<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 29, 2000
COMMISSION FILE NO. 333-32258
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
PRE-EFFECTIVE
AMENDMENT NO. 1
TO
FORM F-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
VISIBLE GENETICS INC.
(Exact name of Registrant as specified in its charter
and translation of Registrant's name into English)
<TABLE>
<S> <C>
ONTARIO N/A
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
</TABLE>
--------------------------
700 BAY STREET
SUITE 1000
TORONTO, ONTARIO
CANADA M5G 1Z6
(416) 813-3240
(Address and telephone number of Registrant's principal executive offices)
--------------------------
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)
--------------------------
COPIES TO:
<TABLE>
<S> <C> <C>
STEVEN S. PRETSFELDER, ESQ. RANDALL W. PRATT, ESQ. MITCHELL S. BLOOM, ESQ.
BAER MARKS & UPHAM LLP OSLER, HOSKIN & HARCOURT LLP TESTA, HURWITZ & THIBEAULT, LLP
805 THIRD AVENUE BOX 50, 1 FIRST CANADIAN PLACE 125 HIGH STREET
NEW YORK, NEW YORK 10022 TORONTO, ONTARIO BOSTON, MASSACHUSETTS 02110
CANADA M5K 1B8
</TABLE>
--------------------------
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. / /
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
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PRICE PER SHARE(1) OFFERING PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Shares................................ 2,300,000 $92.69 $213,187,000 $56,281.37(2)
</TABLE>
(1) This amount is based upon the average of the closing bid and asked prices
as of March 9, 2000, and is being used solely for the purpose of calculating
the registration fee pursuant to Rule 457 under the Securities Act of 1933.
(2) The registration fee was previously paid.
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
SUBJECT TO COMPLETION, DATED MARCH 29, 2000
[LOGO]
2,000,000 COMMON SHARES
Visible Genetics Inc. is offering 2,000,000 of its common shares. Our common
shares are traded on the Nasdaq National Market under the symbol "VGIN." On
March 24, 2000, the last reported sale price for the common shares on the Nasdaq
National Market was $50.00 per share.
--------------
INVESTING IN OUR COMMON SHARES INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 4.
--------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Public Offering Price...................................... $ $
Underwriting Discounts and Commissions..................... $ $
Proceeds to Visible Genetics............................... $ $
</TABLE>
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS
IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
Visible Genetics Inc. has granted the underwriters a 30-day option to
purchase up to an additional 300,000 common shares to cover over-allotments.
--------------
ROBERTSON STEPHENS
PAINEWEBBER INCORPORATED
WARBURG DILLON READ LLC
ROTH CAPITAL PARTNERS, INC.
The date of this Prospectus is , 2000
<PAGE>
[INSERT PICTURE FOR INSIDE FRONT COVER]
Description of Picture Heading is entitled "The OpenGene-TM- Automated DNA
Sequencing System"
Picture of our hardware and list of the components constituting the hardware
Picture of our software and list of the components constituting the software
A picture of our TRUGENE test kit and a list of our test kits
Our company logo
<PAGE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. 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 THE COMMON SHARES. IN THIS
PROSPECTUS, REFERENCES TO "VISIBLE GENETICS," "WE," "US" AND "OUR" REFER TO
VISIBLE GENETICS INC. AND ITS SUBSIDIARIES.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Summary..................................................... 1
Risk Factors................................................ 4
Forward-Looking Statements.................................. 19
Use of Proceeds............................................. 20
Price Range of Common Shares................................ 20
Dividend Policy............................................. 20
Capitalization.............................................. 21
Dilution.................................................... 22
Selected Consolidated Financial Data........................ 23
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 24
Business.................................................... 31
Management.................................................. 51
Principal Shareholders...................................... 54
Underwriting................................................ 55
Description of Capital Shares............................... 58
Legal Matters............................................... 61
Experts..................................................... 61
Where You Can Find More Information......................... 61
Incorporation of Certain Documents by Reference............. 62
Index to Consolidated Financial Statements.................. F-1
</TABLE>
------------------------
TRADEMARKS OR TRADE NAMES OF VISIBLE GENETICS USED IN THIS PROSPECTUS
INCLUDE: CLIP-TM-, CLIPPER-TM-, GEL TOASTER-TM-, GENEKIT-TM-, GENEOBJECTS-TM-,
LONG-READ MICROCEL-TM-, LONG-READ TOWER-TM-, MICROCEL-TM-, OPENGENE-TM-,
SUREFILL-TM-, TRUGENE-TM- AND VISIBLE GENETICS-REGISTERED TRADEMARK-. EACH
TRADEMARK, TRADE NAME OR SERVICE MARK OF ANY OTHER COMPANY APPEARING IN THIS
PROSPECTUS BELONGS TO ITS HOLDER.
Our common shares have not been qualified by prospectus for distribution in
any province of Canada and may be offered for sale in Canada only pursuant to
exemptions from the prospectus requirements of the applicable province. Such
sales may be made only by dealers registered under the laws of such province or
pursuant to exemptions from the applicable registered dealer requirements.
FORWARD LOOKING INFORMATION
Some of the matters discussed under the captions "Summary," "Risk Factors"
and elsewhere in this prospectus may constitute forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995. This
information may involve known and unknown risks, uncertainties and other factors
that may cause our actual results, performance or achievements to be materially
different from any future results, performance or achievements expressed or
implied by these forward-looking statements.
<PAGE>
SUMMARY
BECAUSE THIS IS ONLY A SUMMARY, IT DOES NOT CONTAIN ALL THE INFORMATION THAT
MAY BE IMPORTANT TO YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS, ESPECIALLY "RISK
FACTORS" AND THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES, BEFORE DECIDING TO
INVEST IN OUR COMMON SHARES. ALL FINANCIAL INFORMATION PROVIDED IN THIS
PROSPECTUS IS IN U.S. DOLLARS. EXCEPT WHERE WE STATE OTHERWISE, THE INFORMATION
PRESENTED IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS'
OVER-ALLOTMENT OPTION.
OUR COMPANY
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% to 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 2000 for approval to sell our HIV OpenGene System to the
clinical diagnostic market.
1
<PAGE>
OUR STRATEGY
Our objective is to be a leader in the emerging field of pharmacogenomics.
Our goal is to enable clinicians to use genetic information to monitor and
customize treatment of diseases, initially for HIV and later for other diseases.
Key elements of our business strategy are to:
- provide an integrated genotyping solution for the clinical diagnostic
market;
- target the HIV genotyping market;
- leverage our OpenGene System for additional applications;
- offer a wide range of testing and sequencing services;
- provide sophisticated software for the clinical research and diagnostic
markets;
- tailor our marketing efforts to local markets; and
- maintain our technological leadership in genotyping.
OUR ADDRESS
Our principal executive offices are located at 700 Bay Street, Suite 1000,
Toronto, Ontario, Canada M5G 1Z6. Our telephone number is (416) 813-3240.
THE OFFERING
<TABLE>
<S> <C>
Common shares offered by Visible Genetics.... 2,000,000 common shares
Common shares outstanding after the 14,785,419 common shares
offering...................................
Use of proceeds.............................. For working capital and other general
corporate purposes
Nasdaq National Market symbol................ VGIN
</TABLE>
The number of our common shares outstanding after this offering is based on
12,785,419 common shares outstanding as of February 29, 2000. It excludes
2,447,886 common shares reserved for issuance under our stock option plans, of
which 1,946,474 common shares were subject to outstanding options as of
February 29, 2000 at a weighted average exercise price of $9.60 per common
share. It also excludes 952,118 common shares that may be issued upon exercise
of outstanding warrants and 3,259,748 common shares issuable upon conversion of
our Series A preferred shares as of February 29, 2000. The number of common
shares issuable upon conversion of our Series A preferred shares will increase
as the dividends payable thereon accrue. After giving effect to this offering,
the number of voting shares outstanding as of February 29, 2000 is 18,045,167.
2
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THIS TABLE SUMMARIZES OUR STATEMENTS OF OPERATIONS DATA AND OUR BALANCE
SHEET DATA. THE AS ADJUSTED BALANCE SHEET DATA REFLECTS THE SALE BY VISIBLE
GENETICS OF 2,000,000 COMMON SHARES IN THE OFFERING AT AN ASSUMED PUBLIC
OFFERING PRICE OF $50.00 AND THE RECEIPT OF THE NET PROCEEDS OF THE OFFERING.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------------------------------------------
1995 1996 1997 1998 1999
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Sales.................................. $ -- $ 978 $ 3,033 $ 10,875 $ 13,627
Cost of sales.......................... -- 561 1,995 6,673 9,273
---------- ---------- ---------- ---------- ----------
Gross margin........................... -- 417 1,038 4,202 4,354
Sales, general and administrative
expense.............................. 1,476 3,377 7,448 11,516 19,074
Research and development expense....... 1,241 2,745 4,123 6,289 7,935
Other expense.......................... -- -- 654 420 1,329
---------- ---------- ---------- ---------- ----------
Loss from operations before interest... (2,717) (5,705) (11,187) (14,023) (23,984)
Interest income........................ 12 609 774 264 695
Interest and financing expense......... (19) (69) (3) (1,132) (1,998)
---------- ---------- ---------- ---------- ----------
Net loss............................... (2,724) (5,165) (10,416) (14,891) (25,287)
========== ========== ========== ========== ==========
Cumulative preferred dividends and
accretion of discount attributable to
preferred shares..................... -- -- -- -- (1,770)
---------- ---------- ---------- ---------- ----------
Net loss attributable to common
shareholders......................... $ (2,724) $ (5,165) $ (10,416) $ (14,891) $ (27,057)
========== ========== ========== ========== ==========
Net loss per common share.............. $ (0.65) $ (0.89) $ (1.48) $ (1.91) $ (2.73)
Weighted average number of common
shares outstanding................... 4,181,599 5,791,367 7,059,578 7,782,094 9,916,954
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-------------------
AS
ACTUAL ADJUSTED
-------- --------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and short-term investments........................... $ 42,688 $137,038
Working capital........................................... 45,611 139,961
Total assets.............................................. 58,640 152,990
Mandatorily redeemable convertible preferred shares....... 27,556 27,556
Accumulated deficit....................................... (59,438) (59,438)
Shareholders' equity...................................... 24,351 118,701
</TABLE>
3
<PAGE>
RISK FACTORS
AN INVESTMENT IN OUR COMMON SHARES IS VERY RISKY. YOU SHOULD CAREFULLY
CONSIDER THE FOLLOWING RISK FACTORS IN ADDITION TO THE REMAINDER OF THIS
PROSPECTUS BEFORE PURCHASING OUR COMMON SHARES. THIS PROSPECTUS CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. MANY FACTORS,
INCLUDING THOSE DESCRIBED BELOW, MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM ANTICIPATED RESULTS.
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.
As of December 31, 1999, our accumulated deficit was $59.4 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;
- 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:
4
<PAGE>
- 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;
- 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
5
<PAGE>
- 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
recently 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.
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.
6
<PAGE>
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.
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.
7
<PAGE>
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.
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.
8
<PAGE>
In selected geographic markets outside North America and certain European
countries, beginning in 1999, we entered into distribution and marketing
arrangements with leading distributors to sell our products to the research and
clinical diagnostic markets. These agreements expire at various times from
April 2000 through April 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 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 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 33 U.S.
patents. We own or jointly own an additional 32 U.S. patent applications
pending, of which seven have been allowed. We own 12 foreign patents. We own or
jointly own foreign applications presently pending as PCT applications, or as
national phase PCT
9
<PAGE>
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.
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 notice 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.
Perkin-Elmer Corporation, PE Biosystems Group filed a lawsuit against us in
the United States District Court for the Northern District of California
claiming that our DNA sequencing equipment and products infringe patents
licensed to Perkin-Elmer by the California Institute of Technology. The suit
requests among other remedies that the court enjoin us from continuing to
infringe these patents and an unspecified amount of damages. If Perkin-Elmer is
successful in this suit, we may be unable to manufacture our DNA sequencing
equipment and products without a license from Perkin-Elmer. There can be no
assurance that we would be able to obtain a license for these patents on terms
acceptable to us, or at all. If we fail to obtain a license, or if the terms of
a license are burdensome to us, our business, financial condition and results of
operations could be materially harmed. In addition, monetary damages awarded to
Perkin-Elmer could be substantial, and if so, our business, financial condition
and results of operations could be materially harmed. Dr. Lloyd M. Smith, one of
our directors, is a named inventor on the patents that we are alleged to have
infringed. Dr. Smith indirectly receives royalty payments for those patents from
Perkin-Elmer, through the California Institute of Technology. Dr. Smith is a
co-founder of Third-Wave Technologies Inc., which has announced that it will be
acquired by PE Biosystems in a stock-for-stock transaction. After the closing of
that transaction, Dr. Smith expects to be a consultant to PE Biosystems.
10
<PAGE>
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 also use certain custom-designed components supplied by third parties in
our DNA sequencers and other equipment. We believe that there are alternative
suppliers for these custom-designed parts. However, we will incur costs in
switching to alternative 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.
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;
11
<PAGE>
- 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 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 to our existing staff and systems. In
addition, our current and future expense levels are based largely on our
investment plans and estimates of future revenues and are, to a large extent,
fixed. We may be unable to adjust spending in a timely manner to compensate for
any unexpected revenue shortfall. Therefore, any significant shortfall in
revenues as compared to our planned expenditures 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;
12
<PAGE>
- 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.
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;
13
<PAGE>
- 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,
including proceeds from our recently completed financings, the proceeds from
this offering and anticipated funds from operations will be sufficient to enable
us to meet our operating needs for at least the next 24 months. The proceeds of
this offering will be available for general corporate and working capital
purposes, including, among other things, to acquire complementary businesses,
products, services or technologies. Currently, we have no definitive agreements
to make any acquisition and we cannot be certain that the proceeds we will
receive from this public offering will be sufficient to complete any acquisition
we might make in the future. 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:
- 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
14
<PAGE>
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
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 the third and
fourth quarter of 1999, we raised a total of approximately $52 million in
private financings, after repayment of outstanding indebtedness and offering
expenses, to be used for general working capital purposes. Since a significant
portion of these funds and the funds that we will receive from this offering
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
15
<PAGE>
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 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
16
<PAGE>
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 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 February 29, 2000, we had outstanding 16,045,167 voting shares,
including 3,259,748 shares issuable upon conversion of our Series A preferred
shares but excluding the shares covered by this prospectus. All of these shares
are eligible for sale under Rule 144, pursuant to currently effective
registration statements, or are otherwise freely tradable. Directors, executive
officers and certain shareholders who in the aggregate own 4,879,759 voting
shares have agreed to a 90-day lock-up with respect to their shares. FleetBoston
Robertson Stephens Inc. may release shareholders from the lockup agreement at
any time and without notice. Following the expiration of this lock-up period,
4,879,759 common shares subject to the lock-up agreements will become available
for immediate resale in the public market subject, in some instances, to the
volume and other limitations of Rule 144.
Subject to the lock-up agreements described above, our common shares are
eligible for sale into the public market as follows:
- Our affiliates own 1,971,325 shares that may be sold subject to volume
restrictions imposed by Rule 144. We have agreed to file a registration
statement with the Securities and Exchange Commission covering 1,927,134
of these shares, which will be filed no earlier than 90 days and no later
than 180 days after the completion of this offering. Our affiliates also
own options to acquire an additional 950,776 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 995,698 shares. The shares to be issued upon exercise of
these options have been registered and may be freely sold when issued.
- 3,069 shares issuable upon exercise of outstanding warrants are registered
for sale pursuant to a registration statement filed with the Securities
and Exchange Commission, and may be freely sold.
- We may issue options to purchase up to an additional 501,412 shares under
our stock option plans. The shares to be issued upon exercise of these
options have been registered and may be freely sold when issued.
- We have filed registration statements covering 1,916,000 common shares,
and an additional 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 statements covering them remain effective.
17
<PAGE>
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 147,854 common shares as of
February 29, 2000, after giving effect to this offering) 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 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.
WE HAVE DISCRETION AS TO THE USE OF PROCEEDS FROM THIS OFFERING AND WE MAY NOT
USE THE PROCEEDS FROM THIS OFFERING IN THE MOST EFFECTIVE MANNER.
We have broad discretion as to the use of the proceeds that we will receive
from this offering. We intend to use the net proceeds for working capital and
other general corporate purposes. We may also use a portion of the net proceeds
to acquire or invest in businesses, products, services or technologies that are
complementary to our business, although we have no such specific plans at this
time. We cannot assure you that management will apply the funds raised in this
offering effectively, nor can we assure you that the proceeds will be invested
to yield favorable returns. The ineffective use of the net proceeds may
materially harm our business, financial condition and results of operations.
PURCHASERS OF COMMON SHARES IN THIS OFFERING WILL INCUR IMMEDIATE AND
SUBSTANTIAL DILUTION.
You will incur immediate and substantial dilution of $41.44 per common share
in the net tangible book value of the common shares you purchase in this
offering based on an assumed public offering price of $50.00 per common share.
You may also experience additional dilution as a result of the issuance of
shares in future business acquisitions and otherwise and as a result of the
issuance and exercise of employee stock options and of warrants.
18
<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:
- FDA and other regulatory approval for certain of our products;
- 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;
- our clinical trials;
- reimbursement of our products by insurance companies and other third-party
payors;
- our ability to compete in the research, clinical research and clinical
diagnostic markets;
- our patent applications;
- our ability to bring our Atlanta manufacturing facility fully operational;
- our ability to modify our information systems to accommodate euro
transactions; and
- the status of year 2000 compliance efforts of our company, and our
material customers and suppliers.
We have based these forward-looking statements largely on our current
expectations. However, forward-looking statements are subject to a number of
risks and uncertainties, certain of which are beyond our control. Actual results
could differ materially from those anticipated as a result of the factors
described under "Risk Factors" including, among others:
- delays in obtaining, or our inability to obtain, approval by the FDA and
other regulatory authorities for our HIV OpenGene System and, in the
future, certain of our other products for the clinical diagnostic market;
- refusal of insurance companies and other third-party payors to reimburse
patients and clinicians for our products;
- uncertainty of acceptance of genotyping, in general, and of our products,
in particular, in the clinical diagnostic market;
- problems, delays and expenses we may face with our proposed clinical
trials;
- problems that we may face in manufacturing, marketing and distributing our
products;
- delays in the issuance of, or the failure to obtain, patents or licenses
for certain of our products and technologies;
- problems with important suppliers and business partners;
- delays in developing, or the failure to develop, new products and enhanced
versions of existing products; and
- the timing of our future capital needs or our inability to raise
additional capital when needed.
We do not undertake any obligation to publicly update or revise any
forward-looking statements contained in this prospectus or incorporated by
reference, whether as a result of new information, future events or otherwise.
Because of these risks and uncertainties, the forward-looking statements and
circumstances discussed in this prospectus might not transpire.
19
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds from the sale of our common shares in this
offering will be approximately $94.4 million (approximately $108.6 million if
the underwriters exercise their overallotment option in full) at an assumed
public offering price of $50.00 per share, after deducting the underwriting
discounts and commissions and estimated offering expenses.
We intend to use the net proceeds of this offering for working capital and
other general corporate purposes. In addition, we may use a portion of the net
proceeds to acquire complementary businesses, products, services or
technologies. Currently we have no definitive agreements to make any
acquisition.
Until we use the net proceeds, we intend to invest the funds in
interest-bearing, investment grade securities.
PRICE RANGE OF COMMON SHARES
Our common shares are traded on the Nasdaq National Market under the symbol
"VGIN". Our common shares are not listed or quoted for trading on securities
markets outside of the United States. The following table sets forth, for the
periods indicated, high and low sale prices of our common shares as reported on
the Nasdaq National Market.
<TABLE>
<CAPTION>
PRICE RANGE OF
COMMON SHARES
-----------------------
HIGH LOW
-------- --------
<S> <C> <C>
FISCAL YEAR ENDED DECEMBER 31, 1998:
First Quarter........................................... $ 9.75 $ 6.00
Second Quarter.......................................... $ 11.38 $ 7.50
Third Quarter........................................... $ 13.06 $ 7.00
Fourth Quarter.......................................... $ 14.00 $ 9.25
FISCAL YEAR ENDED DECEMBER 31, 1999:
First Quarter........................................... $ 21.75 $10.00
Second Quarter.......................................... $ 21.81 $15.31
Third Quarter........................................... $ 22.81 $ 8.88
Fourth Quarter.......................................... $ 34.63 $15.00
FISCAL YEAR ENDED DECEMBER 31, 2000:
First Quarter (through March 24, 2000).................. $119.13 $29.00
</TABLE>
On March 24, 2000 the last reported sale price of our common shares on the
Nasdaq National Market was $50.00. As of February 29, 2000, there were 111
holders of record of our common shares. This number does not include an
indeterminable number of beneficial holders of these securities whose common
shares are held by financial institutions in "street name."
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.
20
<PAGE>
CAPITALIZATION
The following table shows our capitalization as of December 31, 1999, on an
actual basis, and on an as adjusted basis after giving effect to the sale of
2,000,000 common shares in this offering at an assumed public offering price of
$50.00 per share, after deducting the underwriting discounts and commissions and
estimated offering expenses.
You should carefully read our Consolidated Financial Statements and the
Notes to those statements included elsewhere in this prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
---------------------------------------
ACTUAL AS ADJUSTED
-------- ------------------------
(IN THOUSANDS)
<S> <C> <C>
Series A mandatorily redeemable convertible preferred
shares, no par value, 33,950 authorized, 33,948 issued and
outstanding, actual and as adjusted....................... $ 27,556 $ 27,556
-------- ------------------------
Shareholders' equity:
Preferred shares, no par value, unlimited shares
authorized, no shares issued and outstanding, actual
and as adjusted....................................... -- --
Common shares, no par value, unlimited shares
authorized, 11,622,115 shares issued and outstanding,
actual; 13,622,115 shares issued and outstanding, as
adjusted.............................................. 75,422 169,772
Other equity................................................ 8,987 8,987
Cumulative translation adjustment........................... (620) (620)
Accumulated deficit......................................... (59,438) (59,438)
-------- ------------------------
Total shareholders' equity.......................... 24,351 118,701
-------- ------------------------
Total capitalization................................ $ 51,907 $ 146,257
======== ========================
</TABLE>
The number of common shares outstanding excludes:
- 2,145,553 common shares reserved for issuance pursuant to outstanding
stock options at a weighted average exercise price of $8.82;
- 542,221 common shares reserved for future issuance under our Employee
Option Plan;
- 75,000 common shares reserved for future issuance under our Director Share
Option Plan;
- 2,052,118 common shares reserved for issuance under outstanding warrants
at a weighted average price of $12.23; and
- 3,213,455 common shares issuable upon conversion of the Series A preferred
shares as of December 31, 1999. The number of common shares issuable upon
conversion of our Series A preferred shares will increase as the dividends
payable thereon accrue.
See Notes 10 and 11 to our Consolidated Financial Statements.
21
<PAGE>
DILUTION
As of December 31, 1999, our net tangible book value was approximately
$22.2 million, or $1.91 per common share. Net tangible book value per common
share represents the amount of our total tangible assets reduced by our total
liabilities and Series A mandatorily redeemable convertible preferred shares,
divided by the number of common shares outstanding. After giving effect to the
receipt of the estimated net proceeds from our sale of 2,000,000 shares in this
offering at an assumed public offering price of $50.00 per common share, our
adjusted net tangible book value as of December 31, 1999 would have been
approximately $116.6 million or $8.56 per common share. This represents an
immediate increase in net tangible book value of $6.65 per common share to
existing shareholders and an immediate dilution of $41.44 per common share to
new investors. The following table illustrates this per common share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per common share.............. $ 50.00
Net tangible book value per common share before this
offering.............................................. $ 1.91
Increase in net tangible book value per common share
attributable to new investors......................... 6.65
--------
Pro forma net tangible book value per common share after
this offering............................................. 8.56
--------
Pro forma dilution in net tangible book value per common
share to new investors.................................... $ 41.44
========
</TABLE>
22
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The 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. The Consolidated Statements of Operations data for fiscal years
1997, 1998, 1999 and the Consolidated Balance Sheet data as of 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 is
included herein. The Consolidated Statements of Operations data for fiscal years
1995 and 1996 and the Consolidated Balance Sheet data as of December 31, 1995,
1996 and 1997, as set forth below, have been derived from audited consolidated
financial statements not included in this prospectus. Historical results are not
necessarily indicative of results to be expected for any future period.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------------------------------------------
1995 1996 1997 1998 1999
---------- ---------- ---------- ---------- ----------
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Sales.................................. $ -- $ 978 $ 3,033 $ 10,875 $ 13,627
Cost of sales.......................... -- 561 1,995 6,673 9,273
---------- ---------- ---------- ---------- ----------
Gross margin........................... -- 417 1,038 4,202 4,354
Sales, general and administrative
expense.............................. 1,476 3,377 7,448 11,516 19,074
Research and development expense....... 1,241 2,745 4,123 6,289 7,935
Other expense.......................... -- -- 654 420 1,329
---------- ---------- ---------- ---------- ----------
Loss from operations before interest... (2,717) (5,705) (11,187) (14,023) (23,984)
Interest income........................ 12 609 774 264 695
Interest and financing expense......... (19) (69) (3) (1,132) (1,998)
---------- ---------- ---------- ---------- ----------
Net loss............................... (2,724) (5,165) (10,416) (14,891) (25,287)
Cumulative preferred dividends and
accretion of discount attributable to
preferred shares..................... -- -- -- -- (1,770)
---------- ---------- ---------- ---------- ----------
Net loss attributable to common
shareholders......................... $ (2,724) $ (5,165) $ (10,416) $ (14,891) $ (27,057)
========== ========== ========== ========== ==========
Net loss per common share.............. $ (0.65) $ (0.89) $ (1.48) $ (1.91) $ (2.73)
Weighted average number of common
shares outstanding................... 4,181,599 5,791,367 7,059,578 7,782,094 9,916,954
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and short-term investments................ $ 403 $18,928 $ 7,588 $11,274 $42,688
Working capital................................ 418 20,061 9,561 8,432 45,611
Total assets................................... 1,791 22,606 13,936 27,783 58,640
Indebtedness................................... 500 -- -- 7,495 --
Mandatorily redeemable convertible preferred
shares....................................... -- -- -- -- 27,556
Accumulated deficit............................ (3,680) (8,845) (19,260) (34,151) (59,438)
Shareholders' equity........................... 841 21,795 12,610 14,579 24,351
</TABLE>
23
<PAGE>
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 include:
- 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
subsidiaries, Applied Sciences, Inc., which we acquired in 1997, and
Visible Genetics Europe S.A. (formerly known as ACT Gene S.A.), which we
acquired in 1998.
During 1996 and 1997, we generated revenues primarily by selling sequencing
systems. During this period, our business strategy focused on installing our DNA
sequencers and related equipment in research and clinical research facilities.
During 1998, we began to shift our strategy to target the clinical diagnostic
market and to place greater emphasis on generating recurring revenues from sales
of GeneKits and other consumables initially to the research and clinical
research markets and, subject to FDA approval, to the clinical diagnostic
market. As part of this strategy, we may sell our DNA sequencers at reduced
prices to customers who commit to purchase significant quantities of GeneKits
and other consumables. In addition, in 1998 and 1999, we bundled our DNA
sequencers and GeneKits for sale at reduced prices. We discontinued the practice
of bundled 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 and
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, 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.
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.
24
<PAGE>
For an analysis of sales by product segment and geographic market, see
Note 15 to our Consolidated Financial Statements.
COST OF SALES. Cost of sales consists of manufacturing costs including
materials, labor and overhead chargeable to inventory. The gross margin from
sales of our products and services varies depending on product category,
distribution channel and geographic market. Gross margin is calculated by
subtracting cost of sales from sales.
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 financing 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 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, 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
25
<PAGE>
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 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
26
<PAGE>
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 an initial public offering in June 1996. We have also
borrowed funds from institutional lenders. In addition, we have an arrangement
with a bank pursuant to which, from time to time, letters of credit are issued.
The obligations under this facility are secured by the assets of our company.
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
27
<PAGE>
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
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
28
<PAGE>
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.
CAPITAL 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.
CURRENT AND FUTURE FINANCING NEEDS. We have incurred negative cash flow
from operations since we started our business. We have spent, and expect to
continue to spend, substantial amounts to complete our planned product
development efforts, expand our sales and marketing activities, conduct our
clinical trials, conduct research, build our business infrastructure and expand
our manufacturing capabilities. At this time, funds from operations are not
sufficient to meet our operating needs and other anticipated financial
requirements.
Based on our current plans, we believe that our cash on hand, anticipated
funds from operations and net proceeds from this offering, will be sufficient to
enable us to meet our operating needs for at least the next 24 months. The
proceeds of this offering will be available for general corporate and working
capital purposes, including, among other things, to acquire complementary
businesses, products, services or technologies. Currently, we have no definitive
agreements to make any acquisition and we cannot be certain that the proceeds we
will receive from this offering will be sufficient to complete any acquisition
we might make in the future. In addition, 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 our 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.
YEAR 2000
We have conducted a comprehensive examination of our information technology
systems and the software applications sold with our products to determine year
2000 compliance. Based on our examination, we believe that these systems and
software are year 2000 compliant and to date none of these systems or
applications have experienced year 2000 problems.
29
<PAGE>
We have spent approximately $470,000 on our year 2000 compliance efforts, of
which $454,000 was for a new enterprise system purchased in 1998. While we did
not purchase the new system specifically in response to year 2000 issues, our
efforts at compliance accelerated the timetable for purchasing the system.
We have contacted our material customers, suppliers and third-party service
providers to identify year 2000 problems and provide solutions to prevent any
disruption of business activities. We completed a review of the compliance
efforts by these parties in the third quarter of 1999. Based on the information
we have received, our most significant year 2000 risk would involve disruption
of our material supply and distribution channels, and in particular the supply
of certain instrument parts and supplies from single-source suppliers. This
would likely lead to material interruption in product development and sales of
our products. In addition, we could encounter significant expenses in remedying
any problems or switching to year 2000 compliant vendors and suppliers. As of
the date of this prospectus, we are not aware of any year 2000 problems
affecting any of our material customers, suppliers or third-party service
providers that might materially disrupt our business.
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.
30
<PAGE>
BUSINESS
OVERVIEW
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. 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 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% to 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 2000 for approval to sell our HIV OpenGene System to the
clinical diagnostic market.
SCIENTIFIC BACKGROUND
DNA. All cells contain DNA, a complex material that stores the genetic
blueprint, or makeup, of an organism. DNA is composed of four chemical building
blocks called nucleotides. Each nucleotide consists of, among other things, one
of four chemical bases: adenine (A), thymine (T), guanine (G) and cytosine (C).
These four bases are the genetic alphabet that is used to write messages and
instructions which direct the
31
<PAGE>
synthesis or expression of the proteins inside the cell, required to make the
cell function. A sequence is the particular order of the nucleotides in the DNA.
Changes in the DNA sequence, also called mutations, may occur from time to time.
These mutations may alter the function of the cell proteins and affect cell
functions.
PHARMACOGENOMICS. Different people often respond in different ways to the
same drug. A drug that is safe and effective in one patient may be toxic or
ineffective in another. We believe that some of these differences in response
may reflect underlying genetic differences between the individuals concerned.
Pharmacogenomics seeks to establish correlations between specific genetic
variations and specific responses to drugs. By establishing such correlations,
pharmacogenomics may permit both new and existing drugs to be targeted to those
patients in whom they are most likely to be both effective and safe.
GENOTYPING. Genotyping is the act of selecting and reading the sequence of
nucleotides in a specific strand of DNA in order to understand how changes in
the DNA may influence the onset and treatment of some diseases and medical
conditions.
Genotyping is used by scientists, researchers and clinicians to identify:
- genes as potential targets for therapeutic intervention;
- mutations in a gene that may predispose an individual to a particular
disease;
- genetic variation among individuals that may cause different reactions to
drug treatment; and
- mutations in the genes of infectious organisms (such as viruses and
bacteria) and tumors that may result in drug resistance, thereby
influencing treatment methods.
Genotyping is performed using tests that rely on either DNA probe or DNA
sequencing technologies.
DNA PROBES. A DNA probe is a single-stranded piece of DNA made to be
complementary to the unique base sequence of the target gene. These probes are
based on the principle that single strands of DNA seek out complementary strands
to form a chemical bond. The DNA probes are placed into prepared samples, which
may include the target gene. If the target gene is present, the probe will bind
to the target, indicating its presence.
DNA probes are highly specific, target single mutations, and require advance
knowledge of the target mutation. Probes are susceptible to producing erroneous
results because they are affected by variations in the sequence immediately
surrounding their targeted mutation. As a result, DNA probes are effective in
detecting diseases only when the disease-associated mutation is at a fixed,
known location within a gene or when the sequence within a particular gene is
stable. However, in diseases where the mutation causing the disease is not
known, probe-based technology is not as effective. Probes also may not
effectively provide genotypes for infectious pathogens, such as viruses, in
which the DNA sequence is highly variable or where mutations occur to evade
immune responses or to develop drug resistance.
DNA SEQUENCING. DNA sequencing identifies all the chemical bases of the DNA
strand to be examined, one-by-one, readily detecting variations or new mutations
within the DNA sequence. Unlike DNA probes, sequencing reads long segments of
DNA and can therefore detect new mutations, multiple mutations and insertions
and deletions of DNA within a sequence. DNA sequencing is also less sensitive
than probes to surrounding variations in the sequence being examined. As a
result, sequencing is generally considered the most thorough and accurate method
for genotyping diseases, such as cancer, and certain viruses, such as HIV, which
have high rates of mutation or have numerous strains. DNA sequencing is also
used to assess predisposition to many diseases and for tissue typing.
