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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 14, 2000
COMMISSION FILE NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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)
Ontario n/a
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
------------------------------------
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:
STEVEN S. PRETSFELDER, ESQ. SAMUEL SCHWARTZ, ESQ.
BAER MARKS & UPHAM LLP GOLDMAN, SPRING, SCHWARTZ & KICHLER
805 THIRD AVENUE 40 SHEPPARD AVENUE WEST
NEW YORK, NEW YORK 10022 SUITE 700
TORONTO, ONTARIO
CANADA M2N 6K9
------------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / ____.
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. / / ___.
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. / /
-----------
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- --------------------------- --------------------- -------------------- ---------------------- ----------------------
PROPOSED
TITLE OF EACH CLASS AMOUNT TO BE MAXIMUM AMOUNT OF
OF SECURITIES TO BE REGISTERED PRICE PER SHARE(1) AGGREGATE OFFERING REGISTRATION FEE
REGISTERED PRICE
- --------------------------- --------------------- -------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C>
Common Shares.............. 1,916,000 $42,875 $82,148,500.00 $21,687.20
- --------------------------- --------------------- -------------------- ---------------------- ----------------------
</TABLE>
(1) This amount is based upon the average of the closing bid and asked prices
as of January 10, 2000, and is being used solely for the purpose of
calculating the registration fee pursuant to Rule 457 under the Securities
Act of 1933.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a)
OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE>
SELLING SHAREHOLDERS'
PROSPECTUS
- ----------
1,916,000 SHARES
VISIBLE GENETICS INC.
COMMON SHARES
This is an offering of common shares by certain shareholders of
Visible Genetics Inc. The selling shareholders will receive all of the
proceeds from the sale of the common shares, less any commissions or
discounts paid to brokers or other agents. We will not receive any of the
proceeds from the sale of the common shares.
The selling shareholders may offer and sell the common shares on the
Nasdaq National Market at prevailing market prices or in privately negotiated
transactions at prices other than the market price. On January __, 2000, the
closing sale price for our common shares on the Nasdaq National Market was
$____.
--------------------
INVESTING IN OUR SHARES INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 3.
--------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
--------------------
JANUARY __, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
<S> <C>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............................................... 2
PROSPECTUS SUMMARY............................................................................ 3
RISK FACTORS.................................................................................. 4
FORWARD-LOOKING STATEMENTS....................................................................25
USE OF PROCEEDS.............................................................................. 27
DIVIDEND POLICY.............................................................................. 27
SELECTED CONSOLIDATED FINANCIAL DATA......................................................... 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........ 30
INFORMATION ABOUT OUR COMPANY................................................................ 38
SELLING SHAREHOLDERS..........................................................................44
PLAN OF DISTRIBUTION..........................................................................47
DESCRIPTION OF CAPITAL SHARES.................................................................48
LEGAL MATTERS.................................................................................51
EXPERTS.......................................................................................51
WHERE YOU CAN FIND MORE INFORMATION...........................................................51
</TABLE>
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which we have filed with the Securities and
Exchange Commission, are incorporated by reference in this prospectus:
1) Our Annual Report on Form 20-F for the year ended December 31,
1998, as amended by Form 20-F/A-1, which we refer to in this
prospectus as our Annual Report on Form 20-F.
2) Our Report on Form 6-K Filing No. 3 for the Month of July, 1999,
dated July 16, 1999.
3) Our Report on Form 6-K Filing No. 1 for the Month of August,
1999, dated August 6, 1999.
4) Our Report on Form 6-K Filing No. 1 for the Month of November,
1999, dated November 10, 1999.
5) Our Report on Form 6-K/A-1 Filing No. 2 for the Month of
December, 1999, dated December 3, 1999.
6) Our Report on Form 6-K Filing No. 3 for the Month of December,
1999, dated December 16, 1999.
7) Our Rport on Form 6-K Filing No. 1 for the Month of January,
2000, dated January 10, 2000.
In addition, all documents which we file with the Securities and
Exchange Commission pursuant to Section 13, 14 or 15(d) of the Securities
Exchange Act of 1934, as amended after the date of the this prospectus and
before termination of the offering, including all annual reports on Form 20-F or
Form 10-K, and all filings on Forms 10-Q and 8-K, will be deemed to be
incorporated by reference in this prospectus and to be a part of this prospectus
from the date those documents are filed. We may also incorporate in this
prospectus any Form 6-K which we file with the Securities and Exchange
Commission by identifying in such form that it is being incorporated by
reference into this prospectus. Any statement contained in a document which is
incorporated, or deemed to be incorporated, by reference into this prospectus,
shall be considered modified or superseded for purposes of this prospectus to
the extent that a statement contained in this prospectus or in any other
subsequently filed document which also is, or is deemed to be, incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this prospectus.
You may request a copy of any document incorporated by reference in
this prospectus at no cost. To receive a copy, write us at:
Visible Genetics Inc.
700 Bay Street
Suite 1000
Toronto, Ontario, Canada M5G 1Z6
Attention: Mr. Kingsley Thomas
Or you can call us at (416) 813-3240. See "Where You Can Find More Information."
<PAGE>
PROSPECTUS SUMMARY
THIS PROSPECTUS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED
ELSEWHERE IN THIS PROSPECTUS. YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER
WITH THE MORE DETAILED INFORMATION REGARDING OUR COMPANY AND THE SHARES BEING
SOLD IN THIS OFFERING, WHICH INFORMATION APPEARS ELSEWHERE IN THIS PROSPECTUS
AND IN SELECTED PORTIONS OF OUR ANNUAL REPORT ON FORM 20-F AND OTHER DOCUMENTS
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION THAT WE HAVE INCORPORATED BY
REFERENCE INTO THIS PROSPECTUS. ALL FINANCIAL INFORMATION PROVIDED IN THIS
PROSPECTUS IS IN U.S. DOLLARS.
OUR BUSINESS
We develop, manufacture and sell integrated DNA sequencing systems that
analyze genetic information to improve the treatment of selected diseases. Our
proprietary DNA sequencing system, called the OpenGene System, is designed to
identify mutations, or changes, in the DNA of genes associated with some
infectious diseases, cancers and other medical conditions. We believe that our
DNA sequencing systems will enable clinicians to monitor and customize the
treatment of diseases, initially for Human Immunodeficiency Virus, or HIV, and
later for other selected diseases.
DNA sequencing is generally considered the most thorough and accurate
method for genotyping diseases, such as cancer and certain viruses, including
HIV, which have high rates of mutation or numerous strains. Genotyping is the
act of selecting and reading certain components of the sequence of a specific
strand of DNA in order to understand how mutations in the DNA may influence the
onset and treatment of some diseases and medical conditions. Most existing DNA
sequencers have been developed to meet the needs of the research market and
typically do not address the needs of the clinical diagnostic market. We have
designed our OpenGene System to meet the needs of the clinical diagnostic
market.
Our OpenGene System consists of automated DNA sequencers, disposable
gel cassettes, related equipment and software and disease-specific GeneKits. Our
GeneKits contain the necessary chemicals, reagents, third-party licenses and
other consumables and materials required for sequencing specific
disease-associated genes. We have developed GeneKits for HIV, HLA (used for
tissue typing, for example, in organ transplants) and the p53 gene (implicated
in many cancers). We are developing GeneKits for hepatitis B, hepatitis C and
tuberculosis. We began selling our OpenGene System to the research and clinical
research markets in the third quarter of 1996 and began selling GeneKits in the
third quarter of 1997. More than 600 of our DNA sequencers are installed in over
150 laboratories.
The first clinical diagnostic application we are targeting is HIV. We
have developed our HIV GeneKit to enable clinicians to genotype the major HIV
species infecting patients in order to improve the management of patient
treatment. HIV is a highly variable virus with high rates of mutations, which
may lead to drug resistance. One of the central challenges in maintaining HIV
patients on long-term drug therapy is to adjust each patient's medication as
drug-resistant strains of the virus emerge. Two initial clinical trials,
including one which we conducted, have shown that patients whose drug therapy is
managed using HIV genotyping had greater reductions in viral load than HIV
patients who were not genotyped.
We plan to apply to the U.S. Food and Drug Administration, or FDA, for
approval to sell our HIV OpenGene System to the clinical diagnostic market. In
December 1998, the FDA allowed us to initiate human clinical trials of our HIV
OpenGene System under an Investigational Device Exemption application, or IDE.
We intend to use the results of our clinical trials, as well as the results of a
clinical trial conducted by others, in support of our proposed FDA application.
If our HIV OpenGene System is approved by the FDA, we plan to focus our
marketing efforts on selling the HIV OpenGene System to the clinical diagnostic
market.
Our principal executive offices are located at 700 Bay Street, Suite
1000, Toronto, Ontario, Canada M5G 1Z6. Our telephone number is (416) 813-3240.
Our Web site address is WWW.VISGEN.COM. INFORMATION CONTAINED ON OUR WEBSITE
DOES NOT CONSTITUTE A PART OF THIS PROSPECTUS.
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RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS AND UNCERTAINTIES DESCRIBED
BELOW BEFORE MAKING AN INVESTMENT DECISION. IF ANY OF THE FOLLOWING RISKS
ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION OR OPERATING RESULTS COULD BE
MATERIALLY HARMED. THIS COULD CAUSE THE TRADING PRICE OF OUR COMMON SHARES TO
DECLINE, AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT.
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE KNOWN
AND UNKNOWN RISKS AND UNCERTAINTIES. THESE STATEMENTS RELATE TO OUR PLANS,
OBJECTIVES, EXPECTATIONS AND INTENTIONS. OUR ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE DISCUSSED IN THESE STATEMENTS. FACTORS THAT COULD
CONTRIBUTE TO THESE DIFFERENCES INCLUDE THOSE DISCUSSED BELOW AND ELSEWHERE IN
THIS PROSPECTUS.
OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT TO EVALUATE OUR FUTURE
PROSPECTS AND OUR PROSPECTS MUST BE CONSIDERED IN LIGHT OF THE DIFFICULTIES
FREQUENTLY ENCOUNTERED BY COMPANIES IN THE EARLY STAGES OF COMMERCIAL
MANUFACTURING AND MARKETING.
Although we began operations in 1993, we are only in the early
stages of commercially manufacturing and marketing our products. In late
1996, we began manufacturing and selling to the research and clinical
research markets, the initial versions of our automated DNA sequencers and
related products and certain GeneKits. Our limited operating history makes it
difficult to evaluate our business and our prospects for future
profitability. Our prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in the early
stages of commercial manufacturing and marketing. Sales for our 1998 fiscal
year were $10.9 million and for the nine months ended September 30, 1999 were
$8.7 million. In the future, sales may not increase or they may decrease.
WE HAVE A HISTORY OF LOSSES, WE ANTICIPATE ADDITIONAL LOSSES AND WE MAY NEVER
BECOME PROFITABLE.
We incurred a net loss of $14.9 million in the year ended December
31, 1998 and $18.5 million during the nine months ended September 30, 1999.
As of September 30, 1999, our accumulated deficit was $53.5 million. Our
losses have resulted principally from expenses incurred in research and
development of our technology and products, and from expenses that we have
incurred while building our business infrastructure. We expect to continue to
incur significant operating losses in the future as we continue our research
and development efforts and clinical trials and expand our sales and
marketing force and business infrastructure, in an effort to achieve greater
sales and expand our business. It is uncertain when, if ever, we will become
profitable. Our ability to become profitable will depend on many factors
including, among others:
o 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;
o the decision of third party payors to reimburse clinicians
and patients for use of our HIV GeneKit and, in the future, other
products;
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o 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;
o our ability to increase sales of our products to the research
and clinical research markets;
o our ability to effectively manage the growth of our business;
and
o our ability to continue to develop advanced versions of our
products and technologies and new products and technologies in a
timely manner.
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:
o unanticipated costs or delays in carrying out our clinical
trials;
o the amount and timing of operating costs and capital
expenditures relating to research and development, and the
expansion of our business, operations and infrastructure;
o our decision to increase or decrease sales of bundled
equipment, GeneKits and other consumables at reduced prices;
o our decision to reduce prices of our products in response to
price reductions by competitors; and
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o general economic conditions, as well as economic conditions
specific to the biotechnology industry.
We believe that period-to-period comparisons of our operating
results may not be meaningful and you should not rely on any such comparisons
as an indication of our future performance. In addition, it is likely that in
one or more future quarters our operating results will fall below the
expectations of securities analysts and investors. In such event, the market
price of our common shares is likely to fall. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations-Overview."
WE MAY NOT RECEIVE APPROVAL OF THE FDA OR FOREIGN REGULATORY AUTHORITIES FOR
OUR HIV OPENGENE SYSTEM AND, IN THE FUTURE, OTHER HIV PRODUCTS, AND,
THEREFORE, WE MAY NOT BE ABLE TO SELL OUR HIV PRODUCTS TO THE CLINICAL
DIAGNOSTIC MARKET IN THE UNITED STATES OR ABROAD.
We intend to seek FDA approval to sell our HIV OpenGene System for
clinical diagnostic purposes in the United States. In the future, we may seek
FDA approval to sell other HIV products for clinical diagnostic purposes in the
United States.
In order to obtain FDA approval for our HIV OpenGene System we
must submit an application supported by extensive human test data
demonstrating the utility, reliability and performance of our HIV GeneKit and
OpenGene System. The FDA must also confirm that we maintain good laboratory,
clinical and manufacturing practices. The FDA approval process is lengthy and
expensive. You should be aware of the following possibilities:
o we may never obtain approval from the FDA to sell our HIV
products to the clinical diagnostic market;
o it may be more expensive and time consuming than we
anticipate to develop the test data needed for the FDA;
o the FDA may disagree with us that the data are adequate, and
we may therefore have to do additional testing;
o the testing may show that our product does not work at all or
is not safe enough, and therefore cannot be authorized by the
FDA, or the testing may show that the product does not work as
well as it needs to for successful marketing, even if marketing
is authorized by the FDA;
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o the testing may be too costly to carry out, either because we
lack adequate funds or because the market potential for the
product does not justify the costs;
o 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;
o there may be significant delays in the FDA review process;
o the FDA may approve products with conditions that could
limit the market for the product or make it more difficult or
expensive to sell than we anticipate; and
o the FDA can revoke marketing authorization for our products
for a variety of reasons, such as our failure to comply with the
FDA's device requirements or poor product performance in terms of
safety and effectiveness.
If we fail to receive FDA approval, if the FDA approval is significantly delayed
or if the FDA imposes conditions that make it difficult to sell or market our
products, we will be unable to carry out our business plan to sell our HIV
OpenGene System for clinical diagnostic use in the United States and our
business, financial condition and results of operations will be materially
harmed.
We also may be required to obtain approval from some foreign
regulatory authorities to sell our HIV products to the clinical diagnostic
market outside of the United States. In some cases, we will face an approval
process similar to that required by the FDA. We cannot be certain that we
will obtain the necessary approvals to sell our HIV products to the clinical
diagnostic market in these countries. In some cases, the failure to obtain
approval could materially harm our business, financial condition and results
of operations.
See "Information About Our Company--Regulation of our Products by the
FDA and Other Governmental Agencies" and "Item 1. Description of
Business--Regulation by the FDA and Other Government Agencies" in our Annual
Report on Form 20-F.
