-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, M8PrhcWjZGfX0jA0GbmSFQ1ONySlPbQywXOGaDPx0T5fpFUPFw1SUz8npfcaz6sg fZELE8bqHbTUPfB49KFICw== 0000912057-00-014320.txt : 20000411 0000912057-00-014320.hdr.sgml : 20000411 ACCESSION NUMBER: 0000912057-00-014320 CONFORMED SUBMISSION TYPE: F-3/A PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 20000329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VISIBLE GENETICS INC CENTRAL INDEX KEY: 0001010819 STANDARD INDUSTRIAL CLASSIFICATION: LABORATORY ANALYTICAL INSTRUMENTS [3826] IRS NUMBER: 000000000 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: F-3/A SEC ACT: SEC FILE NUMBER: 333-32258 FILM NUMBER: 582452 BUSINESS ADDRESS: STREET 1: 700 BAY ST STREET 2: SUITE 1000 CITY: TORONTO ONTARIO CANA STATE: A6 BUSINESS PHONE: 2127025700 MAIL ADDRESS: STREET 1: 700 BAY ST STE 1000 STREET 2: TORONTO ONTARIO CANADA CITY: M5G 1Z6 F-3/A 1 F-3/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 29, 2000 COMMISSION FILE NO. 333-32258 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- PRE-EFFECTIVE AMENDMENT NO. 1 TO FORM F-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------------------- VISIBLE GENETICS INC. (Exact name of Registrant as specified in its charter and translation of Registrant's name into English) ONTARIO N/A (State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.) organization)
-------------------------- 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. RANDALL W. PRATT, ESQ. MITCHELL S. BLOOM, ESQ. BAER MARKS & UPHAM LLP OSLER, HOSKIN & HARCOURT LLP TESTA, HURWITZ & THIBEAULT, LLP 805 THIRD AVENUE BOX 50, 1 FIRST CANADIAN PLACE 125 HIGH STREET NEW YORK, NEW YORK 10022 TORONTO, ONTARIO BOSTON, MASSACHUSETTS 02110 CANADA M5K 1B8
-------------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. / / If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / -------------------------- CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM TITLE OF EACH CLASS OF AMOUNT TO AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED BE REGISTERED PRICE PER SHARE(1) OFFERING PRICE REGISTRATION FEE Common Shares................................ 2,300,000 $92.69 $213,187,000 $56,281.37(2)
(1) This amount is based upon the average of the closing bid and asked prices as of March 9, 2000, and is being used solely for the purpose of calculating the registration fee pursuant to Rule 457 under the Securities Act of 1933. (2) The registration fee was previously paid. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED MARCH 29, 2000 [LOGO] 2,000,000 COMMON SHARES Visible Genetics Inc. is offering 2,000,000 of its common shares. Our common shares are traded on the Nasdaq National Market under the symbol "VGIN." On March 24, 2000, the last reported sale price for the common shares on the Nasdaq National Market was $50.00 per share. -------------- INVESTING IN OUR COMMON SHARES INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 4. --------------
PER SHARE TOTAL --------- ----- Public Offering Price...................................... $ $ Underwriting Discounts and Commissions..................... $ $ Proceeds to Visible Genetics............................... $ $
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. Visible Genetics Inc. has granted the underwriters a 30-day option to purchase up to an additional 300,000 common shares to cover over-allotments. -------------- ROBERTSON STEPHENS PAINEWEBBER INCORPORATED WARBURG DILLON READ LLC ROTH CAPITAL PARTNERS, INC. The date of this Prospectus is , 2000 [INSERT PICTURE FOR INSIDE FRONT COVER] Description of Picture Heading is entitled "The OpenGene-TM- Automated DNA Sequencing System" Picture of our hardware and list of the components constituting the hardware Picture of our software and list of the components constituting the software A picture of our TRUGENE test kit and a list of our test kits Our company logo YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS PROSPECTUS. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS OR OF ANY SALE OF THE COMMON SHARES. IN THIS PROSPECTUS, REFERENCES TO "VISIBLE GENETICS," "WE," "US" AND "OUR" REFER TO VISIBLE GENETICS INC. AND ITS SUBSIDIARIES. ------------------------ TABLE OF CONTENTS
PAGE -------- Summary..................................................... 1 Risk Factors................................................ 4 Forward-Looking Statements.................................. 19 Use of Proceeds............................................. 20 Price Range of Common Shares................................ 20 Dividend Policy............................................. 20 Capitalization.............................................. 21 Dilution.................................................... 22 Selected Consolidated Financial Data........................ 23 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 24 Business.................................................... 31 Management.................................................. 51 Principal Shareholders...................................... 54 Underwriting................................................ 55 Description of Capital Shares............................... 58 Legal Matters............................................... 61 Experts..................................................... 61 Where You Can Find More Information......................... 61 Incorporation of Certain Documents by Reference............. 62 Index to Consolidated Financial Statements.................. F-1
------------------------ TRADEMARKS OR TRADE NAMES OF VISIBLE GENETICS USED IN THIS PROSPECTUS INCLUDE: CLIP-TM-, CLIPPER-TM-, GEL TOASTER-TM-, GENEKIT-TM-, GENEOBJECTS-TM-, LONG-READ MICROCEL-TM-, LONG-READ TOWER-TM-, MICROCEL-TM-, OPENGENE-TM-, SUREFILL-TM-, TRUGENE-TM- AND VISIBLE GENETICS-REGISTERED TRADEMARK-. EACH TRADEMARK, TRADE NAME OR SERVICE MARK OF ANY OTHER COMPANY APPEARING IN THIS PROSPECTUS BELONGS TO ITS HOLDER. Our common shares have not been qualified by prospectus for distribution in any province of Canada and may be offered for sale in Canada only pursuant to exemptions from the prospectus requirements of the applicable province. Such sales may be made only by dealers registered under the laws of such province or pursuant to exemptions from the applicable registered dealer requirements. FORWARD LOOKING INFORMATION Some of the matters discussed under the captions "Summary," "Risk Factors" and elsewhere in this prospectus may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. This information may involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. SUMMARY BECAUSE THIS IS ONLY A SUMMARY, IT DOES NOT CONTAIN ALL THE INFORMATION THAT MAY BE IMPORTANT TO YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS, ESPECIALLY "RISK FACTORS" AND THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES, BEFORE DECIDING TO INVEST IN OUR COMMON SHARES. ALL FINANCIAL INFORMATION PROVIDED IN THIS PROSPECTUS IS IN U.S. DOLLARS. EXCEPT WHERE WE STATE OTHERWISE, THE INFORMATION PRESENTED IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. OUR COMPANY We develop, manufacture and sell integrated DNA sequencing systems that analyze genetic information to improve the treatment of selected diseases. Our strategy is to become a leader in the emerging field of pharmacogenomics. Pharmacogenomics is the science of individualizing therapy based on genetic differences across patients. Our genotyping technology, which employs DNA sequencing, enables the analysis in the clinical diagnostic laboratory of individual genetic variations. Genotyping is the act of selecting and reading certain components of the sequence of a specific strand of DNA in order to understand how mutations in the DNA may influence the onset and treatment of some diseases and medical conditions. DNA sequencing is generally considered the most thorough and accurate method for genotyping diseases. We believe that individualizing therapy through pharmacogenomics will improve the treatment of many diseases, such as Human Immunodeficiency Virus, or HIV, hepatitis B, hepatitis C, tuberculosis and eventually some cancers. Our OpenGene System consists of automated DNA sequencers, disposable gel cassettes, related equipment and software and disease-specific GeneKits. Our GeneKits contain the necessary chemicals, reagents, third-party licenses and other consumables and materials required for sequencing specific disease-associated genes. We have developed GeneKits for HIV and HLA (used for tissue typing, for example, in organ transplants). We are developing GeneKits for hepatitis B, hepatitis C and tuberculosis. We began selling our DNA sequencers and related equipment and consumables to the research and clinical research markets in the third quarter of 1996 and began selling GeneKits into the same markets in the third quarter of 1997. The first clinical diagnostic application we are targeting is HIV. We have developed our HIV GeneKit to enable clinicians to genotype the major HIV species infecting patients in order to improve the management of patient treatment. HIV is a highly variable virus with high rates of mutations, which may lead to drug resistance. One of the central challenges in maintaining HIV patients on long-term drug therapy is to adjust each patient's medication as drug-resistant strains of the virus emerge. Two initial clinical trials, including one that we conducted, have shown that patients whose drug therapy is managed using HIV genotyping had greater reductions in viral load than HIV patients who were not genotyped. In June 1999, we completed a European trial, which we call VIRADAPT, which showed, among other things, that after six months patients who received standard of care treatment and underwent periodic genotyping had a mean decrease in viral load of approximately 93% as compared to a mean decrease in viral load of approximately 79% in the non-genotyping group. In addition, after 6 months, 32% of the patients in the genotyping group had undetectable viral loads as compared to 14% of patients in the non-genotyping group. The other trial, called GART, was funded by the National Institutes of Health, or NIH, and was completed in the United States in December 1998. It showed that, at the end of 8 weeks, patients who received standard of care treatment and underwent periodic genotyping had a mean decrease in viral load of approximately 93%, as compared to 76% to patients in the non-genotyping group. Also in June 1999, we initiated a trial called SEARCH to test the clinical utility of our HIV OpenGene System in genotyping HIV infected patients. Based on the results from the VIRADAPT and GART clinical trials, the FDA has advised us that we are not required to complete the SEARCH trial and has indicated that we will not be required to demonstrate further the clinical utility of our HIV OpenGene System in the treatment of HIV infected individuals. We plan to apply to the FDA during 2000 for approval to sell our HIV OpenGene System to the clinical diagnostic market. 1 OUR STRATEGY Our objective is to be a leader in the emerging field of pharmacogenomics. Our goal is to enable clinicians to use genetic information to monitor and customize treatment of diseases, initially for HIV and later for other diseases. Key elements of our business strategy are to: - provide an integrated genotyping solution for the clinical diagnostic market; - target the HIV genotyping market; - leverage our OpenGene System for additional applications; - offer a wide range of testing and sequencing services; - provide sophisticated software for the clinical research and diagnostic markets; - tailor our marketing efforts to local markets; and - maintain our technological leadership in genotyping. OUR ADDRESS Our principal executive offices are located at 700 Bay Street, Suite 1000, Toronto, Ontario, Canada M5G 1Z6. Our telephone number is (416) 813-3240. THE OFFERING Common shares offered by Visible Genetics.... 2,000,000 common shares Common shares outstanding after the 14,785,419 common shares offering................................... Use of proceeds.............................. For working capital and other general corporate purposes Nasdaq National Market symbol................ VGIN
The number of our common shares outstanding after this offering is based on 12,785,419 common shares outstanding as of February 29, 2000. It excludes 2,447,886 common shares reserved for issuance under our stock option plans, of which 1,946,474 common shares were subject to outstanding options as of February 29, 2000 at a weighted average exercise price of $9.60 per common share. It also excludes 952,118 common shares that may be issued upon exercise of outstanding warrants and 3,259,748 common shares issuable upon conversion of our Series A preferred shares as of February 29, 2000. The number of common shares issuable upon conversion of our Series A preferred shares will increase as the dividends payable thereon accrue. After giving effect to this offering, the number of voting shares outstanding as of February 29, 2000 is 18,045,167. 2 SUMMARY CONSOLIDATED FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) THIS TABLE SUMMARIZES OUR STATEMENTS OF OPERATIONS DATA AND OUR BALANCE SHEET DATA. THE AS ADJUSTED BALANCE SHEET DATA REFLECTS THE SALE BY VISIBLE GENETICS OF 2,000,000 COMMON SHARES IN THE OFFERING AT AN ASSUMED PUBLIC OFFERING PRICE OF $50.00 AND THE RECEIPT OF THE NET PROCEEDS OF THE OFFERING.
YEARS ENDED DECEMBER 31 -------------------------------------------------------------- 1995 1996 1997 1998 1999 ---------- ---------- ---------- ---------- ---------- STATEMENTS OF OPERATIONS DATA: Sales.................................. $ -- $ 978 $ 3,033 $ 10,875 $ 13,627 Cost of sales.......................... -- 561 1,995 6,673 9,273 ---------- ---------- ---------- ---------- ---------- Gross margin........................... -- 417 1,038 4,202 4,354 Sales, general and administrative expense.............................. 1,476 3,377 7,448 11,516 19,074 Research and development expense....... 1,241 2,745 4,123 6,289 7,935 Other expense.......................... -- -- 654 420 1,329 ---------- ---------- ---------- ---------- ---------- Loss from operations before interest... (2,717) (5,705) (11,187) (14,023) (23,984) Interest income........................ 12 609 774 264 695 Interest and financing expense......... (19) (69) (3) (1,132) (1,998) ---------- ---------- ---------- ---------- ---------- Net loss............................... (2,724) (5,165) (10,416) (14,891) (25,287) ========== ========== ========== ========== ========== Cumulative preferred dividends and accretion of discount attributable to preferred shares..................... -- -- -- -- (1,770) ---------- ---------- ---------- ---------- ---------- Net loss attributable to common shareholders......................... $ (2,724) $ (5,165) $ (10,416) $ (14,891) $ (27,057) ========== ========== ========== ========== ========== Net loss per common share.............. $ (0.65) $ (0.89) $ (1.48) $ (1.91) $ (2.73) Weighted average number of common shares outstanding................... 4,181,599 5,791,367 7,059,578 7,782,094 9,916,954
DECEMBER 31, 1999 ------------------- AS ACTUAL ADJUSTED -------- -------- BALANCE SHEET DATA: Cash and short-term investments........................... $ 42,688 $137,038 Working capital........................................... 45,611 139,961 Total assets.............................................. 58,640 152,990 Mandatorily redeemable convertible preferred shares....... 27,556 27,556 Accumulated deficit....................................... (59,438) (59,438) Shareholders' equity...................................... 24,351 118,701
3 RISK FACTORS AN INVESTMENT IN OUR COMMON SHARES IS VERY RISKY. YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS IN ADDITION TO THE REMAINDER OF THIS PROSPECTUS BEFORE PURCHASING OUR COMMON SHARES. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. MANY FACTORS, INCLUDING THOSE DESCRIBED BELOW, MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM ANTICIPATED RESULTS. OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT TO EVALUATE OUR FUTURE PROSPECTS AND OUR PROSPECTS MUST BE CONSIDERED IN LIGHT OF THE DIFFICULTIES FREQUENTLY ENCOUNTERED BY COMPANIES IN THE EARLY STAGES OF COMMERCIAL MANUFACTURING AND MARKETING. Although we began operations in 1993, we are only in the early stages of commercially manufacturing and marketing our products. In late 1996, we began manufacturing and selling to the research and clinical research markets, the initial versions of our automated DNA sequencers and related products. Our limited operating history makes it difficult to evaluate our business and our prospects for future profitability. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in the early stages of commercial manufacturing and marketing. Sales for our fiscal year ended December 31, 1999 were $13.6 million. In the future, sales may not increase or they may decrease. WE HAVE A HISTORY OF LOSSES, WE ANTICIPATE ADDITIONAL LOSSES AND WE MAY NEVER BECOME PROFITABLE. We incurred a net loss of $25.3 million in the year ended December 31, 1999. As of December 31, 1999, our accumulated deficit was $59.4 million. Our losses have resulted principally from expenses incurred in research and development of our technology and products, and from expenses that we have incurred while building our business infrastructure. We expect to continue to incur significant operating losses in the future as we continue our research and development efforts and clinical trials and expand our sales and marketing force and business infrastructure, in an effort to achieve greater sales and expand our business. It is uncertain when, if ever, we will become profitable. Our ability to become profitable will depend on many factors including, among others: - whether we obtain regulatory approval to sell our HIV OpenGene System and, in the future, OpenGene Systems for other diseases, to the clinical diagnostic market in the United States and abroad; - the decision of third-party payors to reimburse clinicians and patients for use of our HIV GeneKit and, in the future, our other products; - our ability to successfully market and sell our HIV OpenGene System and, in the future, OpenGene Systems for other diseases, to the clinical diagnostic market; - our ability to increase sales of our products to the research and clinical research markets; - our ability to effectively manage the growth of our business; - our ability to continue to develop advanced versions of our products and technologies and new products and technologies in a timely manner; and - our ability to manufacture our products according to schedule and within budget. OUR OPERATING RESULTS MAY FLUCTUATE FROM QUARTER TO QUARTER DUE TO MANY FACTORS AND, THEREFORE, YOU SHOULD NOT RELY ON PERIOD TO PERIOD COMPARISONS OF OUR OPERATING RESULTS AS AN INDICATION OF FUTURE PERFORMANCE. Our operating results have varied on a quarterly basis in the past and may fluctuate significantly in the future as a result of a variety of factors, many of which are outside our control. Factors that may affect our quarterly operating results include, among others: 4 - unanticipated costs or delays in carrying out our clinical trials; - the amount and timing of operating costs and capital expenditures relating to research and development, and the expansion of our business, operations and infrastructure; - our decision to increase or decrease sales of equipment, GeneKits and other consumables at reduced prices; - our decision to reduce prices of our products in response to price reductions by competitors; - general economic conditions, as well as economic conditions specific to the biotechnology industry; and - unanticipated costs or delays in manufacturing our products. We believe that period to period comparisons of our operating results may not be meaningful and you should not rely on any such comparisons as an indication of our future performance. In addition, it is likely that in one or more future quarters our operating results will fall below the expectations of securities analysts and investors. In such event, the market price of our common shares is likely to fall. WE MAY NOT RECEIVE APPROVAL OF THE FDA OR FOREIGN REGULATORY AUTHORITIES FOR OUR HIV OPENGENE SYSTEM AND, IN THE FUTURE, OTHER HIV PRODUCTS, AND, THEREFORE, WE MAY NOT BE ABLE TO SELL OUR HIV PRODUCTS TO THE CLINICAL DIAGNOSTIC MARKET IN THE UNITED STATES OR ABROAD. We intend to seek FDA approval to sell our HIV OpenGene System for clinical diagnostic purposes in the United States. In the future, we may seek FDA approval to sell other HIV products for clinical diagnostic purposes in the United States. In order to obtain FDA approval for our HIV OpenGene System we must submit an application supported by extensive human test data demonstrating the utility, reliability and performance of our HIV GeneKit and OpenGene System. The FDA must also confirm that we maintain good laboratory, clinical and manufacturing practices. The FDA approval process is lengthy and expensive. You should be aware of the following possibilities: - we may never obtain approval from the FDA to sell our HIV products to the clinical diagnostic market; - it may be more expensive and time consuming than we anticipate to develop the test data needed for the FDA; - the FDA may disagree with us that the data are adequate, and we may therefore have to do additional testing; - the testing may show that our HIV products do not work at all or are not reliable enough, and therefore cannot be authorized by the FDA, or the testing may show that our HIV products do not work as well as they need to for successful marketing, even if marketing is authorized by the FDA; - the testing may be too costly to carry out, either because we lack adequate funds or because the market potential for our HIV products does not justify the costs; - we may choose or be required to discontinue our clinical trials for a number of reasons, including unanticipated interim trial reports, changes in regulations or the adoption of new regulations, unexpected technological developments by our competitors or problems or delays with patient enrollment in our trials; - there may be significant delays in the FDA review process; - the FDA may approve the sale of our HIV products with conditions that could limit the market for these products or make them more difficult or expensive to sell than we anticipate; and 5 - the FDA can revoke marketing authorization for our products for a variety of reasons, such as our failure to comply with the FDA's device requirements or poor product performance in terms of safety and effectiveness. If we fail to receive FDA approval, if FDA approval is delayed or if the FDA imposes conditions that make it difficult to sell or market our products, we will be unable to carry out our business plan to sell our HIV OpenGene System for clinical diagnostic use in the United States and our business, financial condition and results of operations will be materially harmed. We also may be required to obtain approval from some foreign regulatory authorities to sell our HIV products to the clinical diagnostic market in countries outside of the United States. In some cases, we will face an approval process similar to that required by the FDA. We cannot be certain that we will obtain the necessary approvals to sell our HIV products to the clinical diagnostic market in these countries. In some cases, the failure to obtain approval could materially harm our business, financial condition and results of operations. WE PLAN TO SEEK FDA APPROVAL TO MARKET OUR HIV OPENGENE SYSTEM TO THE CLINICAL DIAGNOSTIC MARKET THROUGH AN APPLICATION PROCESS THAT IS NEW AND INFREQUENTLY USED, AND IF THE FDA DOES NOT GRANT OUR REQUEST, OUR ABILITY TO SELL OUR HIV OPENGENE SYSTEM TO THE CLINICAL DIAGNOSTIC MARKET COULD BE DELAYED SIGNIFICANTLY. Our HIV OpenGene System is currently regulated as a Class III medical device. To sell a Class III medical device a company must first get specific approval of the FDA for the device by submitting a premarket approval application, commonly known as a PMA. However, an FDA advisory committee recently recommended that the FDA reclassify HIV genotyping tests from Class III medical devices to Class II medical devices. To sell a Class II medical device, a company must first obtain permission of the FDA by submitting a 510(k) premarket notification, commonly known as a 510(k), showing that the device is similar to a device already on the market. Generally, a 510(k) notification to the FDA that a new device is similar to an existing device requires less data and takes less time for the FDA to process than a PMA. The FDA is supposed to act on a 510(k) notification within 90 days. By contrast, a PMA application must be supported by more extensive data to prove the safety and efficacy of the device, and a review of a PMA application involves a lengthier process which may take one and one-half years or more from filing. The FDA usually follows the advice of its advisory committees. However, to reclassify a device from Class III to Class II, the FDA's administrative process could take several years. Therefore, it is unlikely that reclassification of HIV genotyping tests by the FDA would be effected for several years. We currently plan to attempt to accelerate the reclassification process by using an alternative provision of the 1997 Food and Drug Administration Modernization Act. Under this alternative, we will submit a 510(k) notification to the FDA, which the FDA will reject because our HIV OpenGene System is still a Class III device. After receipt of the rejection, we will have 30 days to seek reclassification of our HIV OpenGene System, and the FDA will have 60 days to rule on this request. If the FDA grants our request, we will be able to immediately market our HIV OpenGene System to the clinical diagnostic market. We cannot guarantee that this alternative procedure will be successful in shortening the time for FDA approval of our HIV OpenGene System. This process is new and is used very infrequently, and, therefore, there is no assurance that the FDA will grant our request for reclassification. If the FDA does not grant our request to reclassify our HIV OpenGene System under this new reclassification procedure, we either will have to submit a PMA application or wait until the FDA acts to reclassify HIV genotyping tests as recommended by its advisory committee. In either event, our ability to sell our HIV OpenGene System for clinical diagnostic use will be delayed, and our business, financial condition, and results of operations could be materially harmed. 6 WE MAY NOT RECEIVE REGULATORY APPROVAL FOR OUR OTHER PRODUCTS AND THEREFORE MAY NOT BE ABLE TO SELL THESE PRODUCTS FOR CLINICAL DIAGNOSTIC PURPOSES IN THE UNITED STATES OR ABROAD. In addition to our HIV OpenGene System, we have also developed and are continuing to develop GeneKits for other clinical diagnostic applications. In order to sell these GeneKits to the clinical diagnostic market, we may be required to obtain the approval of the FDA and of foreign regulatory authorities through approval procedures that are the same or similar to those required for our HIV OpenGene System. Our failure to obtain necessary approvals to sell our products for clinical diagnostic use in one or more significant markets could cause material harm to our business, financial condition and results of operations. EACH TIME WE MAKE ALTERATIONS TO ANY FDA APPROVED PRODUCTS, WE MAY NEED TO SEEK ADDITIONAL FDA APPROVAL, WHICH WILL LENGTHEN THE TIME AND INCREASE THE COST OF BRINGING UPGRADED OR NEW PRODUCTS TO MARKET. We may need to seek additional FDA approval if we make changes to a product specifically approved by the FDA. Our HIV OpenGene System, as submitted to the FDA, will contain specific reagents, dyes, enzymes, chemicals, software and other materials. If we obtain approval through the 510(k) process, we will be required to obtain prior clearance from the FDA for those product changes that could significantly affect safety or effectiveness. If our HIV OpenGene System is approved through the PMA process, the FDA would require that we obtain additional approval for any change to the kit's components that could alter the performance of the kit, such as changing certain enzymes or reagents. We also may be required to obtain similar foreign regulatory approval. To obtain additional approval, we may have to conduct additional human clinical trials to demonstrate that the altered GeneKit will produce at least the same results as the approved GeneKit or will be as safe and effective as the approved product. Obtaining additional FDA or foreign regulatory approval is likely to be time consuming and costly and, as a result, we may experience delays in bringing these upgraded or new products to market. OUR BUSINESS IS, AND IN THE FUTURE MAY BECOME, SUBJECT TO ADDITIONAL REGULATIONS AND IF WE ARE UNABLE TO COMPLY WITH THEM OUR BUSINESS MAY BE MATERIALLY HARMED. Our reference laboratory in Norcross, Georgia, is subject to stringent regulation under the Clinical Laboratory Improvement Amendments of 1988, known as CLIA. Under CLIA, laboratories must meet various requirements, including requirements relating to the validation of tests, training of personnel, and quality assurance procedures. The laboratory must also be certified by a government agency. Our Norcross laboratory is certified under CLIA and licensed by the state of Georgia. Our failure to comply with state or CLIA requirements can result in various penalties, including loss of certification. The imposition of such penalties could have an adverse impact on us. In addition, some states regulate out-of-state laboratories. The failure to comply with these state requirements could also adversely affect us. We are or may become subject to various other federal, state, provincial and local laws, regulations and recommendations. We are subject to various laws and regulations in Canada, the United States and Europe, relating to product emissions, use and disposal of hazardous or toxic chemicals or potentially hazardous substances, infectious disease agents and other materials, and laboratory and manufacturing practices used in connection with our research and development activities. If we fail to comply with these regulations, we could be fined, we may not be able to operate certain of our facilities or certain portions of our business, and we may suffer other consequences that could materially harm our business, financial condition or results of operations. We are unable to predict the extent of future government regulations or industry standards. You should assume that in the future there may be more government regulations or standards. New regulations or standards may result in increased costs, including costs for obtaining permits, delays or fines resulting from loss of permits or failure to comply with regulations. 7 THE MARKET FOR GENOTYPING PRODUCTS IS NEW AND GENOTYPING MAY NOT BECOME AN ACCEPTED METHOD OF MANAGING DRUG TREATMENT. An important part of our business strategy is our plan to sell our products to the clinical diagnostic market. Our ability to do so will depend on the widespread acceptance and use by doctors and clinicians of genotyping to manage drug treatment of certain diseases or other medical conditions. The use of genotyping by doctors and clinicians for this purpose is relatively new. Existing DNA sequencing systems have been designed primarily for research purposes and we are not aware of any DNA sequencing products that have been approved by the FDA for clinical diagnostic purposes. We cannot be certain that doctors and clinicians will want to use DNA sequencing systems designed for these purposes. If genotyping is not accepted by this market, we will not be able to carry out our business plan and our business, financial condition and results of operations will be materially harmed. IF GENOTYPING IS ACCEPTED AS A METHOD TO MANAGE DRUG TREATMENT, WE CANNOT BE CERTAIN THAT OUR PRODUCTS WILL BE ACCEPTED IN THE CLINICAL DIAGNOSTIC MARKET. If genotyping becomes widely accepted in the clinical diagnostic market, we cannot predict the extent to which doctors and clinicians may be willing to utilize our OpenGene System to manage drug treatment of selected diseases or other medical conditions. Doctors and clinicians may prefer competing technologies and products that can be used for the same purposes as our products such as other DNA sequencers, DNA probe-based diagnostic systems, chip-based and assay-based technologies, or homebrew genetic tests. If our products are not accepted by the clinical diagnostic market, our business, financial condition and results of operations will be materially harmed. IF INSURANCE COMPANIES AND OTHER THIRD-PARTY PAYORS DO NOT REIMBURSE DOCTORS AND PATIENTS FOR OUR PRODUCTS, OUR ABILITY TO SELL OUR PRODUCTS TO THE CLINICAL DIAGNOSTIC MARKET WILL BE IMPAIRED. Our ability to successfully sell our HIV GeneKit and other GeneKits to the clinical diagnostic market will depend partly on the willingness of insurance companies and other third-party payors to reimburse doctors and patients for use of our products. Physicians' recommendations to use genotyping, as well as decisions by patients to pursue genotyping, are likely to be influenced by the availability of reimbursement for genotyping by insurance companies or other third-party payors. Government and private third-party payors are increasingly attempting to contain health care costs by limiting both the extent of coverage and the reimbursement rate for testing and treatment products and services. In particular, services that are determined to be investigational in nature or that are not considered "reasonable and necessary" for diagnosis or treatment may be denied reimbursement coverage. If adequate reimbursement coverage is not available from insurers or other third-party payors, we expect that few, if any, patients would be willing to pay for genotyping. In this case, our anticipated revenues will be substantially reduced, our ability to achieve profitability will be significantly impaired and our business, financial condition and results of operations will be materially harmed. WE DO NOT HAVE MARKETING EXPERIENCE IN THE CLINICAL DIAGNOSTIC MARKET, WE CANNOT BE CERTAIN WE WILL SUCCESSFULLY DEVELOP THE MARKETING CAPABILITIES REQUIRED TO SELL OUR PRODUCTS TO THIS MARKET AND IN SOME MARKETS WE WILL BE DEPENDENT ON THE EFFORTS OF DISTRIBUTORS TO SELL OUR PRODUCTS. We have no experience marketing products to the clinical diagnostic market. If the FDA approves the sale of our HIV OpenGene System and, in the future, other products, to the clinical diagnostic market in the United States, we intend to expand our internal sales force to sell products to these markets in North America and selected other countries. It will take significant time, money and resources to expand our sales force. We cannot be certain that we will develop the marketing capabilities necessary to successfully market and sell our products to the clinical diagnostic market. 8 In selected geographic markets outside North America and certain European countries, beginning in 1999, we entered into distribution and marketing arrangements with leading distributors to sell our products to the research and clinical diagnostic markets. These agreements expire at various times from April 2000 through April 2002, and, in certain cases, are subject to automatic renewal. Certain of the agreements may also be terminated by either party upon specified notice periods and may require us to make termination payments under certain circumstances. Our ability to successfully sell products to the research and clinical diagnostic markets in countries in which we rely on distribution agreements will depend to a great extent on the efforts of the distributors. Failure to successfully market our products will impede our ability to generate significant revenues and become profitable. IF WE ARE UNABLE TO CONTINUE DEVELOPING ADVANCED TECHNOLOGY, ADVANCED VERSIONS OF OUR EXISTING PRODUCTS AND NEW PRODUCTS IN A TIMELY AND COST-EFFECTIVE MANNER, OUR ABILITY TO GENERATE REVENUE AND BECOME PROFITABLE WILL BE IMPAIRED. We believe that if we are to generate additional revenue and become profitable, we must continue to develop advanced technology, advanced versions of our existing products and new products. These technology and products must be developed and introduced to the market in a timely and cost-effective manner to meet both changing customer needs and technological developments. We cannot assure you that we will be able to successfully or timely develop any new technology, products or advanced versions of existing products, or that any new technology, products or advanced versions of existing products will achieve acceptance in the market. If we are unable to successfully develop new technology, products or advanced versions of existing products in the future or if those technologies or products are not accepted in the market, our ability to generate significant revenues will be significantly impaired, we could experience additional significant losses and our business, financial condition and results of operations will be materially harmed. MANUFACTURING PROBLEMS COULD HAMPER OR DELAY OUR ABILITY TO INTRODUCE OUR PRODUCTS TO THE MARKETPLACE. We have limited experience in large-scale assembly and manufacturing of our products. Since we started assembling and manufacturing operations in 1996, we have experienced delays, quality control problems and capacity constraints from time to time. Our plant in Pittsburgh, which manufactures our HIV GeneKit, currently has a limited production capacity. Our new facility in Atlanta, Georgia is in the process of being built and equipped in accordance with our specifications. Construction may take longer than expected, and the planned and actual construction costs of building and qualifying the facility for regulatory compliance may be higher than expected. Any significant delay in making the Atlanta facility operational will limit our ability to increase production. When we are in a position to increase production and begin manufacturing and assembling new products, additional problems may arise. These may include technological, engineering, quality control and other production difficulties. We may also have difficulty complying with FDA quality system regulations at each of our facilities. If we experience these problems, we could be delayed in filling orders, shipping existing products and introducing new products to the marketplace. These problems could also adversely affect customer satisfaction and the market acceptance of our products. IF WE ARE UNABLE TO SUCCESSFULLY PROTECT OUR INTELLECTUAL PROPERTY OR OBTAIN CERTAIN LICENSES, OUR COMPETITIVE POSITION WILL BE HARMED. Our success will partly depend on our ability to obtain patents and licenses from third parties and protect our trade secrets. We own or jointly own 33 U.S. patents. We own or jointly own an additional 32 U.S. patent applications pending, of which seven have been allowed. We own 12 foreign patents. We own or jointly own foreign applications presently pending as PCT applications, or as national phase PCT 9 applications, designating intergovernmental agencies and multiple countries including the European Patent Office, Australia, Canada and Japan. We cannot assure you that our patent applications will result in patents being issued in the United States or foreign countries. In addition, the U.S. Patent and Trademark Office may reverse its decision or delay the issuance of patents that have been allowed. We also cannot assure you that any technologies or products that we may develop in the future will be patentable. In addition, competitors may develop products similar to ours that do not conflict with our patents. Others may challenge our patents and, as a result, our patents could be narrowed or invalidated. From time to time, we may be required to obtain licenses from third parties for some of the technology or components used or included in certain of our GeneKits or other products. We cannot be certain that we will be able to obtain these licenses on acceptable terms or at all. In certain instances, if we are unable to obtain a required license, our ability to sell or use certain products may be impaired. To help protect our proprietary rights in unpatented trade secrets, we generally require our employees, consultants and advisors to sign confidentiality agreements. However, we cannot guarantee that these agreements will provide us with adequate protection if confidential information is used or disclosed improperly. In addition, in some situations, these agreements may conflict with, or be limited by, the rights of third parties with whom our employees, consultants or advisors have prior employment or consulting relationships. Further, others may independently develop similar proprietary information and techniques, or otherwise gain access to our trade secrets. OTHERS COULD CLAIM THAT WE INFRINGE ON THEIR INTELLECTUAL PROPERTY RIGHTS, WHICH MAY RESULT IN COSTLY AND TIME CONSUMING LITIGATION. Our success will also depend partly on our ability to operate without infringing upon the proprietary rights of others, as well as our ability to prevent others from infringing on our proprietary rights. We may be required at times to take legal action in order to protect our proprietary rights. Also, from time to time, we receive notice from third parties claiming that we may infringe their patent or other proprietary rights. Despite our best efforts, we may be sued for infringing on the patent or other proprietary rights of others. Such litigation is costly, and, even if we prevail, the cost of such litigation could harm us. If we do not prevail, in addition to any damages we might have to pay, we could be required to stop the infringing activity or obtain a license. We cannot be certain that any required license would be available to us on acceptable terms, or at all. If we fail to obtain a license, or if the terms of a license are burdensome to us, our business, financial condition and results of operations could be materially harmed. Perkin-Elmer Corporation, PE Biosystems Group filed a lawsuit against us in the United States District Court for the Northern District of California claiming that our DNA sequencing equipment and products infringe patents licensed to Perkin-Elmer by the California Institute of Technology. The suit requests among other remedies that the court enjoin us from continuing to infringe these patents and an unspecified amount of damages. If Perkin-Elmer is successful in this suit, we may be unable to manufacture our DNA sequencing equipment and products without a license from Perkin-Elmer. There can be no assurance that we would be able to obtain a license for these patents on terms acceptable to us, or at all. If we fail to obtain a license, or if the terms of a license are burdensome to us, our business, financial condition and results of operations could be materially harmed. In addition, monetary damages awarded to Perkin-Elmer could be substantial, and if so, our business, financial condition and results of operations could be materially harmed. Dr. Lloyd M. Smith, one of our directors, is a named inventor on the patents that we are alleged to have infringed. Dr. Smith indirectly receives royalty payments for those patents from Perkin-Elmer, through the California Institute of Technology. Dr. Smith is a co-founder of Third-Wave Technologies Inc., which has announced that it will be acquired by PE Biosystems in a stock-for-stock transaction. After the closing of that transaction, Dr. Smith expects to be a consultant to PE Biosystems. 