The DNA sequencing process involves several steps, some of which must be
performed manually and are labor intensive. DNA first must be extracted from the
sample, which usually is blood, other body fluid or tissue. After the DNA is
extracted, it is amplified, or copied, in order to provide enough DNA so that
32
<PAGE>
the DNA sequence can be easily detected. This process of extraction and
amplification typically requires the use of various reagents, primers and other
chemicals, as well as proprietary processes and technologies, some of which must
be licensed from third parties. Some laboratories prepare and use their own
homebrew reagents and chemicals which usually are not subject to standardized
procedures or quality control processes necessary to ensure reliable results.
Once the DNA is extracted and amplified, a process called gel
electrophoresis is performed. This process involves placing the DNA on a gel
substance and running an electrical current through it. This separates the DNA
so that the DNA sequence can be read. While historically many scientists
performed the entire DNA sequencing process manually, automated DNA sequencers
using a number of disposable products have been developed which simplify and
expedite parts of this process.
DNA SEQUENCING MARKETS
DNA sequencing is an important tool for the research, clinical research and
clinical diagnostic markets.
THE RESEARCH MARKET. The research market includes academic institutions,
hospitals, governmental agencies, life science companies and pharmaceutical
companies performing molecular genetics and molecular biology research.
Researchers generally use DNA sequencing equipment for gene discovery and other
large scale research projects which typically must analyze large numbers of
samples and sequence long DNA segments.
THE CLINICAL RESEARCH MARKET. The clinical research market includes
hospitals, life science companies, pharmaceutical companies, academic
institutions and clinical reference laboratories engaged in developing new
diagnostic tests, conducting clinical trials, developing drugs and researching
targeted therapeutics. Researchers in this sector often work both with DNA
probes and DNA sequencing. Researchers typically rely on repetitive sequencing
of relatively short DNA strands of targeted gene segments, for which sequencing
systems that are smaller in scale than those used in the research market are
generally considered most efficient.
THE CLINICAL DIAGNOSTIC MARKET. The clinical diagnostic market consists of
life science companies, hospitals, reference laboratories, medical clinics and
doctors' offices which use clinical molecular genetic tests for the diagnosis
and management of diseases and for tissue typing. Current tests typically rely
on DNA probe-based and other technology including homebrew DNA sequencing tests.
Unlike the research market, genotyping for clinical diagnostic purposes
generally relies on the sequencing of relatively short DNA strands with high
degrees of accuracy. DNA sequencers and related instrumentation used for
diagnostic purposes should enable clinicians to rapidly and accurately sequence
and analyze a high volume of patient samples at relatively low costs, and fit
within the space constraints of a typical clinical laboratory.
LIMITATIONS OF EXISTING DNA SEQUENCING PRODUCTS
Historically, automated DNA sequencers and related products used for
genotyping have been developed primarily to meet the needs of the research and
clinical research markets. We are not aware of any FDA approved DNA sequencing
tests for the clinical diagnostic market. Existing DNA sequencing products
typically do not address the needs of the clinical diagnostic market because:
- they cannot sequence DNA strands quickly enough to satisfy diagnostic
turnaround times;
- they are designed to sequence long DNA segments and therefore may not be
efficient for sequencing shorter DNA segments typical in clinical
diagnostic testing;
- they are expensive;
- they are too large for most clinical laboratories;
33
<PAGE>
- they use gels usually prepared manually in a process that is time
consuming and may result in exposure of laboratory technicians to
dangerous chemicals; and
- they use homebrew tests, reagents, chemicals and protocols that are not
typically subject to the standardized procedures or quality control
processes necessary for reliable results.
OUR SOLUTION
Our OpenGene System consists of automated DNA sequencers, disposable gel
cassettes, related equipment and software and disease-specific GeneKits. Our
OpenGene System has been designed expressly to meet the needs of the clinical
diagnostic market. We believe that our integrated OpenGene System provides a
cost effective and efficient clinical diagnostic solution that will make DNA
sequencing a viable diagnostic tool for the management of selected diseases and
medical conditions because:
- it reads DNA strands faster than existing sequencers designed for the
research market;
- it is designed to efficiently read and analyze the shorter DNA strands
typically used for clinical diagnosis;
- it is significantly less expensive than comparable sequencers designed for
the research market;
- it is small and lightweight;
- it utilizes easy to use disposable gel cassettes;
- it includes our proprietary software package designed for DNA analysis and
patient data management;
- our GeneKits include the reagents, primers and other chemicals,
third-party licenses, software and other materials required to conduct
tests for specific disease-associated genes; and
- our GeneKits are standardized, validated and undergo quality control
testing to provide reliable, reproducible results.
We must obtain approval from the FDA and comparable foreign regulatory
authorities prior to selling our products for clinical diagnostic use.
While our OpenGene System and GeneKits are designed to serve the clinical
diagnostic market, they also fulfill many important requirements within the
research and clinical research markets. Researchers in the clinical research
market also work with short DNA strands, rely on a repetitive sequencing of gene
segments and need quick and efficient sequencing systems. In the research
market, our products complement existing instruments by performing tasks such as
primer labeling, chemistry verification, short sample sequencing and other
preparatory and supportive functions for which speed, cost and efficiency are a
premium. We also have developed a sequencer that is able to read longer segments
required for some research applications.
To date, a substantial portion of our revenues have been generated from
sales to the research and clinical research markets. We expect to continue to
sell to both of these markets even if we receive FDA approval for clinical
diagnostic use of our HIV OpenGene System and other products.
OUR BUSINESS STRATEGY
Our objective is to be a leader in the emerging field of pharmacogenomics.
Our goal is to enable clinicians to use genetic information to monitor and
customize treatment of diseases, initially for HIV and later for other diseases.
Key elements of our business strategy are to:
- PROVIDE AN INTEGRATED GENOTYPING SOLUTION FOR THE CLINICAL DIAGNOSTIC
MARKET. We intend to meet the needs of the clinical diagnostic market by
providing an efficient, inexpensive, easy-to-use
34
<PAGE>
genotyping solution. Our integrated OpenGene System, which we believe
incorporates these features, includes automated DNA sequencers, disposable
gel cassettes, related equipment and software, and disease-specific
GeneKits. We designed this system for the clinical diagnostic market.
- TARGET THE HIV GENOTYPING MARKET. We are focusing initially on the HIV
market because there is clinical evidence to suggest that genotyping may
be effective in managing the treatment of this disease. By identifying
mutations in HIV through genotyping and consistently countering these
mutations with appropriate drug therapy, we believe drug treatment can be
administered and monitored more effectively. We intend to seek approval
from the FDA and other regulatory authorities to sell our HIV OpenGene
System for clinical diagnostic use in the United States and elsewhere.
- LEVERAGE OUR OPENGENE SYSTEM FOR ADDITIONAL APPLICATIONS. We are
developing other disease-specific GeneKits that we believe have the
potential to eliminate or reduce more time consuming and/or expensive
tests and that may enable clinicians to better monitor and manage patient
treatment. In addition to our HIV GeneKit, we have developed GeneKits for
HLA (used for tissue typing, for example, in organ transplants), and are
developing GeneKits for hepatitis B, hepatitis C, tuberculosis and other
species of HIV not tested for in our current HIV GeneKit.
- OFFER A WIDE RANGE OF TESTING AND SEQUENCING SERVICES. We maintain
accredited reference testing laboratories that provide genotyping and
other testing services for HIV, hepatitis B, hepatitis C, other infectious
diseases and various genes associated with cancer. We believe that the
data which we obtain in providing these services will also assist us in
our efforts to develop new GeneKits and other technologies.
- PROVIDE SOPHISTICATED SOFTWARE FOR THE CLINICAL RESEARCH AND DIAGNOSTIC
MARKETS. Our GeneObjects Software operates our OpenGene System, analyzes
the results, and prints out a report that shows the drugs to which a
patient has become resistant. This software was designed to meet the needs
of the clinical research and clinical diagnostic markets. We also are
developing an enhanced version of this software, called TRUGENE CMS, which
is specifically targeted to the clinical diagnostic market and will
simplify the work flow and report generation for disease specific
applications.
- TAILOR OUR MARKETING EFFORTS TO LOCAL MARKETS. We have established and are
expanding our sales and marketing force in the United States, Canada,
selected European countries and in other areas where we believe that the
size of the market and our familiarity with regulatory and other local
conditions justify the development of our own sales force. In selected
geographic and product markets where we believe that regulatory and other
market factors make it more prudent to rely on a third-party local sales
and marketing effort, we seek to enter into distribution and marketing
arrangements with leading distributors.
- MAINTAIN OUR TECHNOLOGICAL LEADERSHIP IN GENOTYPING. We plan to continue
to invest significant resources in research and development so that we may
continue to provide customers with advanced genotyping technologies and
products. Where we believe it is cost effective or otherwise appropriate,
we will continue to license and acquire technologies and products to
include in our OpenGene System and GeneKits. We will also seek to continue
to collaborate with hospitals, academic institutions, pharmaceutical
companies and life science companies to develop additional GeneKits and
other products.
OUR INTEGRATED OPENGENE SYSTEM
Our integrated OpenGene System includes the following components:
SEQUENCING SYSTEMS. Sequencing systems consist of automated DNA sequencers
and related equipment.
35
<PAGE>
SOFTWARE SYSTEMS. Software systems consist of our proprietary GeneObjects
and TRUGENE CMS 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.
SEQUENCING SYSTEMS
LONG-READ TOWER AUTOMATED DNA SEQUENCER. The Long-Read Tower is a two-dye
automated sequencer that can read 400 bases in approximately 40 minutes with
high accuracy, suitable for clinical diagnostic applications, and can also read
longer DNA sequences used in some research applications. Using our proprietary
Long-Read MicroCel cassettes, the Long-Read Tower can read 1,000 bases in under
4 hours with high accuracy. The Long-Read Tower can read 16 lanes and test up to
8 patient samples per gel cassette, and can be networked with other Long-Read
Towers or Clippers so that multiple units can run from a single workstation,
thereby allowing for a significantly greater number of patient samples to be
tested simultaneously. The Long-Read Tower is small (47cm x 39cm x 26cm) and
lightweight relative to competitive instruments, and sells at retail prices
significantly below comparable automated DNA sequencers. The Long-Read Tower can
be connected to almost any computer network, has no moving parts and consumes
only 300 watts of power.
CLIPPER. The MicroGene Clipper automated DNA sequencer is a smaller version
of our Long-Read Tower which, using our proprietary MicroCel cassettes, can read
300 bases in approximately 30 minutes with high accuracy, and is suitable for
clinical diagnostic applications. The Clipper can read 16 lanes and test up to 8
patient samples per gel cassette, and can be networked so that multiple units
can run from a single workstation, thereby allowing for a significantly greater
number of patient samples to be tested simultaneously. The Clipper is small (35
cm x 40 cm x 26 cm) and lightweight. The Clipper sells at retail prices
significantly below comparable automated DNA sequencers. The Clipper can be
connected to almost any computer network, has no moving parts and consumes only
300 watts of power.
SEQ4X4. The Seq4x4 automated DNA sequencer is marketed by Amersham as the
Amersham Pharmacia Biotech Seq4x4-TM- built to Amersham's specifications to work
with Amersham's one color Cy 5.5 terminator chemistry and ThermoSequenase-TM-
Kits. The Seq4x4 is a less expensive version of the Clipper that includes many
of the features of the Clipper; however, it is a 16 lane one-dye sequencer, and
cannot be networked with other sequencers. The Seq4x4 is sold to the research
market where it can be used to complement or replace significantly slower manual
DNA sequencing methods and to complement currently available, more expensive
automated DNA sequencers.
GEL TOASTER. The Gel Toaster is a compact (47 cm x 39 cm x 26 cm),
lightweight device that uses ultraviolet light to polymerize, or cure, liquid
acrylamide that has been injected into the Long-Read MicroCel. The acrylamide
gel is the medium through which the DNA is separated for sequencing. We also
sell a toaster for use with the Seq4x4. This toaster's dimensions are 33 cm x
11.4 cm x 30.5 cm.
SOFTWARE SYSTEMS
GENEOBJECTS. GeneObjects is our DNA analysis and data management software
package which we have designed for use with our sequencing systems. It automates
portions of the test process and facilitates analysis and diagnosis. It also
automates certain laboratory management tasks. GeneObjects software is able to
sort, analyze and store data by patient (regardless of the test or gel source
from which the data is derived) or by the test performed. GeneObjects can also
be used to control multiple sequencers over the network from a single
workstation. It can use existing microcomputers and sequencers, or be installed
as a turnkey system with state-of-the-art hardware.
TRUGENE CMS. TRUGENE CMS, an enhanced version of our GeneObjects software,
is a software system we are developing for genotypic analysis of large
quantities of patient samples in a clinical
36
<PAGE>
diagnostic setting. The first application will be for HIV. The software design
is based on the assembly line concept. A sample, once received by a laboratory
for processing, will be registered with TRUGENE CMS. The new sample will be
placed on the assembly line's conveyer so that it can be passed along from stage
to stage in a specific order. The final product of this assembly line is a
report for the registered sample. TRUGENE CMS is being designed to work with
various protocols, each of which defines how many stages are on the assembly
line, what each stage should do, and what information the final report should
contain.
GENEKITS AND OTHER CONSUMABLES
GENEKITS. We sell to the research and clinical research markets a series of
GeneKits which assist in identifying disease-associated genetic mutations and
gene sequences. Our HIV GeneKit is described in the section of this prospectus
entitled "--Applications for our OpenGene System--HIV." Other GeneKits which we
sell or are developing are described in the section of this prospectus entitled
"--Applications For Our OpenGene System."
GENEKIT TECHNOLOGIES. We developed and are developing GeneKits with
features designed to make our GeneKits suitable for the clinical diagnostic
market. We use certain technologies proprietary to us, and other technologies
licensed to us, to ensure that our GeneKits will meet the needs of this market.
These technologies include our stratified matrix testing method, CLIP and CAS
technology, polymerase chain reaction technology, or PCR, and an extraction
technology referred to as Boom technology. We have U.S. patents covering our
stratified matrix testing method and CLIP technology. We license the PCR
technology from Roche Molecular Systems, Inc. and F. Hoffmann-LaRoche Ltd., the
CAS technology from Genassiance Pharmaceuticals Inc. and the Boom technology
from Organon Teknika.
Our proprietary CLIP technology enables DNA samples to be prepared in a
single test-tube, single-step process that replaces the multiple individual
steps currently required to prepare a sample for DNA sequencing. This technology
saves time and reduces the cost of DNA sequence-based diagnostic testing, which
is important to the clinical diagnostic market. Our CLIP technology is also more
sensitive than traditional techniques, which is especially useful for managing
viral diseases because it permits the genotyping of patients with very low viral
loads that other methods cannot detect. As a result, using CLIP, HIV patients
with low viral loads can be genotyped and treated before drug resistance
develops and their viral loads increase. Our exclusive license from Genassiance
Pharmaceuticals permits us to use CAS technology for diagnostic and clinical
diagnostic applications. CAS technology performs similar functions to CLIP
technology, using different enzyme chemistry on DNA.
PCR is a powerful laboratory technique that can detect, copy and amplify
specific DNA sequences. Amplifying the DNA is an essential part of DNA
sequencing because it allows the technician to start with minute amounts of DNA
and finish with at least a million-fold increase in the number of DNA molecules,
ensuring that a sufficient amount of DNA is available to obtain the sequence.
Boom technology enables sensitive, reproducible and accurate extractions of
RNA and DNA from blood plasma samples, and from body fluids such as semen and
cerebral spinal fluid. The Boom method is especially valuable in HIV genotyping
for patients with low viral loads. In connection with obtaining the Boom
technology license, we granted Organon Teknika a right of first refusal to
certain improvements we may develop to DNA sequencing and extraction technology
and to some of our reagents and uses of our CLIP technology.
MICROCEL CASSETTE. The MicroCel Cassette is a disposable, polyacrylamide
electrophoretic gel cassette which acts as the detection medium for the
Long-Read Tower, Clipper and the Seq4x4. The gel is injected into the cassette.
After the cassette is cured, it is placed into the sequencer for DNA sequencing
and other tests. The cassette is comprised of two small glass plates, has a 50
micron gap and can be filled with acrylamide and cured in three minutes through
a semi-automated process which uses our Gel Toaster and SureFill products.
Competitive sequencers typically use significantly thicker (200-500 micron gap)
gel
37
<PAGE>
systems which are assembled manually by technicians and must be disassembled and
cleaned after use. We manufacture the MicroCel cassette in three sizes for use
with our different DNA sequencers.
SUREFILL CARTRIDGE. The acrylamide injected into the MicroCel cassettes is
supplied in a 10 cm long disposable syringe-based SureFill cartridge that
contains necessary ingredients to fill 10 MicroCels. SureFill protects the
technician from directly handling potentially dangerous chemicals and simplifies
the gel preparation process.
TESTING, SEQUENCING AND OTHER SERVICES
We provide DNA testing, sequencing and other services for HIV, hepatitis B,
hepatitis C, and other infectious diseases as well as for certain cancers.
We operate an accredited reference testing laboratory in Norcross, Georgia,
that specializes in high resolution genotyping of HIV and other viruses
associated with secondary opportunistic infections of patients with AIDS. This
facility also provides high resolution DNA sequencing of hepatitis B,
cytomegalovirus and other viruses that commonly infect AIDS patients. Our
facility in Evry, France, carries out DNA diagnostic testing and sequencing
services in Europe, including genotyping tests for HIV, hepatitis C and other
tests.
We also maintain a library of cultures of HIV strains with known drug
resistant mutations and a patient database on viral drug resistance and high
resolution DNA sequencing data. This data may be used to screen new drugs for
possible viral resistance and to identify patterns of cross resistance to new
drugs as well as for the development of new AIDS treatment strategies.
APPLICATIONS FOR OUR OPENGENE SYSTEM
HIV
Our HIV OpenGene System will enable physicians to genotype the major HIV
species infecting patients and to diagnose and treat HIV based upon the
mutations present in the virus. Our HIV GeneKit contains all of the reagents,
chemicals, third-party licenses and other materials required to sequence the DNA
from the protease and reverse transcriptase regions of the virus, which are
known to develop mutations that make the virus resistant to drugs. We initiated
the sale of our HIV GeneKit, which we call the TRUGENE HIV-1 Genotyping Kit, for
use in the clinical research market in the fourth quarter of 1998. We have a
patent application pending in the United States and in some foreign countries
covering various aspects of our HIV GeneKit.
HIV OVERVIEW. HIV is a virus that attacks the cells in the human immune
system. Without effective treatment, HIV significantly weakens the immune
system, which results in opportunistic infections, neurological dysfunctions,
malignant tumors and eventually death. HIV infected patients may develop
Acquired Immune Deficiency Syndrome, or AIDS, which is a syndrome of infections,
diseases and medical conditions resulting from a weakened immune system. Since
the early 1980's, when the HIV epidemic was first identified, it is estimated
that more than 16.3 million people worldwide have died as a result of
complications from AIDS. Approximately 900,000 people in North America, 880,000
in Europe and Central Asia and a total of 33 million people worldwide are
infected with HIV. In 1999 alone, there were approximately 5.6 million new HIV
infections, including 44,000 in North America, and 2.6 million deaths worldwide
as a result of complications from AIDS.
HIV is a highly variable virus with a high rate of mutations. Because of
HIV's high mutation rate, drugs used to treat the virus, while generally
effective for a period of time, often result in the survival of a virus with
mutations that confer resistance to those drugs. Today, there are more than 140
known HIV mutations associated with drug resistance.
38
<PAGE>
Currently, there are 14 approved anti-HIV drugs. These drugs specifically
target the protease and reverse transcriptase enzymes to interfere with and
reduce HIV replication. Mutations in the genetic information of the virus that
codes for these two enzymes can result in the development of drug resistance.
Current drug therapy usually relies on the use of drug cocktails of two or more
antiviral drugs, targeting different stages of the HIV life cycle. A number of
studies have shown that drugs given in various combinations reduce the viral
load in most patients and can significantly improve these patients' overall
health. Viral load is a generally used measurement of the concentration of virus
in a patient's blood. HIV patients fail drug therapy in many cases either
because the virus mutates and develops resistance to drugs, or because the side
effects of drugs or the strict dosing regimens are intolerable, leading patients
to skip doses or discontinue using the drugs.
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. Because they rely only on viral load, current disease management
methods usually provide a warning that the drugs are no longer working only
after the drug-resistant virus has asserted itself and viral load has increased.
These methods usually do not tell clinicians which drugs are failing due to
emerging resistance or to which drugs the patient should be switched. As a
result, there is a need to provide doctors and clinicians with information about
HIV drug resistance to enable clinicians to better manage HIV drug therapy.
GENOTYPING AND HIV. Genotyping HIV enables clinicians to identify mutations
in the genetic material in the virus. Two initial clinical trials, one of which
we conducted, suggest that by sequencing the patient's HIV, clinicians may be
able to detect early in the process that a resistant mutant has emerged and make
appropriate changes in medication to manage viral load. Sustaining a low viral
load is believed to be a key factor in prolonging the life of an HIV patient.
Achieving and maintaining low viral loads may also significantly reduce medical
costs because patients with low or undetectable viral loads have fewer
opportunistic infections and other symptoms and, therefore, require fewer and
shorter hospital stays and fewer other medical services.
To test the clinical usefulness of genotyping HIV to manage a patient's drug
therapy, the Community Programs for Clinical Research on AIDS, in conjunction
with several universities and funded by the NIH, conducted a 12-week prospective
trial in the United States of 100 HIV positive patients. This trial, completed
in December 1998, is known as GART, which stands for Genotypic Antiretroviral
Resistance Testing. To be eligible, each patient had to have a minimum viral
load of 10,000 copies per milliliter. The patients were randomly split into two
groups. One group received accepted standard of care treatment, but did not
undergo HIV genotyping. The other group received accepted standard of care
treatment plus HIV genotyping. Physicians of patients in the genotyping group
were able, at their discretion, to adjust medication in response to the
genotyping results. The study results showed that the patients treated in the
genotyping group had a mean decrease in viral load of approximately 93% at the
end of eight weeks, compared to an approximately 76% decrease in patients in the
non-genotyping group. This difference was found to be statistically significant.
OUR CLINICAL TRIALS. In December 1998, the FDA allowed us to initiate human
clinical trials of our HIV OpenGene System under our Investigational Device
Exemption, or IDE, application. In June 1999, we completed a clinical trial in
Europe called VIRADAPT, which demonstrated that patients who received standard
of care treatment and whose drug treatments were selected using periodic
genotyping had lower viral loads than patients who received standard of care
treatment but whose drug treatments were selected without the use of genotyping.
This trial was not part of our IDE, but results from this trial will be
submitted to support our market approval application. Also in June 1999, we
initiated a trial under our IDE called SEARCH to test the clinical utility of
our HIV OpenGene System in genotyping HIV infected patients. Based on positive
clinical trial results to date, the FDA has advised us that we are not required
to complete the SEARCH trial. We began our proficiency trials, under our IDE, in
the third quarter of 1999. In January 2000, we also began a large-scale trial
called Vigilance II which will be an open label, cost recovery HIV genotyping
study conducted under our IDE.
39
<PAGE>
The following is a summary of each of these trials:
- VIRADAPT. In March 1997, prior to our IDE allowance, we sponsored a
prospective trial in Europe called VIRADAPT to determine the usefulness of
genotyping in managing the treatment of HIV infected patients. The
VIRADAPT trial involved 108 HIV infected patients and was scheduled to
last 12 months. To be eligible, each patient had to have a minimum viral
load of 10,000 copies per milliliter. The patients were randomly split
into two groups. The control group received standard of care treatment,
but did not undergo periodic genotyping. The genotyping group received
standard of care treatment and underwent periodic genotyping allowing the
physicians, at their discretion, to adjust medication in response to the
genotyping results. Genotypes were done using either homebrew DNA testing
methods or an early version of our HIV GeneKit. At the end of six months,
interim results showed that patients treated in the genotyping group of
the study had a mean decrease in their viral loads of approximately 93%
(32% of patients in the genotyping group had undetectable viral loads), as
compared to an approximately 79% decrease in viral loads in the
non-genotyping group (14% of patients in the non-genotyping group had
undetectable viral loads). This difference was found to be statistically
significant. In January 1999, on the recommendation of the data safety
management committee for the VIRADAPT trial, the control group was stopped
on ethical grounds. The committee decision was based in part on the
interim results of the VIRADAPT trial and in part on the release of the
results of the GART trial in December 1998 which showed decreases in viral
loads for the genotyping patients consistent with the VIRADAPT trial. As a
result, beginning in January 1999, all patients received standard of care
treatment and underwent periodic genotyping. At the end of 12 months,
results showed that 28.4% of patients in the original genotyping arm had
undetectable viral loads. The mean viral loads for this group were
maintained at substantially the same level that existed after six months.
The data also showed that of those patients who were switched from
standard of care treatment only to standard of care treatment and
genotyping, 26% had undetectable viral loans as compared to 14% of
patients in this group at the end of six months before the treatment was
switched. We are reanalyzing the samples collected in the GART and the
VIRADAPT trials using our HIV GeneKit and OpenGene System and plan to
include those results in support of our market approval application.
- SEARCH. The SEARCH trial was intended to test whether patients whose
doctors rely on genotyping using our HIV OpenGene System would experience
greater reductions in viral load than those patients whose doctors rely
only on standard of care treatment. This trial was intended to demonstrate
the clinical utility of our system. We began the SEARCH trial in June
1999. To be eligible, each patient must have had a minimum viral load of
1,000 copies per milliliter. Like GART and VIRADAPT, the patients were
randomly split into two groups. The control group received standard of
care treatment without genotyping, and the genotyping arm received
standard of care treatment plus genotyping. In November 1999, the FDA
advised us that we are not required to complete the SEARCH trial. The FDA
has indicated that it will not require us to demonstrate further the
clinical utility of our HIV OpenGene System in the treatment of HIV
infected individuals. Based on the FDA's position, we will continue to
provide genotyping to all 128 patients currently enrolled in the SEARCH
trial. However, enrollment of new patients into SEARCH has been closed.
- PROFICIENCY TRIAL. The proficiency trial is intended to demonstrate the
reliability and performance characteristics of our HIV GeneKits and
OpenGene System, which is required by the FDA. We are genotyping
approximately 500 plasma samples. We are genotyping the samples using our
HIV OpenGene System at our subsidiary, Applied Sciences, and at six other
U.S. sites with certified technicians. To demonstrate the reproducibility
of results produced using our GeneKits, samples from the same patients are
tested at multiple sites. Multiple technicians test the same samples and
multiple batches of our GeneKits are used to test the same samples. In
addition, various interfering drugs or chemical agents are introduced to a
series of samples to test the effect of those drugs and
40
<PAGE>
agents on the results produced with our GeneKits. We began this trial in
the third quarter of 1999 and expect this trial to be completed during the
second quarter of 2000.
- VIGILANCE II. Vigilance II is a prospective, open label, trial with an
enrollment of up to 30,000 patients located throughout the United States.
We began this trial in January 2000. Testing will be performed at
approximately 50 to 100 sites. All patients will undergo HIV genotyping
and the genotyping results will be provided to their physicians. Doctors
who choose not to change drug treatment based on the genotyping results
will be required to so inform us, and results on these patients will be
separately recorded. We plan to use the data collected in Vigilance II in
two ways. First, we hope to compile data showing the prevalence of certain
mutations in patients from different areas of the country. We believe that
this data may be useful in directing doctors in a particular region to use
certain drugs because of the prevalence of certain mutations identified in
that region. Second, we intend to create a database of the clinical
outcome from changes made in drug therapy. Under our IDE, we intend to
charge patients for the use of our HIV OpenGene System to recover the
costs of conducting this trial. We do not intend to submit the results of
this clinical trial as part of our FDA application.
MARKETING OF THE HIV OPENGENE SYSTEM. Our marketing strategy for the HIV
OpenGene System consists of several components. In the United States, should we
obtain FDA approval, we intend to establish relationships with leading doctors,
laboratories and healthcare providers in the HIV diagnostics market and train
them to use our products. We believe that the use of our products by these
industry leaders will facilitate our marketing efforts in the rest of the HIV
clinical diagnostic market. In addition, we believe that these industry leaders
will help shape reimbursement policies of insurance companies and other
third-party payors for HIV genotyping.
We have begun to establish a dedicated team to work closely with insurance
companies and other third-party payors who will determine whether to reimburse
users of HIV GeneKits and related products in the management of their drug
therapies. We are also forming a dedicated sales force to sell our HIV OpenGene
System to major pharmaceutical companies engaged in research and development of
HIV drugs and treatments.
Outside North America, some European countries and other selected areas, we
seek to enter into distribution arrangements with leading distributors of HIV
products to sell our HIV OpenGene System for clinical diagnostic purposes. If
government approval is required for sales in those markets, we intend to rely on
our local partners to obtain the required authorizations.
We intend to continue to market and sell our HIV OpenGene System to
hospitals, pharmaceutical companies, academic institutions and clinical
reference laboratories for research and clinical research purposes. We expect to
continue to service this market regardless of whether the FDA authorizes us to
sell our HIV products for clinical diagnostic purposes.
HLA
Successful transplants of bone marrow, tissue and organs generally require
that the human leukocyte antigens, known as HLA, of the donor and the recipient
be matched as precisely as possible. HLAs are proteins that exist on the surface
of the cell and are vital for determining whether a transplant will be accepted
or rejected. In 1998, there were approximately 21,000 organ transplants in the
United States and approximately 1,300 bone marrow transplants. DNA sequencing of
HLA is increasingly being recognized as the most reliable method of HLA
matching. For example, recent statistics show approximately 500,000 potential
bone marrow donors are genotyped every month worldwide. By sequencing the
particular genes in the multi-gene HLA complex, a clinician can determine
whether the donor's and recipient's HLA match. It is widely believed that
matching significantly increases the chances of success of the transplant. We
have developed four GeneKits for research use only for the A, B and C loci for
Class I and for DRB1 for Class II genes. We began selling this GeneKit for
research purposes in October 1997. We have two U.S. patents covering various
aspects of this GeneKit. This GeneKit is currently being sold only to the
research and clinical research markets.
41
<PAGE>
HEPATITIS B
We have developed and are currently testing a GeneKit for hepatitis B.
Hepatitis is an inflammation of the liver. Hepatitis B is one type of virus that
causes this inflammation. There are more than 350 million people worldwide that
are chronically infected with hepatitis B, of which approximately one million
are located in the United States. Hepatitis B is treated with interferon, drugs
or certain reverse transcriptase inhibitors. Genotyping may be used to identify
the type of hepatitis virus present (e.g., B or C) and to detect mutations in
the virus that cause the disease to become resistant to anti-viral drugs.
HEPATITIS C
We are currently developing a GeneKit for hepatitis C. Hepatitis C is a
second type of virus that causes inflammation of the liver. There are
approximately 175 million people worldwide that are chronically infected with
hepatitis C, of which approximately 3.2 million are in the United States. Unlike
hepatitis B, interferon drugs work with only certain hepatitis C genotypes. We
have developed and are currently testing a Hepatitis C GeneKit that can be used
to identify the genotypes of the virus, so that the appropriate drug treatment
may be prescribed. Protease inhibitors are also being used experimentally to
treat hepatitis C. Our Hepatitis C GeneKit can also be used to detect mutations
that may confer resistance to these anti-viral drugs.
TUBERCULOSIS
We are currently developing a GeneKit for tuberculosis. Tuberculosis,
commonly known as TB, is a highly contagious bacterial disease of the
respiratory system. There are approximately three million deaths per year
worldwide caused by TB and eight million new infections per year worldwide. In
addition, there is an increase in the number of TB infections which are
multi-drug resistant. In order to be infected with TB, a patient must carry a
certain mycobacterium. People who test positive for non-TB mycobacterium can be
treated at home with certain drugs. Due to the highly contagious nature of TB,
people who test positive for TB mycobacterium must be kept in isolation during
the early stage of treatment. Current testing methods can take from several days
to several weeks to identify whether a patient's mycobacterium is TB or non-TB,
forcing hospitals to quarantine both TB and non-TB patients during this period.
Quarantining patients for any prolonged period uses significant medical
resources. We are developing and currently testing a TB GeneKit designed to
genotype the genetic material in the mycobacterium within approximately one day
to identify the presence of TB or non-TB mycobacterium. Our TB GeneKit can also
be used to detect mutations that confer resistance to drugs used to treat TB. We
intend to market and sell our TB GeneKit in those geographic areas where TB
poses significant health threats, including Asia, Central Europe, parts of the
former Soviet Union and Africa.
OTHER HIV
We are developing additional HIV GeneKits for HIV species not covered by our
existing HIV GeneKit.
REGULATION BY THE FDA AND OTHER GOVERNMENT AGENCIES
We currently sell our products for research and clinical research purposes.
In the future, we intend to sell products for clinical diagnostic purposes. We
do not believe we need authorization from the FDA or health authorities in
foreign countries to sell our products for research purposes, as long as they
are properly labeled. We will, however, require authorization to sell our
products for clinical diagnostic purposes.
FDA APPROVAL PROCESS. Products that are used to diagnose diseases in people
are considered medical devices, which are regulated by the FDA. To obtain FDA
authorization for a new medical device, a
42
<PAGE>
company may have to submit data relating to safety and efficacy based on
extensive testing. This testing, and the preparation of necessary applications
and the processing of those applications by the FDA, are expensive and may take
several years to complete. The following describes several important aspects of
the FDA authorization process.
The FDA has three classes for medical devices:
- Class I devices (for example, bandages, manual wheelchairs and ice
bags) are the least regulated, but they must still comply with the
FDA's labeling, manufacturing, recordkeeping, and other basic
requirements. Most Class I devices do not require premarket
authorization from the FDA.
- Class II devices (for example, portable oxygen generators and
hypodermic needles) may be subject to additional regulatory controls,
such as performance standards and postmarket surveillance.
- Class III devices (for example, cardiac pacemakers) require specific
FDA approval prior to marketing and distribution, and are, as well,
subject to the FDA's basic requirements.