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WE MAY NOT RECEIVE REGULATORY APPROVAL FOR OUR OTHER PRODUCTS AND THEREFORE MAY
NOT BE ABLE TO SELL THESE PRODUCTS FOR CLINICAL DIAGNOSTIC PURPOSES IN THE
UNITED STATES OR IN OTHER COUNTRIES.
In addition to our HIV OpenGene System, we have also developed and are
continuing to develop GeneKits for other clinical diagnostic applications. In
order to sell these GeneKits to the clinical diagnostic market, we may be
required to obtain the approval of the FDA and of foreign regulatory authorities
through approval procedures that are the same or similar to those required for
our HIV OpenGene System. Our failure to obtain necessary approvals to sell our
products for clinical diagnostic use in one or more significant markets could
cause material harm to our business, financial condition and results of
operations.
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EACH TIME WE MAKE ALTERATIONS TO ANY FDA APPROVED PRODUCTS, WE MAY NEED TO SEEK
ADDITIONAL FDA APPROVAL, WHICH WILL LENGTHEN THE TIME AND INCREASE THE COST OF
BRINGING UPGRADED OR NEW PRODUCTS TO MARKET.
We may need to seek additional FDA approval if we make changes to a
product specifically approved by the FDA. Our HIV GeneKit, as submitted to the
FDA, will contain specific reagents, dyes, enzymes, chemicals, software and
other materials. If this kit is approved through the premarket approval
application, or PMA, process, the FDA would require that we obtain additional
approval for any change to the kit's components that could alter the performance
of the kit, such as changing certain enzymes or reagents. If we obtain approval
through the 510(k) premarket notification, or 510(k) process, we will be
required to obtain prior clearance from the FDA for those product changes that
could significantly affect safety or effectiveness. To obtain additional
approval, we may have to conduct additional human clinical trials to demonstrate
that the altered GeneKit will produce at least the same results as the approved
GeneKit or will be as safe and effective as the approved product. Obtaining
additional FDA approval is likely to be time consuming and costly and, as a
result, we may experience delays in bringing these upgraded or new products to
market. See "Information about our Company-Regulation of our Products by the FDA
and other Government Agencies."
OUR BUSINESS IS, AND IN THE FUTURE MAY BECOME, SUBJECT TO ADDITIONAL REGULATIONS
AND IF WE ARE UNABLE TO COMPLY WITH THEM OUR BUSINESS MAY BE MATERIALLY HARMED.
Our reference laboratory in Norcross, Georgia, is subject to the most
stringent level of regulation under the Clinical Laboratory Improvement
Amendments of 1988, known as CLIA. Under CLIA, laboratories must meet various
requirements, including requirements relating to the validation of tests,
training of personnel, and quality assurance procedures. The laboratory must
also be certified by a government agency. Our Norcross laboratory is
certified under CLIA and licensed by the state of Georgia. Our failure to
comply with state or CLIA requirements can result in various penalties,
including loss of certification. The imposition of such penalties could have
an adverse impact on us. In addition, some states regulate out-of-state
laboratories. The failure to comply with these state requirements could also
adversely affect us.
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We are or may become subject to various other federal, state,
provincial and local laws, regulations and recommendations. If we fail to
comply with these regulations we could be fined, we may not be able to
continue to operate certain of our facilities or certain portions of our
business and/or we may suffer other consequences that could materially harm
our business.
We are unable to predict the extent of future government regulations or
industry standards. You should assume that in the future there may be more
government regulations or standards or obtaining permits, delays or fines
resulting from loss of permits or failure to comply with regulations.
See "Information About Our Company--Regulation of Our Products by
the FDA and Other Governmental Agencies" and "Item 1. Description of
Business--Regulation by the FDA and Other Government Agencies" in our Annual
Report on Form 20-F.
THE MARKET FOR GENOTYPING PRODUCTS IS NEW AND GENOTYPING MAY NOT BECOME AN
ACCEPTED METHOD OF MANAGING DRUG TREATMENT.
An important part of our business strategy is our plan to sell our
products to the clinical diagnostic market . Our ability to do so will depend on
the widespread acceptance and use by doctors and clinicians of genotyping to
manage the treatment of certain diseases. The use of genotyping by doctors and
clinicians for this purpose is new. Existing DNA sequencing systems have been
designed primarily for research purposes and we are not aware of any DNA
sequencing products that have been approved by the FDA for clinical diagnostic
purposes. We cannot be certain that doctors and clinicians will want to use DNA
sequencing systems designed for these purposes. If genotyping is not accepted by
this market, we will not be able to carry out our business plan and our
business, financial condition and results of operations will be materially
harmed.
IF GENOTYPING IS ACCEPTED AS A METHOD TO MANAGE DRUG TREATMENT, WE CANNOT
BE CERTAIN THAT OUR PRODUCTS WILL BE ACCEPTED IN THE CLINICAL DIAGNOSTIC MARKET.
If genotyping becomes widely accepted in the clinical diagnostic
market, we cannot predict the extent to which doctors and clinicians may be
willing to utilize our OpenGene System to manage drug treatment of selected
diseases or other medical conditions. Doctors and clinicians may prefer
competing technologies and products that can be used for the same purposes as
our products. If our products are not accepted by the clinical diagnostic
market, our business, financial condition and results of operations will be
materially harmed.
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IF INSURANCE COMPANIES AND OTHER THIRD-PARTY PAYORS DO NOT REIMBURSE DOCTORS
AND PATIENTS FOR OUR PRODUCTS, OUR ABILITY TO SELL OUR PRODUCTS TO THE CLINICAL
DIAGNOSTIC MARKET WILL BE IMPAIRED.
Our ability to successfully sell our HIV GeneKit and other GeneKits
to the clinical diagnostic market will depend partly on the willingness of
insurance companies and other third-party payors to reimburse doctors and
patients for use of our products. Physicians' recommendations to use
genotyping, as well as decisions by patients to pursue genotyping, are likely
to be influenced by the availability of reimbursement for genotyping by
insurance companies or other third party-payors. Government and private third
party payors are increasingly attempting to contain health care costs by
limiting both the extent of coverage and the reimbursement rate for testing
and treatment products and services. In particular, services which are
determined to be investigational in nature or which are not considered
"reasonable and necessary" for the diagnosis or treatment may be denied
reimbursement coverage. If adequate reimbursement coverage is not available
from insurers or other third-party payors, we expect that few, if any,
patients would be willing to pay for genotyping. In this case, our
anticipated revenues would be substantially reduced, our ability to achieve
profitability would be significantly impaired and our business, financial
condition and results of operations would be materially harmed.
WE DO NOT HAVE MARKETING EXPERIENCE IN THE CLINICAL DIAGNOSTIC MARKET, WE
CANNOT BE CERTAIN WE WILL SUCCESSFULLY DEVELOP THE MARKETING CAPABILITIES
REQUIRED TO SELL OUR PRODUCTS TO THIS MARKET AND IN SOME MARKETS WE WILL BE
DEPENDENT ON THE EFFORTS OF DISTRIBUTORS TO SELL OUR PRODUCTS.
We have no experience marketing products to the clinical diagnostic
market. If the FDA approves the sale of our HIV OpenGene System and, in the
future, other products, to the clinical diagnostic market in the United
States, we intend to expand our internal sales force to sell products to
these markets in North America and selected other countries. It will take
significant time, money and resources to expand our sales force. We cannot be
certain that we will be able to develop the marketing capabilities necessary
to successfully market and sell our products to the clinical diagnostic
market.
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In selected geographic markets outside North America and certain
European countries, beginning in 1999, we entered into distribution and
marketing arrangements with leading distributors to sell our products to the
research and clinical diagnostic markets. These agreements expire at various
times from April 2000 through April 2003, and in each case, are subject to
renewal. Certain of the agreements may also be terminated by either party
upon specified notice periods and may require us to make termination payments
under certain circumstances. Our ability to successfully sell products to the
clinical diagnostic market in countries in which we rely on distribution
agreements will depend to a great extent on the efforts of the distributors.
Failure to successfully market our products will likely impede our ability to
generate significant revenues and become profitable.
A SIGNIFICANT PORTION OF OUR SALES DURING 1998 AND 1999 HAVE BEEN TO ONE
DISTRIBUTOR AND WE MAY CONTINUE IN THE FUTURE TO RELY HEAVILY ON THAT
DISTRIBUTOR FOR SALES TO THE RESEARCH AND CLINICAL RESEARCH MARKETS.
In February 1996, we granted Amersham International plc an exclusive
worldwide license to use and sell the Seq4x4-TM- DNA sequencer and related
products used and sold with the sequencer, which is designed for the research
market. During 1998, approximately 30% of our revenues resulted from sales of
sequencers and other products to Amersham. During the nine months ended
September 30, 1999, approximately 16% of our sales resulted from sales to
Amersham and sales to Amersham continued to be significant for the remainder
of 1999. Our agreement with Amersham expires in February 2000 and is
renewable each year unless either party notifies the other at least six
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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.
IF WE ARE UNABLE TO CONTINUE DEVELOPING ADVANCED TECHNOLOGY, ADVANCED
VERSIONS OF OUR EXISTING PRODUCTS AND NEW PRODUCTS IN A TIMELY AND
COST-EFFECTIVE MANNER, OUR ABILITY TO GENERATE REVENUE AND BECOME AND REMAIN
PROFITABLE WILL BE IMPAIRED.
We believe that if we are to generate additional revenue and become and
remain profitable, we must develop advanced technology, advanced versions of our
current products and new products. New technology and products must be developed
and introduced to the market in a timely and cost-effective manner to meet both
changing customer needs and technological developments. We cannot assure you
that we will be able to successfully or timely develop any technology or
products, or that any new technology or products will achieve acceptance in the
market. If we are unable to successfully develop technology or products in the
future or if those products are not accepted in the market, our ability to
generate significant revenues will be significantly impaired, we could
experience additional significant losses and our business, financial condition
and results of operations would be materially harmed.
MANUFACTURING PROBLEMS COULD HAMPER OR DELAY OUR ABILITY TO INTRODUCE OUR
PRODUCTS TO THE MARKETPLACE.
We have limited experience in large-scale assembly and manufacturing of
our products. Since we started assembling and manufacturing operations in 1996,
we have experienced delays, quality control problems and capacity constraints
from time to time. As production increases and we begin manufacturing and
assembling new products, additional problems may arise. These may include
technological, engineering, quality control and other production difficulties.
If we experience these problems, we could be delayed in filling orders, shipping
existing products and introducing new products to the marketplace. These
problems could also adversely affect customer satisfaction and the market
acceptance of our products.
IF WE ARE UNABLE TO SUCCESSFULLY PROTECT OUR INTELLECTUAL PROPERTY, OUR
COMPETITIVE POSITION WILL BE HARMED.
Our success will partly depend on our ability to obtain patents, and
licenses from third parties and protect our trade secrets. We own or jointly
own 27 U.S. patents. We have an additional 34 U.S. patent applications
pending, of which nine have been allowed. We also have filed foreign patent
applications presently pending as PCT applications designating
intergovernmental agencies and multiple countries including the European
Patent Office, Canada and Japan. We cannot assure you that our patent
applications will result in patents being issued in the United States or
foreign countries. In addition, the U.S. Patent and Trademark Office may
reverse its decision or delay the issuance of patents which have been
allowed. We also cannot assure you that any technologies or
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products that we may develop in the future will be patentable. In addition,
competitors may develop products similar to ours which do not conflict with our
patents. Others may challenge our patents and, as a result, our patents could be
narrowed or invalidated.
Our success will also depend partly on our ability to operate without
infringing upon the proprietary rights of others, as well as our ability to
prevent others from infringing on our proprietary rights. We may be required at
times to take legal action in order to protect our proprietary rights. Also,
despite our best efforts, we may be sued for infringing on the patent rights of
others. Patent litigation is costly, and, even if we prevail, the cost of such
litigation could harm us. If we do not prevail, in addition to any damages we
might have to pay, we could be required to stop the infringing activity or
obtain a license. We cannot be certain that any required license would be
available to us on acceptable terms, or at all. If we fail to obtain a license,
or if the terms of a license are burdensome to us, our business, financial
condition and results of operations could be materially harmed.
To help protect our proprietary rights in unpatented trade secrets, we
require our employees, consultants and advisors to sign confidentiality
agreements. However, we cannot guarantee that these agreements will provide us
with adequate protection if confidential information is used or disclosed
improperly. In addition, in some situations, these agreements may conflict with,
or be limited by, the rights of third parties with whom our employees,
consultants or advisors have prior employment or consulting relationships.
Further, others may independently develop similar proprietary information and
techniques, or otherwise gain access to our trade secrets.
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CERTAIN SUPPLIES AND PARTS THAT WE NEED ARE AVAILABLE ONLY FROM LIMITED
SOURCES AND OUR BUSINESS WOULD SUFFER IF WE CANNOT OBTAIN THESE SPECIALIZED
ITEMS USED IN OUR GENEKITS.
We use dyes, reagents and other chemicals supplied by third parties in
our GeneKits. We believe that some dyes supplied by Amersham under our exclusive
worldwide license to use and sell Amersham dyes within our GeneKits, may not be
available from other suppliers. However, our customers might be able to purchase
some, but not all, of these dyes directly from Amersham. In addition, certain
reagents and other chemicals which we use and include in our GeneKits are
available only under license from their manufacturers. We cannot be certain that
we will be able to renew these licenses upon expiration, on favorable terms or
at all. While we believe that alternative dyes, chemicals and reagents are
available, alternate products may not be as effective as certain of the products
which we presently use. If we switched to an alternative dye, chemical or
reagent, we may also have to adapt the GeneKit's analysis software to the new
product, which could take time. If the GeneKit is FDA approved, we may also be
required to seek FDA approval for the altered GeneKit if the alternative product
were to substantially alter the performance of the GeneKit or if the changes
could significantly affect safety or effectiveness. This
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could cause delays in production and in bringing the changed GeneKit to market.
We also use certain custom-designed components supplied by third
parties in our DNA sequencers and other equipment. We believe that there are
alternative suppliers for these custom-designed parts. However, we would incur
costs in switching to alternative suppliers and would likely experience delays
in production of the products that use any of these parts until such time as we
were able to locate alternate suppliers or parts on acceptable terms.
WE ARE DEPENDENT ON OUR LICENSE FOR THE POLYMERAZE CHAIN REACTION TECHNOLOGY WE
USE IN OUR GENEKITS AND OUR BUSINESS WOULD SUFFER IF THE LICENSE WAS TERMINATED
OR NOT RENEWED.
We license the polymerase chain reaction technology that we use in our
GeneKits from Roche Molecular Systems, Inc. and F. Hoffmann La Roche Ltd. These
licenses are not exclusive, and, therefore, may be granted by the Roche
companies to our competitors and others. We are required to pay royalties to the
Roche companies for these licenses. One license is for the life of the patents
included within the licensing agreement, which expire at various times
commencing July 2004. The second license expires in February 2003 but will be
automatically extended until July 2004, unless the Roche companies elect not to
renew the license. After the expiration of the initial term of this license, the
Roche companies may terminate the license at any time by giving us a one-year
notice. The termination of either of these licenses would have a material
adverse effect on our ability to produce or sell GeneKits. Consequently, we
could experience a deterioration of anticipated future sales of our GeneKits and
further losses.
WE FACE SUBSTANTIAL COMPETITION FROM MANY COMPANIES, AND WE MAY NOT BE ABLE TO
EFFECTIVELY COMPETE.
