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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 30, 2000
COMMISSION FILE NO. 333-______
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM F-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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VISIBLE GENETICS INC.
(Exact name of Registrant as specified in its charter and
translation of Registrant's name into English)
ONTARIO 98-0194462
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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700 BAY STREET
SUITE 1000
TORONTO, ONTARIO
CANADA M5G 1Z6
(416) 813-3240
(Address and telephone number of Registrant's principal executive offices)
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BAER MARKS & UPHAM LLP
805 THIRD AVENUE
NEW YORK, NEW YORK 10022
ATTENTION: STEVEN S. PRETSFELDER, ESQ.
(212) 702-5730
(Name, address and telephone number of agent for service)
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS
PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / _______
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / _______
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
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AMOUNT PROPOSED MAXIMUM
TITLE OF EACH CLASS OF TO BE PRICE PER SHARE(1) AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED OFFERING PRICE REGISTRATION FEE
--------------------------- ---------- -------------------- ---------------- ----------------
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COMMON SHARES 1,927,134 $38.625 $74,435,551 $19,650.99
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(1) This amount is based upon the average of the high and low sales
prices as of June 27, 2000, and is being used solely for the purpose of
calculating the registration fee pursuant to Rule 457 under the Securities Act
of 1933.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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SELLING SHAREHOLDER'S PROSPECTUS
1,927,134 SHARES
VISIBLE GENETICS INC.
COMMON SHARES
This is an offering of common shares by a shareholder of Visible
Genetics Inc. The selling shareholder 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 shareholder 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 June 28, 2000, the
closing sale price for our common shares on the Nasdaq National Market was
$40.125.
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INVESTING IN OUR SHARES INVOLVES A HIGH DEGREE OF
RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 2.
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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.
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SUBJECT TO COMPLETION, DATED JUNE 30, 2000
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TABLE OF CONTENTS
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PAGE
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE................................................................. ii
PROSPECTUS SUMMARY.............................................................................................. 1
RISK FACTORS.................................................................................................... 2
FORWARD-LOOKING STATEMENTS...................................................................................... 18
USE OF PROCEEDS................................................................................................. 20
DIVIDEND POLICY................................................................................................. 20
SELECTED CONSOLIDATED FINANCIAL DATA............................................................................ 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................................................................... 22
INFORMATION ABOUT OUR COMPANY................................................................................... 30
SELLING SHAREHOLDER............................................................................................ 31
PLAN OF DISTRIBUTION............................................................................................ 32
DESCRIPTION OF CAPITAL SHARES................................................................................... 33
LEGAL MATTERS................................................................................................... 36
EXPERTS......................................................................................................... 36
WHERE YOU CAN FIND MORE INFORMATION............................................................................. 36
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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:
Our Annual Report on Form 20-F for the year ended December 31, 1999, as
amended by Form 20-F/A-1, which we refer to in this prospectus as our Annual
Report on Form 20-F;
Our Report on Form 6-K Filing No. 1 for the Month of April, 2000;
Our Report on Form 6-K Filing No. 3 for the Month of April, 2000;
Our Report on Form 6-K Filing No. 1 for the Month of May, 2000; and
Our Report on Form 6-K Filing No. 1 for the Month of June, 2000
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 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 you can call us at (416) 813-3240,
or write us at:
Visible Genetics Inc.
700 Bay Street
Suite 1000
Toronto, Ontario, Canada M5G 1Z6
Attention: Mr. Thomas J. Clarke
To obtain more information about our company from the Securities and
Exchange Commission, see the section of this prospectus entitled "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
strategy is to become a leader in the emerging field of pharmacogenomics.
Pharmacogenomics is the science of individualizing therapy based on genetic
differences across patients. Our genotyping technology, which employs DNA
sequencing, enables the analysis in the clinical diagnostic laboratory of
individual genetic variations. 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. DNA sequencing is generally considered the
most thorough and accurate method for genotyping diseases. We believe that
individualizing therapy through pharmacogenomics will improve the treatment of
many diseases, such as Human Immunodeficiency Virus, or HIV, hepatitis B,
hepatitis C, tuberculosis and eventually some cancers.
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 and HLA (used for
tissue typing, for example, in organ transplants). We are developing GeneKits
for hepatitis B, hepatitis C and tuberculosis. We began selling our DNA
sequencers and related equipment and consumables to the research and clinical
research markets in the third quarter of 1996 and began selling GeneKits into
the same markets in the third quarter of 1997.
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 that 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. In
June 1999, we completed a European trial, which we call VIRADAPT, which showed,
among other things, that after six months patients who received standard of care
treatment and underwent periodic genotyping had a mean decrease in viral load of
approximately 93% as compared to a mean decrease in viral load of approximately
79% in the non-genotyping group. In addition, after 6 months, 32% of the
patients in the genotyping group had undetectable viral loads as compared to 14%
of patients in the non-genotyping group. The other trial, called GART, was
funded by the National Institutes of Health, or NIH, and was completed in the
United States in December 1998. It showed that, at the end of 8 weeks, patients
who received standard of care treatment and underwent periodic genotyping had a
mean decrease in viral load of approximately 93%, as compared to 76% for
patients in the non-genotyping group.
Also in June 1999, we initiated a trial called SEARCH to test the
clinical utility of our HIV OpenGene System in genotyping HIV infected patients.
Based on the results from the VIRADAPT and GART clinical trials, the FDA has
advised us that we are not required to complete the SEARCH trial and has
indicated that we will not be required to demonstrate further the clinical
utility of our HIV OpenGene System in the treatment of HIV infected individuals.
We plan to apply to the FDA during the third quarter of 2000 for approval to
sell our 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.
