FDA may grant
expedited (fast-track) review of a PMA application if certain criteria relating
to public health importance are met, but that decision is within the FDA's
discretion and affects only the timing of the review process, not the outcome.
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NEED FOR FDA APPROVAL OF SOME OF OUR PRODUCTS. We intend to market some of
our products in the U.S. for clinical diagnostic purposes, and therefore we will
have to obtain prior FDA authorization, as described above. We believe our HIV
GeneKit is currently considered by the FDA as a Class III medical device.
However, the FDA recently asked an advisory committee of experts whether HIV
genotyping tests should be reclassified from Class III to Class II. The advisory
committee recommended reclassification subject to certain controls including
post-market surveillance of the performance of these products. If the FDA
reclassifies HIV genotyping tests from Class III to Class II, we will be able to
obtain FDA permission to market our HIV OpenGene System by submitting a 510(k),
rather than a PMA. A 510(k) generally contains less data than a PMA and is
usually reviewed and approved more quickly by the FDA than a PMA. Although it is
likely that the FDA will follow the recommendation of its advisory committee, to
do so the FDA is required to issue a proposed regulation, allow the opportunity
for public comment and then publish a final regulation reclassifying HIV
genotyping tests. This process could take several years to complete.
Under the Food and Drug Administration Modernization Act of 1997, there is
an alternative option for us to obtain faster reclassification of our HIV
OpenGene System. Under this new procedure we can ask the FDA to classify our HIV
OpenGene System based upon an evaluation of the risks presented by the device to
patients. The FDA has 60 days to make a decision on this request. However, in
order for us to use this new procedure, we would first have to submit a 510(k)
to the FDA and have the FDA reject the 510(k), which would occur because the
device is still in Class III. Once the FDA rejects our 510(k), we would then
immediately submit our request for classification of our HIV OpenGene System in
Class II. This option is likely to be faster than waiting for the FDA to go
through its normal reclassification procedures. However, this process is new and
is used very infrequently and, if we elect to use this procedure, there is no
assurance that the FDA would grant our request for reclassification.
We believe that some of our other products will be regulated as Class II or
Class III medical devices.
OTHER FDA REQUIREMENTS. In addition to government requirements relating to
marketing authorization for medical device products, we will also be subject to
other FDA requirements. We will have to be registered as a medical device
manufacturer with the FDA. We will be inspected on a routine basis by the FDA
for compliance with the FDA's quality system regulations, which prescribe
standards for manufacturing, testing, distribution, storage, design control and
service activities. In addition, because we will manufacture some of our
products in Canada, the FDA, in conjunction with the U.S. Customs Service, could
impose a ban on our products if the FDA were to conclude that the products
appeared to be in violation of the FDA's regulatory requirements, including
restrictions that apply to the sale of research-use only products. Also, the
FDA's medical device reporting regulation will require us to provide information
to the FDA on deaths or serious injuries associated with the use of our devices,
as well as product malfunctions that are likely to cause or contribute to death
or serious injury if the malfunction were to recur.
Finally, the FDA prohibits promoting a device for unauthorized uses and
reviews company labeling for accuracy. The FDA has become aware that certain
products being sold by other companies for research purposes only, were in fact
being used by some customers for clinical diagnostic purposes.
The FDA recently issued a policy statement describing the conditions under
which companies may sell research-use only products. These conditions may
restrict our ability to sell research-use only products in the United States. We
do not believe these conditions will have any negative effect on our sale of
GeneKits for legitimate scientific research.
REGULATORY APPROVAL OUTSIDE THE UNITED STATES. We plan to market our
products outside the United States, initially in Canada, Japan, countries in
Europe and South America. Government authorization requirements similar to the
FDA's exist in some of these and many other foreign countries. Therefore, for us
to obtain authorization to sell our products for clinical diagnostic purposes in
Canada, Japan and Europe may also require lengthy and costly testing procedures.
In addition, the regulatory bodies in other
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countries may be affected or influenced by significantly different criteria than
those used by the FDA. Sale of our products in these areas may be materially
affected by the policies of these regulatory bodies or the domestic politics of
the countries involved.
OTHER GOVERNMENT REGULATIONS. We are or may become subject to various
federal, state, provincial and local laws, regulations and recommendations,
including those relating to workers compensation, safe working conditions, and
laboratory and manufacturing practices used in connection with our research and
development activities.
In addition, our reference laboratory in Norcross, Georgia, is subject to
regulation under the Clinical Laboratory Improvement Amendments of 1988, known
as CLIA. Under CLIA, laboratories must meet various requirements, including
requirements relating to the validation of tests, training of personnel, and
quality assurance procedures. The laboratory must also be certified by a
government agency. Our Norcross laboratory performs high complexity tests, and
is therefore subject to the most stringent level of regulation under CLIA. This
laboratory is certified under CLIA and by the state of Georgia.
We are also subject to various laws and regulations in Canada, the United
States and Europe, including those relating to product emissions use and
disposal of hazardous or toxic chemicals or potentially hazardous substances,
infectious disease agents and other materials, workers compensation, safe
working conditions, and laboratory and manufacturing practices used in
connection with our research and development activities.
See "Risk Factors--We may not receive approval of the FDA or foreign
regulatory authorities for our HIV OpenGene System and, in the future, other HIV
products and therefore we may not be able to sell our HIV products to the
clinical diagnostic market in the United States or abroad," "Risk Factors-We may
not receive regulatory approval for our other products and therefore we may not
be able to sell these products for clinical diagnostic purposes in the United
States or in other countries," and "Risk Factors-Each time we make alterations
to any FDA approved products, we may need to seek additional FDA approval which
will lengthen the time and increase the cost of bringing upgraded or new
products to market."
CLINICAL TRIALS
We are conducting and have conducted several clinical trials. We plan to
submit the results of our Proficiency trial to the FDA as part of our market
approval application. We also plan to submit to the FDA as part of our
application, the results of our reanalyses of samples collected in the 1998 GART
study conducted by the Community Program for Clinical Research on AIDS. Our
reanalyses will use our HIV GeneKit and OpenGene System which were not used in
the original study. We do not plan to submit results of other trials to the FDA
as part of the application process. The FDA has advised us that we are not
required to complete our clinical trial, SEARCH, for our HIV OpenGene System.