To sell a Class II 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. 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 application. A company may have to include test data in a 510(k)
notification, including human test data. It will almost always have to include
such test data in a PMA application.
If human test data are required for either a 510(k) or a PMA application,
and if the device presents a significant risk, the manufacturer must first file
an Investigational Device Exemption submission, or IDE, with the FDA. The IDE
must contain data, such as animal and laboratory testing, showing that the
device is safe for human testing. If the IDE is granted, human testing may
begin.
Generally, a 510(k) notification to the FDA that a new device is similar to
an existing device requires less data and takes less time for the FDA to process
than a PMA. The FDA is supposed to act on a 510(k) notification within 90 days.
According to the most recent FDA data available, the FDA completes its review of
more than 66% of 510(k)s within 90 days. By contrast, a PMA application must be
supported by more extensive data to prove the safety and efficacy of the device,
and review of a PMA application involves a lengthier FDA process. The FDA
conducts a preliminary review of the PMA application. If complete, the PMA
application is filed by the FDA. Officially, the FDA then has 180 days to review
the PMA application, however, as a practical matter, PMA reviews usually take
much longer, up to one-and-a-half years or more from filing. The FDA may grant
expedited (fast-track) review of a PMA application if certain criteria relating
to public health importance are met, but that decision is within the FDA's
discretion and affects only the timing of the review process, not the outcome.
NEED FOR FDA APPROVAL OF SOME OF OUR PRODUCTS. We intend to market some of
our products in the U.S. for clinical diagnostic purposes, and therefore we will
have to obtain prior FDA authorization, as described above. We believe our HIV
GeneKit is currently considered by the FDA as a Class III medical device.
However, the FDA recently asked an advisory committee of experts whether HIV
genotyping tests should be reclassified from Class III to Class II. The advisory
committee recommended reclassification subject to certain controls including
post-market surveillance of the performance of these products. If the FDA
reclassifies HIV genotyping tests from Class III to Class II, we will be able to
obtain FDA permission to market our HIV OpenGene System by submitting a 510(k),
rather than a PMA. A 510(k) generally contains less data than a PMA and is
usually reviewed and approved by the FDA more quickly than a PMA. Although it is
likely that the FDA will follow the recommendation of its advisory committee, to
do so the FDA is required to issue a proposed regulation, allow the opportunity
for public comment
43
<PAGE>
and then publish a final regulation reclassifying HIV genotyping tests. This
process could take several years to complete.
Under the Food and Drug Administration Modernization Act of 1997, there is
an alternative option for us to obtain faster reclassification of our HIV
OpenGene System. Under this new procedure we can ask the FDA to classify our HIV
OpenGene System based upon an evaluation of the risks presented by the device to
patients. The FDA has 60 days to make a decision on this request. However, in
order for us to use this new procedure, we would first have to submit a 510(k)
to the FDA and have the FDA reject the 510(k), which would occur because the
device is still in Class III. Once the FDA rejects our 510(k), we would then
immediately submit our request for classification of our HIV OpenGene System in
Class II. This option is likely to be faster than waiting for the FDA to go
through its normal reclassification procedures.
We currently plan to follow this alternate option. However, since this
process is new and is used very infrequently, there is no assurance that the FDA
would grant our request for reclassification. If the FDA does not grant our
request to reclassify our HIV GeneKit under this procedure, we will either have
to submit a PMA application or wait until the FDA acts to reclassify HIV
Genotyping tests as recommended by its advisory committee.
We believe that some of our other products will be regulated as Class II or
Class III medical devices.
OTHER FDA REQUIREMENTS. In addition to government requirements relating to
marketing authorization for medical device products, we will also be subject to
other FDA requirements. We will have to be registered as a medical device
manufacturer with the FDA. We will be inspected on a routine basis by the FDA
for compliance with the FDA's quality system regulations, which prescribe
standards for manufacturing, testing, distribution, storage, design control and
service activities. In addition, because we will manufacture some of our
products in Canada, the FDA, in conjunction with the U.S. Customs Service, could
impose a ban on our products if the FDA were to conclude that the products
appeared to be in violation of the FDA's regulatory requirements, including
restrictions that apply to the sale of research-use only products. Also, the
FDA's medical device reporting regulation will require us to provide information
to the FDA on deaths or serious injuries associated with the use of our devices,
as well as product malfunctions that are likely to cause or contribute to death
or serious injury if the malfunction were to recur.
Finally, the FDA prohibits promoting a device for unauthorized uses and
reviews company labeling for accuracy. The FDA has become aware that certain
products being sold by other companies for research purposes only, were in fact
being used by some customers for clinical diagnostic purposes. The FDA recently
issued a policy statement describing the conditions under which companies may
sell research-use only products. These conditions may restrict our ability to
sell research-use only products in the United States. We do not believe these
conditions will have any negative effect on our sale of GeneKits for legitimate
scientific research.
REGULATORY APPROVAL OUTSIDE THE UNITED STATES. We plan to market our
products outside the United States, initially in Canada, Japan, countries in
Europe and South America. Government authorization requirements similar to the
FDA's exist in some of these and many other foreign countries. Therefore,
authorization to sell our products for clinical diagnostic purposes in Canada,
Japan, Europe and South America may also require lengthy and costly testing
procedures. In addition, the regulatory bodies in other countries may be
affected or influenced by significantly different criteria than those used by
the FDA. Sale of our products in these areas may be materially affected by the
policies of these regulatory bodies or the domestic politics of the countries
involved.
OTHER GOVERNMENT REGULATIONS. We are or may become subject to various
federal, state, provincial and local laws, regulations and recommendations,
including those relating to workers compensation, safe
44
<PAGE>
working conditions, and laboratory and manufacturing practices used in
connection with our research and development activities.
In addition, our reference laboratory in Norcross, Georgia, is subject to
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 performs high
complexity tests, and is therefore subject to the most stringent level of
regulation under CLIA. This laboratory is certified under CLIA and by the state
of Georgia.
We are also subject to various laws and regulations in Canada, the United
States and Europe, including those relating to product emissions use and
disposal of hazardous or toxic chemicals or potentially hazardous substances,
infectious disease agents and other materials, workers compensation, safe
working conditions, and laboratory and manufacturing practices used in
connection with our research and development activities.
SALES AND MARKETING
We market our OpenGene System in North America and in many European
countries to the research and clinical research markets through our direct sales
force. We have a sales and marketing force of 58 people. Many members of our
sales force have scientific backgrounds. Our marketing force includes a team of
trained application specialists who provide intensive on-site training,
after-sales support and site-by-site trouble shooting. We offer service
contracts to our customers on our sequencers, certain equipment and software. We
have established a toll-free telephone number in North America for customer
service. The members of our internal sales force are compensated on a commission
and salary basis.
For other areas of the world and in selected product markets, our strategy
is to establish relationships with leading distributors to market and sell our
products. We granted Amersham the exclusive worldwide license to use and sell
the Seq4x4 and related products used and sold with the sequencer, which is
designed for the research market. In November 1999, we granted
Amersham-Pharmacia Biotech K.K. the exclusive right to distribute our products
to the research market in Japan. During 1999 approximately 21% of our revenues
were derived from sales of sequencers and other products to Amersham.
In 1999, we granted exclusive rights to distribute our GeneKits and OpenGene
System to Werfen Medical S.A. in Argentina and Diagnostic Technology Pty Ltd. in
Australia and New Zealand. We also entered into an agreement in 1999 with Roche
Diagnostics, S.L. to act as our exclusive agent in Spain and Portugal in the
clinical diagnostic market. These agreements expire at various times from
April 2000 through April 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. Certain of the agreements also provide for minimum annual
purchases for specified periods.
Our marketing efforts also include product advertisement and participation
in trade shows and product seminars.
RESEARCH AND DEVELOPMENT
We currently conduct research and development through our own staff and
through collaborations with researchers at scientific and academic institutions
and hospitals. Our current research and development activities are focused on:
- developing additional GeneKits, including additional HIV GeneKits for
different HIV species, and GeneKits for hepatitis B, hepatitis C and
tuberculosis;
- developing new technology for our sequencers and related equipment and
software;
45
<PAGE>
- refining existing proprietary, disposable gel cassette technology in order
to improve performance of our sequencers; and
- exploring new technologies for future commercial products.
As of February 29, 2000, our research and development staff consisted of 60
people. This includes a team of software developers who have developed our
GeneObjects software and are developing our TRUGENE CMS software. Our software
developers are working on an advanced version of our GeneObjects software as
well as additional software applications for the clinical diagnostic market. Our
research and development staff is also working to prepare our planned
application to the FDA to sell our HIV OpenGene system to the clinical
diagnostic market.
We incurred $7.9 million of research and development expenses in 1999, $6.3
million in 1998 and $4.1 million in 1997. We have four facilities in the United
States and Canada where we conduct research and development.
MANUFACTURING
We assemble our DNA sequencers and related equipment at a manufacturing
facility in Toronto, Canada. Component parts are manufactured by third parties
in accordance with our design specifications. We manufacture our disposable gel
cassettes at our second manufacturing facility in Toronto. We make GeneKits in
our Pittsburgh, Pennsylvania facility. We also plan to make GeneKits at a new
facility in Atlanta, Georgia, which is in the process of being built. We
manufacture certain chemicals and other components included in the GeneKits.
Other GeneKits components are manufactured by, or licensed from, third parties.
Our new facility in Atlanta is being designed to enable us to increase
significantly our production of GeneKits. Based upon our experience with our
Pittsburgh facility, we believe that we will be in a position to qualify our
Atlanta facility under applicable FDA standards. We expect that this new
approximately 100,000 square foot facility will become available to us in stages
and that we will be in a position to commence commercial production at this
facility in the first quarter of 2001.
We have documented and installed design and production practices in our
Toronto facilities to comply with the FDA's quality system regulations. We are
in the process of documenting and installing design and production practices in
our Pittsburgh facility to comply with the FDA's quality system regulations. We
have implemented a quality management system at these manufacturing facilities
in order to ensure product performance, reliability and quality. We intend to
take the same actions at our new Atlanta facility. We also are seeking
certification of compliance to ISO 9001 for our Toronto facilities. In addition
to adhering to ISO goals and FDA quality standards, we have implemented our own
quality control and quality assurance standards and programs.
We provide one year warranty coverage for product defects on the instrument
component of our sequencers. All product repairs are performed by our employees
at one of our manufacturing facilities.
In connection with our GeneKits, sequencers and related equipment, we use
certain dyes and custom-designed component parts supplied by third parties. We
believe that some dyes supplied by Amersham under our exclusive worldwide
license to use and sell Amersham dyes within our GeneKits, may not be available
from other suppliers, although our customers might be able to purchase some, but
not all, 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. While we believe that alternative reagents and
chemicals are available, alternate supplies may not be as effective as certain
of the products that we presently use. In addition, we believe that there are
alternative suppliers for our custom-designed DNA sequencer parts, but that we
would incur costs in switching to alternative suppliers and would likely
experience delays in production of the products that use any of these parts
until such time as we were able to locate alternate suppliers or parts.
46
<PAGE>
PROPRIETARY RIGHTS
We rely on patents, licenses from third parties, trade secrets, trademarks,
copyright registrations and non-disclosure agreements to establish and protect
our proprietary rights in our technologies and products.
We own or jointly own 33 U.S. patents. We own or jointly own an additional
32 U.S. patent applications pending, of which seven have been allowed. We own 12
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. Our issued and allowed patents and patent
applications cover various aspects of our products and technologies, including
viral load testing, several of our GeneKits and various DNA sequencing and
GeneKit technologies, including the stratified matrix testing technology, the
MicroCel technology, basecalling technology, and the CLIP technology.
Our competitive position is also dependent upon unpatented trade secrets. We
are developing a substantial database of information concerning our research and
development and have taken security measures to protect our data. However, trade
secrets are difficult to protect. In an effort to protect our trade secrets, we
have a policy of requiring our employees, consultants and advisors to execute
non-disclosure agreements. These agreements provide that confidential
information developed or made known to an individual during the course of their
relationship with us must be kept confidential, and may not be used, except in
specified circumstances.
On December 27, 1999, Perkin-Elmer Corporation, PE Biosystems Group filed a
lawsuit against our company in the United States District Court for the Northern
District of California claiming that our DNA sequencing equipment and products
infringe patents licensed to Perkin-Elmer by the California Institute of
Technology. The complaint offers no details to support the allegation of
infringement. The suit requests among other remedies that the court enjoin us
from continuing to infringe these patents and an unspecified amount of damages.
We have previously studied these patents and have received legal advice that we
are not liable for any claims of infringement. We believe that Perkin-Elmer's
claim is without merit and we plan to vigorously defend the suit. Dr. Lloyd M.
Smith, one of our directors, is a named inventor on the patents that we are
alleged to have infringed. Dr. Smith indirectly receives royalty payments for
those patents from Perkin-Elmer, through the California Institute of Technology.
Dr. Smith is a co-founder of Third-Wave Technologies Inc., which has announced
that it will be acquired by PE Biosystems in a stock-for-stock transaction.
After the closing of that transaction, Dr. Smith expects to be a consultant to
PE Biosystems.
From time to time, we receive notice from third parties claiming that we may
infringe their patents.
COMPETITION
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:
biotechnology, pharmaceutical, chemical and other companies; academic and
scientific institutions; governmental agencies; and public and private research
organizations.
Some of our major competitors include:
- manufacturers and distributors of DNA sequencers such as the PE Biosystems
Group, 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;
47
<PAGE>
- 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.; and
- manufacturers of cell cultured assays, including ViroLogic, Inc. and
VIRCO.
Many of these companies and many of our other competitors have much greater
financial, technical and research and development resources and production and
marketing capabilities than we do.
Our GeneKits also compete with homebrew genetic tests for HIV and other
diseases designed by laboratories and some of the companies listed above.
Homebrew tests include a variety of small-scale genotyping tests which typically
have not undergone clinical validation and have not been approved by the FDA or
other regulatory agencies.
We believe that we are able to compete primarily on the basis of the
following:
- our ability to provide an integrated DNA sequencing system;
- ease of use;
- speed of sequencing;
- cost-effectiveness;
- clinical data with respect to the HIV market; and
- with respect to the HIV market, FDA approval of our HIV OpenGene System,
if and when we obtain it.
EMPLOYEES
As of February 29, 2000, we employed 248 full-time employees (including
executive officers) and 21 independent contractors, of whom:
- 60 are engaged in research and development;
- 58 are involved in sales and marketing activities;
- 84 in manufacturing and operations; and
- 67 are involved in finance, legal and administrative functions.
Our employees are not represented by a union or other collective bargaining
unit and we have never experienced a work stoppage. We believe that our employee
relations are good.
48
<PAGE>
FACILITIES
The table below lists the locations of our facilities and summarizes certain
information about each location.
<TABLE>
<CAPTION>
SQUARE
FEET
LOCATION USE (APPROXIMATE)
-------- --- -------------
<S> <C> <C> <C>
1. Bay Street Research, sales and principal executive 20,643
Toronto, Canada offices
2. Etobicoke MicroCel manufacturing 8,482
Ontario, Canada
3. Etobicoke Sequencer manufacturing 10,500
Ontario, Canada
4. Oakville Research and development 8,000
Ontario, Canada
5. University of Kit manufacturing and research and 8,171
Pittsburgh development
Applied Research
Center, Pittsburgh,
Pennsylvania
6. Technology Park Research and development and laboratory 7,313
Norcross, Georgia
7. Suwanee, Georgia* GeneKit manufacturing, research and 99,822
development, laboratory and sales and
administrative offices
8. Evry, European head office 6,000
France
9. Meyerside Drive** Kit development 3,100
Mississauga,
Canada
10. Kestrel Road** Kit manufacturing 22,600
Mississauga,
Canada
11. Technology Park,** Research and development and laboratory 21,032
Norcross, Georgia
<CAPTION>
TERM OF LEASE
-------------
<S> <C>
1. June 1995 -
May 2000
2. June 1996 -
May 2001
3. September 1998 -
August 2003
4. September 1998 -
August 2003
5. September 1997 -
August 2000
6. March 1998 -
February 2003
7. February 2000 -
March 2010
8. March 1999 -
February 2001
9. May 1999 -
April 2004
10. May 1999 -
April 2004
11. November 1999 -
October 2004
</TABLE>
- ------------------------
* This facility is not yet operating.
** We do not intend to use these facilities and are currently attempting to
sublease them.
In addition to the foregoing, we have entered into a short term lease in
Norcross, Georgia for temporary office space until our new facility in Suwanee,
Georgia is complete.
We believe that additional facilities will be available at reasonable market
rates to meet any future needs we may have for additional space.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings other than the suit
described under "Proprietary Rights".
49
<PAGE>
SERVICE AND ENFORCEMENT OF LEGAL PROCESS
Our company is incorporated under the laws of the Province of Ontario,
Canada and a substantial portion of our assets are located in Canada. Certain of
our directors and officers and certain of the experts named in this prospectus
are residents of Canada, and all or a substantial portion of their assets are
located outside the United States. As a result, if any of our shareholders were
to bring a lawsuit against our officers, directors or experts in the United
States it may be difficult for them to effect service of legal process within
the United States upon those people who are not residents of the United States
or to realize in the United States upon judgments of courts of the United States
based upon civil liability under the Securities Act of 1993, as amended, or the
Securities Exchange Act of 1934, as amended (including the rules promulgated
thereunder by the Securities and Exchange Commission). In addition, our
attorneys in Canada, Osler, Hoskin & Harcourt LLP, have advised us that there is
doubt as to the enforceability in Canada against our company, our directors and
officers, or the experts named in this prospectus, in each case if not a
resident of the United States, of liabilities predicated solely upon U.S.
federal securities laws.
50
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to our
executive officers and directors. This information is supplied based upon our
records and information furnished by our executive officers and directors.
<TABLE>
<CAPTION>
DIRECTOR'S
YEAR TERM
NAME AGE POSITION APPOINTED EXPIRES
- ---- -------- --------------------------------------------------- --------- ----------
<S> <C> <C> <C> <C>
Richard T. Daly(3)........ 50 President, Chief Executive Officer and Director 1998 2001
Thomas J. Clarke.......... 52 Chief Financial Officer 2000
Timothy W. Ellis.......... 52 Chief Operating Officer 1999
Dr. Arthur W.G. Cole...... 49 Executive Vice President; President, Visible 1996
Genetics Europe S.A.
Dr. James M. Dunn......... 45 Vice President, Technology 1994
Marguerite Ethier......... 36 Vice President, General Counsel and Director 2000 2000
Michael A. Cardiff(2)..... 40 Director 1999 2000
Sheldon Inwentash(1)...... 44 Director 1994 2002
Jonathan S. Leff(1)(2).... 31 Director 1999 2000
Robert M. MacIntosh....... 77 Director 2000 2002
Prof. J. Robert S.
Prichard(1)(2)(3)....... 50 Director 1999 2002
Dr. Lloyd M. Smith........ 44 Director 1995 2001
Dr. Konrad M. Weis........ 71 Director 1997 2001
</TABLE>
- ------------------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
(3) Corporate Governance Committee
The following is the business experience for at least the last five years of
each of our executive officers and directors:
RICHARD T. DALY has been a Director of our company since June 1998,
Executive Vice President since March 1999 and President and Chief Executive
Officer since July 1999. Prior to joining Visible Genetics, Mr. Daly founded,
and, from March 1989 through July 1998, served as Chairman and Chief Executive
Officer of Clinical Partners, Inc., a San Francisco-based company providing
comprehensive, therapy-specific management of HIV and AIDS patients for
employers and managed health-care organizations. Prior to founding Clinical
Partners, Mr. Daly spent over 15 years in the healthcare industry with several
companies in a variety of executive positions in sales, marketing and general
management, including serving as the President of Baxter Canada for a period of
four years, and President of the Health Data Institute.
THOMAS J. CLARKE has been Chief Financial Officer of our company since
January 2000. From July 1997 to January 2000, Mr. Clarke was Chief Operating
Officer of CCS TrexCom, Inc., a telecommunications software company. From 1991
to July 1997, Mr. Clarke was Chief Financial Officer of CCS TrexCom. From 1989
to 1990, Mr. Clarke was Chief Financial Officer of Medaphis Corporation, a
medical transaction-processing company. From 1986 to 1989, Mr. Clarke was Senior
Vice President and Chief Financial Officer of Days Inn Corporation. From 1985 to
1986, Mr. Clarke was Controller of Quadram Corporation. From 1980 to 1985, Mr.
Clarke held various financial positions at Contel Corporation. Mr. Clarke is a
Certified Public Accountant.
51
<PAGE>
TIMOTHY W. ELLIS has been Chief Operating Officer of our company since
November 1999. From January 1998 to November 1999, Mr. Ellis operated his own
management consultant practice. From 1991 to 1997, Mr. Ellis was President of
Dynex Technologies. From 1988 to 1991, Mr. Ellis was President of Genetic
Systems Corporation. From 1985 to 1988, Mr. Ellis was General Manager of Abbott
Laboratories' Clinical Chemistry Business Unit.
DR. ARTHUR W. G. COLE has been Executive Vice President of our company since
May 1996 and the President of our Visible Genetics Europe S.A. subsidiary since
September 1999. From May 1996 to September 1999, Dr. Cole served as Chief
Business Officer of our company. From 1995 to May 1996, Dr. Cole was a business
consultant to companies in the biotechnology industry through AC Consulting.
From 1981 to 1995, Dr. Cole worked at Pharmacia Biotech, AB, a Swedish
biotechnology supply company in a range of positions, including five years as
Vice President. During his time with Pharmacia, Dr. Cole ran the division
responsible for worldwide sales of DNA sequencing equipment and supplies.
DR. JAMES M. DUNN has been Vice President, Technology of our company since
June 1998 and was our Director of Molecular Test Development from January 1994
to June 1998. Prior to joining our company, Dr. Dunn was a research consultant
to the Hospital for Sick Children from August 1993 to January 1994 and a
National Cancer Institute of Canada research fellow at the Division of Biology,
California Institute of Technology from 1990 to 1993. Dr. Dunn received a B.Sc.
in chemistry from the University of British Columbia and a Ph.D. from the
University of Toronto.
MARGUERITE ETHIER has been Vice President, General Counsel of our company
since January 2000 and has been a Director of our company since March 2000. From
1998 to 1999, Ms. Ethier was a partner in the law firm of McCarthy Tetrault, and
from 1995 to 1997 and 1992 to 1993, Ms. Ethier was an associate with McCarthy
Tetrault. From 1993 to 1995, Ms. Ethier was an associate with the law firms of
Townsend & Townsend Khourie & Crew and Howard Rice Nemerovski Canady Falk &
Rabkin. Ms. Ethier holds a B.Sc. degree from the University of Alberta, an M.Sc.
degree from the University of Toronto, and an LL.B. degree from Osgoode Hall Law
School. Ms. Ethier is a member of the Ontario and California bars, and is
qualified as both a registered Canadian Patent Agent and a United States Patent
Attorney.
MICHAEL A. CARDIFF has been a Director of our company since June 1999. Since
September 1999, Mr. Cardiff has been President and Chief Executive Officer of
Prologic Corporation. From October 1996 to September 1999, Mr. Cardiff was
Executive Vice President, Financial Services of EDS Canada. From November 1994
to September 1996, Mr. Cardiff was Senior Vice President of Sales and Marketing
of EDS Canada and from 1989 to 1994, he held several positions with Stratus
Computer Corp. Mr. Cardiff presently is a member of the boards of directors of
Visible Decisions Inc. (which company is not related to our company), SOLCORP
Insurance Software Solutions Corp. and Spectra Securities Software Inc.
SHELDON INWENTASH has been a Director of our company since April 1994. Since
November 1993, Mr. Inwentash has been the Chairman and Chief Executive Officer
of GeneVest Inc. (formerly known as Gene Screen Inc.), a Canadian company which
is a principal shareholder of our company. Since February 1992, Mr. Inwentash
has been the Chairman and Chief Executive Officer of Pinetree Capital Corp., a
venture capital firm.
JONATHAN S. LEFF has been a director of our company since July 1999, serving
as the nominee of the Series A preferred shareholders. Mr. Leff joined E.M.
Warburg, Pincus & Co., LLC in July 1996 as an Associate. In January 1999, he
became a Vice President, and in January 2000, he became a Managing Director.
Mr. Leff is also a director of VitalCom Inc., Intermune Pharmaceuticals Inc. and
a number of private health care companies.
ROBERT M. MACINTOSH has been a Director of our company since March 2000.
From 1980 until his retirement in 1989, Mr. MacIntosh was President of the
Canadian Bankers Association. Mr. MacIntosh presently is a member of the board
of directors of Chase Manhattan Bank of Canada.
52
<PAGE>
PROF. J. ROBERT S. PRICHARD has been a Director of our company in May 1999.
Prof. Prichard has been President of the University of Toronto since 1990. From
1984 to 1990, Prof. Prichard was Dean of the Faculty of Law at the University of
Toronto. Prof. Prichard is past Chairman of the Council of Ontario Universities,
a Director of the Association of American Universities and a Director of the
Association of Universities and Colleges of Canada and the International
Association of Universities. Prof. Prichard presently serves as a Director of
the University Health Network, Onex Corporation, BioChem Pharmaceuticals, Moore
Corporation, Four Seasons Hotels Inc. and Tesma International Inc.
DR. LLOYD M. SMITH has been a Director of our company since March 1995.
Since June 1994, Dr. Smith has been Professor of Chemistry at the University of
Wisconsin-Madison. Dr. Smith has been involved in the development of
fluorescence-based automated DNA sequencers for over 15 years, has written
numerous scientific papers and is a named inventor on a number of U.S. patents.
Dr. Smith is a past member of the National Institutes of Health National Human
Genome Research Institute Study Section. Dr. Smith is a member of the Scientific
Advisory Board of CuraGen Corp. He also serves, or has served, on the editorial
boards of GENOME RESEARCH, DNA SEQUENCE GENETIC ANALYSIS: TECHNIQUES AND
APPLICATIONS and JOURNAL OF CAPILLARY ELECTROPHORESIS and was a member of the
scientific advisory boards of Fotodyne Incorporated and Boehringer Mannheim
Corp. Dr. Smith is a co-founder of Third-Wave Technologies, Inc., a
biotechnology company, which has agreed to be acquired by PE Biosystems in a
stock-for-stock transaction.
DR. KONRAD M. WEIS has been a Director of our company since 1997. Dr. Weis
has been the honorary Chairman of Bayer Corporation since 1991. He was President
and Chief Executive Officer of the company that later became Bayer Corporation
from 1974 until his retirement in 1991. He presently is a member of the boards
of directors of Demegen Inc., Michael Baker Corporation and Titan
Pharmaceuticals, Inc.
53
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our outstanding voting shares, as of February 29, 1999, for
(i) all shareholders known to beneficially own or exercise control or direction
over more than 10% of our common shares, and (ii) all directors and executive
officers as a group (13 persons):
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY OWNED SHARES BENEFICIALLY
PRIOR TO THE OWNED AFTER THE
OFFERING(1)(2) OFFERING(2)
-------------------- --------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT
- ------------------------ --------- -------- --------- --------
<S> <C> <C> <C> <C>
Warburg Pincus Funds (3)................................ 2,908,434 18.1% 2,908,434 16.1%
GeneVest Inc. (4)....................................... 1,927,134 12.0% 1,927,134 10.7%
All directors and executive officers as a group (13
persons)(5)........................................... 409,134 2.5% 409,134 2.2%
</TABLE>
- ---------
(1) The information in this table is based on our records, information provided
to us by directors and executive officers and a review of any Schedules 13D
and 13G filed in 1999 and 2000 by our shareholders with the Securities and
Exchange Commission. Beneficial ownership is determined in accordance with
rules of the Securities and Exchange Commission and includes shares over
which the indicated beneficial owner exercises voting and/or investment
power. Our common shares subject to options currently exercisable or
exercisable within 60 days are deemed outstanding for computing the
percentage ownership of the person holding the options but are not deemed
outstanding for computing the percentage ownership of any other person.
(2) This information is based on 16,045,167 voting shares outstanding as of
February 29, 2000, which includes 3,259,748 common shares issuable upon
conversion of our Series A preferred shares as of February 29, 2000, and
18,045,167 shares outstanding after this offering, which includes 3,259,748
common shares issuable upon conversion of our Series A preferred shares as
of February 29, 2000. The number of common shares issuable upon conversion
of our Series A preferred shares will increase as the dividends payable
thereon accrue.
(3) Consists of (i) 1,374,236 common shares held by Warburg, Pincus Equity
Partners, L.P., which includes 1,361,122 common shares issuable upon
conversion of their Series A preferred shares; (ii) 1,454,217 common shares
held by Warburg, Pincus Ventures International, L.P., which includes
1,440,341 common shares issuable upon conversion of their Series A preferred
shares; (iii) 43,626 common shares held by Warburg, Pincus Netherlands
Equity Partners, I, C.V., which includes 43,210 common shares issuable upon
conversion of their Series A preferred shares; (iv) 29,084 common shares
held by Warburg, Pincus Netherlands Equity Partners, II, C.V., which
includes 28,807 common shares issuable upon conversion of their Series A
preferred shares; and (v) 7,271 common shares held by Warburg, Pincus
Netherlands Equity Partners III, C.V., which includes 7,202 common shares
issuable upon conversion of their Series A preferred shares.
Warburg, Pincus & Co. ("WP") is the sole general partner of each of these
shareholders. Each of these shareholders is managed by E.M. Warburg, Pincus
& Co., LLC ("EMW LLC"). Lionel I. Pincus is the managing partner of WP and
the managing member of EMW LLC, and may be deemed to control both entities.
Jonathan S. Leff, a director of our company, is a general partner of WP and
a managing director and member of EMW LLC. Mr. Leff may be deemed to have an
indirect pecuniary interest (within the meaning of Rule 16a-1 under the
Securities Exchange Act of 1934, as amended) in an indeterminate portion of
the shares beneficially owned by these shareholders. Mr. Leff disclaims
beneficial ownership of all such shares.
(4) GeneVest Inc. is a Canadian company incorporated pursuant to the laws of
Alberta, Canada. Mr. Sheldon Inwentash, one of our directors, is the
President and Chief Executive Officer of GeneVest and, together with his
affiliates, beneficially owns approximately 45% of GeneVest's issued and
outstanding common shares.
(5) Includes an aggregate of 364,943 shares subject to options, exercisable
within 60 days from February 29, 2000, held by our directors and executive
officers, but excludes the shares held by GeneVest Inc. and the Warburg
Pincus Funds.
54
<PAGE>
UNDERWRITING
The underwriters named below, acting through their representatives
FleetBoston Robertson Stephens Inc., PaineWebber Incorporated, Warburg Dillon
Read LLC and Roth Capital Partners, Inc., have each separately agreed with us,
subject to the terms and conditions of the underwriting agreement, to purchase
from us the number of common shares set forth below opposite their respective
names. The underwriters are committed to purchase and pay for all shares if any
are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------- ----------
<S> <C>
FleetBoston Robertson Stephens Inc..........................
PaineWebber Incorporated....................................
Warburg Dillon Read LLC.....................................
Roth Capital Partners, Inc..................................
INTERNATIONAL UNDERWRITER
- ------------------------------------------------------------
FleetBoston Robertson Stephens International Limited........
PaineWebber International (U.K.) Ltd........................
UBS AG......................................................
Roth Capital Partners, Inc..................................
----------
Total..................................................... 2,000,000
==========
</TABLE>
The representatives have advised us that the underwriters propose to offer
the common shares to the public at the public offering price set forth on the
cover page of this prospectus and to certain dealers at that price less a
concession not in excess of $____ per share, of which $____ may be reallowed to
other dealers. After this offering, the public offering price, concession and
reallowance to dealers may be reduced by the representatives. No such reduction
of this type will change the amount of proceeds to be received by us as set
forth on the cover page of this prospectus. The common shares are offered by the
underwriters as stated in this prospectus subject to receipt and acceptance by
them and subject to their right to reject any order in whole or in part. The
underwriters do not intend to confirm sales to any accounts over which they
exercise discretionary authority.
OVER-ALLOTMENT OPTION
We have granted to the underwriters an option, exercisable during the 30-day
period after the date of this prospectus, to purchase up to 300,000 additional
common shares, to cover over-allotments, if any, at the public offering price
less the underwriting discount set forth on the cover page of this prospectus.
If the underwriters exercise their over-allotment option to purchase any of the
additional 300,000 common shares, the underwriters have severally agreed,
subject to certain conditions, to purchase approximately the same percentage
thereof as the number of common shares to be purchased by each of them bears to
the total number of common shares offered in this offering. If purchased, these
additional common shares will be sold by the underwriters on the same terms as
those on which the common shares offered hereby are being sold. We will be
obligated, pursuant to the over-allotment option, to sell common shares to the
underwriters to the extent the over-allotment option is exercised. The
underwriters may exercise the over-allotment option only to cover
over-allotments made in connection with the sale of the common shares offered in
this offering.
55
<PAGE>
The following table summarizes the compensation to be paid to the
underwriters by us:
<TABLE>
<CAPTION>
TOTAL
-------------------------------
PER WITHOUT WITH
SHARE OVER-ALLOTMENT OVER-ALLOTMENT
-------- -------------- --------------
<S> <C> <C> <C>
Underwriting Discounts and Commissions
payable by us...........................
</TABLE>
The expenses of this offering are estimated at $650,000 and are payable
entirely by us.
INDEMNITY
The underwriting agreement contains covenants of indemnity among the
underwriters and us against certain civil liabilities, including liabilities
under the Securities Act, and liabilities arising from breaches of
representations and warranties contained in the underwriting agreement.