10 CERTAIN SUPPLIES AND PARTS THAT WE NEED ARE AVAILABLE ONLY FROM LIMITED SOURCES AND OUR BUSINESS WILL SUFFER IF WE CANNOT OBTAIN THESE SPECIALIZED ITEMS USED IN OUR GENEKITS. Our GeneKits include dyes, reagents and other chemicals supplied by third parties. We believe that some dyes supplied by Amersham International Public Limited Company under our exclusive worldwide license to use and sell Amersham dyes within our GeneKits, may not be available from other suppliers. However, our customers might be able to purchase some, but not all, of these dyes directly from Amersham. In addition, certain reagents and other chemicals that we use and include in our GeneKits are available only under license from their manufacturers. We cannot be certain that we will be able to renew these licenses upon expiration on favorable terms or at all. While we believe that alternative dyes, chemicals and reagents are available, alternate products may not be as effective as certain of the products that we presently use. If we switched to an alternative dye, chemical or reagent, we may also have to adapt the GeneKit's analysis software to the new product, which could take time. If the GeneKit is FDA approved, we may also be required to seek FDA approval for the altered GeneKit if the alternative product were to substantially alter the performance of the GeneKit or if the changes could significantly affect safety or effectiveness. This could cause delays in production and in bringing the changed GeneKit to market. We also use certain custom-designed components supplied by third parties in our DNA sequencers and other equipment. We believe that there are alternative suppliers for these custom-designed parts. However, we will incur costs in switching to alternative suppliers and will likely experience delays in production of the products that use any of these parts until such time as we are able to locate alternate suppliers or parts on acceptable terms. WE ARE DEPENDENT ON OUR LICENSE FOR THE POLYMERASE CHAIN REACTION TECHNOLOGY WE USE IN OUR GENEKITS AND OUR BUSINESS WOULD SUFFER IF THE LICENSE IS TERMINATED OR NOT RENEWED. We license the polymerase chain reaction technology that we use in our GeneKits from Roche Molecular Systems, Inc. and F. Hoffmann La Roche Ltd. These licenses are not exclusive, and, therefore, may be granted by the Roche companies to our competitors and others. We are required to pay royalties to the Roche companies for these licenses. One license is for the life of the patents included within the licensing agreement, which expire at various times commencing July 2004. The second license expires in February 2003 but will be automatically extended until July 2004, unless the Roche companies elect not to renew the license. After the expiration of the initial term of this license, the Roche companies may terminate the license at any time by giving us a one-year notice. The termination of either of these licenses would have a material adverse effect on our ability to produce or sell GeneKits. Consequently, we could experience a deterioration of anticipated future sales of our GeneKits and further losses. WE FACE SUBSTANTIAL COMPETITION FROM MANY COMPANIES, AND WE MAY NOT BE ABLE TO EFFECTIVELY COMPETE. The biotechnology industry is highly competitive. We compete with entities in the United States and abroad that are engaged in the development and production of products that analyze genetic information. They include: - manufacturers and distributors of DNA sequencers such as the PE Biosystems Group of the Perkin-Elmer Corporation, Amersham and its Molecular Dynamics subsidiary, LI-COR, Inc., Hitachi, Ltd. and Molecular and Genetic BioSystems, Inc.; - manufacturers and distributors of DNA probe-based diagnostic systems such as Abbott Laboratories, Chiron Corp., Roche Diagnostics, Gene Probe Inc., Innogenetics NV, Digene Corporation and Johnson & Johnson; 11 - manufacturers of new technologies used to analyze genetic information, such as chip-based and assay-based technologies, including, Hyseq Inc., Affymetrix Inc., ChemCore Inc., CuraGen Corp., Nanogen, Inc.; - manufacturers of cell cultured assays, including ViroLogic, Inc. and VIRCO; and - manufacturers of homebrew genetic tests, which typically have not undergone clinical validation and have not been approved by the FDA or other regulatory agencies. Many of our competitors have much greater financial, technical research and development resources and production and marketing capabilities than we do. Smaller companies may also prove to be significant competitors, particularly through collaborative arrangements with large pharmaceutical and biotechnology companies. If any of our competitors were to devote significant resources to developing an integrated solution for genotyping, we would experience significantly more competitive pressure. We cannot predict whether we could successfully compete with these pressures and, if we are unable to do so, our business, financial condition and results of operations could suffer. WE MAY NOT BE ABLE TO HIRE OR RETAIN THE QUALIFIED SCIENTIFIC, TECHNICAL, MANAGEMENT AND SALES AND MARKETING PERSONNEL WE REQUIRE. Because of the specialized scientific nature of our business, we are highly dependent upon our ability to attract and retain qualified scientific and technical personnel. We also must hire additional qualified management and sales and marketing personnel as our business expands. Competition in our industry for scientific, technical, management, and sales and marketing personnel is intense and we cannot assure you that we will be able to hire a sufficient number of qualified personnel. Loss of the services of our key personnel in these areas could adversely affect our research and development and sales and marketing programs and could impede the achievement of our goals. We do not maintain key man life insurance on any of our personnel. IF WE ARE UNABLE TO MANAGE OUR ANTICIPATED FUTURE GROWTH WE MAY NOT BE ABLE TO IMPLEMENT OUR BUSINESS PLAN. If we are successful in increasing sales and expanding our markets, there will be additional demands on our management, marketing, distribution, customer support and other operational and administrative resources and systems. To accommodate future growth, we may add staff and information and other systems. We cannot guarantee that we will be able to do so or that, if we do so, we will be able to effectively integrate them to our existing staff and systems. In addition, our current and future expense levels are based largely on our investment plans and estimates of future revenues and are, to a large extent, fixed. We may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. Therefore, any significant shortfall in revenues as compared to our planned expenditures will materially harm our business, financial condition, and results of operations. If we are unable to manage our growth, we may not be able to implement our business plan and our business, financial condition and results of operations will be materially harmed. IF WE ARE UNABLE TO EFFECTIVELY INTEGRATE FUTURE ACQUISITIONS OF NEW OR COMPLEMENTARY BUSINESSES, PRODUCTS OR TECHNOLOGY, OUR BUSINESS MAY BE HARMED. We have made and in the future may make acquisitions of complementary businesses, products, services or technologies. We have limited experience in integrating newly acquired organizations into our operations. Acquisitions expose us to many risks, including: - difficulty in assimilating technologies, products, personnel and operations; - diversion of management's attention from other business concerns; 12 - large write-offs and amortization expenses related to goodwill and other intangible assets; - entering markets in which we have no or limited experience; and - incurrence of debt or assumption of other liabilities. The occurrence of one or more of these factors could materially harm our business, financial condition and results of operations. A SIGNIFICANT PORTION OF OUR SALES DURING 1998 AND 1999 HAVE BEEN TO ONE DISTRIBUTOR AND WE MAY CONTINUE IN THE FUTURE TO RELY HEAVILY ON THAT DISTRIBUTOR FOR SALES TO THE RESEARCH AND CLINICAL RESEARCH MARKETS. In February 1996, we granted Amersham an exclusive worldwide license to use and sell the Seq4x4-TM- DNA sequencer and related products used and sold with the sequencer, which is designed for the research market. During 1998 and 1999, approximately 30% and 21%, respectively, of our revenues resulted from sales of sequencers and other products to Amersham. Our agreement with Amersham expires in February 2001 and is automatically renewed each year unless either party notifies the other at least six months in advance of renewal that it wishes to terminate the agreement. We cannot be certain that Amersham will be successful in selling these products. In addition, we cannot be certain that the agreement will not be terminated before expiration or that, upon expiration, it will be renewed on favorable terms or at all. WE MAY BE SUED BY CLINICIANS, PATIENTS OR THIRD-PARTY PAYORS AND OUR INSURANCE MAY NOT SUFFICIENTLY COVER ALL CLAIMS BROUGHT AGAINST US. The testing, manufacturing, sale and marketing of our products exposes us to the risk of product liability claims. In addition, clinicians, patients, third-party payors and others may at times seek damages based on testing or analysis errors based on a technician's misreading of the sequencing results, mishandling of the patient samples or similar claims. Although we have obtained liability insurance coverage, we cannot guarantee that liability insurance will continue to be available to us on acceptable terms or that our coverage will be sufficient to protect us against all claims that may be brought against us. A liability claim, even one without merit or for which we have substantial coverage, could result in significant legal defense costs, thereby increasing our expenses, lowering our earnings and, depending on revenues, potentially resulting in additional losses. OUR INTERNATIONAL OPERATIONS MAY BE ADVERSELY AFFECTED BY RISKS ASSOCIATED WITH INTERNATIONAL BUSINESS. We sell our products in many countries and operate offices in North America and Europe. Therefore, we are subject to certain risks that are inherent in an international business. These include: - varying regulatory restrictions on sales of our products to certain markets and unexpected changes in regulatory requirements; - tariffs, customs, duties and other trade barriers; - difficulties in managing foreign operations and foreign distribution partners; - longer payment cycles and problems in collecting accounts receivable; - fluctuations in currency exchange rates; - political risks; - foreign exchange controls that may restrict or prohibit repatriation of funds; - varying laws relating to, among other things, employment and employment termination; 13 - export and import restrictions or prohibitions, and delays from customs brokers or government agencies; - seasonal reductions in business activity in certain parts of the world; and - potentially adverse tax consequences. Depending on the countries involved, any or all of the foregoing factors could materially harm our business, financial condition and results of operations. WE MAY NEED TO RAISE ADDITIONAL CAPITAL IN THE FUTURE AND WE CANNOT BE CERTAIN THAT WE WILL BE ABLE TO RAISE CAPITAL WHEN NECESSARY ON ACCEPTABLE TERMS. At this time, our sales are not sufficient to meet our anticipated financing requirements. Based on our current plans, we believe that current cash balances, including proceeds from our recently completed financings, the proceeds from this offering and anticipated funds from operations will be sufficient to enable us to meet our operating needs for at least the next 24 months. The proceeds of this offering will be available for general corporate and working capital purposes, including, among other things, to acquire complementary businesses, products, services or technologies. Currently, we have no definitive agreements to make any acquisition and we cannot be certain that the proceeds we will receive from this public offering will be sufficient to complete any acquisition we might make in the future. In addition, the actual amount of funds that we will need during the next 24 months will be determined by many factors, some of which are beyond our control. These factors include: - our success in selling our products in the research and clinical research markets during this period; - the cost and length of time required to complete the clinical trials needed for our application to the FDA for approval to sell our HIV OpenGene System to the clinical diagnostic market; - the timing of our submission of an application to the FDA for approval to sell our HIV OpenGene System and the length of time it takes the FDA to complete its review; - our success in introducing new products during the period; - our incurring significant fixed overhead and other expenses prior to increasing our revenues; and - the costs of acquiring and integrating any new business or technologies during the period. We may need to obtain additional funds sooner or in greater amounts than we currently anticipate and we may need to obtain additional funds at the end of this 24 month period. If we need to obtain funds at the end of 24 months, or earlier, potential sources of financing include strategic relationships, public or private sales of our shares or debt or other arrangements. Because of our potential long term capital requirements, we may seek to access the public or private equity markets whenever conditions are favorable, even if we do not have an immediate need for additional capital at that time. We do not have any committed sources of financing at this time and it is uncertain whether additional funding will be available when we need it on terms that will be acceptable to us or at all. If we raise funds by selling additional common shares or other securities convertible into common shares, the ownership interest of our existing shareholders will be diluted. If we are not able to obtain financing when needed, we would be unable to carry out our business plan, we would have to significantly limit our operations and our business, financial condition and results of operations would be materially harmed. WE MAY REQUIRE APPROVAL OF THE HOLDERS OF OUR SERIES A PREFERRED SHARES IN ORDER TO OBTAIN CERTAIN TYPES OF FINANCING AND WE MAY BE PREVENTED FROM OBTAINING THESE TYPES OF FINANCING BY THE HOLDERS OF OUR SERIES A PREFERRED SHARES. We will be required to obtain the consent of the holders of a majority of our then outstanding Series A preferred shares prior to issuing any equity security that has rights as to dividends and liquidation 14 that are senior or equal to those of the Series A preferred shares. Also, under certain circumstances, if we propose to sell equity securities, including debt securities convertible into equity securities, certain holders of our Series A preferred shares will be entitled to preemptive rights which allow them to purchase a proportional amount of the securities being offered. We will also be required to obtain the consent of the holders of a majority of our then outstanding Series A preferred shares if we wish to borrow money and at such time or as a result of such loans, the total principal amount of our indebtedness and capitalized lease obligations exceeds $15.0 million. In addition, if we were to enter into a credit facility with a financial institution, we may be subject to additional limitations on our ability to incur additional indebtedness. As a result, we may be delayed in, or prohibited from, obtaining certain types of financing. OUR U.S. INVESTORS COULD SUFFER ADVERSE TAX CONSEQUENCES IF WE ARE CHARACTERIZED AS A PASSIVE FOREIGN INVESTMENT COMPANY. Although we do not believe that we were a passive foreign investment company (or PFIC) for United States federal income tax purposes during 1999 there can be no assurance that we will not be treated as a PFIC in 2000 or thereafter. We would be a PFIC if 75% or more of our gross income in a taxable year is passive income. We also would be a PFIC if at least 50% of the value of our assets averaged over the taxable year produce, or are held for the production of, passive income. For these purposes, the value of our assets is calculated based on our market capitalization. Passive income includes, among other items, interest, dividends, royalties, rents and annuities. For the 1999 taxable year, approximately 8%, of our assets averaged over the taxable year produced, or were held for the production of, passive income, and approximately 5% of our gross income was passive income. During the third and fourth quarter of 1999, we raised a total of approximately $52 million in private financings, after repayment of outstanding indebtedness and offering expenses, to be used for general working capital purposes. Since a significant portion of these funds and the funds that we will receive from this offering will be invested until needed, the percentage of our assets that are likely to produce passive income during 2000 will increase. If we become a PFIC, many of our U.S. shareholders will, in absence of certain elections as discussed below, be subject to the following adverse tax consequences: - they will be taxed at the highest ordinary income tax rates in effect during their holding period on certain distributions on our common shares, and gain from the sale or other disposition of our common shares; - they will be required to pay interest on taxes allocable to prior periods; and - the tax basis of our common shares will not be increased to fair market value at the date of their deaths. If we become a PFIC, our U.S. shareholders could avoid these tax consequences by making a qualified electing fund election or a mark-to-market election. These elections would need to be in effect for all taxable years during which we were a PFIC and during which our U.S. shareholders held our common shares. A U.S. shareholder who makes a qualified electing fund election, will be taxed currently on our ordinary income and net capital gain (unless a deferral election is in effect). A U.S. shareholder who makes a mark-to-market election, will include as ordinary income each year an amount equal to the excess of the fair market value of our common shares over the adjusted tax basis as of the close of each year (with certain adjustments for prior years). If we become a PFIC, our U.S. shareholders will generally be unable to exchange our common shares for shares of an acquiring corporation on a tax-deferred basis under the reorganization rules of the Internal Revenue Code, and the benefits of many other nonrecognition provisions of the Internal Revenue Code will not apply to transfers of our common shares. In addition, if we become a PFIC, pledges of our common shares will be treated as sales for U.S. federal income tax purposes. Our U.S. shareholders should 15 note that state and local taxes may also apply if amounts are included in U.S. federal taxable income under the PFIC rules of the Internal Revenue Code. The PFIC rules are very complex. Our U.S. shareholders are strongly encouraged to consult with their tax advisors concerning all of the tax consequences of investing in our common shares and the possible benefits of making a tax election given their circumstances. Additionally, our U.S. shareholders should review the section entitled "Taxation--U.S. Federal Income Tax Considerations--Tax Status of the Company--Passive Foreign Investment Companies" contained in our Annual Report on Form 20-F for a more detailed description of the PFIC rules and how they may affect their ownership of our common shares. OUR AMENDED ARTICLES OF INCORPORATION AND BY-LAWS CONTAIN CERTAIN PROVISIONS THAT MAKE IT DIFFICULT FOR A THIRD PARTY TO ACQUIRE OUR COMPANY EVEN IF DOING SO WOULD BE BENEFICIAL TO OUR SHAREHOLDERS AND, THEREFORE, OUR SHAREHOLDERS MAY NOT BE ABLE TO MAXIMIZE THE RETURN ON THEIR INVESTMENT. Our authorized capital consists of an unlimited number of preferred shares. The Board of Directors, without any further vote by the common shareholders, has the authority to issue preferred shares and to determine the price, preferences, rights and restrictions, including voting and dividend rights, of these shares. The rights of the holders of common shares are subject to the rights of holders of any preferred shares that the Board of Directors may issue in the future. That means, for example, that we can issue preferred shares with more voting rights, higher dividend payments or more favorable rights upon dissolution, than the common shares. If we issued certain types of preferred shares in the future, it may also be more difficult for a third party to acquire a majority of our outstanding voting shares. In addition, we have a "classified" Board of Directors, which means that only approximately one-third of our directors are eligible for election each year. Therefore, if shareholders wish to change the composition of the Board of Directors, it would take at least two years to remove a majority of the existing directors, and three years to change all directors. Also, the holders of our Series A preferred shares are entitled to vote as a class for one director. The Series A Director serves for a one year term and any vacancy may be filled only by a vote of the holders of Series A preferred shares. If we do not redeem our Series A preferred shares as required during 2006, 2007, and 2008, then our Series A shareholders will be entitled to special voting rights enabling them to elect a majority of our Board of Directors, who will continue to serve as directors until we have redeemed our Series A preferred shares as required. Having a classified Board of Directors and these special rights of the Series A preferred shareholders may, in some circumstances, deter or delay mergers, tender offers or other possible transactions which may be favored by some or a majority of our shareholders. BECAUSE OUR PREFERRED SHAREHOLDERS ARE ENTITLED TO CERTAIN PREFERENCES OVER OUR COMMON SHAREHOLDERS, UNDER CERTAIN CIRCUMSTANCES, OUR COMMON SHAREHOLDERS MAY NOT RECEIVE A RETURN OF THE FULL AMOUNT THEY HAVE INVESTED IN OUR COMPANY. In July 1999, we issued 33,948 Series A preferred shares. Our Series A preferred shares entitle the holders to certain preferences over our common shares (described elsewhere in this prospectus), including the following: - we may not issue any securities that rank senior to, or in parity with, the Series A preferred shares without obtaining the approval of the holders of a majority of the Series A preferred shares; - we may not issue dividends to holders of common shares until all accrued and unpaid dividends on the Series A preferred shares are paid in full; and - if we liquidate or wind-up our company or if we sell our company or in certain other circumstances, holders of Series A preferred shares are entitled to receive an amount equal to $1,000 per Series A preferred share, or approximately $34.0 million in the aggregate, plus accrued 16 and unpaid dividends, before holders of common shares would be entitled to receive any distribution. THE VOLATILITY OF THE STOCK MARKET COULD DRIVE DOWN THE PRICE OF OUR COMMON SHARES WHICH COULD RESULT IN LOSSES TO OUR SHAREHOLDERS. The market prices for securities of life sciences companies, particularly those that are not profitable, have been highly volatile, especially recently. Publicized events and announcements may have a significant impact on the market price of our common shares. In addition, the stock market from time to time experiences extreme price and volume fluctuations which particularly affect the market prices for emerging and life sciences companies, such as ours, and which are often unrelated to the operating performance of the affected companies. These broad market fluctuations may make it difficult for a shareholder to sell shares at a price equal to or above the price at which the shares were purchased. FUTURE SALES BY EXISTING SHAREHOLDERS MAY LOWER THE PRICE OF OUR COMMON SHARES WHICH COULD RESULT IN LOSSES TO OUR SHAREHOLDERS. As of February 29, 2000, we had outstanding 16,045,167 voting shares, including 3,259,748 shares issuable upon conversion of our Series A preferred shares but excluding the shares covered by this prospectus. All of these shares are eligible for sale under Rule 144, pursuant to currently effective registration statements, or are otherwise freely tradable. Directors, executive officers and certain shareholders who in the aggregate own 4,879,759 voting shares have agreed to a 90-day lock-up with respect to their shares. FleetBoston Robertson Stephens Inc. may release shareholders from the lockup agreement at any time and without notice. Following the expiration of this lock-up period, 4,879,759 common shares subject to the lock-up agreements will become available for immediate resale in the public market subject, in some instances, to the volume and other limitations of Rule 144. Subject to the lock-up agreements described above, our common shares are eligible for sale into the public market as follows: - Our affiliates own 1,971,325 shares that may be sold subject to volume restrictions imposed by Rule 144. We have agreed to file a registration statement with the Securities and Exchange Commission covering 1,927,134 of these shares, which will be filed no earlier than 90 days and no later than 180 days after the completion of this offering. Our affiliates also own options to acquire an additional 950,776 shares. The shares to be issued upon exercise of these options have been registered and may be freely sold when issued. - Our employees and consultants who are not deemed affiliates hold options to buy a total of 995,698 shares. The shares to be issued upon exercise of these options have been registered and may be freely sold when issued. - 3,069 shares issuable upon exercise of outstanding warrants are registered for sale pursuant to a registration statement filed with the Securities and Exchange Commission, and may be freely sold. - We may issue options to purchase up to an additional 501,412 shares under our stock option plans. The shares to be issued upon exercise of these options have been registered and may be freely sold when issued. - We have filed registration statements covering 1,916,000 common shares, and an additional 5,283,758 common shares issuable upon conversion of our Series A preferred shares and issued or issuable upon exercise of certain warrants issued on July 15, 1999. These shares may be freely sold so long as the registration statements covering them remain effective. 17 Sales of substantial amounts of common shares into the public market could lower the market price of our common shares. In general, under Rule 144 as currently in effect, a person (or persons whose shares are required to be aggregated) who has owned shares for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of (i) 1% of the number of our common shares then outstanding (which equals approximately 147,854 common shares as of February 29, 2000, after giving effect to this offering) or (ii) the average weekly trading volume of our common shares during the four calendar weeks preceding the filing of a Form 144 with respect to such sale. Sales under Rule 144 are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about our company. Under Rule 144(k), a person who is not deemed to have been our affiliate at any time during the three months preceding a sale, and who has owned the shares proposed to be sold for at least two years, is entitled to sell his shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. WE MAY SUFFER LOSSES AS RESULT OF FLUCTUATIONS IN EXCHANGE RATES BETWEEN THE U.S. DOLLAR AND FOREIGN CURRENCIES. Our financial statements are prepared in U.S. dollars and much of our business is conducted in U.S. dollars. However, we incur expenses in Canadian dollars and in other foreign currencies. We also sell products to customers in foreign countries and bill those customers in local currencies at predetermined exchange rates. As our business expands, we anticipate that we will increasingly incur expenses and bill and receive payments in local currencies at prevailing exchange rates. As a result, we may suffer losses due to fluctuations in the exchange rates between the U.S. dollar and the Canadian dollar and the U.S. dollar and the currencies of other countries. We currently engage in limited foreign exchange hedging activities by sometimes purchasing Canadian funds before they are actually required to protect ourselves against the risk of losses due to fluctuations in exchange rates. We do not currently engage in hedging activities for any other foreign currencies. WE HAVE DISCRETION AS TO THE USE OF PROCEEDS FROM THIS OFFERING AND WE MAY NOT USE THE PROCEEDS FROM THIS OFFERING IN THE MOST EFFECTIVE MANNER. We have broad discretion as to the use of the proceeds that we will receive from this offering. We intend to use the net proceeds for working capital and other general corporate purposes. We may also use a portion of the net proceeds to acquire or invest in businesses, products, services or technologies that are complementary to our business, although we have no such specific plans at this time. We cannot assure you that management will apply the funds raised in this offering effectively, nor can we assure you that the proceeds will be invested to yield favorable returns. The ineffective use of the net proceeds may materially harm our business, financial condition and results of operations. PURCHASERS OF COMMON SHARES IN THIS OFFERING WILL INCUR IMMEDIATE AND SUBSTANTIAL DILUTION. You will incur immediate and substantial dilution of $41.44 per common share in the net tangible book value of the common shares you purchase in this offering based on an assumed public offering price of $50.00 per common share. You may also experience additional dilution as a result of the issuance of shares in future business acquisitions and otherwise and as a result of the issuance and exercise of employee stock options and of warrants. 18 FORWARD-LOOKING STATEMENTS This prospectus includes forward-looking statements. You can identify these forward-looking statements when you see us using words such as "expect," "anticipate," "estimate," "believe," "intend," "may," "predict," and other similar expressions. These forward looking statements cover, among other items: - FDA and other regulatory approval for certain of our products; - acceptance of our products in the clinical diagnostic market; - acceptance of genotyping in the clinical diagnostic market; - our marketing and sales plans; - our expectations about the markets for our products; - the performance of our products; - our intention to introduce new products; - our future capital needs; - our clinical trials; - reimbursement of our products by insurance companies and other third-party payors; - our ability to compete in the research, clinical research and clinical diagnostic markets; - our patent applications; - our ability to bring our Atlanta manufacturing facility fully operational; - our ability to modify our information systems to accommodate euro transactions; and - the status of year 2000 compliance efforts of our company, and our material customers and suppliers. We have based these forward-looking statements largely on our current expectations. However, forward-looking statements are subject to a number of risks and uncertainties, certain of which are beyond our control. Actual results could differ materially from those anticipated as a result of the factors described under "Risk Factors" including, among others: - delays in obtaining, or our inability to obtain, approval by the FDA and other regulatory authorities for our HIV OpenGene System and, in the future, certain of our other products for the clinical diagnostic market; - refusal of insurance companies and other third-party payors to reimburse patients and clinicians for our products; - uncertainty of acceptance of genotyping, in general, and of our products, in particular, in the clinical diagnostic market; - problems, delays and expenses we may face with our proposed clinical trials; - problems that we may face in manufacturing, marketing and distributing our products; - delays in the issuance of, or the failure to obtain, patents or licenses for certain of our products and technologies; - problems with important suppliers and business partners; - delays in developing, or the failure to develop, new products and enhanced versions of existing products; and - the timing of our future capital needs or our inability to raise additional capital when needed. We do not undertake any obligation to publicly update or revise any forward-looking statements contained in this prospectus or incorporated by reference, whether as a result of new information, future events or otherwise. Because of these risks and uncertainties, the forward-looking statements and circumstances discussed in this prospectus might not transpire. 19 USE OF PROCEEDS We estimate that the net proceeds from the sale of our common shares in this offering will be approximately $94.4 million (approximately $108.6 million if the underwriters exercise their overallotment option in full) at an assumed public offering price of $50.00 per share, after deducting the underwriting discounts and commissions and estimated offering expenses. We intend to use the net proceeds of this offering for working capital and other general corporate purposes. In addition, we may use a portion of the net proceeds to acquire complementary businesses, products, services or technologies. Currently we have no definitive agreements to make any acquisition. Until we use the net proceeds, we intend to invest the funds in interest-bearing, investment grade securities. PRICE RANGE OF COMMON SHARES Our common shares are traded on the Nasdaq National Market under the symbol "VGIN". Our common shares are not listed or quoted for trading on securities markets outside of the United States. The following table sets forth, for the periods indicated, high and low sale prices of our common shares as reported on the Nasdaq National Market.
PRICE RANGE OF COMMON SHARES ----------------------- HIGH LOW -------- -------- FISCAL YEAR ENDED DECEMBER 31, 1998: First Quarter........................................... $ 9.75 $ 6.00 Second Quarter.......................................... $ 11.38 $ 7.50 Third Quarter........................................... $ 13.06 $ 7.00 Fourth Quarter.......................................... $ 14.00 $ 9.25 FISCAL YEAR ENDED DECEMBER 31, 1999: First Quarter........................................... $ 21.75 $10.00 Second Quarter.......................................... $ 21.81 $15.31 Third Quarter........................................... $ 22.81 $ 8.88 Fourth Quarter.......................................... $ 34.63 $15.00 FISCAL YEAR ENDED DECEMBER 31, 2000: First Quarter (through March 24, 2000).................. $119.13 $29.00
On March 24, 2000 the last reported sale price of our common shares on the Nasdaq National Market was $50.00. As of February 29, 2000, there were 111 holders of record of our common shares. This number does not include an indeterminable number of beneficial holders of these securities whose common shares are held by financial institutions in "street name." DIVIDEND POLICY SERIES A PREFERRED SHARES. Dividends on our Series A preferred shares accrue at the rate of 9% per year during the first three years after issuance, and 4% per year thereafter. Dividends may not be paid for the first three years. After three years, at our option, we may pay dividends in cash. If dividends are not paid in cash, they will continue to accrue. COMMON SHARES. We have not declared or paid any cash dividends on our common shares. We currently intend to retain any future earnings for use in the operation and expansion of our business. We do not anticipate paying any cash dividends on our common shares in the foreseeable future. 20 CAPITALIZATION The following table shows our capitalization as of December 31, 1999, on an actual basis, and on an as adjusted basis after giving effect to the sale of 2,000,000 common shares in this offering at an assumed public offering price of $50.00 per share, after deducting the underwriting discounts and commissions and estimated offering expenses. You should carefully read our Consolidated Financial Statements and the Notes to those statements included elsewhere in this prospectus.
DECEMBER 31, 1999 --------------------------------------- ACTUAL AS ADJUSTED -------- ------------------------ (IN THOUSANDS) Series A mandatorily redeemable convertible preferred shares, no par value, 33,950 authorized, 33,948 issued and outstanding, actual and as adjusted....................... $ 27,556 $ 27,556 -------- ------------------------ Shareholders' equity: Preferred shares, no par value, unlimited shares authorized, no shares issued and outstanding, actual and as adjusted....................................... -- -- Common shares, no par value, unlimited shares authorized, 11,622,115 shares issued and outstanding, actual; 13,622,115 shares issued and outstanding, as adjusted.............................................. 75,422 169,772 Other equity................................................ 8,987 8,987 Cumulative translation adjustment........................... (620) (620) Accumulated deficit......................................... (59,438) (59,438) -------- ------------------------ Total shareholders' equity.......................... 24,351 118,701 -------- ------------------------ Total capitalization................................ $ 51,907 $ 146,257 ======== ========================
The number of common shares outstanding excludes: - 2,145,553 common shares reserved for issuance pursuant to outstanding stock options at a weighted average exercise price of $8.82; - 542,221 common shares reserved for future issuance under our Employee Option Plan; - 75,000 common shares reserved for future issuance under our Director Share Option Plan; - 2,052,118 common shares reserved for issuance under outstanding warrants at a weighted average price of $12.23; and - 3,213,455 common shares issuable upon conversion of the Series A preferred shares as of December 31, 1999. The number of common shares issuable upon conversion of our Series A preferred shares will increase as the dividends payable thereon accrue. See Notes 10 and 11 to our Consolidated Financial Statements. 21 DILUTION As of December 31, 1999, our net tangible book value was approximately $22.2 million, or $1.91 per common share. Net tangible book value per common share represents the amount of our total tangible assets reduced by our total liabilities and Series A mandatorily redeemable convertible preferred shares, divided by the number of common shares outstanding. After giving effect to the receipt of the estimated net proceeds from our sale of 2,000,000 shares in this offering at an assumed public offering price of $50.00 per common share, our adjusted net tangible book value as of December 31, 1999 would have been approximately $116.6 million or $8.56 per common share. This represents an immediate increase in net tangible book value of $6.65 per common share to existing shareholders and an immediate dilution of $41.44 per common share to new investors. The following table illustrates this per common share dilution: Assumed public offering price per common share.............. $ 50.00 Net tangible book value per common share before this offering.............................................. $ 1.91 Increase in net tangible book value per common share attributable to new investors......................... 6.65 -------- Pro forma net tangible book value per common share after this offering............................................. 8.56 -------- Pro forma dilution in net tangible book value per common share to new investors.................................... $ 41.44 ========
22 SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our Consolidated Financial Statements and the Notes thereto. The Consolidated Statements of Operations data for fiscal years 1997, 1998, 1999 and the Consolidated Balance Sheet data as of December 31, 1998 and 1999, as set forth below, have been derived from our consolidated financial statements which have been audited by PricewaterhouseCoopers LLP, Chartered Accountants in Canada, whose report with respect to such financial statements is included herein. The Consolidated Statements of Operations data for fiscal years 1995 and 1996 and the Consolidated Balance Sheet data as of December 31, 1995, 1996 and 1997, as set forth below, have been derived from audited consolidated financial statements not included in this prospectus. Historical results are not necessarily indicative of results to be expected for any future period.