The biotechnology industry is highly competitive. We compete with
entities in the United States and abroad that are engaged in the development and
production of products that analyze genetic information. They include:
o 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.;
o manufacturers and distributors of DNA probe-based diagnostic
systems such as Abbott Laboratories, Chiron Corp., Hoffmann-La
Roche Inc., Gene Probe Inc., Digene Corporation and Johnson &
Johnson; and
o manufacturers of new technologies used to analyze genetic
information, such as chip-based and assay-based technologies,
including, Hyseq Inc., Affymetrix Inc., ChemCore Inc., CuraGen
Corp., Nanogen, Inc., ViroLogic, Inc. and VIRCO.
Many of our competitors have much greater financial, technical
research and development resources and production and marketing capabilities
than we do. Smaller companies may also prove to be significant competitors,
particularly through collaborative arrangements with large pharmaceutical and
biotechnology companies. If any of our competitors were to devote significant
resources to developing an integrated solution for genotyping, we would
experience significantly more competitive pressure. We cannot predict whether
we could successfully compete with these pressures and, if we are unable to
do so, our business could suffer.
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WE MAY NOT BE ABLE TO HIRE OR RETAIN THE QUALIFIED SCIENTIFIC, TECHNICAL AND
MANAGEMENT PERSONNEL WE REQUIRE.
Because of the specialized scientific nature of our business, we are
highly dependent upon our ability to attract and retain qualified scientific and
technical personnel. We also must hire additional qualified management and sales
and marketing personnel as our business expands. Competition in our industry for
scientific, sales and marketing and management personnel is intense and we
cannot assure you that we will be able to hire a sufficient number of qualified
personnel. Loss of the services of our key personnel in these areas could
adversely affect our research and development and sales and marketing programs
and could impede the achievement of our goals. We do not maintain key man life
insurance on any of our personnel.
IF WE ARE UNABLE TO MANAGE OUR ANTICIPATED FUTURE GROWTH WE MAY NOT BE ABLE TO
IMPLEMENT OUR BUSINESS PLAN.
If we are successful in increasing sales and expanding our markets,
there will be additional demands on our management, marketing, distribution,
customer support and other operational and administrative resources and
systems. To accommodate future growth, we may add information and other
systems. We cannot guarantee that we will be able to do so or that, if we do
so, we will be able to effectively integrate them to our existing staff and
systems. In addition, our current and future expense levels are based largely
on our investment plans and estimates of future revenues and are, to a large
extent, fixed. We may be unable to adjust spending in a timely manner to
compensate for any unexpected revenue shortfall. Therefore, any significant
shortfall in revenues as compared to our planned expenditures would
materially harm our business, financial condition, and results of operations.
If we are unable to manage our growth, we may not be able to implement our
business plan and our business, financial condition and results of operations
would be materially harmed.
IF WE ARE UNABLE TO EFFECTIVELY INTEGRATE FUTURE ACQUISITIONS OF NEW OR
COMPLIMENTARY BUSINESSES, PRODUCTS OR TECHNOLOGY, OUR BUSINESS MAY BE HARMED.
We have made and in the future may make acquisitions of complementary
businesses, products, services or technologies. We have limited experience in
integrating newly acquired organizations into our operations. Acquisitions
expose us to many risks, including:
o difficulty in assimilating technologies, products, personnel
and operations;
o diversion of management's attention from other business
concerns;
o large write-offs and amortization expenses related to
goodwill and other intangible assets;
o entering markets in which we have no or limited experience;
and
o 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.
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WE MAY NEED TO RAISE ADDITIONAL CAPITAL IN THE FUTURE AND WE CANNOT BE CERTAIN
THAT WE WILL BE ABLE TO RAISE CAPITAL WHEN NECESSARY ON ACCEPTABLE TERMS.
At this time, our sales are not sufficient to meet our anticipated
financing requirements. Based on our current plans, we believe that current cash
balances, including proceeds from our recently completed equity financings, and
anticipated funds from operations will be sufficient to enable us to meet our
operating needs for the next 24 months. However, the actual amount of funds
that we will need during the next 24 months will be determined by many
factors, some of which are beyond control. These factors include:
o our success in selling our products in the research and
clinical research markets during this period;
o the cost and length of time required to complete the clinical
trials needed for our application to FDA for approval to sell our
HIV OpenGene System to the clinical diagnostic market;
o the timing of our submission of an application to the FDA for
approval of our HIV OpenGene System and the length of time it
takes the FDA to complete its review;
o our success in introducing new products during the period;
o our incurring significant fixed overhead and other expenses
prior to increasing our revenues; and
o 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.
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WE MAY REQUIRE APPROVAL OF THE HOLDERS OF OUR SERIES A PREFERRED SHARES IN ORDER
TO OBTAIN CERTAIN TYPES OF FINANCING.
We will be required to obtain the consent of the holders of a majority
of our then outstanding Series A preferred shares prior to issuing any equity
security that has rights as to dividends and liquidation that are senior or
equal to those of the Series A preferred shares. Also, under certain
circumstances, if we propose to sell equity securities, including debt
securities convertible into equity securities, certain holders of our
Series A preferred shares will be entitled to preemptive rights which allow them
to purchase a proportional amount of the securities being offered. We will also
be required to obtain the consent of the holders of a majority of our then
outstanding Series A preferred shares if we wish to borrow money and at such
time or as a result of such loans, the total principal amount of our
indebtedness and capitalized lease obligations exceeds $15.0 million. In
addition, if we were to enter into a credit facility with a financial
institution, we may be subject to additional limitations on our ability to incur
additional indebtedness. As a result, we may be delayed in, or prohibited from,
obtaining certain types of financing. See "Description of Capital Shares."
WE MAY BE SUED BY CLINICIANS AND/OR PATIENTS USING OUR PRODUCTS OR SERVICES
AND OUR INSURANCE MAY NOT SUFFICIENTLY COVER ALL CLAIMS BROUGHT AGAINST US.
The testing, manufacturing, sale and marketing of our products exposes
us to the risk of product liability claims. In addition, clinicians, patients
and others may at times seek damages for the misdiagnosis of a patient's disease
based on testing errors, for the erroneous recommendation of drug treatment
based on a technician's misreading of the sequencing results, mishandling of the
patient samples or similar claims. Although we have obtained liability insurance
coverage, we cannot guarantee that liability insurance will continue to be
available to us on acceptable terms or that our coverage will be sufficient to
protect us against all claims that may be
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brought against us. A liability claim, even one without merit or for which we
have substantial coverage, could result in significant legal defense costs,
thereby increasing our expenses, lowering our earnings and, depending on
revenues, potentially resulting in additional losses.
OUR INTERNATIONAL OPERATIONS MAY BE ADVERSELY AFFECTED BY RISKS ASSOCIATED WITH
INTERNATIONAL BUSINESS.
We sell our products in Europe, Asia and South America and operate
offices in Europe. Therefore, we are subject to certain risks that are inherent
in an international business. These include:
o varying regulatory restrictions on sales of our products to
certain markets and unexpected changes in regulatory requirements;
o tariffs, customs, duties and other trade barriers;
o difficulties in managing foreign operations and foreign
distribution partners;
o longer payment cycles and problems in collecting accounts
receivable;
o fluctuations in currency exchange rates;
o political risks;
o foreign exchange controls which may restrict or prohibit
repatriation of funds;
o export and import restrictions or prohibitions, and delays
from customs brokers or government agencies;
o seasonal reductions in business activity in certain parts of
the world; and
o potentially adverse tax consequences.
Depending on the countries involved, any or all of the foregoing
factors could materially harm our business, financial condition and results of
operations.
U.S. INVESTORS IN OUR COMPANY COULD SUFFER ADVERSE TAX CONSEQUENCES IF
WE ARE CHARACTERIZED AS A PASSIVE FOREIGN INVESTMENT COMPANY.
Although we do not believe that we were a passive foreign investment
company (or PFIC) for United States federal income tax purposes during 1998 or
1999 there can be no assurance that we will not be treated as a PFIC in 2000 or
thereafter. We would be a PFIC if 75% or more of our gross income in a taxable
year is passive income. We would also be a PFIC if at least 50% of our assets
averaged over the taxable year produce, or are held for the production of,
passive income. Passive income includes, among other items, interest, dividends,
royalties, rents and annuities.
For the 1998 taxable year and for the nine months ended September
30, 1999, approximately 36% and 35%, respectively, of our assets averaged
over the taxable year and period produced, or were held for the production
of, passive income, and approximately 2% and 4%, respectively, of our gross
income was passive income. During the third and fourth quarter of 1999, we
raised a total of approximately $58.0 million in private financings to be
used for general working capital purposes. Since a significant portion of
these funds will be invested until needed, the
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percentage of assets which are likely to produce passive income during 2000 is
likely to increase. If we raise additional funds during 2000 that
percentage is likely to increase further.
If we are or become a PFIC, many of our U.S. shareholders will be
subject to the following adverse tax consequences:
o 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;
o they will be required to pay interest on taxes allocable to
prior periods; and
o the tax basis of our common shares will not be increased to
fair market value at the date of their death.
If we are or become a PFIC, our U.S. shareholders could avoid these tax
consequences by making a qualified electing fund election or a mark-to-market
election (a mark-to-market election, however, will not provide for an increase
of our common shares to fair market value at the date of their death). These
elections would need to be in effect for all taxable years during which we were
a PFIC and during which our U.S. shareholders held our common shares. If a U.S.
shareholder makes a qualified electing fund election, he will be taxed currently
on our ordinary income and net capital gain (unless a deferral election is in
effect). If a U.S. shareholder makes a mark-to-market election, he will include
as ordinary income each year an amount equal to the excess of the fair market
value of our common shares over his adjusted tax basis as of the close of each
year (with certain adjustments for prior years).
If we are or become a PFIC, our U.S. shareholders will generally be
unable to exchange our common shares for common shares of an acquiring
corporation on a tax-deferred basis under the reorganization rules of the
Internal Revenue Code, and many other nonrecognition provisions of the Internal
Revenue Code will not apply to transfers of our common shares. In addition, if
we are or become a PFIC, pledges of our common shares will be treated as sales
for federal income tax purposes. Our U.S. shareholders should note that state
and local taxes may also apply if amounts are included in federal taxable income
under the PFIC rules of the Internal Revenue Code. The PFIC rules are very
complex. Our U.S. shareholders are strongly encouraged to consult with their tax
advisor concerning all of the tax consequences of investing in our common shares
and the possible benefits of making a tax election given their circumstances.
Additionally, our U.S. shareholders should review the section entitled "U.S.
Federal Income Tax Considerations" contained in our Annual Report on Form 20-F
for a more detailed description of the PFIC rules and how they may affect their
ownership of our common shares.
IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US EVEN IF DOING SO WOULD BE
BENEFICIAL TO OUR SHAREHOLDERS.
Our authorized capital consists of an unlimited number of preferred
shares. The Board of Directors, without any further vote by the shareholders,
has the authority to issue preferred shares and to determine the price,
preferences, rights and restrictions, including voting and dividend rights, of
these shares. The rights of the holders of common shares are subject to the
rights of holders of any preferred shares that the Board of Directors may issue
in the future. That means, for example, that we can issue preferred shares with
more voting rights, higher dividend payments or more favorable rights upon
dissolution, than the common shares. If we issued certain types of preferred
shares in the future, it may also be more difficult for a third party to acquire
a majority of our outstanding voting shares.
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In addition, we have a "classified" Board of Directors, which means
that only one-third of our directors are eligible for election each year.
Therefore, if shareholders wish to change the composition of the Board of
Directors, it would take at least two years to remove a majority of the
existing directors, and three years to change all directors. Also, the
holders of our Series A preferred shares are entitled to vote as a class for
one director. Each Series A Director serves for a one year term and any
vacancy may be filled only by a vote of the holders of Series A preferred
shares. If we do not redeem our Series A preferred shares as required during
2006, 2007, and 2008, then our Series A shareholders will be entitled to
special voting rights enabling them to elect a majority of our Board of
Directors, who will continue to serve as directors until we have redeemed our
Series A preferred shares as required. See "Description of Capital Shares."
Having a classified Board of Directors and these special rights of the
Series A preferred shareholders may, in some circumstances, deter or delay
mergers, tender offers or other possible transactions which may be favored by
some or a majority of our shareholders.
OUR PREFERRED SHAREHOLDERS ARE ENTITLED TO CERTAIN PREFERENCES OVER OUR COMMON
SHAREHOLDERS.
In July 1999, we issued 33,948 Series A preferred shares. Our Series A
preferred shares entitle the holders to certain preferences over our common
shares (in addition to those described above), including the following:
o 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;
o 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
o if we liquidate or wind-up our company or if we sell our
company or in certain other circumstances, holders of Series A
preferred shares are entitled to receive an amount equal to
$1,000 per Series A preferred share, or approximately $34.0
million in the aggregate, plus accrued and unpaid dividends,
before holders of common shares would be entitled to receive any
distribution. See "Description of Capital Shares."
THE VOLATILITY OF THE STOCK MARKET COULD DRIVE DOWN THE PRICE OF OUR COMMON
SHARES WHICH COULD RESULT IN SUBSTANTIAL LOSSES TO OUR SHAREHOLDERS.
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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.
As of December 31, 1999, we had outstanding 11,623,615 common
shares, not including the shares covered by this prospectus. Of those shares
9,707,615 are eligible for sale under Rule 144, or are otherwise freely
tradable, except for those common shares held by our affiliates.
In addition:
o Our affiliates own 2,021,325 shares which may be sold subject
to volume restrictions imposed by Rule 144. Our affiliates also
own options to acquire an additional 1,160,816 shares. The shares
to be issued upon exercise of these options have been registered
and may be freely sold when issued.
o Our employees and consultants (who are not deemed affiliates)
hold options to buy a total of 1,024,739 shares. The shares to
be issued upon exercise of these options have been registered
and may be freely sold when issued.
o 76,734 shares issuable upon exercise of outstanding warrants,
are registered for sale pursuant to a registration statement filed
with the Securities and Exchange Commission, and may be freely
sold.
o We may issue options to purchase up to an additional 577,221
shares under our stock option plans. The shares to be issued upon
exercise of these options have been registered
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and may be freely sold when issued.
o We filed a registration statement covering
5,283,758 shares issuable upon conversion of our Series A
preferred shares and exercise of certain warrants issued on
July 15, 1999. That registration statement is currently being
reviewed by the Securities and Exchange Commission, and the
shares may be freely sold when the registration statement is
declared effective.
Sales of substantial amounts of common shares into the public market
could lower the market price of our common shares.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are required to be aggregated) who has owned shares for at least
one year would be entitled to sell within any three-month period a number of
shares that does not exceed the greater of (i) 1% of the number of our common
shares then outstanding (which will equal approximately 116,236 shares
immediately upon the effective date of this prospectus) or (ii) the average
weekly trading volume of our common shares during the four calendar weeks
preceding the filing of a Form 144 with respect to such sale. Sales under Rule
144 are also subject to certain manner of sale provisions and notice
requirements and to the availability of current public information about our
company. Under Rule 144(k), a person who is not deemed to have been our
affiliate at any time during the three months preceding a sale, and who has
owned the shares proposed to be sold for at least two years, is entitled to sell
his shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.
WE MAY SUFFER LOSSES AS RESULT OF FLUCTUATIONS IN EXCHANGE RATES BETWEEN THE
U.S. DOLLAR AND FOREIGN CURRENCIES.