LOCK-UP AGREEMENTS
Each of our executive officers, directors and 10% beneficial owners have
agreed, subject to specified exceptions, not to offer to sell, contract to sell,
or otherwise dispose of, loan, pledge or grant any rights with respect to any
common shares or any options or warrants to purchase any common shares, or any
securities convertible into or exchangeable for common shares owned as of the
date of this prospectus or thereafter acquired directly by those holders or with
respect to which they have the power of disposition, without the prior written
consent of FleetBoston Robertson Stephens Inc. This restriction terminates after
the close of trading of our common shares on the 90th day following the day the
common shares offered hereby commenced trading on the Nasdaq National Market.
However, FleetBoston Robertson Stephens Inc. may, in its sole discretion and at
any time or from time to time before the termination of the 90-day period,
without notice, release all or any portion of the securities subject to lock-up
agreements. There are no existing agreements between the representatives and any
of our shareholders who have executed a lock-up agreement providing consent to
the sale of shares prior to the expiration of the lock-up period.
In addition, we have agreed that during the lock-up period we will not,
without the prior consent of FleetBoston Robertson Stephens Inc., subject to
certain exceptions, consent to the disposition of any common shares held by
shareholders subject to lock-up agreements prior to the expiration of the
lock-up period, or issue, sell, contract to sell, or otherwise dispose of, any
common shares, any options or warrants to purchase any common shares or any
securities convertible into, exercisable for or exchangeable for common shares
other than our sale of shares in this offering, the purchase and sale of our
common shares under our Employee Share Purchase Plan, the issuance of our common
shares upon the exercise of outstanding options or warrants or upon the
conversion of our Series A preferred shares, and the issuance of options under
our existing employee and director share option plans provided that those
options do not vest prior to the expiration of the lock-up period.
STABILIZATION
The representatives have advised us that, pursuant to Regulation M under the
Securities Exchange Act of 1934, certain persons participating in this offering
may engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids, that may have the effect of
stabilizing or maintaining the market price of our common shares at a level
above that which might otherwise prevail in the open market. A "stabilizing bid"
is a bid for or the purchase of our common shares on behalf of the underwriters
for the purpose of fixing or maintaining the price of our common shares. A
"syndicate covering transaction" is a bid for or the purchase of our common
shares on behalf of the underwriters to reduce a short position incurred by the
underwriters in connection with the offering. A "penalty bid" is an arrangement
permitting the representatives to reclaim the selling concession otherwise
accruing to an underwriter or syndicate member in connection with the offering
if the common shares
56
<PAGE>
originally sold by that underwriter or syndicate member are purchased by the
representatives in a covering transaction and has therefore not been effectively
placed by such underwriter or syndicate member. The representatives have advised
us that these transactions may be affected on the Nasdaq National Market or
otherwise and, if commenced, may be discontinued at any time.
PASSIVE MARKET MAKING
In connection with this offering and before the commencement of offers or
sales of our common shares, certain underwriters who are qualified market makers
on the Nasdaq National Market may engage in passive market making transactions
in our common shares on the Nasdaq National Market in accordance with Rule 103
of Regulation M under the Exchange Act, during the business day prior to the
pricing of the offering. Passive market makers must comply with applicable
volume and price limitations and must be identified as such. In general, a
passive market maker must display its bid at a price not in excess of the
highest independent bid for such security; if all independent bids are lowered
below the passive market maker's bid, however, such bid must then be lowered
when certain purchase limits are exceeded.
PaineWebber Incorporated and Roth Capital Partners, Inc. received customary
compensation in exchange for their placement agent services in connection with
our December 1999 private placement. From time to time the underwriters have
performed and may, in the future perform, investment banking or other services
for us.
Our common shares have not been qualified by prospectus for distribution in
any province of Canada and may be offered for sale in Canada only pursuant to
exemptions from the prospectus requirements of the applicable province. Such
sales may be made only by dealers registered under the laws of such province or
pursuant to exemptions from the applicable registered dealer requirements.
57
<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 that our Board of Directors may issue could have rights
equal or superior to the rights of the common shares.
COMMON SHARES
The holders of our 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 our common shares. The preferred shares may have voting rights superior to
our 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 mandatorily redeemable 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, 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
58
<PAGE>
the redemption price, and we will be permitted to redeem the preferred shares at
any time beginning on the seventh anniversary after issuance. If we fail to
redeem the Series A Preferred shares as required, 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 Series A preferred shares is entitled to the
number of votes corresponding 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 accrued and 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 of
Series A preferred shares to participate in future offerings in this manner
provides those shareholders with the opportunity to avoid having their ownership
interest in our company diluted under certain circumstances when the interest of
our common shareholders would be diluted.
We also are prohibited from incurring indebtedness for borrowed money and
capital lease obligations in excess of $15.0 million outstanding at any one
time, without first obtaining approval of the holders of a majority of the
Series A preferred shares.
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.
WARRANTS
In connection with our leased property in Gwinnett County, Georgia, we are
obligated to issue 10,000 warrants to the landlord. Each warrant is exercisable
at any time from the third anniversary of the date of issuance until the ninth
anniversary of the date of issuance, at an initial purchase price of $31.875,
subject to customary antidilution provisions.
59
<PAGE>
For a description of additional warrants which we have issued, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources" and our Annual Report on Form 20-F.
CLASSIFIED BOARD
Our Board of Directors is divided into three classes. The classification of
the Board of Directors was implemented in March 1996.
The holders of our Series A preferred shares are entitled to vote as a class
for one director. Each Series A Director serves for a one year term and any
vacancy may be filled only by a vote of the holders of Series A preferred
shares. In the event that we do not redeem our Series A preferred shares as
required during 2006, 2007 and 2008, then our Series A shareholders will be
entitled to special voting rights enabling them to elect a majority of our Board
of Directors, who will continue to serve as directors until we have redeemed our
Series A preferred shares as required.
TRANSFER AGENT
The transfer agent and registrar for our common shares is ChaseMellon
Shareholder Services, LLC, Overpeck Center, 85 Challenger Road, Ridgefield Park,
New Jersey 07660.
60
<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, and the underwriters' attorneys, Testa, Hurwitz & Thibeault, LLP, Boston,
Massachusetts. Certain matters relating to regulation by the U.S. Food and Drug
Administration will be passed upon by our attorneys, Hyman, Phelps & McNamara,
P.C., Washington, D.C. Certain matters relating to patents will be passed upon
by our attorneys, Oppedahl & Larson, L.L.P., Frisco, Colorado.
EXPERTS
Our Consolidated Financial Statements as of December 31, 1999 and 1998 and
for the years ended December 31, 1999, 1998 and 1997, included in this
prospectus, have been audited by PricewaterhouseCoopers LLP, Chartered
Accountants in Canada, as stated in their report appearing herein. The
Consolidated Financial Statements have been included herein 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, 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:
Judiciary Plaza
450 Fifth Street, N.W.
Room 1024 Washington, D.C. 20549
7 World Trade Center
New York, New York 10048
500 West Madison Street
Suite 1400
Chicago, Illinois 60661
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.
61
<PAGE>
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:
the following sections of our Annual Report on Form 20-F for the year
ended December 31, 1999:
Item 6--Exchange Controls and Other Limitations Affecting Security
Holders
Item 7--Taxation
Item 11--Compensation of Directors and Officers
Item 12--Options to Purchase Securities from Registrant or Subsidiaries
Item 13--Interest of Management in Certain Transactions
Item 14--Description of Securities to Be Registered
Item 15--Defaults Upon Senior Securities
Item 16--Changes in Securities and Changes in Security for Registered
Securities;
In addition, all documents that we file with the Securities and Exchange
Commission pursuant to Section 13, 14 or 15(d) of the Securities Exchange Act of
1934, as amended, after the date of the this prospectus and before termination
of the offering, including all annual reports on Form 20-F or Form 10-K, and all
filings on Forms 10-Q and 8-K, will be deemed to be incorporated by reference in
this prospectus and to be a part of this prospectus from the date those
documents are filed. We may also incorporate in this prospectus any Form 6-K
that 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 that 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 that
also is, or is deemed to be, incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
prospectus.
You may request a copy of any document incorporated by reference in this
prospectus at no cost. To receive a copy, write us at:
Visible Genetics Inc.
700 Bay Street
Suite 1000
Toronto, Ontario, Canada M5G 1Z6
Attention: Mr. Thomas J. Clarke
Or you can call us at (416) 813-3240. See "Where You Can Find More
Information."
62
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Audited Consolidated Financial Statements for the years
ended December 31, 1999, 1998 and 1997
Auditors' Report............................................ F-2
Consolidated Balance Sheets as at December 31, 1999 and
1998...................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997.......................... F-4
Consolidated Statements of Deficit for the years ended
December 31, 1999, 1998 and 1997.......................... F-5
Consolidated Statements of Comprehensive Loss for the years
ended December 31, 1999, 1998 and 1997.................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE>
AUDITORS' REPORT
TO THE SHAREHOLDERS OF VISIBLE GENETICS INC.
We have audited the consolidated balance sheets of Visible Genetics Inc. as
at December 31, 1999 and 1998 and the consolidated statements of operations,
deficit, comprehensive loss, and cash flows for the years ended December 31,
1999, 1998 and 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted
auditing standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Company as at December 31, 1999 and 1998
and the results of its operations and its cash flows for the years ended
December 31, 1999, 1998 and 1997 in accordance with generally accepted
accounting principles in the United States of America.
PricewaterhouseCoopers LLP
Chartered Accountants
Toronto, Canada
February 18, 2000
F-2
<PAGE>
VISIBLE GENETICS INC.
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $ 2,792,985 $ 6,165,924
Short-term investments.................................... 39,894,978 5,108,254
Trade receivables (net of allowance for doubtful accounts
of $1,180,801; 1998--$470,926).......................... 5,657,822 4,770,796
Other receivables (Note 4)................................ 668,748 1,445,820
Prepaid and deposits...................................... 729,307 233,072
Inventory (Note 5)........................................ 2,600,007 3,912,336
------------ ------------
Total current assets........................................ 52,343,847 21,636,202
------------ ------------
Fixed assets (Note 6)....................................... 4,173,335 3,877,163
Patents and licenses (Note 7)............................... 2,122,367 2,269,170
------------ ------------
$ 58,639,549 $ 27,782,535
============ ============
LIABILITIES
Current liabilities
Notes payable (Note 8).................................... $ -- $ 7,494,877
Accounts payable.......................................... 3,110,442 3,985,103
Accrued liabilities (Note 9).............................. 3,622,110 1,723,840
------------ ------------
Total current liabilities................................... 6,732,552 13,203,820
------------ ------------
MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SHARES
(Note 10)................................................. 27,555,652 --
------------ ------------
SHAREHOLDERS' EQUITY
Share capital (Note 11)..................................... 75,422,070 46,412,685
Other equity (Note 11)...................................... 8,987,328 2,232,465
Cumulative translation adjustment........................... (619,911) 84,822
Deficit..................................................... (59,438,142) (34,151,257)
------------ ------------
24,351,345 14,578,715
------------ ------------
$ 58,639,549 $ 27,782,535
============ ============
COMMITMENTS AND CONTINGENCY (Note 16)
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
Approved by the Board.
<TABLE>
<C> <S> <C>
/s/ RICHARD T. DALY
-------------------------------------------
Richard T. Daly, Director
/s/ SHELDON INWENTASH
-------------------------------------------
Sheldon Inwentash, Director
</TABLE>
F-3
<PAGE>
VISIBLE GENETICS INC.
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Sales
Products........................................... $ 12,455,775 $ 9,421,933 $ 2,967,695
Services........................................... 1,171,145 1,453,415 65,041
------------ ------------ ------------
13,626,920 10,875,348 3,032,736
------------ ------------ ------------
Costs of sales
Products........................................... 8,593,774 5,995,869 1,963,312
Services........................................... 679,112 677,712 31,520
------------ ------------ ------------
9,272,886 6,673,581 1,994,832
------------ ------------ ------------
Gross margin......................................... 4,354,034 4,201,767 1,037,904
------------ ------------ ------------
Expenses:
Sales, general and administrative (Note 7)......... 19,073,546 11,515,757 7,447,861
Research and development........................... 7,935,327 6,289,032 4,122,916
Acquired research and development (Note 12)........ -- 420,043 654,621
Exit and termination costs (Note 13)............... 1,329,083 -- --
------------ ------------ ------------
28,337,956 18,224,832 12,225,398
------------ ------------ ------------
Loss from operations before interest................. (23,983,922) (14,023,065) (11,187,494)
Interest income...................................... 694,549 264,195 774,462
Interest and financing expense (Note 8).............. (1,997,512) (1,132,091) (2,714)
------------ ------------ ------------
Net loss for the year................................ (25,286,885) (14,890,961) (10,415,746)
Cumulative preferred dividends and accretion of
discount attributable to preferred shares
(Note 10).......................................... (1,770,069) -- --
------------ ------------ ------------
Net loss attributable to common shareholders......... $(27,056,954) $(14,890,961) $(10,415,746)
============ ============ ============
Weighted average number of common shares
outstanding........................................ 9,916,954 7,782,094 7,059,578
Basic and diluted loss per common share.............. $ (2.73) $ (1.91) $ (1.48)
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-4
<PAGE>
VISIBLE GENETICS INC.
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF DEFICIT
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Deficit, beginning of year........................... $(34,151,257) $(19,260,296) $ (8,844,550)
Net loss for the year................................ (25,286,885) (14,890,961) (10,415,746)
------------ ------------ ------------
Deficit, end of year................................. $(59,438,142) $(34,151,257) $(19,260,296)
============ ============ ============
</TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net loss for the year................................ $(25,286,885) $(14,890,961) $(10,415,746)
Other comprehensive income:
Foreign currency translation adjustments........... (704,733) 112,477 --
------------ ------------ ------------
Comprehensive loss for the year...................... $(25,991,618) $(14,778,484) $(10,415,746)
============ ============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-5
<PAGE>
VISIBLE GENETICS INC.
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash provided by (used in) operating activities
Net loss for the year................................... $(25,286,885) $(14,890,961) $(10,415,746)
Add: Items not involving cash
Depreciation.......................................... 1,708,923 1,090,086 495,388
Amortization.......................................... 393,979 206,640 130,593
Patents and licenses written off...................... 451,085 -- --
Deferred compensation cost related to options
granted............................................. -- 77,469 250,067
Non cash financing expense related to warrants
granted............................................. 1,466,691 580,981 --
Amortization of discount on accounts receivable....... (48,158) -- --
Foreign exchange loss................................. 26,789 28,453 37,067
In-process research and development acquired.......... -- 420,043 654,621
Increase (decrease) from changes in
Trade receivables..................................... (1,804,006) (2,327,121) (1,193,858)
Other receivables..................................... 719,519 (850,270) (142,757)
Prepaids and deposits................................. (501,742) 28,913 (92,247)
Inventory............................................. 1,290,997 (3,149,740) (441,957)
Refundable investment tax credits..................... -- -- 476,393
Accounts Payable...................................... (734,230) 2,490,594 624,278
Accrued liabilities................................... 1,956,660 1,159,952 (80,460)
------------ ------------ ------------
(20,360,378) (15,134,961) (9,698,618)
------------ ------------ ------------
Investing activities
Purchase of fixed assets................................ (1,905,129) (3,348,261) (1,265,825)
Licenses and patents acquired........................... (698,261) (877,796) (815,925)
Purchase of short-term investments...................... (50,503,643) (13,705,737) (3,221,329)
Redemption of short-term investments.................... 15,716,919 14,616,777 7,432,233
Acquisition of ACT Gene S.A............................. -- (536,929) --
------------ ------------ ------------
(37,390,114) (3,851,946) 2,129,154
------------ ------------ ------------
Financing activities
Preferred shares issued, net of expenses................ 22,719,748 -- --
Warrants issued in connection with preferred shares..... 6,397,448 -- --
Common shares issued, net of expenses................... 29,009,385 14,640,188 419,167
Warrants issued in connection with private placement.... -- 444,572 --
Issuance of notes payable............................... -- 6,817,559 --
Warrants issued in connection with notes payable........ -- 1,182,441 --
Repayment of note payable............................... (4,100,000) -- --
Other equity............................................ 29,851 8,259 38,392
Repayment of loan from an officer....................... 323,405 -- --
------------ ------------ ------------
54,379,837 23,093,019 457,559
------------ ------------ ------------
Effect of exchange rate fluctuations on cash.............. (2,284) 193,133 151,982
------------ ------------ ------------
Increase (decrease) in cash during the year............... (3,372,939) 4,299,245 (6,959,923)
Cash, beginning of year................................. 6,165,924 1,866,679 8,826,602
------------ ------------ ------------
Cash, end of year....................................... $ 2,792,985 $ 6,165,924 $ 1,866,679
============ ============ ============
Supplemental information
Interest paid........................................... $ 786,585 $ 48,073 $ 2,714
Income taxes paid....................................... $ -- $ -- $ --
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-6
<PAGE>
VISIBLE GENETICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--NATURE OF OPERATIONS
Visible Genetics Inc. (the "Company") develops, manufactures and sells
integrated DNA sequencing systems that analyze genetic information. Such systems
are designed to identify mutations in the DNA of genes associated with certain
diseases. The Company's products are intended for research and clinical
purposes. Prior to marketing any products for use in the clinical diagnostic
market, the Company will require appropriate regulatory approval.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared in United States dollars, in
accordance with the accounting principles generally accepted in the United
States. The principal accounting policies of the Company, which have been
consistently applied, are summarized as follows:
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements of the Company include
the following subsidiaries: Visible Genetics Corp., Visible Genetics B.V.,
Applied Sciences, Inc., Gene Foundry Inc., Visible Genetics Europe S.A.
(formerly ACT Gene S.A.), Visible Genetics Israel Ltd. and Visible Genetics Srl.
All intercompany accounts and transactions have been eliminated upon
consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION AND WARRANTY
Revenues from the sale of the Company's products are recognized when
shipment occurs and title passes to the customer or distributor and there is
reasonable assurance of collectibility. There are no significant customer
acceptance requirements or post shipment obligations on the part of the Company.
Revenues from the sale of services are recognized when the services are provided
and there is reasonable assurance of collectibility. A provision is made for
estimated warranty costs at the time of the sale. Revenues from extended
warranty contracts are recognized over the life of the contract. Sales of
bundled sequencing systems and testing kits are recognized pro rata as the
components of the bundle are shipped to customers.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
As required under Statement of Financial Accounting Standards (SFAS)
No. 95, cash equivalents consist of short-term investments that are highly
liquid, are readily convertible to cash and have initial terms to maturity of
three months or less. Short-term investments consist of United States treasury
bills and corporate debt securities. They are classified as held-to-maturity and
are recorded at amortized cost. Contractual maturities of short-term investments
at December 31, 1999 and December 31, 1998 range from one to eight months.
F-7
<PAGE>
VISIBLE GENETICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FINANCIAL INSTRUMENTS
The carrying values of the Company's financial instruments consisting of
cash and cash equivalents, short-term investments, trade and other receivables,
accounts payable and notes payable, approximate their fair values due to their
short-term nature.
CONCENTRATION OF CREDIT RISK
The Company's financial instruments that are exposed to concentration of
credit risk consist primarily of cash and cash equivalents, short-term
investments and receivables. The Company maintains its accounts for cash and
cash equivalents and short-term investments with the United States treasury and
a number of large low-credit-risk financial institutions and corporations in
Canada and the United States in order to reduce its exposure. In addition, the
Company limits its maximum investment to any one counterparty to limit its
credit exposure. At December 31, 1999 and December 31, 1998 no customers
accounted for greater than 10% of gross trade receivables.
INVENTORY
Inventory is stated at the lower of cost and estimated realizable value.
Cost is determined by the first-in first-out method, and includes material,
labor, and an allocation of overhead.
FIXED ASSETS
Fixed assets are recorded at cost. Depreciation is provided on a
straight-line basis over the estimated useful lives of the assets, as follows:
<TABLE>
<S> <C>
Laboratory and computer equipment 2 to 5 years
Leasehold improvements term of the lease
</TABLE>
PATENTS AND LICENSES
External costs of patents and licenses are recorded at cost and amortized
over their estimated useful lives, which are generally up to ten years. If the
carrying amount of a patent or license is no longer recoverable, the related
unamortized cost is written down to fair value.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of",
the Company reviews long-lived assets, including fixed assets, patents and
licenses, for impairment whenever events or changes in business circumstances
indicate that the carrying amount of the asset may not be fully recoverable.
Under SFAS No. 121, an impairment loss would be recognized when estimated
undiscounted future cash flows expected to result from the use of the asset and
its eventual disposition are less than its carrying amount. Impairment, if any,
is assessed using discounted cash flows.
F-8
<PAGE>
VISIBLE GENETICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION
Monetary assets and liabilities denominated in foreign currencies are
translated into United States dollars at the exchange rate prevailing at the
balance sheet date. Other assets, liabilities and operating items are translated
at exchange rates prevailing at the respective transaction dates. Resulting
translation adjustments are included in the consolidated statement of
operations. Assets and liabilities of subsidiaries with functional currencies
other than United States dollars are translated at the exchange rate prevailing
at the balance sheet date, and the results of their operations are translated at
average exchange rates for the year. The resulting translation adjustments are
reflected in a separate component of shareholders' equity. Other exchange gains
or losses are included in the consolidated statement of operations.
INCOME TAXES
The Company provides for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," which prescribes an asset and liability approach
that results in the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
consolidated financial statements or tax returns.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development costs are expensed in the period incurred. The
Company is entitled to certain Canadian federal and provincial tax incentives
for qualified research and development. They are accounted for as a reduction of
the related expenditure for current expenses and a reduction of the related
asset for capital assets when it is more likely than not that the credit will be
realized. The Company is entitled to Canadian federal investment tax credits at
a rate of 20% on eligible current and capital expenditures, claimable against
income taxes otherwise payable.
ADVERTISING COSTS
The Company expenses the cost of advertising as incurred. The Company
incurred advertising costs of approximately $560,000, $271,000 and $408,000 for
1999, 1998 and 1997, respectively.
STOCK OPTIONS
The Company follows SFAS No. 123 which permits the use of APB No. 25 to
account for stock options issued to employees. Under that method, the Company
uses the intrinsic value method to measure the cost associated with the granting
of stock options to employees. The amount by which the market price of the
underlying shares exceeds the exercise price of the options is accounted for as
compensation expense over the periods in which services are rendered. Options
issued to consultants are recorded at their fair market value at the date of the
grant. This amount is charged to operations over the periods in which services
are rendered.
EARNINGS (LOSS) PER SHARE
The company follows SFAS No. 128 "Earnings Per Share" to calculate basic and
diluted earnings (loss) per share. Basic earnings (loss) per share is calculated
using the weighted average number of common shares outstanding during the year.
Diluted earnings (loss) per share is calculated using the weighted average
number of common and potential common shares outstanding during the year.
Potential
F-9
<PAGE>
VISIBLE GENETICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
common shares consist of the incremental common shares issuable upon conversion
of outstanding convertible preferred shares (using the if converted method) and
shares issuable upon the exercise of stock options and warrants (using the
treasury stock method). Potential common shares are excluded from the
calculation if their effect is anti-dilutive, as was the case for the years
ended December 31, 1999, 1998 and 1997.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities and is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
The Company does not anticipate that SFAS No. 133 will have a significant impact
on its financial position or results of operations.
NOTE 3--COLLABORATIVE AND DISTRIBUTION AGREEMENTS
COLLABORATIVE AGREEMENTS
The Company has agreements with several parties for the use of certain
intellectual property in the manufacture of the Company's products, the most
significant of which are as follows:
The Polymerase Chain Reaction (PCR) is used in most of the GeneKits made by
the Company and is produced and sold under license from Roche Molecular Systems,
Inc. and F. Hoffman-La Roche, Ltd. The reverse transcriptase enzyme used in the
TRUGENE HIV-1 Genotyping Kit is the Superscript II-TM- licensed from Life
Technologies. A portion of the method of CLIP sequencing which is used by most
of the GeneKits made by the Company is licensed from Genaissance
Pharmaceuticals, Inc. UNG (Uracin N-Glycosylase) is a method of incorporating
Uracil into a PCR product, which can be subsequently destroyed enzymatically.
This method is used to control carry-over contamination between sequential
samples under going PCR. At present, none of the Company's products uses this
method, however, it is expected that future GeneKit production may incorporate
this technology. This method is licensed from Life Technologies.
Under these agreements, the Company is required to make certain up-front
payments and certain royalty payments on specified sales to customers ranging
from 0.5% to 15%, and up to 25% on specified product sales to certain
distributors. Included in accounts payable is an amount of approximately
$461,000 and $148,000, relating to royalties payable, at December 31, 1999 and
1998, respectively.
DISTRIBUTION AGREEMENTS
Commencing in 1999, the Company entered into various distribution and
marketing arrangements with distributors to sell the Company's products to the
research and clinical diagnostic markets in selected geographic markets outside
North America and certain European countries. These agreements expire at various
times from April 2000 through April 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. Certain of the agreements also provide for
minimum annual purchases for specified periods.
F-10
<PAGE>
VISIBLE GENETICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--OTHER RECEIVABLES
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1999 1998
-------- ----------
<S> <C> <C>
Refundable taxes............................................ $105,007 $ 616,214
Other....................................................... 563,741 829,606
-------- ----------
$668,748 $1,445,820
======== ==========
</TABLE>
NOTE 5--INVENTORY
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
Raw materials............................................... $1,346,951 $2,231,994
Work in process............................................. 221,771 339,109
Finished goods.............................................. 1,031,285 1,341,233
---------- ----------
$2,600,007 $3,912,336
========== ==========
</TABLE>
NOTE 6--FIXED ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
COST
Laboratory and computer equipment....................... $6,511,025 $4,581,794
Leasehold improvements.................................. 1,264,022 1,198,488
---------- ----------
7,775,047 5,780,282
---------- ----------
ACCUMULATED DEPRECIATION AND AMORTIZATION
Laboratory and computer equipment....................... 3,118,913 1,650,840
Leasehold improvements.................................. 482,799 252,279
---------- ----------
3,601,712 1,903,119
---------- ----------
$4,173,335 $3,877,163
========== ==========
</TABLE>
F-11
<PAGE>
VISIBLE GENETICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--PATENTS AND LICENSES
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
COST
Patents................................................. $1,078,173 $1,050,276
Licenses................................................ 1,596,591 1,616,032
---------- ----------
2,674,764 2,666,308
---------- ----------
ACCUMULATED AMORTIZATION
Patents................................................. 207,197 166,548
Licenses................................................ 345,200 230,590
---------- ----------
552,397 397,138
---------- ----------
$2,122,367 $2,269,170
========== ==========
</TABLE>
The net book value of patents and licenses at December 31, 1999 is after
reflecting an impairment loss of $401,085 and $50,000, respectively, recorded
during the year and included in "Sales, general and administrative" expenses in
the statement of operations. The impairment loss was recorded as a result of the
Company abandoning certain patents and licensed technologies.
NOTE 8--NOTES PAYABLE
On April 30, 1998, the Company, through its subsidiary, Visible Genetics
Corp., borrowed $7,000,000 under a term loan agreement with certain
institutional lenders. The loan bore interest at 10% per annum, and interest and
principal were payable in full on or about April 29, 1999. The loan was secured
by a security interest in substantially all of the assets of the Company, and it
imposed certain restrictive covenants, including a limit on the total
indebtedness the Company could incur. In connection with the loan, the Company
granted warrants to the lenders to purchase an aggregate of 420,000 common
shares at an exercise price of $10.00 per share. On September 28, 1998, the term
loan facility was extended under similar terms and the Company borrowed an
additional $1,000,000 under the expanded loan facility. The additional loan was
due on December 28, 1999. In connection with the additional loan, the Company
granted warrants to the lenders to acquire 120,000 common shares at an exercise
price of $10.00 per share. The fair market value of the warrants granted in
connection with both loans was estimated at the date of grant using the
Black-Scholes option valuation model based upon the following assumptions:
dividend yield--nil, risk-free interest rate--5.0%, average expected
volatility--65%, expected term--2 years.
The total proceeds received from the institutional lenders were allocated
between the warrants and term loans based on the relative fair value of each
component, resulting in $944,836 and $237,805 of the total proceeds from the
April 1998 and September 1998 term loans, respectively, being allocated to
warrants. The value of the term loans was accreted to their face value,
resulting in a charge to financing expense over the term of the loans. As a
result, $601,660 and $580,981 were recorded as financing expense in 1999 and
1998, respectively.
F-12
<PAGE>
VISIBLE GENETICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8--NOTES PAYABLE (CONTINUED)
On April 30, 1999, the Company and the institutional lenders agreed to delay
the payment date of the $7,000,000 loan to December 31, 1999, and to move up the
payment date of the $1,000,000 loan to July 1, 1999. The institutional lenders
later extended the payment date of the $1,000,000 loan to the earlier of
July 22, 1999, or the completion of the Warburg Pincus financing (see Note 10).
In addition, the institutional lenders agreed to permit the Company to borrow up
to an additional $5,000,000 of loans from other lenders which would be senior to
the $7,000,000 loan and junior to the $1,000,000 loan. The amended terms of the
loans did not result in the loans being considered substantially different, as
the cash flow effect on a present value basis was less than 10%. Accordingly, no
debt extinguishment gain or loss was recognized in the statement of operations.
In connection with the modification of the term loans, on April 30, 1999,
the Company granted the institutional lenders warrants to purchase an additional
140,000 common shares at an exercise price of $17.00 per share. The fair market
value of the warrants was estimated at the date of grant using the Black-
Scholes option valuation model based upon the following assumptions: dividend
yield--nil, risk-free interest rate--5.0%, average expected volatility--65%,
expected term--2.5 years, resulting in a value attributed to these warrants of
$865,031. This amount was recorded as a deferred charge and was to be amortized
to financing expense over the term of the loan maturing on December 31, 1999.
On July 15, 1999, the Company repaid all of the loans made to the
institutional lenders. Of the $8,000,000 principal amount of loans, the Company
paid $4,100,000 of principal plus accrued interest on the loans in cash with the
balance of principal plus accrued interest being converted into 3,948 Series A
preferred shares (see Note 10) and 147,098 warrants to purchase common shares.
As a result, the unamortized balance of the deferred charge was recorded as
financing expense at that time.
NOTE 9--ACCRUED LIABILITIES
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
Warranty provision.......................................... $ 387,103 $ 90,107
Salaries and benefits....................................... 1,149,279 79,640
Professional fees........................................... 393,196 161,251
Interest.................................................... 13,000 503,037
Value added taxes........................................... 492,711 335,944
Provision for exit costs.................................... 789,849 --
Other....................................................... 396,972 553,861
---------- ----------
$3,622,110 $1,723,840
========== ==========
</TABLE>
NOTE 10--MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SHARES
(A) AUTHORIZED AND ISSUED
Authorized share capital consists of an unlimited number of preferred shares
which may be issued in one or more series.
On July 15, 1999, the Board of Directors authorized the issuance of 33,950
Series A Convertible Preferred Shares, of which 33,948 were issued during 1999.
F-13
<PAGE>
VISIBLE GENETICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SHARES (CONTINUED)
On July 15, 1999, the Company issued 30,000 preferred shares and warrants to
purchase 1,100,000 common shares to certain affiliated funds managed by E.M.
Warburg, Pincus & Co., LLC (Warburg Pincus) for net proceeds of $29,219,854. In
addition, on July 15, 1999 in connection with the repayment of certain loans
with institutional lenders specified in note 8, the Company issued 3,948
preferred shares and warrants to purchase 147,098 common shares for net proceeds
of $3,845,008.
The fair market value of the warrants was estimated at the date of grant
using the Black-Scholes option valuation model based upon the following
assumptions: dividend yield--nil, risk-free interest rate--5.61%, average
expected volatility--70%, expected term--4 years.
The value of the net proceeds was allocated between warrants and mandatorily
redeemable convertible preferred shares based on the relative fair value of each
instrument. The total amount relating to Warburg Pincus, net of issue costs of
$780,146 allocated to warrants and mandatorily redeemable convertible preferred
shares, was $6,420,672 and $22,799,182, respectively. The total amount relating
to the institutional investors, net of issue costs of $102,992 allocated to
warrants and mandatorily redeemable convertible preferred shares, was $858,607
and $2,986,401, respectively.
The value of the warrants is treated as a discount to the mandatorily
redeemable convertible 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 mandatorily redeemable
convertible preferred shares first becomes mandatory.
(B) RIGHTS AND CONDITIONS OF MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED
SHAREHOLDERS
CONVERSION
The mandatorily redeemable convertible preferred shares are convertible at
any time, at the option of the holders into common shares of the Company at a
conversion price of $11.00, subject to certain adjustments. 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 mandatorily
redeemable convertible preferred shares contain provisions under which the
conversion price would be reduced on a weighted average basis if the Company
issues 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.
This conversion right will terminate on any redemption of the mandatorily
redeemable convertible preferred shares or any liquidation of the Company. Each
mandatorily redeemable convertible preferred share will automatically convert
into common shares at its then effective conversion price, if at least a
majority of the mandatorily redeemable convertible preferred shares are either
voted to be converted or have already been converted into common shares.
DIVIDENDS
Dividends on the mandatorily redeemable convertible 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 the Company's
option, dividends are payable in cash. If dividends are not paid in cash, they
will continue to accrue. The
F-14
<PAGE>
VISIBLE GENETICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SHARES (CONTINUED)
Company is prohibited from declaring or issuing any dividends to holders of
common shares before paying all unpaid dividends on the mandatorily redeemable
convertible preferred shares. The Company is also prohibited from issuing any
equity securities that are senior or equal in rank to the mandatorily redeemable
convertible preferred shares without approval of the holders of a majority of
such shares. If the Company were to be liquidated or sold or under certain other
circumstances, holders of mandatorily redeemable convertible preferred shares
would be entitled to receive an amount equal to $1,000 per share, plus accrued
and unpaid dividends, before holders of common shares would be entitled to any
distributions.