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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. 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 fiscal
year ended December 31, 1999 were $13.6 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 $25.3 million in the year ended December 31,
1999, and $5.7 million during the three months ended March 31, 2000. As of March
31, 2000, our accumulated deficit was $65.2 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, our
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;
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-- our ability to continue to develop advanced versions of our
products and technologies and new products and technologies in
a timely manner; and
-- our ability to manufacture our products according to schedule
and within budget.
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 equipment,
GeneKits and other consumables at reduced prices;
-- our decision to reduce prices of our products in response to
price reductions by competitors;
-- general economic conditions, as well as economic conditions
specific to the biotechnology industry; and
-- unanticipated costs or delays in manufacturing our products.
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.
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;
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-- The testing may show that our HIV products do not work at all
or are not reliable enough, and therefore cannot be authorized
by the FDA, or the testing may show that our HIV products do
not work as well as they need 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 our
HIV products 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, 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 the sale of our HIV products with
conditions that could limit the market for these products or
make them 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 FDA approval is 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 in
countries 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.
WE PLAN TO SEEK FDA APPROVAL TO MARKET OUR HIV OPENGENE SYSTEM TO THE CLINICAL
DIAGNOSTIC MARKET THROUGH AN APPLICATION PROCESS THAT IS NEW AND INFREQUENTLY
USED, AND IF THE FDA DOES NOT GRANT OUR REQUEST, OUR ABILITY TO SELL OUR HIV
OPENGENE SYSTEM TO THE CLINICAL DIAGNOSTIC MARKET COULD BE DELAYED
SIGNIFICANTLY.
Our HIV OpenGene System is currently regulated as a Class III medical
device. To sell a Class III medical device a company must first get specific
approval of the FDA for the device by submitting a premarket approval
application, commonly known as a PMA. However, an FDA advisory committee
recommended that the FDA reclassify HIV genotyping tests from Class III medical
devices to Class II medical devices. To sell a Class II medical device, a
company must first 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. 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. By contrast, a PMA application must be supported by
more extensive data to prove the safety and efficacy of the device, and a review
of a PMA application involves a lengthier process which may take one and
one-half years or more from filing.
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The FDA usually follows the advice of its advisory committees. However,
to reclassify a device from Class III to Class II, the FDA's administrative
process could take several years. Therefore, it is unlikely that
reclassification of HIV genotyping tests by the FDA would be effected for
several years.
We currently plan to attempt to accelerate the reclassification process
by using an alternative provision of the 1997 Food and Drug Administration
Modernization Act. Under this alternative, we will submit a 510(k) notification
to the FDA, which the FDA will reject because our HIV OpenGene System is still a
Class III device. After receipt of the rejection, we will have 30 days to seek
reclassification of our HIV OpenGene System, and the FDA will have 60 days to
rule on this request. If the FDA grants our request, we will be able to
immediately market our HIV OpenGene System to the clinical diagnostic market.
We cannot guarantee that this alternative procedure will be successful
in shortening the time for FDA approval of our HIV OpenGene System. This process
is new and is used very infrequently, and, therefore, there is no assurance that
the FDA will grant our request for reclassification. If the FDA does not grant
our request to reclassify our HIV OpenGene System under this new
reclassification procedure, we either will have to submit a PMA application or
wait until the FDA acts to reclassify HIV genotyping tests as recommended by its
advisory committee. In either event, our ability to sell our HIV OpenGene System
for clinical diagnostic use will be delayed, and our business, financial
condition, and results of operations could be materially harmed.
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 ABROAD.
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 OpenGene System, as submitted
to the FDA, will contain specific reagents, dyes, enzymes, chemicals, software
and other materials. If we obtain approval through the 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. If our HIV OpenGene
System is approved through the 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. We also
may be required to obtain similar foreign regulatory approval. 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 or foreign regulatory approval is likely to be time
consuming and costly and, as a result, we may experience delays in bringing
these upgraded or new products to market.
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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 stringent
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. We are subject to
various laws and regulations in Canada, the United States and Europe, relating
to product emissions, use and disposal of hazardous or toxic chemicals or
potentially hazardous substances, infectious disease agents and other materials,
and laboratory and manufacturing practices used in connection with our research
and development activities. If we fail to comply with these regulations, we
could be fined, we may not be able to operate certain of our facilities or
certain portions of our business, and we may suffer other consequences that
could materially harm our business, financial condition or results of
operations.
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. New regulations or standards may result in
increased costs, including costs for obtaining permits, delays or fines
resulting from loss of permits or failure to comply with regulations.
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 drug treatment of certain diseases or other medical conditions. The use
of genotyping by doctors and clinicians for this purpose is relatively 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 such as other DNA sequencers, DNA probe-based diagnostic systems,
chip-based and assay-based technologies, or homebrew genetic tests. 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 that are determined to be investigational
in nature or that are not considered "reasonable and necessary" for 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 will be substantially reduced, our ability to achieve
profitability will be significantly impaired and our business, financial
condition and results of operations will 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
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 agency or 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 September 2000 through December 2002, and, in certain cases, are
subject to automatic 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 research and clinical diagnostic markets 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 impede our ability to
generate significant revenues and become profitable.
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 PROFITABLE WILL BE IMPAIRED.
We believe that if we are to generate additional revenue and become
profitable, we must continue to develop advanced technology, advanced versions
of our existing products and new products. These 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 new
technology, products or advanced versions of existing products, or that any new
technology, products or advanced versions of existing products will achieve
acceptance in the market. If we are unable to successfully develop new
technology, products or
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advanced versions of existing products in the future or if those technologies or
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 will 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. Our plant in Pittsburgh, which manufactures our HIV GeneKit,
currently has a limited production capacity. Our new facility in Atlanta,
Georgia is in the process of being designed, built and equipped in accordance
with our specifications. Construction may take longer than expected, and the
planned and actual construction costs of building and qualifying the facility
for regulatory compliance may be higher than expected.