Our financial statements are prepared in U.S. dollars and much of
our business is conducted in U.S. dollars. However, we do incur expenses in
Canadian dollars and in other foreign currencies. We also sell products to
customers in foreign countries and bill those customers in local currencies
at predetermined exchange rates. As our business expands, we anticipate that
we will increasingly incur expenses and bill and receive payments in local
currencies at prevailing exchange rates. As a result, we may suffer losses due
to fluctuations in the exchange rates between the U.S. dollar and the
Canadian dollar and the U.S. dollar and the currencies of such other
countries. We currently engage in limited foreign exchange hedging activities
by sometimes purchasing Canadian funds before they are actually required to
protect ourselves against the risk of losses due to fluctuations in exchange
rates. We do not currently engage in hedging activities for any other foreign
currencies.
OUR BUSINESS COULD BE HARMED IF THE SOFTWARE, COMPUTER TECHNOLOGY
AND OTHER SYSTEMS WE USE ARE NOT YEAR 2000 COMPLIANT.
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Failure of our internal computer systems or third-party equipment or
software, or systems maintained by our users and third parties with whom we have
marketing or distribution agreements, to operate properly with regard to the
Year 2000 issues could require us to incur significant unanticipated expenses to
remedy any problems and could cause system interruptions and loss of data. Any
of these events could harm our reputation and materially and adversely affect
our ability to gain market acceptance for our products and services. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000."
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:
o acceptance of our products in the clinical diagnostic market;
o acceptance of genotyping in the clinical diagnostic market;
o our marketing and sales plans;
o our expectations about the markets for our products;
o the performance of our products;
o our intention to introduce new products;
o our future capital needs;
o FDA and other regulatory approval for certain of our
products;
o our proposed clinical trials;
o reimbursement of our products by insurance companies and
other third-party payors;
o our ability to compete in the research, clinical research and
clinical diagnostic markets;
o our patent applications; and
o 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:
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o 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;
o refusal of insurance companies and other third-party payors
to reimburse patients and clinicians for our products;
o uncertainty of acceptance of genotyping, in general, and of
our products, in particular, in the clinical diagnostic market;
o problems, delays and expenses we may face with our proposed
clinical trials;
o problems that we may face in manufacturing, marketing and
distributing our products;
o delays in the issuance of, or the failure to obtain, patents
or licenses for certain of our products and technologies;
o problems with important suppliers and business partners;
o delays in developing, or the failure to develop, new products
and enhanced versions of existing products; and
o the timing of our future capital needs or our inability to
raise additional capital when needed.
We do not undertake any obligation to publicly update or revise any
forward-looking statements contained in this prospectus or incorporated by
reference, whether as a result of new information, future events or otherwise.
Because of these risks and uncertainties, the forward-looking statements and
circumstances discussed in this prospectus might not transpire.
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USE OF PROCEEDS
All of the common shares offered by this prospectus are being offered
by the selling shareholders. We will not receive any proceeds from sales of
common shares by the selling shareholders.
DIVIDEND POLICY
SERIES A PREFERRED SHARES. Dividends on our Series A preferred shares
accrue at the rate of 9% per year during the first three years after issuance,
and 4% per year thereafter. Dividends may not be paid for the first three years.
After three years, at our option, we may pay dividends in cash. If dividends are
not paid in cash, they will continue to accrue and will be convertible into
additional common shares upon conversion of the preferred shares. See
"Description of Capital Shares."
COMMON SHARES. We have not declared or paid any cash dividends on our
common shares. We currently intend to retain any future earnings for use in the
operation and expansion of our business. We do not anticipate paying any cash
dividends on our common shares in the foreseeable future.
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SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data set forth
below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our
Consolidated Financial Statements and the Notes thereto included in our
Annual Report on Form 20-F, incorporated into this prospectus by reference.
The Consolidated Statement of Operations data for fiscal years 1996, 1997 and
1998 and the Consolidated Balance Sheet data as of December 31, 1997 and
1998, as set forth below, have been derived from our consolidated financial
statements included in our Annual Report on Form 20-F, which have been
audited by PricewaterhouseCoopers LLP, Chartered Accountants in Canada, whose
report with respect to such financial statements appears in our Annual Report
on Form 20-F. The Consolidated Statement of Operations data for fiscal years
1994 and 1995 and the Consolidated Balance Sheet data as of December 31,
1994, 1995 and 1996, as set forth below, have been derived from audited
consolidated financial statements not included in this prospectus. The
Consolidated Statement of Operations data for the nine-month periods ended
September 30, 1998 and 1999 and the Consolidated Balance Sheet data as of
September 30, 1999 are derived from unaudited consolidated financial
statements included in our Report on Form 6-K dated November 10, 1999, which
in the opinion of our management, reflect all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the financial data for
such period. Historical results are not necessarily indicative of results to be
expected for any future period.
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(in thousands, except number of common shares outstanding
and net loss per share amounts)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------------- -------------------------
STATEMENT OF OPERATIONS 1994 1995 1996 1997 1998 1998 1999
---- ---- ---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Sales........................ $ - $ - $ 978 $ 3,033 $10,875 $6,797 $8,672
Cost of Sales................ - - 561 1,995 6,673 4,406 6,318
Gross margin................. - - 417 1,038 4,202 2,391 2,354
Sales, general and administrative
expense...................... 450 1,476 3,377 7,448 11,516 7,655 13,409
Research and development..... 482 1,241 2,745 4,123 6,289 5,005 5,986
Other........................ - - - 654 420 - -
Loss from operations before
interest..................... (932) (2,717) (5,705) (11,187) (14,023) (10,269) (17,041)
Interest income.............. 9 12 609 774 264 200 351
Interest and financing
expense...................... - (19) (69) (3) (1,132) (434) (1,783)
Net (loss)................... $ (923) $(2,724) $(5,165) $(10,416) $(14,891) $(10,503) $(18,473)
Net (loss) per share......... $(0.32) $(0.65) $(0.89) $ (1.48) $ (1.91) $ (1.42) $ (2.03)
Weighted average number of
Common shares outstanding......... 2,902,735 4,181,599 5,791,367 7,059,578 7,782,094 7,416,393 9,508,358
</TABLE>
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<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, SEPTEMBER 30,
1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ----
(UNAUDITED)
BALANCE SHEET DATA
<S> <C> <C> <C> <C> <C> <C>
Cash and short-term investments................ $633 $403 $18,928 $7,588 $11,274 $18,956
Working capital................................ $869 $418 $20,061 $9,561 $8,432 $24,656
Indebtedness................................... -- $500 -- -- $7,495 --
Total assets................................... $1,217 $1,791 $22,606 $13,936 $27,783 $36,315
Shareholders' equity........................... $1,040 $841 $21,795 $12,610 $14,579 $4,723
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction
with "Selected Consolidated Financial Data" and our Consolidated Financial
Statements and Notes, included in our Annual Report on Form 20-F, incorporated
into this prospectus by reference. In addition to historical information, the
following discussion contains certain forward-looking statements that involve
known and unknown risks and uncertainties, such as statements of our plans,
objectives, expectations and intentions. Our actual results could differ
materially from those discussed in the forward-looking statements. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed below and in the section entitled "Risk Factors," and "Forward
Looking Statements" as well as those discussed elsewhere herein.
OVERVIEW
We began operations in 1993. Until 1996, we devoted substantially all
of our resources to the research and development of our technology and products.
In late 1996, we began manufacturing and selling our products to the research
and clinical research markets.
Our products and services are described below.
- SEQUENCING SYSTEMS. Sequencing systems consist of
automated DNA sequencers and related equipment, and our
proprietary DNA analysis and data management software.
- GENEKITS AND OTHER CONSUMABLES. GeneKits consist of
various reagents, enzymes, primers and other chemicals, and other
consumables consist of disposable gel cassettes, acrylamide and
other materials.
- TESTING, SEQUENCING AND OTHER SERVICES. We provide
services, such as viral load testing, genotyping and other
molecular services, through our wholly-owned subsidiaries, Applied
Sciences, Inc., which we acquired in 1997, and Visible Genetics
Europe S.A. (formerly known as ACT Gene S.A.), which we acquired
in 1998.
During 1996 and 1997, we generated revenues primarily by selling
sequencing systems. During this period, our business strategy focused on
installing our DNA sequencers and related equipment in research and clinical
research facilities. During 1998, we began to shift our strategy to target the
clinical diagnostic market and to place greater emphasis on generating recurring
revenues from sales of GeneKits and other consumables initially to the research
and clinical research markets and, subject to FDA approval, to the clinical
diagnostic market. As part of this strategy, we may sell our DNA sequencers at
reduced prices to customers who commit to purchase significant quantities of
GeneKits and other consumables, or we may bundle the sequencers and GeneKits for
sale at favorable prices. This strategy may result, initially, in reduced gross
margins and additional losses as we attempt to expand our installed base of DNA
sequencers. However, we believe that this strategy, over the long term, will
help us maximize recurring sales of our HIV GeneKit and other GeneKits to the
clinical diagnostic market, should we receive FDA approval.
OUR OPERATIONS
SALES. Sales consist of revenues from the sale of sequencing systems,
GeneKits and other consumables as well as from the sale of testing services.
Sales include shipping charges, but exclude sales
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and excise taxes. Revenue from the sale of our products is recognized when
shipment occurs and title passes to the customer. Revenue from the sale of
testing and other services is recognized when the service is provided and there
is a reasonable assurance of collectibility. Sales of bundled sequencing systems
and GeneKits are recognized proportionately as the components of the bundle are
shipped to customers. The total sales price of the bundle is allocated to the
components proportionately based on the retail prices typically charged for such
components if they were sold individually rather than as part of the bundle. For
an analysis of sales by product segment and geographic market, see Note 12 to
our Consolidated Financial Statements.
COST OF SALES. Cost of sales consists of manufacturing costs including
materials, labor and overhead chargeable to inventory. The gross margin from
sales of our products and services varies depending on product category,
distribution channel and geographic market. Gross margin is calculated by
subtracting cost of sales from sales. We sell our products in North America,
Europe, Asia, Australia and South America. In the United States, Canada and many
countries in Europe, we sell our products directly through our own sales force.
In selected geographic and product markets, we seek to sell our products through
distribution, marketing or agency agreements with leading distributors.
Currently, we have entered into agreements with distributors or agents in Spain,
Portugal, Japan, Australia, New Zealand, Argentina and Brazil.
SALES, GENERAL AND ADMINISTRATIVE EXPENSES. Sales, general and
administrative expenses consist primarily of salaries and related expenses,
occupancy costs, utilities, professional fees, consulting fees, travel costs,
capital taxes, depreciation of fixed assets and amortization of costs paid to
patent counsel.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
consist primarily of salaries and related expenses for employees engaged in
research and development, occupancy costs, consulting fees, travel costs,
depreciation and amortization of fixed assets and costs related to FDA clinical
trials for our HIV OpenGene System.
INTEREST INCOME. Interest income consists of income earned on cash,
cash equivalents and marketable securities.
INTEREST AND FINANCING EXPENSE. Interest and finance expense consists
of interest paid or accrued, and amortization of warrant costs and other
financing expenses.
Our financial statements are presented in U.S. dollars and are prepared
in accordance with generally accepted accounting principles in the United
States.
RESULTS OF OPERATIONS
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1999 TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
SALES. Sales increased 28% to $8.7 million for the nine months ended
September 30, 1999, compared with $6.8 million for the same period of the prior
year. This increase resulted primarily from increased sales of our GeneKits and
other consumables. In the nine months ended September 30, 1999, automated DNA
sequencing systems accounted for 57% of total sales, compared to approximately
73% of total sales in the same period of the prior year. GeneKits and other
consumables accounted for 33% of total sales, compared to approximately 13% of
total sales in the same period of the prior year. Testing services accounted for
10% of total sales, compared to 14% of total sales in the same period of the
prior year. Sales in North America, Europe, and Asia and South America were $3.9
million, $3.4 million and $1.4 million, respectively, during the nine months
ended September 30, 1999, as compared to $5.6 million, $1.0 million and $0.2
million, respectively, during the nine months ended September 30, 1998.
During the nine months ended September 30, 1999, one customer accounted for
approximately 16% of sales, of which 14% comprised DNA sequencing systems and
2% comprised GeneKits and other consumables. During the nine months ended
September 30, 1998, one customer accounted for 43% of sales, of which 42%
comprised DNA sequencing systems and 1% comprised Gene Kits and other
consumables. The sales to this customer were made on the same general terms
and conditions as the majority of other sales during the respective periods.
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COST OF SALES. Cost of sales increased to $6.3 million for the nine
months ended September 30, 1999, from $4.4 million in the same period of the
prior year. In the nine months ended September 30, 1999, cost of sales
aggregated 73% of sales, compared to 65% of sales in the same period of the
prior year. This increase in cost of sales was primarily related to the increase
in sales and a write-off of obsolete and discontinued instruments and related
parts totaling $0.62 million recorded in the second quarter of 1999.
SALES, GENERAL AND ADMINISTRATIVE EXPENSES. Sales, general and
administrative expenses increased 75% to $13.4 million for the nine months ended
September 30, 1999, compared with $7.7 million for the same period of the prior
year. This increase resulted primarily from increased payroll and personnel
costs due to the continued growth of our business, costs of quality control and
regulatory departments established in 1998 and the continued expansion of our
sales force in North America and Europe. Sales and marketing expenses included
in sales, general and administrative expenses increased 93% to $7.0 million for
the nine months ended September 30, 1999, compared with $3.6 million for the
same period of the prior year.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased 20% to $6.0 million for the nine months ended September 30, 1999,
compared with $5.0 million for the same period of the prior year. This increase
resulted from increased payroll and personnel costs, along with increased
purchases of laboratory supplies, as we developed additional GeneKits and
continued our research programs. Additionally, we incurred costs for
pre-clinical and clinical trials related to our FDA submission for our HIV
OpenGene System.
INTEREST INCOME. Interest income was $0.4 million for the nine months
ended September 30, 1999, compared with $0.2 million for the same period of the
prior year.
INTEREST AND FINANCING EXPENSE. Interest and financing expense
increased to $1.8 million for the nine months ended September 30, 1999,
compared with $0.4 million for the same period of the prior year. This
increase was due to interest and financing costs on our term loan agreements
entered into in April and September 1998 and the Warburg Pincus financing in
July 1999. Of the total interest and financing expense, $1.3 million was a
non-cash charge due to the amortization of costs attributable to warrants
issued in connection with our term loans and the Warburg Pincus financing,
compared to $0.2 million for the same period of the prior year. See
"Liquidity and Capital Resources."
COMPARISON OF FISCAL YEAR ENDED DECEMBER 31, 1998 TO FISCAL YEAR ENDED
DECEMBER 31, 1997
SALES. Sales increased 259% to $10.9 million in 1998 from $3.0 million
in 1997. This increase resulted from increased sales of our automated DNA
sequencers, GeneKits and other consumables and testing services. In 1998, 412
automated DNA sequencing systems were sold, an increase of 353% from the 91
systems sold in 1997. In 1998, automated DNA sequencing systems accounted for
74% of sales, compared to 90% of sales in 1997. GeneKits and other consumables
accounted for 13% of sales in 1998, compared to 8% in 1997. Testing services
accounted for 13% of sales in 1998 compared to 2% of sales in 1997 as a result
of our acquisition in 1998 of a DNA diagnostic testing company. Sales during
1998 in North America, Europe, and Asia and South America were $7.4 million,
$3.0 million and $0.5 million, respectively, as compared to $2.8 million, $0.2
million and $0.05 million, respectively, during 1997. During 1998, one customer
accounted for 30% of sales, of which 29% comprised DNA sequencing systems and 1%
comprised GeneKits and other consumables. The sales to this customer were made
on the same general terms and conditions as the majority of other sales during
the year.