REDEMPTION
After the third anniversary and prior to the seventh anniversary of the date
of issuance of the mandatorily redeemable convertible preferred shares, the
Company has the right to redeem the outstanding mandatorily redeemable
convertible preferred shares at the redemption price, equal to $1,000 per share,
plus accrued but unpaid dividends, subject to certain conditions. The Company
will be required to redeem one-third of any remaining outstanding mandatorily
redeemable convertible preferred shares on each of the seventh, eighth and ninth
anniversaries of the date of issuance at the redemption price. If the Company
fails to redeem the shares as required, holders may appoint a majority of our
Board of Directors, who will continue to serve until the Company has redeemed
the mandatorily redeemable convertible preferred shares as required.
VOTING
The holders of the mandatorily redeemable convertible preferred shares are
entitled to vote as a group with the holders of common shares on all matters
except that holders of the mandatorily redeemable convertible preferred shares
are entitled to vote separately for one director and are not entitled to
participate in the vote for any other directors of the Company. On all other
matters, each holder of mandatorily redeemable convertible preferred shares is
entitled to the number of votes equal to the number of common shares the holder
is entitled to receive upon conversion of the holder's mandatorily redeemable
convertible preferred shares.
OTHER
Certain holders of mandatorily redeemable convertible 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. The
right of holders of mandatorily redeemable convertible preferred shares to
participate in future offerings in this manner provides those shareholders with
the opportunity to avoid having their ownership interest in the Company diluted
under certain circumstances when the interest of common shareholders would be
diluted.
The Company is also prohibited from incurring indebtedness for borrowed
money and capital lease obligations in excess of $15,000,000 outstanding at any
one time, without first obtaining approval of the holders of a majority of the
mandatorily redeemable convertible preferred shares.
F-15
<PAGE>
VISIBLE GENETICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--SHARE CAPITAL
(A) AUTHORIZED AND ISSUED SHARE CAPITAL
Authorized share capital consists of an unlimited number of common shares,
without par value.
<TABLE>
<CAPTION>
NUMBER OF AVERAGE
COMMON ISSUE
SHARES PRICE AMOUNT
---------- -------- -----------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1996.................................. 6,962,198 $30,339,955
========== ===========
Issued for cash under stock option arrangements........... 191,498 $ 2.19 419,167
Issued for acquisition of Applied Sciences, Inc........... 95,000 $ 5.50 522,500
---------- ------ -----------
BALANCE, DECEMBER 31, 1997.................................. 7,248,696 31,281,622
========== ===========
Issued for cash under stock option arrangements........... 385,548 $ 2.39 921,395
Issued for acquisition of ACT Gene S.A.................... 85,000 $ 5.78 490,875
Issued for private placement offering, net of issue 1,528,989
costs (i)............................................... $ 9.88 13,718,793
---------- ------ -----------
BALANCE, DECEMBER 31, 1998.................................. 9,248,233 46,412,685
========== ===========
Issued for cash under stock option arrangements........... 457,882 $ 5.12 2,343,603
Issued for private placement offering, net of issue 1,916,000
costs................................................... $13.92 26,665,782
---------- ------ -----------
BALANCE, DECEMBER 31, 1999.................................. 11,622,115 $75,422,070
========== ===========
</TABLE>
- ------------------------
(i) The value of the warrants issued in connection with the private placement
(Note 11(e)) in the amount of $444,572 has been recorded as a reduction of
the proceeds of issue and an increase to warrants included in Other equity
(Note 11(b)). The fair market value of the warrants is estimated at the date
of grant using the Black-Scholes option valuation model based upon the
following assumptions: dividend yield--nil, risk-free interest rate--4.0%,
average expected volatility--65%, expected term--2.5 years.
(B) OTHER EQUITY
<TABLE>
<CAPTION>
1999 1998 1997
----------- ---------- ---------
<S> <C> <C> <C>
Deferred compensation costs............................... $ -- $ -- $ (77,469)
Options................................................... 922,714 922,714 922,714
Warrants.................................................. 9,782,470 1,610,791 80,115
Contributed surplus....................................... 61,250 61,250 61,250
Cumulative preferred dividends attributable to mandatorily
redeemable convertible preferred shares................. (1,400,344) -- --
Cumulative accretion of discount attributable to
mandatorily redeemable convertible preferred shares..... (369,728) -- --
Loan to an officer to purchase shares..................... -- (323,405) (323,405)
Employee share purchase loans............................. (9,034) (38,885) (47,144)
----------- ---------- ---------
$ 8,987,328 $2,232,465 $ 616,061
=========== ========== =========
</TABLE>
F-16
<PAGE>
VISIBLE GENETICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--SHARE CAPITAL (CONTINUED)
Employee share purchase loans are non-recourse and secured only by the
shares themselves. The loan to an officer was made in July 1996 to purchase
shares of the Company. The loan was interest free and was originally repayable
in 2006. In November 1999, the loan was repaid.
(C) DEFERRED COMPENSATION COSTS
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- ---------
<S> <C> <C> <C>
BALANCE, BEGINNING OF YEAR.................................. $ -- $(77,469) $(354,786)
Options granted less cancellation........................... -- -- 27,250
Charged to expense during the year.......................... -- 77,469 250,067
---- -------- ---------
BALANCE, END OF YEAR........................................ $ -- $ -- $ (77,469)
==== ======== =========
</TABLE>
(D) OPTIONS
The Company has incentive plans under which options to purchase common
shares may be granted to its employees, consultants or directors at the
discretion of the Board of Directors. Options for an aggregate of 3,750,901
shares may be granted, subject to shareholder ratification. Under the plans,
each option is for the purchase of one common share, expires up to ten years
from the date of issue, and is generally earned over a three to four year
period. There are no repurchase features. Options issued to employees may be
cancelled if employment is terminated within three years. The number of options
that may be cancelled is reduced in stages over that period. Options issued to
employees after May, 1996 must be exercised within 90 days of the termination of
employment.
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER EXERCISE PRICE
--------- ----------------
<S> <C> <C>
BALANCE, DECEMBER 31, 1996.................................. 1,235,625 $ 3.56
========= ======
Granted at $3.50 to $11.50................................ 527,580 $ 5.25
Exercised................................................. (191,498) $ 2.19
Cancelled................................................. (20,237) $ 3.50
--------- ------
BALANCE, DECEMBER 31, 1997.................................. 1,551,470 $ 4.32
========= ======
Granted at $7.70 to $10.98................................ 580,364 $ 8.26
Exercised................................................. (387,881) $ 2.41
Cancelled................................................. (45,902) $ 4.01
--------- ------
BALANCE, DECEMBER 31, 1998.................................. 1,698,051 $ 6.11
========= ======
Granted at $3.50 to $19.08................................ 1,001,545 $11.69
Exercised................................................. (383,749) $ 4.82
Cancelled................................................. (170,294) $ 7.51
--------- ------
BALANCE, DECEMBER 31, 1999.................................. 2,145,553 $ 8.82
========= ======
</TABLE>
F-17
<PAGE>
VISIBLE GENETICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--SHARE CAPITAL (CONTINUED)
The fair market value of employee options granted in 1999 was approximately
$6,689,000 (1998--$2,397,000; 1997--$1,342,000). If employee options granted had
been recorded at their fair market value, the pro forma net loss in 1999 would
have been $(28,763,000) or $(3.08) per common share (1998--$(16,753,000) or
$(2.15) per common share; 1997--$(11,443,000) or $(1.62) per common share).
The fair market value of each option is estimated at the date of grant using
the Black-Scholes option valuation model based upon the following assumptions:
dividend yield--nil, risk-free interest rate (for four-year zero coupon
bond)--5.5% (1998 and 1997--5.0%), average expected volatility--70% (1998 and
1997--65%), expected average option term--4 years. The weighted average fair
value for options granted in 1999 was $6.68 (1998--$4.13; 1997--$2.63).
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's stock option plans have characteristics significantly
different from those of traded options, and because change in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE EXERCISE NUMBER WEIGHTED AVERAGE
OUTSTANDING AT PRICE OF WEIGHTED EXERCISABLE AT EXERCISE PRICE OF
RANGE OF DECEMBER 31, OUTSTANDING AVERAGE DECEMBER 31, EXERCISABLE
EXERCISE PRICES 1999 OPTIONS REMAINING LIFE 1999 OPTIONS
- --------------------- -------------- ---------------- -------------- -------------- -----------------
<S> <C> <C> <C> <C> <C>
Cdn$1.37-Cdn$3.42 182,541 Cdn$2.49 5.3 years 182,541 Cdn$2.49
US$3.50 340,998 US$3.50 6.7 years 317,826 US$3.50
$4.45-$6.07 23,250 $5.72 7.5 years 15,117 $5.62
$7.12-$7.84 230,757 $7.76 7.8 years 141,499 $7.76
$8.00-$9.35 506,182 $8.60 8.5 years 275,879 $8.39
$10.00-$11.50 608,625 $11.01 9.4 years 125,043 $11.33
$12.74-$16.45 119,200 $15.83 9.8 years 667 $12.74
$17.00-$19.08 134,000 $18.11 9.5 years 65,333 $18.18
--------- -------- ---------
2,145,553 $8.82 1,123,905
========= ======== =========
</TABLE>
F-18
<PAGE>
VISIBLE GENETICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11--SHARE CAPITAL (CONTINUED)
(E) WARRANTS
<TABLE>
<CAPTION>
NUMBER EXERCISE PRICE EXPIRY DATE
--------- -------------- ---------------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 AND 1997.................. 79,803
=========
Granted in connection with loans (Note 8).......... 540,000 $10.00 April, 2003--
September, 2003
Granted in connection with private placement (Note
11(a))........................................... 121,951 $12.81 November, 2003
---------
BALANCE, DECEMBER 31, 1998........................... 741,754
=========
Granted in connection with loans (Note 8).......... 140,000 $17.00 April, 2006
Granted in connection with mandatorily redeemable
convertible preferred shares (Note 10)........... 1,247,098 $12.60 July, 2003
Exercised.......................................... (76,734) $ 6.90
---------
BALANCE, DECEMBER 31, 1999........................... 2,052,118
=========
</TABLE>
On February 17, 2000, warrants to purchase 1,100,000 common shares were
exercised at a price of $12.60 per common share. Under the terms of the warrant
agreement, the warrant holders elected to pay the exercise price for the
warrants through a non-cash exercise. As a result, the warrant holders received
847,749 common shares rather than 1,100,000 common shares they would otherwise
have received upon exercise in cash of all of their warrants.
NOTE 12--ACQUISITIONS
Effective April, 1998, the Company acquired 100% of the shares of ACT Gene
S.A., a DNA diagnostic testing company, for 85,000 common shares of the Company,
and cash payable of $650,000. The acquisition was accounted for as a purchase,
and resulted in the recording of an excess of purchase price over tangible net
assets of $488,000, of which $420,043 was recorded as in-process research and
development, and reflected as an expense in 1998. The nature of the acquired
research and development relates to the cost and time pertaining to the
development of a test kit and research clinical samples necessary for the
development of several kits designed for use with DNA sequencing systems. As of
April, 1998 the kit was approximately 80% completed and was expected to be
completed during 1999. As a result of delays related to the development of the
kit, the estimated completion date has been revised to the year 2000. The
projected incremental cash flows of these projects were discounted using
discount rates ranging from 60% to 70%. The primary risk factor affecting the
commercialization of each of these products is the receipt of FDA and foreign
regulatory agency approvals for use in the clinical diagnostic market.
Effective October, 1997, the Company acquired 100% of the shares of Applied
Sciences, Inc., a DNA diagnostic testing company, for 95,000 common shares of
the Company, and the assumption of all liabilities (including $90,000 which was
repaid to the former shareholders of Applied Sciences, Inc.), as well as a
deficit of $132,000. The acquisition was accounted for as a purchase, and
resulted in the recording of an excess of purchase price over tangible net
assets of $654,621 which was recorded as in-process research and development,
and reflected as an expense in 1997. The nature of the acquired research and
development relates to the cost and time pertaining to the development of
certain test kits designed for
F-19
<PAGE>
VISIBLE GENETICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--ACQUISITIONS (CONTINUED)
use with DNA sequencing systems. As of October 1997, these kits were
approximately 20% to 50% completed. Development of one kit was completed in the
fourth quarter of 1998, and the remaining kits are expected to be completed
during 2000. Projected incremental cash flows of these projects were discounted
using discount rates ranging from 60% to 70%. The primary risk factor affecting
the commercialization of each of these products is the receipt of FDA and
foreign regulatory agency approvals for use in the clinical diagnostic market.
NOTE 13--EXIT AND TERMINATION COSTS
EXIT COSTS
During 1999, the Company approved a plan to move the sales, marketing and
various other corporate functions from Canada to a U.S. facility being
established in Atlanta. The U.S. facility will also house Applied Sciences Inc.
(a wholly owned subsidiary of the Company) as well as being used for kit
manufacturing. The exit plan is expected to be completed in 2000.
As a result of the decision to centralize U.S. operations in Atlanta,
certain premises currently leased by the Company will be vacated. In
December 1999, the Company committed to a new facility and commenced efforts to
sublease the premises to be vacated. Accordingly, the Company recorded a charge
of approximately $790,000 in the statement of operations in 1999, which is
included in accrued liabilities at December 31, 1999. This amount represents the
remaining future lease commitments net of estimated sub-lease income, the
unamortized balance of leasehold improvements, and other estimated costs of
sub-leasing the vacated facilities. If the Company is unsuccessful in its
subleasing efforts, the remaining future lease commitments on premises to be
vacated, in excess of amounts accrued, approximates $2,100,000.
TERMINATION COSTS
During 1999, two senior officers of the Company received special termination
benefits in connection with their departure from the Company. The termination
benefits included lump-sum payments and periodic future payments, as specified
in the related termination agreements, offered by the Company and accepted by
the officers. The present value of the obligations for special termination
benefits approximated $539,000, which was included in the statement of
operations in 1999. As at December 31, 1999, approximately $162,000 of these
costs were paid and the balance is included in accrued salaries and benefits.
F-20
<PAGE>
VISIBLE GENETICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14--INCOME TAXES
The Company's income tax provision has been determined as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net loss for the year comprised of:
Domestic........................................... $ (8,081,807) $ (6,195,350) $ (8,472,572)
Foreign............................................ (17,205,078) (8,695,611) (1,943,174)
------------ ------------ ------------
$(25,286,885) $(14,890,961) $(10,415,746)
============ ============ ============
Income taxes at 44.6%................................ $(11,283,008) $ (6,641,369) $ (4,645,423)
Decrease resulting from permanent non-tax deductible
expense............................................ 736,478 52,182 412,842
Decrease resulting from foreign rate differences..... 835,867 114,856 --
Increase in valuation allowance...................... 9,710,663 6,474,331 4,232,581
------------ ------------ ------------
$ -- $ -- $ --
============ ============ ============
</TABLE>
As at December 31, 1999, the Company has available losses in various
countries that may be used to reduce taxable income in future years, and expire
as follows:
<TABLE>
<CAPTION>
CANADA(1) UNITED STATES FRANCE ITALY NETHERLANDS ISRAEL
----------- ------------- ---------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
2001......................... $ 481,000 $ -- $ -- $ -- $ -- $ --
2002......................... 1,480,000 -- -- -- -- --
2003......................... 2,846,000 -- 439,000 -- -- --
2004......................... 4,805,000 -- 3,037,000 95,000 -- --
2005......................... 1,567,000 -- -- -- -- --
2006......................... 2,819,000 -- -- -- -- --
2012......................... -- 1,238,000 -- -- -- --
2018......................... -- 3,962,000 -- -- -- --
2019......................... -- 6,671,000 -- -- -- --
No Expiry Date............... -- -- -- -- 5,908,000 156,000
----------- ----------- ---------- ------- ---------- --------
Total........................ $13,998,000 $11,871,000 $3,476,000 $95,000 $5,908,000 $156,000
=========== =========== ========== ======= ========== ========
</TABLE>
- ------------------------
(1) In addition to the Canadian losses above, certain scientific research and
development expenditures eligible for tax purposes incurred by the Company
may be deferred and deducted in future years. These unclaimed deductions,
which can be carried forward indefinitely, amounted to approximately
$12,946,000 at December 31, 1999. In addition, the Company has earned
non-refundable investment tax credits amounting to approximately $3,028,000
that can be applied to reduce future income taxes payable. These expire
$504,000 in 2006, $744,000 in 2007, $1,034,000 in 2008 and $746,000 in 2009.
F-21
<PAGE>
VISIBLE GENETICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14--INCOME TAXES (CONTINUED)
The benefit of these losses, unclaimed deductions and non-refundable
investment tax credits has not been reflected in these financial statements. The
deferred tax balances are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
DEFERRED TAX ASSETS
Research expenses........................................... $ 5,776,300 $ 4,122,100
Non-capital losses.......................................... 15,555,300 8,483,100
Investment tax credits...................................... 1,597,600 1,114,700
Fixed assets................................................ 1,048,100 239,000
Warranty and other provisions............................... 810,100 25,600
----------- -----------
24,787,400 13,984,500
Valuation allowance......................................... (24,787,400) (13,984,500)
----------- -----------
Net deferred tax asset (liability).......................... $ -- $ --
=========== ===========
</TABLE>
The valuation allowance increased by $10,802,900 during 1999
(1998--$4,903,000). Realization of the future tax benefits related to the
deferred tax assets is dependent upon many factors, including the Company's
ability to generate taxable income within the loss carryforward periods.
NOTE 15--SEGMENTED INFORMATION
In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This replaced the previous industry segment
approach with disclosure based upon the internal organization used by management
for making operating decisions and assessing performance. SFAS No. 131 also
requires disclosures as to products and services, geographic areas and major
customers. The adoption of SFAS No. 131 did not affect results of operations or
financial position, but did affect the disclosure of segment information. The
Company's reportable segments are Sequencing Systems, GeneKits and other
Consumables, and Testing, Sequencing and Other Services. The accounting policies
of the segments are the same as those described above in Note 2, "Summary of
significant accounting policies."
1999
<TABLE>
<CAPTION>
SEQUENCING GENEKITS AND OTHER TESTING, SEQUENCING RECONCILING
SYSTEMS CONSUMABLES AND OTHER SERVICES ITEMS TOTAL
----------- ------------------ ------------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues............. $ 7,725,910 $ 4,729,865 $1,171,145 -- $13,626,920
Depreciation and
Amortization....... (1,184,981) (985,608) (383,398) -- (2,553,987)
Profit (loss) from
operations before
interest........... (13,889,277) (10,099,584) 4,939 -- (23,983,922)
Additions to Fixed
assets............. 697,030 835,181 372,918 -- 1,905,129
Total assets......... 7,466,062 6,724,730 1,760,794 $42,687,963(1) 58,639,549
</TABLE>
RECONCILING ITEM CONSISTS OF: (1) CASH, CASH EQUIVALENTS AND SHORT-TERM
INVESTMENTS
F-22
<PAGE>
VISIBLE GENETICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--SEGMENTED INFORMATION (CONTINUED)
1998
<TABLE>
<CAPTION>
SEQUENCING GENEKITS AND OTHER TESTING, SEQUENCING RECONCILING
SYSTEMS CONSUMABLES AND OTHER SERVICES ITEMS TOTAL
----------- ------------------ ------------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues............. $ 8,042,421 $1,379,512 $1,453,415 -- $ 10,875,348
Depreciation and
Amortization....... (396,837) (666,061) (233,828) -- (1,296,726)
Profit (loss) from
operations before
interest........... (10,879,023) (3,023,804) 299,805 $ (420,043)(2) (14,023,065)
Additions to Fixed
assets............. 1,199,316 1,137,904 1,011,041 -- 3,348,261
Total assets......... 8,859,003 5,281,294 2,368,060 11,274,178(3) 27,782,535
</TABLE>
RECONCILING ITEMS CONSIST OF: (2) ACQUIRED RESEARCH AND DEVELOPMENT (NOTE 12)
(3) CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
1997
<TABLE>
<CAPTION>
SEQUENCING GENEKITS AND OTHER TESTING, SEQUENCING RECONCILING
SYSTEMS CONSUMABLES AND OTHER SERVICES ITEMS TOTAL
----------- ------------------ ------------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues.............. $ 2,720,844 $ 246,851 $ 65,041 -- $ 3,032,736
Depreciation and
Amortization........ (231,694) (362,688) (31,599) -- (625,981)
Profit (loss) from
operations before
interest............ (9,592,047) (874,149) (66,677) $ (654,621)(4) (11,187,494)
Additions to Fixed
assets.............. 557,427 504,142 204,256 -- 1,265,825
Total assets.......... 4,126,088 2,002,571 199,812 7,607,901(5) 13,936,372
</TABLE>
RECONCILING ITEMS CONSIST OF: (4) ACQUIRED RESEARCH AND DEVELOPMENT (NOTE 12)
(5) CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
F-23
<PAGE>
VISIBLE GENETICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--SEGMENTED INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
GEOGRAPHIC INFORMATION--YEARS ENDED DECEMBER 31
- -----------------------------------------------
SALES, BY CUSTOMER LOCATION 1999 1998 1997
- --------------------------- ----------- ----------- ----------
<S> <C> <C> <C>
NORTH AMERICA
Canada.................................................. $ 468,535 $ 844,863 $ 542,716
United States........................................... 4,686,868 3,513,150 2,278,246
----------- ----------- ----------
5,155,403 4,358,013 2,820,962
----------- ----------- ----------
EUROPE
France.................................................. 1,252,222 1,616,788 --
Other Europe............................................ 4,298,745 2,949,288 161,837
----------- ----------- ----------
5,550,967 4,566,076 161,837
----------- ----------- ----------
ASIA AND LATIN AMERICA..................................
Japan................................................... 1,609,799 1,640,123 --
Other Asia and Latin America............................ 1,310,751 311,136 49,937
----------- ----------- ----------
2,920,550 1,951,259 49,937
----------- ----------- ----------
$13,626,920 $10,875,348 $3,032,736
=========== =========== ==========
</TABLE>
<TABLE>
<CAPTION>
GEOGRAPHIC INFORMATION--YEARS ENDED DECEMBER 31
- -----------------------------------------------
FIXED ASSETS 1999 1998 1997
- ------------ ----------- ----------- ----------
<S> <C> <C> <C>
Canada.................................................. $ 2,530,222 $ 2,346,394 $ 928,350
United States........................................... 955,161 1,083,788 459,983
France.................................................. 687,952 446,981 62,647
----------- ----------- ----------
$ 4,173,335 $ 3,877,163 $1,450,980
=========== =========== ==========
</TABLE>
In 1999, one customer accounted for 21% of sales, of which 19% comprised
Sequencing Systems and 2% comprised GeneKits and other Consumables. (1998--one
customer accounted for 30% of sales, of which 29% comprised Sequencing Systems
and 1% comprised GeneKits and other Consumables; 1997--no customer accounted for
more than 10% of sales).
NOTE 16--COMMITMENTS AND CONTINGENCY
COMMITMENTS
The Company is committed to make a payment under a license agreement of
$300,000 in 2000. The Company has collaborative arrangements with certain third
parties that provide for royalty payments (see Note 3).
F-24
<PAGE>
VISIBLE GENETICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16--COMMITMENTS AND CONTINGENCY (CONTINUED)
The Company has entered into operating leases for premises and equipment as
follows:
<TABLE>
<S> <C>
2000........................................................ $1,584,020
2001........................................................ 1,292,084
2002........................................................ 1,116,517
2003........................................................ 1,078,102
2004 and thereafter......................................... 3,513,877
----------
$8,584,600
==========
</TABLE>
Rent expense was $851,876 in 1999 (1998--$554,497; 1997--$284,396).
CONTINGENCY
In December 1999, a lawsuit was filed against the Company alleging
unspecified damages resulting from the Company's alleged infringement of certain
patents. The Company has previously studied these patents and has received legal
advice that it is not liable for any claims of infringement. Management believes
that these allegations are without merit and intends to vigorously defend
against these allegations. No amount has been provided in these financial
statements in respect of these allegations, as the amount of the loss, if any,
cannot be determined and the results of such allegations cannot be predicted
with certainty.
NOTE 17--RELATED PARTY TRANSACTIONS
During 1999, the Company incurred legal fees to a law firm, in which a
partner was a former director of the Company, of $246,210 (1998--$164,624;
1997--$183,627). During 1999, the Company incurred consulting fees to a firm, of
which the president was a director of the Company, of $291,115 (1998--$280,000;
1997--nil). During 1999, the Company also incurred consulting fees to a former
director of the Company, of $58,269 (1998--nil; 1997--nil). Other receivables
include a loan and unpaid interest due from a Company officer and director
aggregating $55,614 in 1998 and $72,018 in 1997. The loan was repaid during
1999.
NOTE 18--COMPARATIVE FIGURES
Certain comparative figures have been reclassified to conform to the
financial statement presentation adopted in the current year.
F-25
<PAGE>
[LOGO]
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
SUBJECT TO COMPLETION, DATED MARCH 29, 2000
[LOGO]
2,000,000 COMMON SHARES
Visible Genetics Inc. is offering 2,000,000 of its common shares. Our common
shares are traded on the Nasdaq National Market under the symbol "VGIN." On
March 24, 2000, the last reported sale price for the common shares on the Nasdaq
National Market was $50.00 per share.
--------------
INVESTING IN OUR COMMON SHARES INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 4.
--------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Public Offering Price...................................... $ $
Underwriting Discounts and Commissions..................... $ $
Proceeds to Visible Genetics............................... $ $
</TABLE>
THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR
DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Visible Genetics Inc. has granted the underwriters a 30-day option to
purchase up to an additional 300,000 common shares to cover over-allotments.
--------------
ROBERTSON STEPHENS INTERNATIONAL
PAINEWEBBER INTERNATIONAL
WARBURG DILLON READ
ROTH CAPITAL PARTNERS, INC.
The date of this Prospectus is , 2000
<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............... $ 56,281
Nasdaq additional listing fee............................... $ 17,500
NASD fee.................................................... $ 23,414
Accounting fees............................................. $ 50,000
Legal fees.................................................. $ 240,000
Transfer Agent fees......................................... $ 10,000
Printing and engraving...................................... $ 250,000
Miscellaneous............................................... $ 2,805
Total................................................... $ 650,000
</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 or her 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.
ITEM 16. EXHIBITS
The following exhibits are being filed herewith:
1.1 Underwriting Agreement
4.1 Specimen of Certificate for Common Shares(1)
4.2 Certificate of Designations, Number, Voting Powers, Preference and
Rights of Series A Convertible Preferred Shares of Visible Genetics
Inc.(2)
*5.1 Form of Opinion of Osler, Hoskin & Harcourt LLP as to the legality of
the Common Shares
*23.1 Form of Consent of Osler, Hoskin & Harcourt LLP (included in
Exhibit 5.1)
*23.2 Consent of Baer Marks & Upham LLP
II-1
<PAGE>
23.3 Consent of PricewaterhouseCoopers LLP
*23.4 Consent of Hyman, Phelps & McNamara, P.C.
*23.5 Consent of Oppedahl & Larson, L.L.P.
*24 Powers of Attorney (included on the executed signature page of this
Registration Statement)
- ------------------------
(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 the Company's Registration
Statement on Form F-3, File No. 333-91155 filed with the Securities and
Exchange Commission on November 17, 1999.
* Previously filed.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes as follows:
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.
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.
The undersigned registrant hereby undertakes that, (i) for purposes of
determining any liability under the Securities Act of 1933, the information
omitted from the form of prospectus filed as part of this registration statement
in reliance upon Rule 430A and contained in a form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act
shall be deemed to be part of this registration statement as of the time it was
declared effective, and (ii) for the purpose of determining any liability under
the Securities Act of 1933, each post-effective amendment that contains a form
of prospectus 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.
The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the Prospectus, to each person to whom the Prospectus is sent or
given, the latest annual report, to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X is not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the Prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the Prospectus to provide such interim financial information.
II-2
<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 or amendment to be signed on its behalf by the undersigned, thereunto
duly authorized in the City of Toronto, Province of Ontario, Canada on the 27th
day of March, 2000.
<TABLE>
<S> <C> <C>
VISIBLE GENETICS INC.
By: /s/ RICHARD T. DALY
----------------------------------------------
Richard T. Daly
President and Chief Executive Officer
</TABLE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each director and officer whose
signature appears below constitutes and appoints Richard T. Daly and Thomas J.
Clarke, or any of them, as his true and lawful attorneys-in-fact and agents,
with full powers of substitution and re-substitution, for him and in his name,
place and stead, to sign in any and all capacities any and all amendments
(including post-effective amendments under Rule 462) to this Registration
Statement on Form F-3 and to file the same, with all exhibits thereto and all
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 and 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 such
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 by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ RICHARD T. DALY President and Chief Executive
-------------------------------------- Officer (principal executive March 27, 2000
Richard T. Daly officer)
/s/ THOMAS J. CLARKE Chief Financial Officer (principal
-------------------------------------- financial officer and principal March 27, 2000
Thomas J. Clarke accounting officer)
/s/ RICHARD T. DALY*
-------------------------------------- Vice President, General Counsel and March 27, 2000
Marguerite Ethier Director
/s/ RICHARD T. DALY*
-------------------------------------- Director March 27, 2000
Michael A. Cardiff
/s/ RICHARD T. DALY*
-------------------------------------- Director March 27, 2000
Sheldon Inwentash
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ RICHARD T. DALY*
-------------------------------------- Director March 27, 2000
Jonathan S. Leff
/s/ RICHARD T. DALY*
-------------------------------------- Director March 27, 2000
Robert M. MacIntosh
/s/ RICHARD T. DALY*
-------------------------------------- Director March 27, 2000
Prof. J. Robert S. Prichard
/s/ RICHARD T. DALY*
-------------------------------------- Director March 27, 2000
Dr. Lloyd M. Smith
/s/ RICHARD T. DALY*
-------------------------------------- Director March 27, 2000
Dr. Konrad M. Weis
</TABLE>
<TABLE>
<S> <C> <C> <C>
AUTHORIZED REPRESENTATIVE IN THE UNITED
STATES
BAER MARKS & UPHAM LLP
By: /s/ STEVEN S. PRETSFELDER, ESQ. March 27, 2000
---------------------------------
Steven S. Pretsfelder, Esq.
* by Richard T. Daly, as attorney-in-fact
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT PAGE
- --------------------- ----------------------- --------
<C> <S> <C>
1.1 Underwriting Agreement......................................
23.3 Consent of PricewaterhouseCoopers LLP.......................
</TABLE>
<PAGE>
UNDERWRITING AGREEMENT
March __, 2000
FleetBoston Robertson Stephens Inc.
Warburg Dillon Read LLC
PaineWebber Incorporated
Roth Capital Partners, Inc.
As Representatives of the several Underwriters
c/o FleetBoston Robertson Stephens Inc.
555 California Street, Suite 2600
San Francisco, CA 94104
Ladies and Gentlemen:
INTRODUCTORY. Visible Genetics Inc., a corporation organized
under the laws of the Province of Ontario, Canada (the "Company"), proposes to
issue and sell to the several underwriters named in SCHEDULE A (the
"Underwriters") an aggregate of 2,000,000 shares (the "Firm Shares") of its
common shares (the "Common Shares"). In addition, the Company has granted to the
Underwriters an option to purchase up to an additional 300,000 Common Shares
(the "Option Shares") as provided in Section 2. The Firm Shares and, if and to
the extent such option is exercised, the Option Shares are collectively called
the "Shares". FleetBoston Robertson Stephens Inc. ("Robertson Stephens"),
Warburg Dillon Read LLC, PaineWebber Incorporated and Roth Capital Partners,
Inc. have agreed to act as representatives of the several Underwriters (in such
capacity, the "Representatives") in connection with the offering and sale of the
Shares.
The Company has prepared and filed with the Securities and
Exchange Commission (the "Commission") a registration statement on Form F-3
(File No. 333-32258), which contains a form of prospectus, subject to
completion, to be used in connection with the public offering and sale of the
Shares. Each such prospectus, subject to completion, used in connection with
such public offering is called a "preliminary prospectus". Such registration
statement, as amended, including the financial statements, exhibits and
schedules thereto, in the form in which it was declared effective by the
Commission under the Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder (collectively, the "Securities Act"),
including all documents incorporated or deemed to be incorporated by reference
therein (each an "Incorporated Document") and any information deemed to be a
part thereof at the time of effectiveness pursuant to Rule 430A under the
Securities Act, is called the "Registration Statement". Any registration
statement filed by the Company pursuant to Rule 462(b) under the Securities Act
is called the "Rule 462(b) Registration Statement", and from and after the date
and time of filing of the Rule 462(b)
<PAGE>
Registration Statement, the term "Registration Statement" shall include the Rule
462(b) Registration Statement. Such prospectus, in the form first used by the
Underwriters to confirm sales of the Shares, is called the "Prospectus". All
references in this Agreement to the Registration Statement, the Rule 462(b)
Registration Statement, a preliminary prospectus, the Prospectus or any
amendments or supplements to any of the foregoing, shall include any copy
thereof filed with the Commission pursuant to its Electronic Data Gathering,
Analysis and Retrieval System ("EDGAR"). All references in this Agreement to
financial statements and schedules and other information which is "contained,"
"included" or "stated" in the Registration Statement or the Prospectus (and all
other references of like import) shall be deemed to mean and include all such
financial statements and schedules and other information which is or is deemed
to be incorporated by reference in the Registration Statement or the Prospectus,
as the case may be; and all references in this Agreement to amendments or
supplements to the Registration Statement or the Prospectus shall be deemed to
mean and include the filing of any document under the Securities Exchange Act of
1934, as amended, and the rules and regulations promulgated thereunder
(collectively, the "Exchange Act") which is or is deemed to be incorporated by
reference in the Registration Statement or the Prospectus, as the case may be.
The Company hereby confirms its agreements with the
Underwriters as follows:
SECTION 1. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY.