Any significant delay in making the Atlanta facility operational will
limit our ability to increase production. When we are in a position to increase
production and begin manufacturing and assembling new products, additional
problems may arise. These may include technological, engineering, quality
control and other production difficulties. We may also have difficulty complying
with FDA quality system regulations at each of our facilities. 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 OR OBTAIN
CERTAIN LICENSES, 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
37 U.S. patents. We own or jointly own an additional 32 U.S. patent applications
pending, of which five have been allowed. We own 14 foreign patents. We own or
jointly own foreign applications presently pending as PCT applications, or as
national phase PCT applications, designating intergovernmental agencies and
multiple countries including the European Patent Office, Australia, 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 that 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 that do not conflict with our
patents. Others may challenge our patents and, as a result, our patents could be
narrowed or invalidated. From time to time, we may be required to obtain
licenses from third parties for some of the technology or components used or
included in certain of our GeneKits or other products. We cannot be certain that
we will be able to obtain these licenses on acceptable terms or at all. In
certain instances, if we are unable to obtain a required license, our ability to
sell or use certain products may be impaired.
To help protect our proprietary rights in unpatented trade secrets, we
generally 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,
from time to time, we receive notices from third parties claiming that we may
infringe their patent or other proprietary rights. Despite our best efforts, we
may be sued for infringing on the patent or other proprietary rights of others.
Such 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.
CERTAIN SUPPLIES AND PARTS THAT WE NEED ARE AVAILABLE ONLY FROM LIMITED SOURCES
AND OUR BUSINESS WILL SUFFER IF WE CANNOT OBTAIN THESE SPECIALIZED ITEMS USED IN
OUR GENEKITS.
Our GeneKits include dyes, reagents and other chemicals supplied by
third parties. We believe that some dyes supplied by Amersham International
Public Limited Company 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
that 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 that 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 currently purchase acrylamide, an important chemical used in our
MicroCel Cassettes, from one supplier. This supplier has informed us that it is
experiencing financial hardship. Should this supplier go out of business, we
will need to find an alternative source of acrylamide. We cannot be certain that
we will be able to find a satisfactory alternate supplier. If we are unable to
find an alternate reliable supplier, we may elect to manufacture acrylamide in
our own facilities. We have no experience in this area and we cannot be certain
that we will be able to do so successfully. If we are unable to locate reliable
alternate supplies or make acrylamide on our own, our business could be
materially and adversely harmed.
We also use certain custom-designed components supplied by third
parties in our DNA sequencers and other equipment. We believe that there are
alternate suppliers for these custom-designed parts. However, we will incur
costs in switching to alternate suppliers and will likely experience delays in
production of the products that use any of these parts until such time as we are
able to locate alternate suppliers or parts on acceptable terms.
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WE ARE DEPENDENT ON OUR LICENSE FOR THE POLYMERASE CHAIN REACTION TECHNOLOGY WE
USE IN OUR GENEKITS AND OUR BUSINESS WOULD SUFFER IF THE LICENSE IS 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., Roche
Diagnostics, Gene Probe Inc., Innogenetics NV, Digene
Corporation and Johnson & Johnson;
-- 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.;
-- manufacturers of cell cultured assays, including ViroLogic,
Inc. and VIRCO; and
-- manufacturers of homebrew genetic tests, which typically have
not undergone clinical validation and have not been approved
by the FDA or other regulatory agencies.
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, financial condition and results of operations could suffer.
WE MAY NOT BE ABLE TO HIRE OR RETAIN THE QUALIFIED SCIENTIFIC, TECHNICAL,
MANAGEMENT AND SALES AND MARKETING 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, technical, management, and sales and marketing personnel is intense
and we
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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.
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 staff and 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 into 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 will 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 will be
materially harmed.
IF WE ARE UNABLE TO EFFECTIVELY INTEGRATE FUTURE ACQUISITIONS OF NEW OR
COMPLEMENTARY 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.
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 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 and
1999 approximately 30% and 21%, respectively, of our revenues resulted from
sales of sequencers and other products to Amersham. Our agreement with Amersham
expires in February 2001 and is automatically renewed 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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WE MAY BE SUED BY CLINICIANS, PATIENTS OR THIRD-PARTY PAYORS 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,
third-party payors and others may at times seek damages based on testing or
analysis errors 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 many countries and operate offices in North
America and 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;
-- longer payment cycles and problems in collecting accounts
receivable;
-- fluctuations in currency exchange rates;
-- political risks;
-- foreign exchange controls that may restrict or prohibit
repatriation of funds;
-- varying laws relating to, among other things, employment and
employment termination;
-- 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.
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 and anticipated funds from operations will be sufficient to enable us
to meet our operating needs for the next 24 months. In addition, 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 our control. These factors include:
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-- 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 the 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 to sell 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.
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.
OUR U.S. INVESTORS 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 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 also would be a PFIC if at least 50% of the value of
our assets
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averaged over the taxable year produce, or are held for the production of,
passive income. For these purposes, the value of our assets is calculated based
on our market capitalization. Passive income includes, among other items,
interest, dividends, royalties, rents and annuities.
For the 1999 taxable year approximately 8% of our assets averaged over
the taxable year produced, or were held for the production of, passive income,
and approximately 5% of our gross income was passive income. During 2000 we have
raised a total of approximately $75.4 million in a public offering, after
underwriting discounts, to be used for working capital and other general
corporate purposes. Since a significant portion of these funds will be invested
until needed, the percentage of our assets that are likely to produce passive
income during 2000 will increase.
If we become a PFIC, many of our U.S. shareholders will, in absence of
certain elections as discussed below, 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 deaths.
If we 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. 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. A U.S. shareholder who makes a qualified electing fund election,
will be taxed currently on our ordinary income and net capital gain (unless a
deferral election is in effect). A U.S. shareholder who makes a mark-to-market
election, will include as ordinary income each year an amount equal to the
excess of the fair market value of our common shares over the adjusted tax basis
as of the close of each year (with certain adjustments for prior years).