YEARS ENDED DECEMBER 31 -------------------------------------------------------------- 1995 1996 1997 1998 1999 ---------- ---------- ---------- ---------- ---------- ($ IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENTS OF OPERATIONS DATA: Sales.................................. $ -- $ 978 $ 3,033 $ 10,875 $ 13,627 Cost of sales.......................... -- 561 1,995 6,673 9,273 ---------- ---------- ---------- ---------- ---------- Gross margin........................... -- 417 1,038 4,202 4,354 Sales, general and administrative expense.............................. 1,476 3,377 7,448 11,516 19,074 Research and development expense....... 1,241 2,745 4,123 6,289 7,935 Other expense.......................... -- -- 654 420 1,329 ---------- ---------- ---------- ---------- ---------- Loss from operations before interest... (2,717) (5,705) (11,187) (14,023) (23,984) Interest income........................ 12 609 774 264 695 Interest and financing expense......... (19) (69) (3) (1,132) (1,998) ---------- ---------- ---------- ---------- ---------- Net loss............................... (2,724) (5,165) (10,416) (14,891) (25,287) Cumulative preferred dividends and accretion of discount attributable to preferred shares..................... -- -- -- -- (1,770) ---------- ---------- ---------- ---------- ---------- Net loss attributable to common shareholders......................... $ (2,724) $ (5,165) $ (10,416) $ (14,891) $ (27,057) ========== ========== ========== ========== ========== Net loss per common share.............. $ (0.65) $ (0.89) $ (1.48) $ (1.91) $ (2.73) Weighted average number of common shares outstanding................... 4,181,599 5,791,367 7,059,578 7,782,094 9,916,954
DECEMBER 31 ---------------------------------------------------- 1995 1996 1997 1998 1999 -------- -------- -------- -------- -------- (IN THOUSANDS) BALANCE SHEET DATA: Cash and short-term investments................ $ 403 $18,928 $ 7,588 $11,274 $42,688 Working capital................................ 418 20,061 9,561 8,432 45,611 Total assets................................... 1,791 22,606 13,936 27,783 58,640 Indebtedness................................... 500 -- -- 7,495 -- Mandatorily redeemable convertible preferred shares....................................... -- -- -- -- 27,556 Accumulated deficit............................ (3,680) (8,845) (19,260) (34,151) (59,438) Shareholders' equity........................... 841 21,795 12,610 14,579 24,351
23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW We began operations in 1993. Until 1996, we devoted substantially all of our resources to the research and development of our technology and products. In late 1996, we began manufacturing and selling our products to the research and clinical research markets. Our products and services include: - SEQUENCING SYSTEMS. Sequencing systems consist of automated DNA sequencers and related equipment, and our proprietary DNA analysis and data management software. - GENEKITS AND OTHER CONSUMABLES. GeneKits consist of various reagents, enzymes, primers and other chemicals, and other consumables consist of disposable gel cassettes, acrylamide and other materials. - TESTING, SEQUENCING AND OTHER SERVICES. We provide services, such as viral load testing, genotyping and other molecular services, through our subsidiaries, Applied Sciences, Inc., which we acquired in 1997, and Visible Genetics Europe S.A. (formerly known as ACT Gene S.A.), which we acquired in 1998. During 1996 and 1997, we generated revenues primarily by selling sequencing systems. During this period, our business strategy focused on installing our DNA sequencers and related equipment in research and clinical research facilities. During 1998, we began to shift our strategy to target the clinical diagnostic market and to place greater emphasis on generating recurring revenues from sales of GeneKits and other consumables initially to the research and clinical research markets and, subject to FDA approval, to the clinical diagnostic market. As part of this strategy, we may sell our DNA sequencers at reduced prices to customers who commit to purchase significant quantities of GeneKits and other consumables. In addition, in 1998 and 1999, we bundled our DNA sequencers and GeneKits for sale at reduced prices. We discontinued the practice of bundled sales in the second half of 1999. This strategy may result, initially, in reduced gross margins and additional losses as we attempt to expand our installed base of DNA sequencers. However, we believe that this strategy, over the long term, will help us maximize recurring sales of our HIV GeneKit and other GeneKits to the clinical diagnostic market, should we receive FDA approval. OUR OPERATIONS SALES. Sales consist of revenues from the sale of sequencing systems and GeneKits and other consumables, as well as from the sale of testing services. Sales include shipping charges, but exclude sales and excise taxes. Revenues from the sale of our products are recognized when shipment occurs, title passes to the customer or distributor and there is a reasonable assurance of collectibility. Revenues from the sale of testing and other services are recognized when the service is provided and there is a reasonable assurance of collectibility. Sales of bundled sequencing systems and GeneKits are recognized proportionately as the components of the bundle are shipped to customers. The total sales price of the bundle is allocated to the components proportionately based on the retail prices typically charged for such components if they were sold individually rather than as part of the bundle. We sell our products in North America, Europe, Asia, Australia and South America. In the United States, Canada and many countries in Europe, we sell our products directly through our own sales force. In selected geographic and product markets, we seek to sell our products through distribution, marketing or agency agreements with leading distributors. Currently, we have entered into agreements with distributors or agents in Spain, Portugal, Japan, Australia, New Zealand and Argentina. 24 For an analysis of sales by product segment and geographic market, see Note 15 to our Consolidated Financial Statements. COST OF SALES. Cost of sales consists of manufacturing costs including materials, labor and overhead chargeable to inventory. The gross margin from sales of our products and services varies depending on product category, distribution channel and geographic market. Gross margin is calculated by subtracting cost of sales from sales. SALES, GENERAL AND ADMINISTRATIVE EXPENSES. Sales, general and administrative expenses consist primarily of salaries and related expenses, occupancy costs, utilities, professional fees, consulting fees, travel costs, capital taxes, depreciation of fixed assets and amortization of costs paid to patent counsel. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses consist primarily of salaries and related expenses for employees engaged in research and development, occupancy costs, consulting fees, travel costs, depreciation and amortization of fixed assets and costs related to FDA clinical trials for our HIV OpenGene System. INTEREST INCOME. Interest income consists of income earned on cash, cash equivalents and marketable securities. INTEREST AND FINANCING EXPENSE. Interest and financing expense consists of interest paid or accrued, and amortization of warrant costs and other financing expenses. Our financial statements are presented in U.S. dollars and are prepared in accordance with generally accepted accounting principles in the United States. RESULTS OF OPERATIONS COMPARISON OF FISCAL YEAR ENDED DECEMBER 31, 1999 TO FISCAL YEAR ENDED DECEMBER 31, 1998 SALES. Sales increased 25% to $13.6 million in 1999, from $10.9 million in 1998. This increase resulted primarily from increased sales of our GeneKits and other consumables. In 1999, 340 sequencing systems were sold, as compared to 412 sequencing systems sold in 1998. The decrease in sequencing systems sold in 1999 as compared to 1998 is due to a decline in Seq4x4 sales to Amersham, which decreased from 273 units in 1998 to 85 units in 1999. In 1998 Amersham began to actively market the Seq4x4 and initial sales were high as Amersham filled their distribution pipeline. Subsequently, Amersham's marketing effort has been transferred to the Long-Read Tower at a higher unit price but lower anticipated volume. In 1999, sequencing systems accounted for 57% of total sales, compared to 74% of total sales in 1998. In 1999, GeneKits and other consumables accounted for 35% of total sales, compared to 13% of total sales in 1998. Testing services accounted for 8% of sales in 1999, compared to 13% of sales in 1998. Sales in North America, Europe, Japan and the rest of the world were $5.2 million, $5.5 million, $1.6 million and $1.3 million, respectively, for 1999, as compared to $4.4 million, $4.6 million, $1.6 million and $0.3 million, respectively, during 1998. During 1999, Amersham accounted for approximately 21% of sales, of which 19% comprised sequencing systems and 2% comprised GeneKits and other consumables. During 1998, Amersham accounted for 30% of sales, of which 29% comprised sequencing systems and 1% comprised GeneKits and other consumables. The sales to Amersham were made on the same general terms and conditions as the majority of other sales during the respective periods. COST OF SALES. Cost of sales increased 39% to $9.3 million in 1999, from $6.7 million in 1998. In 1999, cost of sales aggregated 68% of sales, compared to 61% of sales in 1998. This increase in cost of sales as a percentage of sales was primarily related to a write-off of obsolete and discontinued instruments and related parts totaling $0.6 million recorded in the second quarter of 1999. SALES, GENERAL AND ADMINISTRATIVE EXPENSES. Sales, general and administrative expenses increased 66% to $19.1 million in 1999, from $11.5 million in 1998. This increase resulted primarily from increased 25 payroll and personnel costs due to the continued growth of our business, costs of quality control and regulatory departments established in 1998 and the continued expansion of our sales force in North America and Europe. Sales and marketing expenses included in sales, general and administrative expenses increased 79% to $11.1 million in 1999, from $6.2 million in 1998. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased 26% to $7.9 million in 1999, from $6.3 million in 1998. This increase resulted from increased payroll and personnel costs, along with increased purchases of laboratory supplies, as we developed additional GeneKits and continued our research programs. Additionally, we incurred costs for pre-clinical and clinical trials related to our FDA submission for our HIV OpenGene System. EXIT AND TERMINATION COSTS. During 1999, we incurred exit and termination costs of $1.3 million. There were no such costs in 1998. Of this amount, $0.8 million related to the planned relocation of certain of our activities to a new location in Atlanta, and $0.5 million was for termination benefits payable to two senior officers in connection with the termination of their employment with our company. INTEREST INCOME. Interest income increased to $0.7 million in 1999, from $0.3 million in 1998. The increase reflects interest earned on higher average cash balances as a result of the proceeds received from financings completed during the third and fourth quarters of 1999. INTEREST AND FINANCING EXPENSE. Interest and financing expense increased to $2.0 million in 1999, from $1.1 million in 1998. This increase was due to interest and financing costs on our term loan agreements entered into in April and September 1998 and the Warburg Pincus financing in July 1999. Of the total interest and financing expense, $1.5 million was a non-cash charge due to the amortization of costs attributable to warrants issued in connection with our term loans and the Warburg Pincus financing, compared to $0.6 million during 1998. COMPARISON OF FISCAL YEAR ENDED DECEMBER 31, 1998 TO FISCAL YEAR ENDED DECEMBER 31, 1997 SALES. Sales increased 259% to $10.9 million in 1998 from $3.0 million in 1997. This increase resulted from increased sales of our sequencing systems, GeneKits and other consumables and testing, sequencing and other services. In 1998, 412 sequencing systems were sold, an increase of 353% from the 91 systems sold in 1997. In 1998, sequencing systems accounted for 74% of sales, compared to 90% of sales in 1997. GeneKits and other consumables accounted for 13% of sales in 1998, compared to 8% in 1997. Testing services accounted for 13% of sales in 1998 compared to 2% of sales in 1997 as a result of our acquisitions in 1997 and 1998 of DNA diagnostic testing companies. Sales during 1998 in North America, Europe, Japan and the rest of the world were $4.4 million, $4.6 million, $1.6 million and $0.3 million, respectively, as compared to $2.8 million, $0.2 million, nil and $0.05 million, respectively, during 1997. During 1998, Amersham accounted for 30% of sales, of which 29% comprised sequencing systems and 1% comprised GeneKits and other consumables. The sales to Amersham were made on the same general terms and conditions as the majority of other sales during the year. During 1997, no customer accounted for more than 10% of sales. COST OF SALES. Cost of sales increased 235% to $6.7 million in 1998 from $2.0 million in 1997. In 1998, cost of sales aggregated 61% of sales, a decrease from 66% of sales in 1997. Cost of sales decreased in 1998 as a percentage of sales due to improvements in our manufacturing processes, as well as economies of scale as production of sequencing systems, GeneKits and other consumables increased compared to the previous year. SALES, GENERAL AND ADMINISTRATIVE EXPENSES. Sales, general and administrative expenses increased 55% to $11.5 million in 1998 from $7.4 million in 1997. This increase resulted primarily from increased payroll and personnel costs due to the growth of our business, establishment of quality control and regulatory departments and development of a sales force in North America and in certain countries in Europe. Sales 26 and marketing expenses included in sales, general and administrative expenses increased 72% to $6.2 million in 1998 from $3.6 million in 1997. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased 53% to $6.3 million in 1998 from $4.1 million in 1997. This increase in research and development expenses resulted from increased payroll and personnel costs along with increased purchases of laboratory supplies as we continued to develop GeneKits and expanded our research programs. In April 1998, we acquired 100% of the shares of ACT Gene S.A., a DNA diagnostic testing company, for 85,000 common shares and cash payable of $0.7 million. This acquisition was accounted for as a purchase, and resulted in the recording of an excess of purchase price over tangible net assets of $0.5 million, of which $0.4 million was determined to be in-process research and development, and reflected as an expense in 1998. The in-process research and development related to the cost and time pertaining to the development of a test kit and research clinical samples necessary for the development of several kits designed for use with sequencing systems. As of April 1998, the test kit was approximately 80% completed, with an estimated cost to complete the kit of approximately $650,000. At that time we expected to complete the kit during 1999. We currently estimate the cost to date plus additional cost to complete the kit will total approximately $900,000. We currently expect development of the kit to be completed during 2000. At the date of acquisition, the test kit had not yet reached technological feasibility and had no alternative future uses in the clinical diagnostic market. INTEREST INCOME. Interest income declined to $0.3 million in 1998 from $0.8 million in 1997. INTEREST AND FINANCING EXPENSE. Interest and financing expense increased to $1.1 million in 1998 from approximately nil in 1997 due to interest paid or accrued and the amortization of costs attributable to warrants issued in connection with term loans entered into in April and September 1998. LIQUIDITY AND CAPITAL RESOURCES Since inception, we have financed our operations primarily through private placements of equity and an initial public offering in June 1996. We have also borrowed funds from institutional lenders. In addition, we have an arrangement with a bank pursuant to which, from time to time, letters of credit are issued. The obligations under this facility are secured by the assets of our company. INSTITUTIONAL LOANS. On April 30, 1998, our subsidiary, Visible Genetics Corp., or VGC, borrowed $7.0 million from various funds, which we refer to as the Hilal Funds, for which Hilal Capital Management LLC serves as general partner, investment advisor or management company. In September 1998, VGC borrowed an additional $1.0 million from these lenders. The interest rate of the loans was 10% per year. Interest and principal on the $7.0 million loan were payable on or about April 29, 1999, and, on the $1.0 million loan, were payable on December 28, 1999. On April 30, 1999, we and the Hilal Funds agreed to delay the payment date of the $7.0 million loan to December 31, 1999, and to move up the payment date of the $1.0 million loan to July 1, 1999. The Hilal Funds later extended the payment date to the earlier of July 22, 1999, or the completion of the Warburg Pincus financing described below. In addition, the Hilal Funds agreed to permit us to borrow up to an additional $5.0 million of loans from other lenders which would be senior to the $7.0 million loan and junior to the $1.0 million loan. We guaranteed VGC's obligations under both loans. We gave the Hilal Funds a security interest in most of our assets to secure our obligations under the guaranty, including a pledge of the outstanding stock of VGC. Both the loan agreements and the guaranty imposed certain restrictions on us and our subsidiaries, including limitations on loans and other obligations that we may incur. As part of the loan arrangements, we granted the Hilal Funds warrants to purchase our common shares. Initially, we granted the Hilal Funds warrants to purchase 420,000 common shares which may be 27 exercised until April 2003, at a price of $10.00 per share. When we borrowed an additional $1.0 million from the Hilal Funds in September 1998, we granted them warrants for an additional 120,000 common shares which may be exercised until September 2003, at a price of $10.00 per share. The warrants were valued using the Black-Scholes option valuation model. The total proceeds received from the Hilal Funds were allocated between the warrants and term loans based on the relative fair value of each component, resulting in $0.9 million and $0.2 million of the total proceeds from the April 1998 and September 1998 term loans, respectively, being allocated to warrants. The value of the term loans were to be increased to their face value at their respective maturity dates, resulting in a charge to financing expense and warrants, by their pro rata share, over the remaining term of the loans. As a result, non-cash charges of $0.6 million were recorded as financing expenses in 1998. The remaining $0.6 million was recorded as non-cash financing expenses in 1999. On April 30, 1999, we granted the Hilal Funds warrants to purchase an additional 140,000 common shares which may be exercised until April 30, 2006, at a price of $17.00 per share. The warrants were valued using the Black-Scholes option valuation model, resulting in a value being attributed to these warrants of $0.9 million. This amount was recorded as a deferred charge on the balance sheet and was to be amortized to financing expense over the remaining term of the loan maturing on December 31, 1999. As a result, the entire amount was recorded as a non-cash charge to financing expense in 1999. On July 15, 1999, we repaid or satisfied all of the loans made to us by the Hilal Funds. Of the $8.0 million principal amount of the loans, we paid $4.1 million of principal plus accrued interest on the loan in cash. The Hilal Funds converted the remaining $3.9 million principal amount plus accrued interest into 3,948 Series A preferred shares and 147,098 warrants to purchase our common shares. The warrants were valued using the Black-Scholes option valuation model. The value of the net proceeds was allocated between convertible preferred shares and warrants based on the relative fair value of each instrument. The total amount allocated to warrants and preferred shares, was $0.9 million and $3.0 million, respectively. The value of the warrants is treated as a discount to the preferred shares and will be charged directly to retained earnings or, in the absence of retained earnings, against other equity over seven years, the time period when redemption of the preferred shares first becomes mandatory. The increase in value of the preferred shares to their mandatory redemption price as well as the accrual of dividends on the preferred shares will reduce earnings attributable to common shareholders. The Series A preferred shares and warrants have the same terms as those granted to Warburg Pincus as described below. WARBURG PINCUS FINANCING. On July 15, 1999, certain affiliated funds managed by E.M. Warburg, Pincus & Co., LLC, who we refer to as the Warburg Pincus Funds, invested $30.0 million in our company. In consideration for this investment, we issued to the Warburg Pincus Funds 30,000 Series A preferred shares convertible at the holders' option into common shares at $11.00 per share, and warrants to purchase 1,100,000 common shares exercisable for four years at a purchase price of $12.60 per share. The warrants were valued using the Black-Scholes option valuation model. The value of the net proceeds was allocated between convertible preferred shares and warrants based on the relative fair value of each instrument. The total amount allocated to warrants and preferred shares was $6.4 million and $22.8 million, respectively. The value of the warrants is treated as a discount to the preferred shares and will be charged directly to retained earnings or, in the absence of retained earnings, against other equity over seven years, the time period when redemption of the preferred shares first becomes mandatory. The increase in value of the preferred shares to their mandatory redemption price as well as the accrual of dividends on the preferred shares will reduce earnings attributable to common shareholders. In February 2000, the Warburg Pincus Funds exercised all of their warrants. Under the terms of our warrant agreement, the Warburg Pincus Funds elected to pay the exercise price for the warrants through a non-cash exercise. As a result, the Warburg Pincus Funds received 847,749 of our common shares rather than 1,100,000 common shares they otherwise would have received upon exercise in cash of all of their warrants. DECEMBER 1999 PRIVATE PLACEMENT. In December 1999, various institutional investors purchased 1,916,000 common shares of our company in a private placement. The investors paid $15 per share and we 28 received net proceeds of $26.7 million from the private placement. The institutional investors included the Warburg Pincus Funds, the Hilal Funds, certain investors who had purchased our common shares in a November 1998 private placement and certain new institutional investors. CAPITAL EXPENDITURES. Additions to fixed assets were approximately $1.9 million, $3.3 million and $1.3 million for the years ended December 31, 1999, 1998 and 1997, respectively. We expect capital expenditures to increase over the next several years as we expand our facilities and acquire additional manufacturing and scientific equipment. CURRENT AND FUTURE FINANCING NEEDS. We have incurred negative cash flow from operations since we started our business. We have spent, and expect to continue to spend, substantial amounts to complete our planned product development efforts, expand our sales and marketing activities, conduct our clinical trials, conduct research, build our business infrastructure and expand our manufacturing capabilities. At this time, funds from operations are not sufficient to meet our operating needs and other anticipated financial requirements. Based on our current plans, we believe that our cash on hand, anticipated funds from operations and net proceeds from this offering, will be sufficient to enable us to meet our operating needs for at least the next 24 months. The proceeds of this offering will be available for general corporate and working capital purposes, including, among other things, to acquire complementary businesses, products, services or technologies. Currently, we have no definitive agreements to make any acquisition and we cannot be certain that the proceeds we will receive from this offering will be sufficient to complete any acquisition we might make in the future. In addition, the actual amount of funds we will need to operate for the next 24 months is subject to many factors, some of which are beyond our control. We may need to obtain additional funds sooner or in greater amounts than we currently anticipate and we may need to obtain additional funds at the end of the 24 month period. If we need to obtain funds at the end of 24 months, or earlier, potential sources of financing include strategic relationships, public or private sales of our shares or debt or other arrangements. Because of our potential long term capital requirements, we may seek to access the public or private equity markets whenever conditions are favorable, even if we do not have an immediate need for additional capital at that time. We do not have any committed sources of financing at this time and it is uncertain whether additional funding will be available when we need it on terms that will be acceptable to us or at all. If we raise funds by selling additional common shares or other securities convertible into common shares, the ownership interest of our existing shareholders will be diluted. If we are not able to obtain financing when needed, we would be unable to carry out our business plan, we would have to significantly limit our operations and our business, financial condition and results of operations would be materially harmed. If we wish to issue equity securities or obtain additional financing, we will need, under certain circumstances, the consent of the Series A preferred shareholders. We will be required to obtain the consent of the holders of a majority of the then outstanding Series A preferred shares prior to issuing any equity security that has rights as to dividends and liquidation that are senior or equal to those of the Series A preferred shares. We will also be required to obtain the consent of the holders of a majority of the then outstanding Series A preferred shares if we wish to borrow money and at such time or as a result of such loans, the total principal amount of our indebtedness and capitalized lease obligations exceeds $15.0 million. As a result, we may be delayed in, or prohibited from, obtaining certain types of financing. YEAR 2000 We have conducted a comprehensive examination of our information technology systems and the software applications sold with our products to determine year 2000 compliance. Based on our examination, we believe that these systems and software are year 2000 compliant and to date none of these systems or applications have experienced year 2000 problems. 29 We have spent approximately $470,000 on our year 2000 compliance efforts, of which $454,000 was for a new enterprise system purchased in 1998. While we did not purchase the new system specifically in response to year 2000 issues, our efforts at compliance accelerated the timetable for purchasing the system. We have contacted our material customers, suppliers and third-party service providers to identify year 2000 problems and provide solutions to prevent any disruption of business activities. We completed a review of the compliance efforts by these parties in the third quarter of 1999. Based on the information we have received, our most significant year 2000 risk would involve disruption of our material supply and distribution channels, and in particular the supply of certain instrument parts and supplies from single-source suppliers. This would likely lead to material interruption in product development and sales of our products. In addition, we could encounter significant expenses in remedying any problems or switching to year 2000 compliant vendors and suppliers. As of the date of this prospectus, we are not aware of any year 2000 problems affecting any of our material customers, suppliers or third-party service providers that might materially disrupt our business. EURO CONVERSION Effective January 1, 1999, 11 of the 15 member countries of the European Union adopted the euro as their common legal currency and each participant established fixed conversion rates between their sovereign, or legacy, currencies and the common euro currency. The legacy currencies of the individual countries are scheduled to remain legal tender as denominations of the euro until January 1, 2002, when euro-denominated bills and coins will be introduced. During this transition period, public and private parties may choose to pay for goods and services using either the euro or the participating country's legacy currency. By July 1, 2002, the legacy currencies will be phased out entirely as legal tender. We currently conduct business operations in U.S. and Canadian dollars and several other currencies. Since our information systems and processes generally accommodate multiple currencies, we anticipate that any necessary modification to our information systems, equipment and processes to accommodate euro transactions will be made on a timely basis and do not expect any failures that would have a material adverse effect on our financial position or results of operations. 30 BUSINESS OVERVIEW We develop, manufacture and sell integrated DNA sequencing systems that analyze genetic information to improve the treatment of selected diseases. Our strategy is to become a leader in the emerging field of pharmacogenomics. Pharmacogenomics is the science of individualizing therapy based on genetic differences across patients. Our genotyping technology, which employs DNA sequencing, enables the analysis in the clinical diagnostic laboratory of individual genetic variations. DNA sequencing is generally considered the most thorough and accurate method for genotyping diseases. We believe that individualizing therapy through pharmacogenomics will improve the treatment of many diseases, such as Human Immunodeficiency Virus, or HIV, hepatitis B, hepatitis C, tuberculosis and eventually some cancers. Our OpenGene System consists of automated DNA sequencers, disposable gel cassettes, related equipment and software and disease-specific GeneKits. Our GeneKits contain the necessary chemicals, reagents, third-party licenses and other consumables and materials required for sequencing specific disease-associated genes. We have developed GeneKits for HIV and HLA (used for tissue typing, for example, in organ transplants). We are developing GeneKits for hepatitis B, hepatitis C and tuberculosis. We began selling our DNA sequencers and related equipment and consumables to the research and clinical research markets in the third quarter of 1996 and began selling GeneKits into the same markets in the third quarter of 1997. The first clinical diagnostic application we are targeting is HIV. We have developed our HIV GeneKit to enable clinicians to genotype the major HIV species infecting patients in order to improve the management of patient treatment. HIV is a highly variable virus with high rates of mutations, which may lead to drug resistance. One of the central challenges in maintaining HIV patients on long-term drug therapy is to adjust each patient's medication as drug-resistant strains of the virus emerge. Two initial clinical trials, including one that we conducted, have shown that patients whose drug therapy is managed using HIV genotyping had greater reductions in viral load than HIV patients who were not genotyped. In June 1999, we completed a European trial, which we call VIRADAPT, which showed, among other things, that after six months patients who received standard of care treatment and underwent periodic genotyping had a mean decrease in viral load of approximately 93% as compared to a mean decrease in viral load of approximately 79% in the non-genotyping group. In addition, after 6 months, 32% of the patients in the genotyping group had undetectable viral loads as compared to 14% of patients in the non-genotyping group. The other trial, called GART, was funded by the NIH and was completed in the United States in December 1998. It showed that, at the end of 8 weeks, patients who received standard of care treatment and underwent periodic genotyping had a mean decrease in viral load of approximately 93%, as compared to 76% to patients in the non-genotyping group. Also in June 1999, we initiated a trial called SEARCH to test the clinical utility of our HIV OpenGene System in genotyping HIV infected patients. Based on the results from the VIRADAPT and GART clinical trials, the FDA has advised us that we are not required to complete the SEARCH trial and has indicated that we will not be required to demonstrate further the clinical utility of our HIV OpenGene System in the treatment of HIV infected individuals. We plan to apply to the FDA during 2000 for approval to sell our HIV OpenGene System to the clinical diagnostic market. SCIENTIFIC BACKGROUND DNA. All cells contain DNA, a complex material that stores the genetic blueprint, or makeup, of an organism. DNA is composed of four chemical building blocks called nucleotides. Each nucleotide consists of, among other things, one of four chemical bases: adenine (A), thymine (T), guanine (G) and cytosine (C). These four bases are the genetic alphabet that is used to write messages and instructions which direct the 31 synthesis or expression of the proteins inside the cell, required to make the cell function. A sequence is the particular order of the nucleotides in the DNA. Changes in the DNA sequence, also called mutations, may occur from time to time. These mutations may alter the function of the cell proteins and affect cell functions. PHARMACOGENOMICS. Different people often respond in different ways to the same drug. A drug that is safe and effective in one patient may be toxic or ineffective in another. We believe that some of these differences in response may reflect underlying genetic differences between the individuals concerned. Pharmacogenomics seeks to establish correlations between specific genetic variations and specific responses to drugs. By establishing such correlations, pharmacogenomics may permit both new and existing drugs to be targeted to those patients in whom they are most likely to be both effective and safe. GENOTYPING. Genotyping is the act of selecting and reading the sequence of nucleotides in a specific strand of DNA in order to understand how changes in the DNA may influence the onset and treatment of some diseases and medical conditions. Genotyping is used by scientists, researchers and clinicians to identify: - genes as potential targets for therapeutic intervention; - mutations in a gene that may predispose an individual to a particular disease; - genetic variation among individuals that may cause different reactions to drug treatment; and - mutations in the genes of infectious organisms (such as viruses and bacteria) and tumors that may result in drug resistance, thereby influencing treatment methods. Genotyping is performed using tests that rely on either DNA probe or DNA sequencing technologies. DNA PROBES. A DNA probe is a single-stranded piece of DNA made to be complementary to the unique base sequence of the target gene. These probes are based on the principle that single strands of DNA seek out complementary strands to form a chemical bond. The DNA probes are placed into prepared samples, which may include the target gene. If the target gene is present, the probe will bind to the target, indicating its presence. DNA probes are highly specific, target single mutations, and require advance knowledge of the target mutation. Probes are susceptible to producing erroneous results because they are affected by variations in the sequence immediately surrounding their targeted mutation. As a result, DNA probes are effective in detecting diseases only when the disease-associated mutation is at a fixed, known location within a gene or when the sequence within a particular gene is stable. However, in diseases where the mutation causing the disease is not known, probe-based technology is not as effective. Probes also may not effectively provide genotypes for infectious pathogens, such as viruses, in which the DNA sequence is highly variable or where mutations occur to evade immune responses or to develop drug resistance. DNA SEQUENCING. DNA sequencing identifies all the chemical bases of the DNA strand to be examined, one-by-one, readily detecting variations or new mutations within the DNA sequence. Unlike DNA probes, sequencing reads long segments of DNA and can therefore detect new mutations, multiple mutations and insertions and deletions of DNA within a sequence. DNA sequencing is also less sensitive than probes to surrounding variations in the sequence being examined. As a result, sequencing is generally considered the most thorough and accurate method for genotyping diseases, such as cancer, and certain viruses, such as HIV, which have high rates of mutation or have numerous strains. DNA sequencing is also used to assess predisposition to many diseases and for tissue typing. The DNA sequencing process involves several steps, some of which must be performed manually and are labor intensive. DNA first must be extracted from the sample, which usually is blood, other body fluid or tissue. After the DNA is extracted, it is amplified, or copied, in order to provide enough DNA so that 32 the DNA sequence can be easily detected. This process of extraction and amplification typically requires the use of various reagents, primers and other chemicals, as well as proprietary processes and technologies, some of which must be licensed from third parties. Some laboratories prepare and use their own homebrew reagents and chemicals which usually are not subject to standardized procedures or quality control processes necessary to ensure reliable results. Once the DNA is extracted and amplified, a process called gel electrophoresis is performed. This process involves placing the DNA on a gel substance and running an electrical current through it. This separates the DNA so that the DNA sequence can be read. While historically many scientists performed the entire DNA sequencing process manually, automated DNA sequencers using a number of disposable products have been developed which simplify and expedite parts of this process. DNA SEQUENCING MARKETS DNA sequencing is an important tool for the research, clinical research and clinical diagnostic markets. THE RESEARCH MARKET. The research market includes academic institutions, hospitals, governmental agencies, life science companies and pharmaceutical companies performing molecular genetics and molecular biology research. Researchers generally use DNA sequencing equipment for gene discovery and other large scale research projects which typically must analyze large numbers of samples and sequence long DNA segments. THE CLINICAL RESEARCH MARKET. The clinical research market includes hospitals, life science companies, pharmaceutical companies, academic institutions and clinical reference laboratories engaged in developing new diagnostic tests, conducting clinical trials, developing drugs and researching targeted therapeutics. Researchers in this sector often work both with DNA probes and DNA sequencing. Researchers typically rely on repetitive sequencing of relatively short DNA strands of targeted gene segments, for which sequencing systems that are smaller in scale than those used in the research market are generally considered most efficient. THE CLINICAL DIAGNOSTIC MARKET. The clinical diagnostic market consists of life science companies, hospitals, reference laboratories, medical clinics and doctors' offices which use clinical molecular genetic tests for the diagnosis and management of diseases and for tissue typing. Current tests typically rely on DNA probe-based and other technology including homebrew DNA sequencing tests. Unlike the research market, genotyping for clinical diagnostic purposes generally relies on the sequencing of relatively short DNA strands with high degrees of accuracy. DNA sequencers and related instrumentation used for diagnostic purposes should enable clinicians to rapidly and accurately sequence and analyze a high volume of patient samples at relatively low costs, and fit within the space constraints of a typical clinical laboratory. LIMITATIONS OF EXISTING DNA SEQUENCING PRODUCTS Historically, automated DNA sequencers and related products used for genotyping have been developed primarily to meet the needs of the research and clinical research markets. We are not aware of any FDA approved DNA sequencing tests for the clinical diagnostic market. Existing DNA sequencing products typically do not address the needs of the clinical diagnostic market because: - they cannot sequence DNA strands quickly enough to satisfy diagnostic turnaround times; - they are designed to sequence long DNA segments and therefore may not be efficient for sequencing shorter DNA segments typical in clinical diagnostic testing; - they are expensive; - they are too large for most clinical laboratories; 33 - they use gels usually prepared manually in a process that is time consuming and may result in exposure of laboratory technicians to dangerous chemicals; and - they use homebrew tests, reagents, chemicals and protocols that are not typically subject to the standardized procedures or quality control processes necessary for reliable results. OUR SOLUTION Our OpenGene System consists of automated DNA sequencers, disposable gel cassettes, related equipment and software and disease-specific GeneKits. Our OpenGene System has been designed expressly to meet the needs of the clinical diagnostic market. We believe that our integrated OpenGene System provides a cost effective and efficient clinical diagnostic solution that will make DNA sequencing a viable diagnostic tool for the management of selected diseases and medical conditions because: - it reads DNA strands faster than existing sequencers designed for the research market; - it is designed to efficiently read and analyze the shorter DNA strands typically used for clinical diagnosis; - it is significantly less expensive than comparable sequencers designed for the research market; - it is small and lightweight; - it utilizes easy to use disposable gel cassettes; - it includes our proprietary software package designed for DNA analysis and patient data management; - our GeneKits include the reagents, primers and other chemicals, third-party licenses, software and other materials required to conduct tests for specific disease-associated genes; and - our GeneKits are standardized, validated and undergo quality control testing to provide reliable, reproducible results. We must obtain approval from the FDA and comparable foreign regulatory authorities prior to selling our products for clinical diagnostic use. While our OpenGene System and GeneKits are designed to serve the clinical diagnostic market, they also fulfill many important requirements within the research and clinical research markets. Researchers in the clinical research market also work with short DNA strands, rely on a repetitive sequencing of gene segments and need quick and efficient sequencing systems. In the research market, our products complement existing instruments by performing tasks such as primer labeling, chemistry verification, short sample sequencing and other preparatory and supportive functions for which speed, cost and efficiency are a premium. We also have developed a sequencer that is able to read longer segments required for some research applications. To date, a substantial portion of our revenues have been generated from sales to the research and clinical research markets. We expect to continue to sell to both of these markets even if we receive FDA approval for clinical diagnostic use of our HIV OpenGene System and other products. OUR BUSINESS STRATEGY Our objective is to be a leader in the emerging field of pharmacogenomics. Our goal is to enable clinicians to use genetic information to monitor and customize treatment of diseases, initially for HIV and later for other diseases. Key elements of our business strategy are to: - PROVIDE AN INTEGRATED GENOTYPING SOLUTION FOR THE CLINICAL DIAGNOSTIC MARKET. We intend to meet the needs of the clinical diagnostic market by providing an efficient, inexpensive, easy-to-use 34 genotyping solution. Our integrated OpenGene System, which we believe incorporates these features, includes automated DNA sequencers, disposable gel cassettes, related equipment and software, and disease-specific GeneKits. We designed this system for the clinical diagnostic market. - TARGET THE HIV GENOTYPING MARKET. We are focusing initially on the HIV market because there is clinical evidence to suggest that genotyping may be effective in managing the treatment of this disease. By identifying mutations in HIV through genotyping and consistently countering these mutations with appropriate drug therapy, we believe drug treatment can be administered and monitored more effectively. We intend to seek approval from the FDA and other regulatory authorities to sell our HIV OpenGene System for clinical diagnostic use in the United States and elsewhere. - LEVERAGE OUR OPENGENE SYSTEM FOR ADDITIONAL APPLICATIONS. We are developing other disease-specific GeneKits that we believe have the potential to eliminate or reduce more time consuming and/or expensive tests and that may enable clinicians to better monitor and manage patient treatment. In addition to our HIV GeneKit, we have developed GeneKits for HLA (used for tissue typing, for example, in organ transplants), and are developing GeneKits for hepatitis B, hepatitis C, tuberculosis and other species of HIV not tested for in our current HIV GeneKit. - OFFER A WIDE RANGE OF TESTING AND SEQUENCING SERVICES. We maintain accredited reference testing laboratories that provide genotyping and other testing services for HIV, hepatitis B, hepatitis C, other infectious diseases and various genes associated with cancer. We believe that the data which we obtain in providing these services will also assist us in our efforts to develop new GeneKits and other technologies. - PROVIDE SOPHISTICATED SOFTWARE FOR THE CLINICAL RESEARCH AND DIAGNOSTIC MARKETS. Our GeneObjects Software operates our OpenGene System, analyzes the results, and prints out a report that shows the drugs to which a patient has become resistant. This software was designed to meet the needs of the clinical research and clinical diagnostic markets. We also are developing an enhanced version of this software, called TRUGENE CMS, which is specifically targeted to the clinical diagnostic market and will simplify the work flow and report generation for disease specific applications. - TAILOR OUR MARKETING EFFORTS TO LOCAL MARKETS. We have established and are expanding our sales and marketing force in the United States, Canada, selected European countries and in other areas where we believe that the size of the market and our familiarity with regulatory and other local conditions justify the development of our own sales force. In selected geographic and product markets where we believe that regulatory and other market factors make it more prudent to rely on a third-party local sales and marketing effort, we seek to enter into distribution and marketing arrangements with leading distributors. - MAINTAIN OUR TECHNOLOGICAL LEADERSHIP IN GENOTYPING. We plan to continue to invest significant resources in research and development so that we may continue to provide customers with advanced genotyping technologies and products. Where we believe it is cost effective or otherwise appropriate, we will continue to license and acquire technologies and products to include in our OpenGene System and GeneKits. We will also seek to continue to collaborate with hospitals, academic institutions, pharmaceutical companies and life science companies to develop additional GeneKits and other products. OUR INTEGRATED OPENGENE SYSTEM Our integrated OpenGene System includes the following components: SEQUENCING SYSTEMS. Sequencing systems consist of automated DNA sequencers and related equipment. 