The Company hereby represents, warrants and covenants to each Underwriter as
follows:
(a) COMPLIANCE WITH REGISTRATION REQUIREMENTS. The Registration
Statement and any Rule 462(b) Registration Statement have been declared
effective by the Commission under the Securities Act. The Company has complied
to the Commission's satisfaction with all requests of the Commission for
additional or supplemental information. No stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b) Registration
Statement is in effect and no proceedings for such purpose have been instituted
or are pending or, to the best knowledge of the Company, are contemplated or
threatened by the Commission.
Each preliminary prospectus and the Prospectus when filed
complied in all material respects with the Securities Act and, if filed by
electronic transmission pursuant to EDGAR (except as may be permitted by
Regulation S-T under the Securities Act), was identical to the copy thereof
delivered to the Underwriters for use in connection with the offer and sale of
the Shares. Each of the Registration Statement, any Rule 462(b) Registration
Statement and any post-effective amendment thereto, at the time it became
effective and at all subsequent times, complied and will comply in all material
respects with the Securities Act and did not and will not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading. Each
preliminary prospectus, as of its date, and the Prospectus, as amended or
supplemented, as of its date and at all subsequent times through the 30th day
after the date hereof, did not and will not contain any untrue statement of a
material fact or omit to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. The representations and warranties set forth in the two
immediately preceding sentences do not apply to statements in or omissions from
the Registration Statement, any Rule 462(b) Registration Statement, or any
post-effective amendment thereto, or the Prospectus, or any amendments or
supplements thereto, made in reliance upon and in conformity with
2
<PAGE>
information relating to any Underwriter furnished to the Company in writing by
the Representatives expressly for use therein. There are no contracts or other
documents required to be described in the Prospectus or to be filed as exhibits
to the Registration Statement which have not been described or filed as
required.
(b) OFFERING MATERIALS FURNISHED TO UNDERWRITERS. The Company has
delivered to the Representatives (i) four complete conformed copies of the
Registration Statement and of each consent and certificate of experts filed as a
part thereof, and (ii) conformed copies of the Registration Statement (without
exhibits) and preliminary prospectuses and the Prospectus, as amended or
supplemented, in such quantities and at such places as the Representatives have
reasonably requested for each of the Underwriters.
(c) DISTRIBUTION OF OFFERING MATERIAL BY THE COMPANY. The Company has
not distributed and will not distribute, prior to the later of the Second
Closing Date (as defined below) and the completion of the Underwriters'
distribution of the Shares, any offering material in connection with the
offering and sale of the Shares other than a preliminary prospectus, the
Prospectus or the Registration Statement.
(d) THE UNDERWRITING AGREEMENT. This Agreement has been duly
authorized, executed and delivered by, and is a valid and binding agreement of,
the Company, enforceable in accordance with its terms, except as rights to
indemnification hereunder may be limited by applicable law and except as the
enforcement hereof may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting the rights and
remedies of creditors or by general equitable principles.
(e) AUTHORIZATION OF THE SHARES. The Shares to be purchased by the
Underwriters from the Company have been duly authorized for issuance and sale
pursuant to this Agreement and, when paid for by the Underwriters and issued and
delivered by the Company pursuant to this Agreement, will be validly issued,
fully paid and nonassessable.
(f) NO APPLICABLE REGISTRATION OR OTHER SIMILAR RIGHTS. There are no
persons with registration or other similar rights to have any equity or debt
securities registered for sale under the Registration Statement or included in
the offering contemplated by this Agreement except for such rights as have been
duly waived or are not exercisable in accordance with their terms by virtue
of the Underwriters' determination that marketing factors do not permit the
securities owned by such persons to be included in the Registration Statement.
(g) NO MATERIAL ADVERSE CHANGE. Subsequent to the respective dates as
of which information is given in the Prospectus: (i) there has been no material
adverse change, or any development that could reasonably be expected to result
in a material adverse change, in the condition, financial or otherwise, or in
the earnings, business, operations or prospects, whether or not arising from
transactions in the ordinary course of business, of the Company and its
subsidiaries, considered as one enterprise (any such change or effect, where the
context so requires, is called a "Material Adverse Change" or a "Material
Adverse Effect"); (ii) the Company and its subsidiaries, considered as one
entity, have not incurred any material liability or obligation, indirect, direct
or contingent, not in the ordinary course of business nor entered into any
material transaction or agreement not in the ordinary course of business; and
(iii) there has been no dividend or distribution of any kind declared, paid or
made by the Company except as set forth in the Prospectus
3
<PAGE>
or, except for dividends paid to the Company or other subsidiaries, any of
its subsidiaries on any class of capital stock or repurchase or redemption by
the Company or any of its subsidiaries of any class of capital stock.
(h) INDEPENDENT ACCOUNTANTS. PriceWaterhouseCoopers LLP, who have
expressed their opinion with respect to the consolidated financial statements
(which term as used in this Agreement includes the related notes thereto) filed
with the Commission as a part of the Registration Statement and included in the
Prospectus, are independent public or certified public accountants as required
by the Securities Act and the Exchange Act.
(i) PREPARATION OF THE FINANCIAL STATEMENTS. The financial statements
filed with the Commission as a part of the Registration Statement and included
in the Prospectus present fairly the consolidated financial position of the
Company and its subsidiaries as of and at the dates indicated and the results of
their operations and cash flows for the periods specified. Such financial
statements have been prepared in conformity with generally accepted accounting
principles as applied in the United States applied on a consistent basis
throughout the periods involved, except as may be expressly stated in the
related notes thereto. No other financial statements or supporting schedules are
required to be included in the Registration Statement. The financial data set
forth in the Prospectus under the captions "Summary--Summary Consolidated
Financial Data", "Selected Consolidated Financial Data" and "Capitalization"
fairly present the information set forth therein on a basis consistent with that
of the audited financial statements contained in the Registration Statement.
(j) COMPANY'S ACCOUNTING SYSTEM. The Company and each of its
subsidiaries maintain a system of accounting controls sufficient to provide
reasonable assurances that (i) transactions are executed in accordance with
management's general or specific authorization; (ii) transactions are recorded
as necessary to permit preparation of financial statements in conformity with
generally accepted accounting principles as applied in the United States and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(k) SUBSIDIARIES OF THE COMPANY. The Company does not own or control,
directly or indirectly, any corporation, association or other entity other than
the following subsidiaries: Applied Sciences Inc., Visible Genetics Europe S.A.,
Visible Genetics Corp., Visible Genetics B.V., Visible Genetics Srl and Visible
Genetics Israel Ltd. (each an "Active Subsidiary" and collectively the "Active
Subsidiaries") and Gene Foundry Inc., which is a non-active subsidiary.
(l) INCORPORATION AND GOOD STANDING OF THE COMPANY AND ITS
SUBSIDIARIES. The Company has been amalgamated, each of its subsidiaries has
been duly organized and each of the Company and the Active Subsidiaries is
validly existing as a corporation in good standing under the laws of the
jurisdiction in which it is organized with full corporate power and authority to
own its properties and conduct its business as described in the prospectus, and
is duly qualified to do business as a foreign corporation and is in good
standing under the laws of each jurisdiction which requires such qualification
(except where the failure to be so qualified would
4
<PAGE>
not reasonably be expected to have a Material Adverse Effect). None of the
subsidiaries of the Company (other than the Active Subsidiaries) are engaged in
any business.
(m) CAPITALIZATION OF THE ACTIVE SUBSIDIARIES. All the outstanding
shares of capital stock of each Active Subsidiary have been duly and validly
authorized and issued and are fully paid and nonassessable, and, except as
otherwise set forth in the Prospectus, all outstanding shares of capital stock
of the Active Subsidiaries are owned by the Company either directly or through
wholly owned subsidiaries free and clear of any security interests, claims,
liens or encumbrances.
(n) NO PROHIBITION ON ACTIVE SUBSIDIARIES FROM PAYING DIVIDENDS OR
MAKING OTHER DISTRIBUTIONS. No Active Subsidiary of the Company is currently
prohibited, directly or indirectly, from paying any dividends to the Company,
from making any other distribution on such Active Subsidiary's capital stock,
from repaying to the Company any loans or advances to such Active Subsidiary
from the Company or from transferring any of such Active Subsidiary's property
or assets to the Company or any other Active Subsidiary of the Company, except
as described in or contemplated by the Prospectus.
(o) CAPITALIZATION AND OTHER CAPITAL STOCK MATTERS. The authorized,
issued and outstanding capital stock of the Company is as set forth in the
Prospectus under the caption "Capitalization" (other than for subsequent
issuances, if any, pursuant to employee benefit plans described in the
Prospectus or upon exercise of outstanding options or warrants described in the
Prospectus). The Common Shares (including the Shares) conform in all material
respects to the description thereof contained in the Prospectus or incorporated
by reference therein. All of the issued and outstanding Common Shares have been
duly authorized and validly issued, are fully paid and nonassessable and have
been issued in compliance with federal and state securities laws. None of the
outstanding Common Shares were issued in violation of any preemptive rights,
rights of first refusal or other similar rights to subscribe for or purchase
securities of the Company. There are no authorized or outstanding options,
warrants, preemptive rights, rights of first refusal or other rights to
purchase, or equity or debt securities convertible into or exchangeable or
exercisable for, any capital stock of the Company or any of its subsidiaries
other than those accurately described in the Prospectus. The description of the
Company's stock option, stock bonus and other stock plans or arrangements, and
the options or other rights granted thereunder, set forth in the Prospectus
accurately and fairly presents the information required to be shown with respect
to such plans, arrangements, options and rights.
(p) STOCK EXCHANGE LISTING. The Shares are registered pursuant to
Section 12(g) of the Exchange Act and are listed on the Nasdaq National Market,
and the Company has taken no action designed to, or likely to have the effect
of, terminating the registration of the Common Shares under the Exchange Act or
delisting the Common Shares from the Nasdaq National Market, nor has the Company
received any notification that the Commission or the National Association of
Securities Dealers, LLC (the "NASD") is contemplating terminating such
registration or listing.
(q) NO CONSENTS, APPROVALS OR AUTHORIZATIONS REQUIRED. No consent,
approval, authorization, filing with or order of any court or governmental
agency or regulatory body is required in connection with the transactions
contemplated herein, except such as have been
5
<PAGE>
obtained or made under the Securities Act and such as may be required (i) under
the blue sky laws of any jurisdiction in connection with the purchase and
distribution of the Shares by the Underwriters in the manner contemplated here
and in the Prospectus, (ii) by the National Association of Securities Dealers,
LLC and (iii) by the federal and provincial laws of Canada.
(r) NON-CONTRAVENTION OF EXISTING INSTRUMENTS AGREEMENTS. Neither the
issue and sale of the Shares nor the consummation of any other of the
transactions herein contemplated nor the fulfillment of the terms hereof will
conflict with, result in a breach or violation or imposition of any lien, charge
or encumbrance upon any property or assets of the Company or any of its Active
Subsidiaries pursuant to, (i) the charter or by-laws of the Company or any of
its Active Subsidiaries, (ii) the terms of any indenture, contract, lease,
mortgage, deed of trust, note agreement, loan agreement or other agreement,
obligation, condition, covenant or instrument to which the Company or any of its
subsidiaries is a party or bound or to which its or their property is subject or
(iii) any statute, law, rule, regulation, judgment, order or decree applicable
to the Company or any of its Active Subsidiaries of any court, regulatory body,
administrative agency, governmental body, arbitrator or other authority having
jurisdiction over the Company or any of its Active Subsidiaries or any of its or
their properties.
(s) NO DEFAULTS OR VIOLATIONS. Neither the Company nor any Active
Subsidiary is in violation or default of (i) any provision of its charter or
by-laws, (ii) the terms of any indenture, contract, lease, mortgage, deed of
trust, note agreement, loan agreement or other agreement, obligation, condition,
covenant or instrument to which it is a party or bound or to which its property
is subject or (iii) any statute, law, rule, regulation, judgment, order or
decree of any court, regulatory body, administrative agency, governmental body,
arbitrator or other authority having jurisdiction over the Company or such
Active Subsidiary or any of its properties, as applicable, except any such
violation or default which would not, singly or in the aggregate, reasonably be
expected to result in a Material Adverse Change or except as otherwise disclosed
in the Prospectus.
(t) NO ACTIONS, SUITS OR PROCEEDINGS. Except as otherwise disclosed in
the Prospectus, no action, suit or proceeding by or before any court or
governmental agency, authority or body or any arbitrator involving the Company
or any of its Active Subsidiaries or its or their property is pending or, to the
best knowledge of the Company, threatened that (i) could reasonably be expected
to have a material adverse effect on the performance of this Agreement or the
consummation of any of the transactions contemplated hereby or (ii) could
reasonably be expected to result in a Material Adverse Effect.
(u) ALL NECESSARY PERMITS, ETC. The Company and each Active Subsidiary
possess such valid and current certificates, authorizations or permits issued by
the appropriate state, federal or foreign regulatory agencies or bodies
necessary to conduct their respective businesses except as disclosed in the
Prospectus and except for any certificates, authorizations or permits, the
absence of which would not reasonably be expected to have a Material Adverse
Effect, and neither the Company nor any Active Subsidiary has received any
notice of proceedings relating to the revocation or modification of, or
non-compliance with, any such certificate, authorization or permit which, singly
or in the aggregate, if the subject of an unfavorable decision, ruling or
finding, could reasonably be expected to result in a Material Adverse Change.
6
<PAGE>
(v) TITLE TO PROPERTIES. Except as otherwise disclosed in the
Prospectus, the Company and each of its Active Subsidiaries has good title to
all the properties and assets reflected as owned in the financial statements
referred to in Section 1(i) above, in each case free and clear of any security
interests, mortgages, liens, encumbrances, equities, claims and other defects,
except such as do not materially and adversely affect the value of such property
and do not materially interfere with the use made or proposed to be made of such
property by the Company or such Active Subsidiary. The real property,
improvements, equipment and personal property held under lease by the Company or
any Active Subsidiary are held under valid and enforceable leases, with such
exceptions as are not material and do not materially interfere with the use made
or proposed to be made of such real property, improvements, equipment or
personal property by the Company or such Active Subsidiary.
(w) TAX LAW COMPLIANCE.
(i) All tax returns required to be filed by or on behalf of
the Company and its subsidiaries, except for non-income state and local
tax returns (other than, for this purpose, ad valorem tax returns)
which, singly and in the aggregate are not material, have been duly
filed on a timely basis and such tax returns are true, correct and
complete. All taxes shown to be payable on such tax returns, or on
subsequent assessments with respect thereto, have been paid in full on
a timely basis, and no other taxes are payable by the Company and its
subsidiaries with respect to items or periods covered by such tax
returns (whether or not shown or reportable on such tax returns). The
amount of the Company's and its subsidiaries' liabilities for unpaid
taxes for all periods do not exceed the amount of the current liability
accruals for taxes reflected in the financial statements of the
Company, and such financial statements properly accrue in accordance
with US GAAP all liabilities for taxes of the Company and its
subsidiaries payable after the date of the financial statements
attributable to transactions or events occurring prior to such date.
(ii) The designation of the law of New York to apply to this
Agreement will not cause the Company to have a "permanent
establishment" in the United States, as such term is defined in the
Convention between the Government of the United States of America and
Canada with respect to Taxes on Income and on Capital (the "Treaty").
(iii) The Company was not a "passive foreign investment
company" (a "PFIC") as defined in Section 1297(a) of the Internal
Revenue Code of 1986, as amended, and the regulations and published
interpretations thereunder (the "Code") during its 1999 taxable year.
The Company does not believe that it is, or that upon the consummation
of the transactions contemplated hereby and the application of the net
proceeds as described in the Prospectus under the heading "Use of
Proceeds" it will be, a PFIC. The Company will review not less
frequently than annually whether it has become a PFIC and if, pursuant
to such review, the Company determines that it has or is likely to
become a PFIC, it will use its best efforts to inform its shareholders
of such PFIC status as soon as practicable and to comply with any
applicable reporting and other requirements of Subparts A, B and C of
Part VI of Subchapter P of the Code. The Company does not believe that
it is, or is likely to become, a "foreign personal holding company" as
defined in Section 552 of the Code.
7
<PAGE>
(iv) No stamp or other issue or transfer taxes or duties
are payable by or on behalf of the Underwriters to the Canadian
government or to the provincial government of Ontario in connection
with (A) the issuance, sale and delivery by the Company to or for
the respective accounts of the Underwriters of the Common Shares or
(B) the sale and delivery outside Canada by the Underwriters of the
Common Shares to the initial purchasers thereof in the manner
contemplated in the Underwriting Agreement.
(v) The statements under the caption "Taxation--Canadian
Federal Income Tax Considerations" in Item 7 of Part I of the Annual
Report on Form 20-F filed for the year ended December 31, 1999, insofar
as such statements relate to Canadian tax matters currently applicable
to the U.S. holders referred to therein, fairly disclose in all
material respects as of the date of the Prospectus the principal
Canadian income tax consequences of holding Shares as capital property
and dealing at arm's length with the Company.
(vi) The statements under the caption "Taxation--U.S. Federal
Income Tax Consequences" in Item 7 of Part I of the Annual Report on
Form 20-F filed for the year ended December 31, 1999, and under the
heading "RISK FACTORS--Our U.S. investors could suffer adverse tax
consequences if we are characterized as a passive foreign investment
company" in the Registration Statement on Form F-3 filed with the
Securities and Exchange Commission on March ___, 2000, insofar as such
statements relate to United States tax matters currently applicable to
the persons described therein, accurately reflect in all material
respects as of the date of the Prospectus the material tax consequences
of owning Shares to such persons.
(x) INTELLECTUAL PROPERTY RIGHTS. Except as described in the
Prospectus, each of the Company and its subsidiaries owns or possesses adequate
rights to use all patents, patent rights or licenses, inventions, collaborative
research agreements, trade secrets, know-how, trademarks, service marks, trade
names and copyrights which are necessary to conduct its businesses as described
in the Registration Statement and Prospectus and any Incorporated Document; the
expiration of any patents, patent rights, trade secrets, trademarks, service
marks, trade names or copyrights which, singly or in the aggregate, would not
result in a Material Adverse Change that is not otherwise disclosed in the
Prospectus; except as described in the Prospectus, the Company has not received
any notice of, and has no knowledge of, any infringement of or conflict with
asserted rights of the Company by others with respect to any patent, patent
rights, inventions, trade secrets, know-how, trademarks, service marks, trade
names or copyrights; and, except as described in the Prospectus, the Company has
not received any notice of, and has no knowledge of, any infringement of or
conflict by the Company with asserted rights of others with respect to any
patent, patent rights, inventions, trade secrets, know-how, trademarks, service
marks, trade names or copyrights which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, might reasonably be
expected to have a Material Adverse Effect. Except as described in the
Prospectus, there is no claim being made against the Company regarding patents,
patent rights or licenses, inventions, collaborative research, trade secrets,
know-how, trademarks, service marks, trade names or copyrights which, singly or
in the aggregate, if the subject of an unfavorable decision, ruling or finding
might reasonably be expected to have a Material Adverse Effect. Except as
described in the Prospectus, the Company and its subsidiaries do not in the
conduct of their business as now or proposed to be conducted as
8
<PAGE>
described in the Prospectus infringe or conflict with any right or patent of any
third party, or any discovery, invention, product or process which is the
subject of a patent application filed by any third party, known to the Company
or any of its subsidiaries, which such infringement or conflict is reasonably
likely to result in a Material Adverse Change.
(y) Y2K. There are no Y2K issues related to the Company or any of its
subsidiaries that (i) are of a character required to be described or referred to
in the Registration Statement or Prospectus or any Incorporated Document by the
Securities Act or by the Exchange Act which have not been accurately described
in all material respects in the Registration Statement, Prospectus or any
Incorporated Document or (ii) might reasonably be expected to result in any
Material Adverse Change or that might materially affect their properties, assets
or rights.
(z) NO TRANSFER TAXES OR OTHER FEES. There are no transfer taxes or
other similar fees or charges under Canadian or United States federal law or the
laws of any state, province or any political subdivision thereof, required to be
paid in connection with the execution and delivery of this Agreement or the
issuance and sale by the Company of the Shares.
(aa) COMPANY NOT AN "INVESTMENT COMPANY". The Company has been advised
of the rules and requirements under the Investment Company Act of 1940, as
amended (the "Investment Company Act"). The Company is not, and after receipt of
payment for the Shares will not be, an "investment company" or an entity
"controlled" by an "investment company" within the meaning of the Investment
Company Act and will conduct its business in a manner so that it will not become
subject to the Investment Company Act.
(bb) INSURANCE. Each of the Company and its Active Subsidiaries are
insured by recognized, financially sound and reputable institutions with
policies in such amounts and with such deductibles and covering such risks as
are generally deemed adequate and customary for their businesses including, but
not limited to, policies covering real and personal property owned or leased by
the Company and its Active Subsidiaries against theft, damage, destruction, acts
of vandalism and earthquakes, general liability and Directors and Officers
liability. The Company has no reason to believe that it or any Active Subsidiary
will not be able (i) to renew its existing insurance coverage as and when such
policies expire or (ii) to obtain comparable coverage from similar institutions
as may be necessary or appropriate to conduct its business as now conducted and
at a cost that would not result in a Material Adverse Change. During the past 24
months, neither of the Company nor any Active Subsidiary has been denied any
insurance coverage which it has sought or for which it has applied.
(cc) LABOR MATTERS. To the best of Company's knowledge, no labor
disturbance by the employees of the Company or any of its Active Subsidiaries
exists or is imminent; and the Company is not aware of any existing or imminent
labor disturbance by the employees of any of its principal suppliers,
subassemblers, subcontractors, or international distributors that might be
expected to result in a Material Adverse Change.
(dd) NO PRICE STABILIZATION OR MANIPULATION. The Company has not taken
and will not take, directly or indirectly, any action designed to or that might
be reasonably expected to cause or result in stabilization or manipulation of
the price of the Common Shares to facilitate the sale or resale of the Shares.
9
<PAGE>
(ee) LOCK-UP AGREEMENTS. Each executive officer and director of the
Company and each beneficial owner of five or more percent of the outstanding
issued share capital of the Company (other than Hilal Capital Management LLC,
Oracle Strategic Partners, L.P., Dr. John K. Stevens, DCF Capital, L.L.C.,
DWS Investment GmbH and Frontier Capital Management Company) has agreed to
sign an agreement substantially in the form attached hereto as EXHIBIT A (the
"Lock-up Agreements"). The Company has provided to counsel for the
Underwriters a complete and accurate list of all securityholders of record of
the Company and the number and type of securities held by each
securityholder. The Company has provided to counsel for the Underwriters
true, accurate and complete copies of all of the Lock-up Agreements presently
in effect. The Company hereby represents and warrants that it will not
release any of its officers, directors or other stockholders from any Lock-up
Agreements currently existing or hereafter effected without the prior written
consent of Robertson Stephens.
(ff) RELATED PARTY TRANSACTIONS. There are no business relationships or
related-party transactions involving the Company or any Active Subsidiary or any
other person required to be described in the Prospectus which have not been
described as required.
(gg) ENVIRONMENTAL LAWS. (i) The Company is in compliance with all
rules, laws and regulations relating to the use, treatment, storage and disposal
of toxic substances and protection of health or the environment ("Environmental
Laws") which are applicable to its business, except where the failure to comply
would not reasonably be expected to result in a Material Adverse Change, (ii)
the Company has received no notice from any governmental authority or third
party of an asserted claim under Environmental Laws, which claim is required to
be disclosed in the Registration Statement, the Prospectus and any Incorporated
Document, (iii) the Company is not currently aware that it will be required to
make future material capital expenditures to comply with Environmental Laws and
(iv) to the knowledge of the Company, no property that is owned, leased or
occupied by the Company has been designated as a Superfund site pursuant to the
Comprehensive Response, Compensation, and Liability Act of 1980, as amended (42
U.S.C. ss. 9601, ET SEQ.), or otherwise designated as a contaminated site under
applicable state or local law.
(hh) PERIODIC REVIEW OF COSTS OF ENVIRONMENTAL COMPLIANCE. The Company
has conducted reviews of the effect of Environmental Laws on the business,
operations and properties of the Company and its Active Subsidiaries, in the
course of which it has identified and evaluated associated costs and liabilities
(including, without limitation, any capital or operating expenditures required
for clean-up, closure of properties or compliance with Environmental Laws or any
permit, license or approval, any related constraints on operating activities and
any potential liabilities to third parties). On the basis of such reviews and
the amount of its established reserves, the Company has reasonably concluded
that such associated costs and liabilities would not, individually or in the
aggregate, reasonably be expected to result in a Material Adverse Change.
(ii) REGULATORY COMPLIANCE. Neither the Company nor any of its
subsidiaries is in violation of any applicable foreign, federal, state,
provincial or local laws or regulations relating to the development, testing,
human trials, handling, manufacturing, and commercialization of medical devices,
including without limitation the U.S. Food, Drug and Cosmetic Act and the rules
and regulations of the U.S. Food and Drug Administration (the "FDA") (or its
Canadian
10
<PAGE>
equivalent) (collectively, "Drug Laws") which would reasonably be expected to
result in any Material Adverse Change. To the best knowledge of the Company,
except as set forth in the Registration Statement and the Prospectus, no
prospective change in any of such laws or regulations or any other applicable
foreign, federal, state, provincial or local laws or regulations has been
adopted that, when made effective, would reasonably be expected to have a
Material Adverse Effect. Each of the Company and its Active Subsidiaries has
such permits, licenses, franchises and authorizations of governmental or
regulatory authorities ("permits"), including, without limitation, under any
applicable Drug Laws as are necessary to own, lease and operate its respective
properties and to conduct its business, except as described in the Prospectus
and except for those permits, the absence of which would not reasonably be
expected to have a Material Adverse Effect. Each of the Company and its Active
Subsidiaries has fulfilled and performed all of its material obligations with
respect to such permits and no event has occurred that allows, or after notice
or lapse of time would allow, revocation or termination thereof or results in
any other material impairment of the rights of the holder of any such permit;
and, except as described in the Prospectus, such permits contain no restrictions
that are materially burdensome to the Company or any of its Active Subsidiaries,
except for such restrictions that would not reasonably be expected to have a
Material Adverse Effect.
(jj) ERISA COMPLIANCE. Any "employee benefit plan" (as defined under
the Employee Retirement Income Security Act of 1974, as amended, and the
regulations thereunder (collectively, "ERISA")) established or maintained by
"U.S. ERISA Affiliates" (as defined below) are in compliance in all
material respects with ERISA. "U.S. ERISA Affiliate" means, with respect
to the Company, any member of any group of organizations described in
Sections 414(b),(c),(m) or (o) of the Code of which the Company is a member
and which is incorporated or organized in the United States. No "reportable
event" (as defined under ERISA) for which the 30-day reporting requirement
has not been waived has occurred or is reasonably expected to occur with
respect to any "employee benefit plan" covered by Title IV of ERISA
established or maintained by any U.S. ERISA Affiliates. No "employee benefit
plan" established or maintained by the U.S. ERISA Affiliates, if such
"employee benefit plan" were terminated, would have any "amount of unfounded
benefit liabilities" (as defined under ERISA) that would have a Material
Adverse Effect. No U.S. ERISA Affiliate has incurred or reasonably expects to
incur any liability having a Material Adverse Effect under (i) Title IV of
ERISA with respect to termination of, or withdrawal from, any "employee
benefit plan" or (ii) penalties or excise tax under Sections 412, 4971, 4975
or 4980B of the Code. Each "employee benefit plan" established or maintained
by any U.S. ERISA Affiliate that is intended to be qualified under Section
401(a) of the Code has received a favorable opinion letter from the Internal
Revenue Service as to qualified status and, to the best knowledge of the
Company or any subsidiary, nothing has occurred, whether by action or failure
to act, which would cause the loss of such qualified status.
(kk) EXCHANGE ACT COMPLIANCE. The documents incorporated or deemed to
be incorporated by reference in the Prospectus, at the time they were or
hereafter are filed with the Commission, complied and will comply in all
material respects with the requirements of the Exchange Act, and, when read
together with the other information in the Prospectus, at the time the
Registration Statement and any amendments thereto become effective and at the
First Closing Date and the Second Closing Date, as the case may be, will not
contain an untrue statement of a material fact or omit to state a material fact
required to be stated therein or
11
<PAGE>
necessary to make the fact required to be stated therein or necessary to make
the statements therein, in the light of the circumstances under which they were
made, not misleading.
(ll) EXCHANGE ACT REPORTS FILED. The Company has filed all reports
required to be filed pursuant to the Securities Act and the Exchange Act.
(mm) CONDITIONS FOR USE OF FORM F-3. The Company has satisfied the
conditions for the use of Form F-3, as set forth in the general instructions
thereto, with respect to the Registration Statement.
Any certificate signed by an officer of the Company and delivered to the
Representatives or to counsel for the Underwriters pursuant to the terms of
this Agreement or related to the transactions contemplated hereby shall be
deemed to be a representation and warranty by the Company to each Underwriter
as to the matters set forth therein.
SECTION 2. PURCHASE, SALE AND DELIVERY OF THE SHARES.
(a) THE FIRM SHARES. The Company agrees to issue and sell to the
several Underwriters the Firm Shares upon the terms herein set forth. On the
basis of the representations, warranties and agreements herein contained, and
upon the terms but subject to the conditions herein set forth, the Underwriters
agree, severally and not jointly, to purchase from the Company the respective
number of Firm Shares set forth opposite their names on SCHEDULE A. The purchase
price per Firm Share to be paid by the several Underwriters to the Company shall
be $[___] per share.
(b) THE FIRST CLOSING DATE. Delivery of the Firm Shares to be purchased
by the Underwriters and payment therefor shall be made by the Company and the
Representatives at 6:00 a.m. San Francisco time, at the offices of Baer Marks &
Upham, LLP, 805 Third Avenue, New York, New York 10022 (or at such other place
as may be agreed upon among the Representatives and the Company), (i) on the
third (3rd) full business day following the first day that Shares are traded,
(ii) if this Agreement is executed and delivered after 1:30 P.M., San Francisco
time, the fourth (4th) full business day following the day that this Agreement
is executed and delivered or (iii) at such other time and date not later that
seven (7) full business days following the first day that Shares are traded as
the Representatives and the Company may determine (or at such time and date to
which payment and delivery shall have been postponed pursuant to Section 8
hereof), such time and date of payment and delivery being herein called the
"First Closing Date;" provided, however, that if the Company has not made
available to the Representatives copies of the Prospectus within the time
provided in Section 2(g) and 3(e) hereof, the Representatives may, in their sole
discretion, postpone the First Closing Date until no later that two (2) full
business days following delivery of copies of the Prospectus to the
Representatives.
(c) THE OPTION SHARES; THE SECOND CLOSING DATE. In addition, on the
basis of the representations, warranties and agreements herein contained, and
upon the terms but subject to the conditions herein set forth, the Company
hereby grants an option to the several Underwriters to purchase, severally and
not jointly, up to an aggregate of 300,000 Option Shares from the Company at the
purchase price per share to be paid by the Underwriters for the Firm Shares. The
option granted hereunder is for use by the Underwriters solely in covering any
over-
12
<PAGE>
allotments in connection with the sale and distribution of the Firm Shares. The
option granted hereunder may be exercised at any time upon notice by the
Representatives to the Company, which notice may be given at any time within 30
days from the date of this Agreement. The time and date of delivery of the
Option Shares, if subsequent to the First Closing Date, is called the "Second
Closing Date" and shall be determined by the Representatives and shall not be
earlier than three nor later than five full business days after delivery of such
notice of exercise. If any Option Shares are to be purchased, each Underwriter
agrees, severally and not jointly, to purchase the number of Option Shares
(subject to such adjustments to eliminate fractional shares as the
Representatives may determine) that bears the same proportion to the total
number of Option Shares to be purchased as the number of Firm Shares set forth
on SCHEDULE A opposite the name of such Underwriter bears to the total number of
Firm Shares. The Representatives may cancel the option at any time prior to its
expiration by giving written notice of such cancellation to the Company.
(d) PUBLIC OFFERING OF THE SHARES. The Representatives hereby advise
the Company that the Underwriters intend to offer for sale to the public, as
described in the Prospectus, their respective portions of the Shares as soon
after this Agreement has been executed and the Registration Statement has been
declared effective as the Representatives, in their sole judgment, have
determined is advisable and practicable.
(e) PAYMENT FOR THE SHARES. Payment for the Shares shall be made at the
First Closing Date (and, if applicable, at the Second Closing Date) by wire
transfer in immediately available funds to the order of the Company.
It is understood that the Representatives have been
authorized, for their own accounts and the accounts of the several Underwriters,
to accept delivery of and receipt for, and make payment of the purchase price
for, the Firm Shares and any Option Shares the Underwriters have agreed to
purchase. FleetBoston Robertson Stephens Inc., individually and not as the
Representatives of the Underwriters, may (but shall not be obligated to) make
payment for any Shares to be purchased by any Underwriter whose funds shall not
have been received by the Representatives by the First Closing Date or the
Second Closing Date, as the case may be, for the account of such Underwriter,
but any such payment shall not relieve such Underwriter from any of its
obligations under this Agreement.
(f) DELIVERY OF THE SHARES. The Company shall deliver, or cause to be
delivered, a credit representing the Firm Shares to an account or accounts at
The Depository Trust Company, as designated by the Representatives for the
accounts of the Representatives and the several Underwriters at the First
Closing Date, against the irrevocable release of a wire transfer of immediately
available funds for the amount of the purchase price therefor. The Company shall
also deliver, or cause to be delivered, a credit representing the Option Shares
the Underwriters have agreed to purchase at the First Closing Date (or the
Second Closing Date, as the case may be), to an account or accounts at The
Depository Trust Company as designated by the Representatives for the accounts
of the Representatives and the several Underwriters at the Second Closing Date,
against the irrevocable release of a wire transfer of immediately available
funds for the amount of the purchase price therefor. Time shall be of the
essence, and delivery at the time and place specified in this Agreement is a
further condition to the obligations of the Underwriters.