If we become a PFIC, our U.S. shareholders will generally be unable to
exchange our common shares for shares of an acquiring corporation on a
tax-deferred basis under the reorganization rules of the Internal Revenue Code,
and the benefits of many other nonrecognition provisions of the Internal Revenue
Code will not apply to transfers of our common shares. In addition, if we become
a PFIC, pledges of our common shares will be treated as sales for U.S. federal
income tax purposes. Our U.S. shareholders should note that state and local
taxes may also apply if amounts are included in U.S. 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
advisors 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 "Taxation- U.S. Federal Income Tax Considerations-Tax Status of the
COMPANY-PASSIVE FOREIGN INVESTMENT COMPANIES" 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 AND BY-LAWS 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 common
shareholders, has the authority to issue preferred
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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 approximately 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. The 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.
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 (described elsewhere in this prospectus), 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
-- 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.
THE VOLATILITY OF THE STOCK MARKET COULD DRIVE DOWN THE PRICE OF OUR COMMON
SHARES WHICH COULD RESULT IN 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
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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 June 23, 2000, we had outstanding 18,521,189 voting shares,
including 3,329,187 shares issuable upon conversion of our Series A preferred
shares. All of these shares are eligible for sale under Rule 144, pursuant to
currently effective registration statements, or are otherwise freely tradable.
Our common shares are eligible for sale into the public market as follows:
-- Our affiliates own 1,981,325 shares (of which 1,927,134 are
covered by this prospectus and may be freely sold, if and when
the registration statement covering these shares, of which
this prospectus forms a part, is declared effective) that may
be sold subject to volume restrictions imposed by Rule 144.
Our affiliates also own options to acquire an additional
1,055,776 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 769,144 shares. The shares to
be issued upon exercise of these options have been registered
and may be freely sold when issued.
-- We may issue options to purchase up to an additional 976,512
shares under our share option plans. The shares to be issued
upon exercise of these options have been registered and may be
freely sold when issued.
-- We have filed a registration statement covering 5,283,758
common shares issuable upon conversion of our Series A
preferred shares and issued or issuable upon exercise of
certain warrants issued on July 15, 1999. These shares may be
freely sold so long as the registration statement covering
them remain 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 then outstanding (which equals approximately 151,920 common shares as of
June 23, 2000 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 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
16
<PAGE>
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 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.
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<PAGE>
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; and
-- our patent applications.
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;
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<PAGE>
-- 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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<PAGE>
USE OF PROCEEDS
All of the common shares offered by this prospectus are being offered
by the selling shareholder. We will not receive any proceeds from sales of
common shares by the selling shareholder.
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.
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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<PAGE>
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 1997, 1998 and 1999 and the Consolidated
Balance Sheet data as at December 31, 1998 and 1999, as set forth below, have
been derived from our consolidated financial statements 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, incorporated into this prospectus by reference. The Consolidated Statement
of Operations data for fiscal years 1995 and 1996 and the Consolidated Balance
Sheet data as at December 31, 1995, 1996 and 1997, 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 three-month
period ended March 31, 1999 and 2000 and the Consolidated Balance Sheet data as
at March 31, 2000 are derived from unaudited consolidated financial statements
included in our Report on Form 6-K Filing No. 1 for the Month of May, 2000,
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
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------------------ --------------------
1995 1996 1997 1998 1999 1999 2000
----------- ---------- ---------- ---------- ---------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales ............................ $ -- $ 978 $ 3,033 $ 10,875 $ 13,627 $ 3,261 $ 3,644
Cost of sales .................... -- 561 1,995 6,673 9,273 2,151 2,284
----------- ---------- ---------- ---------- ---------- -------- --------
Gross margin ..................... -- 417 1,038 4,202 4,354 1,110 1,360
Sales, general and
administrative expense ......... 1,476 3,377 7,448 11,516 19,074 3,163 5,418
Research and development expense . 1,241 2,745 4,123 6,289 7,935 1,854 2,083
Other expense .................... -- -- 654 420 1,329 -- --
----------- ---------- ---------- ---------- ---------- -------- --------
Loss from operations before
interest ....................... (2,717) (5,705) (11,187) (14,023) (23,984) (3,907) (6,141)
Interest income .................. 12 609 774 264 695 113 430
Interest and financing expense ... (19) (69) (3) (1,132) (1,998) (540) (5)
----------- ---------- ---------- ---------- ---------- -------- --------
Net loss ......................... (2,724) (5,165) (10,416) (14,891) (25,287) (4,334) (5,716)
Cumulative preferred dividends
and accretion of discount
attributable to preferred
shares.......................... -- -- -- -- (1,770) -- (967)
----------- ---------- ---------- ---------- ---------- -------- --------
Net loss attributable to
common shareholders ........ $ (2,724) $ (5,165) $ (10,416) $ (14,891) $ (27,057) $ (4,334) $ (6,683)
----------- ---------- ---------- ---------- ---------- -------- --------
----------- ---------- ---------- ---------- ---------- -------- --------
Net loss per common share ........ $ (0.65) $ (0.89) $ (1.48) $ (1.91) $ (2.73) $ (0.46) $ (0.55)
Weighted average number of
common shares outstanding ... 4,181,599 5,791,367 7,059,578 7,782,094 9,916,954 9,410,845 12,248,002
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------- MARCH 31,
1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- -----------
(in thousands) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and short-term investments ...... $ 403 $ 18,928 $ 7,588 $ 11,274 $ 42,688 $ 36,187
Working capital ...................... 418 20,061 9,561 8,432 45,611 39,047
Total assets ......................... 1,791 22,606 13,936 27,783 58,640 54,834
Indebtedness ......................... 500 -- -- 7,495 -- --
Mandatorily redeemable convertible
preferred shares .................. -- -- -- -- 27,556 28,523
Accumulated deficit .................. (3,680) (8,845) (19,260) (34,151) (59,438) (65,154)
Shareholders' equity ................. 841 21,795 12,610 14,579 24,351 19,577
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, or at no cost, to customers who commit, or to customers who we
anticipate will commit, to purchase significant quantities of GeneKits and other
consumables. In addition, in 1998 and 1999, we bundled our DNA sequencers and
GeneKits for sale at reduced prices. We discontinued the practice of bundle
sales in the second half of 1999. 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. Revenues
from the sale of our products are recognized when shipment occurs and title
passes to the customer or distributor and there is a reasonable assurance of
collectibility. Revenues from the sale of testing and other services are
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 typically charged for such components if they were
sold individually rather than as part of the bundle.