The FDA has indicated that it will not require us to demonstrate further the
clinical utility of our HIV OpenGene System in the treatment of HIV infected
individuals. Based on the FDA's position, we will continue to provide genotyping
to all 128 patients currently enrolled in the SEARCH study. However, enrollment
of new patients into SEARCH has been closed. For a description of our
Proficiency, SEARCH, and other clinical trials, see the section of our Annual
Report on Form 20-F entitled "Item 1. Description of Business-Our HIV OpenGene
System-FDA Allowance and Clinical Trials." For a description of the GART study,
see the section of our Annual Report on Form 20-F entitled "Item 1. Description
of Business-The HIV Genotyping Market-Genotyping and HIV."
DISTRIBUTION AGREEMENTS
We terminated our initial agreement with Roche Diagnostics S.L. for Spain
and Portugal in September 1999 and subsequently entered into a new agreement
with Roche Diagnostics S.L. for these territories. Under the new agreement,
Roche Diagnostics S.L. will act as our exclusive agent in Spain and Portugal and
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will receive a commission based on sales. In November 1999, we granted
Amersham-Pharmacia Biotech K.K. the exclusive right to distribute our products
to the research market in Japan.
PATENTS
We own or jointly own 27 U.S. patents. We have an additional 34 U.S. patent
applications pending, of which nine have been allowed.
GENEKITS
We are no longer developing a GeneKit for human papillomavirus. We feel our
resources are better utilized by concentrating on other GeneKits we are
currently developing, such as hepatitis B, hepatitis C and tuberculosis.
MANAGEMENT CHANGES
In July 1999, certain affiliated funds managed by E.M Warburg, Pincus & Co.,
LLC, invested $30.0 million in our company in exchange for 30,000 Series A
convertible preferred shares and warrants to purchase 1.1 million common shares
of our company. Holders of our Series A preferred shares are entitled to vote as
a class for one director. Pursuant to that right, our Series A shareholders
appointed Jonathan S. Leff, a Vice President of E.M. Warburg, Pincus & Co., LLC
(see below for biography), as their representative to our Board of Directors.
Since Canadian law requires that a majority of our Board of Directors be
residents of Canada, Dr. Thomas C. Merigan, Jr. resigned as a director, thus
allowing our company to remain in compliance with the law. Mr. Leff has filled
the position held by Dr. Merigan. Mr. Leff also serves on the Audit Committee
and the Compensation Committee of our Board of Directors. Mr. Leff, who is 31,
joined E.M. Warburg, Pincus & Co., LLC in July 1996 as an Associate. In
January 1999, he became a Vice President, and in January 2000, he became a
Managing Director. Mr. Leff is also a director of VitalCom Inc., a provider of
patient information networks and software, and a number of private health care
companies.
In November, 1999, Dr. John K. Stevens, our founder, and Chairman of the
Board of Directors retired from the Board. In accordance with the terms of his
employment agreement, Dr. Stevens has received a severance package of two years
salary plus benefits. We have extended the termination date of Dr. Stevens'
options until 2003. Upon retirement, Dr. Stevens repaid a $323,405 loan owed to
our company which was payable in 2006 and a $50,000 loan owed to our company
which was payable in December 1999. Dr. Stevens retired as President and Chief
Executive Officer of our company in July, 1999. We are in the process of
identifying a candidate to serve as chairman of our board of directors.
In November 1999, Timothy W. Ellis was appointed Chief Operating Officer for
our company. Mr. Ellis will be based in Atlanta, where our wholly owned
subsidiary, Applied Sciences, Inc. is currently located. We are in the process
of establishing a new 100,000 square foot facility in Atlanta that will house
its kit manufacturing operations, sales and marketing, and the existing Applied
Sciences, Inc. operations.
Mr. Ellis has been involved in the diagnostics business for over 25 years,
having held a variety of positions with a number of companies. From
January 1998 to November 1999, Mr. Ellis operated his own management consultant
practice. From 1991 to 1997, Mr. Ellis was President of Dynex Technologies. From
1988 to 1991, Mr. Ellis was President of Genetic Systems Corporation. From 1985
to 1988, Mr. Ellis was General Manager of Abbott Laboratories' Clinical
Chemistry Business Unit. Mr. Ellis received Bachelor of Science and Master of
Science degrees from Bradley University.
As of November 10, 1999, we agreed with Dr. Chalom Sayada, that Dr. Sayada
would no longer continue to serve as our Vice President for European Business
Development. However, Dr. Sayada will continue to provide marketing and strategy
consulting services to our company through May 2001 pursuant to a consulting
agreement. Dr. Sayada's responsibilities have been assumed by Dr. Arthur W. G.
Cole, the
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President of our Visible Genetics Europe, S.A. subsidiary. Dr. Cole became the
President of Visible Genetics Europe, S.A. on September 14, 1999. From May 1996
to September 13, 1999, Dr. Cole served as Executive Vice President and Chief
Business Officer of our Company. From 1995 to May 1996, Dr. Cole was a business
consultant to companies in the biotechnology industry through AC Consulting.
From 1981 to 1995, Dr. Cole worked at Pharmacia Biotech, AB, a Swedish
biotechnology supply company in a range of positions, including five years as
Vice President. During his time with Pharmacia, Dr. Cole ran the division
responsible for worldwide sales of DNA sequencing equipment and supplies.
Dr. Cole holds a B.Sc. degree in Biological Chemistry form Heriot Watt
University and a Ph.D. from the University of London.
In December 1999, William C. Sullivan was appointed Vice President,
Diagnostic Manufacturing for our company. In this role he will be responsible
for managing our kit manufacturing facility in Pittsburgh and establishing a new
manufacturing facility in Atlanta. Mr. Sullivan has over 25 years of clinical
laboratory IN VITRO diagnostics experience. From November 1998 to
December 1999, Mr. Sullivan was Vice President, Operations for Nichols Institute
Diagnostics, a unit of Quest Diagnostics. From July 1997 to November 1998,
Mr. Sullivan was Vice President, Operations for DiaNET Med LLC. From April 1988
to July 1997, Mr. Sullivan held various positions at Laboratory Corporation of
America, and its predecessor company, Roche Biomedical Laboratories, Inc.