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During 1997, no customer accounted for more than 10% of sales.
COST OF SALES. Cost of sales increased to $6.7 million in 1998 from
$2.0 million in 1997. In 1998, cost of sales aggregated 61% of sales, a decrease
from 66% of sales in 1997. Cost of sales decreased in 1998 as a percentage of
sales due to improvements in our manufacturing processes, as well as economies
of scale as production of automated DNA sequencing systems, GeneKits and other
consumables increased compared to the previous year.
SALES, GENERAL AND ADMINISTRATIVE EXPENSES. Sales, general and
administrative expenses increased 55% to $11.5 million in 1998 from $7.4 million
in 1997. This increase resulted primarily from increased payroll and personnel
costs due to the growth of our business, establishment of quality control and
regulatory departments and development of a sales force in North America and in
certain countries in Europe. Sales and marketing expenses included in sales,
general and administrative expenses increased 126% to $6.1 million in 1998 from
$2.7 million in 1997.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased 53% to $6.3 million in 1998 from $4.1 million in 1997. This increase
in research and development expenses resulted from increased payroll and
personnel costs along with increased purchases of laboratory supplies as we
continued to develop GeneKits and expanded our research programs.
In April 1998, we acquired 100% of the shares of ACT Gene S.A., a DNA
diagnostic testing company, for 85,000 common shares and cash payable of $0.7
million. This acquisition was accounted for as a purchase, and resulted in the
recording of an excess of purchase price over tangible net assets of $0.5
million, of which $0.4 million was determined to be in-process research and
development, and reflected as an expense in 1998. The in-process research and
development related to the cost and time pertaining to the development of a
test kit and research clinical samples necessary for the development of
several kits designed for use with DNA sequencing systems. As of April, 1998,
the test kit was approximately 80% completed and was expected to be completed
during 1999. We currently expect the test kit to be completed during 2000. At
the date of acquisition, the test kit had not yet reached technicalogical
feasibility and had no alternative future uses in the clinical diagnostic
market.
INTEREST INCOME. Interest income declined to $0.3 million in 1998 from
$0.8 million in 1997.
INTEREST AND FINANCING EXPENSE. Interest and financing expense
increased to $1.1 million in 1998 from approximately nil in 1997 due to interest
paid or accrued and the amortization of costs attributable to warrants issued in
connection with term loans entered into in April and September 1998.
COMPARISON OF FISCAL YEAR ENDED DECEMBER 31, 1997 TO FISCAL YEAR ENDED
DECEMBER 31, 1996
SALES. Sales increased 210% to $3.0 million in 1997 from $1.0 million
in 1996. This increase resulted from increased sales of our automated DNA
sequencers and GeneKits and other consumables. In 1997, 91 automated DNA
sequencing systems were sold, an increase of 112% from the 43 systems sold in
1996. In 1997, automated DNA sequencing systems accounted for 89% of total
sales, compared to 95% of total sales in 1996. GeneKits and other consumables
accounted for 9% of total sales in 1997, compared to 5% of total sales in 1996.
Sales during 1997 in North America, Europe, and Asia and South America were $2.8
million, $0.2 million and $0.05 million, respectively, as compared to $0.8
million, $0.1 million and nil, respectively, during 1996. During 1997, no
customer accounted for more than 10% of sales. During 1996, two customers each
accounted for approximately 15% of sales, all which were comprised of DNA
sequencing systems. The sales to these two customers were made on the same
general terms and conditions as the majority of other sales during the year.
COST OF SALES. Cost of sales increased to $2.0 million in 1997 from
$0.6 million in 1996. In 1997, cost of sales aggregated 66% of sales as compared
to 57% of sales in 1996. Cost of sales increased in 1997 as a percentage of
sales due to capacity constraints and various manufacturing challenges as
production increased to meet demand.
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SALES, GENERAL AND ADMINISTRATIVE EXPENSES. Sales, general and
administrative expenses increased 121% to $7.4 million in 1997 from $3.4 million
in 1996. This increase primarily resulted from increased payroll and personnel
costs as we hired additional selling, marketing, administrative and management
personnel due to our growth, and the costs of developing a sales force in North
America and certain countries in Europe. Sales and marketing costs included in
sales, general and administrative expenses increased to $2.7 million in 1997
from $0.7 million in 1996.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased 50% to $4.1 million in 1997 from $2.7 million in 1996. This increase
resulted from increased payroll and personnel costs along with increased
purchases of laboratory supplies as we established a research facility in
Pittsburgh, the continued development of GeneKits at our main lab in Toronto and
with outside researchers and increased design and development costs associated
with our OpenGene System.
Effective October 1997, we acquired Applied Sciences, Inc., a
Georgia-based diagnostics company specializing in HIV genotyping. This
acquisition was accounted for as a purchase and resulted in the recording of an
excess of purchase price over tangible assets of $0.7 million. This amount was
determined to be in-process research and development and was reflected as an
expense in 1997. The in-process research and development related to the cost
and time pertaining to the development of certain test kits designed for use
with DNA sequencing systems. As of October 1997, these kits were
approximately 20% to 50% completed. Development of one kit was completed in
the fourth quarter of 1998, and the remaining kits are expected to be
completed during 2000. At the date of acquisition, the test kits had not
reached technicalogical feasability and had no alternative future uses in the
clinical diagnostic market.
INTEREST INCOME. Interest income increased to $0.8 million in 1997 from
$0.6 million in 1996. This increase resulted because in 1996 we earned only six
months' interest following our initial public offering in June 1996.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through
private placements of equity, and an initial public offering in June 1996. We
have also borrowed funds from institutional lenders and in the past utilized a
bank credit facility.
BANK CREDIT FACILITY. In 1997, we obtained a bank line of credit for up
to $1.1 million from the Royal Bank of Canada. The loan was secured by a lien on
our accounts receivable, inventory and fixed assets. In April 1998, the bank
line was repaid and the line was cancelled.
INSTITUTIONAL LOANS. On April 30, 1998, our subsidiary, Visible
Genetics Corp., or VGC, borrowed $7.0 million from various funds for which Hilal
Capital Management LLC serves as general partner, investment advisor or
management company. We refer to these funds in this prospectus as our
"institutional lenders" or the "Hilal funds." In September 1998, VGC borrowed an
additional $1.0 million from these lenders. The interest rate of the loans was
10% per year. Interest and principal on the $7.0 million loan were payable on or
about April 29, 1999, and, on the $1.0 million loan, were payable on December
28, 1999.
On April 30, 1999, we and the institutional lenders agreed to delay the
payment date of the $7.0 million loan to December 31, 1999, and to move up the
payment date of the $1.0 million loan to July 1, 1999. The institutional lenders
later extended the payment date to the earlier of July 22, 1999, or the
completion of the Warburg Pincus financing (described below). In addition, the
institutional lenders agreed to permit us to borrow up to an additional $5.0
million of loans from other lenders which would be senior to the $7.0 million
loan and junior to the $1.0 million loan.
We guaranteed VGC's obligations under both loans. We gave the
institutional lenders a security interest in most of our assets to secure our
obligations under the guaranty, including a pledge of the outstanding stock of
VGC. Both the loan agreements and the guaranty imposed certain restrictions on
us and our subsidiaries, including limitations on loans and other obligations
which we may incur.
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As part of the loan arrangements, we granted the institutional lenders
warrants to purchase our common shares. Initially, we granted the institutional
lenders warrants to purchase 420,000 common shares which may be exercised until
April 2003, at a price of $10.00 per share. When we borrowed an additional $1.0
million from the institutional lenders in September 1998, we granted them
warrants for an additional 120,000 common shares which may be exercised until
September 2003, at a price of $10.00 per share. The warrants were valued using
the Black-Scholes option valuation model. The total proceeds received from the
institutional lenders were allocated between the warrants and term loans based
on the relative fair value of each component, resulting in $0.9 million and $0.2
million of the total proceeds from the April 1998 and September 1998 term loans,
respectively, being allocated to warrants. The value of the term loans were to
be increased to their face value at their respective maturity dates, resulting
in a charge to financing expense and warrants, by their pro rata share, over the
remaining term of the loans. As a result, non-cash charges of $0.6 million were
recorded as financing expenses in 1998. The remaining $0.4 million will be
recorded as non-cash financing expenses in 1999.
On April 30, 1999, we granted the institutional lenders warrants to
purchase an additional 140,000 common shares which may be exercised until April
30, 2006, at a price of $17.00 per share. The warrants were valued using the
Black-Scholes option valuation model, resulting in a value being attributed to
these warrants of $0.9 million. This amount was recorded as a deferred charge on
the balance sheet and was to be amortized to financing expense over the
remaining term of the loan maturing on December 31, 1999. As a result, the
entire amount will be recorded as a non-cash charge to financing expense in
1999.
On July 15, 1999, we repaid all of the loans made to us by the Hilal
Funds. Of the $8.0 million principal amount of the loans, we paid $4.1 million
of principal plus accrued interest on the loan in cash. The Hilal Funds
converted the remaining $3.9 million principal amount plus accrued interest into
3,948 Series A preferred shares and 147,098 warrants to purchase our common
shares. The warrants were valued using the Black-Scholes option valuation model.
The value of the net proceeds was allocated between convertible preferred shares
and warrants based on the relative fair value of each instrument. The total
amount allocated to warrants and preferred shares, was $0.9 million and $3.0
million, respectively. The value of the warrants is treated as a discount to the
preferred shares and will be charged directly to retained earnings over seven
years, the time period when redemption of the preferred shares first becomes
mandatory. See "Description of Capital Shares." The Series A preferred shares
and warrants have the same terms as those granted to Warburg Pincus (as
described below).
WARBURG PINCUS FINANCING. On July 15, 1999, certain affiliated funds
managed by E.M. Warburg, Pincus & Co., LLC, invested $30.0 million in our
company. In consideration for this investment, we issued to the Warburg Pincus
Funds 30,000 Series A preferred shares convertible at the holders' option into
common shares at $11.00 per share, and warrants to purchase 1,100,000 common
shares exercisable for four years at a purchase price of $12.60 per share. The
warrants were valued using the Black-Scholes option valuation model. The value
of the net proceeds was allocated between convertible preferred shares and
warrants based on the relative fair value of each instrument. The total amount
allocated to warrants and preferred shares was $6.4 million and $22.8 million,
respectively. The value of the warrants is treated as a discount to the
preferred shares and will be charged directly to retained earnings over seven
years, the time period when redemption of the preferred shares first becomes
mandatory. For a description of the Series A preferred shares and the warrants,
see "Description of Capital Shares."
PRIVATE PLACEMENT. In December 1999, the selling shareholders purchased
1,916,000 common shares of our company in a private placement. The investors
paid $15 per share and we received total proceeds of $28.74 million from the
private placement. We agreed to use our best efforts to register the common
shares sold in that offering by April 14, 2000. If the shares are not
registered by that date, we must pay to each investor an amount equal to
0.75% of the dollar amount of its investment for each full month following
April 14, 2000 that the shares are not registered. If the shares are still
not registered by June 14, 2000, we must pay to each investor an amount equal
to 1.5% of the dollar amount of its investment for each full month following
June 14, 2000 that the shares are not registered.
CAPITAL EXPENDITURES. Additions to fixed assets were approximately $0.8
million, $1.1 million and $3.3 million for the years ended December 31, 1996,
1997 and 1998, respectively and $1.5 million for the nine months ended September
30, 1999. We expect capital expenditures to increase over the next several years
as we expand our facilities and acquire additional manufacturing and scientific
equipment.
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CURRENT AND FUTURE FINANCING NEEDS. We have incurred negative cash flow
from operations since we started our business. We have spent, and expect to
continue to spend, substantial amounts to complete our planned product
development efforts, expand our sales and marketing activities, conduct our
clinical trials, conduct research, build our business infrastructure and expand
our manufacturing capabilities. At this time, funds from operations are not
sufficient to meet our operating needs and other anticipated financial
requirements.
We believe, based on our current plans, that our cash on hand and
anticipated funds from operations will be sufficient to enable us to meet our
operating needs for the next 24 months. However, the actual amount of funds
we will need to operate for the next 24 months is subject to many factors,
some which are beyond are control. We may need to obtain additional funds
sooner or in greater amounts than we currently anticipate and we may need to
obtain additional funds at the end of the 24 month period. If we need to
obtain funds at the end of 24 months, or earlier, potential sources of
financing include strategic relationships, public or private sales of our
shares or debt or other arrangements. Because of our potential long term
capital requirements, we may seek to access the public or private equity
markets whenever conditions are favorable, even if we do not have an
immediate need for additional capital at that time. We do not have any
committed sources of financing at this time and it is uncertain whether
additional funding will be available when we need it on terms that will be
acceptable to us or at all. If we raise funds by selling additional common
shares or other securities convertible into common shares, the ownership
interest of our existing shareholders will be diluted. If we are not able to
obtain financing when needed, we would be unable to carry out our business
plan, we would have to significantly limit our operations and our business,
financial condition and results of operations would be materially harmed.
If we wish to issue equity securities or obtain additional financing,
we will need the consent of the Series A preferred shareholders under certain
circumstances. We will be required to obtain the consent of the holders of a
majority of the then outstanding Series A preferred shares prior to issuing any
equity security that has rights as to dividends and liquidation that are senior
or equal to those of the Series A preferred shares. We will also be required to
obtain the consent of the holders of a majority of the then outstanding Series A
preferred shares if we wish to borrow money and at such time or as a result of
such loans, the total principal amount of our indebtedness and capitalized lease
obligations exceeds $15.0 million. As a result, we may be delayed in, or
prohibited from, obtaining certain types of financing.
See "Risk Factors- We may need to raise additional capital in the future
and we cannot be certain that we will be able to raise capital when necessary
on acceptable terms," and "Risk Factors-We may require approval of the
holders of our Series A Preferred Shares in order to obtain certain types of
financing."
YEAR 2000
Many computer software applications and programs may not properly
recognize calendar dates beginning in the year 2000, because of the computer
industry's past practice of using two digits rather than four digits to identify
the applicable year. If not corrected, these applications and programs could
fail or create erroneous results.
We have conducted a comprehensive examination of our information
technology systems and the software applications sold with our products to
determine year 2000 compliance. Based on our examination, we believe that these
systems and software applications are year 2000 compliant. As of the date of
this prospectus, none of these systems or applications have experienced year
2000 problems.
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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. See "Risk Factors-Our business could be harmed if the software,
computer technology and other systems we use are not year 2000
compliant."
EURO CONVERSION
Effective January 1, 1999, 11 of the 15 member countries of the
European Union adopted the euro as their common legal currency and each
participant established fixed conversion rates between their sovereign, or
legacy, currencies and the common euro currency. The legacy currencies of the
individual countries are scheduled to remain legal tender as denominations of
the euro until January 1, 2002, when euro-denominated bills and coins will be
introduced. During this transition period, public and private parties may choose
to pay for goods and services using either the euro or the participating
country's legacy currency. By July 1, 2002, the legacy currencies will be phased
out entirely as legal tender.