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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 and Argentina.
For an analysis of sales by product segment and geographic market, see
Note 15 to our Consolidated Financial Statements included in our Annual Report
on Form 20-F, incorporated into this prospectus by reference.
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.
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 THREE MONTHS ENDED MARCH 31, 2000 TO THREE MONTHS ENDED
MARCH 31, 1999
SALES. Sales increased 12% to $3.6 million for the three months ended
March 31, 2000, compared with $3.3 million for the same period of the prior
year. This increase resulted primarily from increased sales of our HIV GeneKit.
In the three months ended March 31, 2000, automated DNA sequencing systems
accounted for 51% of total sales, compared to approximately 73% of total sales
in the same period of the prior year. GeneKits and other consumables accounted
for 44% of total sales, compared to approximately 21% of total sales in the same
period of the prior year. Testing services accounted for 5% of total sales,
compared to 6% of total sales in the same period of the prior year. It is
expected that sales of GeneKits and other consumables will continue to grow as a
percentage of total sales. Sales in North America, Europe, and Asia and South
America were $1.6 million, $1.2 million and $0.8 million, respectively, during
the three months ended March 31, 2000, as compared to $1.5 million, $1.0 million
and $0.8 million, respectively, during the three months ended March 31, 1999.
During the three months ended March 31, 2000, Amersham accounted for
approximately 21% of sales, of which 20% comprised DNA sequencing systems and 1%
comprised GeneKits and other consumables. During the three months ended March
31, 1999, Amersham accounted for 11% of sales, of which 9% comprised DNA
sequencing
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systems and 2% comprised GeneKits and other consumables. The sales to Amersham
were made on the same general terms and conditions as the majority of other
sales during the respective periods.
COST OF SALES. Cost of sales increased to $2.3 million for the three
months ended March 31, 2000, from $2.2 million in the same period of the prior
year. In the three months ended March 31, 2000, cost of sales aggregated 63% of
sales, compared to 66% of sales in the same period of the prior year. The
decrease in cost of sales as a percentage of sales was primarily related to the
increase in sales of GeneKits. GeneKit sales have a higher gross margin and
lower cost of sales, than sales of DNA sequencing systems and testing services.
SALES, GENERAL AND ADMINISTRATIVE EXPENSES. Sales, general and
administrative expenses increased 71% to $5.4 million for the three months ended
March 31, 2000, compared with $3.2 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 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 60% to $3.0
million for the three months ended March 31, 2000, compared with $1.9 million
for the same period of the prior year.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased 12% to $2.1 million for the three months ended March 31, 2000,
compared with $1.9 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 related to our
planned FDA submission for our HIV OpenGene System.
INTEREST INCOME. Interest income was $0.4 million for the three months
ended March 31, 2000, compared with $0.1 million for the same period of the
prior year. This increase reflects interest earned on higher average cash
balances as a result of the cash proceeds received from the July 1999 issuance
of the Series A preferred shares and the December 1999 private placement of
1,916,000 common shares.
INTEREST AND FINANCING EXPENSE. Interest and financing expense
decreased to approximately nil for the three months ended March 31, 2000,
compared with $0.5 million for the same period of the prior year. The decrease
is due to the repayment in July 1999, concurrent with the issuance of the Series
A preferred shares, of all of the company's outstanding debt.
CUMULATIVE PREFERRED DIVIDENDS AND ACCRETION OF DISCOUNT ATTRIBUTABLE
TO PREFERRED SHARES. The increase in cumulative preferred dividends and
accretion of discount attributable to preferred shares to $1.0 million for the
three months ended March 31, 2000 from nil for the same period of the prior
year, reflects dividends and amortization of discount on the Series A preferred
shares issued in July 1999.
COMPARISON OF FISCAL YEAR ENDED DECEMBER 31, 1999 TO FISCAL YEAR ENDED
DECEMBER 31, 1998
SALES. Sales increased 25% to $13.6 million in 1999, from $10.9 million
in 1998. This increase resulted primarily from increased sales of our GeneKits
and other consumables. In 1999, 340 sequencing systems were sold, as compared to
412 sequencing systems sold in 1998. The decrease in sequencing systems sold in
1999 as compared to 1998 is due to a decline in Seq4x4 sales to Amersham, which
decreased from 273 units in 1998 to 85 units in 1999. In 1998 Amersham began to
actively market the Seq4x4 and initial sales were high as Amersham filled their
distribution pipeline. Subsequently, Amersham's marketing effort has been
transferred to the Long-Read Tower at a higher unit price but lower anticipated
volume. In 1999, sequencing systems accounted for 57% of total sales, compared
to 74% of total sales in 1998. In 1999, GeneKits and other consumables accounted
for 35% of total sales,
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<PAGE>
compared to 13% of total sales in 1998. Testing services accounted for 8% of
sales in 1999, compared to 13% of sales in 1998. Sales in North America, Europe,
Japan and the rest of the world were $5.2 million, $5.5 million, $1.6 million
and $1.3 million, respectively, for 1999, as compared to $4.4 million, $4.6
million, $1.6 million and $0.3 million, respectively, during 1998. During 1999,
Amersham accounted for approximately 21% of sales, of which 19% comprised
sequencing systems and 2% comprised GeneKits and other consumables. During 1998,
Amersham accounted for 30% of sales, of which 29% comprised sequencing systems
and 1% comprised GeneKits and other consumables. The sales to Amersham were made
on the same general terms and conditions as the majority of other sales during
the respective periods.