35 SOFTWARE SYSTEMS. Software systems consist of our proprietary GeneObjects and TRUGENE CMS DNA analysis and data management software. GENEKITS AND OTHER CONSUMABLES. GeneKits consist of various reagents, enzymes, primers and other chemicals, and other consumables consist of disposable gel cassettes, acrylamide and other materials. SEQUENCING SYSTEMS LONG-READ TOWER AUTOMATED DNA SEQUENCER. The Long-Read Tower is a two-dye automated sequencer that can read 400 bases in approximately 40 minutes with high accuracy, suitable for clinical diagnostic applications, and can also read longer DNA sequences used in some research applications. Using our proprietary Long-Read MicroCel cassettes, the Long-Read Tower can read 1,000 bases in under 4 hours with high accuracy. The Long-Read Tower can read 16 lanes and test up to 8 patient samples per gel cassette, and can be networked with other Long-Read Towers or Clippers so that multiple units can run from a single workstation, thereby allowing for a significantly greater number of patient samples to be tested simultaneously. The Long-Read Tower is small (47cm x 39cm x 26cm) and lightweight relative to competitive instruments, and sells at retail prices significantly below comparable automated DNA sequencers. The Long-Read Tower can be connected to almost any computer network, has no moving parts and consumes only 300 watts of power. CLIPPER. The MicroGene Clipper automated DNA sequencer is a smaller version of our Long-Read Tower which, using our proprietary MicroCel cassettes, can read 300 bases in approximately 30 minutes with high accuracy, and is suitable for clinical diagnostic applications. The Clipper can read 16 lanes and test up to 8 patient samples per gel cassette, and can be networked so that multiple units can run from a single workstation, thereby allowing for a significantly greater number of patient samples to be tested simultaneously. The Clipper is small (35 cm x 40 cm x 26 cm) and lightweight. The Clipper sells at retail prices significantly below comparable automated DNA sequencers. The Clipper can be connected to almost any computer network, has no moving parts and consumes only 300 watts of power. SEQ4X4. The Seq4x4 automated DNA sequencer is marketed by Amersham as the Amersham Pharmacia Biotech Seq4x4-TM- built to Amersham's specifications to work with Amersham's one color Cy 5.5 terminator chemistry and ThermoSequenase-TM- Kits. The Seq4x4 is a less expensive version of the Clipper that includes many of the features of the Clipper; however, it is a 16 lane one-dye sequencer, and cannot be networked with other sequencers. The Seq4x4 is sold to the research market where it can be used to complement or replace significantly slower manual DNA sequencing methods and to complement currently available, more expensive automated DNA sequencers. GEL TOASTER. The Gel Toaster is a compact (47 cm x 39 cm x 26 cm), lightweight device that uses ultraviolet light to polymerize, or cure, liquid acrylamide that has been injected into the Long-Read MicroCel. The acrylamide gel is the medium through which the DNA is separated for sequencing. We also sell a toaster for use with the Seq4x4. This toaster's dimensions are 33 cm x 11.4 cm x 30.5 cm. SOFTWARE SYSTEMS GENEOBJECTS. GeneObjects is our DNA analysis and data management software package which we have designed for use with our sequencing systems. It automates portions of the test process and facilitates analysis and diagnosis. It also automates certain laboratory management tasks. GeneObjects software is able to sort, analyze and store data by patient (regardless of the test or gel source from which the data is derived) or by the test performed. GeneObjects can also be used to control multiple sequencers over the network from a single workstation. It can use existing microcomputers and sequencers, or be installed as a turnkey system with state-of-the-art hardware. TRUGENE CMS. TRUGENE CMS, an enhanced version of our GeneObjects software, is a software system we are developing for genotypic analysis of large quantities of patient samples in a clinical 36 diagnostic setting. The first application will be for HIV. The software design is based on the assembly line concept. A sample, once received by a laboratory for processing, will be registered with TRUGENE CMS. The new sample will be placed on the assembly line's conveyer so that it can be passed along from stage to stage in a specific order. The final product of this assembly line is a report for the registered sample. TRUGENE CMS is being designed to work with various protocols, each of which defines how many stages are on the assembly line, what each stage should do, and what information the final report should contain. GENEKITS AND OTHER CONSUMABLES GENEKITS. We sell to the research and clinical research markets a series of GeneKits which assist in identifying disease-associated genetic mutations and gene sequences. Our HIV GeneKit is described in the section of this prospectus entitled "--Applications for our OpenGene System--HIV." Other GeneKits which we sell or are developing are described in the section of this prospectus entitled "--Applications For Our OpenGene System." GENEKIT TECHNOLOGIES. We developed and are developing GeneKits with features designed to make our GeneKits suitable for the clinical diagnostic market. We use certain technologies proprietary to us, and other technologies licensed to us, to ensure that our GeneKits will meet the needs of this market. These technologies include our stratified matrix testing method, CLIP and CAS technology, polymerase chain reaction technology, or PCR, and an extraction technology referred to as Boom technology. We have U.S. patents covering our stratified matrix testing method and CLIP technology. We license the PCR technology from Roche Molecular Systems, Inc. and F. Hoffmann-LaRoche Ltd., the CAS technology from Genassiance Pharmaceuticals Inc. and the Boom technology from Organon Teknika. Our proprietary CLIP technology enables DNA samples to be prepared in a single test-tube, single-step process that replaces the multiple individual steps currently required to prepare a sample for DNA sequencing. This technology saves time and reduces the cost of DNA sequence-based diagnostic testing, which is important to the clinical diagnostic market. Our CLIP technology is also more sensitive than traditional techniques, which is especially useful for managing viral diseases because it permits the genotyping of patients with very low viral loads that other methods cannot detect. As a result, using CLIP, HIV patients with low viral loads can be genotyped and treated before drug resistance develops and their viral loads increase. Our exclusive license from Genassiance Pharmaceuticals permits us to use CAS technology for diagnostic and clinical diagnostic applications. CAS technology performs similar functions to CLIP technology, using different enzyme chemistry on DNA. PCR is a powerful laboratory technique that can detect, copy and amplify specific DNA sequences. Amplifying the DNA is an essential part of DNA sequencing because it allows the technician to start with minute amounts of DNA and finish with at least a million-fold increase in the number of DNA molecules, ensuring that a sufficient amount of DNA is available to obtain the sequence. Boom technology enables sensitive, reproducible and accurate extractions of RNA and DNA from blood plasma samples, and from body fluids such as semen and cerebral spinal fluid. The Boom method is especially valuable in HIV genotyping for patients with low viral loads. In connection with obtaining the Boom technology license, we granted Organon Teknika a right of first refusal to certain improvements we may develop to DNA sequencing and extraction technology and to some of our reagents and uses of our CLIP technology. MICROCEL CASSETTE. The MicroCel Cassette is a disposable, polyacrylamide electrophoretic gel cassette which acts as the detection medium for the Long-Read Tower, Clipper and the Seq4x4. The gel is injected into the cassette. After the cassette is cured, it is placed into the sequencer for DNA sequencing and other tests. The cassette is comprised of two small glass plates, has a 50 micron gap and can be filled with acrylamide and cured in three minutes through a semi-automated process which uses our Gel Toaster and SureFill products. Competitive sequencers typically use significantly thicker (200-500 micron gap) gel 37 systems which are assembled manually by technicians and must be disassembled and cleaned after use. We manufacture the MicroCel cassette in three sizes for use with our different DNA sequencers. SUREFILL CARTRIDGE. The acrylamide injected into the MicroCel cassettes is supplied in a 10 cm long disposable syringe-based SureFill cartridge that contains necessary ingredients to fill 10 MicroCels. SureFill protects the technician from directly handling potentially dangerous chemicals and simplifies the gel preparation process. TESTING, SEQUENCING AND OTHER SERVICES We provide DNA testing, sequencing and other services for HIV, hepatitis B, hepatitis C, and other infectious diseases as well as for certain cancers. We operate an accredited reference testing laboratory in Norcross, Georgia, that specializes in high resolution genotyping of HIV and other viruses associated with secondary opportunistic infections of patients with AIDS. This facility also provides high resolution DNA sequencing of hepatitis B, cytomegalovirus and other viruses that commonly infect AIDS patients. Our facility in Evry, France, carries out DNA diagnostic testing and sequencing services in Europe, including genotyping tests for HIV, hepatitis C and other tests. We also maintain a library of cultures of HIV strains with known drug resistant mutations and a patient database on viral drug resistance and high resolution DNA sequencing data. This data may be used to screen new drugs for possible viral resistance and to identify patterns of cross resistance to new drugs as well as for the development of new AIDS treatment strategies. APPLICATIONS FOR OUR OPENGENE SYSTEM HIV Our HIV OpenGene System will enable physicians to genotype the major HIV species infecting patients and to diagnose and treat HIV based upon the mutations present in the virus. Our HIV GeneKit contains all of the reagents, chemicals, third-party licenses and other materials required to sequence the DNA from the protease and reverse transcriptase regions of the virus, which are known to develop mutations that make the virus resistant to drugs. We initiated the sale of our HIV GeneKit, which we call the TRUGENE HIV-1 Genotyping Kit, for use in the clinical research market in the fourth quarter of 1998. We have a patent application pending in the United States and in some foreign countries covering various aspects of our HIV GeneKit. HIV OVERVIEW. HIV is a virus that attacks the cells in the human immune system. Without effective treatment, HIV significantly weakens the immune system, which results in opportunistic infections, neurological dysfunctions, malignant tumors and eventually death. HIV infected patients may develop Acquired Immune Deficiency Syndrome, or AIDS, which is a syndrome of infections, diseases and medical conditions resulting from a weakened immune system. Since the early 1980's, when the HIV epidemic was first identified, it is estimated that more than 16.3 million people worldwide have died as a result of complications from AIDS. Approximately 900,000 people in North America, 880,000 in Europe and Central Asia and a total of 33 million people worldwide are infected with HIV. In 1999 alone, there were approximately 5.6 million new HIV infections, including 44,000 in North America, and 2.6 million deaths worldwide as a result of complications from AIDS. HIV is a highly variable virus with a high rate of mutations. Because of HIV's high mutation rate, drugs used to treat the virus, while generally effective for a period of time, often result in the survival of a virus with mutations that confer resistance to those drugs. Today, there are more than 140 known HIV mutations associated with drug resistance. 38 Currently, there are 14 approved anti-HIV drugs. These drugs specifically target the protease and reverse transcriptase enzymes to interfere with and reduce HIV replication. Mutations in the genetic information of the virus that codes for these two enzymes can result in the development of drug resistance. Current drug therapy usually relies on the use of drug cocktails of two or more antiviral drugs, targeting different stages of the HIV life cycle. A number of studies have shown that drugs given in various combinations reduce the viral load in most patients and can significantly improve these patients' overall health. Viral load is a generally used measurement of the concentration of virus in a patient's blood. HIV patients fail drug therapy in many cases either because the virus mutates and develops resistance to drugs, or because the side effects of drugs or the strict dosing regimens are intolerable, leading patients to skip doses or discontinue using the drugs. One of the central challenges in maintaining HIV patients on long-term drug therapy is to adjust each patient's medication as drug-resistant strains of the virus emerge. Because they rely only on viral load, current disease management methods usually provide a warning that the drugs are no longer working only after the drug-resistant virus has asserted itself and viral load has increased. These methods usually do not tell clinicians which drugs are failing due to emerging resistance or to which drugs the patient should be switched. As a result, there is a need to provide doctors and clinicians with information about HIV drug resistance to enable clinicians to better manage HIV drug therapy. GENOTYPING AND HIV. Genotyping HIV enables clinicians to identify mutations in the genetic material in the virus. Two initial clinical trials, one of which we conducted, suggest that by sequencing the patient's HIV, clinicians may be able to detect early in the process that a resistant mutant has emerged and make appropriate changes in medication to manage viral load. Sustaining a low viral load is believed to be a key factor in prolonging the life of an HIV patient. Achieving and maintaining low viral loads may also significantly reduce medical costs because patients with low or undetectable viral loads have fewer opportunistic infections and other symptoms and, therefore, require fewer and shorter hospital stays and fewer other medical services. To test the clinical usefulness of genotyping HIV to manage a patient's drug therapy, the Community Programs for Clinical Research on AIDS, in conjunction with several universities and funded by the NIH, conducted a 12-week prospective trial in the United States of 100 HIV positive patients. This trial, completed in December 1998, is known as GART, which stands for Genotypic Antiretroviral Resistance Testing. To be eligible, each patient had to have a minimum viral load of 10,000 copies per milliliter. The patients were randomly split into two groups. One group received accepted standard of care treatment, but did not undergo HIV genotyping. The other group received accepted standard of care treatment plus HIV genotyping. Physicians of patients in the genotyping group were able, at their discretion, to adjust medication in response to the genotyping results. The study results showed that the patients treated in the genotyping group had a mean decrease in viral load of approximately 93% at the end of eight weeks, compared to an approximately 76% decrease in patients in the non-genotyping group. This difference was found to be statistically significant. OUR CLINICAL TRIALS. In December 1998, the FDA allowed us to initiate human clinical trials of our HIV OpenGene System under our Investigational Device Exemption, or IDE, application. In June 1999, we completed a clinical trial in Europe called VIRADAPT, which demonstrated that patients who received standard of care treatment and whose drug treatments were selected using periodic genotyping had lower viral loads than patients who received standard of care treatment but whose drug treatments were selected without the use of genotyping. This trial was not part of our IDE, but results from this trial will be submitted to support our market approval application. Also in June 1999, we initiated a trial under our IDE called SEARCH to test the clinical utility of our HIV OpenGene System in genotyping HIV infected patients. Based on positive clinical trial results to date, the FDA has advised us that we are not required to complete the SEARCH trial. We began our proficiency trials, under our IDE, in the third quarter of 1999. In January 2000, we also began a large-scale trial called Vigilance II which will be an open label, cost recovery HIV genotyping study conducted under our IDE. 39 The following is a summary of each of these trials: - VIRADAPT. In March 1997, prior to our IDE allowance, we sponsored a prospective trial in Europe called VIRADAPT to determine the usefulness of genotyping in managing the treatment of HIV infected patients. The VIRADAPT trial involved 108 HIV infected patients and was scheduled to last 12 months. To be eligible, each patient had to have a minimum viral load of 10,000 copies per milliliter. The patients were randomly split into two groups. The control group received standard of care treatment, but did not undergo periodic genotyping. The genotyping group received standard of care treatment and underwent periodic genotyping allowing the physicians, at their discretion, to adjust medication in response to the genotyping results. Genotypes were done using either homebrew DNA testing methods or an early version of our HIV GeneKit. At the end of six months, interim results showed that patients treated in the genotyping group of the study had a mean decrease in their viral loads of approximately 93% (32% of patients in the genotyping group had undetectable viral loads), as compared to an approximately 79% decrease in viral loads in the non-genotyping group (14% of patients in the non-genotyping group had undetectable viral loads). This difference was found to be statistically significant. In January 1999, on the recommendation of the data safety management committee for the VIRADAPT trial, the control group was stopped on ethical grounds. The committee decision was based in part on the interim results of the VIRADAPT trial and in part on the release of the results of the GART trial in December 1998 which showed decreases in viral loads for the genotyping patients consistent with the VIRADAPT trial. As a result, beginning in January 1999, all patients received standard of care treatment and underwent periodic genotyping. At the end of 12 months, results showed that 28.4% of patients in the original genotyping arm had undetectable viral loads. The mean viral loads for this group were maintained at substantially the same level that existed after six months. The data also showed that of those patients who were switched from standard of care treatment only to standard of care treatment and genotyping, 26% had undetectable viral loans as compared to 14% of patients in this group at the end of six months before the treatment was switched. We are reanalyzing the samples collected in the GART and the VIRADAPT trials using our HIV GeneKit and OpenGene System and plan to include those results in support of our market approval application. - SEARCH. The SEARCH trial was intended to test whether patients whose doctors rely on genotyping using our HIV OpenGene System would experience greater reductions in viral load than those patients whose doctors rely only on standard of care treatment. This trial was intended to demonstrate the clinical utility of our system. We began the SEARCH trial in June 1999. To be eligible, each patient must have had a minimum viral load of 1,000 copies per milliliter. Like GART and VIRADAPT, the patients were randomly split into two groups. The control group received standard of care treatment without genotyping, and the genotyping arm received standard of care treatment plus genotyping. In November 1999, the FDA advised us that we are not required to complete the SEARCH trial. The FDA has indicated that it will not require us to demonstrate further the clinical utility of our HIV OpenGene System in the treatment of HIV infected individuals. Based on the FDA's position, we will continue to provide genotyping to all 128 patients currently enrolled in the SEARCH trial. However, enrollment of new patients into SEARCH has been closed. - PROFICIENCY TRIAL. The proficiency trial is intended to demonstrate the reliability and performance characteristics of our HIV GeneKits and OpenGene System, which is required by the FDA. We are genotyping approximately 500 plasma samples. We are genotyping the samples using our HIV OpenGene System at our subsidiary, Applied Sciences, and at six other U.S. sites with certified technicians. To demonstrate the reproducibility of results produced using our GeneKits, samples from the same patients are tested at multiple sites. Multiple technicians test the same samples and multiple batches of our GeneKits are used to test the same samples. In addition, various interfering drugs or chemical agents are introduced to a series of samples to test the effect of those drugs and 40 agents on the results produced with our GeneKits. We began this trial in the third quarter of 1999 and expect this trial to be completed during the second quarter of 2000. - VIGILANCE II. Vigilance II is a prospective, open label, trial with an enrollment of up to 30,000 patients located throughout the United States. We began this trial in January 2000. Testing will be performed at approximately 50 to 100 sites. All patients will undergo HIV genotyping and the genotyping results will be provided to their physicians. Doctors who choose not to change drug treatment based on the genotyping results will be required to so inform us, and results on these patients will be separately recorded. We plan to use the data collected in Vigilance II in two ways. First, we hope to compile data showing the prevalence of certain mutations in patients from different areas of the country. We believe that this data may be useful in directing doctors in a particular region to use certain drugs because of the prevalence of certain mutations identified in that region. Second, we intend to create a database of the clinical outcome from changes made in drug therapy. Under our IDE, we intend to charge patients for the use of our HIV OpenGene System to recover the costs of conducting this trial. We do not intend to submit the results of this clinical trial as part of our FDA application. MARKETING OF THE HIV OPENGENE SYSTEM. Our marketing strategy for the HIV OpenGene System consists of several components. In the United States, should we obtain FDA approval, we intend to establish relationships with leading doctors, laboratories and healthcare providers in the HIV diagnostics market and train them to use our products. We believe that the use of our products by these industry leaders will facilitate our marketing efforts in the rest of the HIV clinical diagnostic market. In addition, we believe that these industry leaders will help shape reimbursement policies of insurance companies and other third-party payors for HIV genotyping. We have begun to establish a dedicated team to work closely with insurance companies and other third-party payors who will determine whether to reimburse users of HIV GeneKits and related products in the management of their drug therapies. We are also forming a dedicated sales force to sell our HIV OpenGene System to major pharmaceutical companies engaged in research and development of HIV drugs and treatments. Outside North America, some European countries and other selected areas, we seek to enter into distribution arrangements with leading distributors of HIV products to sell our HIV OpenGene System for clinical diagnostic purposes. If government approval is required for sales in those markets, we intend to rely on our local partners to obtain the required authorizations. We intend to continue to market and sell our HIV OpenGene System to hospitals, pharmaceutical companies, academic institutions and clinical reference laboratories for research and clinical research purposes. We expect to continue to service this market regardless of whether the FDA authorizes us to sell our HIV products for clinical diagnostic purposes. HLA Successful transplants of bone marrow, tissue and organs generally require that the human leukocyte antigens, known as HLA, of the donor and the recipient be matched as precisely as possible. HLAs are proteins that exist on the surface of the cell and are vital for determining whether a transplant will be accepted or rejected. In 1998, there were approximately 21,000 organ transplants in the United States and approximately 1,300 bone marrow transplants. DNA sequencing of HLA is increasingly being recognized as the most reliable method of HLA matching. For example, recent statistics show approximately 500,000 potential bone marrow donors are genotyped every month worldwide. By sequencing the particular genes in the multi-gene HLA complex, a clinician can determine whether the donor's and recipient's HLA match. It is widely believed that matching significantly increases the chances of success of the transplant. We have developed four GeneKits for research use only for the A, B and C loci for Class I and for DRB1 for Class II genes. We began selling this GeneKit for research purposes in October 1997. We have two U.S. patents covering various aspects of this GeneKit. This GeneKit is currently being sold only to the research and clinical research markets. 41 HEPATITIS B We have developed and are currently testing a GeneKit for hepatitis B. Hepatitis is an inflammation of the liver. Hepatitis B is one type of virus that causes this inflammation. There are more than 350 million people worldwide that are chronically infected with hepatitis B, of which approximately one million are located in the United States. Hepatitis B is treated with interferon, drugs or certain reverse transcriptase inhibitors. Genotyping may be used to identify the type of hepatitis virus present (e.g., B or C) and to detect mutations in the virus that cause the disease to become resistant to anti-viral drugs. HEPATITIS C We are currently developing a GeneKit for hepatitis C. Hepatitis C is a second type of virus that causes inflammation of the liver. There are approximately 175 million people worldwide that are chronically infected with hepatitis C, of which approximately 3.2 million are in the United States. Unlike hepatitis B, interferon drugs work with only certain hepatitis C genotypes. We have developed and are currently testing a Hepatitis C GeneKit that can be used to identify the genotypes of the virus, so that the appropriate drug treatment may be prescribed. Protease inhibitors are also being used experimentally to treat hepatitis C. Our Hepatitis C GeneKit can also be used to detect mutations that may confer resistance to these anti-viral drugs. TUBERCULOSIS We are currently developing a GeneKit for tuberculosis. Tuberculosis, commonly known as TB, is a highly contagious bacterial disease of the respiratory system. There are approximately three million deaths per year worldwide caused by TB and eight million new infections per year worldwide. In addition, there is an increase in the number of TB infections which are multi-drug resistant. In order to be infected with TB, a patient must carry a certain mycobacterium. People who test positive for non-TB mycobacterium can be treated at home with certain drugs. Due to the highly contagious nature of TB, people who test positive for TB mycobacterium must be kept in isolation during the early stage of treatment. Current testing methods can take from several days to several weeks to identify whether a patient's mycobacterium is TB or non-TB, forcing hospitals to quarantine both TB and non-TB patients during this period. Quarantining patients for any prolonged period uses significant medical resources. We are developing and currently testing a TB GeneKit designed to genotype the genetic material in the mycobacterium within approximately one day to identify the presence of TB or non-TB mycobacterium. Our TB GeneKit can also be used to detect mutations that confer resistance to drugs used to treat TB. We intend to market and sell our TB GeneKit in those geographic areas where TB poses significant health threats, including Asia, Central Europe, parts of the former Soviet Union and Africa. OTHER HIV We are developing additional HIV GeneKits for HIV species not covered by our existing HIV GeneKit. REGULATION BY THE FDA AND OTHER GOVERNMENT AGENCIES We currently sell our products for research and clinical research purposes. In the future, we intend to sell products for clinical diagnostic purposes. We do not believe we need authorization from the FDA or health authorities in foreign countries to sell our products for research purposes, as long as they are properly labeled. We will, however, require authorization to sell our products for clinical diagnostic purposes. FDA APPROVAL PROCESS. Products that are used to diagnose diseases in people are considered medical devices, which are regulated by the FDA. To obtain FDA authorization for a new medical device, a 42 company may have to submit data relating to safety and efficacy based on extensive testing. This testing, and the preparation of necessary applications and the processing of those applications by the FDA, are expensive and may take several years to complete. The following describes several important aspects of the FDA authorization process. The FDA has three classes for medical devices: - Class I devices (for example, bandages, manual wheelchairs and ice bags) are the least regulated, but they must still comply with the FDA's labeling, manufacturing, recordkeeping, and other basic requirements. Most Class I devices do not require premarket authorization from the FDA. - Class II devices (for example, portable oxygen generators and hypodermic needles) may be subject to additional regulatory controls, such as performance standards and postmarket surveillance. - Class III devices (for example, cardiac pacemakers) require specific FDA approval prior to marketing and distribution, and are, as well, subject to the FDA's basic requirements. To sell a Class II medical device, a company must first obtain permission of the FDA by submitting a 510(k) premarket notification, commonly known as a 510(k), showing that the device is similar to a device already on the market. To sell a Class III medical device, a company must first get specific approval of the FDA for the device by submitting a premarket approval application, commonly known as a PMA application. A company may have to include test data in a 510(k) notification, including human test data. It will almost always have to include such test data in a PMA application. If human test data are required for either a 510(k) or a PMA application, and if the device presents a significant risk, the manufacturer must first file an Investigational Device Exemption submission, or IDE, with the FDA. The IDE must contain data, such as animal and laboratory testing, showing that the device is safe for human testing. If the IDE is granted, human testing may begin. Generally, a 510(k) notification to the FDA that a new device is similar to an existing device requires less data and takes less time for the FDA to process than a PMA. The FDA is supposed to act on a 510(k) notification within 90 days. According to the most recent FDA data available, the FDA completes its review of more than 66% of 510(k)s within 90 days. By contrast, a PMA application must be supported by more extensive data to prove the safety and efficacy of the device, and review of a PMA application involves a lengthier FDA process. The FDA conducts a preliminary review of the PMA application. If complete, the PMA application is filed by the FDA. Officially, the FDA then has 180 days to review the PMA application, however, as a practical matter, PMA reviews usually take much longer, up to one-and-a-half years or more from filing. The FDA may grant expedited (fast-track) review of a PMA application if certain criteria relating to public health importance are met, but that decision is within the FDA's discretion and affects only the timing of the review process, not the outcome. NEED FOR FDA APPROVAL OF SOME OF OUR PRODUCTS. We intend to market some of our products in the U.S. for clinical diagnostic purposes, and therefore we will have to obtain prior FDA authorization, as described above. We believe our HIV GeneKit is currently considered by the FDA as a Class III medical device. However, the FDA recently asked an advisory committee of experts whether HIV genotyping tests should be reclassified from Class III to Class II. The advisory committee recommended reclassification subject to certain controls including post-market surveillance of the performance of these products. If the FDA reclassifies HIV genotyping tests from Class III to Class II, we will be able to obtain FDA permission to market our HIV OpenGene System by submitting a 510(k), rather than a PMA. A 510(k) generally contains less data than a PMA and is usually reviewed and approved by the FDA more quickly than a PMA. Although it is likely that the FDA will follow the recommendation of its advisory committee, to do so the FDA is required to issue a proposed regulation, allow the opportunity for public comment 43 and then publish a final regulation reclassifying HIV genotyping tests. This process could take several years to complete. Under the Food and Drug Administration Modernization Act of 1997, there is an alternative option for us to obtain faster reclassification of our HIV OpenGene System. Under this new procedure we can ask the FDA to classify our HIV OpenGene System based upon an evaluation of the risks presented by the device to patients. The FDA has 60 days to make a decision on this request. However, in order for us to use this new procedure, we would first have to submit a 510(k) to the FDA and have the FDA reject the 510(k), which would occur because the device is still in Class III. Once the FDA rejects our 510(k), we would then immediately submit our request for classification of our HIV OpenGene System in Class II. This option is likely to be faster than waiting for the FDA to go through its normal reclassification procedures. We currently plan to follow this alternate option. However, since this process is new and is used very infrequently, there is no assurance that the FDA would grant our request for reclassification. If the FDA does not grant our request to reclassify our HIV GeneKit under this procedure, we will either have to submit a PMA application or wait until the FDA acts to reclassify HIV Genotyping tests as recommended by its advisory committee. We believe that some of our other products will be regulated as Class II or Class III medical devices. OTHER FDA REQUIREMENTS. In addition to government requirements relating to marketing authorization for medical device products, we will also be subject to other FDA requirements. We will have to be registered as a medical device manufacturer with the FDA. We will be inspected on a routine basis by the FDA for compliance with the FDA's quality system regulations, which prescribe standards for manufacturing, testing, distribution, storage, design control and service activities. In addition, because we will manufacture some of our products in Canada, the FDA, in conjunction with the U.S. Customs Service, could impose a ban on our products if the FDA were to conclude that the products appeared to be in violation of the FDA's regulatory requirements, including restrictions that apply to the sale of research-use only products. Also, the FDA's medical device reporting regulation will require us to provide information to the FDA on deaths or serious injuries associated with the use of our devices, as well as product malfunctions that are likely to cause or contribute to death or serious injury if the malfunction were to recur. Finally, the FDA prohibits promoting a device for unauthorized uses and reviews company labeling for accuracy. The FDA has become aware that certain products being sold by other companies for research purposes only, were in fact being used by some customers for clinical diagnostic purposes. The FDA recently issued a policy statement describing the conditions under which companies may sell research-use only products. These conditions may restrict our ability to sell research-use only products in the United States. We do not believe these conditions will have any negative effect on our sale of GeneKits for legitimate scientific research. REGULATORY APPROVAL OUTSIDE THE UNITED STATES. We plan to market our products outside the United States, initially in Canada, Japan, countries in Europe and South America. Government authorization requirements similar to the FDA's exist in some of these and many other foreign countries. Therefore, authorization to sell our products for clinical diagnostic purposes in Canada, Japan, Europe and South America may also require lengthy and costly testing procedures. In addition, the regulatory bodies in other countries may be affected or influenced by significantly different criteria than those used by the FDA. Sale of our products in these areas may be materially affected by the policies of these regulatory bodies or the domestic politics of the countries involved. OTHER GOVERNMENT REGULATIONS. We are or may become subject to various federal, state, provincial and local laws, regulations and recommendations, including those relating to workers compensation, safe 44 working conditions, and laboratory and manufacturing practices used in connection with our research and development activities. In addition, our reference laboratory in Norcross, Georgia, is subject to stringent regulation under the Clinical Laboratory Improvement Amendments of 1988, known as CLIA. Under CLIA, laboratories must meet various requirements, including requirements relating to the validation of tests, training of personnel, and quality assurance procedures. The laboratory must also be certified by a government agency. Our Norcross laboratory performs high complexity tests, and is therefore subject to the most stringent level of regulation under CLIA. This laboratory is certified under CLIA and by the state of Georgia. We are also subject to various laws and regulations in Canada, the United States and Europe, including those relating to product emissions use and disposal of hazardous or toxic chemicals or potentially hazardous substances, infectious disease agents and other materials, workers compensation, safe working conditions, and laboratory and manufacturing practices used in connection with our research and development activities. SALES AND MARKETING We market our OpenGene System in North America and in many European countries to the research and clinical research markets through our direct sales force. We have a sales and marketing force of 58 people. Many members of our sales force have scientific backgrounds. Our marketing force includes a team of trained application specialists who provide intensive on-site training, after-sales support and site-by-site trouble shooting. We offer service contracts to our customers on our sequencers, certain equipment and software. We have established a toll-free telephone number in North America for customer service. The members of our internal sales force are compensated on a commission and salary basis. For other areas of the world and in selected product markets, our strategy is to establish relationships with leading distributors to market and sell our products. We granted Amersham the exclusive worldwide license to use and sell the Seq4x4 and related products used and sold with the sequencer, which is designed for the research market. In November 1999, we granted Amersham-Pharmacia Biotech K.K. the exclusive right to distribute our products to the research market in Japan. During 1999 approximately 21% of our revenues were derived from sales of sequencers and other products to Amersham. In 1999, we granted exclusive rights to distribute our GeneKits and OpenGene System to Werfen Medical S.A. in Argentina and Diagnostic Technology Pty Ltd. in Australia and New Zealand. We also entered into an agreement in 1999 with Roche Diagnostics, S.L. to act as our exclusive agent in Spain and Portugal in the clinical diagnostic market. These agreements expire at various times from April 2000 through April 2002, and in certain cases, are subject to automatic renewal. Certain of the agreements may also be terminated by either party upon specified notice periods and may require us to make termination payments under certain circumstances. Certain of the agreements also provide for minimum annual purchases for specified periods. Our marketing efforts also include product advertisement and participation in trade shows and product seminars. RESEARCH AND DEVELOPMENT We currently conduct research and development through our own staff and through collaborations with researchers at scientific and academic institutions and hospitals. Our current research and development activities are focused on: - developing additional GeneKits, including additional HIV GeneKits for different HIV species, and GeneKits for hepatitis B, hepatitis C and tuberculosis; - developing new technology for our sequencers and related equipment and software; 45 - refining existing proprietary, disposable gel cassette technology in order to improve performance of our sequencers; and - exploring new technologies for future commercial products. As of February 29, 2000, our research and development staff consisted of 60 people. This includes a team of software developers who have developed our GeneObjects software and are developing our TRUGENE CMS software. Our software developers are working on an advanced version of our GeneObjects software as well as additional software applications for the clinical diagnostic market. Our research and development staff is also working to prepare our planned application to the FDA to sell our HIV OpenGene system to the clinical diagnostic market. We incurred $7.9 million of research and development expenses in 1999, $6.3 million in 1998 and $4.1 million in 1997. We have four facilities in the United States and Canada where we conduct research and development. MANUFACTURING We assemble our DNA sequencers and related equipment at a manufacturing facility in Toronto, Canada. Component parts are manufactured by third parties in accordance with our design specifications. We manufacture our disposable gel cassettes at our second manufacturing facility in Toronto. We make GeneKits in our Pittsburgh, Pennsylvania facility. We also plan to make GeneKits at a new facility in Atlanta, Georgia, which is in the process of being built. We manufacture certain chemicals and other components included in the GeneKits. Other GeneKits components are manufactured by, or licensed from, third parties. Our new facility in Atlanta is being designed to enable us to increase significantly our production of GeneKits. Based upon our experience with our Pittsburgh facility, we believe that we will be in a position to qualify our Atlanta facility under applicable FDA standards. We expect that this new approximately 100,000 square foot facility will become available to us in stages and that we will be in a position to commence commercial production at this facility in the first quarter of 2001. We have documented and installed design and production practices in our Toronto facilities to comply with the FDA's quality system regulations. We are in the process of documenting and installing design and production practices in our Pittsburgh facility to comply with the FDA's quality system regulations. We have implemented a quality management system at these manufacturing facilities in order to ensure product performance, reliability and quality. We intend to take the same actions at our new Atlanta facility. We also are seeking certification of compliance to ISO 9001 for our Toronto facilities. In addition to adhering to ISO goals and FDA quality standards, we have implemented our own quality control and quality assurance standards and programs. We provide one year warranty coverage for product defects on the instrument component of our sequencers. All product repairs are performed by our employees at one of our manufacturing facilities. In connection with our GeneKits, sequencers and related equipment, we use certain dyes and custom-designed component parts supplied by third parties. We believe that some dyes supplied by Amersham under our exclusive worldwide license to use and sell Amersham dyes within our GeneKits, may not be available from other suppliers, although our customers might be able to purchase some, but not all, dyes directly from Amersham. In addition, certain reagents and other chemicals that we use and include in our GeneKits are available only under license from their manufacturers. While we believe that alternative reagents and chemicals are available, alternate supplies may not be as effective as certain of the products that we presently use. In addition, we believe that there are alternative suppliers for our custom-designed DNA sequencer parts, but that we would incur costs in switching to alternative suppliers and would likely experience delays in production of the products that use any of these parts until such time as we were able to locate alternate suppliers or parts. 46 PROPRIETARY RIGHTS We rely on patents, licenses from third parties, trade secrets, trademarks, copyright registrations and non-disclosure agreements to establish and protect our proprietary rights in our technologies and products. We own or jointly own 33 U.S. patents. We own or jointly own an additional 32 U.S. patent applications pending, of which seven have been allowed. We own 12 foreign patents. We own or jointly own foreign applications presently pending as PCT applications, or as national phase PCT applications, designating intergovernmental agencies and multiple countries including the European Patent Office, Australia, Canada and Japan. Our issued and allowed patents and patent applications cover various aspects of our products and technologies, including viral load testing, several of our GeneKits and various DNA sequencing and GeneKit technologies, including the stratified matrix testing technology, the MicroCel technology, basecalling technology, and the CLIP technology. Our competitive position is also dependent upon unpatented trade secrets. We are developing a substantial database of information concerning our research and development and have taken security measures to protect our data. However, trade secrets are difficult to protect. In an effort to protect our trade secrets, we have a policy of requiring our employees, consultants and advisors to execute non-disclosure agreements. These agreements provide that confidential information developed or made known to an individual during the course of their relationship with us must be kept confidential, and may not be used, except in specified circumstances. On December 27, 1999, Perkin-Elmer Corporation, PE Biosystems Group filed a lawsuit against our company in the United States District Court for the Northern District of California claiming that our DNA sequencing equipment and products infringe patents licensed to Perkin-Elmer by the California Institute of Technology. The complaint offers no details to support the allegation of infringement. The suit requests among other remedies that the court enjoin us from continuing to infringe these patents and an unspecified amount of damages. We have previously studied these patents and have received legal advice that we are not liable for any claims of infringement. We believe that Perkin-Elmer's claim is without merit and we plan to vigorously defend the suit. Dr. Lloyd M. Smith, one of our directors, is a named inventor on the patents that we are alleged to have infringed. Dr. Smith indirectly receives royalty payments for those patents from Perkin-Elmer, through the California Institute of Technology. Dr. Smith is a co-founder of Third-Wave Technologies Inc., which has announced that it will be acquired by PE Biosystems in a stock-for-stock transaction. After the closing of that transaction, Dr. Smith expects to be a consultant to PE Biosystems. From time to time, we receive notice from third parties claiming that we may infringe their patents. COMPETITION The biotechnology industry is highly competitive. We compete with entities in the United States and abroad that are engaged in the development and production of products that analyze genetic information. They include: biotechnology, pharmaceutical, chemical and other companies; academic and scientific institutions; governmental agencies; and public and private research organizations. Some of our major competitors include: - manufacturers and distributors of DNA sequencers such as the PE Biosystems Group, Amersham and its Molecular Dynamics subsidiary, LI-COR, Inc., Hitachi, Ltd. and Molecular and Genetic BioSystems, Inc.; - manufacturers and distributors of DNA probe-based diagnostic systems such as Abbott Laboratories, Chiron Corp., Roche Diagnostics, Gene Probe Inc., Innogenetics NV, Digene Corporation and Johnson & Johnson; 47 - manufacturers of new technologies used to analyze genetic information, such as chip-based and assay-based technologies, including, Hyseq Inc., Affymetrix Inc., ChemCore Inc., CuraGen Corp., Nanogen, Inc.; and - manufacturers of cell cultured assays, including ViroLogic, Inc. and VIRCO. Many of these companies and many of our other competitors have much greater financial, technical and research and development resources and production and marketing capabilities than we do. Our GeneKits also compete with homebrew genetic tests for HIV and other diseases designed by laboratories and some of the companies listed above. Homebrew tests include a variety of small-scale genotyping tests which typically have not undergone clinical validation and have not been approved by the FDA or other regulatory agencies. We believe that we are able to compete primarily on the basis of the following: - our ability to provide an integrated DNA sequencing system; - ease of use; - speed of sequencing; - cost-effectiveness; - clinical data with respect to the HIV market; and - with respect to the HIV market, FDA approval of our HIV OpenGene System, if and when we obtain it. EMPLOYEES As of February 29, 2000, we employed 248 full-time employees (including executive officers) and 21 independent contractors, of whom: - 60 are engaged in research and development; - 58 are involved in sales and marketing activities; - 84 in manufacturing and operations; and - 67 are involved in finance, legal and administrative functions. Our employees are not represented by a union or other collective bargaining unit and we have never experienced a work stoppage. We believe that our employee relations are good. 48 FACILITIES The table below lists the locations of our facilities and summarizes certain information about each location.