We currently conduct business operations in U.S. and Canadian dollars
and several other currencies. Since our information systems and processes
generally accommodate multiple currencies, we anticipate that any necessary
modification to our information systems, equipment and processes to accommodate
euro transactions will be made on a timely basis and do not expect any failures
that would have a material adverse effect on our financial position or results
of operations.
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INFORMATION ABOUT OUR COMPANY
For a detailed description of our business and information about our
management, see our Annual Report on Form 20-F which is incorporated into this
prospectus by reference. The following information supplements or supercedes, as
appropriate, the information contained in our Annual Report on Form 20-F.
REGULATION OF OUR PRODUCTS BY THE FDA AND OTHER GOVERNMENT AGENCIES
We currently sell our products for research and clinical research
purposes. In the future, we intend to sell products for clinical diagnostic
purposes. We do not believe we need authorization from the FDA or health
authorities in foreign countries to sell our products for research purposes, as
long as they are properly labeled. We will, however, require authorization
to sell our products for clinical diagnostic purposes.
FDA APPROVAL PROCESS. Products that are used to diagnose diseases in
people are considered medical devices, which are regulated by the FDA. To obtain
FDA authorization for a new medical device, a company may have to submit data
relating to safety and efficacy based on extensive testing. This testing, and
the preparation of necessary applications and the processing of those
applications by the FDA, are expensive and may take several years to complete.
The following describes several important aspects of the FDA authorization
process.
The FDA has three classes for medical devices:
- Class I devices (for example, bandages, manual
wheelchairs and ice bags) are the least regulated, but they must
still comply with the FDA's labeling, manufacturing,
recordkeeping, and other basic requirements. Most Class I
devices do not require premarket authorization from the FDA.
- Class II devices (for example, portable oxygen generators
and hypodermic needles) may be subject to additional regulatory
controls, such as performance standards and postmarket
surveillance.
- Class III devices (for example, cardiac pacemakers)
require specific FDA approval prior to marketing and distribution,
and are, as well, subject to the FDA's basic requirements.
To sell a Class II or Class III medical device, a company must first
either obtain permission of the FDA by submitting a 510(k) premarket
notification, commonly known as a 510(k), showing that the device is similar
to a device already on the market, or get specific approval for the device by
submitting a premarket approval application, commonly known as a PMA
application. A company may have to include test data in the notification,
including human test data. It will almost always have to include such test
data in a PMA application.
If human test data are required for either a 510(k) or a PMA
application, and if the device presents a significant risk, the manufacturer
must first file an Investigational Device Exemption submission, or IDE, with the
FDA. The IDE must contain data, such as animal and laboratory testing, showing
that the device is safe for human testing. If the IDE is granted, human testing
may begin.
Generally, a 510(k) notification to the FDA that a new device is
similar to an existing device requires less data and takes less time for the FDA
to process than a PMA. The FDA is supposed to act on a 510(k) notification
within 90 days. According to the most recent FDA data available, the FDA
completes its review of more than 70% of 510(k)s within 90 days. By contrast,
a PMA application must be supported by more extensive data to prove the safety
and efficacy of the device, and review of a PMA
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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 more quickly by the FDA than a PMA. Although it is
likely that the FDA will follow the recommendation of its advisory committee, to
do so the FDA is required to issue a proposed regulation, allow the opportunity
for public comment and then publish a final regulation reclassifying HIV
genotyping tests. This process could take several years to complete.
Under the Food and Drug Administration Modernization Act of 1997, there
is an alternative option for us to obtain faster reclassification of our HIV
OpenGene System. Under this new procedure we can ask the FDA to classify our HIV
OpenGene System based upon an evaluation of the risks presented by the device to
patients. The FDA has 60 days to make a decision on this request. However, in
order for us to use this new procedure, we would first have to submit a 510(k)
to the FDA and have the FDA reject the 510(k), which would occur because the
device is still in Class III. Once the FDA rejects our 510(k), we would then
immediately submit our request for classification of our HIV OpenGene System in
Class II. This option is likely to be faster than waiting for the FDA to go
through its normal reclassification procedures. However, this process is new
and is used very infrequently and, if we elect to use this procedure, there is
no assurance that the FDA would grant our request for reclassification.
We believe that some of our other products will be regulated as Class
II or Class III medical devices.
OTHER FDA REQUIREMENTS. In addition to government requirements relating
to marketing authorization for medical device products, we will also be subject
to other FDA requirements. We will have to be registered as a medical device
manufacturer with the FDA. We will be inspected on a routine basis by the FDA
for compliance with the FDA's quality system regulations, which prescribe
standards for manufacturing, testing, distribution, storage, design control and
service activities. In addition, because we will manufacture some of our
products in Canada, the FDA, in conjunction with the U.S. Customs Service, could
impose a ban on our products if the FDA were to conclude that the products
appeared to be in violation of the FDA's regulatory requirements, including
restrictions that apply to the sale of research-use only products. Also, the
FDA's medical device reporting regulation will require us to provide information
to the FDA on deaths or serious injuries associated with the use of our devices,
as well as product malfunctions that are likely to cause or contribute to death
or serious injury if the malfunction were to recur.
Finally, the FDA prohibits promoting a device for unauthorized uses and
reviews company labeling for accuracy. The FDA has become aware that certain
products being sold by other companies for research purposes only, were in fact
being used by some customers for clinical diagnostic purposes.
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The FDA recently issued a policy statement describing the conditions under which
companies may sell research-use only products. These conditions may restrict our
ability to sell research-use only products in the United States. We do not
believe these conditions will have any negative effect on our sale of GeneKits
for legitimate scientific research.
REGULATORY APPROVAL OUTSIDE THE UNITED STATES. We plan to market our
products outside the United States, initially in Canada, Japan, countries in
Europe and South America. Government authorization requirements similar to
the FDA's exist in some of these and many other foreign countries. Therefore,
for us to obtain authorization to sell our products for clinical diagnostic
purposes in Canada, Japan and Europe may also require lengthy and costly
testing procedures. In addition, the regulatory bodies in other countries may
be affected or influenced by significantly different criteria than those used
by the FDA. Sale of our products in these areas may be materially affected by
the policies of these regulatory bodies or the domestic politics of the
countries involved.
OTHER GOVERNMENT REGULATIONS. We are or may become subject to various
federal, state, provincial and local laws, regulations and recommendations,
including those relating to workers compensation, safe working conditions, and
laboratory and manufacturing practices used in connection with our research and
development activities.
In addition, our reference laboratory in Norcross, Georgia, is subject
to regulation under the Clinical Laboratory Improvement Amendments of 1988,
known as CLIA. Under CLIA, laboratories must meet various requirements,
including requirements relating to the validation of tests, training of
personnel, and quality assurance procedures. The laboratory must also be
certified by a government agency. Our Norcross laboratory performs high
complexity tests, and is therefore subject to the most stringent level of
regulation under CLIA. This laboratory is certified under CLIA and by the state
of Georgia.
We are also subject to various laws and regulations in Canada, the
United States and Europe, including those relating to product emissions
use and disposal of hazardous or toxic chemicals, infectious disease agents
and other materials, workers compensation, safe working conditions, and
laboratory and manufacturing practices used in connection with our research
and development activities.
See "Risk Factors-We may not receive approval of the FDA or foreign
regulatory authorities for our HIV OpenGene System and, in the future, other HIV
products and therefore we may not be able to sell our HIV products to the
clinical diagnostic market in the United States or abroad," "Risk Factors-We may
not receive regulatory approval for our other products and therefore we may not
be able to sell these products for clinical diagnostic purposes in the United
States or in other countries," and "Risk Factors-Each time we make alterations
to any FDA approved products, we may need to seek additional FDA approval which
will lengthen the time and increase the cost of bringing upgraded or new
products to market."
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CLINICAL TRIALS
We are conducting and have conducted several clinical trials. We
plan to submit the results of our Proficiency trial to the FDA as part of
our market appoval application. We also plan to submit to the FDA as part of
our application, the results of our reanalyses of samples collected in the 1998
GART study conducted by the Community Program for Clinical Research on AIDS.
Our reanalyses will use our HIV GeneKit and OpenGene System which were not
used in the original study. We do not plan to submit results of other trials
to the FDA as part of the application process. The FDA has advised us that we
are not required to complete our clinical trial, SEARCH, for our HIV OpenGene
System. The FDA has indicated that it will not require us to demonstrate
further the clinical utility of our HIV OpenGene System in the treatment of
HIV infected individuals. Based on the FDA's position, we will continue to
provide genotyping to all 128 patients currently enrolled in the SEARCH study.
However, enrollment of new patients into SEARCH has been closed. For a
description of our Proficiency, SEARCH, and other clinical trials,
see the section of our Annual Report on Form 20-F entitled "Item 1. Description
of Business-Our HIV OpenGene System-FDA Allowance and Clinical Trials." For a
description of the GART study, see the section of our Annual Report on Form
20-F entitled "Item 1. Description of Business-The HIV Genotyping
Market-Genotyping and HIV."
DISTRIBUTION AGREEMENTS
We terminated our initial agreement with Roche Diagnostics S.L. for
Spain and Portugal in September 1999 and subsequently entered into a new
agreement with Roche Diagnostics S.L. for these territories. Under the new
agreement, Roche Diagnostics S.L. will act as our exclusive agent in Spain
and Portugal and will receive a commission based on sales. In November 1999,
we granted Amersham-Pharmacia Biotech K.K. the exclusive right to distribute
our products to the research market in Japan.
PATENTS
We own or jointly own 27 U.S. patents. We have an additional 34 U.S.
patent applications pending, of which nine have been allowed.
GeneKits
We are no longer developing a GeneKit for human papillomavirus. We feel
our resources are better utilized by concentrating on other GeneKits we are
currently developing, such as hepatitis B, hepatitis C and tuberculosis.
MANAGEMENT CHANGES
In July 1999, certain affiliated funds managed by E.M Warburg, Pincus &
Co., LLC, invested $30.0 million in our Company in exchange for 30,000 Series A
convertible preferred shares and warrants to purchase 1.1 million common shares
of our Company. Holders of our Series A preferred shares are entitled to vote as
a class for one director. Pursuant to that right, our Series A shareholders
appointed Jonathan S. Leff, a Vice President of E.M. Warburg, Pincus & Co., LLC
(see below for biography), as their representative to our Board of Directors.
Since Canadian law requires that a majority of our Board of Directors be
residents of Canada, Dr. Thomas C. Merigan, Jr. resigned as a director, thus
allowing our Company to remain in compliance with the law. Mr. Leff has filled
the position held by Dr. Merigan. Mr. Leff also serves on the Audit Committee
and the Compensation Committee of our Board of Directors. Mr. Leff, who is 31,
joined E.M. Warburg, Pincus & Co., LLC in July 1996 as an Associate. In
January 1999, he became a Vice President, and in January 2000, he became a
Managing Director. Mr. Leff is also a director of VitalCom Inc., a provider of
patient information networks and software, and a number of private health care
companies.
In November, 1999, Dr. John K. Stevens, our founder, and Chairman of
the Board of Directors retired from the Board. In accordance with the terms of
his employment agreement, Dr. Stevens has received a severance package of two
years salary plus benefits. We have extended the termination date of Dr.
Stevens' options until 2003. Upon retirement, Dr. Stevens repaid a $323,405 loan
owed to our company which
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was payable in 2006 and a $50,000 loan owed to our company which was payable in
December 1999. Dr. Stevens retired as President and Chief Executive Officer of
our company in July, 1999. We are in the process of identifying a candidate to
serve as chairman of our board of directors.
In November 1999, Timothy W. Ellis was appointed Chief Operating
Officer for our company. Mr. Ellis will be based in Atlanta, where our wholly
owned subsidiary, Applied Sciences, Inc. is currently located. We are in the
process of establishing a new 100,000 square foot facility in Atlanta that
will house its kit manufacturing operations, sales and marketing, and the
existing Applied Sciences, Inc. operations.
Mr. Ellis has been involved in the diagnostics business for over 25
years, having held a variety of positions with a number of companies. From
January 1998 to November 1999, Mr. Ellis operated his own management
consultant practice. From 1991 to 1997, Mr. Ellis was President of Dynex
Technologies. From 1988 to 1991, Mr. Ellis was President of Genetic Systems
Corporation. From 1985 to 1988, Mr. Ellis was General Manager of Abbott
Laboratories' Clinical Chemistry Business Unit. Mr. Ellis received Bachelor
of Science and Master of Science degrees from Bradley University.
As of November 10, 1999, we agreed with Dr. Chalom Sayada, that
Dr. Sayada would no longer continue to serve as our Vice President for European
Business Development. However, Dr. Sayada will continue to provide marketing
and strategy consulting services to our company through May 2001 pursuant to a
consulting agreement. Dr. Sayada's responsibilities have been assumed by
Dr. Arthur W. G. Cole, the President of our Visible Genetics Europe, S.A.
subsidiary. Dr. Cole became the President of Visible Genetics Europe, S.A. on
September 14, 1999. From May 1996 to September 13, 1999, Dr. Cole served as
Executive Vice President and Chief Business Officer of our Company. From 1995
to May 1996, Dr. Cole was a business consultant to companies in the
biotechnology industry through AC Consulting. From 1981 to 1995, Dr. Cole
worked at Pharmacia Biotech, AB, a Swedish biotechnology supply company in a
range of positions, including five years as Vice President. During his time
with Pharmacia, Dr. Cole ran the division responsible for worldwide sales of
DNA sequencing equipment and supplies. Dr. Cole holds a B.Sc. degree in
Biological Chemistry form Heriot Watt University and a Ph.D. from the
University of London.
In December 1999, William C. Sullivan was appointed Vice President,
Diagnostic Manufacturing for our company. In this role he will be responsible
for managing our kit manufacturing facility in Pittsburgh and establishing a
new manufacturing facility in Atlanta. Mr. Sullivan has over 25 years of
clinical laboratory IN VITRO diagnostics experience. From November 1998 to
December 1999, Mr. Sullivan was Vice President, Operations for Nichols
Institute Diagnostics, a unit of Quest Diagnostics. From July 1997 to
November 1998, Mr. Sullivan was Vice President, Operations for DiaNET Med
LLC. From April 1988 to July 1997, Mr. Sullivan held various positions at
Laboratory Corporation of America, and its predecessor company, Roche
Biomedical Laboratories, Inc.
In January 2000, Thomas Clarke was appointed Chief Financial Officer
of our company. Mr. Clarke replaces Jeffrey D. Sherman who resigned as Chief
Financial Officer in November 1999. Mr. Clarke, who will be based in Atlanta,
where our wholly owned subsidiary, Applied Sciences, Inc. is currently
located, is a Certified Public Accountant, and has over 20 years of financial
experience gained in a variety of private and public companies. From July
1997 to January 2000, Mr. Clarke was Chief Operating Officer of CCS TrexCom,
Inc., a telecommunications software company. From 1991 to July 1997, Mr.
Clarke was Chief Financial Officer of CCS TrexCom. From 1989 to 1990, Mr.
Clarke was Chief Financial Officer of Medaphis Corporation, a medical
transaction-processing company. From 1986 to 1989, Mr. Clarke was Senior
Vice-President and Chief Financial Officer of Days Inn Corporation. From 1985
to 1986, Mr. Clarke was Controller of Quadram Corporation. From 1980 to 1985,
Mr. Clarke held various financial positions at Contel Corporation. Mr. Clarke
received a BSBA degree from the University of Central Florida.