In January 2000, Thomas Clarke was appointed Chief Financial Officer of our
company. Mr. Clarke replaces Jeffrey D. Sherman who resigned as Chief Financial
Officer in November 1999. Mr. Clarke, who will be based in Atlanta, where our
wholly owned subsidiary, Applied Sciences, Inc. is currently located, is a
Certified Public Accountant, and has over 20 years of financial experience
gained in a variety of private and public companies. From July 1997 to
January 2000, Mr. Clarke was Chief Operating Officer of CCS TrexCom, Inc., a
telecommunications software company. From 1991 to July 1997, Mr. Clarke was
Chief Financial Officer of CCS TrexCom. From 1989 to 1990, Mr. Clarke was Chief
Financial Officer of Medaphis Corporation, a medical transaction-processing
company. From 1986 to 1989, Mr. Clarke was Senior Vice-President and Chief
Financial Officer of Days Inn Corporation. From 1985 to 1986, Mr. Clarke was
Controller of Quadram Corporation. From 1980 to 1985, Mr. Clarke held various
financial positions at Contel Corporation. Mr. Clarke received a BSBA degree
from the University of Central Florida.
In January 2000, Marguerite Ethier was appointed Vice President, General
Counsel of our company. From 1998 to 1999, Ms. Ethier was a partner in the law
firm of McCarthy Tetrault, and from 1995 to 1997 and 1992 to 1993, Ms. Ethier
was an associate with McCarthy Tetrault. From 1993 to 1995, Ms. Ethier was an
associate with the law firms of Townsend & Townsend Khourie & Crew and Howard
Rice Nemerovski Canady Falk & Rabin. Ms. Ethier holds a B.Sc. degree from the
University of Alberta, an M.Sc. degree from the University of Toronto, and an
LL.B. degree from Osgoode Hall Law School. Ms. Ethier is a member of the Ontario
and California bars, and is qualified as both a registered Canadian Patent Agent
and a United States Patent Attorney.
On February 10, 2000, Samuel Schwartz resigned as a director and officer of
our company.
OPTIONS AND WARRANTS
As of January 7, 2000 there were options and warrants outstanding to
purchase an aggregate of 4,237,672 common shares, including options to purchase
1,160,816 common shares held by directors and officers as a group. The options
held by directors and officers as a group have exercise prices ranging from
$1.37 to $18.38 per share and expire at various times between 2004 and 2010. The
other options and warrants have exercise prices ranging from $1.37 to $17.00 per
share, and expire at various times between 2002 and 2009.
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PROPERTY
We have entered into three leases for property located in Georgia. One lease
is for 99,822 square feet and has a term beginning on February 15, 2000 and
ending on March 14, 2010. This facility, located in Suwanee, Georgia and which
is not yet operating, will house our U.S. headquarters and will be used for kit
manufacturing, research and development, and various corporate functions. We
have also entered into a short-term four month lease, which commenced on
December 15, 1999, for 3,258 square feet in Norcross, Georgia, to be used as
temporary office space until our Suwanee facility is fully operational. In the
other facility, located in Gwinnett County, Georgia, we are leasing 21,032
square feet, for a term from November 1, 1999 to October 31, 2004. We have no
present plans to utilize this facility and are currently looking to sublease the
property.
CERTAIN TRANSACTIONS
We and Dr. Merigan have agreed not to complete the proposed acquisition by
us of certain assets and intellectual property owned by Dr. Merigan and an
affiliate, which is described in our Annual Report on Form 20-F under the
heading "Item 13.--Interests of Management in Certain Transactions." Dr. Merigan
is still performing part-time services for us.
LITIGATION
On December 27, 1999, Perkin-Elmer Corporation, PE Biosystems Group filed a
lawsuit against our company in the United States District Court for the Northern
District of California claiming that our DNA sequencing equipment and products
infringe patents licensed to Perkin-Elmer by the California Institute of
Technology. Perkin-Elmer has not served us with the complaint. The complaint
offers no details to support the allegations of infringement. The suit requests
among other remedies that the court enjoin us from continuing to infringe on
these patents and an unspecified amount of damages. We have previously studied
these patents and have received legal advice that we are not liable for any
claims of infringement. We believe that Perkin-Elmer's claim is without merit
and we plan to vigorously defend the suit.
SERVICE AND ENFORCEMENT OF LEGAL PROCESS
Our company is incorporated under the laws of the Province of Ontario,
Canada and a substantial portion of our assets are located in Canada. Certain of
our directors and officers and certain of the experts named in this prospectus
are residents of Canada, and all or a substantial portion of their assets are
located outside the United States. As a result, if any of our shareholders were
to bring a lawsuit against our officers, directors or experts in the United
States it may be difficult for them to effect service of legal process within
the United States upon those people who are not residents of the United States
or to realize in the United States upon judgments of courts of the United States
based upon civil liability under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended (including the rules promulgated
thereunder by the Commission). In addition, our attorneys in Canada, Goldman,
Spring, Schwartz & Kichler, have advised us that a judgment of a United States
court based solely upon civil liability under these laws would probably be
enforceable in Canada if the U.S. court in which the judgment were obtained had
a basis for jurisdiction in the matter. Our attorneys have also advised us that,
in their opinion, there is substantial doubt whether an action could be brought
successfully in Canada in the first instance on the basis of liability
predicated solely upon such laws.
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SELLING SHAREHOLDERS
The following table provides certain information with respect to the common
shares issuable upon exercise of the warrants and/or conversion of the Series A
preferred shares held by each selling shareholder as of December 31, 1999. In
consideration for a $30.0 million investment in our company, we issued to the
Warburg Pincus Funds 30,000 Series A preferred shares, and warrants to purchase
1,100,000 common shares exercisable for four years at a purchase price of $12.60
per share. In conjunction with the Warburg Pincus financing, the Hilal Funds
converted $3.9 million of debt plus accrued interest into 3,948 Series A
preferred shares and warrants to purchase 147,098 common shares exercisable for
four years at a purchase price of $12.60 per share. We granted the Warburg
Pincus Funds and the Hilal Funds certain registration rights, pursuant to which
the common shares issuable upon exercise of their warrants and conversion of
their Series A preferred shares are now being registered.