COST OF SALES. Cost of sales increased 39% to $9.3 million in 1999,
from $6.7 million in 1998. In 1999, cost of sales aggregated 68% of sales,
compared to 61% of sales in 1998. This increase in cost of sales as a percentage
of sales was primarily related to a write-off of obsolete and discontinued
instruments and related parts totaling $0.6 million recorded in the second
quarter of 1999.
SALES, GENERAL AND ADMINISTRATIVE EXPENSES. Sales, general and
administrative expenses increased 66% to $19.1 million in 1999, from $11.5
million in 1998. 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 79% to
$11.1 million in 1999, from $6.2 million in 1998.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased 26% to $7.9 million in 1999, from $6.3 million in 1998. 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.
EXIT AND TERMINATION COSTS. During 1999, we incurred exit and
termination costs of $1.3 million. There were no such costs in 1998. Of this
amount, $0.8 million related to the planned relocation of certain of our
activities to a new location in Atlanta, and $0.5 million was for termination
benefits payable to two senior officers in connection with the termination of
their employment with our company.
INTEREST INCOME. Interest income increased to $0.7 million in 1999,
from $0.3 million in 1998. The increase reflects interest earned on higher
average cash balances as a result of the proceeds received from financings
completed during the third and fourth quarters of 1999.
INTEREST AND FINANCING EXPENSE. Interest and financing expense
increased to $2.0 million in 1999, from $1.1 million in 1998. 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, $1.5 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 $0.6 million during
1998.
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 sequencing systems,
GeneKits and other consumables and testing, sequencing and other services. In
1998, 412 sequencing systems were sold, an increase of 353% from the 91 systems
sold in 1997. In 1998, 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
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1997. Testing services accounted for 13% of sales in 1998 compared to 2% of
sales in 1997 as a result of our acquisitions in 1997 and 1998 of DNA diagnostic
testing companies. Sales during 1998 in North America, Europe, Japan and the
rest of the world were $4.4 million, $4.6 million, $1.6 million and $0.3
million, respectively, as compared to $2.8 million, $0.2 million, nil and $0.05
million, respectively, during 1997. During 1998, Amersham accounted for 30% of
sales, of which 29% comprised sequencing systems and 1% comprised GeneKits and
other consumables. The sales to Amersham 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 235% 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 production of 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 72% to $6.2 million in 1998 from
$3.6 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 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 estimate the cost to date plus additional cost to complete
the kit will total approximately $900,000. We currently expect development of
the kit to be completed during 2000. 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.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through
private placements of equity and public offerings. We have also borrowed funds
from institutional lenders.
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<PAGE>
INSTITUTIONAL LOANS. On April 30, 1998, our subsidiary, Visible
Genetics Corp., or VGC, borrowed $7.0 million from various funds, which we refer
to as the Hilal Funds, for which Hilal Capital Management LLC serves as general
partner, investment advisor or management company. 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 Hilal Funds 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 Hilal Funds 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 Hilal Funds 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 Hilal
Funds 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 that we may
incur.
As part of the loan arrangements, we granted the Hilal Funds warrants
to purchase our common shares. Initially, we granted the Hilal Funds 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
Hilal funds 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 Hilal Funds 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 $0.6 million was recorded as non-cash financing expenses
in 1999.
On April 30, 1999, we granted the Hilal Funds 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 was
recorded as a non-cash charge to financing expense in 1999.
On July 15, 1999, we repaid or satisfied 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
27
<PAGE>
shares will reduce earnings attributable to common shareholders. 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, who we refer to as the Warburg
Pincus Funds, 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 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. In February 2000, the Warburg Pincus Funds exercised all of their
warrants. Under the terms of our warrant agreement, the Warburg Pincus Funds
elected to pay the exercise price for the warrants through a non-cash exercise.
As a result, the Warburg Pincus Funds received 847,749 of our common shares
rather than 1,100,000 common shares they otherwise would have received upon
exercise in cash of all of their warrants.
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 net proceeds
of $26.7 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.
APRIL 2000 PUBLIC OFFERING. In April 2000 we completed an underwritten
follow-on public offering of 2,090,000 common shares at $38 per share. All of
the shares were sold by us. After underwriting discounts, but before related
fees and expenses, we received proceeds of $75.4 million.
CAPITAL AND OTHER EXPENDITURES. Additions to fixed assets were
approximately $1.9 million, $3.3 million and $1.3 million for the years ended
December 31, 1999, 1998 and 1997, respectively. We expect capital expenditures
to increase over the next several years as we expand our facilities and acquire
additional manufacturing and scientific equipment.
In April 2000 we entered into a worldwide licensing and collaboration
agreement with PE Biosystems Group, further described in our Report on Form 6-K
Filing No. 3 for the Month of April, 2000, incorporated into this prospectus by
reference. Under the terms of the agreement, we paid an initial licensing fee to
PE Biosystems of $10.0 million in June 2000. We will pay future licensing fees
of $5.0 million in each of June 2001, June 2002 and June 2003, unless the
agreement is terminated before those dates. We are not obligated to make any
further payments upon the termination of the agreement. In addition we will also
make royalty payments to PE Biosystems based on sales in return for access to
the PE Biosystems technology and installed instrument customer base. We may
terminate the agreement upon 60 days written notice to PE Biosystems and either
party may terminate the agreement under certain other limited circumstances.
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
28
<PAGE>
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.
Based on our current plans, we believe 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 of
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, under certain circumstances, the consent of the Series A preferred
shareholders. 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.
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.