OPTIONS AND WARRANTS
As of January 7, 2000 there were options and warrants outstanding to
purchase an aggregate of 4,237,672 common shares, including options to
purchase 1,160,816 common shares held by directors and officers as a group.
The options held by directors and officers as a group have exercise prices
ranging from $1.37 to $18.38 per share and expire at various times between
2004 and 2010. The other options and warrants have exercise prices ranging
from $1.37 to $17.00 per share, and expire at various times between 2002 and
2009.
PROPERTY
We have entered into three leases for property located in Georgia.
One lease is for 99,822 square feet and has a term beginning on February 15,
2000 and ending on March 14, 2010. This facility, located in Suwanee, Georgia
and which is not yet operating, will house our U.S. headquarters and will be
used for kit manufacturing, research and development, and various corporate
functions. We have also entered into a short-term four month lease, which
commenced on December 15, 1999, for 3,258 square feet in Norcross, Georgia,
to be used as temporary office space until our Suwanee facility is fully
operational. In the other facility, located in Gwinnett County, Georgia, we
are leasing 21,032 square feet, for a term from November 1, 1999 to October
31, 2004. We have no present plans to utilize this facility and are currently
looking to sublease the property.
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CERTAIN TRANSACTIONS
We and Dr. Merigan have agreed not to complete the proposed acquisition
by us of certain assets and intellectual property owned by Dr. Merigan and an
affiliate, which is described in our Annual Report on Form 20-F under the
heading "Item 13. - Interests of Management in Certain Transactions." Dr.
Merigan is still performing part-time services for us.
SERVICE AND ENFORCEMENT OF LEGAL PROCESS
Our company is incorporated under the laws of the Province of Ontario,
Canada and a substantial portion of our assets are located in Canada. Certain of
our directors and officers and certain of the experts named in this prospectus
are residents of Canada, and all or a substantial portion of their assets are
located outside the United States. As a result, if any of our shareholders were
to bring a lawsuit against our officers, directors or experts in the United
States it may be difficult for them to effect service of legal process within
the United States upon those people who are not residents of the United States
or to realize in the United States upon judgments of courts of the United States
based upon civil liability under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended (including the rules promulgated
thereunder by the Commission). In addition, our attorneys in Canada, Goldman,
Spring, Schwartz & Kichler, have advised us that a judgment of a United States
court based solely upon civil liability under these laws would probably be
enforceable in Canada if the U.S. court in which the judgment were obtained had
a basis for jurisdiction in the matter. Our attorneys have also advised us that,
in their opinion, there is substantial doubt whether an action could be brought
successfully in Canada in the first instance on the basis of liability
predicated solely upon such laws.
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SELLING SHAREHOLDERS
The following table provides certain information with respect to the
common shares held by each selling shareholder as of January 7, 2000. Except as
described in this Registration Statement, our Annual Report on Form 20-F, or
otherwise noted in the footnotes following the table, none of the selling
shareholders has held any position or office, or has had a material relationship
with our company or our subsidiaries or other affiliates within the past
three years, other than owning the common shares. Except as otherwise noted,
all of the common shares owned by each selling shareholder are registered for
sale pursuant to this prospectus. The selling shareholders, however, are not
under any obligation to sell all or any portion of their common shares, nor
are the selling shareholders obligated to sell any of their common shares
immediately under this prospectus. We will not receive any proceeds from any
sales of common shares by the selling shareholders.
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<TABLE>
<CAPTION>
Number of Common Shares Number of Percentage of
Common Offered Common Shares Common Shares
Shares Owned Pursuant to this Owned After Owned After
Selling Shareholder Before Offering(1) Prospectus Offering(2) Offering(3)
- ------------------- --------------- ---------- -------- --------
<S> <C> <C> <C> <C>
Warburg, Pincus
Equity Partners, L.P. (4) 2,045,925 179,550 1,866,375(11) 13.8%
Warburg, Pincus
Ventures International, L.P(4) 2,165,000 190,000 1,975,000(11) 14.5%
Warburg, Pincus
Netherlands Equity Partners I, C.V. (4) 64,950 5,700 59,250(11) *
Warburg, Pincus
Netherlands Equity Partners II, C.V. (4) 43,300 3,800 39,500(11) *
Warburg, Pincus
Netherlands Equity Partners III, C.V. (4) 10,825 950 9,875(11) *
Hilal Capital, LP(5) 184,485 37,000 147,485(12) 1.3%
Hilal Capital QP, LP(5) 480,378 96,000 384,378(13) 3.3%
Hilal Capital International, Ltd. (5) 622,123 127,000 495,123(14) 4.2%
T. Rowe Price New Horizons Fund, Inc. (6) 390,000 250,000 140,000 1.2%
T. Rowe Price Health Sciences Fund, Inc. (6) 100,000 100,000 0 -
Oracle Strategic Partners, L.P. (7) 858,861 160,000 698,881(15) 6%
Frontier Performance Partnership L.P. (8) 113,900 35,800 78,100 *
Boston Small Cap Investment Fund (8) 58,400 18,500 39,900 *
Frontier Partners Fund L.P (8) 6,300 2,100 4,200 *
Frontier Partners Fund II L.P. (8) 121,000 39,600 81,400 *
DWS Investment GmbH (9) 682,500 620,000 62,500 *
M. Kingdon Offshore, N.V. (10) 450,700 50,000 400,700(16) 3.4%
</TABLE>
- ------------------
* Less than 1%
(1) Includes shares issuable upon exercise of warrants and conversion of
Series A preferred shares including common shares issuable with respect
to accrued interest at 9% per year, through January 15, 2000. See
"Description of Capital Shares."
(2) Assuming all of the common shares offered by each selling shareholder
are sold in the offering. Includes shares issuable upon exercise of
warrants and conversion of Series A preferred shares, including common
shares issuable with respect to accrued interest at 9% per year, through
January 15, 2000. See "Description of Capital Shares."
(3) Common shares issuable upon exercise of warrants and conversion of
Series A preferred shares are deemed outstanding for computing the
percentage ownership of the person holding the warrants and Series A
preferred shares but are not deemed outstanding for computing the
percentage ownership of any other person. This information is based on
11,623,615 common shares outstanding on December 31, 1999.
(4) Warburg, Pincus & Co. ("WP") is the sole general partner of each of these
selling shareholders. Each of these selling shareholders is managed by
E.M. Warburg, Pincus & Co., LLC ("EMW LLC"). Lionel I. Pincus is the
managing partner of WP and the managing member of EMW LLC, and may be
deemed to control both entities. Jonathan S. Leff, a director of our
company, is a general partner of WP and a managing director and member of
EMW LLC. Mr. Leff may be deemed to have an indirect pecuniary interest
(within the meaning of Rule 16a-1 under the Securities Exchange Act of
1934, as amended) in an indeterminate portion of the shares beneficially
owned by the selling shareholders. Mr. Leff disclaims beneficial ownership
of all such shares.
(5) For the relationship of the Hilal funds to our company, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources-INSTITUTIONAL LOANS." Hilal
Capital Partners LLC is general partner of Hilal Capital, LP and Hilal
Capital QP, LP and has investment and dispositive power over the
securities held by those funds. Hilal Capital Management LLC, is the
investment manager of Hilal Capital International Ltd., and, has
investment and dispositive power over the securities held by Hilal
Capital International, Ltd. Peter K. Hilal, M.D. manages and has sole
discretion over Hilal Capital Partners LLC and Hilal Capital Management
LLC, and, in that capacity, has ultimate investment and dispositive
power over securities held by all of those funds.
(6) T. Rowe Price Associates, Inc., the investment advisor of these funds,
has sole investment and dispostive power over the securities held by
these funds. John H. Laporte, or his designee, as President of T. Rowe
Price Health Sciences Fund, Inc. and T. Rowe Price New Horizon Fund,
Inc. has the ultimate voting power, and as an officer of T. Rowe Price
Associates, Inc., has ultimate dispositive power over the securities
held by these funds.
(7) Oracle Strategic Partners, L.P. and Oracle Strategic Capital, L.L.C.,
the Investment Manager of Oracle Strategic Partners, share voting and
dispositive power over the shares owned by Oracle Strategic Partners.
Larry Feinberg manages and has sole discretion over these funds, and, in
that capacity, has ultimate investment and dispositive power over
securities held by these funds.
(8) Michael Cavarretta, in his capacity as manager of Frontier Performance
Partnership L.P., Frontier Partners Fund L.P., Boston Small Cap
Investment Fund and Frontier Partners Fund II L.P., has sole voting and
dispositive power over securities held by these funds.
(9) Michael Sistenich, in his capacity as senior fund manager of DWS
Investment GmbH, has sole voting and dispositive power over securities
held by these funds.
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(10) Kingdon Capital Management, LLC, as investment advisor to M. Kingdon
Offshore, N.V., has voting and dispositive power over the securities
held by this fund. Mark Kingdon manages and has sole discretion over
Kingdon Capital Management, LLC, and in that capacity, has ultimate
voting and dispositive power over securities held by this fund.
(11) These shares are being registered by a separate Registration Statement
filed with, and currently being reviewed by, the Securities and Exchange
Commission.
(12) Includes 75,530 shares which are being registered by a separate
Registration Statement filed with, and currently being reviewed by, the
Securities and Exchange Commission.
(13) Includes 192,028 shares which are being registered by a separate
Registration Statement filed with, and currently being reviewed by, the
Securities and Exchange Commission.
(14) Includes 254,600 shares which are being registered by a separate
Registration Statement filed with, and currently being reviewed by, the
Securities and Exchange Commission.
(15) Includes 708,861 shares which have been registered under a separate
Registration Statement on Form F-3 (File No. 333-67607).
(16) Includes 389,202 shares which have been registered under a separate
Registration Statement on Form F-3 (File No. 333-67607).
46
<PAGE>
PLAN OF DISTRIBUTION
The common shares may be sold from time to time by the selling
shareholders in one or more transactions at fixed prices, at market prices at
the time of sale, at varying prices determined at the time of sale or at
negotiated prices. The selling shareholders may offer their common shares in one
or more of the following transactions:
- on any national securities exchange or quotation service
on which the common shares may be listed or quoted at the time of
sale, including the Nasdaq National Market;
- in the over-the-counter market;
- in private transactions;
- through options;
- by pledge to secure debts and other obligations;
- or a combination of any of the above transactions.
The common shares described in this prospectus may be sold from time to
time directly by the selling shareholders. Alternatively, the selling
shareholders may from time to time offer common shares to or through
underwriters, broker/dealers or agents. The selling shareholders and any
underwriters, broker/dealers or agents that participate in the distribution of
the common shares may be deemed to be "underwriters" within the meaning of the
Securities Act of 1933. Any profits on the resale of common shares and any
compensation received by any underwriter, broker/dealer or agent may be deemed
to be underwriting discounts and commissions under the Securities Act of 1933.
Any shares covered by this prospectus which qualify for sale pursuant
to Rule 144 under the Securities Act of 1933 may be sold under Rule 144 rather
than pursuant to this prospectus. The selling shareholders may not be able to
sell all of their shares under Rule 144. The selling shareholders may transfer,
devise or gift such shares by other means not described in this prospectus.
To comply with the securities laws of certain jurisdictions, the common
shares must be offered or sold only through registered or licensed brokers or
dealers. In addition, in certain jurisdictions, the common shares may not be
offered or sold unless they have been registered or qualified for sale or an
exemption is available and complied with.
The anti-manipulation provisions of Rules 101 through 104 under
Regulation M of the Securities Exchange Act of 1934 may apply to purchases and
sales of common shares by the selling shareholders. In addition, there are
restrictions on market-making activities by persons engaged in the distribution
of the common shares.
We have agreed to pay all of the expenses relating to the registration,
offering and sale of the common shares by the selling shareholders to the
public, other than commissions or discounts of underwriters, broker-dealers or
agents.
47
<PAGE>
DESCRIPTION OF CAPITAL SHARES
GENERAL
The current authorized capital of our company consists of an unlimited
number of common shares and an unlimited number of preferred shares. Any series
of preferred shares which our Board of Directors may issue could have rights
equal or superior to the rights of the common shares.
COMMON SHARES
The holders of common shares are entitled to receive dividends if,
as and when declared by our Board of Directors, subject to the rights of the
holders of any other class of our shares entitled to receive dividends in
priority to the common shares. If our company were liquidated or dissolved,
the holders of common shares would be entitled to receive all assets
remaining after the rights of the holders of any other class of shares
entitled to receive assets in priority to the holders of the common shares
have been satisfied.
The holders of the common shares are entitled to one vote for each
common share held at all meetings of our shareholders.
PREFERRED SHARES
Our Board of Directors is authorized to issue an unlimited number of
preferred shares in one or more series, to fix the number of preferred shares
and determine the designations, rights (including voting and dividend rights),
privileges, restrictions and conditions attaching to the shares of each such
series, without further vote or action by the shareholders. Because the terms of
the preferred shares may be fixed by our Board of Directors without shareholder
action, the preferred shares could, subject to regulatory policies, be issued
quickly, with terms calculated to defeat a takeover of our company or to make
the removal of our directors and executive officers more difficult. Under
certain circumstances, this could have the effect of decreasing the market value
of the common shares. The preferred shares may have voting rights superior to
the common shares and may rank senior to the common shares as to dividends and
as to the distribution of assets in the event our company were liquidated or
dissolved.
On July 15, 1999, our Board of Directors authorized the issuance of
33,950 shares of Series A Convertible Preferred Shares. We have issued 33,948
Series A Preferred Shares. The Series A preferred shares are convertible at
the holders' option into common shares at $11.00 per share. The preferred
shares contain provisions under which the conversion price would be reduced
on a weighted average basis if we issue shares, options or certain other
securities at prices lower than the conversion price (subject to certain
exceptions), and will also be adjusted upon the issuance of certain other
securities, certain recapitalization events and in certain other
circumstances to protect the holders against the dilutive effect of those
events.
Dividends on the preferred shares accrue quarterly at the rate of 9%
per year during the first three years after issuance, and 4% per year thereafter
and are compounded annually. Dividends are not payable for the first three
years. After three years, at our option, we may pay dividends in cash. If
dividends are not paid in cash, they will continue to accrue and will be
convertible into additional common shares upon conversion of the preferred
shares.
After the third anniversary and prior to the seventh anniversary of the
date of issuance of the preferred shares, we have the right to redeem the
outstanding preferred shares at a price, which we call the redemption price,
equal to $1,000 per share, plus accrued but unpaid dividends, provided that the
price of our common shares on the Nasdaq National Market equals or exceeds 150%
of the conversion
48
<PAGE>
price for 20 trading days during a consecutive 30-day period ending within 10
days before we notify shareholders of the redemption. We will be required to
redeem one-third of any remaining outstanding preferred shares on each of the
seventh, eighth and ninth anniversaries of the date of issuance at the
redemption price, and we will be permitted to redeem the preferred shares at any
time beginning on the seventh anniversary after issuance. If we fail to redeem
the shares as required, holders may appoint a majority of our Board of
Directors, who will continue to serve until we have redeemed the preferred
shares as required.