The Series A preferred shares are convertible to common shares at a
conversion price of $11.00 per share. Dividends accrue at the rate of 9% of the
liquidation value of the shares through July 15, 2002 and 4% of the liquidation
value until July 15, 2008. The liquidation value of the Warburg Pincus Funds'
Series A preferred shares is $30.0 million and the liquidation value of the
Hilal Funds' Series A preferred shares is $3.9 million. Dividends accrue
quarterly on the 15th day of January, April, July and October.
For purposes of the table below, the number of common shares offered
includes all common shares which a listed shareholder is entitled to receive
upon conversion of its Series A preferred shares plus accrued dividends on those
shares through January 15, 2000. The number of common shares which a listed
shareholder may receive upon conversion will increase as dividends accrue, and
therefore, the number of shares offered pursuant to this prospectus will
increase accordingly.
Although the table below includes shares which a holder of Series A
preferred shares is entitled to receive upon conversion as of January 15, 2000,
this prospectus (and the registration statement of which this prospectus is a
part) covers a total of 5,283,758 shares which includes all shares that would be
issued if all Series A preferred shares are converted by October 15, 2002. If
any of the Series A preferred shares are converted sooner, then fewer common
shares would be issued. Similarly, if cash dividends were paid after July 15,
2002 (the first date dividends may be paid), the cash dividends paid would not
be converted into common shares. However, we are required to give the holders of
Series A preferred shares notice and the opportunity to convert their shares
prior to the payment of any dividend. If cash dividends are not paid and all of
the Series A preferred shares are converted at a date after October 15, 2002,
then more common shares would be issued upon conversion. In that case, we would
be required to file an additional registration statement covering the excess
shares to be issued as a result of dividends accruing after October 15, 2002.
See "Description of Capital Shares."
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, and includes voting or investment power with
respect to the common shares. Unless otherwise indicated below, to our
knowledge, all persons named in the table have sole voting and investment power
with respect to their common shares, except to the extent authority is shared by
spouses under applicable law. The inclusion of any common shares in this table
does not constitute an admission of beneficial ownership for the person named
below. This information is based on, with respect to the Warburg Pincus Funds
and the Other Warburg Pincus Funds Selling Shareholders, information provided to
us by E.M. Warburg Pincus & Co., LLC, and, with respect to the Hilal funds,
information provided to us by Hilal Capital Management LLC.
Except as otherwise noted, all of the common shares issuable upon exercise
of the warrants and/or conversion of Series A preferred shares owned by each
selling shareholder are registered for sale pursuant to this prospectus. The
selling shareholders, however, are not under any obligation to exercise their
warrants or convert their Series A preferred shares or sell all or any portion
of their common shares, nor are the selling shareholders obligated to sell any
of their common shares immediately under this prospectus. We cannot estimate the
number of the shares that will be held by the selling shareholders after
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<PAGE>
completion of this offering. However, for the purposes of this table, we have
assumed that, after completion of this offering, none of the common shares
covered by this prospectus will be held by the selling shareholders. We will not
receive any proceeds from any sales of common shares by the selling
shareholders.
Except as described in our Annual Report on Form 20-F or otherwise noted in
the footnotes following the table, none of the selling shareholders has held any
position or office, or has had a material relationship with our Company or our
subsidiaries or other affiliates within the past three years, other than owning
the common shares.
<TABLE>
<CAPTION>
COMMON PERCENTAGE OF
NUMBER OF SHARES NUMBER OF COMMON
COMMON OFFERED COMMON SHARES SHARES
SHARES OWNED PURSUANT TO THIS OWNED AFTER OWNED AFTER
SELLING SHAREHOLDER BEFORE OFFERING(1) PROSPECTUS(2) OFFERING(3) OFFERING(11)
- ------------------- ------------------ ---------------- ------------- -------------
<S> <C> <C> <C> <C>
Warburg, Pincus Equity Partners, L.P.
(4)(5).................................. 1,866,375 1,866,375 0 0
Warburg, Pincus Ventures International,
L.P(4)(5)............................... 1,975,000 1,975,000 0 0
Warburg, Pincus Netherlands Equity
Partners I, C.V.(4)(5).................. 59,250 59,250 0 0
Warburg, Pincus Netherlands Equity
Partners II, C.V.(4)(5)................. 39,500 39,500 0 0
Warburg, Pincus Netherlands Equity
Partners III, C.V.(4)(5)................ 9,875 9,875 0 0
Other Warburg Pincus Funds Selling
Shareholders:(5)
Warburg, Pincus Partners LLC.............. 766,796 766,796 0 0
Public Employees Retirement Association of
Colorado................................ 298,469 298,469 0 0
Chase Manhattan Bank Trustee for the IBM
Retirement Plan Trust................... 211,106 211,106 0 0
New York State Common Retirement Fund..... 188,003 188,003 0 0
Michigan Public School Employees, State
Employees, State Police and Judges
Retirement Systems...................... 180,054 180,054 0 0
Marinecrew & Co........................... 167,193 167,193 0 0
Washington State Investment Board......... 164,992 164,992 0 0
Miami Valley Insurance Company............ 128,610 128,610 0 0
State Treasurer of the State of
Michigan................................ 123,744 123,744 0 0
Merrill Lynch Private Equity Fund, LLC.... 116,263 116,263 0 0
General Electric Pension Trust............ 103,120 103,120 0 0
Teachers Insurance and Annuity Association
of America.............................. 84,929 84,929 0 0
Teachers' Retirement System of
Louisiana............................... 82,496 82,496 0 0
Northern Trust Company, as Trustee of the
Lucent Technologies Inc. Master Pension
Trust................................... 79,167 79,167 0 0
The Robert Wood Johnson Foundation........ 74,617 74,617 0 0
Bankers Trust Co., as Trustee for the GTE
Services Corp. Plans for Employees'
Pension 66,970 66,970 0 0
Warburg, Pincus Equity Partners Trust..... 66,821 66,821 0 0
Atlantic Equity Corporation............... 64,850 64,850 0 0
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
COMMON PERCENTAGE OF
NUMBER OF SHARES NUMBER OF COMMON
COMMON OFFERED COMMON SHARES SHARES
SHARES OWNED PURSUANT TO THIS OWNED AFTER OWNED AFTER