13
<PAGE>
(g) DELIVERY OF PROSPECTUS TO THE UNDERWRITERS. Not later than 12:00
noon on the second business day following the date the Shares are released by
the Underwriters for sale to the public, the Company shall deliver or cause to
be delivered copies of the Prospectus in such quantities and at such places as
the Representatives shall request.
SECTION 3. COVENANTS OF THE COMPANY.
The Company further covenants and agrees with each Underwriter
as follows:
(a) REGISTRATION STATEMENT MATTERS. The Company will (i) use its best
efforts to cause the Registration Statement to become effective or, if the
procedure in Rule 430A of the Securities Act is followed, to prepare and timely
file with the Commission under Rule 424(b) under the Securities Act a Prospectus
in a form approved by the Representatives containing information previously
omitted at the time of effectiveness of the Registration Statement in reliance
on Rule 430A of the Securities Act and (ii) not file any amendment to the
Registration Statement or supplement to the Prospectus of which the
Representatives shall not previously have been advised and furnished with a copy
or to which the Representatives shall have reasonably objected in writing or
which is not in compliance with the Securities Act. If the Company elects to
rely on Rule 462(b) under the Securities Act, the Company shall file a Rule
462(b) Registration Statement with the Commission in compliance with Rule 462(b)
under the Securities Act prior to the time confirmations are sent or given, as
specified by Rule 462(b)(2) under the Securities Act, and shall pay the
applicable fees in accordance with Rule 111 under the Securities Act.
(b) SECURITIES ACT COMPLIANCE. The Company will advise the
Representatives promptly (i) when the Registration Statement or any
post-effective amendment thereto shall have become effective, (ii) of receipt of
any comments from the Commission, (iii) of any request of the Commission for
amendment of the Registration Statement or for supplement to the Prospectus or
for any additional information and (iv) of the issuance by the Commission of any
stop order suspending the effectiveness of the Registration Statement or the use
of the Prospectus or of the institution of any proceedings for that purpose. The
Company will use its best efforts to prevent the issuance of any such stop order
preventing or suspending the use of the Prospectus and to obtain as soon as
possible the lifting thereof, if issued.
(c) BLUE SKY COMPLIANCE. The Company will cooperate with the
Representatives and counsel for the Underwriters in endeavoring to qualify the
Shares for sale under the securities laws of such jurisdictions (both national
and foreign) as the Representatives may reasonably have designated in writing
and will make such applications, file such documents, and furnish such
information as may be reasonably required for that purpose, provided the Company
shall not be required to qualify as a foreign corporation or to file a general
consent to service of process in any jurisdiction where it is not now so
qualified or required to file such a consent. The Company will, from time to
time, prepare and file such statements, reports and other documents, as are or
may be required to continue such qualifications in effect for so long a period
as the Representatives may reasonably request for distribution of the Shares.
(d) AMENDMENTS AND SUPPLEMENTS TO THE PROSPECTUS AND OTHER SECURITIES
ACT MATTERS. The Company will comply with the Securities Act and the Exchange
Act, and the rules
14
<PAGE>
and regulations of the Commission thereunder, so as to permit the completion of
the distribution of the Shares as contemplated in this Agreement and the
Prospectus. If during the period in which a prospectus is required by law to be
delivered by an Underwriter or dealer, any event shall occur as a result of
which, in the judgment of the Company or in the reasonable opinion of the
Representatives or counsel for the Underwriters, it becomes necessary to amend
or supplement the Prospectus in order to make the statements therein, in the
light of the circumstances existing at the time the Prospectus is delivered to a
purchaser, not misleading, or, if it is necessary at any time to amend or
supplement the Prospectus to comply with any law, the Company promptly will
prepare and file with the Commission, and furnish at its own expense to the
Underwriters and to dealers, an appropriate amendment to the Registration
Statement or supplement to the Prospectus so that the Prospectus as so amended
or supplemented will not, in the light of the circumstances when it is so
delivered, be misleading, or so that the Prospectus will comply with the law.
(e) COPIES OF ANY AMENDMENTS AND SUPPLEMENTS TO THE PROSPECTUS. The
Company agrees to furnish the Representatives, without charge, during the period
beginning on the date hereof and ending on the later of the First Closing Date
or such date, as in the opinion of counsel for the Underwriters, the Prospectus
is no longer required by law to be delivered in connection with sales by an
Underwriter or dealer (the "Prospectus Delivery Period"), as many copies of the
Prospectus and any amendments and supplements thereto (including any documents
incorporated or deemed incorporated by reference therein) as the Representatives
may request.
(f) INSURANCE. The Company shall (i) obtain Directors and Officers
liability insurance in the minimum amount of $10 million which shall apply to
the offering contemplated hereby and (ii) cause Robertson Stephens to be added
to such policy such that up to $500,000 of its expenses pursuant to section 7(a)
shall be paid directly by such insurer.
(g) NOTICE OF SUBSEQUENT EVENTS. If at any time during the ninety (90)
day period after the Registration Statement becomes effective, any rumor,
publication or event relating to or affecting the Company shall occur as a
result of which, in your opinion, the market price of the Common Shares has been
or is likely to be materially affected (regardless of whether such rumor,
publication or event necessitates a supplement to or amendment of the
Prospectus), the Company will, after written notice from you advising the
Company to the effect set forth above, forthwith prepare, consult with you
concerning the substance of and disseminate a press release or other public
statement, reasonably satisfactory to you, responding to or commenting on such
rumor, publication or event.
(h) USE OF PROCEEDS. The Company shall apply the net proceeds from the
sale of the Shares sold by it in the manner described under the caption "Use of
Proceeds" in the Prospectus.
(i) TRANSFER AGENT. The Company shall engage and maintain, at its
expense, a registrar and transfer agent for the Company Shares.
(j) EARNINGS STATEMENT. As soon as practicable, the Company will make
generally available to its security holders and to the Representatives an
earnings statement (which need not be audited) covering the twelve-month period
ending June 30, 2001 that satisfies the provisions of Section 11(a) of the
Securities Act.
15
<PAGE>
(k) PERIODIC REPORTING OBLIGATIONS. During the Prospectus Delivery
Period the Company shall file, on a timely basis, with the Commission and the
Nasdaq National Market all reports and documents required to be filed under the
Exchange Act.
(l) AGREEMENT NOT TO OFFER OR SELL ADDITIONAL SECURITIES. The Company
will not offer, sell or contract to sell, or otherwise dispose of or enter into
any transaction which is designed to, or could reasonably be expected to, result
in the disposition (whether by actual disposition or effective economic
disposition due to cash settlement or otherwise by the Company or any affiliate
of the Company or any person in privity with the Company or any affiliate of the
Company) directly or indirectly, or announce the offering of, any other Common
Shares or any securities convertible into, or exchangeable for, Common Shares;
provided, however, that the Company may (i) issue and sell Common Shares
pursuant to any director or employee stock option or stock purchase plan, stock
ownership plan or dividend reinvestment plan of the Company in effect at the
date of the Prospectus against the transfer of any such Common Shares and (ii)
the Company may issue Common Shares issuable upon the conversion of securities
(including options and the Company's Series A Convertible Preferred Shares) or
the exercise of warrants outstanding at the date of the Prospectus and described
in the Prospectus. These restrictions terminate after the close of trading of
the Shares on the 90th day after (and including) the day the Shares commenced
trading on the Nasdaq National Market (the "Lock-Up Period").
(m) FUTURE REPORTS TO THE REPRESENTATIVEs. During the period of five
years hereafter the Company will furnish to the Representatives (i) as soon as
practicable after the end of each fiscal year, copies of the Annual Report of
the Company containing the balance sheet of the Company as of the close of such
fiscal year and statements of operations, shareholders' equity (deficit) and
cash flows for the year then ended and the opinion thereon of the Company's
independent public or certified public accountants; (ii) as soon as practicable
after the filing thereof, copies of each proxy statement, Annual Report on Form
10-K or 20-F, Quarterly Report on Form 10-Q, Current Report on Form 8-K or 6-K
or other report filed by the Company with the Commission, the National
Association of Securities Dealers, LLC or any securities exchange; and (iii) as
soon as available, copies of any report or communication of the Company mailed
generally to holders of its capital stock.
(n) EXCHANGE ACT COMPLIANCE. During the Prospectus Delivery Period, the
Company will file all documents required to be filed with the Commission
pursuant to Section 13, 14 or 15 of the Exchange Act in the manner and within
the time periods required by the Exchange Act.
16
<PAGE>
SECTION 4. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS. The
obligations of the several Underwriters to purchase and pay for the Shares as
provided herein on the First Closing Date and, with respect to the Option
Shares, on the Second Closing Date, shall be subject to the accuracy of the
representations and warranties on the part of the Company set forth in Section 1
hereof as of the date hereof and as of the First Closing Date as though then
made and, with respect to the Option Shares, as of the Second Closing Date as
though then made (except in each case with respect to any representation or
warranty made as of a particular date, in which case such representation or
warranty shall be accurate as of such date), to the timely performance by the
Company of its covenants and other obligations hereunder, and to each of the
following additional conditions:
(a) COMPLIANCE WITH REGISTRATION REQUIREMENTS; NO STOP ORDER; NO
OBJECTION FROM THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, LLC. The
Registration Statement shall have become effective prior to the execution of
this Agreement, or at such later date as shall be consented to in writing by
you; and no stop order suspending the effectiveness thereof shall have been
issued and no proceedings for that purpose shall have been initiated or, to the
knowledge of the Company or any Underwriter, threatened by the Commission, and
any request of the Commission for additional information (to be included in the
Registration Statement or the Prospectus or any Incorporated Document or
otherwise) shall have been complied with to the reasonable satisfaction of
Underwriters' counsel; and the National Association of Securities Dealers, LLC
shall have raised no objection to the fairness and reasonableness of the
underwriting terms and arrangements.
(b) CORPORATE PROCEEDINGS. All corporate proceedings and other legal
matters in connection with this Agreement, the form of Registration Statement
and the Prospectus, and the registration, authorization, issue, sale and
delivery of the Shares, shall have been reasonably satisfactory to Underwriters'
counsel, and such counsel shall have been furnished with such papers and
information as they may reasonably have requested to enable them to pass upon
the matters referred to in this Section.
(c) NO MATERIAL ADVERSE CHANGE. Subsequent to the execution and
delivery of this Agreement and prior to the First Closing Date, or the Second
Closing Date, as the case may be, there shall not have been any Material Adverse
Change from that set forth in the Registration Statement or Prospectus, which,
in your sole judgment, is material and adverse and that makes it, in your sole
judgment, impracticable or inadvisable to proceed with the public offering of
the Shares as contemplated by the Prospectus.
(d) OPINION OF COUNSEL FOR THE COMPANY. You shall have received on the
First Closing Date, or the Second Closing Date, as the case may be, an opinion
of (i) Baer Marks & Upham, LLP, United States counsel for the Company,
substantially in the form of EXHIBIT B-1 attached hereto, and (ii) an opinion of
Osler, Hoskin & Harcourt, LLP, Canadian counsel for the Company, substantially
in the form of EXHIBIT B-2 attached hereto, in each case dated the First Closing
Date, or the Second Closing Date, addressed to the Underwriters and with
reproduced copies or signed counterparts thereof for each of the Underwriters.
17
<PAGE>
Counsel rendering the opinions contained in EXHIBITS B-1 and
B-2 may rely as to questions of fact upon representations or certificates of
officers of the Company, and of government officials, in which case its opinion
is to state that they are so relying and that, without any independent
investigation, they have no knowledge of any material misstatement or
inaccuracy in any such opinion, representation or certificate. Copies of any
opinion, representation or certificate so relied upon shall be delivered to
you, as Representatives of the Underwriters, and to Underwriters' counsel.
(e) OPINION OF INTELLECTUAL PROPERTY COUNSEL FOR THE COMPANY. You shall
have received on the First Closing Date, or the Second Closing Date, as the case
may be, an opinion of Oppedahl and Larson, L.L.P. intellectual property counsel
for the Company, substantially in the form of EXHIBIT C attached hereto.
(f) OPINION OF REGULATORY COUNSEL FOR THE COMPANY. You shall have
received on the First Closing Date, or the Second Closing Date, as the case may
be, an opinion of Hyman, Phelps & McNamara, P.C., regulatory counsel for the
Company, substantially in the form of EXHIBIT E attached hereto.
(g) OPINION OF COUNSEL FOR THE UNDERWRITERS. You shall have received on
the First Closing Date or the Second Closing Date, as the case may be, an
opinion of Testa, Hurwitz & Thibeault, LLP, substantially in the form of EXHIBIT
D hereto. The Company shall have furnished to such counsel such documents as
they may have requested for the purpose of enabling them to pass upon such
matters.
(h) ACCOUNTANTS' COMFORT LETTER. You shall have received on the First
Closing Date and on the Second Closing Date, as the case may be, a letter from
PriceWaterhouseCoopers, LLP addressed to the Underwriters, dated the First
Closing Date or the Second Closing Date, as the case may be, confirming that
they are independent certified public accountants with respect to the Company
within the meaning of the Securities Act and the applicable published Rules and
Regulations and based upon the procedures described in such letter delivered to
you concurrently with the execution of this Agreement (herein called the
"Original Letter"), but carried out to a date not more than four (4) business
days prior to the First Closing Date or the Second Closing Date, as the case may
be, (i) confirming, to the extent true, that the statements and conclusions set
forth in the Original Letter are accurate as of the First Closing Date or the
Second Closing Date, as the case may be, and (ii) setting forth any revisions
and additions to the statements and conclusions set forth in the Original Letter
which are necessary to reflect any changes in the facts described in the
Original Letter since the date of such letter, or to reflect the availability of
more recent financial statements, data or information. The letter shall not
disclose any change in the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and its subsidiaries
considered as one enterprise from that set forth in the Registration Statement
or Prospectus, which, in your sole judgment, is material and adverse and that
makes it, in your sole judgment, impracticable or inadvisable to proceed with
the public offering of the Shares as contemplated by the Prospectus. The
Original Letter from PriceWaterhouseCoopers, LLP shall be addressed to or for
the use of the Underwriters in form and substance satisfactory to the
Underwriters and shall (i) represent, to the extent true, that they are
independent certified public accountants with respect to the Company within the
meaning of the Securities Act and the applicable published Rules and
Regulations, (ii) set forth their opinion with respect to their examination of
the consolidated balance sheet of the Company as of December 31, 1999 and
18
<PAGE>
related consolidated statements of operations, shareholders' equity, and cash
flows for the twelve (12) months ended December 31, 1999, and address other
matters agreed upon by PriceWaterhouseCoopers, LLP and you.
(i) OFFICERS' CERTIFICATE. You shall have received on the First Closing
Date and the Second Closing Date, as the case may be, a certificate of the
Company, dated the First Closing Date or the Second Closing Date, as the case
may be, signed by the Chief Executive Officer and Chief Financial Officer of the
Company, to the effect that, and you shall be satisfied that:
(i) The representations and warranties of the Company in this Agreement
are true and correct, as if made on and as of the First Closing Date or
the Second Closing Date, as the case may be (except in each case with
respect to any representation or warranty made as of a particular date,
in which case such representation or warranty shall be accurate as of
such date), and the Company has complied with all the agreements and
satisfied all the conditions on its part to be performed or satisfied
at or prior to the First Closing Date or the Second Closing Date, as
the case may be;
(ii) No stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have been
instituted or are pending or threatened under the Act;
(iii) When the Registration Statement became effective and at all times
subsequent thereto up to the delivery of such certificate, the
Registration Statement and the Prospectus, and any amendments or
supplements thereto and the Incorporated Documents, when such
Incorporated Documents became effective or were filed with the
Commission, contained all material information required to be included
therein by the Securities Act or the Exchange Act and the applicable
rules and regulations of the Commission thereunder, as the case may be,
and in all material respects conformed to the requirements of the
Securities Act or the Exchange Act and the applicable rules and
regulations of the Commission thereunder, as the case may be, and (A)
the Registration Statement and any amendments thereto, did not and does
not include any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading and (B) the Prospectus and any
amendments or supplements thereto, did not and does not include any
untrue statement of a material fact or omit the statement of material
fact required to be stated therein or necessary to make the statement
therein not misleading in light of the circumstances under which they
were made; and, since the effective date of the Registration Statement,
there has occurred no event required to be set forth in an amended or
supplemented Prospectus which has not been so set forth; and
(iv) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus as amended or
supplemented, there has not been (a) any material adverse change in the
condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its subsidiaries considered as
one enterprise, (b) any transaction that is material to the Company and
its subsidiaries considered as one enterprise, except transactions
entered into in the ordinary course of business, (c) any obligation,
direct or contingent, that is material to the Company and its
19
<PAGE>
subsidiaries considered as one enterprise, incurred by the Company or
its subsidiaries, except obligations incurred in the ordinary course of
business, (d) any change in the capital stock or outstanding
indebtedness of the Company or any of its subsidiaries that is material
to the Company and its subsidiaries considered as one enterprise, (e)
any dividend or distribution of any kind declared, paid or made on the
capital stock of the Company or any of its subsidiaries except for the
accrual of dividends under the Series A Convertible Preferred Shares in
accordance with their terms as described in the Prospectus, or (f) any
loss or damage (whether or not insured) to the property of the Company
or any of its subsidiaries which has been sustained or will have been
sustained which has a Material Adverse Effect.
(j) LOCK-UP AGREEMENT FROM CERTAIN STOCKHOLDERS OF THE COMPANY. The
Company shall have obtained and delivered to you an agreement substantially
in the form of EXHIBIT A attached hereto from each executive officer and
director of the Company, and each beneficial owner of five or more percent of
the outstanding issued share capital of the Company (other than Hilal Capital
Management LLC, Oracle Strategic Partners, L.P., Dr. John K. Stevens, DCF
Capital, L.L.C., DWS Investment GmbH and Frontier Capital Management Company).
(k) STOCK EXCHANGE LISTING. The Shares shall have been approved for
listing on the Nasdaq National Market, subject only to official notice of
issuance.
(l) COMPLIANCE WITH PROSPECTUS DELIVERY REQUIREMENTS. The Company shall
have complied with the provisions of Sections 2(g) and 3(e) hereof with respect
to the furnishing of Prospectuses.
(m) ADDITIONAL DOCUMENTS. On or before each of the First Closing Date
and the Second Closing Date, as the case may be, the Representatives and counsel
for the Underwriters shall have received such information, documents and
opinions as they may reasonably require for the purposes of enabling them to
pass upon the issuance and sale of the Shares as contemplated herein, or in
order to evidence the accuracy of any of the representations and warranties, or
the satisfaction of any of the conditions or agreements, herein contained.
If any condition specified in this Section 4 is not satisfied
when and as required to be satisfied, this Agreement may be terminated by the
Representatives by notice to the Company at any time on or prior to the First
Closing Date and, with respect to the Option Shares, at any time prior to the
Second Closing Date, which termination shall be without liability on the part of
any party to any other party, except that Section 5 (Payment of Expenses),
Section 6 (Reimbursement of Underwriters' Expenses), Section 7 (Indemnification
and Contribution) and Section 10 (Representations and Indemnities to Survive
Delivery) shall at all times be effective and shall survive such termination.
SECTION 5. PAYMENT OF EXPENSES. The Company agrees to pay all costs,
fees and expenses incurred in connection with the performance of its obligations
hereunder and in connection with the transactions contemplated hereby, including
without limitation (i) all expenses incident to the issuance and delivery of the
Common Shares (including all printing and engraving costs), (ii) all fees and
expenses of the registrar and transfer agent of the Common Shares, (iii) all
necessary issue, transfer and other stamp taxes in connection with the issuance
20
<PAGE>
and sale of the Shares to the Underwriters, (iv) all fees and expenses of the
Company's counsel, independent public or certified public accountants and other
advisors, (v) all costs and expenses incurred in connection with the
preparation, printing, filing, shipping and distribution of the Registration
Statement (including financial statements, exhibits, schedules, consents and
certificates of experts), each preliminary prospectus and the Prospectus, and
all amendments and supplements thereto, and this Agreement, (vi) all filing
fees, attorneys' fees and expenses incurred by the Company or, subject to the
penultimate sentence of this Section 5, the Underwriters in connection with
qualifying or registering (or obtaining exemptions from the qualification or
registration of) all or any part of the Shares for offer and sale under (A) the
state securities or blue sky laws or (B) the provincial securities laws of
Canada or any other country, and, if requested by the Representatives, preparing
and printing a "Blue Sky Survey", an "International Blue Sky Survey" or other
memorandum, and any supplements thereto, advising the Underwriters of such
qualifications, registrations and exemptions, (vii) the filing fees incident to,
and the reasonable fees and expenses of counsel for the Underwriters in
connection with, the National Association of Securities Dealers, LLC review and
approval of the Underwriters' participation in the offering and distribution of
the Common Shares, (viii) the fees and expenses associated with listing the
Common Shares on the Nasdaq National Market, (ix) all costs and expenses
incident to the travel and accommodation of the Company's employees on the
"roadshow", and (x) all other fees, costs and expenses referred to in Item 14 of
Part II of the Registration Statement. Notwithstanding anything herein to the
contrary, the Company shall not be obligated to pay attorneys' fees and expenses
of the Underwriters contemplated by clauses (vi) and vii) of this Section 5 in
excess of $15,000 in the aggregate. Except as provided in this Section 5,
Section 6, and Section 7 hereof, the Underwriters shall pay their own expenses,
including the fees and disbursements of their counsel.
SECTION 6. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If this Agreement
is terminated by the Representatives pursuant to Section 4, Section 8 or Section
9, or if the sale to the Underwriters of the Shares on the First Closing Date is
not consummated because of any refusal, inability or failure on the part of the
Company to perform any agreement herein or to comply with any provision hereof,
the Company agrees to reimburse the Representatives and the other Underwriters
(or such Underwriters as have terminated this Agreement with respect to
themselves), severally, upon demand for all out-of-pocket expenses that shall
have been reasonably incurred by the Representatives and the Underwriters in
connection with the proposed purchase and the offering and sale of the Shares,
including but not limited to fees and disbursements of counsel, printing
expenses, travel and accommodation expenses, postage, facsimile and telephone
charges.
SECTION 7. INDEMNIFICATION AND CONTRIBUTION.
(a) INDEMNIFICATION OF THE UNDERWRITERS.
The Company agrees to indemnify and hold harmless each Underwriter, its
officers and employees, and each person, if any, who controls any Underwriter
within the meaning of the Securities Act and the Exchange Act against any loss,
claim, damage, liability or expense, as incurred, to which such Underwriter or
such controlling person may become subject, under the Securities Act, the
Exchange Act or other federal or state statutory law or regulation, or at common
law or otherwise (including in settlement of any litigation, if such settlement
is effected
21
<PAGE>
with the written consent of the Company, which consent shall not be unreasonably
withheld), insofar as such loss, claim, damage, liability or expense (or actions
in respect thereof as contemplated below) arises out of or is based (i) upon any
untrue statement or alleged untrue statement of a material fact contained in the
Registration Statement, or any amendment thereto, including any information
deemed to be a part thereof pursuant to Rule 430A under the Securities Act, or
the omission or alleged omission therefrom of a material fact required to be
stated therein or necessary to make the statements therein not misleading; or
(ii) upon any untrue statement or alleged untrue statement of a material fact
contained in any preliminary prospectus or the Prospectus (or any amendment or
supplement thereto), or the omission or alleged omission therefrom of a material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; or (iii) in whole or
in part upon any inaccuracy in the representations and warranties of the Company
contained herein; or (iv) in whole or in part upon any failure of the Company to
perform its obligations hereunder or under law; or (v) any untrue statement or
alleged untrue statement of any material fact contained in any audio or visual
materials provided by the Company or based upon written information furnished by
or on behalf of the Company including, without limitation, slides, videos, films
or tape recordings, used in connection with the marketing of the Shares,
including without limitation, statements communicated by the Company to
securities analysts employed by the Underwriters; or (vi) any act or failure to
act or any alleged act or failure to act by any Underwriter in connection with,
or relating in any manner to, the Shares or the offering contemplated hereby,
and which is included as part of or referred to in any loss, claim, damage,
liability or action arising out of or based upon any matter covered by clause
(i), (ii), (iii), (iv) or (v) above, provided that the Company shall not be
liable under this clause (vi) to the extent that a court of competent
jurisdiction shall have determined by a final judgment that such loss, claim,
damage, liability or action resulted directly from any such acts or failures to
act undertaken or omitted to be taken by such Underwriter through its bad faith
or willful misconduct; and to reimburse each Underwriter and each such
controlling person for any and all expenses (including the fees and
disbursements of counsel chosen by Robertson Stephens) as such expenses are
reasonably incurred by such Underwriter or such controlling person in connection
with investigating, defending, settling, compromising or paying any such loss,
claim, damage, liability, expense or action; provided, however, that the
foregoing indemnity agreement shall not apply to any loss, claim, damage,
liability or expense to the extent, but only to the extent, arising out of or
based upon any untrue statement or alleged untrue statement or omission or
alleged omission made in reliance upon and in conformity with written
information furnished to the Company by the Representatives expressly for use in
the Registration Statement, any preliminary prospectus or the Prospectus (or any
amendment or supplement thereto); and provided, further, that with respect to
any preliminary prospectus, the foregoing indemnity agreement shall not apply or
inure to the benefit of any Underwriter from whom the person asserting any loss,
claim, damage, liability or expense purchased Shares, or any person controlling
such Underwriter, if copies of the Prospectus were timely delivered to the
Underwriter pursuant to Section 2 and a copy of the Prospectus (as then amended
or supplemented if the Company shall have furnished any amendments or
supplements thereto) was not sent or given by or on behalf of such Underwriter
to such person, if required by law so to have been delivered, and if the
Prospectus (as so amended or supplemented) would have cured the defect giving
rise to such loss, claim, damage, liability or expense. The indemnity agreement
set forth in this Section 7(a) shall be in addition to any liabilities that the
Company may otherwise have.
22
<PAGE>
(b) INDEMNIFICATION OF THE COMPANY, ITS DIRECTORS, OFFICERS. Each
Underwriter agrees, severally and not jointly, to indemnify and hold harmless
the Company, each of its directors, each of its officers who signed the
Registration Statement and each person, if any, who controls the Company within
the meaning of the Securities Act or the Exchange Act, against any loss, claim,
damage, liability or expense, as incurred, to which the Company, or any such
director, officer or controlling person may become subject, under the Securities
Act, the Exchange Act, or other federal or state statutory law or regulation, or
at common law or otherwise (including in settlement of any litigation, if such
settlement is effected with the written consent of such Underwriter), insofar as
such loss, claim, damage, liability or expense (or actions in respect thereof as
contemplated below) arises out of or is based upon any untrue or alleged untrue
statement of a material fact contained in the Registration Statement, any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto), or arises out of or is based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in the Registration Statement, any preliminary
prospectus, the Prospectus (or any amendment or supplement thereto), in reliance
upon and in conformity with written information furnished to the Company by the
Representatives expressly for use therein; and to reimburse the Company, or any
such director, officer or controlling person for any legal and other expense
reasonably incurred by the Company, or any such director, officer or controlling
person in connection with investigating, defending, settling, compromising or
paying any such loss, claim, damage, liability, expense or action. The indemnity
agreement set forth in this Section 7(b) shall be in addition to any liabilities
that each Underwriter may otherwise have.
(c) INFORMATION PROVIDED BY THE UNDERWRITERS. The Company and each
person, if any, who controls the Company within the meaning of the Securities
Act or the Exchange Act, hereby acknowledges that the only information that the
Underwriters have furnished to the Company in writing expressly for use in the
Registration Statement, any preliminary prospectus or the Prospectus (or any
amendment or supplement thereto) are the statements set forth in the table in
the first, second, eighth and ninth paragraphs under the caption "Underwriting"
in the Prospectus; and the Underwriters confirm that such statements are
correct.
(d) NOTIFICATIONS AND OTHER INDEMNIFICATION PROCEDURES. Promptly after
receipt by an indemnified party under this Section 7 of notice of the
commencement of any action, such indemnified party will, if a claim in respect
thereof is to be made against an indemnifying party under this Section 7, notify
the indemnifying party in writing of the commencement thereof, but the omission
so to notify the indemnifying party will not relieve it from any liability which
it may have to any indemnified party for contribution or otherwise than under
the indemnity agreement contained in this Section 7 or to the extent it is not
prejudiced as a proximate result of such failure. In case any such action is
brought against any indemnified party and such indemnified party seeks or
intends to seek indemnity from an indemnifying party, the indemnifying party
will be entitled to participate in, and, to the extent that it shall elect,
jointly with all other indemnifying parties similarly notified, by written
notice delivered to the indemnified party promptly after receiving the aforesaid
notice from such indemnified party, to assume the defense thereof with counsel
reasonably satisfactory to such indemnified party; provided, however, if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that a conflict
23
<PAGE>
may arise between the positions of the indemnifying party and the indemnified
party in conducting the defense of any such action or that there may be legal
defenses available to it and/or other indemnified parties which are different
from or additional to those available to the indemnifying party, the indemnified
party or parties shall have the right to select separate counsel to assume such
legal defenses and to otherwise participate in the defense of such action on
behalf of such indemnified party or parties. Upon receipt of notice from the
indemnifying party to such indemnified party of such indemnifying party's
election so to assume the defense of such action and approval by the indemnified
party of counsel, the indemnifying party will not be liable to such indemnified
party under this Section 7 for any legal or other expenses subsequently incurred
by such indemnified party in connection with the defense thereof unless (i) the
indemnified party shall have employed separate counsel in accordance with the
proviso to the next preceding sentence (it being understood, however, that the
indemnifying party shall not be liable for the expenses of more than one
separate counsel (together with local counsel), approved by the indemnifying
party (Robertson Stephens in the case of Section 7(b) and Section 8),
representing the indemnified parties who are parties to such action), (ii) the
indemnifying party shall not have employed counsel reasonably satisfactory to
the indemnified party to represent the indemnified party within a reasonable
time after notice of commencement of the action, or (iii) the indemnifying party
has authorized the employment of counsel for the indemnified party at the
expense of the indemnifying party, in each of which cases the reasonable fees
and expenses of counsel shall be at the expense of the indemnifying party.
(e) SETTLEMENTS. The indemnifying party under this Section 7 shall not
be liable for any settlement of any proceeding effected without its written
consent, which consent shall not be unreasonably withheld, but if settled with
such consent or if there be a final judgment for the plaintiff, the indemnifying
party agrees to indemnify the indemnified party against any loss, claim, damage,
liability or expense by reason of such settlement or judgment. Notwithstanding
the foregoing sentence, if at any time an indemnified party shall have requested
an indemnifying party to reimburse the indemnified party for fees and expenses
of counsel as contemplated by Section 7(d) hereof, the indemnifying party agrees
that it shall be liable for any settlement of any proceeding effected without
its written consent if (i) such settlement is entered into more than 60 days
after receipt by such indemnifying party of the aforesaid request and (ii) such
indemnifying party shall not have reimbursed the indemnified party in accordance
with such request prior to the date of such settlement. No indemnifying party
shall, without the prior written consent of the indemnified party, effect any
settlement, compromise or consent to the entry of judgment in any pending or
threatened action, suit or proceeding in respect of which any indemnified party
is or could have been a party and indemnity was or could have been sought
hereunder by such indemnified party, unless such settlement, compromise or
consent includes (i) an unconditional release of such indemnified party from all
liability on claims that are the subject matter of such action, suit or
proceeding and (ii) does not include a statement as to or an admission of fault,
culpability or a failure to act by or on behalf of any indemnified party.
(f) CONTRIBUTION. If the indemnification provided for in this Section 7
is unavailable to or insufficient to hold harmless an indemnified party under
Section 7(a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) then each
indemnifying party shall contribute to the aggregate amount paid or payable by
such indemnified party in such proportion as is appropriate to reflect the
relative benefits received by such party on the one hand and the Underwriters on
the other from the offering of the Shares. If,
24
<PAGE>
however, the allocation provided by the immediately preceding sentence is not
permitted by applicable law then each indemnifying party shall contribute to
such amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the such party on the one hand and the Underwriters on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities, (or actions or proceedings in respect thereof),
as well as any other relevant equitable considerations. The relative fault shall
be determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company or the "control"
Shareholders on the one hand or the Underwriters on the other and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.
The Company and Underwriters agree that it would not be just
and equitable if contributions pursuant to this Section 7(f) were determined by
pro rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation which does not take account
of the equitable considerations referred to above in this Section 7(f). The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages or liabilities (or actions or proceedings in respect thereof)
referred to above in this Section 7(f) shall be deemed to include any legal or
other expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this subsection (f), (i) no Underwriter shall be required to
contribute any amount in excess of the underwriting discounts and commissions
applicable to the Shares purchased by such Underwriter and (ii) no person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations in
this Section 7(f) to contribute are several in proportion to their respective
underwriting obligations and not joint.
(g) TIMING OF ANY PAYMENTS OF INDEMNIFICATION. Any losses, claims,
damages, liabilities or expenses for which an indemnified party is entitled to
indemnification or contribution under this Section 7 shall be paid by the
indemnifying party to the indemnified party as such losses, claims, damages,
liabilities or expenses are incurred, but in all cases, no later than forty-five
(45) days of invoice to the indemnifying party.
(h) SURVIVAL. The indemnity and contribution agreements contained in
this Section 7 and the representation and warranties set forth in this Agreement
shall remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter, the Company, its directors or officers or any persons
controlling the Company, (ii) acceptance of any Shares and payment therefor
hereunder, and (iii) any termination of this Agreement. A successor to any
Underwriter, or to the Company, its directors or officers, or any person
controlling the Company, shall be entitled to the benefits of the indemnity,
contribution and reimbursement agreements contained in this Section 7.