SQUARE FEET LOCATION USE (APPROXIMATE) -------- --- ------------- 1. Bay Street Research, sales and principal executive 20,643 Toronto, Canada offices 2. Etobicoke MicroCel manufacturing 8,482 Ontario, Canada 3. Etobicoke Sequencer manufacturing 10,500 Ontario, Canada 4. Oakville Research and development 8,000 Ontario, Canada 5. University of Kit manufacturing and research and 8,171 Pittsburgh development Applied Research Center, Pittsburgh, Pennsylvania 6. Technology Park Research and development and laboratory 7,313 Norcross, Georgia 7. Suwanee, Georgia* GeneKit manufacturing, research and 99,822 development, laboratory and sales and administrative offices 8. Evry, European head office 6,000 France 9. Meyerside Drive** Kit development 3,100 Mississauga, Canada 10. Kestrel Road** Kit manufacturing 22,600 Mississauga, Canada 11. Technology Park,** Research and development and laboratory 21,032 Norcross, Georgia TERM OF LEASE ------------- 1. June 1995 - May 2000 2. June 1996 - May 2001 3. September 1998 - August 2003 4. September 1998 - August 2003 5. September 1997 - August 2000 6. March 1998 - February 2003 7. February 2000 - March 2010 8. March 1999 - February 2001 9. May 1999 - April 2004 10. May 1999 - April 2004 11. November 1999 - October 2004
- ------------------------ * This facility is not yet operating. ** We do not intend to use these facilities and are currently attempting to sublease them. In addition to the foregoing, we have entered into a short term lease in Norcross, Georgia for temporary office space until our new facility in Suwanee, Georgia is complete. We believe that additional facilities will be available at reasonable market rates to meet any future needs we may have for additional space. LEGAL PROCEEDINGS We are not a party to any material legal proceedings other than the suit described under "Proprietary Rights". 49 SERVICE AND ENFORCEMENT OF LEGAL PROCESS Our company is incorporated under the laws of the Province of Ontario, Canada and a substantial portion of our assets are located in Canada. Certain of our directors and officers and certain of the experts named in this prospectus are residents of Canada, and all or a substantial portion of their assets are located outside the United States. As a result, if any of our shareholders were to bring a lawsuit against our officers, directors or experts in the United States it may be difficult for them to effect service of legal process within the United States upon those people who are not residents of the United States or to realize in the United States upon judgments of courts of the United States based upon civil liability under the Securities Act of 1993, as amended, or the Securities Exchange Act of 1934, as amended (including the rules promulgated thereunder by the Securities and Exchange Commission). In addition, our attorneys in Canada, Osler, Hoskin & Harcourt LLP, have advised us that there is doubt as to the enforceability in Canada against our company, our directors and officers, or the experts named in this prospectus, in each case if not a resident of the United States, of liabilities predicated solely upon U.S. federal securities laws. 50 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth certain information with respect to our executive officers and directors. This information is supplied based upon our records and information furnished by our executive officers and directors.
DIRECTOR'S YEAR TERM NAME AGE POSITION APPOINTED EXPIRES - ---- -------- --------------------------------------------------- --------- ---------- Richard T. Daly(3)........ 50 President, Chief Executive Officer and Director 1998 2001 Thomas J. Clarke.......... 52 Chief Financial Officer 2000 Timothy W. Ellis.......... 52 Chief Operating Officer 1999 Dr. Arthur W.G. Cole...... 49 Executive Vice President; President, Visible 1996 Genetics Europe S.A. Dr. James M. Dunn......... 45 Vice President, Technology 1994 Marguerite Ethier......... 36 Vice President, General Counsel and Director 2000 2000 Michael A. Cardiff(2)..... 40 Director 1999 2000 Sheldon Inwentash(1)...... 44 Director 1994 2002 Jonathan S. Leff(1)(2).... 31 Director 1999 2000 Robert M. MacIntosh....... 77 Director 2000 2002 Prof. J. Robert S. Prichard(1)(2)(3)....... 50 Director 1999 2002 Dr. Lloyd M. Smith........ 44 Director 1995 2001 Dr. Konrad M. Weis........ 71 Director 1997 2001
- ------------------------ (1) Member of Audit Committee (2) Member of Compensation Committee (3) Corporate Governance Committee The following is the business experience for at least the last five years of each of our executive officers and directors: RICHARD T. DALY has been a Director of our company since June 1998, Executive Vice President since March 1999 and President and Chief Executive Officer since July 1999. Prior to joining Visible Genetics, Mr. Daly founded, and, from March 1989 through July 1998, served as Chairman and Chief Executive Officer of Clinical Partners, Inc., a San Francisco-based company providing comprehensive, therapy-specific management of HIV and AIDS patients for employers and managed health-care organizations. Prior to founding Clinical Partners, Mr. Daly spent over 15 years in the healthcare industry with several companies in a variety of executive positions in sales, marketing and general management, including serving as the President of Baxter Canada for a period of four years, and President of the Health Data Institute. THOMAS J. CLARKE has been Chief Financial Officer of our company since January 2000. From July 1997 to January 2000, Mr. Clarke was Chief Operating Officer of CCS TrexCom, Inc., a telecommunications software company. From 1991 to July 1997, Mr. Clarke was Chief Financial Officer of CCS TrexCom. From 1989 to 1990, Mr. Clarke was Chief Financial Officer of Medaphis Corporation, a medical transaction-processing company. From 1986 to 1989, Mr. Clarke was Senior Vice President and Chief Financial Officer of Days Inn Corporation. From 1985 to 1986, Mr. Clarke was Controller of Quadram Corporation. From 1980 to 1985, Mr. Clarke held various financial positions at Contel Corporation. Mr. Clarke is a Certified Public Accountant. 51 TIMOTHY W. ELLIS has been Chief Operating Officer of our company since November 1999. From January 1998 to November 1999, Mr. Ellis operated his own management consultant practice. From 1991 to 1997, Mr. Ellis was President of Dynex Technologies. From 1988 to 1991, Mr. Ellis was President of Genetic Systems Corporation. From 1985 to 1988, Mr. Ellis was General Manager of Abbott Laboratories' Clinical Chemistry Business Unit. DR. ARTHUR W. G. COLE has been Executive Vice President of our company since May 1996 and the President of our Visible Genetics Europe S.A. subsidiary since September 1999. From May 1996 to September 1999, Dr. Cole served as Chief Business Officer of our company. From 1995 to May 1996, Dr. Cole was a business consultant to companies in the biotechnology industry through AC Consulting. From 1981 to 1995, Dr. Cole worked at Pharmacia Biotech, AB, a Swedish biotechnology supply company in a range of positions, including five years as Vice President. During his time with Pharmacia, Dr. Cole ran the division responsible for worldwide sales of DNA sequencing equipment and supplies. DR. JAMES M. DUNN has been Vice President, Technology of our company since June 1998 and was our Director of Molecular Test Development from January 1994 to June 1998. Prior to joining our company, Dr. Dunn was a research consultant to the Hospital for Sick Children from August 1993 to January 1994 and a National Cancer Institute of Canada research fellow at the Division of Biology, California Institute of Technology from 1990 to 1993. Dr. Dunn received a B.Sc. in chemistry from the University of British Columbia and a Ph.D. from the University of Toronto. MARGUERITE ETHIER has been Vice President, General Counsel of our company since January 2000 and has been a Director of our company since March 2000. From 1998 to 1999, Ms. Ethier was a partner in the law firm of McCarthy Tetrault, and from 1995 to 1997 and 1992 to 1993, Ms. Ethier was an associate with McCarthy Tetrault. From 1993 to 1995, Ms. Ethier was an associate with the law firms of Townsend & Townsend Khourie & Crew and Howard Rice Nemerovski Canady Falk & Rabkin. Ms. Ethier holds a B.Sc. degree from the University of Alberta, an M.Sc. degree from the University of Toronto, and an LL.B. degree from Osgoode Hall Law School. Ms. Ethier is a member of the Ontario and California bars, and is qualified as both a registered Canadian Patent Agent and a United States Patent Attorney. MICHAEL A. CARDIFF has been a Director of our company since June 1999. Since September 1999, Mr. Cardiff has been President and Chief Executive Officer of Prologic Corporation. From October 1996 to September 1999, Mr. Cardiff was Executive Vice President, Financial Services of EDS Canada. From November 1994 to September 1996, Mr. Cardiff was Senior Vice President of Sales and Marketing of EDS Canada and from 1989 to 1994, he held several positions with Stratus Computer Corp. Mr. Cardiff presently is a member of the boards of directors of Visible Decisions Inc. (which company is not related to our company), SOLCORP Insurance Software Solutions Corp. and Spectra Securities Software Inc. SHELDON INWENTASH has been a Director of our company since April 1994. Since November 1993, Mr. Inwentash has been the Chairman and Chief Executive Officer of GeneVest Inc. (formerly known as Gene Screen Inc.), a Canadian company which is a principal shareholder of our company. Since February 1992, Mr. Inwentash has been the Chairman and Chief Executive Officer of Pinetree Capital Corp., a venture capital firm. JONATHAN S. LEFF has been a director of our company since July 1999, serving as the nominee of the Series A preferred shareholders. Mr. Leff joined E.M. Warburg, Pincus & Co., LLC in July 1996 as an Associate. In January 1999, he became a Vice President, and in January 2000, he became a Managing Director. Mr. Leff is also a director of VitalCom Inc., Intermune Pharmaceuticals Inc. and a number of private health care companies. ROBERT M. MACINTOSH has been a Director of our company since March 2000. From 1980 until his retirement in 1989, Mr. MacIntosh was President of the Canadian Bankers Association. Mr. MacIntosh presently is a member of the board of directors of Chase Manhattan Bank of Canada. 52 PROF. J. ROBERT S. PRICHARD has been a Director of our company in May 1999. Prof. Prichard has been President of the University of Toronto since 1990. From 1984 to 1990, Prof. Prichard was Dean of the Faculty of Law at the University of Toronto. Prof. Prichard is past Chairman of the Council of Ontario Universities, a Director of the Association of American Universities and a Director of the Association of Universities and Colleges of Canada and the International Association of Universities. Prof. Prichard presently serves as a Director of the University Health Network, Onex Corporation, BioChem Pharmaceuticals, Moore Corporation, Four Seasons Hotels Inc. and Tesma International Inc. DR. LLOYD M. SMITH has been a Director of our company since March 1995. Since June 1994, Dr. Smith has been Professor of Chemistry at the University of Wisconsin-Madison. Dr. Smith has been involved in the development of fluorescence-based automated DNA sequencers for over 15 years, has written numerous scientific papers and is a named inventor on a number of U.S. patents. Dr. Smith is a past member of the National Institutes of Health National Human Genome Research Institute Study Section. Dr. Smith is a member of the Scientific Advisory Board of CuraGen Corp. He also serves, or has served, on the editorial boards of GENOME RESEARCH, DNA SEQUENCE GENETIC ANALYSIS: TECHNIQUES AND APPLICATIONS and JOURNAL OF CAPILLARY ELECTROPHORESIS and was a member of the scientific advisory boards of Fotodyne Incorporated and Boehringer Mannheim Corp. Dr. Smith is a co-founder of Third-Wave Technologies, Inc., a biotechnology company, which has agreed to be acquired by PE Biosystems in a stock-for-stock transaction. DR. KONRAD M. WEIS has been a Director of our company since 1997. Dr. Weis has been the honorary Chairman of Bayer Corporation since 1991. He was President and Chief Executive Officer of the company that later became Bayer Corporation from 1974 until his retirement in 1991. He presently is a member of the boards of directors of Demegen Inc., Michael Baker Corporation and Titan Pharmaceuticals, Inc. 53 PRINCIPAL SHAREHOLDERS The following table sets forth certain information regarding the beneficial ownership of our outstanding voting shares, as of February 29, 1999, for (i) all shareholders known to beneficially own or exercise control or direction over more than 10% of our common shares, and (ii) all directors and executive officers as a group (13 persons):
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY PRIOR TO THE OWNED AFTER THE OFFERING(1)(2) OFFERING(2) -------------------- -------------------- NAME OF BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT - ------------------------ --------- -------- --------- -------- Warburg Pincus Funds (3)................................ 2,908,434 18.1% 2,908,434 16.1% GeneVest Inc. (4)....................................... 1,927,134 12.0% 1,927,134 10.7% All directors and executive officers as a group (13 persons)(5)........................................... 409,134 2.5% 409,134 2.2%
- --------- (1) The information in this table is based on our records, information provided to us by directors and executive officers and a review of any Schedules 13D and 13G filed in 1999 and 2000 by our shareholders with the Securities and Exchange Commission. Beneficial ownership is determined in accordance with rules of the Securities and Exchange Commission and includes shares over which the indicated beneficial owner exercises voting and/or investment power. Our common shares subject to options currently exercisable or exercisable within 60 days are deemed outstanding for computing the percentage ownership of the person holding the options but are not deemed outstanding for computing the percentage ownership of any other person. (2) This information is based on 16,045,167 voting shares outstanding as of February 29, 2000, which includes 3,259,748 common shares issuable upon conversion of our Series A preferred shares as of February 29, 2000, and 18,045,167 shares outstanding after this offering, which includes 3,259,748 common shares issuable upon conversion of our Series A preferred shares as of February 29, 2000. The number of common shares issuable upon conversion of our Series A preferred shares will increase as the dividends payable thereon accrue. (3) Consists of (i) 1,374,236 common shares held by Warburg, Pincus Equity Partners, L.P., which includes 1,361,122 common shares issuable upon conversion of their Series A preferred shares; (ii) 1,454,217 common shares held by Warburg, Pincus Ventures International, L.P., which includes 1,440,341 common shares issuable upon conversion of their Series A preferred shares; (iii) 43,626 common shares held by Warburg, Pincus Netherlands Equity Partners, I, C.V., which includes 43,210 common shares issuable upon conversion of their Series A preferred shares; (iv) 29,084 common shares held by Warburg, Pincus Netherlands Equity Partners, II, C.V., which includes 28,807 common shares issuable upon conversion of their Series A preferred shares; and (v) 7,271 common shares held by Warburg, Pincus Netherlands Equity Partners III, C.V., which includes 7,202 common shares issuable upon conversion of their Series A preferred shares. Warburg, Pincus & Co. ("WP") is the sole general partner of each of these shareholders. Each of these shareholders is managed by E.M. Warburg, Pincus & Co., LLC ("EMW LLC"). Lionel I. Pincus is the managing partner of WP and the managing member of EMW LLC, and may be deemed to control both entities. Jonathan S. Leff, a director of our company, is a general partner of WP and a managing director and member of EMW LLC. Mr. Leff may be deemed to have an indirect pecuniary interest (within the meaning of Rule 16a-1 under the Securities Exchange Act of 1934, as amended) in an indeterminate portion of the shares beneficially owned by these shareholders. Mr. Leff disclaims beneficial ownership of all such shares. (4) GeneVest Inc. is a Canadian company incorporated pursuant to the laws of Alberta, Canada. Mr. Sheldon Inwentash, one of our directors, is the President and Chief Executive Officer of GeneVest and, together with his affiliates, beneficially owns approximately 45% of GeneVest's issued and outstanding common shares. (5) Includes an aggregate of 364,943 shares subject to options, exercisable within 60 days from February 29, 2000, held by our directors and executive officers, but excludes the shares held by GeneVest Inc. and the Warburg Pincus Funds. 54 UNDERWRITING The underwriters named below, acting through their representatives FleetBoston Robertson Stephens Inc., PaineWebber Incorporated, Warburg Dillon Read LLC and Roth Capital Partners, Inc., have each separately agreed with us, subject to the terms and conditions of the underwriting agreement, to purchase from us the number of common shares set forth below opposite their respective names. The underwriters are committed to purchase and pay for all shares if any are purchased.
NUMBER OF UNDERWRITER SHARES - ----------- ---------- FleetBoston Robertson Stephens Inc.......................... PaineWebber Incorporated.................................... Warburg Dillon Read LLC..................................... Roth Capital Partners, Inc.................................. INTERNATIONAL UNDERWRITER - ------------------------------------------------------------ FleetBoston Robertson Stephens International Limited........ PaineWebber International (U.K.) Ltd........................ UBS AG...................................................... Roth Capital Partners, Inc.................................. ---------- Total..................................................... 2,000,000 ==========
The representatives have advised us that the underwriters propose to offer the common shares to the public at the public offering price set forth on the cover page of this prospectus and to certain dealers at that price less a concession not in excess of $____ per share, of which $____ may be reallowed to other dealers. After this offering, the public offering price, concession and reallowance to dealers may be reduced by the representatives. No such reduction of this type will change the amount of proceeds to be received by us as set forth on the cover page of this prospectus. The common shares are offered by the underwriters as stated in this prospectus subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. The underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority. OVER-ALLOTMENT OPTION We have granted to the underwriters an option, exercisable during the 30-day period after the date of this prospectus, to purchase up to 300,000 additional common shares, to cover over-allotments, if any, at the public offering price less the underwriting discount set forth on the cover page of this prospectus. If the underwriters exercise their over-allotment option to purchase any of the additional 300,000 common shares, the underwriters have severally agreed, subject to certain conditions, to purchase approximately the same percentage thereof as the number of common shares to be purchased by each of them bears to the total number of common shares offered in this offering. If purchased, these additional common shares will be sold by the underwriters on the same terms as those on which the common shares offered hereby are being sold. We will be obligated, pursuant to the over-allotment option, to sell common shares to the underwriters to the extent the over-allotment option is exercised. The underwriters may exercise the over-allotment option only to cover over-allotments made in connection with the sale of the common shares offered in this offering. 55 The following table summarizes the compensation to be paid to the underwriters by us:
TOTAL ------------------------------- PER WITHOUT WITH SHARE OVER-ALLOTMENT OVER-ALLOTMENT -------- -------------- -------------- Underwriting Discounts and Commissions payable by us...........................
The expenses of this offering are estimated at $650,000 and are payable entirely by us. INDEMNITY The underwriting agreement contains covenants of indemnity among the underwriters and us against certain civil liabilities, including liabilities under the Securities Act, and liabilities arising from breaches of representations and warranties contained in the underwriting agreement. LOCK-UP AGREEMENTS Each of our executive officers, directors and 10% beneficial owners have agreed, subject to specified exceptions, not to offer to sell, contract to sell, or otherwise dispose of, loan, pledge or grant any rights with respect to any common shares or any options or warrants to purchase any common shares, or any securities convertible into or exchangeable for common shares owned as of the date of this prospectus or thereafter acquired directly by those holders or with respect to which they have the power of disposition, without the prior written consent of FleetBoston Robertson Stephens Inc. This restriction terminates after the close of trading of our common shares on the 90th day following the day the common shares offered hereby commenced trading on the Nasdaq National Market. However, FleetBoston Robertson Stephens Inc. may, in its sole discretion and at any time or from time to time before the termination of the 90-day period, without notice, release all or any portion of the securities subject to lock-up agreements. There are no existing agreements between the representatives and any of our shareholders who have executed a lock-up agreement providing consent to the sale of shares prior to the expiration of the lock-up period. In addition, we have agreed that during the lock-up period we will not, without the prior consent of FleetBoston Robertson Stephens Inc., subject to certain exceptions, consent to the disposition of any common shares held by shareholders subject to lock-up agreements prior to the expiration of the lock-up period, or issue, sell, contract to sell, or otherwise dispose of, any common shares, any options or warrants to purchase any common shares or any securities convertible into, exercisable for or exchangeable for common shares other than our sale of shares in this offering, the purchase and sale of our common shares under our Employee Share Purchase Plan, the issuance of our common shares upon the exercise of outstanding options or warrants or upon the conversion of our Series A preferred shares, and the issuance of options under our existing employee and director share option plans provided that those options do not vest prior to the expiration of the lock-up period. STABILIZATION The representatives have advised us that, pursuant to Regulation M under the Securities Exchange Act of 1934, certain persons participating in this offering may engage in transactions, including stabilizing bids, syndicate covering transactions or the imposition of penalty bids, that may have the effect of stabilizing or maintaining the market price of our common shares at a level above that which might otherwise prevail in the open market. A "stabilizing bid" is a bid for or the purchase of our common shares on behalf of the underwriters for the purpose of fixing or maintaining the price of our common shares. A "syndicate covering transaction" is a bid for or the purchase of our common shares on behalf of the underwriters to reduce a short position incurred by the underwriters in connection with the offering. A "penalty bid" is an arrangement permitting the representatives to reclaim the selling concession otherwise accruing to an underwriter or syndicate member in connection with the offering if the common shares 56 originally sold by that underwriter or syndicate member are purchased by the representatives in a covering transaction and has therefore not been effectively placed by such underwriter or syndicate member. The representatives have advised us that these transactions may be affected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. PASSIVE MARKET MAKING In connection with this offering and before the commencement of offers or sales of our common shares, certain underwriters who are qualified market makers on the Nasdaq National Market may engage in passive market making transactions in our common shares on the Nasdaq National Market in accordance with Rule 103 of Regulation M under the Exchange Act, during the business day prior to the pricing of the offering. Passive market makers must comply with applicable volume and price limitations and must be identified as such. In general, a passive market maker must display its bid at a price not in excess of the highest independent bid for such security; if all independent bids are lowered below the passive market maker's bid, however, such bid must then be lowered when certain purchase limits are exceeded. PaineWebber Incorporated and Roth Capital Partners, Inc. received customary compensation in exchange for their placement agent services in connection with our December 1999 private placement. From time to time the underwriters have performed and may, in the future perform, investment banking or other services for us. Our common shares have not been qualified by prospectus for distribution in any province of Canada and may be offered for sale in Canada only pursuant to exemptions from the prospectus requirements of the applicable province. Such sales may be made only by dealers registered under the laws of such province or pursuant to exemptions from the applicable registered dealer requirements. 57 DESCRIPTION OF CAPITAL SHARES GENERAL The current authorized capital of our company consists of an unlimited number of common shares and an unlimited number of preferred shares. Any series of preferred shares that our Board of Directors may issue could have rights equal or superior to the rights of the common shares. COMMON SHARES The holders of our common shares are entitled to receive dividends if, as and when declared by our Board of Directors, subject to the rights of the holders of any other class of our shares entitled to receive dividends in priority to the common shares. If our company were liquidated or dissolved, the holders of common shares would be entitled to receive all assets remaining after the rights of the holders of any other class of shares entitled to receive assets in priority to the holders of the common shares have been satisfied. The holders of the common shares are entitled to one vote for each common share held at all meetings of our shareholders. PREFERRED SHARES Our Board of Directors is authorized to issue an unlimited number of preferred shares in one or more series, to fix the number of preferred shares and determine the designations, rights (including voting and dividend rights), privileges, restrictions and conditions attaching to the shares of each such series, without further vote or action by the shareholders. Because the terms of the preferred shares may be fixed by our Board of Directors without shareholder action, the preferred shares could, subject to regulatory policies, be issued quickly, with terms calculated to defeat a takeover of our company or to make the removal of our directors and executive officers more difficult. Under certain circumstances, this could have the effect of decreasing the market value of our common shares. The preferred shares may have voting rights superior to our common shares and may rank senior to the common shares as to dividends and as to the distribution of assets in the event our company were liquidated or dissolved. On July 15, 1999, our Board of Directors authorized the issuance of 33,950 shares of Series A mandatorily redeemable convertible preferred shares. We have issued 33,948 Series A Preferred Shares. The Series A preferred shares are convertible at the holders' option into common shares at $11.00 per share. Upon conversion, the holders will also receive common shares, at the conversion price of $11.00 per share, equal to the amount of all accrued and unpaid dividends. The Series A preferred shares contain provisions under which the conversion price would be reduced on a weighted average basis if we issue shares, options or certain other securities at prices lower than the conversion price (subject to certain exceptions), and will also be adjusted upon the issuance of certain other securities, certain recapitalization events and in certain other circumstances to protect the holders against the dilutive effect of those events. Dividends on the Series A preferred shares accrue quarterly at the rate of 9% per year during the first three years after issuance, and 4% per year thereafter and are compounded annually. Dividends are not payable for the first three years. After three years, at our option, we may pay dividends in cash. If dividends are not paid in cash, they will continue to accrue. After the third anniversary and prior to the seventh anniversary of the date of issuance of the Series A preferred shares, we have the right to redeem the outstanding Series A preferred shares at a price, which we call the redemption price, equal to $1,000 per share, plus accrued but unpaid dividends, provided that the price of our common shares on the Nasdaq National Market equals or exceeds 150% of the conversion price for 20 trading days during a consecutive 30-day period ending within 10 days before we notify shareholders of the redemption. We will be required to redeem one-third of any remaining outstanding Series A preferred shares on each of the seventh, eighth and ninth anniversaries of the date of issuance at 58 the redemption price, and we will be permitted to redeem the preferred shares at any time beginning on the seventh anniversary after issuance. If we fail to redeem the Series A Preferred shares as required, holders may appoint a majority of our Board of Directors, who will continue to serve until we have redeemed the Series A preferred shares as required. The holders of Series A preferred shares are entitled to vote as a group with the holders of common shares on all matters, except that holders of Series A preferred shares are entitled to vote separately for one director and are not entitled to participate in the vote for any other directors of our company. On all other matters, each holder of Series A preferred shares is entitled to the number of votes corresponding to the number of common shares the holder is entitled to receive upon conversion of his Series A preferred shares. Our agreements with the holders of, and the terms of the, Series A preferred shares provide that we are prohibited from declaring or issuing any dividends to holders of our common shares before paying all accrued and unpaid dividends on the Series A preferred shares. We also are prohibited from issuing any equity securities that have rights as to dividends and liquidation that are senior or equal in rank to the Series A preferred shares without approval of the holders of a majority of the Series A preferred shares. If our company were to be liquidated or sold or under certain other circumstances, holders of Series A preferred shares would be entitled to receive an amount equal to $1,000 per share, plus accrued dividends, before holders of our common shares would be entitled to any distributions. Certain holders of our Series A preferred shares are also entitled to certain other rights, including the right to participate, on a pro rata basis, in future company financings, subject to certain exceptions. If we propose to sell equity securities of any kind, including debt securities convertible into equity securities, certain holders of our Series A preferred shares are entitled to purchase a proportional amount of the securities being offered based on the number of common shares they own assuming conversion of all convertible securities. These holders are not entitled to exercise this right in connection with securities issued: (i) to the public in a firm commitment underwriting; (ii) upon exercise of any of our options or warrants outstanding on July 15, 1999; (iii) pursuant to the acquisition of another entity by us or one of our subsidiaries by merger, purchase of substantially all of the assets or other form of reorganization; (iv) in connection with our acquisition or license of technology rights or other assets; (v) pursuant to our stock option plans, stock bonus plans, stock purchase plans or other compensation equity agreements or programs; or (vi) upon conversion or exercise of any equity securities, such as warrants, options, or other rights to acquire equity securities and debt securities convertible into equity securities. The right of these holders of Series A preferred shares to participate in future offerings in this manner provides those shareholders with the opportunity to avoid having their ownership interest in our company diluted under certain circumstances when the interest of our common shareholders would be diluted. We also are prohibited from incurring indebtedness for borrowed money and capital lease obligations in excess of $15.0 million outstanding at any one time, without first obtaining approval of the holders of a majority of the Series A preferred shares. We are required to obtain the consent of the holders of a majority of our then outstanding Series A preferred shares if we wish to borrow money and at such time or as a result of such loans, the total principal amount of our indebtedness and capitalized lease obligations exceeds $15.0 million. In addition, if we were to enter into a credit facility with a financial institution, we may be subject to additional limitations on our ability to incur additional indebtedness. WARRANTS In connection with our leased property in Gwinnett County, Georgia, we are obligated to issue 10,000 warrants to the landlord. Each warrant is exercisable at any time from the third anniversary of the date of issuance until the ninth anniversary of the date of issuance, at an initial purchase price of $31.875, subject to customary antidilution provisions. 59 For a description of additional warrants which we have issued, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources" and our Annual Report on Form 20-F. CLASSIFIED BOARD Our Board of Directors is divided into three classes. The classification of the Board of Directors was implemented in March 1996. The holders of our Series A preferred shares are entitled to vote as a class for one director. Each Series A Director serves for a one year term and any vacancy may be filled only by a vote of the holders of Series A preferred shares. In the event that we do not redeem our Series A preferred shares as required during 2006, 2007 and 2008, then our Series A shareholders will be entitled to special voting rights enabling them to elect a majority of our Board of Directors, who will continue to serve as directors until we have redeemed our Series A preferred shares as required. TRANSFER AGENT The transfer agent and registrar for our common shares is ChaseMellon Shareholder Services, LLC, Overpeck Center, 85 Challenger Road, Ridgefield Park, New Jersey 07660. 60 LEGAL MATTERS The validity of the common shares being offered hereby has been passed upon for us by our attorneys, Osler, Hoskin & Harcourt LLP, Toronto, Ontario. Certain other matters relating to this offering with respect to United States securities laws will be passed upon by our attorneys, Baer Marks & Upham LLP, New York, New York, and the underwriters' attorneys, Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts. Certain matters relating to regulation by the U.S. Food and Drug Administration will be passed upon by our attorneys, Hyman, Phelps & McNamara, P.C., Washington, D.C. Certain matters relating to patents will be passed upon by our attorneys, Oppedahl & Larson, L.L.P., Frisco, Colorado. EXPERTS Our Consolidated Financial Statements as of December 31, 1999 and 1998 and for the years ended December 31, 1999, 1998 and 1997, included in this prospectus, have been audited by PricewaterhouseCoopers LLP, Chartered Accountants in Canada, as stated in their report appearing herein. The Consolidated Financial Statements have been included herein in reliance upon such report, given upon the authority of said firm as experts in auditing and accounting. WHERE YOU CAN FIND MORE INFORMATION We have filed with the Securities and Exchange Commission a Registration Statement on Form F-3 under the Securities Act with respect to the common shares offered hereby. This prospectus, which constitutes a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement. Certain items of the Registration Statement are contained in exhibits and schedules as permitted by the rules and regulations of the Securities and Exchange Commission. Statements made in this prospectus as to the contents of any contract, agreement or other document referred to are not necessarily complete. With respect to each such contract, agreement or other document filed as an exhibit to the Registration Statement or to our Annual Report, certain items of which are incorporated by reference into this prospectus, reference is made to the exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference. We are subject to the informational requirements of the Exchange Act and file reports and other information with the Securities and Exchange Commission. Reports and other information which we file with the Securities and Exchange Commission, including the Registration Statement on Form F-3 of which this prospectus is a part, may be inspected and copied at the public reference facilities of the Securities and Exchange Commission at: Judiciary Plaza 450 Fifth Street, N.W. Room 1024 Washington, D.C. 20549 7 World Trade Center New York, New York 10048 500 West Madison Street Suite 1400 Chicago, Illinois 60661 You can also obtain copies of this material by mail from the Public Reference Section of the Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Additionally, copies of this material may also be obtained from the Securities and Exchange Commission's Internet site at http://www.sec.gov. The Commission's telephone number is 1-800-SEC-0330. 61 INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents, which we have filed with the Securities and Exchange Commission, are incorporated by reference in this prospectus: the following sections of our Annual Report on Form 20-F for the year ended December 31, 1999: Item 6--Exchange Controls and Other Limitations Affecting Security Holders Item 7--Taxation Item 11--Compensation of Directors and Officers Item 12--Options to Purchase Securities from Registrant or Subsidiaries Item 13--Interest of Management in Certain Transactions Item 14--Description of Securities to Be Registered Item 15--Defaults Upon Senior Securities Item 16--Changes in Securities and Changes in Security for Registered Securities; In addition, all documents that we file with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Securities Exchange Act of 1934, as amended, after the date of the this prospectus and before termination of the offering, including all annual reports on Form 20-F or Form 10-K, and all filings on Forms 10-Q and 8-K, will be deemed to be incorporated by reference in this prospectus and to be a part of this prospectus from the date those documents are filed. We may also incorporate in this prospectus any Form 6-K that we file with the Securities and Exchange Commission by identifying in such form that it is being incorporated by reference into this prospectus. Any statement contained in a document that is incorporated, or deemed to be incorporated, by reference into this prospectus, shall be considered modified or superseded for purposes of this prospectus to the extent that a statement contained in this prospectus or in any other subsequently filed document that also is, or is deemed to be, incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this prospectus. You may request a copy of any document incorporated by reference in this prospectus at no cost. To receive a copy, write us at: Visible Genetics Inc. 700 Bay Street Suite 1000 Toronto, Ontario, Canada M5G 1Z6 Attention: Mr. Thomas J. Clarke Or you can call us at (416) 813-3240. See "Where You Can Find More Information." 62 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE -------- Audited Consolidated Financial Statements for the years ended December 31, 1999, 1998 and 1997 Auditors' Report............................................ F-2 Consolidated Balance Sheets as at December 31, 1999 and 1998...................................................... F-3 Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997.......................... F-4 Consolidated Statements of Deficit for the years ended December 31, 1999, 1998 and 1997.......................... F-5 Consolidated Statements of Comprehensive Loss for the years ended December 31, 1999, 1998 and 1997.................... F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997.......................... F-6 Notes to Consolidated Financial Statements.................. F-7