SELLING SHAREHOLDER BEFORE OFFERING(1) PROSPECTUS(2) OFFERING(3) OFFERING(11)
- ------------------- ------------------ ---------------- ------------- -------------
<S> <C> <C> <C> <C>
Wingfoot Corporation...................... 64,305 64,305 0 0
Stichting Pensioenfonds ABP............... 61,872 61,872 0 0
BSWP I, LLC, by BellSouth Master Pension
Trust 51,560 51,560 0 0
Djursholm Investments..................... 51,444 51,444 0 0
Helsingfors Investments................... 51,444 51,444 0 0
HOV Investments........................... 51,444 51,444 0 0
Inglestorp Investments.................... 51,444 51,444 0 0
PNC Venture Corp.......................... 50,957 50,957 0 0
Procific.................................. 49,497 49,497 0 0
First Chicago Investment Corporation...... 46,346 46,346 0 0
ML Warburg, Pincus Trust.................. 45,372 45,372 0 0
Mellon Bank N.A., as Trustee for the Bell
Atlantic Master Trust................... 41,248 41,248 0 0
Minnesota State Board of Investment....... 41,248 41,248 0 0
MVE, Inc.................................. 41,248 41,248
National Union Fire Insurance Company of
Pittsburgh, PA.......................... 41,248 41,248 0 0
Pensioenfonds PGGM........................ 41,248 41,248 0 0
Merrill Lynch Private Equity Offshore
Fund, L.P. 38,969 38,969 0 0
American General Annuity Insurance
Company................................. 38,583 38,583 0 0
The Equitable Life Assurance Society of
the U.S................................. 36,034 36,034 0 0
Chrysler Corporation Master Retirement
Trust................................... 30,936 30,936 0 0
Novartis Pension Fund..................... 30,936 30,936 0 0
State Teachers Retirement System of
Ohio.................................... 30,936 30,936 0 0
Valquest Partners #37, L.P................ 30,866 30,866 0 0
Foundation Investments of Ohio Ltd........ 29,846 29,846 0 0
Johns Hopkins University.................. 29,846 29,846 0 0
MAF Investments, Ltd...................... 27,784 27,784 0 0
Europe Select Private Equity Partners,
L.P..................................... 25,722 25,722 0 0
Kolnische Ruckversicherungs, Geselischaft
AG...................................... 25,722 25,722 0 0
Leeway & Co............................... 23,953 23,953 0 0
Sandpiper Investments Inc................. 22,686 22,686 0 0
Merrill Lynch KECALP International LP,
1997.................................... 21,864 21,864 0 0
State Street Bank and Trust Company, as
Trustee for the Con Agra Master Trust... 20,624 20,624 0 0
First Colony Life Insurance Company....... 20,624 20,624 0 0
State Stret Bank, as Trustee for the Long-
Term Investment Trust A................. 20,624 20,624 0 0
Wenonah Development Company............... 17,810 17,810 0 0
Cornell University........................ 16,985 16,985 0 0
Shell Pensions Trust Limited.............. 16,499 16,499 0 0
Ameritas Life Insurance Corp.............. 14,923 14,923 0 0
BT Investment Partners, Inc............... 13,406 13,406 0 0
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
COMMON PERCENTAGE OF
NUMBER OF SHARES NUMBER OF COMMON
COMMON OFFERED COMMON SHARES SHARES
SHARES OWNED PURSUANT TO THIS OWNED AFTER OWNED AFTER
SELLING SHAREHOLDER BEFORE OFFERING(1) PROSPECTUS(2) OFFERING(3) OFFERING(11)
- ------------------- ------------------ ---------------- ------------- -------------
<S> <C> <C> <C> <C>
Chemical Investments, Inc................. 13,406 13,406 0 0
CIBC Capital Corporation.................. 13,406 13,406 0 0
Benchlight & Co........................... 12,861 12,861 0 0
Blazership & Co........................... 12,861 12,861 0 0
Hawick Investments Limited................ 12,861 12,861 0 0
Assur Investments LLC..................... 12,374 12,374 0 0
Boston Safe Deposit, as Trustee for the
Employees Retirement Plan Trust of
Minnesota Mining........................ 12,374 12,374 0 0
Citibank, F.S.B., solely as Directed
Trustee of the Delta Master Trust....... 12,374 12,374 0 0
Illinois State Board of Investment........ 12,374 12,374 0 0
Northern Trust Company, as Trustee, The
Bristol-Myers Squibb Company Defined
Benefit Master Trust.................... 12,374 12,374 0 0
Textron Inc............................... 12,374 12,374 0 0
The Norinchukin Bank...................... 12,374 12,374 0 0
Alaska State Pension Investment Board..... 10,312 10,312 0 0
General Reinsurance Corporation........... 10,312 10,312 0 0
Merrill Lynch Private Equity Partners II,
LLC..................................... 10,312 10,312 0 0
Stichting Bedrijfspensidenfonds voor de
Metallnijverneid........................ 10,312 10,312 0 0
The Sumitomo Bank Limited................. 10,312 10,312 0 0
The University of Chicago................. 10,312 10,312 0 0
Utah Retirement Systems................... 10,312 10,312 0 0
Wake Forest University.................... 10,312 10,312 0 0
WPEP Partners, LLC........................ 9,899 9,899 0 0
NTP Partners.............................. 9,778 9,778 0 0
Williston International Ltd............... 9,487 9,487 0 0
Assurances Generales de France IART....... 9,003 9,003 0 0
Assurances-Generales se France VIE........ 9,003 9,003 0 0
AIP (Kansas Public Employees Retirement
System)................................. 8,249 8,249 0 0
Fresno County Employees' Retirement
Association............................. 8,249 8,249 0 0
Houston Police Officers Pension System.... 8,249 8,249 0 0
Lateen & Co............................... 8,249 8,249 0 0
The Kresge Foundation Trust............... 8,249 8,249 0 0
American General Life Insurance Company... 6,187 6,187 0 0
Mellon Bank, N.A., as Trustee for the
Northeast Utilities Service Company
Retirement Plan 6,187 6,187 0 0
Private Selection Fund II, L.P............ 6,187 6,187 0 0
Warburg Amerika-Anlage GmbH............... 5,556 5,556 0 0
H. Stone Limited Partnership.............. 5,144 5,144 0 0
John R. Purcell........................... 5,144 5,144 0 0
Levi Family Deed 10/17/97................. 5,144 5,144 0 0
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
COMMON PERCENTAGE OF
NUMBER OF SHARES NUMBER OF COMMON
COMMON OFFERED COMMON SHARES SHARES
SHARES OWNED PURSUANT TO THIS OWNED AFTER OWNED AFTER
SELLING SHAREHOLDER BEFORE OFFERING(1) PROSPECTUS(2) OFFERING(3) OFFERING(11)
- ------------------- ------------------ ---------------- ------------- -------------
<S> <C> <C> <C> <C>
Abbott Capital Private Equity Fund II,
L.P..................................... 4,949 4,949 0 0
Other selling shareholders(6)............. 116,226 116,226 0 0
Hilal Capital, LP(7)...................... 147,485(8) 75,530 71,955 *
Hilal Capital QP, LP(7)................... 384,378(9) 192,028 192,350 1.6%
Hilal Capital International, Ltd.(7)...... 495,123(10) 254,600 240,523 2.0%
</TABLE>
- ------------------------
* Less than 1%
(1) Includes shares issuable upon exercise of warrants and conversion of Series
A preferred shares.