(i) ACKNOWLEDGEMENTS OF PARTIES. The parties to this Agreement hereby
acknowledge that they are sophisticated business persons who were represented by
counsel during the negotiations regarding the provisions hereof including,
without limitation, the provisions of this
25
<PAGE>
Section 7, and are fully informed regarding said provisions. They further
acknowledge that the provisions of this Section 7 fairly allocate the risks in
light of the ability of the parties to investigate the Company and its business
in order to assure that adequate disclosure is made in the Registration
Statement and Prospectus as required by the Securities Act and the Exchange Act.
SECTION 8. DEFAULT OF ONE OR MORE OF THE SEVERAL UNDERWRITERS. If, on
the First Closing Date or the Second Closing Date, as the case may be, any one
or more of the several Underwriters shall fail or refuse to purchase Shares that
it or they have agreed to purchase hereunder on such date, and the aggregate
number of Common Shares which such defaulting Underwriter or Underwriters agreed
but failed or refused to purchase does not exceed 10% of the aggregate number of
the Shares to be purchased on such date, the other Underwriters shall be
obligated, severally, in the proportions that the number of Firm Shares set
forth opposite their respective names on SCHEDULE A bears to the aggregate
number of Firm Shares set forth opposite the names of all such non-defaulting
Underwriters, or in such other proportions as may be specified by the
Representatives with the consent of the non-defaulting Underwriters, to purchase
the Shares which such defaulting Underwriter or Underwriters agreed but failed
or refused to purchase on such date. If, on the First Closing Date or the Second
Closing Date, as the case may be, any one or more of the Underwriters shall fail
or refuse to purchase Shares and the aggregate number of Shares with respect to
which such default occurs exceeds 10% of the aggregate number of Shares to be
purchased on such date, and arrangements satisfactory to the Representatives and
the Company for the purchase of such Shares are not made within 48 hours after
such default, this Agreement shall terminate without liability of any party to
any other party except that the provisions of Section 5, and Section 7 shall at
all times be effective and shall survive such termination; provided, however,
that the Company shall not be obligated to pay any expenses of, or any other
amounts to, or to indemnify, any Underwriter who has defaulted in its
obligations under this Agreement. In any such case either the Representatives or
the Company shall have the right to postpone the First Closing Date or the
Second Closing Date, as the case may be, but in no event for longer than seven
days in order that the required changes, if any, to the Registration Statement
and the Prospectus or any other documents or arrangements may be effected.
As used in this Agreement, the term "Underwriter" shall be
deemed to include any person substituted for a defaulting Underwriter under this
Section 8. Any action taken under this Section 8 shall not relieve any
defaulting Underwriter from liability in respect of any default of such
Underwriter under this Agreement.
SECTION 9. TERMINATION OF THIS AGREEMENT. This Agreement may be
terminated by the Representatives by notice given to the Company if (a) at any
time after the execution and delivery of this Agreement and prior to the First
Closing Date (i) trading or quotation in any of the Company's securities shall
have been suspended or limited by the Commission or by the Nasdaq Stock Market,
or trading in securities generally on either the Nasdaq Stock Market or the New
York Stock Exchange shall have been suspended or limited, or minimum or maximum
prices shall have been generally established on any of such stock exchanges by
the Commission or the National Association of Securities Dealers, LLC; (ii) a
general banking moratorium shall have been declared by any of federal, New York
or California authorities; (iii) there shall have occurred any outbreak or
escalation of national or international hostilities or any crisis or
26
<PAGE>
calamity, or any change in the United States or international financial markets,
or any substantial change or development involving a prospective change in
United States' or international political, financial or economic conditions, as
in the judgment of the Representatives is material and adverse and makes it
impracticable or inadvisable to market the Common Shares in the manner and on
the terms contemplated in the Prospectus or to enforce contracts for the sale of
securities; or (iv) in the judgment of the Representatives there shall have
occurred any Material Adverse Change; or (b) in the case of any of the events
specified 9(a)(i)-(v), such event singly or together with any other event, makes
it, in your judgement, impracticable or inadvisable to market the Common Shares
in the manner and on the terms contemplated in the Prospectus. Any termination
pursuant to this Section 9 shall be without liability on the part of (x) the
Company to any Underwriter, except that the Company shall be obligated to
reimburse the expenses of the Representatives and the Underwriters pursuant to
Sections 5 and 6 hereof, (y) any Underwriter to the Company or any person
controlling the Company, or (z) of any party hereto to any other party except
that the provisions of Section 7 shall at all times be effective and shall
survive such termination.
SECTION 10. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY. The
respective indemnities, agreements, representations, warranties and other
statements of the Company or any person controlling the company, of its
officers, and of the several Underwriters set forth in or made pursuant to this
Agreement will remain in full force and effect, regardless of any investigation
made by or on behalf of any Underwriter or the Company or any of its or their
partners, officers or directors or any controlling person, as the case may be,
and will survive delivery of and payment for the Shares sold hereunder and any
termination of this Agreement.
SECTION 11. NOTICES. All communications hereunder shall be in writing
and shall be mailed, hand delivered or telecopied and confirmed to the parties
hereto as follows:
If to the Representatives:
FLEETBOSTON ROBERTSON STEPHENS INC.
555 California Street
San Francisco, California 94104
Facsimile: (415) 676-2675
Attention: General Counsel
If to the Company:
VISIBLE GENETICS INC.
700 Bay Street, Suite 1000
Toronto, Ontario
Canada M5G 126
Facsimile: (416) 813-3250
Attention: President
Any party hereto may change the address for receipt of communications by giving
written notice to the others.
27
<PAGE>
SECTION 12. SUCCESSORS. This Agreement will inure to the benefit of and
be binding upon the parties hereto, including any substitute Underwriters
pursuant to Section 8 hereof, and to the benefit of the employees, officers and
directors and controlling persons referred to in Section 7, and to their
respective successors and personal representatives, and no other person will
have any right or obligation hereunder. The term "successors" shall not include
any purchaser of the Shares as such from any of the Underwriters merely by
reason of such purchase.
SECTION 13. PARTIAL UNENFORCEABILITY. The invalidity or
unenforceability of any Section, paragraph or provision of this Agreement shall
not affect the validity or enforceability of any other Section, paragraph or
provision hereof. If any Section, paragraph or provision of this Agreement is
for any reason determined to be invalid or unenforceable, there shall be deemed
to be made such minor changes (and only such minor changes) as are necessary to
make it valid and enforceable.
SECTION 14. GOVERNING LAW PROVISIONS.
(a) GOVERNING LAW. This agreement shall be governed by and construed in
accordance with the internal laws of the state of New York applicable to
agreements made and to be performed in such state.
(b) CONSENT TO JURISDICTION. Any legal suit, action or proceeding
arising out of or based upon this Agreement or the transactions contemplated
hereby ("Related Proceedings") may be instituted in the federal courts of the
United States of America located in the City and County of San Francisco or the
courts of the State of California in each case located in the City and County of
San Francisco (collectively, the "Specified Courts"), and each party irrevocably
submits to the exclusive jurisdiction (except for proceedings instituted in
regard to the enforcement of a judgment of any such court (a "Related
Judgment"), as to which such jurisdiction is non-exclusive) of such courts in
any such suit, action or proceeding. Service of any process, summons, notice or
document by mail to such party's address set forth above shall be effective
service of process for any suit, action or other proceeding brought in any such
court. The parties irrevocably and unconditionally waive any objection to the
laying of venue of any suit, action or other proceeding in the Specified Courts
and irrevocably and unconditionally waive and agree not to plead or claim in any
such court that any such suit, action or other proceeding brought in any such
court has been brought in an inconvenient forum. Each party not located in the
United States irrevocably appoints CT Corporation System, which currently
maintains a San Francisco office at 49 Stevenson Street, San Francisco,
California 94105, United States of America, as its agent to receive service of
process or other legal summons for purposes of any such suit, action or
proceeding that may be instituted in any state or federal court in the City and
County of San Francisco.
(c) WAIVER OF IMMUNITY. With respect to any Related Proceeding, each
party irrevocably waives, to the fullest extent permitted by applicable law, all
immunity (whether on the basis of sovereignty or otherwise) from jurisdiction,
service of process, attachment (both before and after judgment) and execution to
which it might otherwise be entitled in the Specified Courts, and with respect
to any Related Judgment, each party waives any such immunity in the Specified
Courts or any other court of competent jurisdiction, and will not raise or claim
or cause to be pleaded any such immunity at or in respect of any such Related
Proceeding or Related
28
<PAGE>
Judgment, including, without limitation, any immunity pursuant to the United
States Foreign Sovereign Immunities Act of 1976, as amended.
SECTION 15. GENERAL PROVISIONS. This Agreement constitutes the entire
agreement of the parties to this Agreement and supersedes all prior written or
oral and all contemporaneous oral agreements, understandings and negotiations
with respect to the subject matter hereof. This Agreement may be executed in two
or more counterparts, each one of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement may not be amended or modified unless in writing by all of the
parties hereto, and no condition herein (express or implied) may be waived
unless waived in writing by each party whom the condition is meant to benefit.
Section headings herein are for the convenience of the parties only and shall
not affect the construction or interpretation of this Agreement.
SECTION 16. DISTRIBUTION OF SHARES IN CANADA. The Representatives
hereby agree on behalf of the Underwriters that during the distribution of the
Shares, and for a period of 90 days thereafter, the Underwriters shall offer the
Shares for sale in Canada only pursuant to exemptions from the prospectus
requirements of applicable securities legislation through dealers appropriately
registered under such laws or pursuant to exemptions from the applicable
registered dealer requirements.
[The remainder of this page has been intentionally left blank.]
29
<PAGE>
If the foregoing is in accordance with your understanding of
our agreement, please sign and return to the Company the enclosed copies hereof,
whereupon this instrument, along with all counterparts hereof, shall become a
binding agreement in accordance with its terms.
Very truly yours,
VISIBLE GENETICS INC.
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
The foregoing Underwriting Agreement is hereby confirmed and
accepted by the Representatives as of the date first above written.
FLEETBOSTON ROBERTSON STEPHENS INC.
WARBURG DILLON READ LLC
PAINEWEBER INCORPORATED
ROTH CAPITAL PARTNERS, INC.
On their behalf and on behalf of each of the several underwriters named in
SCHEDULE A hereto.
BY FLEETBOSTON ROBERTSON STEPHENS INC.
By:
-------------------------------------------
Mitch Whiteford
30
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
NUMBER OF FIRM COMMON
UNDERWRITERS SHARES TO BE PURCHASED
- ----------------------------------------- ----------------------------------
<S> <C>
FLEETBOSTON ROBERTSON STEPHENS INC....... [___]
WARBURG DILLON READ LLC.................. [___]
PAINEWEBER INCORPORATED.................. [___]
ROTH CAPITAL PARTNERS, INC............... [___]
Total........................... 2,000,000
</TABLE>
S-A
<PAGE>
EXHIBIT A
FORM OF LOCK-UP AGREEMENT
FleetBoston Robertson Stephens Inc.
Warburg Dillon Read LLC
PaineWeber Incorporated
Roth Capital Partners
As Representatives of the Several Underwriters
c/o FleetBoston Robertson Stephens Inc.
555 California Street, Suite 2600
San Francisco, California 94104
RE: Visible Genetics Inc. (the "Company")
Ladies & Gentlemen:
The undersigned is an owner of record or beneficially of
certain Common Shares of the Company ("Common Shares") or securities convertible
into or exchangeable or exercisable for Common Shares. The Company proposes to
carry out a public offering of Common Shares (the "Offering") for which you will
act as the representatives (the "Representatives") of the underwriters. The
undersigned recognizes that the Offering will be of benefit to the undersigned
and will benefit the Company by, among other things, raising additional capital
for its operations. The undersigned acknowledges that you and the other
underwriters are relying on the representations and agreements of the
undersigned contained in this letter in carrying out the Offering and in
entering into underwriting arrangements with the Company with respect to the
Offering.
In consideration of the foregoing, the undersigned hereby
agrees that the undersigned will not offer to sell, contract to sell, or
otherwise sell, dispose of, loan, pledge or grant any rights with respect to
(collectively, a "Disposition") any Common Shares, any options or warrants to
purchase any Common Shares or any securities convertible into or exchangeable
for Common Shares (collectively, "Securities") now owned or hereafter acquired
directly by such person or with respect to which such person has or hereafter
acquires the power of disposition, otherwise than (i) as a bona fide gift or
gifts, provided the donee or donees thereof agree in writing to be bound by this
restriction, (ii) as a distribution to partners or shareholders of such person,
provided that the distributees thereof agree in writing to be bound by the terms
of this restriction, (iii) with respect to sales or purchases of Common Shares
acquired on the open market, (iv) by will or the laws of descent, or (v) with
the prior written consent of FleetBoston Robertson Stephens Inc. The foregoing
restrictions will terminate after the close of trading of the Common Shares on
the 90th day after (and including) the day the Common Shares commenced trading
on the Nasdaq National Market (the "Lock-Up Period"). The foregoing restriction
has been expressly agreed to preclude the holder of the Securities from engaging
in any hedging or other transaction which is designed to or reasonably expected
to lead to or result in a Disposition of Securities during the Lock-Up Period,
even if such Securities would be disposed of by someone other than such holder.
Such prohibited hedging or other transactions would include,
A-1
<PAGE>
without limitation, any short sale (whether or not against the box) or any
purchase, sale or grant of any right (including, without limitation, any put or
call option) with respect to any Securities or with respect to any security
(other than a broad-based market basket or index) that included, relates to or
derives any significant part of its value from Securities. The undersigned also
agrees and consents to the entry of stop transfer instructions with the
Company's transfer agent and registrar against the transfer of Common Shares or
Securities held by the undersigned except in compliance with the foregoing
restrictions.
This agreement is irrevocable and will be binding on the
undersigned and the respective successors, heirs, personal representatives, and
assigns of the undersigned. In the event the Offering has not occurred on or
before June 30, 2000, this Lock-Up Agreement shall be of no further force or
effect.
Dated
--------------------------------------------------------
-------------------------------------------------------------
Printed Name of Holder
By:
----------------------------------------------------------
Signature
-------------------------------------------------------------
Printed Name of Person Signing
(and indicate capacity of person signing if signing as
custodian, trustee, or on behalf of an entity)
A-2
<PAGE>
EXHIBIT B-1
MATTERS TO BE COVERED IN THE OPINION OF COMPANY'S U.S. COUNSEL
(i) Each of Applied Sciences, Inc. ("ASI") and Visible Genetics Corp.
("VGC") has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation;
(ii) Each of ASI and VGC has the corporate power and authority to own,
lease and operate its properties and to conduct its business as
described in the Prospectus;
(iii) Each of ASI and VGC is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction, if any, in
which the ownership or leasing of its properties or the conduct of its
business requires such qualification, except where the failure to be so
qualified or be in good standing would not reasonably be expected to
have a Material Adverse Effect.
(iv) To such counsel's knowledge, the issued and outstanding capital shares
of the Company outstanding prior to the issuance of the Shares will not
have been issued in violation of or subject to any [NON-STATUTORY CO-SALE
RIGHT, RIGHT OF FIRST REFUSAL OR OTHER SIMILAR RIGHT, OTHER THAN ANY
REGISTRATION RIGHTS DESCRIBED IN OPINION (xiv) HEREOF];
(v) All issued and outstanding shares of capital stock of each of ASI
and VGC have been duly authorized and validly issued and are fully paid
and nonassessable, and, to such counsel's knowledge, have not been
issued in violation of or subject to any preemptive right arising under
the certificate of incorporation or applicable law, co-sale right, right
of first refusal or other similar right, other than any registration
rights described in Opinion (xiv) hereof and except as otherwise
described in the Prospectus to the knowledge of the Company are owned by
the Company free and clear of any pledge, lien, security interest,
encumbrance, claim or equitable interest;
(vi) This Agreement is enforceable in accordance with its terms, except
as rights to indemnification hereunder may be limited by applicable law
and except as enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws relating to or affecting
creditors' rights generally or by general equitable principles (whether
relief is sought in a proceeding at law or in equity);
(vii) The Registration Statement has become effective under the Act and,
to such counsel's knowledge, no stop order suspending the effectiveness
of the Registration Statement has been issued and no proceedings for
that purpose have been instituted or are pending or threatened under the
Securities Act;
(viii) The Registration Statement and the Prospectus, and each amendment
or supplement thereto (other than the financial statements (including
supporting schedules) and financial data derived therefrom as to which
such counsel need express no opinion), as of the effective date of the
Registration Statement, complied as to form in all material respects
with the requirements of the Act and the applicable Rules and
Regulations; and
<PAGE>
each of the Incorporated Documents (other than the financial statements
(including supporting schedules) and the financial data derived
therefrom as to which such counsel need express no opinion) complied
when filed pursuant to the Exchange Act as to form in all material
respects with the requirements of the Act and the Rules and Regulations
of the Exchange Act and the applicable rules and regulations of the
Commission thereunder;
(ix) The description in the Registration Statement and the Prospectus of
U.S. statutes, other than those statutes regarding the FDA or
intellectual property, are accurate and fairly present the information
required to be presented by the Securities Act;
(x) To such counsel's knowledge, there are no agreements, contracts,
leases or documents to which the Company is a party of a character
required to be described or referred to in the Registration Statement or
Prospectus or any Incorporated Document or to be filed as an exhibit to
the Registration Statement or any Incorporated Document which are not
described or referred to therein or filed as required;
(xi) The performance of this Agreement and the consummation of the
transactions herein contemplated (other than performance of the
Company's indemnification obligations hereunder, concerning which no
opinion need be expressed) will not to such counsel's knowledge, result
in a material breach or violation of any of the terms and provisions of,
or constitute a default under, any bond, debenture, note or other
evidence of indebtedness, or any lease, contract, indenture, mortgage,
deed of trust, loan agreement, joint venture or other agreement or
instrument filed as an exhibit to the Annual Report on Form 20-F filed
for the year ended December 31, 1999 to which the Company is a party or
by which its properties are bound, or any applicable statute, rule or
regulation known to such counsel or, to such counsel's knowledge, any
order, writ or decree of any court, government or governmental agency or
body having jurisdiction over the Company or any of its subsidiaries, or
over any of their properties or operations;
(xii) No consent, approval, authorization or order of or qualification
with any court, government or governmental agency or body having
jurisdiction over the Company or any of its subsidiaries, or over any of
their properties or operations is necessary in connection with the
consummation by the Company of the transactions herein contemplated,
except (i) such as have been obtained under the Securities Act, (ii)
such as may be required under state or other securities or Blue Sky laws
in connection with the purchase and the distribution of the Shares by
the Underwriters, (iii) such as may be required by the National
Association of Securities Dealers, LLC and (iv) such as may be required
under the federal or provincial laws of Canada;
(xiii) To such counsel's knowledge, there are no legal or governmental
proceedings pending or threatened against the Company or any of its
subsidiaries of a character required to be disclosed in the Registration
Statement or the Prospectus [or any Incorporated Document] by the
Securities Act or by the Exchange Act or the applicable rules and
regulations of the Commission thereunder, other than those described
therein; and
<PAGE>
(xiv) To such counsel's knowledge, except as set forth in the
Registration Statement and Prospectus and any Incorporated Document, no
holders of Company Shares or other securities of the Company have
registration rights with respect to securities of the Company and,
except as set forth in the Registration Statement and Prospectus, all
holders of securities of the Company having rights known to such counsel
to registration of such shares of Company Shares or other securities,
because of the filing of the Registration Statement by the Company have,
with respect to the offering contemplated thereby, waived such rights or
such rights have expired by reason of lapse of time following
notification of the Company's intent to file the Registration Statement
or are not exercisable in accordance with their terms by virtue of the
Underwriter's determination that marketing factors do not permit the
securities owned by such persons to be included in the Registration
Statement or have included securities in the Registration Statement
pursuant to the exercise of and in full satisfaction of such rights.
(xv) The Company is not and, after giving effect to the offering and the
sale of the Shares and the application of the proceeds thereof as described
in the Prospectus, will not be, an "investment company" as such term is
defined in the Investment Company Act of 1940, as amended. [SUCH COUNSEL
MAY RELY ON A CERTIFICATE OF THE APPROPRIATE OFFICERS OF THE COMPANY AS TO
THE MANNER IN WHICH THE COMPANY'S FUNDS ARE AND WILL BE INVESTED.]
(xx) Each document filed pursuant to the Exchange Act (other than the
financial statements and supporting schedules included therein, as to
which no opinion need be rendered) and incorporated or deemed to be
incorporated by reference in the Prospectus complied when so filed as to
form in all material respects with the Exchange Act; and such counsel
has no reason to believe that any of such documents, when they were so
filed, contained an untrue statement of a material fact or omitted to
state a material fact necessary in order to make the statements therein,
in the light of the circumstances under which they were made when such
documents were filed, not misleading.
Additional Matters to be Covered in the Opinion of Baer Marks & Upham LLP
(xxi) The statements contained in the Prospectus and Registration
Statement under the caption "RISK FACTORS - U.S. investors in our
company could suffer adverse tax consequences if we are characterized as
a passive foreign investment company" and in Item 7 of Part I of the
Annual Report on Form 20-F filed for the year ended December 31, 1999,
insofar as they refer to statements of law of the United States or legal
conclusions thereunder, are correct in all material respects and present
fairly the information described therein.
In addition, such counsel shall state that such counsel has
participated in conferences with officials and other representatives of the
Company, the Representatives, Underwriters' counsel and the independent
certified public accountants of the Company, at which such conferences the
contents of the Registration Statement and Prospectus and related matters were
discussed, and although they have not verified the accuracy or completeness of
the statements contained in the Registration Statement or the Prospectus,
nothing has come to the attention of such counsel which leads them to believe
that, at the time the Registration Statement became effective and at all times
subsequent thereto up to and on the First Closing Date or Second Closing Date,
as the case may be, the Registration Statement and any amendment or supplement
thereto and any Incorporated Document, when such documents became effective or
were filed with the Commission (other than the financial statements including
supporting schedules and other financial and statistical information derived
therefrom, as to which such counsel need express no comment) contained any
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein not misleading,
or at the First Closing Date or the Second Closing Date, as the case may be, the
Registration Statement, the Prospectus and any amendment or supplement thereto
and any Incorporated Document (except as aforesaid) contained any untrue
statement of a material fact or omitted to state a material fact necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading. Such counsel shall also state that the conditions for
the use of Form F-3 set forth in the General Instructions thereto have been
satisfied.
<PAGE>
EXHIBIT B-2
MATTERS TO BE COVERED IN THE OPINION OF CANADIAN COUNSEL TO THE COMPANY
(i) The Company is a corporation amalgamated under the laws of the
Province of Ontario. There are no restrictions on the corporate power and
capacity of the Company to own and lease property and assets and to carry on
business.
(ii) The Company's authorized equity capitalization consists of an
unlimited number of Common Shares and an unlimited number of Preferred Shares,
issuable in series, of which 33,950 Series A Convertible Preferred Shares (the
"Series A Shares") have been authorized for issuance.
(iii) The Common Shares to be issued by the Company pursuant to the
terms of the Underwriting Agreement have been duly authorized and, upon issuance
and delivery against payment therefor in accordance with the terms of the
Underwriting Agreement, will be validly issued and outstanding as fully paid and
non-assessable and will not have been issued in violation of, or subject to, any
pre-emptive right arising under the Company's charter or by-laws or under the
BUSINESS CORPORATIONS ACT (Ontario).
(iv) There are no restrictions on the corporate power and capacity of
the Company to enter into the Underwriting Agreement or to carry out its
obligations under the Underwriting Agreement. The execution and delivery of the
Underwriting Agreement and the consummation of the transactions contemplated in
the Underwriting Agreement have been duly authorized by all necessary
corporation action on the part of the Company.
(v) The Underwriting Agreement has been duly executed by the Company.
(vi) The performance of the Underwriting Agreement and the consummation
of the transactions contemplated thereunder in accordance with the terms of the
Underwriting Agreement do not (a) result in any violation of the Company's
charter or by-laws, (b) result in a violation of any law of the Province of
Ontario (or the federal law of Canada applicable therein) applicable to the
Company and applicable to transactions such as those provided for in the
Underwriting Agreement, or (c) to the knowledge of Osler, Hoskin & Harcourt LLP,
any judgment, order or decree binding upon the Company of any court, regulatory
body, administrative agency or governmental body in Canada having jurisdiction
over the Company.
(vii) No consent, approval, authorization, licence or order of, or
filing with, any court, government, governmental agency or body in Canada having
jurisdiction over the Company is required to be obtained or made by the Company
under the laws of the Province of Ontario or the federal laws of Canada
applicable therein, for the valid authorization, issuance, sale and delivery by
the Company of
<PAGE>
the Shares to be sold by it pursuant to the Underwriting Agreement, or the
performance by the Company of the Underwriting Agreement or the consummation by
the Company of the transactions contemplated at the date hereof by the
Underwriting Agreement, in each case in respect of the distribution of the
Shares by the Underwriters outside of Canada.
(viii) The provisions of the Common Shares and the Series A Shares
conform, in all material respects, with the descriptions thereof contained in
the Prospectus under the heading "Description of Capital Shares".
(ix) The form of share certificate for the Common Shares has been duly
approved by the Company and complies with the provisions of the BUSINESS
CORPORATIONS ACT (Ontario).
(x) The statements contained in the Prospectus under the headings "Risk
Factors - We may require approval of the holders of our Series A preferred
shares in order to obtain certain types of financing and we may be prevented
from obtaining these types of financing by the holders of our Series A preferred
shares", "- 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 of their investment", "-
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",
"Dividend Policy" and "Description of Capital Shares - Classified Board", in
each case , insofar as such statements purport to describe certain provisions of
the Company's charter or by-laws, are accurate in all material respects.
(xi) The disclosure contained in the Prospectus under the heading
"Service and Enforcement of Legal Process" and in Item 6 of Part I of the Annual
Report of the Company on Form 20-F filed for the year ended December 31, 1999
(the "Annual Report"), in each case, insofar as such disclosure describes or
summarizes matters of Canadian law or constitutes conclusions of Canadian law,
fairly summarizes such matters of law or conclusions of law.
(xii) The statements contained in Item 7 of Part I of the Annual Report
under the heading "Canadian Federal Income Tax Considerations", insofar as they
refer to statements of law of Canada or legal conclusions thereunder fairly
describe the principal Canadian federal income tax consequences under the INCOME
TAX ACT (Canada) to a Holder (as defined therein) of Common Shares and a Series
A Holder (as defined therein) of Series A preferred shares of the Company.
(xiii) No stamp or other issuance or transfer taxes or duties are
payable by or on behalf of the Underwriters to the Canadian government or to the
provincial government of Ontario in connection with (A) the issuance, sale and
delivery by
<PAGE>
the Company to or for the respective accounts of the Underwriters of the Common
Shares or (B) the sale and delivery outside Canada by the Underwriters of the
Common Shares to the initial purchasers thereof in the manner contemplated in
the Underwriting Agreement.
<PAGE>
EXHIBIT C
MATTERS TO BE COVERED IN THE OPINION OF
INTELLECTUAL PROPERTY COUNSEL FOR THE COMPANY
Such counsel are familiar with the technology used by the
Company in its business and the manner of its use thereof and have read the
Registration Statement and the Prospectus, including particularly the portions
of the Registration Statement and the Prospectus referring to patents, trade
secrets, trademarks, service marks or other proprietary information or materials
and:
(i) As to the statements under the captions "Risk Factors -- If we are
unable to successfully protect our intellectual property, our
competitive position will be harmed." "Risk Factors -- Others could
claim that we infringe on their intellectual property rights, which may
result in costly, time consuming litigation" and "Business --
Proprietary Rights," nothing has come to the attention of such counsel
which caused them to believe that the above-mentioned sections of the
Registration Statement and any amendment or supplement thereto made
available and reviewed by such counsel, at the time the Registration
Statement became effective and at all times subsequent thereto up to
and on the Closing Date and on any later date on which Option Shares
are to be purchased, contained any untrue statement of a material fact
or omitted to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading;
(ii) Except as described in the Prospectus, such counsel knows of no
material action, suit, claim or proceeding relating to patents, patent
rights or licenses, trademarks or trademark rights, copyrights,
collaborative research, licenses or royalty arrangements or agreements
or trade secrets, know-how or proprietary techniques, including
processes and substances, owned by or affecting the business or
operations of the Company which are pending or threatened against the
Company or any of its officers or directors.
(iii) The Company is listed in the records of the United States Patent
and Trademark Office as the holder of record of the patents listed on a
schedule to such opinion (the "Patents") and each of the applications
listed on a schedule to such opinion (the "Applications"). To the
knowledge of such counsel, there are no claims of third parties to any
ownership interest or lien with respect to any of the Patents or
Applications. Such counsel is not aware of any material defect in form
in the preparation or filing of the Applications on behalf of the
Company. To the knowledge of such counsel, the Applications are being
pursued by the Company. To the knowledge of such counsel, the Company
owns as its sole property the Patents and pending Applications;
(iv) The Company is listed in the records of the appropriate foreign
offices as the sole holder of record of the foreign patents listed on a
schedule to such opinion (the "Foreign Patents") and each of the
applications listed on a schedule to such opinion (the "Foreign
Applications"). Such counsel knows of no claims of third parties to any
ownership interest or lien with respect to the Foreign Patents or
Foreign Applications. Such counsel is not aware of any material defect
of form in the preparation or filing of
C-1
<PAGE>
the Foreign Applications on behalf of the Company. To the knowledge of
such counsel, the Foreign Applications are being pursued by the
Company. To the knowledge of such counsel, the Company owns as its sole
property the Foreign Patents and pending Foreign Applications; and
(v) Such counsel knows of no reason why the Patents or Foreign Patents
are not valid as issued. Such counsel has no knowledge of any reason
why any patent to be issued as a result of any Application or Foreign
Application would not be valid or would not afford the Company useful
patent protection with respect thereto.
C-2
<PAGE>
EXHIBIT D
MATTERS TO BE COVERED IN THE OPINION OF UNDERWRITERS' COUNSEL
(i) The [Firm Shares] [Option Shares] have been duly authorized and,
upon issuance and delivery and payment therefor in accordance with the
terms of the Underwriting Agreement, will be validly issued, fully paid
and non-assessable.
(ii) The Registration Statement complied as to form in all material
respects with the requirements of the Act; the Registration Statement
has become effective under the Act and, to such counsel's knowledge, no
stop order proceedings with respect thereto have been instituted or
threatened or are pending under the Securities Act.
(iii) The Underwriting Agreement has been duly authorized, executed and
delivered by the Company.
Such counsel shall state that such counsel has reviewed the
opinions addressed to the Representatives from each dated the date hereof, and
furnished to you in accordance with the provisions of the Underwriting
Agreement. Such opinions appear on their face to be appropriately responsive to
the requirements of the Underwriting Agreement.
In addition, such counsel shall state that such counsel has
participated in conferences with officials and other representatives of the
Company, the Representatives, Underwriters' Counsel and the independent
certified public accountants of the Company, at which such conferences the
contents of the Registration Statement and Prospectus and related matters were
discussed, and although they have not verified the accuracy or completeness of
the statements contained in the Registration Statement or the Prospectus,
nothing has come to the attention of such counsel which leads them to believe
that, at the time the Registration Statement became effective and at all times
subsequent thereto up to and on the First Closing Date or Second Closing Date,
as the case may be, the Registration Statement and any amendment or supplement
thereto and any Incorporated Document, when such documents became effective or
were filed with the Commission (other than the financial statements including
supporting schedules and other financial and statistical information derived
therefrom, as to which such counsel need express no comment) contained any
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein not misleading,
or at the First Closing Date or the Second Closing Date, as the case may be, the
Registration Statement, the Prospectus and any amendment or supplement thereto
and any Incorporated Document (except as aforesaid) contained any untrue
statement of a material fact or omitted to state a material fact necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading.
D-1
<PAGE>
EXHIBIT E
MATTERS TO BE COVERED IN THE OPINION OF REGULATORY COUNSEL
Such counsel are familiar with the nature of the Company's
business and have read the Registration Statement and the Prospectus, including
particularly the portions of the Registration Statement and the Prospectus
referring to regulatory matters and:
As to the statements under the captions "Risk Factors -- We may not
receive approval of the FDA or foreign regulatory authorities for our
HIV OpenGene System and, in the future, other HIV products, and,
therefore, we may not be able to sell our HIV products to the clinical
diagnostic market in the United States or abroad," "Risk Factors --
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," and
"Business -- Regulation by the FDA and Other Government Agencies,"
nothing has come to the attention of such counsel which caused them to
believe that the above-mentioned sections of the Registration Statement
and any amendment or supplement thereto made available and reviewed by
such counsel, at the time the Registration Statement became effective
and at all times subsequent thereto up to and on the Closing Date and
on any later date on which Option Shares are to be purchased, contained
any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
E-1
<PAGE>
EXHIBIT 23.3
PRICEWATERHOUSECOOPERS
<TABLE>
<S> <C>
PRICEWATERHOUSECOOPERS LLP
CHARTERED ACCOUNTANTS
5700 Yonge Street
Suite 1900
North York Ontario
Canada M2M 4K7
Telephone +1 (416) 218 1500
Facsimile +1 (416) 218-1499
Direct Tel. +1 (416)
218-1432
Direct Fax +1 (416) 218-1499
March 29, 2000
</TABLE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the incorporation in the Pre-Effective Amendment No. 1
to Registration Statement on Form F-3 of Visible Genetics Inc. (the "Company")
dated March 29, 2000, of our report dated February 18, 2000 relating to our
audit of the Company's consolidated balance sheets as at December 31, 1999 and
1998 and the consolidated statements of operations, deficit, comprehensive loss,
and cash flows for the years ended December 31, 1999, 1998 and 1997, and to the
reference in the Registration Statement to our firm under the headings "Selected
Consolidated Financial Data" and "Experts."
/s/ PricewaterhouseCoopers
Chartered Accountants