F-1 AUDITORS' REPORT TO THE SHAREHOLDERS OF VISIBLE GENETICS INC. We have audited the consolidated balance sheets of Visible Genetics Inc. as at December 31, 1999 and 1998 and the consolidated statements of operations, deficit, comprehensive loss, and cash flows for the years ended December 31, 1999, 1998 and 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 1999 and 1998 and the results of its operations and its cash flows for the years ended December 31, 1999, 1998 and 1997 in accordance with generally accepted accounting principles in the United States of America. PricewaterhouseCoopers LLP Chartered Accountants Toronto, Canada February 18, 2000 F-2 VISIBLE GENETICS INC. CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS
DECEMBER 31 --------------------------- 1999 1998 ------------ ------------ ASSETS Current assets Cash and cash equivalents................................. $ 2,792,985 $ 6,165,924 Short-term investments.................................... 39,894,978 5,108,254 Trade receivables (net of allowance for doubtful accounts of $1,180,801; 1998--$470,926).......................... 5,657,822 4,770,796 Other receivables (Note 4)................................ 668,748 1,445,820 Prepaid and deposits...................................... 729,307 233,072 Inventory (Note 5)........................................ 2,600,007 3,912,336 ------------ ------------ Total current assets........................................ 52,343,847 21,636,202 ------------ ------------ Fixed assets (Note 6)....................................... 4,173,335 3,877,163 Patents and licenses (Note 7)............................... 2,122,367 2,269,170 ------------ ------------ $ 58,639,549 $ 27,782,535 ============ ============ LIABILITIES Current liabilities Notes payable (Note 8).................................... $ -- $ 7,494,877 Accounts payable.......................................... 3,110,442 3,985,103 Accrued liabilities (Note 9).............................. 3,622,110 1,723,840 ------------ ------------ Total current liabilities................................... 6,732,552 13,203,820 ------------ ------------ MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SHARES (Note 10)................................................. 27,555,652 -- ------------ ------------ SHAREHOLDERS' EQUITY Share capital (Note 11)..................................... 75,422,070 46,412,685 Other equity (Note 11)...................................... 8,987,328 2,232,465 Cumulative translation adjustment........................... (619,911) 84,822 Deficit..................................................... (59,438,142) (34,151,257) ------------ ------------ 24,351,345 14,578,715 ------------ ------------ $ 58,639,549 $ 27,782,535 ============ ============ COMMITMENTS AND CONTINGENCY (Note 16)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. Approved by the Board. /s/ RICHARD T. DALY ------------------------------------------- Richard T. Daly, Director /s/ SHELDON INWENTASH ------------------------------------------- Sheldon Inwentash, Director
F-3 VISIBLE GENETICS INC. CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31 ------------------------------------------ 1999 1998 1997 ------------ ------------ ------------ Sales Products........................................... $ 12,455,775 $ 9,421,933 $ 2,967,695 Services........................................... 1,171,145 1,453,415 65,041 ------------ ------------ ------------ 13,626,920 10,875,348 3,032,736 ------------ ------------ ------------ Costs of sales Products........................................... 8,593,774 5,995,869 1,963,312 Services........................................... 679,112 677,712 31,520 ------------ ------------ ------------ 9,272,886 6,673,581 1,994,832 ------------ ------------ ------------ Gross margin......................................... 4,354,034 4,201,767 1,037,904 ------------ ------------ ------------ Expenses: Sales, general and administrative (Note 7)......... 19,073,546 11,515,757 7,447,861 Research and development........................... 7,935,327 6,289,032 4,122,916 Acquired research and development (Note 12)........ -- 420,043 654,621 Exit and termination costs (Note 13)............... 1,329,083 -- -- ------------ ------------ ------------ 28,337,956 18,224,832 12,225,398 ------------ ------------ ------------ Loss from operations before interest................. (23,983,922) (14,023,065) (11,187,494) Interest income...................................... 694,549 264,195 774,462 Interest and financing expense (Note 8).............. (1,997,512) (1,132,091) (2,714) ------------ ------------ ------------ Net loss for the year................................ (25,286,885) (14,890,961) (10,415,746) Cumulative preferred dividends and accretion of discount attributable to preferred shares (Note 10).......................................... (1,770,069) -- -- ------------ ------------ ------------ Net loss attributable to common shareholders......... $(27,056,954) $(14,890,961) $(10,415,746) ============ ============ ============ Weighted average number of common shares outstanding........................................ 9,916,954 7,782,094 7,059,578 Basic and diluted loss per common share.............. $ (2.73) $ (1.91) $ (1.48)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. F-4 VISIBLE GENETICS INC. CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF DEFICIT
YEARS ENDED DECEMBER 31 ------------------------------------------ 1999 1998 1997 ------------ ------------ ------------ Deficit, beginning of year........................... $(34,151,257) $(19,260,296) $ (8,844,550) Net loss for the year................................ (25,286,885) (14,890,961) (10,415,746) ------------ ------------ ------------ Deficit, end of year................................. $(59,438,142) $(34,151,257) $(19,260,296) ============ ============ ============
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
YEARS ENDED DECEMBER 31 ------------------------------------------ 1999 1998 1997 ------------ ------------ ------------ Net loss for the year................................ $(25,286,885) $(14,890,961) $(10,415,746) Other comprehensive income: Foreign currency translation adjustments........... (704,733) 112,477 -- ------------ ------------ ------------ Comprehensive loss for the year...................... $(25,991,618) $(14,778,484) $(10,415,746) ============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. F-5 VISIBLE GENETICS INC. CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31 ------------------------------------------ 1999 1998 1997 ------------ ------------ ------------ Cash provided by (used in) operating activities Net loss for the year................................... $(25,286,885) $(14,890,961) $(10,415,746) Add: Items not involving cash Depreciation.......................................... 1,708,923 1,090,086 495,388 Amortization.......................................... 393,979 206,640 130,593 Patents and licenses written off...................... 451,085 -- -- Deferred compensation cost related to options granted............................................. -- 77,469 250,067 Non cash financing expense related to warrants granted............................................. 1,466,691 580,981 -- Amortization of discount on accounts receivable....... (48,158) -- -- Foreign exchange loss................................. 26,789 28,453 37,067 In-process research and development acquired.......... -- 420,043 654,621 Increase (decrease) from changes in Trade receivables..................................... (1,804,006) (2,327,121) (1,193,858) Other receivables..................................... 719,519 (850,270) (142,757) Prepaids and deposits................................. (501,742) 28,913 (92,247) Inventory............................................. 1,290,997 (3,149,740) (441,957) Refundable investment tax credits..................... -- -- 476,393 Accounts Payable...................................... (734,230) 2,490,594 624,278 Accrued liabilities................................... 1,956,660 1,159,952 (80,460) ------------ ------------ ------------ (20,360,378) (15,134,961) (9,698,618) ------------ ------------ ------------ Investing activities Purchase of fixed assets................................ (1,905,129) (3,348,261) (1,265,825) Licenses and patents acquired........................... (698,261) (877,796) (815,925) Purchase of short-term investments...................... (50,503,643) (13,705,737) (3,221,329) Redemption of short-term investments.................... 15,716,919 14,616,777 7,432,233 Acquisition of ACT Gene S.A............................. -- (536,929) -- ------------ ------------ ------------ (37,390,114) (3,851,946) 2,129,154 ------------ ------------ ------------ Financing activities Preferred shares issued, net of expenses................ 22,719,748 -- -- Warrants issued in connection with preferred shares..... 6,397,448 -- -- Common shares issued, net of expenses................... 29,009,385 14,640,188 419,167 Warrants issued in connection with private placement.... -- 444,572 -- Issuance of notes payable............................... -- 6,817,559 -- Warrants issued in connection with notes payable........ -- 1,182,441 -- Repayment of note payable............................... (4,100,000) -- -- Other equity............................................ 29,851 8,259 38,392 Repayment of loan from an officer....................... 323,405 -- -- ------------ ------------ ------------ 54,379,837 23,093,019 457,559 ------------ ------------ ------------ Effect of exchange rate fluctuations on cash.............. (2,284) 193,133 151,982 ------------ ------------ ------------ Increase (decrease) in cash during the year............... (3,372,939) 4,299,245 (6,959,923) Cash, beginning of year................................. 6,165,924 1,866,679 8,826,602 ------------ ------------ ------------ Cash, end of year....................................... $ 2,792,985 $ 6,165,924 $ 1,866,679 ============ ============ ============ Supplemental information Interest paid........................................... $ 786,585 $ 48,073 $ 2,714 Income taxes paid....................................... $ -- $ -- $ --
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. F-6 VISIBLE GENETICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1--NATURE OF OPERATIONS Visible Genetics Inc. (the "Company") develops, manufactures and sells integrated DNA sequencing systems that analyze genetic information. Such systems are designed to identify mutations in the DNA of genes associated with certain diseases. The Company's products are intended for research and clinical purposes. Prior to marketing any products for use in the clinical diagnostic market, the Company will require appropriate regulatory approval. NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES These financial statements have been prepared in United States dollars, in accordance with the accounting principles generally accepted in the United States. The principal accounting policies of the Company, which have been consistently applied, are summarized as follows: PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements of the Company include the following subsidiaries: Visible Genetics Corp., Visible Genetics B.V., Applied Sciences, Inc., Gene Foundry Inc., Visible Genetics Europe S.A. (formerly ACT Gene S.A.), Visible Genetics Israel Ltd. and Visible Genetics Srl. All intercompany accounts and transactions have been eliminated upon consolidation. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. REVENUE RECOGNITION AND WARRANTY Revenues from the sale of the Company's products are recognized when shipment occurs and title passes to the customer or distributor and there is reasonable assurance of collectibility. There are no significant customer acceptance requirements or post shipment obligations on the part of the Company. Revenues from the sale of services are recognized when the services are provided and there is reasonable assurance of collectibility. A provision is made for estimated warranty costs at the time of the sale. Revenues from extended warranty contracts are recognized over the life of the contract. Sales of bundled sequencing systems and testing kits are recognized pro rata as the components of the bundle are shipped to customers. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS As required under Statement of Financial Accounting Standards (SFAS) No. 95, cash equivalents consist of short-term investments that are highly liquid, are readily convertible to cash and have initial terms to maturity of three months or less. Short-term investments consist of United States treasury bills and corporate debt securities. They are classified as held-to-maturity and are recorded at amortized cost. Contractual maturities of short-term investments at December 31, 1999 and December 31, 1998 range from one to eight months. F-7 VISIBLE GENETICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) FINANCIAL INSTRUMENTS The carrying values of the Company's financial instruments consisting of cash and cash equivalents, short-term investments, trade and other receivables, accounts payable and notes payable, approximate their fair values due to their short-term nature. CONCENTRATION OF CREDIT RISK The Company's financial instruments that are exposed to concentration of credit risk consist primarily of cash and cash equivalents, short-term investments and receivables. The Company maintains its accounts for cash and cash equivalents and short-term investments with the United States treasury and a number of large low-credit-risk financial institutions and corporations in Canada and the United States in order to reduce its exposure. In addition, the Company limits its maximum investment to any one counterparty to limit its credit exposure. At December 31, 1999 and December 31, 1998 no customers accounted for greater than 10% of gross trade receivables. INVENTORY Inventory is stated at the lower of cost and estimated realizable value. Cost is determined by the first-in first-out method, and includes material, labor, and an allocation of overhead. FIXED ASSETS Fixed assets are recorded at cost. Depreciation is provided on a straight-line basis over the estimated useful lives of the assets, as follows: Laboratory and computer equipment 2 to 5 years Leasehold improvements term of the lease
PATENTS AND LICENSES External costs of patents and licenses are recorded at cost and amortized over their estimated useful lives, which are generally up to ten years. If the carrying amount of a patent or license is no longer recoverable, the related unamortized cost is written down to fair value. IMPAIRMENT OF LONG-LIVED ASSETS In accordance with the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", the Company reviews long-lived assets, including fixed assets, patents and licenses, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the asset may not be fully recoverable. Under SFAS No. 121, an impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. Impairment, if any, is assessed using discounted cash flows. F-8 VISIBLE GENETICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) FOREIGN CURRENCY TRANSLATION Monetary assets and liabilities denominated in foreign currencies are translated into United States dollars at the exchange rate prevailing at the balance sheet date. Other assets, liabilities and operating items are translated at exchange rates prevailing at the respective transaction dates. Resulting translation adjustments are included in the consolidated statement of operations. Assets and liabilities of subsidiaries with functional currencies other than United States dollars are translated at the exchange rate prevailing at the balance sheet date, and the results of their operations are translated at average exchange rates for the year. The resulting translation adjustments are reflected in a separate component of shareholders' equity. Other exchange gains or losses are included in the consolidated statement of operations. INCOME TAXES The Company provides for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes," which prescribes an asset and liability approach that results in the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the consolidated financial statements or tax returns. RESEARCH AND DEVELOPMENT EXPENSES Research and development costs are expensed in the period incurred. The Company is entitled to certain Canadian federal and provincial tax incentives for qualified research and development. They are accounted for as a reduction of the related expenditure for current expenses and a reduction of the related asset for capital assets when it is more likely than not that the credit will be realized. The Company is entitled to Canadian federal investment tax credits at a rate of 20% on eligible current and capital expenditures, claimable against income taxes otherwise payable. ADVERTISING COSTS The Company expenses the cost of advertising as incurred. The Company incurred advertising costs of approximately $560,000, $271,000 and $408,000 for 1999, 1998 and 1997, respectively. STOCK OPTIONS The Company follows SFAS No. 123 which permits the use of APB No. 25 to account for stock options issued to employees. Under that method, the Company uses the intrinsic value method to measure the cost associated with the granting of stock options to employees. The amount by which the market price of the underlying shares exceeds the exercise price of the options is accounted for as compensation expense over the periods in which services are rendered. Options issued to consultants are recorded at their fair market value at the date of the grant. This amount is charged to operations over the periods in which services are rendered. EARNINGS (LOSS) PER SHARE The company follows SFAS No. 128 "Earnings Per Share" to calculate basic and diluted earnings (loss) per share. Basic earnings (loss) per share is calculated using the weighted average number of common shares outstanding during the year. Diluted earnings (loss) per share is calculated using the weighted average number of common and potential common shares outstanding during the year. Potential F-9 VISIBLE GENETICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) common shares consist of the incremental common shares issuable upon conversion of outstanding convertible preferred shares (using the if converted method) and shares issuable upon the exercise of stock options and warrants (using the treasury stock method). Potential common shares are excluded from the calculation if their effect is anti-dilutive, as was the case for the years ended December 31, 1999, 1998 and 1997. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities and is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company does not anticipate that SFAS No. 133 will have a significant impact on its financial position or results of operations. NOTE 3--COLLABORATIVE AND DISTRIBUTION AGREEMENTS COLLABORATIVE AGREEMENTS The Company has agreements with several parties for the use of certain intellectual property in the manufacture of the Company's products, the most significant of which are as follows: The Polymerase Chain Reaction (PCR) is used in most of the GeneKits made by the Company and is produced and sold under license from Roche Molecular Systems, Inc. and F. Hoffman-La Roche, Ltd. The reverse transcriptase enzyme used in the TRUGENE HIV-1 Genotyping Kit is the Superscript II-TM- licensed from Life Technologies. A portion of the method of CLIP sequencing which is used by most of the GeneKits made by the Company is licensed from Genaissance Pharmaceuticals, Inc. UNG (Uracin N-Glycosylase) is a method of incorporating Uracil into a PCR product, which can be subsequently destroyed enzymatically. This method is used to control carry-over contamination between sequential samples under going PCR. At present, none of the Company's products uses this method, however, it is expected that future GeneKit production may incorporate this technology. This method is licensed from Life Technologies. Under these agreements, the Company is required to make certain up-front payments and certain royalty payments on specified sales to customers ranging from 0.5% to 15%, and up to 25% on specified product sales to certain distributors. Included in accounts payable is an amount of approximately $461,000 and $148,000, relating to royalties payable, at December 31, 1999 and 1998, respectively. DISTRIBUTION AGREEMENTS Commencing in 1999, the Company entered into various distribution and marketing arrangements with distributors to sell the Company's products to the research and clinical diagnostic markets in selected geographic markets outside North America and certain European countries. These agreements expire at various times from April 2000 through April 2002 and, in certain cases, are subject to automatic renewal. Certain of the agreements may also be terminated by either party upon specified notice periods and may require us to make termination payments under certain circumstances. Certain of the agreements also provide for minimum annual purchases for specified periods. F-10 VISIBLE GENETICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4--OTHER RECEIVABLES
DECEMBER 31 --------------------- 1999 1998 -------- ---------- Refundable taxes............................................ $105,007 $ 616,214 Other....................................................... 563,741 829,606 -------- ---------- $668,748 $1,445,820 ======== ==========
NOTE 5--INVENTORY
DECEMBER 31 ----------------------- 1999 1998 ---------- ---------- Raw materials............................................... $1,346,951 $2,231,994 Work in process............................................. 221,771 339,109 Finished goods.............................................. 1,031,285 1,341,233 ---------- ---------- $2,600,007 $3,912,336 ========== ==========
NOTE 6--FIXED ASSETS
DECEMBER 31 ----------------------- 1999 1998 ---------- ---------- COST Laboratory and computer equipment....................... $6,511,025 $4,581,794 Leasehold improvements.................................. 1,264,022 1,198,488 ---------- ---------- 7,775,047 5,780,282 ---------- ---------- ACCUMULATED DEPRECIATION AND AMORTIZATION Laboratory and computer equipment....................... 3,118,913 1,650,840 Leasehold improvements.................................. 482,799 252,279 ---------- ---------- 3,601,712 1,903,119 ---------- ---------- $4,173,335 $3,877,163 ========== ==========
F-11 VISIBLE GENETICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7--PATENTS AND LICENSES
DECEMBER 31 ----------------------- 1999 1998 ---------- ---------- COST Patents................................................. $1,078,173 $1,050,276 Licenses................................................ 1,596,591 1,616,032 ---------- ---------- 2,674,764 2,666,308 ---------- ---------- ACCUMULATED AMORTIZATION Patents................................................. 207,197 166,548 Licenses................................................ 345,200 230,590 ---------- ---------- 552,397 397,138 ---------- ---------- $2,122,367 $2,269,170 ========== ==========
The net book value of patents and licenses at December 31, 1999 is after reflecting an impairment loss of $401,085 and $50,000, respectively, recorded during the year and included in "Sales, general and administrative" expenses in the statement of operations. The impairment loss was recorded as a result of the Company abandoning certain patents and licensed technologies. NOTE 8--NOTES PAYABLE On April 30, 1998, the Company, through its subsidiary, Visible Genetics Corp., borrowed $7,000,000 under a term loan agreement with certain institutional lenders. The loan bore interest at 10% per annum, and interest and principal were payable in full on or about April 29, 1999. The loan was secured by a security interest in substantially all of the assets of the Company, and it imposed certain restrictive covenants, including a limit on the total indebtedness the Company could incur. In connection with the loan, the Company granted warrants to the lenders to purchase an aggregate of 420,000 common shares at an exercise price of $10.00 per share. On September 28, 1998, the term loan facility was extended under similar terms and the Company borrowed an additional $1,000,000 under the expanded loan facility. The additional loan was due on December 28, 1999. In connection with the additional loan, the Company granted warrants to the lenders to acquire 120,000 common shares at an exercise price of $10.00 per share. The fair market value of the warrants granted in connection with both loans was estimated at the date of grant using the Black-Scholes option valuation model based upon the following assumptions: dividend yield--nil, risk-free interest rate--5.0%, average expected volatility--65%, expected term--2 years. The total proceeds received from the institutional lenders were allocated between the warrants and term loans based on the relative fair value of each component, resulting in $944,836 and $237,805 of the total proceeds from the April 1998 and September 1998 term loans, respectively, being allocated to warrants. The value of the term loans was accreted to their face value, resulting in a charge to financing expense over the term of the loans. As a result, $601,660 and $580,981 were recorded as financing expense in 1999 and 1998, respectively. F-12 VISIBLE GENETICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8--NOTES PAYABLE (CONTINUED) On April 30, 1999, the Company and the institutional lenders agreed to delay the payment date of the $7,000,000 loan to December 31, 1999, and to move up the payment date of the $1,000,000 loan to July 1, 1999. The institutional lenders later extended the payment date of the $1,000,000 loan to the earlier of July 22, 1999, or the completion of the Warburg Pincus financing (see Note 10). In addition, the institutional lenders agreed to permit the Company to borrow up to an additional $5,000,000 of loans from other lenders which would be senior to the $7,000,000 loan and junior to the $1,000,000 loan. The amended terms of the loans did not result in the loans being considered substantially different, as the cash flow effect on a present value basis was less than 10%. Accordingly, no debt extinguishment gain or loss was recognized in the statement of operations. In connection with the modification of the term loans, on April 30, 1999, the Company granted the institutional lenders warrants to purchase an additional 140,000 common shares at an exercise price of $17.00 per share. The fair market value of the warrants was estimated at the date of grant using the Black- Scholes option valuation model based upon the following assumptions: dividend yield--nil, risk-free interest rate--5.0%, average expected volatility--65%, expected term--2.5 years, resulting in a value attributed to these warrants of $865,031. This amount was recorded as a deferred charge and was to be amortized to financing expense over the term of the loan maturing on December 31, 1999. On July 15, 1999, the Company repaid all of the loans made to the institutional lenders. Of the $8,000,000 principal amount of loans, the Company paid $4,100,000 of principal plus accrued interest on the loans in cash with the balance of principal plus accrued interest being converted into 3,948 Series A preferred shares (see Note 10) and 147,098 warrants to purchase common shares. As a result, the unamortized balance of the deferred charge was recorded as financing expense at that time. NOTE 9--ACCRUED LIABILITIES
DECEMBER 31 ----------------------- 1999 1998 ---------- ---------- Warranty provision.......................................... $ 387,103 $ 90,107 Salaries and benefits....................................... 1,149,279 79,640 Professional fees........................................... 393,196 161,251 Interest.................................................... 13,000 503,037 Value added taxes........................................... 492,711 335,944 Provision for exit costs.................................... 789,849 -- Other....................................................... 396,972 553,861 ---------- ---------- $3,622,110 $1,723,840 ========== ==========
NOTE 10--MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SHARES (A) AUTHORIZED AND ISSUED Authorized share capital consists of an unlimited number of preferred shares which may be issued in one or more series. On July 15, 1999, the Board of Directors authorized the issuance of 33,950 Series A Convertible Preferred Shares, of which 33,948 were issued during 1999. F-13 VISIBLE GENETICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10--MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SHARES (CONTINUED) On July 15, 1999, the Company issued 30,000 preferred shares and warrants to purchase 1,100,000 common shares to certain affiliated funds managed by E.M. Warburg, Pincus & Co., LLC (Warburg Pincus) for net proceeds of $29,219,854. In addition, on July 15, 1999 in connection with the repayment of certain loans with institutional lenders specified in note 8, the Company issued 3,948 preferred shares and warrants to purchase 147,098 common shares for net proceeds of $3,845,008. The fair market value of the warrants was estimated at the date of grant using the Black-Scholes option valuation model based upon the following assumptions: dividend yield--nil, risk-free interest rate--5.61%, average expected volatility--70%, expected term--4 years. The value of the net proceeds was allocated between warrants and mandatorily redeemable convertible preferred shares based on the relative fair value of each instrument. The total amount relating to Warburg Pincus, net of issue costs of $780,146 allocated to warrants and mandatorily redeemable convertible preferred shares, was $6,420,672 and $22,799,182, respectively. The total amount relating to the institutional investors, net of issue costs of $102,992 allocated to warrants and mandatorily redeemable convertible preferred shares, was $858,607 and $2,986,401, respectively. The value of the warrants is treated as a discount to the mandatorily redeemable convertible preferred shares and will be charged directly to retained earnings or, in the absence of retained earnings, against other equity, over seven years, the time period when redemption of the mandatorily redeemable convertible preferred shares first becomes mandatory. (B) RIGHTS AND CONDITIONS OF MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SHAREHOLDERS CONVERSION The mandatorily redeemable convertible preferred shares are convertible at any time, at the option of the holders into common shares of the Company at a conversion price of $11.00, subject to certain adjustments. Upon conversion, the holders will also receive common shares, at the conversion price of $11.00 per share, equal to the amount of all accrued and unpaid dividends. The mandatorily redeemable convertible preferred shares contain provisions under which the conversion price would be reduced on a weighted average basis if the Company issues shares, options or certain other securities at prices lower than the conversion price (subject to certain exceptions), and will also be adjusted upon the issuance of certain other securities, certain recapitalization events and in certain other circumstances to protect the holders against the dilutive effect of those events. This conversion right will terminate on any redemption of the mandatorily redeemable convertible preferred shares or any liquidation of the Company. Each mandatorily redeemable convertible preferred share will automatically convert into common shares at its then effective conversion price, if at least a majority of the mandatorily redeemable convertible preferred shares are either voted to be converted or have already been converted into common shares. DIVIDENDS Dividends on the mandatorily redeemable convertible preferred shares accrue quarterly at the rate of 9% per year during the first three years after issuance, and 4% per year thereafter and are compounded annually. Dividends are not payable for the first three years. After three years, at the Company's option, dividends are payable in cash. If dividends are not paid in cash, they will continue to accrue. The F-14 VISIBLE GENETICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10--MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SHARES (CONTINUED) Company is prohibited from declaring or issuing any dividends to holders of common shares before paying all unpaid dividends on the mandatorily redeemable convertible preferred shares. The Company is also prohibited from issuing any equity securities that are senior or equal in rank to the mandatorily redeemable convertible preferred shares without approval of the holders of a majority of such shares. If the Company were to be liquidated or sold or under certain other circumstances, holders of mandatorily redeemable convertible preferred shares would be entitled to receive an amount equal to $1,000 per share, plus accrued and unpaid dividends, before holders of common shares would be entitled to any distributions. REDEMPTION After the third anniversary and prior to the seventh anniversary of the date of issuance of the mandatorily redeemable convertible preferred shares, the Company has the right to redeem the outstanding mandatorily redeemable convertible preferred shares at the redemption price, equal to $1,000 per share, plus accrued but unpaid dividends, subject to certain conditions. The Company will be required to redeem one-third of any remaining outstanding mandatorily redeemable convertible preferred shares on each of the seventh, eighth and ninth anniversaries of the date of issuance at the redemption price. If the Company fails to redeem the shares as required, holders may appoint a majority of our Board of Directors, who will continue to serve until the Company has redeemed the mandatorily redeemable convertible preferred shares as required. VOTING The holders of the mandatorily redeemable convertible preferred shares are entitled to vote as a group with the holders of common shares on all matters except that holders of the mandatorily redeemable convertible preferred shares are entitled to vote separately for one director and are not entitled to participate in the vote for any other directors of the Company. On all other matters, each holder of mandatorily redeemable convertible preferred shares is entitled to the number of votes equal to the number of common shares the holder is entitled to receive upon conversion of the holder's mandatorily redeemable convertible preferred shares. OTHER Certain holders of mandatorily redeemable convertible preferred shares are also entitled to certain other rights, including the right to participate, on a pro rata basis, in future Company financings, subject to certain exceptions. The right of holders of mandatorily redeemable convertible preferred shares to participate in future offerings in this manner provides those shareholders with the opportunity to avoid having their ownership interest in the Company diluted under certain circumstances when the interest of common shareholders would be diluted. The Company is also prohibited from incurring indebtedness for borrowed money and capital lease obligations in excess of $15,000,000 outstanding at any one time, without first obtaining approval of the holders of a majority of the mandatorily redeemable convertible preferred shares. F-15 VISIBLE GENETICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 11--SHARE CAPITAL (A) AUTHORIZED AND ISSUED SHARE CAPITAL Authorized share capital consists of an unlimited number of common shares, without par value.
NUMBER OF AVERAGE COMMON ISSUE SHARES PRICE AMOUNT ---------- -------- ----------- BALANCE, DECEMBER 31, 1996.................................. 6,962,198 $30,339,955 ========== =========== Issued for cash under stock option arrangements........... 191,498 $ 2.19 419,167 Issued for acquisition of Applied Sciences, Inc........... 95,000 $ 5.50 522,500 ---------- ------ ----------- BALANCE, DECEMBER 31, 1997.................................. 7,248,696 31,281,622 ========== =========== Issued for cash under stock option arrangements........... 385,548 $ 2.39 921,395 Issued for acquisition of ACT Gene S.A.................... 85,000 $ 5.78 490,875 Issued for private placement offering, net of issue 1,528,989 costs (i)............................................... $ 9.88 13,718,793 ---------- ------ ----------- BALANCE, DECEMBER 31, 1998.................................. 9,248,233 46,412,685 ========== =========== Issued for cash under stock option arrangements........... 457,882 $ 5.12 2,343,603 Issued for private placement offering, net of issue 1,916,000 costs................................................... $13.92 26,665,782 ---------- ------ ----------- BALANCE, DECEMBER 31, 1999.................................. 11,622,115 $75,422,070 ========== ===========
- ------------------------ (i) The value of the warrants issued in connection with the private placement (Note 11(e)) in the amount of $444,572 has been recorded as a reduction of the proceeds of issue and an increase to warrants included in Other equity (Note 11(b)). The fair market value of the warrants is estimated at the date of grant using the Black-Scholes option valuation model based upon the following assumptions: dividend yield--nil, risk-free interest rate--4.0%, average expected volatility--65%, expected term--2.5 years. (B) OTHER EQUITY
1999 1998 1997 ----------- ---------- --------- Deferred compensation costs............................... $ -- $ -- $ (77,469) Options................................................... 922,714 922,714 922,714 Warrants.................................................. 9,782,470 1,610,791 80,115 Contributed surplus....................................... 61,250 61,250 61,250 Cumulative preferred dividends attributable to mandatorily redeemable convertible preferred shares................. (1,400,344) -- -- Cumulative accretion of discount attributable to mandatorily redeemable convertible preferred shares..... (369,728) -- -- Loan to an officer to purchase shares..................... -- (323,405) (323,405) Employee share purchase loans............................. (9,034) (38,885) (47,144) ----------- ---------- --------- $ 8,987,328 $2,232,465 $ 616,061 =========== ========== =========
F-16 VISIBLE GENETICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 11--SHARE CAPITAL (CONTINUED) Employee share purchase loans are non-recourse and secured only by the shares themselves. The loan to an officer was made in July 1996 to purchase shares of the Company. The loan was interest free and was originally repayable in 2006. In November 1999, the loan was repaid. (C) DEFERRED COMPENSATION COSTS
1999 1998 1997 -------- -------- --------- BALANCE, BEGINNING OF YEAR.................................. $ -- $(77,469) $(354,786) Options granted less cancellation........................... -- -- 27,250 Charged to expense during the year.......................... -- 77,469 250,067 ---- -------- --------- BALANCE, END OF YEAR........................................ $ -- $ -- $ (77,469) ==== ======== =========
(D) OPTIONS The Company has incentive plans under which options to purchase common shares may be granted to its employees, consultants or directors at the discretion of the Board of Directors. Options for an aggregate of 3,750,901 shares may be granted, subject to shareholder ratification. Under the plans, each option is for the purchase of one common share, expires up to ten years from the date of issue, and is generally earned over a three to four year period. There are no repurchase features. Options issued to employees may be cancelled if employment is terminated within three years. The number of options that may be cancelled is reduced in stages over that period. Options issued to employees after May, 1996 must be exercised within 90 days of the termination of employment.