(2) Assumes the exercise of all warrants issued and conversion of all Series A
preferred shares (including accrued interest at 9% per year) outstanding at
exercise prices in effect on January 15, 2000.
(3) Assuming all of the common shares offered by each selling shareholder are
sold in the offering.
(4) Warburg, Pincus & Co. ("WP") is the sole general partner of each of these
selling shareholders. Each of these selling shareholders is managed by E.M.
Warburg, Pincus & Co., LLC ("EMW LLC"). Lionel I. Pincus is the managing
partner of WP and the managing member of EMW LLC, and may be deemed to
control both entities. Jonathan S. Leff, a director of our company, is a
general partner of WP and a managing director and member of EMW LLC.
Mr. Leff may be deemed to have an indirect pecuniary interest (within the
meaning of Rule 16a-1 under the Securities Exchange Act of 1934, as amended)
in an indeterminate portion of the shares beneficially owned by the selling
shareholders. Mr. Leff disclaims beneficial ownership of all such shares.
(5) Warburg, Pincus Equity Partners, L.P., Warburg, Pincus Ventures
International, L.P., Warburg, Pincus Netherlands Equity Partners I, C.V.,
Warburg, Pincus Netherlands Equity Partners II, C.V. and Warburg, Pincus
Netherlands Equity Partners III, C.V., which we refer to collectively as the
Warburg Pincus Funds, currently own all of the 3,950,000 common shares being
offered by the Warburg Pincus Funds pursuant to this prospectus. From time
to time, the Warburg Pincus Funds may decide to distribute a portion or all
of the common shares, which they receive upon conversion of their Series A
preferred shares and warrants, to the selling shareholders identified in the
table as "Other Warburg Pincus Funds Selling Shareholders" in connection
with a partnership distribution. The number of common shares shown opposite
the name of each Other Warburg Pincus Funds Selling Shareholder is the
maximum number of common shares that might be distributed to it based on its
ownership interests in the Warburg Pincus Funds and the maximum number that
may be offered by it under this prospectus. (subject to additional common
shares resulting from accrual of dividends on the Series A preferred shares
after January 15, 2000). In no event will the maximum number of common
shares distributed to or offered by the Other Warburg Funds Selling
Shareholders, as a group, pursuant to this prospectus, exceed 3,950,000.
(subject to additional common shares resulting from accrual of dividends on
the Series A preferred shares after January 15, 2000).
(6) Includes 52 persons or entities holding an aggregate of less than 1% of the
company's common shares outstanding as of December 31, 1999.
(7) For the relationship of the Hilal funds to our company, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources-Institutional Loans." Hilal
Capital Partners LLC is general partner of Hilal Capital, LP and Hilal
Capital QP, LP and has investment and dispositive power over the securities
held by those funds. Hilal Capital Management LLC, is the investment manager
of Hilal Capital International Ltd., and, has investment and dispositive
power over the securities held by Hilal Capital International, Ltd. Peter K.
Hilal, M.D.
39
<PAGE>
manages and has sole discretion over Hilal Capital Partners LLC and Hilal
Capital Management LLC and, in that capacity, has ultimate investment and
dispositive power over securities held by all of those funds.
(8) In addition to the warrants issued in July 1999, includes warrants to
purchase 46,213 shares at a purchase price of $10.00 per shares and
warrants to purchase 11,284 shares at a purchase price of $17.00 per share.
(9) In addition to the warrants issued in July 1999, includes warrants to
purchase 115,688 shares at a purchase price of $10.00 per shares and
warrants to purchase 28,683 shares at a purchase price of $17.00 per share.
(10) In addition to the warrants issued in July 1999, includes warrants to
purchase 156,099 shares at a purchase price of $10.00 per shares and
warrants to purchase 38,033 shares at a purchase price of $17.00 per share.
(11) Common shares issuable upon exercise of warrants and conversion of
Series A preferred shares are deemed outstanding for computing the
percentage ownership of the person holding the warrants and Series A
preferred shares but are not deemed outstanding for computing the percentage
ownership of any other person. This information is based on 11,623,615
common shares outstanding on December 31, 1999.
40
<PAGE>
PLAN OF DISTRIBUTION
The common shares may be sold from time to time by the selling shareholders
in one or more transactions at fixed prices, at market prices at the time of
sale, at varying prices determined at the time of sale or at negotiated prices.
The selling shareholders may offer their common shares in one or more of the
following transactions:
- on any national securities exchange or quotation service on which the
common shares may be listed or quoted at the time of sale, including the
Nasdaq National Market;
- in the over-the-counter market;
- in private transactions;
- through options;
- by pledge to secure debts and other obligations;
- or a combination of any of the above transactions.
The common shares described in this prospectus may be sold from time to time
directly by the selling shareholders. Alternatively, the selling shareholders
may from time to time offer common shares to or through underwriters,
broker/dealers or agents. The selling shareholders and any underwriters, broker/
dealers or agents that participate in the distribution of the common shares may
be deemed to be "underwriters" within the meaning of the Securities Act of 1933.
Any profits on the resale of common shares and any compensation received by any
underwriter, broker/dealer or agent may be deemed to be underwriting discounts
and commissions under the Securities Act of 1933.