29
<PAGE>
INFORMATION ABOUT OUR COMPANY
For a detailed description of our business and information about our
management, see our Annual Report on Form 20-F and the Form 6-Ks, which are
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 and the Form 6-Ks, which are incorporated into this
prospectus by reference.
BOARD OF DIRECTORS
In April 2000, J. Spencer Lanthier was appointed to the Board of
Directors, filling the vacancy created by the resignation, from the Board of
Directors, of Marguerite Ethier, Vice President and General Counsel of our
company. Ms. Ethier was appointed to the Board of Directors in March 2000 to
fill the vacancy created by the resignation of Samuel Schwartz. Since January
2000, Mr. Lanthier has been self-employed as a corporate director. From 1993 to
April 1999, Mr. Lanthier was Chairman and Chief Executive Officer of KPMG Canada
LLP.
In April 2000, Jacques R. Lapointe was appointed to the Board of
Directors, filling the vacancy created by the resignation of Robert M.
MacIntosh. Mr. MacIntosh was appointed to the Board of Directors in March 2000
to fill the vacancy created by the resignation of Dr. Thomas C. Merigan. Since
June 1998, Mr. Lapointe has been President and Chief Operating Officer of
BioChem Pharma Inc. From April 1994 to June 1998, Mr. Lapointe was Managing
Director and Business Development Director of Glaxo Wellcome Plc. Mr. Lapointe
is presently a member of the board of directors of BioChem Pharma Inc.
At our annual meeting on May 16, 2000, Michael A. Cardiff and J.
Spencer Lanthier were elected to our Board of Directors to serve as Class I
Directors, for a term expiring in 2003, and Jonathan S. Leff was elected to our
Board of Directors to serve as the Series A Director, for a term expiring in
2001.
30
<PAGE>
SELLING SHAREHOLDERS
The following table provides certain information with respect to the
common shares held by the selling shareholder as of June 23, 2000.
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. Except as otherwise indicated below, to our
knowledge, the selling shareholder has sole voting and investment power with
respect to its common shares. This information is based on information provided
to us by the selling shareholder.
The selling shareholder is not under any obligation to sell all or any
portion of its common shares, nor is the selling shareholder obligated to sell
any of its common shares immediately under this prospectus. We cannot estimate
the number of the shares that will be held by the selling shareholder after
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 shareholder. We will not
receive any proceeds from any sales of common shares by the selling shareholder.
Except as described in our Annual Report on Form 20-F or otherwise
noted in the footnotes following the table, the selling shareholder has not 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>
NUMBER OF COMMON SHARES NUMBER OF PERCENTAGE OF
COMMON SHARES OFFERED COMMON SHARES COMMON SHARES
BENEFICIALLY OWNED PURSUANT TO THIS BENEFICIALLY OWNED BENEFICIALLY OWNED
SELLING SHAREHOLDER BEFORE OFFERING PROSPECTUS AFTER OFFERING AFTER OFFERING
------------------- ------------------ ---------------- ------------------ ------------------
<S> <C> <C> <C> <C>
GeneVest Inc.(1) 1,927,134 1,927,134 0 --
</TABLE>
--------------
(1) Sheldon Inwentash, a director of our company, is the Chairman and
Chief Executive Officer of GeneVest, and together with his affiliates,
beneficially owns 45% of the issued and outstanding common shares of
GeneVest. Mr. Inwentash disclaims beneficial ownership of these common
shares held of record by GeneVest.
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<PAGE>
PLAN OF DISTRIBUTION
The common shares may be sold from time to time by the selling
shareholder 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 shareholder may offer its 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 shareholder. Alternatively, the selling shareholder
may from time to time offer common shares to or through underwriters,
broker/dealers or agents. The selling shareholder 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 shareholder may not be able to
sell all of its shares under Rule 144. The selling shareholder 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 shareholder. 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 shareholder 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. Upon conversion, the
holders will also receive common shares, at the conversion price of $11.00 per
share, equal to the amount of all accrued and unpaid dividends. The Series A
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 Series A 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.
After the third anniversary and prior to the seventh anniversary of the
date of issuance of the Series A preferred shares, we have the right to redeem
the outstanding Series A preferred shares at a price, which we call the
redemption price, equal to $1,000 per share, plus accrued but unpaid dividends,
33
<PAGE>
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 Series A 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 Series A preferred shares at any time beginning on the
seventh anniversary after issuance. If we fail to redeem the Series A preferred
shares as required, the holders may appoint a majority of our Board of
Directors, who will continue to serve until we have redeemed the Series A
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 a Series A preferred share 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, and the terms of, the 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
have rights as to dividends and liquidation 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.
Certain holders of our 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, certain holders of our Series A preferred shares 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. These holders 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 these holders to
participate in future offerings in this manner provides those holders 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.
We 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.
34
<PAGE>
CLASSIFIED BOARD
Our Board of Directors is divided into three classes. The
classification of the Board of Directors was implemented in March 1996.
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, 44 Wall Street, 6th Floor, New York, New York 10005.
35
<PAGE>
LEGAL MATTERS
The validity of the common shares being offered hereby has been passed
upon for us by our attorneys, Osler, Hoskin & Harcourt LLP, Toronto, Ontario.
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.
EXPERTS
Our Consolidated Financial Statements as at December 31, 1999 and 1998
and for the years ended December 31, 1999, 1998 and 1997, included in our Annual
Report on Form 20-F/A-1, 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/A-1. The Consolidated
Financial Statements have been included in our Annual Report on Form 20-F/A-1 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.
36
<PAGE>
================================================================================
1,927,134 SHARES
VISIBLE GENETICS INC.
COMMON SHARES
-------------------------------------------
SELLING SHAREHOLDERS' PROSPECTUS
---------------------
June __, 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 shareholder is 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.
37
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses of the Company in
connection with the offering described in this Registration Statement. All of
these expenses are being borne by the Company.