WEIGHTED AVERAGE NUMBER EXERCISE PRICE --------- ---------------- BALANCE, DECEMBER 31, 1996.................................. 1,235,625 $ 3.56 ========= ====== Granted at $3.50 to $11.50................................ 527,580 $ 5.25 Exercised................................................. (191,498) $ 2.19 Cancelled................................................. (20,237) $ 3.50 --------- ------ BALANCE, DECEMBER 31, 1997.................................. 1,551,470 $ 4.32 ========= ====== Granted at $7.70 to $10.98................................ 580,364 $ 8.26 Exercised................................................. (387,881) $ 2.41 Cancelled................................................. (45,902) $ 4.01 --------- ------ BALANCE, DECEMBER 31, 1998.................................. 1,698,051 $ 6.11 ========= ====== Granted at $3.50 to $19.08................................ 1,001,545 $11.69 Exercised................................................. (383,749) $ 4.82 Cancelled................................................. (170,294) $ 7.51 --------- ------ BALANCE, DECEMBER 31, 1999.................................. 2,145,553 $ 8.82 ========= ======
F-17 VISIBLE GENETICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 11--SHARE CAPITAL (CONTINUED) The fair market value of employee options granted in 1999 was approximately $6,689,000 (1998--$2,397,000; 1997--$1,342,000). If employee options granted had been recorded at their fair market value, the pro forma net loss in 1999 would have been $(28,763,000) or $(3.08) per common share (1998--$(16,753,000) or $(2.15) per common share; 1997--$(11,443,000) or $(1.62) per common share). The fair market value of each option is estimated at the date of grant using the Black-Scholes option valuation model based upon the following assumptions: dividend yield--nil, risk-free interest rate (for four-year zero coupon bond)--5.5% (1998 and 1997--5.0%), average expected volatility--70% (1998 and 1997--65%), expected average option term--4 years. The weighted average fair value for options granted in 1999 was $6.68 (1998--$4.13; 1997--$2.63). The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock option plans have characteristics significantly different from those of traded options, and because change in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
WEIGHTED NUMBER AVERAGE EXERCISE NUMBER WEIGHTED AVERAGE OUTSTANDING AT PRICE OF WEIGHTED EXERCISABLE AT EXERCISE PRICE OF RANGE OF DECEMBER 31, OUTSTANDING AVERAGE DECEMBER 31, EXERCISABLE EXERCISE PRICES 1999 OPTIONS REMAINING LIFE 1999 OPTIONS - --------------------- -------------- ---------------- -------------- -------------- ----------------- Cdn$1.37-Cdn$3.42 182,541 Cdn$2.49 5.3 years 182,541 Cdn$2.49 US$3.50 340,998 US$3.50 6.7 years 317,826 US$3.50 $4.45-$6.07 23,250 $5.72 7.5 years 15,117 $5.62 $7.12-$7.84 230,757 $7.76 7.8 years 141,499 $7.76 $8.00-$9.35 506,182 $8.60 8.5 years 275,879 $8.39 $10.00-$11.50 608,625 $11.01 9.4 years 125,043 $11.33 $12.74-$16.45 119,200 $15.83 9.8 years 667 $12.74 $17.00-$19.08 134,000 $18.11 9.5 years 65,333 $18.18 --------- -------- --------- 2,145,553 $8.82 1,123,905 ========= ======== =========
F-18 VISIBLE GENETICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11--SHARE CAPITAL (CONTINUED) (E) WARRANTS
NUMBER EXERCISE PRICE EXPIRY DATE --------- -------------- --------------- BALANCE, DECEMBER 31, 1996 AND 1997.................. 79,803 ========= Granted in connection with loans (Note 8).......... 540,000 $10.00 April, 2003-- September, 2003 Granted in connection with private placement (Note 11(a))........................................... 121,951 $12.81 November, 2003 --------- BALANCE, DECEMBER 31, 1998........................... 741,754 ========= Granted in connection with loans (Note 8).......... 140,000 $17.00 April, 2006 Granted in connection with mandatorily redeemable convertible preferred shares (Note 10)........... 1,247,098 $12.60 July, 2003 Exercised.......................................... (76,734) $ 6.90 --------- BALANCE, DECEMBER 31, 1999........................... 2,052,118 =========
On February 17, 2000, warrants to purchase 1,100,000 common shares were exercised at a price of $12.60 per common share. Under the terms of the warrant agreement, the warrant holders elected to pay the exercise price for the warrants through a non-cash exercise. As a result, the warrant holders received 847,749 common shares rather than 1,100,000 common shares they would otherwise have received upon exercise in cash of all of their warrants. NOTE 12--ACQUISITIONS Effective April, 1998, the Company acquired 100% of the shares of ACT Gene S.A., a DNA diagnostic testing company, for 85,000 common shares of the Company, and cash payable of $650,000. The acquisition was accounted for as a purchase, and resulted in the recording of an excess of purchase price over tangible net assets of $488,000, of which $420,043 was recorded as in-process research and development, and reflected as an expense in 1998. The nature of the acquired research and development relates to the cost and time pertaining to the development of a test kit and research clinical samples necessary for the development of several kits designed for use with DNA sequencing systems. As of April, 1998 the kit was approximately 80% completed and was expected to be completed during 1999. As a result of delays related to the development of the kit, the estimated completion date has been revised to the year 2000. The projected incremental cash flows of these projects were discounted using discount rates ranging from 60% to 70%. The primary risk factor affecting the commercialization of each of these products is the receipt of FDA and foreign regulatory agency approvals for use in the clinical diagnostic market. Effective October, 1997, the Company acquired 100% of the shares of Applied Sciences, Inc., a DNA diagnostic testing company, for 95,000 common shares of the Company, and the assumption of all liabilities (including $90,000 which was repaid to the former shareholders of Applied Sciences, Inc.), as well as a deficit of $132,000. The acquisition was accounted for as a purchase, and resulted in the recording of an excess of purchase price over tangible net assets of $654,621 which was recorded as in-process research and development, and reflected as an expense in 1997. The nature of the acquired research and development relates to the cost and time pertaining to the development of certain test kits designed for F-19 VISIBLE GENETICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 12--ACQUISITIONS (CONTINUED) use with DNA sequencing systems. As of October 1997, these kits were approximately 20% to 50% completed. Development of one kit was completed in the fourth quarter of 1998, and the remaining kits are expected to be completed during 2000. Projected incremental cash flows of these projects were discounted using discount rates ranging from 60% to 70%. The primary risk factor affecting the commercialization of each of these products is the receipt of FDA and foreign regulatory agency approvals for use in the clinical diagnostic market. NOTE 13--EXIT AND TERMINATION COSTS EXIT COSTS During 1999, the Company approved a plan to move the sales, marketing and various other corporate functions from Canada to a U.S. facility being established in Atlanta. The U.S. facility will also house Applied Sciences Inc. (a wholly owned subsidiary of the Company) as well as being used for kit manufacturing. The exit plan is expected to be completed in 2000. As a result of the decision to centralize U.S. operations in Atlanta, certain premises currently leased by the Company will be vacated. In December 1999, the Company committed to a new facility and commenced efforts to sublease the premises to be vacated. Accordingly, the Company recorded a charge of approximately $790,000 in the statement of operations in 1999, which is included in accrued liabilities at December 31, 1999. This amount represents the remaining future lease commitments net of estimated sub-lease income, the unamortized balance of leasehold improvements, and other estimated costs of sub-leasing the vacated facilities. If the Company is unsuccessful in its subleasing efforts, the remaining future lease commitments on premises to be vacated, in excess of amounts accrued, approximates $2,100,000. TERMINATION COSTS During 1999, two senior officers of the Company received special termination benefits in connection with their departure from the Company. The termination benefits included lump-sum payments and periodic future payments, as specified in the related termination agreements, offered by the Company and accepted by the officers. The present value of the obligations for special termination benefits approximated $539,000, which was included in the statement of operations in 1999. As at December 31, 1999, approximately $162,000 of these costs were paid and the balance is included in accrued salaries and benefits. F-20 VISIBLE GENETICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 14--INCOME TAXES The Company's income tax provision has been determined as follows:
YEARS ENDED DECEMBER 31, ------------------------------------------ 1999 1998 1997 ------------ ------------ ------------ Net loss for the year comprised of: Domestic........................................... $ (8,081,807) $ (6,195,350) $ (8,472,572) Foreign............................................ (17,205,078) (8,695,611) (1,943,174) ------------ ------------ ------------ $(25,286,885) $(14,890,961) $(10,415,746) ============ ============ ============ Income taxes at 44.6%................................ $(11,283,008) $ (6,641,369) $ (4,645,423) Decrease resulting from permanent non-tax deductible expense............................................ 736,478 52,182 412,842 Decrease resulting from foreign rate differences..... 835,867 114,856 -- Increase in valuation allowance...................... 9,710,663 6,474,331 4,232,581 ------------ ------------ ------------ $ -- $ -- $ -- ============ ============ ============
As at December 31, 1999, the Company has available losses in various countries that may be used to reduce taxable income in future years, and expire as follows:
CANADA(1) UNITED STATES FRANCE ITALY NETHERLANDS ISRAEL ----------- ------------- ---------- -------- ----------- -------- 2001......................... $ 481,000 $ -- $ -- $ -- $ -- $ -- 2002......................... 1,480,000 -- -- -- -- -- 2003......................... 2,846,000 -- 439,000 -- -- -- 2004......................... 4,805,000 -- 3,037,000 95,000 -- -- 2005......................... 1,567,000 -- -- -- -- -- 2006......................... 2,819,000 -- -- -- -- -- 2012......................... -- 1,238,000 -- -- -- -- 2018......................... -- 3,962,000 -- -- -- -- 2019......................... -- 6,671,000 -- -- -- -- No Expiry Date............... -- -- -- -- 5,908,000 156,000 ----------- ----------- ---------- ------- ---------- -------- Total........................ $13,998,000 $11,871,000 $3,476,000 $95,000 $5,908,000 $156,000 =========== =========== ========== ======= ========== ========
- ------------------------ (1) In addition to the Canadian losses above, certain scientific research and development expenditures eligible for tax purposes incurred by the Company may be deferred and deducted in future years. These unclaimed deductions, which can be carried forward indefinitely, amounted to approximately $12,946,000 at December 31, 1999. In addition, the Company has earned non-refundable investment tax credits amounting to approximately $3,028,000 that can be applied to reduce future income taxes payable. These expire $504,000 in 2006, $744,000 in 2007, $1,034,000 in 2008 and $746,000 in 2009. F-21 VISIBLE GENETICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 14--INCOME TAXES (CONTINUED) The benefit of these losses, unclaimed deductions and non-refundable investment tax credits has not been reflected in these financial statements. The deferred tax balances are summarized as follows:
1999 1998 ----------- ----------- DEFERRED TAX ASSETS Research expenses........................................... $ 5,776,300 $ 4,122,100 Non-capital losses.......................................... 15,555,300 8,483,100 Investment tax credits...................................... 1,597,600 1,114,700 Fixed assets................................................ 1,048,100 239,000 Warranty and other provisions............................... 810,100 25,600 ----------- ----------- 24,787,400 13,984,500 Valuation allowance......................................... (24,787,400) (13,984,500) ----------- ----------- Net deferred tax asset (liability).......................... $ -- $ -- =========== ===========
The valuation allowance increased by $10,802,900 during 1999 (1998--$4,903,000). Realization of the future tax benefits related to the deferred tax assets is dependent upon many factors, including the Company's ability to generate taxable income within the loss carryforward periods. NOTE 15--SEGMENTED INFORMATION In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." This replaced the previous industry segment approach with disclosure based upon the internal organization used by management for making operating decisions and assessing performance. SFAS No. 131 also requires disclosures as to products and services, geographic areas and major customers. The adoption of SFAS No. 131 did not affect results of operations or financial position, but did affect the disclosure of segment information. The Company's reportable segments are Sequencing Systems, GeneKits and other Consumables, and Testing, Sequencing and Other Services. The accounting policies of the segments are the same as those described above in Note 2, "Summary of significant accounting policies." 1999
SEQUENCING GENEKITS AND OTHER TESTING, SEQUENCING RECONCILING SYSTEMS CONSUMABLES AND OTHER SERVICES ITEMS TOTAL ----------- ------------------ ------------------- ----------- ----------- Revenues............. $ 7,725,910 $ 4,729,865 $1,171,145 -- $13,626,920 Depreciation and Amortization....... (1,184,981) (985,608) (383,398) -- (2,553,987) Profit (loss) from operations before interest........... (13,889,277) (10,099,584) 4,939 -- (23,983,922) Additions to Fixed assets............. 697,030 835,181 372,918 -- 1,905,129 Total assets......... 7,466,062 6,724,730 1,760,794 $42,687,963(1) 58,639,549
RECONCILING ITEM CONSISTS OF: (1) CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS F-22 VISIBLE GENETICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 15--SEGMENTED INFORMATION (CONTINUED) 1998
SEQUENCING GENEKITS AND OTHER TESTING, SEQUENCING RECONCILING SYSTEMS CONSUMABLES AND OTHER SERVICES ITEMS TOTAL ----------- ------------------ ------------------- ----------- ------------ Revenues............. $ 8,042,421 $1,379,512 $1,453,415 -- $ 10,875,348 Depreciation and Amortization....... (396,837) (666,061) (233,828) -- (1,296,726) Profit (loss) from operations before interest........... (10,879,023) (3,023,804) 299,805 $ (420,043)(2) (14,023,065) Additions to Fixed assets............. 1,199,316 1,137,904 1,011,041 -- 3,348,261 Total assets......... 8,859,003 5,281,294 2,368,060 11,274,178(3) 27,782,535
RECONCILING ITEMS CONSIST OF: (2) ACQUIRED RESEARCH AND DEVELOPMENT (NOTE 12) (3) CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS 1997
SEQUENCING GENEKITS AND OTHER TESTING, SEQUENCING RECONCILING SYSTEMS CONSUMABLES AND OTHER SERVICES ITEMS TOTAL ----------- ------------------ ------------------- ----------- ------------ Revenues.............. $ 2,720,844 $ 246,851 $ 65,041 -- $ 3,032,736 Depreciation and Amortization........ (231,694) (362,688) (31,599) -- (625,981) Profit (loss) from operations before interest............ (9,592,047) (874,149) (66,677) $ (654,621)(4) (11,187,494) Additions to Fixed assets.............. 557,427 504,142 204,256 -- 1,265,825 Total assets.......... 4,126,088 2,002,571 199,812 7,607,901(5) 13,936,372
RECONCILING ITEMS CONSIST OF: (4) ACQUIRED RESEARCH AND DEVELOPMENT (NOTE 12) (5) CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS F-23 VISIBLE GENETICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 15--SEGMENTED INFORMATION (CONTINUED)
GEOGRAPHIC INFORMATION--YEARS ENDED DECEMBER 31 - ----------------------------------------------- SALES, BY CUSTOMER LOCATION 1999 1998 1997 - --------------------------- ----------- ----------- ---------- NORTH AMERICA Canada.................................................. $ 468,535 $ 844,863 $ 542,716 United States........................................... 4,686,868 3,513,150 2,278,246 ----------- ----------- ---------- 5,155,403 4,358,013 2,820,962 ----------- ----------- ---------- EUROPE France.................................................. 1,252,222 1,616,788 -- Other Europe............................................ 4,298,745 2,949,288 161,837 ----------- ----------- ---------- 5,550,967 4,566,076 161,837 ----------- ----------- ---------- ASIA AND LATIN AMERICA.................................. Japan................................................... 1,609,799 1,640,123 -- Other Asia and Latin America............................ 1,310,751 311,136 49,937 ----------- ----------- ---------- 2,920,550 1,951,259 49,937 ----------- ----------- ---------- $13,626,920 $10,875,348 $3,032,736 =========== =========== ==========
GEOGRAPHIC INFORMATION--YEARS ENDED DECEMBER 31 - ----------------------------------------------- FIXED ASSETS 1999 1998 1997 - ------------ ----------- ----------- ---------- Canada.................................................. $ 2,530,222 $ 2,346,394 $ 928,350 United States........................................... 955,161 1,083,788 459,983 France.................................................. 687,952 446,981 62,647 ----------- ----------- ---------- $ 4,173,335 $ 3,877,163 $1,450,980 =========== =========== ==========
In 1999, one customer accounted for 21% of sales, of which 19% comprised Sequencing Systems and 2% comprised GeneKits and other Consumables. (1998--one customer accounted for 30% of sales, of which 29% comprised Sequencing Systems and 1% comprised GeneKits and other Consumables; 1997--no customer accounted for more than 10% of sales). NOTE 16--COMMITMENTS AND CONTINGENCY COMMITMENTS The Company is committed to make a payment under a license agreement of $300,000 in 2000. The Company has collaborative arrangements with certain third parties that provide for royalty payments (see Note 3). F-24 VISIBLE GENETICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 16--COMMITMENTS AND CONTINGENCY (CONTINUED) The Company has entered into operating leases for premises and equipment as follows: 2000........................................................ $1,584,020 2001........................................................ 1,292,084 2002........................................................ 1,116,517 2003........................................................ 1,078,102 2004 and thereafter......................................... 3,513,877 ---------- $8,584,600 ==========
Rent expense was $851,876 in 1999 (1998--$554,497; 1997--$284,396). CONTINGENCY In December 1999, a lawsuit was filed against the Company alleging unspecified damages resulting from the Company's alleged infringement of certain patents. The Company has previously studied these patents and has received legal advice that it is not liable for any claims of infringement. Management believes that these allegations are without merit and intends to vigorously defend against these allegations. No amount has been provided in these financial statements in respect of these allegations, as the amount of the loss, if any, cannot be determined and the results of such allegations cannot be predicted with certainty. NOTE 17--RELATED PARTY TRANSACTIONS During 1999, the Company incurred legal fees to a law firm, in which a partner was a former director of the Company, of $246,210 (1998--$164,624; 1997--$183,627). During 1999, the Company incurred consulting fees to a firm, of which the president was a director of the Company, of $291,115 (1998--$280,000; 1997--nil). During 1999, the Company also incurred consulting fees to a former director of the Company, of $58,269 (1998--nil; 1997--nil). Other receivables include a loan and unpaid interest due from a Company officer and director aggregating $55,614 in 1998 and $72,018 in 1997. The loan was repaid during 1999. NOTE 18--COMPARATIVE FIGURES Certain comparative figures have been reclassified to conform to the financial statement presentation adopted in the current year. F-25 [LOGO] THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED MARCH 29, 2000 [LOGO] 2,000,000 COMMON SHARES Visible Genetics Inc. is offering 2,000,000 of its common shares. Our common shares are traded on the Nasdaq National Market under the symbol "VGIN." On March 24, 2000, the last reported sale price for the common shares on the Nasdaq National Market was $50.00 per share. -------------- INVESTING IN OUR COMMON SHARES INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 4. --------------
PER SHARE TOTAL --------- ----- Public Offering Price...................................... $ $ Underwriting Discounts and Commissions..................... $ $ Proceeds to Visible Genetics............................... $ $
THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. Visible Genetics Inc. has granted the underwriters a 30-day option to purchase up to an additional 300,000 common shares to cover over-allotments. -------------- ROBERTSON STEPHENS INTERNATIONAL PAINEWEBBER INTERNATIONAL WARBURG DILLON READ ROTH CAPITAL PARTNERS, INC. The date of this Prospectus is , 2000 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. Securities and Exchange Commission filing fee............... $ 56,281 Nasdaq additional listing fee............................... $ 17,500 NASD fee.................................................... $ 23,414 Accounting fees............................................. $ 50,000 Legal fees.................................................. $ 240,000 Transfer Agent fees......................................... $ 10,000 Printing and engraving...................................... $ 250,000 Miscellaneous............................................... $ 2,805 Total................................................... $ 650,000
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 136 of the Ontario Business Corporations Act and Section 7 of the Company's By-Laws Nos. 1 and 3 provide for the indemnification of directors and officers of the Company. Under these provisions, the Company shall indemnify a director or officer of the Company (or a former director or officer) against all costs, charges and expenses, including amounts paid to settle an action or satisfy a judgment, reasonably incurred by such director or officer in respect of any civil, criminal or administrative action or proceeding (other than in respect of an action by or on behalf of the Company to procure a judgment in its favor) to which such director or officer (or a former director or officer) is made a party by reason of his or her position with the Company, provided such director or officer: (a) acted honestly and in good faith with a view to the best interests of the Company and (b) in the case of a criminal or administrative action or proceeding that is enforced by a monetary penalty, had reasonable grounds for believing that his conduct was lawful. In respect of an action by or on behalf of the Company to procure a judgment in its favor, the Company, with the approval of a court, may indemnify a director or officer of the Company (or a former director or officer) against all costs, charges and expenses reasonably incurred by him in connection with such action if he fulfills the conditions set out in clauses (a) and (b) of the previous sentence. Notwithstanding the foregoing, a director or officer of the Company (or a former director or officer) is entitled to indemnification from the Company with respect to all costs, charges and expenses reasonably incurred by him in connection with the defense of any civil, criminal or administrative action or proceeding to which he is made a party by reason of his position with the Company if he was substantially successful on the merits in his defense of the action or proceeding and he fulfills the conditions in clauses (a) and (b) of the second sentence of this paragraph. The Company also has a policy insuring it and its directors and officers against certain liabilities and has entered into indemnification agreements with each of its directors and officers. ITEM 16. EXHIBITS The following exhibits are being filed herewith: 1.1 Underwriting Agreement 4.1 Specimen of Certificate for Common Shares(1) 4.2 Certificate of Designations, Number, Voting Powers, Preference and Rights of Series A Convertible Preferred Shares of Visible Genetics Inc.(2) *5.1 Form of Opinion of Osler, Hoskin & Harcourt LLP as to the legality of the Common Shares *23.1 Form of Consent of Osler, Hoskin & Harcourt LLP (included in Exhibit 5.1) *23.2 Consent of Baer Marks & Upham LLP II-1 23.3 Consent of PricewaterhouseCoopers LLP *23.4 Consent of Hyman, Phelps & McNamara, P.C. *23.5 Consent of Oppedahl & Larson, L.L.P. *24 Powers of Attorney (included on the executed signature page of this Registration Statement) - ------------------------ (1) Incorporated by reference from Exhibit 4.1 to Amendment No. 1 to the Company's Registration Statement on Form F-1, File No. 333-3118 filed with the Securities and Exchange Commission on May 15, 1996. (2) Incorporated by reference from Exhibit 4.2 to the Company's Registration Statement on Form F-3, File No. 333-91155 filed with the Securities and Exchange Commission on November 17, 1999. * Previously filed. ITEM 17. UNDERTAKINGS The undersigned Registrant hereby undertakes as follows: The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the Registration Statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be in the initial bona fide offering thereof. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that, (i) for purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective, and (ii) for the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. The undersigned registrant hereby undertakes to deliver or cause to be delivered with the Prospectus, to each person to whom the Prospectus is sent or given, the latest annual report, to security holders that is incorporated by reference in the prospectus and furnished pursuant to and meeting the requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of 1934; and, where interim financial information required to be presented by Article 3 of Regulation S-X is not set forth in the prospectus, to deliver, or cause to be delivered to each person to whom the Prospectus is sent or given, the latest quarterly report that is specifically incorporated by reference in the Prospectus to provide such interim financial information. II-2 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form F-3 and has duly caused this Registration Statement or amendment to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Toronto, Province of Ontario, Canada on the 27th day of March, 2000. VISIBLE GENETICS INC. By: /s/ RICHARD T. DALY ---------------------------------------------- Richard T. Daly President and Chief Executive Officer
POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each director and officer whose signature appears below constitutes and appoints Richard T. Daly and Thomas J. Clarke, or any of them, as his true and lawful attorneys-in-fact and agents, with full powers of substitution and re-substitution, for him and in his name, place and stead, to sign in any and all capacities any and all amendments (including post-effective amendments under Rule 462) to this Registration Statement on Form F-3 and to file the same, with all exhibits thereto and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ RICHARD T. DALY President and Chief Executive -------------------------------------- Officer (principal executive March 27, 2000 Richard T. Daly officer) /s/ THOMAS J. CLARKE Chief Financial Officer (principal -------------------------------------- financial officer and principal March 27, 2000 Thomas J. Clarke accounting officer) /s/ RICHARD T. DALY* -------------------------------------- Vice President, General Counsel and March 27, 2000 Marguerite Ethier Director /s/ RICHARD T. DALY* -------------------------------------- Director March 27, 2000 Michael A. Cardiff /s/ RICHARD T. DALY* -------------------------------------- Director March 27, 2000 Sheldon Inwentash
II-3
SIGNATURE TITLE DATE --------- ----- ---- /s/ RICHARD T. DALY* -------------------------------------- Director March 27, 2000 Jonathan S. Leff /s/ RICHARD T. DALY* -------------------------------------- Director March 27, 2000 Robert M. MacIntosh /s/ RICHARD T. DALY* -------------------------------------- Director March 27, 2000 Prof. J. Robert S. Prichard /s/ RICHARD T. DALY* -------------------------------------- Director March 27, 2000 Dr. Lloyd M. Smith /s/ RICHARD T. DALY* -------------------------------------- Director March 27, 2000 Dr. Konrad M. Weis
AUTHORIZED REPRESENTATIVE IN THE UNITED STATES BAER MARKS & UPHAM LLP By: /s/ STEVEN S. PRETSFELDER, ESQ. March 27, 2000 --------------------------------- Steven S. Pretsfelder, Esq. * by Richard T. Daly, as attorney-in-fact
II-4 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT PAGE - --------------------- ----------------------- -------- 1.1 Underwriting Agreement...................................... 23.3 Consent of PricewaterhouseCoopers LLP.......................
EX-1.1 2 EXHIBIT 1.1 UNDERWRITING AGREEMENT March __, 2000 FleetBoston Robertson Stephens Inc. Warburg Dillon Read LLC PaineWebber Incorporated Roth Capital Partners, Inc. As Representatives of the several Underwriters c/o FleetBoston Robertson Stephens Inc. 555 California Street, Suite 2600 San Francisco, CA 94104 Ladies and Gentlemen: INTRODUCTORY. Visible Genetics Inc., a corporation organized under the laws of the Province of Ontario, Canada (the "Company"), proposes to issue and sell to the several underwriters named in SCHEDULE A (the "Underwriters") an aggregate of 2,000,000 shares (the "Firm Shares") of its common shares (the "Common Shares"). In addition, the Company has granted to the Underwriters an option to purchase up to an additional 300,000 Common Shares (the "Option Shares") as provided in Section 2. The Firm Shares and, if and to the extent such option is exercised, the Option Shares are collectively called the "Shares". FleetBoston Robertson Stephens Inc. ("Robertson Stephens"), Warburg Dillon Read LLC, PaineWebber Incorporated and Roth Capital Partners, Inc. have agreed to act as representatives of the several Underwriters (in such capacity, the "Representatives") in connection with the offering and sale of the Shares. The Company has prepared and filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form F-3 (File No. 333-32258), which contains a form of prospectus, subject to completion, to be used in connection with the public offering and sale of the Shares. Each such prospectus, subject to completion, used in connection with such public offering is called a "preliminary prospectus". Such registration statement, as amended, including the financial statements, exhibits and schedules thereto, in the form in which it was declared effective by the Commission under the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder (collectively, the "Securities Act"), including all documents incorporated or deemed to be incorporated by reference therein (each an "Incorporated Document") and any information deemed to be a part thereof at the time of effectiveness pursuant to Rule 430A under the Securities Act, is called the "Registration Statement". Any registration statement filed by the Company pursuant to Rule 462(b) under the Securities Act is called the "Rule 462(b) Registration Statement", and from and after the date and time of filing of the Rule 462(b) Registration Statement, the term "Registration Statement" shall include the Rule 462(b) Registration Statement. Such prospectus, in the form first used by the Underwriters to confirm sales of the Shares, is called the "Prospectus". All references in this Agreement to the Registration Statement, the Rule 462(b) Registration Statement, a preliminary prospectus, the Prospectus or any amendments or supplements to any of the foregoing, shall include any copy thereof filed with the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval System ("EDGAR"). All references in this Agreement to financial statements and schedules and other information which is "contained," "included" or "stated" in the Registration Statement or the Prospectus (and all other references of like import) shall be deemed to mean and include all such financial statements and schedules and other information which is or is deemed to be incorporated by reference in the Registration Statement or the Prospectus, as the case may be; and all references in this Agreement to amendments or supplements to the Registration Statement or the Prospectus shall be deemed to mean and include the filing of any document under the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder (collectively, the "Exchange Act") which is or is deemed to be incorporated by reference in the Registration Statement or the Prospectus, as the case may be. The Company hereby confirms its agreements with the Underwriters as follows: SECTION 1. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY. The Company hereby represents, warrants and covenants to each Underwriter as follows: (a) COMPLIANCE WITH REGISTRATION REQUIREMENTS. The Registration Statement and any Rule 462(b) Registration Statement have been declared effective by the Commission under the Securities Act. The Company has complied to the Commission's satisfaction with all requests of the Commission for additional or supplemental information. No stop order suspending the effectiveness of the Registration Statement or any Rule 462(b) Registration Statement is in effect and no proceedings for such purpose have been instituted or are pending or, to the best knowledge of the Company, are contemplated or threatened by the Commission. Each preliminary prospectus and the Prospectus when filed complied in all material respects with the Securities Act and, if filed by electronic transmission pursuant to EDGAR (except as may be permitted by Regulation S-T under the Securities Act), was identical to the copy thereof delivered to the Underwriters for use in connection with the offer and sale of the Shares. Each of the Registration Statement, any Rule 462(b) Registration Statement and any post-effective amendment thereto, at the time it became effective and at all subsequent times, complied and will comply in all material respects with the Securities Act and did not and will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. Each preliminary prospectus, as of its date, and the Prospectus, as amended or supplemented, as of its date and at all subsequent times through the 30th day after the date hereof, did not and will not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The representations and warranties set forth in the two immediately preceding sentences do not apply to statements in or omissions from the Registration Statement, any Rule 462(b) Registration Statement, or any post-effective amendment thereto, or the Prospectus, or any amendments or supplements thereto, made in reliance upon and in conformity with 2 information relating to any Underwriter furnished to the Company in writing by the Representatives expressly for use therein. There are no contracts or other documents required to be described in the Prospectus or to be filed as exhibits to the Registration Statement which have not been described or filed as required. (b) OFFERING MATERIALS FURNISHED TO UNDERWRITERS. The Company has delivered to the Representatives (i) four complete conformed copies of the Registration Statement and of each consent and certificate of experts filed as a part thereof, and (ii) conformed copies of the Registration Statement (without exhibits) and preliminary prospectuses and the Prospectus, as amended or supplemented, in such quantities and at such places as the Representatives have reasonably requested for each of the Underwriters. (c) DISTRIBUTION OF OFFERING MATERIAL BY THE COMPANY. The Company has not distributed and will not distribute, prior to the later of the Second Closing Date (as defined below) and the completion of the Underwriters' distribution of the Shares, any offering material in connection with the offering and sale of the Shares other than a preliminary prospectus, the Prospectus or the Registration Statement. (d) THE UNDERWRITING AGREEMENT. This Agreement has been duly authorized, executed and delivered by, and is a valid and binding agreement of, the Company, enforceable in accordance with its terms, except as rights to indemnification hereunder may be limited by applicable law and except as the enforcement hereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting the rights and remedies of creditors or by general equitable principles. (e) AUTHORIZATION OF THE SHARES. The Shares to be purchased by the Underwriters from the Company have been duly authorized for issuance and sale pursuant to this Agreement and, when paid for by the Underwriters and issued and delivered by the Company pursuant to this Agreement, will be validly issued, fully paid and nonassessable. (f) NO APPLICABLE REGISTRATION OR OTHER SIMILAR RIGHTS. There are no persons with registration or other similar rights to have any equity or debt securities registered for sale under the Registration Statement or included in the offering contemplated by this Agreement except for such rights as have been duly waived or are not exercisable in accordance with their terms by virtue of the Underwriters' determination that marketing factors do not permit the securities owned by such persons to be included in the Registration Statement. (g) NO MATERIAL ADVERSE CHANGE. Subsequent to the respective dates as of which information is given in the Prospectus: (i) there has been no material adverse change, or any development that could reasonably be expected to result in a material adverse change, in the condition, financial or otherwise, or in the earnings, business, operations or prospects, whether or not arising from transactions in the ordinary course of business, of the Company and its subsidiaries, considered as one enterprise (any such change or effect, where the context so requires, is called a "Material Adverse Change" or a "Material Adverse Effect"); (ii) the Company and its subsidiaries, considered as one entity, have not incurred any material liability or obligation, indirect, direct or contingent, not in the ordinary course of business nor entered into any material transaction or agreement not in the ordinary course of business; and (iii) there has been no dividend or distribution of any kind declared, paid or made by the Company except as set forth in the Prospectus 3 or, except for dividends paid to the Company or other subsidiaries, any of its subsidiaries on any class of capital stock or repurchase or redemption by the Company or any of its subsidiaries of any class of capital stock. (h) INDEPENDENT ACCOUNTANTS. PriceWaterhouseCoopers LLP, who have expressed their opinion with respect to the consolidated financial statements (which term as used in this Agreement includes the related notes thereto) filed with the Commission as a part of the Registration Statement and included in the Prospectus, are independent public or certified public accountants as required by the Securities Act and the Exchange Act. (i) PREPARATION OF THE FINANCIAL STATEMENTS. The financial statements filed with the Commission as a part of the Registration Statement and included in the Prospectus present fairly the consolidated financial position of the Company and its subsidiaries as of and at the dates indicated and the results of their operations and cash flows for the periods specified. Such financial statements have been prepared in conformity with generally accepted accounting principles as applied in the United States applied on a consistent basis throughout the periods involved, except as may be expressly stated in the related notes thereto. No other financial statements or supporting schedules are required to be included in the Registration Statement. The financial data set forth in the Prospectus under the captions "Summary--Summary Consolidated Financial Data", "Selected Consolidated Financial Data" and "Capitalization" fairly present the information set forth therein on a basis consistent with that of the audited financial statements contained in the Registration Statement. (j) COMPANY'S ACCOUNTING SYSTEM. The Company and each of its subsidiaries maintain a system of accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles as applied in the United States and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (k) SUBSIDIARIES OF THE COMPANY. The Company does not own or control, directly or indirectly, any corporation, association or other entity other than the following subsidiaries: Applied Sciences Inc., Visible Genetics Europe S.A., Visible Genetics Corp., Visible Genetics B.V., Visible Genetics Srl and Visible Genetics Israel Ltd. (each an "Active Subsidiary" and collectively the "Active Subsidiaries") and Gene Foundry Inc., which is a non-active subsidiary. (l) INCORPORATION AND GOOD STANDING OF THE COMPANY AND ITS SUBSIDIARIES. The Company has been amalgamated, each of its subsidiaries has been duly organized and each of the Company and the Active Subsidiaries is validly existing as a corporation in good standing under the laws of the jurisdiction in which it is organized with full corporate power and authority to own its properties and conduct its business as described in the prospectus, and is duly qualified to do business as a foreign corporation and is in good standing under the laws of each jurisdiction which requires such qualification (except where the failure to be so qualified would 4 not reasonably be expected to have a Material Adverse Effect). None of the subsidiaries of the Company (other than the Active Subsidiaries) are engaged in any business. (m) CAPITALIZATION OF THE ACTIVE SUBSIDIARIES. All the outstanding shares of capital stock of each Active Subsidiary have been duly and validly authorized and issued and are fully paid and nonassessable, and, except as otherwise set forth in the Prospectus, all outstanding shares of capital stock of the Active Subsidiaries are owned by the Company either directly or through wholly owned subsidiaries free and clear of any security interests, claims, liens or encumbrances. (n) NO PROHIBITION ON ACTIVE SUBSIDIARIES FROM PAYING DIVIDENDS OR MAKING OTHER DISTRIBUTIONS. No Active Subsidiary of the Company is currently prohibited, directly or indirectly, from paying any dividends to the Company, from making any other distribution on such Active Subsidiary's capital stock, from repaying to the Company any loans or advances to such Active Subsidiary from the Company or from transferring any of such Active Subsidiary's property or assets to the Company or any other Active Subsidiary of the Company, except as described in or contemplated by the Prospectus. (o) CAPITALIZATION AND OTHER CAPITAL STOCK MATTERS. The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectus under the caption "Capitalization" (other than for subsequent issuances, if any, pursuant to employee benefit plans described in the Prospectus or upon exercise of outstanding options or warrants described in the Prospectus). The Common Shares (including the Shares) conform in all material respects to the description thereof contained in the Prospectus or incorporated by reference therein. All of the issued and outstanding Common Shares have been duly authorized and validly issued, are fully paid and nonassessable and have been issued in compliance with federal and state securities laws. None of the outstanding Common Shares were issued in violation of any preemptive rights, rights of first refusal or other similar rights to subscribe for or purchase securities of the Company. There are no authorized or outstanding options, warrants, preemptive rights, rights of first refusal or other rights to purchase, or equity or debt securities convertible into or exchangeable or exercisable for, any capital stock of the Company or any of its subsidiaries other than those accurately described in the Prospectus. The description of the Company's stock option, stock bonus and other stock plans or arrangements, and the options or other rights granted thereunder, set forth in the Prospectus accurately and fairly presents the information required to be shown with respect to such plans, arrangements, options and rights. (p) STOCK EXCHANGE LISTING. The Shares are registered pursuant to Section 12(g) of the Exchange Act and are listed on the Nasdaq National Market, and the Company has taken no action designed to, or likely to have the effect of, terminating the registration of the Common Shares under the Exchange Act or delisting the Common Shares from the Nasdaq National Market, nor has the Company received any notification that the Commission or the National Association of Securities Dealers, LLC (the "NASD") is contemplating terminating such registration or listing. (q) NO CONSENTS, APPROVALS OR AUTHORIZATIONS REQUIRED. No consent, approval, authorization, filing with or order of any court or governmental agency or regulatory body is required in connection with the transactions contemplated herein, except such as have been 5 obtained or made under the Securities Act and such as may be required (i) under the blue sky laws of any jurisdiction in connection with the purchase and distribution of the Shares by the Underwriters in the manner contemplated here and in the Prospectus, (ii) by the National Association of Securities Dealers, LLC and (iii) by the federal and provincial laws of Canada. (r) NON-CONTRAVENTION OF EXISTING INSTRUMENTS AGREEMENTS. Neither the issue and sale of the Shares nor the consummation of any other of the transactions herein contemplated nor the fulfillment of the terms hereof will conflict with, result in a breach or violation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of its Active Subsidiaries pursuant to, (i) the charter or by-laws of the Company or any of its Active Subsidiaries, (ii) the terms of any indenture, contract, lease, mortgage, deed of trust, note agreement, loan agreement or other agreement, obligation, condition, covenant or instrument to which the Company or any of its subsidiaries is a party or bound or to which its or their property is subject or (iii) any statute, law, rule, regulation, judgment, order or decree applicable to the Company or any of its Active Subsidiaries of any court, regulatory body, administrative agency, governmental body, arbitrator or other authority having jurisdiction over the Company or any of its Active Subsidiaries or any of its or their properties. (s) NO DEFAULTS OR VIOLATIONS. Neither the Company nor any Active Subsidiary is in violation or default of (i) any provision of its charter or by-laws, (ii) the terms of any indenture, contract, lease, mortgage, deed of trust, note agreement, loan agreement or other agreement, obligation, condition, covenant or instrument to which it is a party or bound or to which its property is subject or (iii) any statute, law, rule, regulation, judgment, order or decree of any court, regulatory body, administrative agency, governmental body, arbitrator or other authority having jurisdiction over the Company or such Active Subsidiary or any of its properties, as applicable, except any such violation or default which would not, singly or in the aggregate, reasonably be expected to result in a Material Adverse Change or except as otherwise disclosed in the Prospectus. (t) NO ACTIONS, SUITS OR PROCEEDINGS. Except as otherwise disclosed in the Prospectus, no action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving the Company or any of its Active Subsidiaries or its or their property is pending or, to the best knowledge of the Company, threatened that (i) could reasonably be expected to have a material adverse effect on the performance of this Agreement or the consummation of any of the transactions contemplated hereby or (ii) could reasonably be expected to result in a Material Adverse Effect. (u) ALL NECESSARY PERMITS, ETC. The Company and each Active Subsidiary possess such valid and current certificates, authorizations or permits issued by the appropriate state, federal or foreign regulatory agencies or bodies necessary to conduct their respective businesses except as disclosed in the Prospectus and except for any certificates, authorizations or permits, the absence of which would not reasonably be expected to have a Material Adverse Effect, and neither the Company nor any Active Subsidiary has received any notice of proceedings relating to the revocation or modification of, or non-compliance with, any such certificate, authorization or permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, could reasonably be expected to result in a Material Adverse Change. 