Any shares covered by this prospectus which qualify for sale pursuant to
Rule 144 under the Securities Act of 1933 may be sold under Rule 144 rather than
pursuant to this prospectus. The selling shareholders may not be able to sell
all of their shares under Rule 144. The selling shareholders may transfer,
devise or gift such shares by other means not described in this prospectus.
To comply with the securities laws of certain jurisdictions, the common
shares must be offered or sold only through registered or licensed brokers or
dealers. In addition, in certain jurisdictions, the common shares may not be
offered or sold unless they have been registered or qualified for sale or an
exemption is available and complied with.
The anti-manipulation provisions of Rules 101 through 104 under Regulation M
of the Securities Exchange Act of 1934 may apply to purchases and sales of
common shares by the selling shareholders. In addition, there are restrictions
on market-making activities by persons engaged in the distribution of the common
shares.
We have agreed to pay all of the expenses relating to the registration,
offering and sale of the common shares by the selling shareholders to the
public, other than commissions or discounts of underwriters, broker-dealers or
agents.
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<PAGE>
DESCRIPTION OF CAPITAL SHARES
GENERAL
The current authorized capital of our company consists of an unlimited
number of common shares and an unlimited number of preferred shares. Any series
of preferred shares which our Board of Directors may issue could have rights
equal or superior to the rights of the common shares.
COMMON SHARES
The holders of common shares are entitled to receive dividends if, as and
when declared by our Board of Directors, subject to the rights of the holders of
any other class of our shares entitled to receive dividends in priority to the
common shares. If our company were liquidated or dissolved, the holders of
common shares would be entitled to receive all assets remaining after the rights
of the holders of any other class of shares entitled to receive assets in
priority to the holders of the common shares have been satisfied.
The holders of the common shares are entitled to one vote for each common
share held at all meetings of our shareholders.
PREFERRED SHARES
Our Board of Directors is authorized to issue an unlimited number of
preferred shares in one or more series, to fix the number of preferred shares
and determine the designations, rights (including voting and dividend rights),
privileges, restrictions and conditions attaching to the shares of each such
series, without further vote or action by the shareholders. Because the terms of
the preferred shares may be fixed by our Board of Directors without shareholder
action, the preferred shares could, subject to regulatory policies, be issued
quickly, with terms calculated to defeat a takeover of our company or to make
the removal of our directors and executive officers more difficult. Under
certain circumstances, this could have the effect of decreasing the market value
of the common shares. The preferred shares may have voting rights superior to
the common shares and may rank senior to the common shares as to dividends and
as to the distribution of assets in the event our company were liquidated or
dissolved.
On July 15, 1999, our Board of Directors authorized the issuance of 33,950
shares of Series A Convertible Preferred Shares. We have issued 33,948 Series A
preferred shares. The Series A preferred shares are convertible at the holders'
option into common shares at $11.00 per share. The preferred shares contain
provisions under which the conversion price would be reduced on a weighted
average basis if we issue shares, options or certain other securities at prices
lower than the conversion price (subject to certain exceptions), and will also
be adjusted upon the issuance of certain other securities, certain
recapitalization events and in certain other circumstances to protect the
holders against the dilutive effect of those events.
Dividends on the preferred shares accrue quarterly at the rate of 9% per
year during the first three years after issuance, and 4% per year thereafter and
are compounded annually. Dividends are not payable for the first three years.
After three years, at our option, we may pay dividends in cash. If dividends are
not paid in cash, they will continue to accrue and will be convertible into
additional common shares upon conversion of the preferred shares.
After the third anniversary and prior to the seventh anniversary of the date
of issuance of the preferred shares, we have the right to redeem the outstanding
preferred shares at a price, which we call the redemption price, equal to $1,000
per share, plus accrued but unpaid dividends, provided that the price of our
common shares on the Nasdaq National Market equals or exceeds 150% of the
conversion price for 20 trading days during a consecutive 30-day period ending
within 10 days before we notify shareholders of the redemption. We will be
required to redeem one-third of any remaining outstanding preferred shares on
each of the seventh, eighth and ninth anniversaries of the date of issuance at
the redemption price, and we will be permitted to redeem the preferred shares at
any time beginning on the seventh anniversary after
42
<PAGE>
issuance. If we fail to redeem the shares as required, holders may appoint a
majority of our Board of Directors, who will continue to serve until we have
redeemed the preferred shares as required.
The holders of Series A preferred shares are entitled to vote as a group
with the holders of common shares on all matters except that holders of
Series A preferred shares are entitled to vote separately for one director and
are not entitled to participate in the vote for any other directors of our
company. On all other matters, each holder of Series A preferred shares is
entitled to the number of votes equal to the number of common shares the holder
is entitled to receive upon conversion of his Series A preferred shares. Our
agreements with the holders of Series A preferred shares provide that we are
prohibited from declaring or issuing any dividends to holders of our common
shares before paying all unpaid dividends on the Series A preferred shares. We
also are prohibited from issuing any equity securities that are senior or equal
in rank to the Series A preferred shares without approval of the holders of a
majority of the Series A preferred shares. If our company were to be liquidated
or sold or under certain other circumstances, holders of Series A preferred
shares would be entitled to receive an amount equal to $1,000 per share, plus
accrued dividends, before holders of our common shares would be entitled to any
distributions.
Holders of Series A preferred shares are also entitled to certain other
rights, including the right to participate, on a pro rata basis, in future
company financings, subject to certain exceptions. If we propose to sell equity
securities of any kind, including debt securities convertible into equity
securities, Series A holders are entitled to purchase a proportional amount of
the securities being offered based on the number of common shares they own
assuming conversion of all convertible securities. Holders of Series A preferred
shares are not entitled to exercise this right in connection with securities
issued: (i) to the public in a firm commitment underwriting; (ii) upon exercise
of any of our options or warrants outstanding on July 15, 1999; (iii) pursuant
to the acquisition of another entity by us or one of our subsidiaries by merger,
purchase of substantially all of the assets or other form of reorganization;
(iv) in connection with our acquisition or license of technology rights or other
assets; (v) pursuant to our stock option plans, stock bonus plans, stock
purchase plans or other compensation equity agreements or programs; or
(vi) upon conversion or exercise of any equity securities, such as warrants,
options, or other rights to acquire equity securities and debt securities
convertible into equity securities. The right of holders of Series A preferred
shares to participate in future offerings in this manner provides those
shareholders with the opportunity to avoid having their ownership interest in
our company diluted under certain circumstances when the interest of our common
shareholders would be diluted.