<TABLE>
<S> <C>
Securities and Exchange Commission filing fee.... $19,650
Nasdaq additional listing fee.................... $17,500
Accounting fees.................................. $ 8,000
Legal fees....................................... $10,000
Printing and engraving........................... $ 1,000
Miscellaneous.................................... $ 850
-------
Total............................ $57,000
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 136 of the Ontario Business Corporations Act and Section 7 of
the Company's By-Laws Nos. 1 and 3 provide for the indemnification of directors
and officers of the Company. Under these provisions, the Company shall indemnify
a director or officer of the Company (or a former director or officer) against
all costs, charges and expenses, including amounts paid to settle an action or
satisfy a judgment, reasonably incurred by such director or officer in respect
of any civil, criminal or administrative action or proceeding (other than in
respect of an action by or on behalf of the Company to procure a judgment in its
favor) to which such director or officer (or a former director or officer) is
made a party by reason of his position with the Company, provided such director
or officer: (a) acted honestly and in good faith with a view to the best
interests of the Company and (b) in the case of a criminal or administrative
action or proceeding that is enforced by a monetary penalty, had reasonable
grounds for believing that his conduct was lawful. In respect of an action by or
on behalf of the Company to procure a judgment in its favor, the Company, with
the approval of a court, may indemnify a director or officer of the Company (or
a former director or officer) against all costs, charges and expenses reasonably
incurred by him in connection with such action if he fulfills the conditions set
out in clauses (a) and (b) of the previous sentence. Notwithstanding the
foregoing, a director or officer of the Company (or a former director or
officer) is entitled to indemnification from the Company with respect to all
costs, charges and expenses reasonably incurred by him in connection with the
defense of any civil, criminal or administrative action or proceeding to which
he is made a party by reason of his position with the Company if he was
substantially successful on the merits in his defense of the action or
proceeding and he fulfills the conditions in clauses (a) and (b) of the second
sentence of this paragraph.
The Company also has a policy insuring it and its directors and
officers against certain liabilities and has entered into indemnification
agreements with each of its directors and officers.
II-1
<PAGE>
ITEM 16. EXHIBITS
The following exhibits are being filed herewith:
<TABLE>
<S> <C>
4.1 Specimen of Certificate for Common Shares (1)
4.2 Certificate of Designations, Number, Voting Powers, Preferences and Rights of
Series A Convertible Preferred Shares of Visible Genetics Inc (2)
5.1 Opinion of Osler, Hoskin & Harcourt LLP as to the legality of the Common Shares
23.1 Consent of Osler, Hoskin & Harcourt LLP (included in Exhibit 5.1)
23.2 Consent of Baer Marks & Upham LLP
23.3 Consent of PricewaterhouseCoopers LLP
24 Powers of Attorney (included on the executed signature page of this Registration
Statement)
</TABLE>
--------------
(1) Incorporated by reference from Exhibit 4.1 to Amendment No. 1 to the
Company's Registration Statement on Form F-1, File No. 333-3118, filed with the
Securities and Exchange Commission on May 15, 1996.
(2) Incorporated by reference from Exhibit 4.2 to Amendment No. 1 to the
Company's Registration Statement on Form F-3, File No. 333-91155, filed with
the Securities and Exchange Commission on November 17, 1999.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes as follows:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement to include any
material information with respect to the plan of distribution not previously
disclosed in the Registration Statement or any material change to such
information in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial BONA
FIDE offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remains unsold at the
termination of the offering.
(4) To file a post-effective amendment to the Registration
Statement to include any financial statements required by Rule 3-19 of
Regulation S-X at the start of any delayed offering or throughout a continuous
offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the Registration Statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
in the initial BONA FIDE offering thereof.
II-2
<PAGE>
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form F-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Toronto, Province of Ontario, Canada, on the 30 day
of June 2000.
VISIBLE GENETICS INC.
By: /s/ RICHARD T. DALY
-------------------------------------
Richard T. Daly
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Richard T. Daly and Thomas J. Clarke or
any of them, as his true and lawful attorney-in-fact and agents, with full
powers of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement on Form F-3, and to
file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite or necessary to be done, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents or any of
them, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ RICHARD T. DALY President and Chief Executive June 30, 2000
----------------------------------------- Officer (principal executive
Richard T. Daly officer)
/s/THOMAS J. CLARKE Chief Financial Officer June 30, 2000
----------------------------------------- (Principal financial officer
Thomas J. Clarke and principal accounting
officer)
/s/ MICHAEL A. CARDIFF Director June 30, 2000
----------------------------------------
Michael A. Cardiff
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ SHELDON INWENTASH Director June 30, 2000
----------------------------------------
Sheldon Inwentash
/s/ J. SPENCER LANTHIER Director June 30, 2000
----------------------------------------
J. Spencer Lanthier
/s/ JACQUES R. LAPOINTE Director June 30, 2000
----------------------------------------
Jacques R. Lapointe
/s/ JONATHAN S. LEFF Director June 30, 2000
----------------------------------------
Jonathan S. Leff
/s/ DR. J. ROBERT S. PRICHARD Director June 30, 2000
----------------------------------------
Dr. J. Robert S. Prichard
/s/ DR. LLOYD M. SMITH Director June 30, 2000
----------------------------------------
Dr. Lloyd M. Smith
/s/ DR. KONRAD M. WEIS Director June 30, 2000
----------------------------------------
Dr. Konrad M. Weis
Authorized Representative in the United States:
BAER MARKS & UPHAM LLP June 30, 2000
By: /s/ STEVEN S. PRETSFELDER
-------------------------
Steven S. Pretsfelder
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
5.1 Opinion of Osler, Hoskin & Harcourt LLP as to the legality of the Common Shares
23.1 Consent of Osler, Hoskin & Harcourt LLP (included in Exhibit 5.1)
23.2 Consent of Baer Marks & Upham LLP
23.3 Consent of PricewaterhouseCoopers LLP
</TABLE>
II-6