The holders of Series A preferred shares are entitled to vote as a
group with the holders of common shares on all matters except that holders of
Series A preferred shares are entitled to vote separately for one director
and are not entitled to participate in the vote for any other directors of
our company. On all other matters, each holder of Series A preferred shares is
entitled to the number of votes equal to the number of common shares the holder
is entitled to receive upon conversion of his Series A preferred shares. Our
agreements with the holders of Series A preferred shares provide that we are
prohibited from declaring or issuing any dividends to holders of our common
shares before paying all unpaid dividends on the Series A preferred shares. We
also are prohibited from issuing any equity securities that are senior or
equal in rank to the Series A preferred shares without approval of the holders
of a majority of the Series A preferred shares. If our company were to be
liquidated or sold or under certain other circumstances, holders of Series A
preferred shares would be entitled to receive an amount equal to $1,000 per
share, plus accrued dividends, before holders of our common shares would be
entitled to any distributions.
Holders of Series A preferred shares are also entitled to certain
other rights, including the right to participate, on a pro rata basis, in future
company financings, subject to certain exceptions. If we propose to sell equity
securities of any kind, including debt securities convertible into equity
securities, Series A holders are entitled to purchase a proportional amount
of the securities being offered based on the number of common shares they own
assuming conversion of all convertible securities. Holders of Series A preferred
shares are not entitled to exercise this right in connection with securities
issued: (i) to the public in a firm commitment underwriting; (ii) upon exercise
of any of our options or warrants outstanding on July 15, 1999; (iii) pursuant
to the acquisition of another entity by us or one of our subsidiaries by merger,
purchase of substantially all of the assets or other form of reorganization;
(iv) in connection with our acquisition or license of technology rights or other
assets; (v) pursuant to our stock option plans, stock bonus plans, stock
purchase plans or other compensation equity agreements or programs; or (vi) upon
conversion or exercise of any equity securities, such as warrants, options, or
other rights to acquire equity securities and debt securities convertible into
equity securities. The right of holders of Series A preferred shares to
participate in future offerings in this manner provides those shareholders with
the opportunity to avoid having their ownership interest in our company diluted
under certain circumstances when the interest of our common shareholders would
be diluted.
We also are prohibited from incurring indebtedness for borrowed money
and capital lease obligations in excess of $15.0 million outstanding at any one
time, without first obtaining approval of the holders of a majority of the
Series A preferred shares. See "Risk Factors- We may require approval of the
holders of our Series A Preferred Shares in order to obtain certain
types of financing."
We are required to obtain the consent of the holders of a majority
of our then outstanding Series A preferred shares prior to issuing any equity
security that has rights as to dividends and liquidation that are senior or
equal to those of the Series A preferred shares.
49
<PAGE>
We also are required to obtain the consent of the holders of a majority of
our then outstanding Series A preferred shares if we wish to borrow money and
at such time or as a result of such loans, the total principal amount of our
indebtedness and capitalized lease obligations exceeds $15.0 million. In
addition, if we were to enter into a credit facility with a financial
institution, we may be subject to additional limitations on our ability to
incur additional indebtedness.
WARRANTS
On July 15, 1999, we issued 1,247,098 warrants to purchase our common
shares, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations-Liquidity and Capital Resources." Each warrant is
exercisable for four years at an initial purchase price of $12.60, subject to
customary antidilution provisions.
In connection with our leased property in Gwinnett County, Georgia, we
are obligated to issue, within 30 days of December 22, 1999, 10,000 warrants
to the landlord. Each warrant is exercisable at any time from the third
anniversary of the date of issuance until the ninth anniversary of the date
of issuance, at an initial purchase price of $31.875, subject to customary
antidilution provisions. See "Information About Our Company-Property."
For a description of additional warrants which we have issued, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources" and our Annual Report on Form
20-F.
CLASSIFIED BOARD
Our Board of Directors is divided into three classes. The
classification of the Board of Directors was implemented in March 1996. See
"Risk Factors-It may be difficult for a third party to acquire us even if doing
so would be beneficial to our shareholders."
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.
50
<PAGE>
LEGAL MATTERS
The validity of the common shares being offered hereby has been
passed upon for us by our attorneys, Goldman, Spring, Schwartz & Kichler,
Ontario, Canada. Certain other matters relating to this offering with respect
to United States securities laws will be passed upon by our attorneys, Baer
Marks & Upham LLP, New York, New York. Certain matters relating to regulation
by the U.S. Food and Drug Administration will be passed upon by our
attorneys, Hyman, Phelps & McNamara, P.C., Washington, D.C. Samuel Schwartz,
a senior partner of Goldman, Spring, Schwartz & Kichler, is a director of the
Company. Mr. Schwartz holds options to purchase an aggregate of 100,040
common shares at various exercise prices.
EXPERTS
Our Consolidated Financial Statements as of December 31, 1997 and 1998
and for the years ended December 31, 1996, 1997 and 1998, included in our Annual
Report on Form 20-F, incorporated herein by reference, have been audited by
PricewaterhouseCoopers LLP, Chartered Accountants in Canada, as stated in their
report appearing in our Annual Report on Form 20-F. The Consolidated Financial
Statements have been included in our Annual Report on Form 20-F in reliance upon
such report, given upon the authority of said firm as experts in auditing and
accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a
Registration Statement on Form F-3 under the Securities Act with respect to the
common shares offered hereby. This prospectus, which constitutes a part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement. Certain items of the Registration Statement are
contained in exhibits and schedules as permitted by the rules and regulations of
the Securities and Exchange Commission. Statements made in this prospectus as to
the contents of any contract, agreement or other document referred to are not
necessarily complete. With respect to each such contract, agreement or other
document filed as an exhibit to the Registration Statement or to our Annual
Report on Form 20-F, certain items of which are incorporated by reference into
this prospectus, reference is made to the exhibit for a more complete
description of the matter involved, and each such statement shall be deemed
qualified in its entirety by such reference.
We are subject to the informational requirements of the Exchange Act
and file reports and other information with the Securities and Exchange
Commission. Reports and other information which we file with the Securities and
Exchange Commission, including the Registration Statement on Form F-3 of which
this prospectus is a part, may be inspected and copied at the public reference
facilities of the Securities and Exchange Commission at:
<TABLE>
<S> <C> <C>
450 Fifth Street N.W. 7 World Trade Center 500 West Madison Street
Room 1024 New York, New York 10048 Suite 1400
Washington D.C. 20549 Chicago, Illinois 60661
</TABLE>
You can also obtain copies of this material by mail from the Public
Reference Section of the Securities and Exchange Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. Additionally, copies of this
material may also be obtained from the Securities and Exchange Commission's
Internet site at http://www.sec.gov. The Commission's telephone number is
1-800-SEC-0330.
51
<PAGE>
1,916,000 SHARES
VISIBLE GENETICS INC.
COMMON SHARES
---------------------------
SELLING SHAREHOLDERS' PROSPECTUS
---------------------
January , 2000
---------------------
YOU SHOULD RELY ONLY ON INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. THE SELLING SHAREHOLDERS ARE OFFERING TO SELL, AND
SEEKING OFFERS TO BUY, COMMON SHARES ONLY IN JURISDICTIONS WHERE OFFERS AND
SALES ARE PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE
ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF
THIS PROSPECTUS OR OF ANY SALE OF OUR COMMON SHARES.
<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 $21,700
Accounting fees $ 5,000
Legal fees $10,000
Printing and engraving $ 5,000
Miscellaneous $ 5,000
-------
Total $46,700
=======
</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 2 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.
Jonathan S. Leff, one of our directors, is also indemnified pursuant to
venture fund partnership agreements, as well as supplemental coverage through
Warburg, Pincus & Co.
The Company also has a policy insuring it and its directors and
officers against certain liabilities and has entered into indemnification
agreements with each of its directors and officers.
II-1
<PAGE>
ITEM 16. EXHIBITS.
The following exhibits are being filed herewith:
3.1 Amended Articles of Incorporation of the Company.(1)
3.2 Amended and Restated Bylaws of the Company.(2)
4.1 Specimen of Certificate for Common Shares.(3)
4.2 Certificate of Designations, Number, Voting Powers,
Preferences and Rights of Series A Convertible Preferred
Shares of Visible Genetics Inc. (4)
5.1 Opinion of Goldman, Spring, Schwartz & Kichler as to the
legality of the Common Shares.
23.1 Consent of Goldman, Spring, Schwartz & Kichler (included in
Exhibit 5.1).
23.2 Consent of Baer Marks & Upham LLP.
23.3 Consent of PricewaterhouseCoopers LLP.
23.4 Consent of Hyman, Phelps & McNamara, P.C.
24 Powers of Attorney (included on the executed signature page of
this Registration Statement).
- -----------------------
(1) Incorporated by reference from Exhibit 3.1 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 3.2 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.
(3) 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.
(4) 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.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes as follows:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration Statement.
(i) To include any Prospectus required by Section 10
(a)(3) of the Securities Act of 1933;
II-2
<PAGE>
(ii) To reflect in the Prospectus any facts or events
arising after the effective date of the Registration Statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the Registration
Statement; and
(iii) To include any material information with
respect to the plan of distribution not previously disclosed
in the Registration Statement or any material change to such
information in the Registration Statement.
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remains unsold
at the termination of the offering.
(4) To file a post-effective amendment to the Registration
Statement to include any financial statements required by Rule 3-19 of
Regulation S-X at the start of any delayed offering or throughout a
continuous offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the Registration Statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
in the initial bona fide offering thereof.
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 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-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form F-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Toronto, Province of Ontario, Canada, on the 14th day
of January 2000.
VISIBLE GENETICS INC.
By:/s/ Richard T. Daly
-------------------
Richard T. Daly
President and Chief Executive Officer
II-4
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Richard T. Daly and Samuel Schwartz
or any of them, as his true and lawful attorney-in-fact and agents, with full
powers of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement on Form F-3, and to
file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite or necessary to be
done, as fully to all intents and purposes as he might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents
or any of them, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Richard T. Daly President and Chief Executive January 14, 2000
------------------------------ Officer (principal executive
Richard T. Daly officer and principal
financial officer)
/s/ Samuel Schwartz Secretary and Director January 14, 2000
------------------------------
Samuel Schwartz
/s/ Sheldon Inwentwash Director January 14, 2000
------------------------------
Sheldon Inwentwash
/s/ Jonathan S. Leff Director January 14, 2000
------------------------------
Jonathan S. Leff
/s/ Dr. J. Robert S. Prichard Director January 14, 2000
------------------------------
Dr. J. Robert S. Prichard
/s/ Dr. Lloyd M. Smith Director January 14, 2000
------------------------------
Dr. Lloyd M. Smith
/s/ Dr. Konrad M. Weis Director January 14, 2000
------------------------------
Dr. Konrad M. Weis
Authorized Representative in the United States:
/s/ Steven S. Pretsfelder Director January 14, 2000
------------------------------
Steven S. Pretsfelder
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Document Page
------ ----------------------- ----
<S> <C>
3.1 Amended Articles of Incorporation of the Company.(1)
3.2 Amended and Restated Bylaws of the Company.(2)
4.1 Specimen of Certificate for Common Shares.(3)
4.2 Certificate of Designations, Number, Voting Powers,
Preferences and Rights of Series A Convertible Preferred
Shares of Visible Genetics Inc.(4)
5.1 Opinion of Goldman, Spring, Schwartz & Kichler as to the
legality of the Common Shares
23.1 Consent of Goldman, Spring, Schwartz & Kichler (included
in Exhibit 5.1)
23.2 Consent of Baer Marks & Upham LLP
23.3 Consent of PricewaterhouseCoopers LLP
23.4 Consent of Hyman, Phelps & McNamara, P.C.
24 Powers of Attorney (included on the executed signature
page of this Registration Statement)
</TABLE>
- -----------------------
(1) Incorporated by reference from Exhibit 3.1 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 3.2 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.
(3) 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.
(4) 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.
<PAGE>
EXHIBIT 5.1
January 14, 2000
Visible Genetics Inc.
Suite 1000, Box 333
700 Bay Street
Toronto, Ontario
Canada M5G 1Z6
Gentlemen:
RE: Visible Genetics Inc.
Registration Statement on Form F-3
We have acted as Canadian counsel to Visible Genetics Inc. (the
"Company") in connection with the preparation and filing with the Securities and
Exchange Commission of the Company's Registration Statement on Form F-3 (the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act") relating to the registration of (the "Offering") 1,916,000
common shares (the "Common Shares"), to be sold by the Selling Shareholders.
Capitalized terms used herein but not otherwise defined shall have the
respective meanings set forth in the Registration Statement.
In connection with the foregoing, we have examined copies of the
Company's Amended and Restated Articles of Incorporation (the "Restated Articles
of Incorporation") and the Amended and Restated by-laws, the Registration
Statement and all exhibits thereto, the minutes of various meetings or unanimous
written consents of the Board of Directors of the Company, and originals,
photocopies or certified copies of all such records of the Company, and all such
agreements, certificates of public officials, certificates of officers and
representatives of the Company and others, and such other documents, papers,
statutes and authorities, as we deemed necessary to form the basis of the
opinion hereinafter expressed. In such examination, we have assumed the
genuineness of all signatures, the authenticity and accuracy of all documents
submitted to us as originals and the conformity to original documents of all
documents supplied to us as copies. As to various questions of fact material to
such opinion, we have relied upon statements and certificates of officers of the
Company and others.
Based upon the foregoing and subject to the qualifications and
limitations stated herein, we are of the opinion that the Common Shares, when
sold by the Selling Shareholders, will be validly issued, fully paid and
non-assessable.
<PAGE>
EXHIBIT 23.2
We hereby consent to the use of our name under the caption "Legal
Matters" in the prospectus forming a part of this Registration Statement on Form
F-3 of Visible Genetics Inc. In giving such consent, we do not thereby concede
that we are in the category of persons whose consent is required under Section 7
of the Securities Act of 1933 as amended (the "Act"), or the rules and
regulations thereunder, or that we are "experts" within the meaning of the Act
or such rules and regulations.
Dated: January 14, 2000
Very truly yours,
/s/ Baer Marks & Upham LLP
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EXHIBIT 23.3
PRICEWATERHOUSECOOPERS
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<S> <C>
PRICEWATERHOUSECOOPERS LLP
CHARTERED ACCOUNTANTS
5700 Yonge Street
Suite 1900
January 14, 1999 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
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CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form F-3 of Visible Genetics Inc. (the "Company") dated
January 14, 2000, of our report dated February 19, 1999 relating to our audit
of the Company's consolidated balance sheets as at December 31, 1998 and 1997
and the consolidated statements of operations, deficit, comprehensive loss, and
cash flows for the years ended December 31, 1998, 1997 and 1996, which report
is included in the Company's Annual Report on Form 20-F/A-1 dated January 10,
2000, and to the reference in the Registration Statement to our firm under
the headings "Selected Consolidated Financial Data" and "Experts."
/s/ PricewaterhouseCoopers LLP
Chartered Accountants
<PAGE>
Exhibit 23.4
We hereby consent to the use of our name under the caption "Legal
Matters" in the prospectus forming a part of this Registration Statement on
Form F-3 of Visible Genetics Inc. In giving such consent, we do not thereby
concede that we are in the category of persons whose consent is required
under Section 7 of the Securities Act of 1933, as amended (the "Act"), or the
rules and regulations thereunder, or that we are "experts" within the meaning
of the Act or such rules and regulations.
Dated: January 14, 2000
Very truly yours,
/s/ Hyman, Phelps & McNamara, P.C.