We also are prohibited from incurring indebtedness for borrowed money and
capital lease obligations in excess of $15.0 million outstanding at any one
time, without first obtaining approval of the holders of a majority of the
Series A preferred shares. See "Risk Factors- We may require approval of the
holders of our Series A Preferred Shares in order to obtain certain types of
financing and we may be prevented from obtaining these types of financing by the
holders of our Series A Preferred Shares."
We are required to obtain the consent of the holders of a majority of our
then outstanding Series A preferred shares prior to issuing any equity security
that has rights as to dividends and liquidation that are senior or equal to
those of the Series A preferred shares. We also are required to obtain the
consent of the holders of a majority of our then outstanding Series A preferred
shares if we wish to borrow money and at such time or as a result of such loans,
the total principal amount of our indebtedness and capitalized lease obligations
exceeds $15.0 million. In addition, if we were to enter into a credit facility
with a financial institution, we may be subject to additional limitations on our
ability to incur additional indebtedness.
WARRANTS
On July 15, 1999, we issued 1,247,098 warrants to purchase our common
shares, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations-Liquidity and Capital Resources." Each warrant is
exercisable for four years at an initial purchase price of $12.60, subject to
customary antidilution provisions.
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<PAGE>
In connection with our leased property in Gwinnett County, Georgia, we are
obligated to issue 10,000 warrants to the landlord. Each warrant is exercisable
at any time from the third anniversary of the date of issuance until the ninth
anniversary of the date of issuance, at an initial purchase price of $31.875,
subject to customary antidilution provisions. See "Information About Our
Company-Property."
For a description of additional warrants which we have issued, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources" and our Annual Report on Form 20-F.
CLASSIFIED BOARD
Our Board of Directors is divided into three classes. The classification of
the Board of Directors was implemented in March 1996. See "Risk Factors-Our
Amended Articles of Incorporation contain certain provisions that make it
difficult for a third party to acquire our company even if doing so would be
beneficial to our shareholders and, therefore, our shareholders may not be able
to maximize the return on their investment."
The holders of our Series A preferred shares are entitled to vote as a class
for one director. Each Series A Director serves for a one year term and any
vacancy may be filled only by a vote of the holders of Series A preferred
shares. In the event that we do not redeem our Series A preferred shares as
required during 2006, 2007 and 2008, then our Series A shareholders will be
entitled to special voting rights enabling them to elect a majority of our Board
of Directors, who will continue to serve as directors until we have redeemed our
Series A preferred shares as required.
TRANSFER AGENT
The transfer agent and registrar for our common shares is ChaseMellon
Shareholder Services, LLC, Overpeck Center, 85 Challenger Road, Ridgefield Park,
New Jersey 07660.
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<PAGE>
LEGAL MATTERS
The validity of the common shares being offered hereby has been passed upon
for us by our attorneys, Goldman, Spring, Schwartz & Kichler, Ontario, Canada.
Certain other matters relating to this offering with respect to United States
securities laws will be passed upon by our attorneys, Baer Marks & Upham LLP,
New York, New York. Certain matters relating to regulation by the U.S. Food and
Drug Administration will be passed upon by our attorneys, Hyman, Phelps &
McNamara, P.C., Washington, D.C. Samuel Schwartz, a senior partner of Goldman,
Spring, Schwartz & Kichler, was a director of our company. Mr. Schwartz holds
options to purchase an aggregate of 100,040 common shares at various exercise
prices.
EXPERTS
Our Consolidated Financial Statements as of December 31, 1997 and 1998 and
for the years ended December 31, 1996, 1997 and 1998, included in our Annual
Report on Form 20-F, incorporated herein by reference, have been audited by
PricewaterhouseCoopers LLP, Chartered Accountants in Canada, as stated in their
report appearing in our Annual Report on Form 20-F. The Consolidated Financial
Statements have been included in our Annual Report on Form 20-F in reliance upon
such report, given upon the authority of said firm as experts in auditing and
accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a Registration
Statement on Form F-3 under the Securities Act with respect to the common shares
offered hereby. This prospectus, which constitutes a part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement. Certain items of the Registration Statement are contained in exhibits
and schedules as permitted by the rules and regulations of the Securities and
Exchange Commission. Statements made in this prospectus as to the contents of
any contract, agreement or other document referred to are not necessarily
complete. With respect to each such contract, agreement or other document filed
as an exhibit to the Registration Statement or to our Annual Report on Form
20-F, certain items of which are incorporated by reference into this prospectus,
reference is made to the exhibit for a more complete description of the matter
involved, and each such statement shall be deemed qualified in its entirety by
such reference.
We are subject to the informational requirements of the Exchange Act and
file reports and other information with the Securities and Exchange Commission.
Reports and other information which we file with the Securities and Exchange
Commission, including the Registration Statement on Form F-3 of which this
prospectus is a part, may be inspected and copied at the public reference
facilities of the Securities and Exchange Commission at:
<TABLE>
<S> <C> <C>
450 Fifth Street N.W. 7 World Trade Center 500 West Madison Street
Room 1024 New York, New York 10048 Suite 1400
Washington D.C. 20549 Chicago, Illinois 60661
</TABLE>
You can also obtain copies of this material by mail from the Public
Reference Section of the Securities and Exchange Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. Additionally, copies of this
material may also be obtained from the Securities and Exchange Commission's
Internet site at http://www.sec.gov. The Commission's telephone number is
1-800-SEC-0330.
45
<PAGE>
5,283,758 SHARES
VISIBLE GENETICS INC.
COMMON SHARES
------------------
SELLING SHAREHOLDERS' PROSPECTUS
------------------------
FEBRUARY 14, 2000
------------------------
YOU SHOULD RELY ONLY ON INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. THE SELLING SHAREHOLDERS ARE OFFERING TO SELL, AND
SEEKING OFFERS TO BUY, COMMON SHARES ONLY IN JURISDICTIONS WHERE OFFERS AND
SALES ARE PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE
ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF
THIS PROSPECTUS OR OF ANY SALE OF OUR COMMON SHARES.