6 (v) TITLE TO PROPERTIES. Except as otherwise disclosed in the Prospectus, the Company and each of its Active Subsidiaries has good title to all the properties and assets reflected as owned in the financial statements referred to in Section 1(i) above, in each case free and clear of any security interests, mortgages, liens, encumbrances, equities, claims and other defects, except such as do not materially and adversely affect the value of such property and do not materially interfere with the use made or proposed to be made of such property by the Company or such Active Subsidiary. The real property, improvements, equipment and personal property held under lease by the Company or any Active Subsidiary are held under valid and enforceable leases, with such exceptions as are not material and do not materially interfere with the use made or proposed to be made of such real property, improvements, equipment or personal property by the Company or such Active Subsidiary. (w) TAX LAW COMPLIANCE. (i) All tax returns required to be filed by or on behalf of the Company and its subsidiaries, except for non-income state and local tax returns (other than, for this purpose, ad valorem tax returns) which, singly and in the aggregate are not material, have been duly filed on a timely basis and such tax returns are true, correct and complete. All taxes shown to be payable on such tax returns, or on subsequent assessments with respect thereto, have been paid in full on a timely basis, and no other taxes are payable by the Company and its subsidiaries with respect to items or periods covered by such tax returns (whether or not shown or reportable on such tax returns). The amount of the Company's and its subsidiaries' liabilities for unpaid taxes for all periods do not exceed the amount of the current liability accruals for taxes reflected in the financial statements of the Company, and such financial statements properly accrue in accordance with US GAAP all liabilities for taxes of the Company and its subsidiaries payable after the date of the financial statements attributable to transactions or events occurring prior to such date. (ii) The designation of the law of New York to apply to this Agreement will not cause the Company to have a "permanent establishment" in the United States, as such term is defined in the Convention between the Government of the United States of America and Canada with respect to Taxes on Income and on Capital (the "Treaty"). (iii) The Company was not a "passive foreign investment company" (a "PFIC") as defined in Section 1297(a) of the Internal Revenue Code of 1986, as amended, and the regulations and published interpretations thereunder (the "Code") during its 1999 taxable year. The Company does not believe that it is, or that upon the consummation of the transactions contemplated hereby and the application of the net proceeds as described in the Prospectus under the heading "Use of Proceeds" it will be, a PFIC. The Company will review not less frequently than annually whether it has become a PFIC and if, pursuant to such review, the Company determines that it has or is likely to become a PFIC, it will use its best efforts to inform its shareholders of such PFIC status as soon as practicable and to comply with any applicable reporting and other requirements of Subparts A, B and C of Part VI of Subchapter P of the Code. The Company does not believe that it is, or is likely to become, a "foreign personal holding company" as defined in Section 552 of the Code. 7 (iv) No stamp or other issue or transfer taxes or duties are payable by or on behalf of the Underwriters to the Canadian government or to the provincial government of Ontario in connection with (A) the issuance, sale and delivery by the Company to or for the respective accounts of the Underwriters of the Common Shares or (B) the sale and delivery outside Canada by the Underwriters of the Common Shares to the initial purchasers thereof in the manner contemplated in the Underwriting Agreement. (v) The statements under the caption "Taxation--Canadian Federal Income Tax Considerations" in Item 7 of Part I of the Annual Report on Form 20-F filed for the year ended December 31, 1999, insofar as such statements relate to Canadian tax matters currently applicable to the U.S. holders referred to therein, fairly disclose in all material respects as of the date of the Prospectus the principal Canadian income tax consequences of holding Shares as capital property and dealing at arm's length with the Company. (vi) The statements under the caption "Taxation--U.S. Federal Income Tax Consequences" in Item 7 of Part I of the Annual Report on Form 20-F filed for the year ended December 31, 1999, and under the heading "RISK FACTORS--Our U.S. investors could suffer adverse tax consequences if we are characterized as a passive foreign investment company" in the Registration Statement on Form F-3 filed with the Securities and Exchange Commission on March ___, 2000, insofar as such statements relate to United States tax matters currently applicable to the persons described therein, accurately reflect in all material respects as of the date of the Prospectus the material tax consequences of owning Shares to such persons. (x) INTELLECTUAL PROPERTY RIGHTS. Except as described in the Prospectus, each of the Company and its subsidiaries owns or possesses adequate rights to use all patents, patent rights or licenses, inventions, collaborative research agreements, trade secrets, know-how, trademarks, service marks, trade names and copyrights which are necessary to conduct its businesses as described in the Registration Statement and Prospectus and any Incorporated Document; the expiration of any patents, patent rights, trade secrets, trademarks, service marks, trade names or copyrights which, singly or in the aggregate, would not result in a Material Adverse Change that is not otherwise disclosed in the Prospectus; except as described in the Prospectus, the Company has not received any notice of, and has no knowledge of, any infringement of or conflict with asserted rights of the Company by others with respect to any patent, patent rights, inventions, trade secrets, know-how, trademarks, service marks, trade names or copyrights; and, except as described in the Prospectus, the Company has not received any notice of, and has no knowledge of, any infringement of or conflict by the Company with asserted rights of others with respect to any patent, patent rights, inventions, trade secrets, know-how, trademarks, service marks, trade names or copyrights which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, might reasonably be expected to have a Material Adverse Effect. Except as described in the Prospectus, there is no claim being made against the Company regarding patents, patent rights or licenses, inventions, collaborative research, trade secrets, know-how, trademarks, service marks, trade names or copyrights which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding might reasonably be expected to have a Material Adverse Effect. Except as described in the Prospectus, the Company and its subsidiaries do not in the conduct of their business as now or proposed to be conducted as 8 described in the Prospectus infringe or conflict with any right or patent of any third party, or any discovery, invention, product or process which is the subject of a patent application filed by any third party, known to the Company or any of its subsidiaries, which such infringement or conflict is reasonably likely to result in a Material Adverse Change. (y) Y2K. There are no Y2K issues related to the Company or any of its subsidiaries that (i) are of a character required to be described or referred to in the Registration Statement or Prospectus or any Incorporated Document by the Securities Act or by the Exchange Act which have not been accurately described in all material respects in the Registration Statement, Prospectus or any Incorporated Document or (ii) might reasonably be expected to result in any Material Adverse Change or that might materially affect their properties, assets or rights. (z) NO TRANSFER TAXES OR OTHER FEES. There are no transfer taxes or other similar fees or charges under Canadian or United States federal law or the laws of any state, province or any political subdivision thereof, required to be paid in connection with the execution and delivery of this Agreement or the issuance and sale by the Company of the Shares. (aa) COMPANY NOT AN "INVESTMENT COMPANY". The Company has been advised of the rules and requirements under the Investment Company Act of 1940, as amended (the "Investment Company Act"). The Company is not, and after receipt of payment for the Shares will not be, an "investment company" or an entity "controlled" by an "investment company" within the meaning of the Investment Company Act and will conduct its business in a manner so that it will not become subject to the Investment Company Act. (bb) INSURANCE. Each of the Company and its Active Subsidiaries are insured by recognized, financially sound and reputable institutions with policies in such amounts and with such deductibles and covering such risks as are generally deemed adequate and customary for their businesses including, but not limited to, policies covering real and personal property owned or leased by the Company and its Active Subsidiaries against theft, damage, destruction, acts of vandalism and earthquakes, general liability and Directors and Officers liability. The Company has no reason to believe that it or any Active Subsidiary will not be able (i) to renew its existing insurance coverage as and when such policies expire or (ii) to obtain comparable coverage from similar institutions as may be necessary or appropriate to conduct its business as now conducted and at a cost that would not result in a Material Adverse Change. During the past 24 months, neither of the Company nor any Active Subsidiary has been denied any insurance coverage which it has sought or for which it has applied. (cc) LABOR MATTERS. To the best of Company's knowledge, no labor disturbance by the employees of the Company or any of its Active Subsidiaries exists or is imminent; and the Company is not aware of any existing or imminent labor disturbance by the employees of any of its principal suppliers, subassemblers, subcontractors, or international distributors that might be expected to result in a Material Adverse Change. (dd) NO PRICE STABILIZATION OR MANIPULATION. The Company has not taken and will not take, directly or indirectly, any action designed to or that might be reasonably expected to cause or result in stabilization or manipulation of the price of the Common Shares to facilitate the sale or resale of the Shares. 9 (ee) LOCK-UP AGREEMENTS. Each executive officer and director of the Company and each beneficial owner of five or more percent of the outstanding issued share capital of the Company (other than Hilal Capital Management LLC, Oracle Strategic Partners, L.P., Dr. John K. Stevens, DCF Capital, L.L.C., DWS Investment GmbH and Frontier Capital Management Company) has agreed to sign an agreement substantially in the form attached hereto as EXHIBIT A (the "Lock-up Agreements"). The Company has provided to counsel for the Underwriters a complete and accurate list of all securityholders of record of the Company and the number and type of securities held by each securityholder. The Company has provided to counsel for the Underwriters true, accurate and complete copies of all of the Lock-up Agreements presently in effect. The Company hereby represents and warrants that it will not release any of its officers, directors or other stockholders from any Lock-up Agreements currently existing or hereafter effected without the prior written consent of Robertson Stephens. (ff) RELATED PARTY TRANSACTIONS. There are no business relationships or related-party transactions involving the Company or any Active Subsidiary or any other person required to be described in the Prospectus which have not been described as required. (gg) ENVIRONMENTAL LAWS. (i) The Company is in compliance with all rules, laws and regulations relating to the use, treatment, storage and disposal of toxic substances and protection of health or the environment ("Environmental Laws") which are applicable to its business, except where the failure to comply would not reasonably be expected to result in a Material Adverse Change, (ii) the Company has received no notice from any governmental authority or third party of an asserted claim under Environmental Laws, which claim is required to be disclosed in the Registration Statement, the Prospectus and any Incorporated Document, (iii) the Company is not currently aware that it will be required to make future material capital expenditures to comply with Environmental Laws and (iv) to the knowledge of the Company, no property that is owned, leased or occupied by the Company has been designated as a Superfund site pursuant to the Comprehensive Response, Compensation, and Liability Act of 1980, as amended (42 U.S.C. ss. 9601, ET SEQ.), or otherwise designated as a contaminated site under applicable state or local law. (hh) PERIODIC REVIEW OF COSTS OF ENVIRONMENTAL COMPLIANCE. The Company has conducted reviews of the effect of Environmental Laws on the business, operations and properties of the Company and its Active Subsidiaries, in the course of which it has identified and evaluated associated costs and liabilities (including, without limitation, any capital or operating expenditures required for clean-up, closure of properties or compliance with Environmental Laws or any permit, license or approval, any related constraints on operating activities and any potential liabilities to third parties). On the basis of such reviews and the amount of its established reserves, the Company has reasonably concluded that such associated costs and liabilities would not, individually or in the aggregate, reasonably be expected to result in a Material Adverse Change. (ii) REGULATORY COMPLIANCE. Neither the Company nor any of its subsidiaries is in violation of any applicable foreign, federal, state, provincial or local laws or regulations relating to the development, testing, human trials, handling, manufacturing, and commercialization of medical devices, including without limitation the U.S. Food, Drug and Cosmetic Act and the rules and regulations of the U.S. Food and Drug Administration (the "FDA") (or its Canadian 10 equivalent) (collectively, "Drug Laws") which would reasonably be expected to result in any Material Adverse Change. To the best knowledge of the Company, except as set forth in the Registration Statement and the Prospectus, no prospective change in any of such laws or regulations or any other applicable foreign, federal, state, provincial or local laws or regulations has been adopted that, when made effective, would reasonably be expected to have a Material Adverse Effect. Each of the Company and its Active Subsidiaries has such permits, licenses, franchises and authorizations of governmental or regulatory authorities ("permits"), including, without limitation, under any applicable Drug Laws as are necessary to own, lease and operate its respective properties and to conduct its business, except as described in the Prospectus and except for those permits, the absence of which would not reasonably be expected to have a Material Adverse Effect. Each of the Company and its Active Subsidiaries has fulfilled and performed all of its material obligations with respect to such permits and no event has occurred that allows, or after notice or lapse of time would allow, revocation or termination thereof or results in any other material impairment of the rights of the holder of any such permit; and, except as described in the Prospectus, such permits contain no restrictions that are materially burdensome to the Company or any of its Active Subsidiaries, except for such restrictions that would not reasonably be expected to have a Material Adverse Effect. (jj) ERISA COMPLIANCE. Any "employee benefit plan" (as defined under the Employee Retirement Income Security Act of 1974, as amended, and the regulations thereunder (collectively, "ERISA")) established or maintained by "U.S. ERISA Affiliates" (as defined below) are in compliance in all material respects with ERISA. "U.S. ERISA Affiliate" means, with respect to the Company, any member of any group of organizations described in Sections 414(b),(c),(m) or (o) of the Code of which the Company is a member and which is incorporated or organized in the United States. No "reportable event" (as defined under ERISA) for which the 30-day reporting requirement has not been waived has occurred or is reasonably expected to occur with respect to any "employee benefit plan" covered by Title IV of ERISA established or maintained by any U.S. ERISA Affiliates. No "employee benefit plan" established or maintained by the U.S. ERISA Affiliates, if such "employee benefit plan" were terminated, would have any "amount of unfounded benefit liabilities" (as defined under ERISA) that would have a Material Adverse Effect. No U.S. ERISA Affiliate has incurred or reasonably expects to incur any liability having a Material Adverse Effect under (i) Title IV of ERISA with respect to termination of, or withdrawal from, any "employee benefit plan" or (ii) penalties or excise tax under Sections 412, 4971, 4975 or 4980B of the Code. Each "employee benefit plan" established or maintained by any U.S. ERISA Affiliate that is intended to be qualified under Section 401(a) of the Code has received a favorable opinion letter from the Internal Revenue Service as to qualified status and, to the best knowledge of the Company or any subsidiary, nothing has occurred, whether by action or failure to act, which would cause the loss of such qualified status. (kk) EXCHANGE ACT COMPLIANCE. The documents incorporated or deemed to be incorporated by reference in the Prospectus, at the time they were or hereafter are filed with the Commission, complied and will comply in all material respects with the requirements of the Exchange Act, and, when read together with the other information in the Prospectus, at the time the Registration Statement and any amendments thereto become effective and at the First Closing Date and the Second Closing Date, as the case may be, will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or 11 necessary to make the fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. (ll) EXCHANGE ACT REPORTS FILED. The Company has filed all reports required to be filed pursuant to the Securities Act and the Exchange Act. (mm) CONDITIONS FOR USE OF FORM F-3. The Company has satisfied the conditions for the use of Form F-3, as set forth in the general instructions thereto, with respect to the Registration Statement. Any certificate signed by an officer of the Company and delivered to the Representatives or to counsel for the Underwriters pursuant to the terms of this Agreement or related to the transactions contemplated hereby shall be deemed to be a representation and warranty by the Company to each Underwriter as to the matters set forth therein. SECTION 2. PURCHASE, SALE AND DELIVERY OF THE SHARES. (a) THE FIRM SHARES. The Company agrees to issue and sell to the several Underwriters the Firm Shares upon the terms herein set forth. On the basis of the representations, warranties and agreements herein contained, and upon the terms but subject to the conditions herein set forth, the Underwriters agree, severally and not jointly, to purchase from the Company the respective number of Firm Shares set forth opposite their names on SCHEDULE A. The purchase price per Firm Share to be paid by the several Underwriters to the Company shall be $[___] per share. (b) THE FIRST CLOSING DATE. Delivery of the Firm Shares to be purchased by the Underwriters and payment therefor shall be made by the Company and the Representatives at 6:00 a.m. San Francisco time, at the offices of Baer Marks & Upham, LLP, 805 Third Avenue, New York, New York 10022 (or at such other place as may be agreed upon among the Representatives and the Company), (i) on the third (3rd) full business day following the first day that Shares are traded, (ii) if this Agreement is executed and delivered after 1:30 P.M., San Francisco time, the fourth (4th) full business day following the day that this Agreement is executed and delivered or (iii) at such other time and date not later that seven (7) full business days following the first day that Shares are traded as the Representatives and the Company may determine (or at such time and date to which payment and delivery shall have been postponed pursuant to Section 8 hereof), such time and date of payment and delivery being herein called the "First Closing Date;" provided, however, that if the Company has not made available to the Representatives copies of the Prospectus within the time provided in Section 2(g) and 3(e) hereof, the Representatives may, in their sole discretion, postpone the First Closing Date until no later that two (2) full business days following delivery of copies of the Prospectus to the Representatives. (c) THE OPTION SHARES; THE SECOND CLOSING DATE. In addition, on the basis of the representations, warranties and agreements herein contained, and upon the terms but subject to the conditions herein set forth, the Company hereby grants an option to the several Underwriters to purchase, severally and not jointly, up to an aggregate of 300,000 Option Shares from the Company at the purchase price per share to be paid by the Underwriters for the Firm Shares. The option granted hereunder is for use by the Underwriters solely in covering any over- 12 allotments in connection with the sale and distribution of the Firm Shares. The option granted hereunder may be exercised at any time upon notice by the Representatives to the Company, which notice may be given at any time within 30 days from the date of this Agreement. The time and date of delivery of the Option Shares, if subsequent to the First Closing Date, is called the "Second Closing Date" and shall be determined by the Representatives and shall not be earlier than three nor later than five full business days after delivery of such notice of exercise. If any Option Shares are to be purchased, each Underwriter agrees, severally and not jointly, to purchase the number of Option Shares (subject to such adjustments to eliminate fractional shares as the Representatives may determine) that bears the same proportion to the total number of Option Shares to be purchased as the number of Firm Shares set forth on SCHEDULE A opposite the name of such Underwriter bears to the total number of Firm Shares. The Representatives may cancel the option at any time prior to its expiration by giving written notice of such cancellation to the Company. (d) PUBLIC OFFERING OF THE SHARES. The Representatives hereby advise the Company that the Underwriters intend to offer for sale to the public, as described in the Prospectus, their respective portions of the Shares as soon after this Agreement has been executed and the Registration Statement has been declared effective as the Representatives, in their sole judgment, have determined is advisable and practicable. (e) PAYMENT FOR THE SHARES. Payment for the Shares shall be made at the First Closing Date (and, if applicable, at the Second Closing Date) by wire transfer in immediately available funds to the order of the Company. It is understood that the Representatives have been authorized, for their own accounts and the accounts of the several Underwriters, to accept delivery of and receipt for, and make payment of the purchase price for, the Firm Shares and any Option Shares the Underwriters have agreed to purchase. FleetBoston Robertson Stephens Inc., individually and not as the Representatives of the Underwriters, may (but shall not be obligated to) make payment for any Shares to be purchased by any Underwriter whose funds shall not have been received by the Representatives by the First Closing Date or the Second Closing Date, as the case may be, for the account of such Underwriter, but any such payment shall not relieve such Underwriter from any of its obligations under this Agreement. (f) DELIVERY OF THE SHARES. The Company shall deliver, or cause to be delivered, a credit representing the Firm Shares to an account or accounts at The Depository Trust Company, as designated by the Representatives for the accounts of the Representatives and the several Underwriters at the First Closing Date, against the irrevocable release of a wire transfer of immediately available funds for the amount of the purchase price therefor. The Company shall also deliver, or cause to be delivered, a credit representing the Option Shares the Underwriters have agreed to purchase at the First Closing Date (or the Second Closing Date, as the case may be), to an account or accounts at The Depository Trust Company as designated by the Representatives for the accounts of the Representatives and the several Underwriters at the Second Closing Date, against the irrevocable release of a wire transfer of immediately available funds for the amount of the purchase price therefor. Time shall be of the essence, and delivery at the time and place specified in this Agreement is a further condition to the obligations of the Underwriters. 13 (g) DELIVERY OF PROSPECTUS TO THE UNDERWRITERS. Not later than 12:00 noon on the second business day following the date the Shares are released by the Underwriters for sale to the public, the Company shall deliver or cause to be delivered copies of the Prospectus in such quantities and at such places as the Representatives shall request. SECTION 3. COVENANTS OF THE COMPANY. The Company further covenants and agrees with each Underwriter as follows: (a) REGISTRATION STATEMENT MATTERS. The Company will (i) use its best efforts to cause the Registration Statement to become effective or, if the procedure in Rule 430A of the Securities Act is followed, to prepare and timely file with the Commission under Rule 424(b) under the Securities Act a Prospectus in a form approved by the Representatives containing information previously omitted at the time of effectiveness of the Registration Statement in reliance on Rule 430A of the Securities Act and (ii) not file any amendment to the Registration Statement or supplement to the Prospectus of which the Representatives shall not previously have been advised and furnished with a copy or to which the Representatives shall have reasonably objected in writing or which is not in compliance with the Securities Act. If the Company elects to rely on Rule 462(b) under the Securities Act, the Company shall file a Rule 462(b) Registration Statement with the Commission in compliance with Rule 462(b) under the Securities Act prior to the time confirmations are sent or given, as specified by Rule 462(b)(2) under the Securities Act, and shall pay the applicable fees in accordance with Rule 111 under the Securities Act. (b) SECURITIES ACT COMPLIANCE. The Company will advise the Representatives promptly (i) when the Registration Statement or any post-effective amendment thereto shall have become effective, (ii) of receipt of any comments from the Commission, (iii) of any request of the Commission for amendment of the Registration Statement or for supplement to the Prospectus or for any additional information and (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the use of the Prospectus or of the institution of any proceedings for that purpose. The Company will use its best efforts to prevent the issuance of any such stop order preventing or suspending the use of the Prospectus and to obtain as soon as possible the lifting thereof, if issued. (c) BLUE SKY COMPLIANCE. The Company will cooperate with the Representatives and counsel for the Underwriters in endeavoring to qualify the Shares for sale under the securities laws of such jurisdictions (both national and foreign) as the Representatives may reasonably have designated in writing and will make such applications, file such documents, and furnish such information as may be reasonably required for that purpose, provided the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction where it is not now so qualified or required to file such a consent. The Company will, from time to time, prepare and file such statements, reports and other documents, as are or may be required to continue such qualifications in effect for so long a period as the Representatives may reasonably request for distribution of the Shares. (d) AMENDMENTS AND SUPPLEMENTS TO THE PROSPECTUS AND OTHER SECURITIES ACT MATTERS. The Company will comply with the Securities Act and the Exchange Act, and the rules 14 and regulations of the Commission thereunder, so as to permit the completion of the distribution of the Shares as contemplated in this Agreement and the Prospectus. If during the period in which a prospectus is required by law to be delivered by an Underwriter or dealer, any event shall occur as a result of which, in the judgment of the Company or in the reasonable opinion of the Representatives or counsel for the Underwriters, it becomes necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances existing at the time the Prospectus is delivered to a purchaser, not misleading, or, if it is necessary at any time to amend or supplement the Prospectus to comply with any law, the Company promptly will prepare and file with the Commission, and furnish at its own expense to the Underwriters and to dealers, an appropriate amendment to the Registration Statement or supplement to the Prospectus so that the Prospectus as so amended or supplemented will not, in the light of the circumstances when it is so delivered, be misleading, or so that the Prospectus will comply with the law. (e) COPIES OF ANY AMENDMENTS AND SUPPLEMENTS TO THE PROSPECTUS. The Company agrees to furnish the Representatives, without charge, during the period beginning on the date hereof and ending on the later of the First Closing Date or such date, as in the opinion of counsel for the Underwriters, the Prospectus is no longer required by law to be delivered in connection with sales by an Underwriter or dealer (the "Prospectus Delivery Period"), as many copies of the Prospectus and any amendments and supplements thereto (including any documents incorporated or deemed incorporated by reference therein) as the Representatives may request. (f) INSURANCE. The Company shall (i) obtain Directors and Officers liability insurance in the minimum amount of $10 million which shall apply to the offering contemplated hereby and (ii) cause Robertson Stephens to be added to such policy such that up to $500,000 of its expenses pursuant to section 7(a) shall be paid directly by such insurer. (g) NOTICE OF SUBSEQUENT EVENTS. If at any time during the ninety (90) day period after the Registration Statement becomes effective, any rumor, publication or event relating to or affecting the Company shall occur as a result of which, in your opinion, the market price of the Common Shares has been or is likely to be materially affected (regardless of whether such rumor, publication or event necessitates a supplement to or amendment of the Prospectus), the Company will, after written notice from you advising the Company to the effect set forth above, forthwith prepare, consult with you concerning the substance of and disseminate a press release or other public statement, reasonably satisfactory to you, responding to or commenting on such rumor, publication or event. (h) USE OF PROCEEDS. The Company shall apply the net proceeds from the sale of the Shares sold by it in the manner described under the caption "Use of Proceeds" in the Prospectus. (i) TRANSFER AGENT. The Company shall engage and maintain, at its expense, a registrar and transfer agent for the Company Shares. (j) EARNINGS STATEMENT. As soon as practicable, the Company will make generally available to its security holders and to the Representatives an earnings statement (which need not be audited) covering the twelve-month period ending June 30, 2001 that satisfies the provisions of Section 11(a) of the Securities Act. 15 (k) PERIODIC REPORTING OBLIGATIONS. During the Prospectus Delivery Period the Company shall file, on a timely basis, with the Commission and the Nasdaq National Market all reports and documents required to be filed under the Exchange Act. (l) AGREEMENT NOT TO OFFER OR SELL ADDITIONAL SECURITIES. The Company will not offer, sell or contract to sell, or otherwise dispose of or enter into any transaction which is designed to, or could reasonably be expected to, result in the disposition (whether by actual disposition or effective economic disposition due to cash settlement or otherwise by the Company or any affiliate of the Company or any person in privity with the Company or any affiliate of the Company) directly or indirectly, or announce the offering of, any other Common Shares or any securities convertible into, or exchangeable for, Common Shares; provided, however, that the Company may (i) issue and sell Common Shares pursuant to any director or employee stock option or stock purchase plan, stock ownership plan or dividend reinvestment plan of the Company in effect at the date of the Prospectus against the transfer of any such Common Shares and (ii) the Company may issue Common Shares issuable upon the conversion of securities (including options and the Company's Series A Convertible Preferred Shares) or the exercise of warrants outstanding at the date of the Prospectus and described in the Prospectus. These restrictions terminate after the close of trading of the Shares on the 90th day after (and including) the day the Shares commenced trading on the Nasdaq National Market (the "Lock-Up Period"). (m) FUTURE REPORTS TO THE REPRESENTATIVEs. During the period of five years hereafter the Company will furnish to the Representatives (i) as soon as practicable after the end of each fiscal year, copies of the Annual Report of the Company containing the balance sheet of the Company as of the close of such fiscal year and statements of operations, shareholders' equity (deficit) and cash flows for the year then ended and the opinion thereon of the Company's independent public or certified public accountants; (ii) as soon as practicable after the filing thereof, copies of each proxy statement, Annual Report on Form 10-K or 20-F, Quarterly Report on Form 10-Q, Current Report on Form 8-K or 6-K or other report filed by the Company with the Commission, the National Association of Securities Dealers, LLC or any securities exchange; and (iii) as soon as available, copies of any report or communication of the Company mailed generally to holders of its capital stock. (n) EXCHANGE ACT COMPLIANCE. During the Prospectus Delivery Period, the Company will file all documents required to be filed with the Commission pursuant to Section 13, 14 or 15 of the Exchange Act in the manner and within the time periods required by the Exchange Act. 16 SECTION 4. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS. The obligations of the several Underwriters to purchase and pay for the Shares as provided herein on the First Closing Date and, with respect to the Option Shares, on the Second Closing Date, shall be subject to the accuracy of the representations and warranties on the part of the Company set forth in Section 1 hereof as of the date hereof and as of the First Closing Date as though then made and, with respect to the Option Shares, as of the Second Closing Date as though then made (except in each case with respect to any representation or warranty made as of a particular date, in which case such representation or warranty shall be accurate as of such date), to the timely performance by the Company of its covenants and other obligations hereunder, and to each of the following additional conditions: (a) COMPLIANCE WITH REGISTRATION REQUIREMENTS; NO STOP ORDER; NO OBJECTION FROM THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, LLC. The Registration Statement shall have become effective prior to the execution of this Agreement, or at such later date as shall be consented to in writing by you; and no stop order suspending the effectiveness thereof shall have been issued and no proceedings for that purpose shall have been initiated or, to the knowledge of the Company or any Underwriter, threatened by the Commission, and any request of the Commission for additional information (to be included in the Registration Statement or the Prospectus or any Incorporated Document or otherwise) shall have been complied with to the reasonable satisfaction of Underwriters' counsel; and the National Association of Securities Dealers, LLC shall have raised no objection to the fairness and reasonableness of the underwriting terms and arrangements. (b) CORPORATE PROCEEDINGS. All corporate proceedings and other legal matters in connection with this Agreement, the form of Registration Statement and the Prospectus, and the registration, authorization, issue, sale and delivery of the Shares, shall have been reasonably satisfactory to Underwriters' counsel, and such counsel shall have been furnished with such papers and information as they may reasonably have requested to enable them to pass upon the matters referred to in this Section. (c) NO MATERIAL ADVERSE CHANGE. Subsequent to the execution and delivery of this Agreement and prior to the First Closing Date, or the Second Closing Date, as the case may be, there shall not have been any Material Adverse Change from that set forth in the Registration Statement or Prospectus, which, in your sole judgment, is material and adverse and that makes it, in your sole judgment, impracticable or inadvisable to proceed with the public offering of the Shares as contemplated by the Prospectus. (d) OPINION OF COUNSEL FOR THE COMPANY. You shall have received on the First Closing Date, or the Second Closing Date, as the case may be, an opinion of (i) Baer Marks & Upham, LLP, United States counsel for the Company, substantially in the form of EXHIBIT B-1 attached hereto, and (ii) an opinion of Osler, Hoskin & Harcourt, LLP, Canadian counsel for the Company, substantially in the form of EXHIBIT B-2 attached hereto, in each case dated the First Closing Date, or the Second Closing Date, addressed to the Underwriters and with reproduced copies or signed counterparts thereof for each of the Underwriters. 17 Counsel rendering the opinions contained in EXHIBITS B-1 and B-2 may rely as to questions of fact upon representations or certificates of officers of the Company, and of government officials, in which case its opinion is to state that they are so relying and that, without any independent investigation, they have no knowledge of any material misstatement or inaccuracy in any such opinion, representation or certificate. Copies of any opinion, representation or certificate so relied upon shall be delivered to you, as Representatives of the Underwriters, and to Underwriters' counsel. (e) OPINION OF INTELLECTUAL PROPERTY COUNSEL FOR THE COMPANY. You shall have received on the First Closing Date, or the Second Closing Date, as the case may be, an opinion of Oppedahl and Larson, L.L.P. intellectual property counsel for the Company, substantially in the form of EXHIBIT C attached hereto. (f) OPINION OF REGULATORY COUNSEL FOR THE COMPANY. You shall have received on the First Closing Date, or the Second Closing Date, as the case may be, an opinion of Hyman, Phelps & McNamara, P.C., regulatory counsel for the Company, substantially in the form of EXHIBIT E attached hereto. (g) OPINION OF COUNSEL FOR THE UNDERWRITERS. You shall have received on the First Closing Date or the Second Closing Date, as the case may be, an opinion of Testa, Hurwitz & Thibeault, LLP, substantially in the form of EXHIBIT D hereto. The Company shall have furnished to such counsel such documents as they may have requested for the purpose of enabling them to pass upon such matters. (h) ACCOUNTANTS' COMFORT LETTER. You shall have received on the First Closing Date and on the Second Closing Date, as the case may be, a letter from PriceWaterhouseCoopers, LLP addressed to the Underwriters, dated the First Closing Date or the Second Closing Date, as the case may be, confirming that they are independent certified public accountants with respect to the Company within the meaning of the Securities Act and the applicable published Rules and Regulations and based upon the procedures described in such letter delivered to you concurrently with the execution of this Agreement (herein called the "Original Letter"), but carried out to a date not more than four (4) business days prior to the First Closing Date or the Second Closing Date, as the case may be, (i) confirming, to the extent true, that the statements and conclusions set forth in the Original Letter are accurate as of the First Closing Date or the Second Closing Date, as the case may be, and (ii) setting forth any revisions and additions to the statements and conclusions set forth in the Original Letter which are necessary to reflect any changes in the facts described in the Original Letter since the date of such letter, or to reflect the availability of more recent financial statements, data or information. The letter shall not disclose any change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and its subsidiaries considered as one enterprise from that set forth in the Registration Statement or Prospectus, which, in your sole judgment, is material and adverse and that makes it, in your sole judgment, impracticable or inadvisable to proceed with the public offering of the Shares as contemplated by the Prospectus. The Original Letter from PriceWaterhouseCoopers, LLP shall be addressed to or for the use of the Underwriters in form and substance satisfactory to the Underwriters and shall (i) represent, to the extent true, that they are independent certified public accountants with respect to the Company within the meaning of the Securities Act and the applicable published Rules and Regulations, (ii) set forth their opinion with respect to their examination of the consolidated balance sheet of the Company as of December 31, 1999 and 18 related consolidated statements of operations, shareholders' equity, and cash flows for the twelve (12) months ended December 31, 1999, and address other matters agreed upon by PriceWaterhouseCoopers, LLP and you. (i) OFFICERS' CERTIFICATE. You shall have received on the First Closing Date and the Second Closing Date, as the case may be, a certificate of the Company, dated the First Closing Date or the Second Closing Date, as the case may be, signed by the Chief Executive Officer and Chief Financial Officer of the Company, to the effect that, and you shall be satisfied that: (i) The representations and warranties of the Company in this Agreement are true and correct, as if made on and as of the First Closing Date or the Second Closing Date, as the case may be (except in each case with respect to any representation or warranty made as of a particular date, in which case such representation or warranty shall be accurate as of such date), and the Company has complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied at or prior to the First Closing Date or the Second Closing Date, as the case may be; (ii) No stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or threatened under the Act; (iii) When the Registration Statement became effective and at all times subsequent thereto up to the delivery of such certificate, the Registration Statement and the Prospectus, and any amendments or supplements thereto and the Incorporated Documents, when such Incorporated Documents became effective or were filed with the Commission, contained all material information required to be included therein by the Securities Act or the Exchange Act and the applicable rules and regulations of the Commission thereunder, as the case may be, and in all material respects conformed to the requirements of the Securities Act or the Exchange Act and the applicable rules and regulations of the Commission thereunder, as the case may be, and (A) the Registration Statement and any amendments thereto, did not and does not include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (B) the Prospectus and any amendments or supplements thereto, did not and does not include any untrue statement of a material fact or omit the statement of material fact required to be stated therein or necessary to make the statement therein not misleading in light of the circumstances under which they were made; and, since the effective date of the Registration Statement, there has occurred no event required to be set forth in an amended or supplemented Prospectus which has not been so set forth; and (iv) Subsequent to the respective dates as of which information is given in the Registration Statement and Prospectus as amended or supplemented, there has not been (a) any material adverse change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and its subsidiaries considered as one enterprise, (b) any transaction that is material to the Company and its subsidiaries considered as one enterprise, except transactions entered into in the ordinary course of business, (c) any obligation, direct or contingent, that is material to the Company and its 19 subsidiaries considered as one enterprise, incurred by the Company or its subsidiaries, except obligations incurred in the ordinary course of business, (d) any change in the capital stock or outstanding indebtedness of the Company or any of its subsidiaries that is material to the Company and its subsidiaries considered as one enterprise, (e) any dividend or distribution of any kind declared, paid or made on the capital stock of the Company or any of its subsidiaries except for the accrual of dividends under the Series A Convertible Preferred Shares in accordance with their terms as described in the Prospectus, or (f) any loss or damage (whether or not insured) to the property of the Company or any of its subsidiaries which has been sustained or will have been sustained which has a Material Adverse Effect. (j) LOCK-UP AGREEMENT FROM CERTAIN STOCKHOLDERS OF THE COMPANY. The Company shall have obtained and delivered to you an agreement substantially in the form of EXHIBIT A attached hereto from each executive officer and director of the Company, and each beneficial owner of five or more percent of the outstanding issued share capital of the Company (other than Hilal Capital Management LLC, Oracle Strategic Partners, L.P., Dr. John K. Stevens, DCF Capital, L.L.C., DWS Investment GmbH and Frontier Capital Management Company). (k) STOCK EXCHANGE LISTING. The Shares shall have been approved for listing on the Nasdaq National Market, subject only to official notice of issuance. (l) COMPLIANCE WITH PROSPECTUS DELIVERY REQUIREMENTS. The Company shall have complied with the provisions of Sections 2(g) and 3(e) hereof with respect to the furnishing of Prospectuses. (m) ADDITIONAL DOCUMENTS. On or before each of the First Closing Date and the Second Closing Date, as the case may be, the Representatives and counsel for the Underwriters shall have received such information, documents and opinions as they may reasonably require for the purposes of enabling them to pass upon the issuance and sale of the Shares as contemplated herein, or in order to evidence the accuracy of any of the representations and warranties, or the satisfaction of any of the conditions or agreements, herein contained. If any condition specified in this Section 4 is not satisfied when and as required to be satisfied, this Agreement may be terminated by the Representatives by notice to the Company at any time on or prior to the First Closing Date and, with respect to the Option Shares, at any time prior to the Second Closing Date, which termination shall be without liability on the part of any party to any other party, except that Section 5 (Payment of Expenses), Section 6 (Reimbursement of Underwriters' Expenses), Section 7 (Indemnification and Contribution) and Section 10 (Representations and Indemnities to Survive Delivery) shall at all times be effective and shall survive such termination. SECTION 5. PAYMENT OF EXPENSES. The Company agrees to pay all costs, fees and expenses incurred in connection with the performance of its obligations hereunder and in connection with the transactions contemplated hereby, including without limitation (i) all expenses incident to the issuance and delivery of the Common Shares (including all printing and engraving costs), (ii) all fees and expenses of the registrar and transfer agent of the Common Shares, (iii) all necessary issue, transfer and other stamp taxes in connection with the issuance 20 and sale of the Shares to the Underwriters, (iv) all fees and expenses of the Company's counsel, independent public or certified public accountants and other advisors, (v) all costs and expenses incurred in connection with the preparation, printing, filing, shipping and distribution of the Registration Statement (including financial statements, exhibits, schedules, consents and certificates of experts), each preliminary prospectus and the Prospectus, and all amendments and supplements thereto, and this Agreement, (vi) all filing fees, attorneys' fees and expenses incurred by the Company or, subject to the penultimate sentence of this Section 5, the Underwriters in connection with qualifying or registering (or obtaining exemptions from the qualification or registration of) all or any part of the Shares for offer and sale under (A) the state securities or blue sky laws or (B) the provincial securities laws of Canada or any other country, and, if requested by the Representatives, preparing and printing a "Blue Sky Survey", an "International Blue Sky Survey" or other memorandum, and any supplements thereto, advising the Underwriters of such qualifications, registrations and exemptions, (vii) the filing fees incident to, and the reasonable fees and expenses of counsel for the Underwriters in connection with, the National Association of Securities Dealers, LLC review and approval of the Underwriters' participation in the offering and distribution of the Common Shares, (viii) the fees and expenses associated with listing the Common Shares on the Nasdaq National Market, (ix) all costs and expenses incident to the travel and accommodation of the Company's employees on the "roadshow", and (x) all other fees, costs and expenses referred to in Item 14 of Part II of the Registration Statement. Notwithstanding anything herein to the contrary, the Company shall not be obligated to pay attorneys' fees and expenses of the Underwriters contemplated by clauses (vi) and vii) of this Section 5 in excess of $15,000 in the aggregate. Except as provided in this Section 5, Section 6, and Section 7 hereof, the Underwriters shall pay their own expenses, including the fees and disbursements of their counsel. SECTION 6. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If this Agreement is terminated by the Representatives pursuant to Section 4, Section 8 or Section 9, or if the sale to the Underwriters of the Shares on the First Closing Date is not consummated because of any refusal, inability or failure on the part of the Company to perform any agreement herein or to comply with any provision hereof, the Company agrees to reimburse the Representatives and the other Underwriters (or such Underwriters as have terminated this Agreement with respect to themselves), severally, upon demand for all out-of-pocket expenses that shall have been reasonably incurred by the Representatives and the Underwriters in connection with the proposed purchase and the offering and sale of the Shares, including but not limited to fees and disbursements of counsel, printing expenses, travel and accommodation expenses, postage, facsimile and telephone charges. SECTION 7. INDEMNIFICATION AND CONTRIBUTION. (a) INDEMNIFICATION OF THE UNDERWRITERS. The Company agrees to indemnify and hold harmless each Underwriter, its officers and employees, and each person, if any, who controls any Underwriter within the meaning of the Securities Act and the Exchange Act against any loss, claim, damage, liability or expense, as incurred, to which such Underwriter or such controlling person may become subject, under the Securities Act, the Exchange Act or other federal or state statutory law or regulation, or at common law or otherwise (including in settlement of any litigation, if such settlement is effected 21 with the written consent of the Company, which consent shall not be unreasonably withheld), insofar as such loss, claim, damage, liability or expense (or actions in respect thereof as contemplated below) arises out of or is based (i) upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, or any amendment thereto, including any information deemed to be a part thereof pursuant to Rule 430A under the Securities Act, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading; or (ii) upon any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus or the Prospectus (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; or (iii) in whole or in part upon any inaccuracy in the representations and warranties of the Company contained herein; or (iv) in whole or in part upon any failure of the Company to perform its obligations hereunder or under law; or (v) any untrue statement or alleged untrue statement of any material fact contained in any audio or visual materials provided by the Company or based upon written information furnished by or on behalf of the Company including, without limitation, slides, videos, films or tape recordings, used in connection with the marketing of the Shares, including without limitation, statements communicated by the Company to securities analysts employed by the Underwriters; or (vi) any act or failure to act or any alleged act or failure to act by any Underwriter in connection with, or relating in any manner to, the Shares or the offering contemplated hereby, and which is included as part of or referred to in any loss, claim, damage, liability or action arising out of or based upon any matter covered by clause (i), (ii), (iii), (iv) or (v) above, provided that the Company shall not be liable under this clause (vi) to the extent that a court of competent jurisdiction shall have determined by a final judgment that such loss, claim, damage, liability or action resulted directly from any such acts or failures to act undertaken or omitted to be taken by such Underwriter through its bad faith or willful misconduct; and to reimburse each Underwriter and each such controlling person for any and all expenses (including the fees and disbursements of counsel chosen by Robertson Stephens) as such expenses are reasonably incurred by such Underwriter or such controlling person in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, liability, expense or action; provided, however, that the foregoing indemnity agreement shall not apply to any loss, claim, damage, liability or expense to the extent, but only to the extent, arising out of or based upon any untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with written information furnished to the Company by the Representatives expressly for use in the Registration Statement, any preliminary prospectus or the Prospectus (or any amendment or supplement thereto); and provided, further, that with respect to any preliminary prospectus, the foregoing indemnity agreement shall not apply or inure to the benefit of any Underwriter from whom the person asserting any loss, claim, damage, liability or expense purchased Shares, or any person controlling such Underwriter, if copies of the Prospectus were timely delivered to the Underwriter pursuant to Section 2 and a copy of the Prospectus (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of such Underwriter to such person, if required by law so to have been delivered, and if the Prospectus (as so amended or supplemented) would have cured the defect giving rise to such loss, claim, damage, liability or expense. The indemnity agreement set forth in this Section 7(a) shall be in addition to any liabilities that the Company may otherwise have. 22 (b) INDEMNIFICATION OF THE COMPANY, ITS DIRECTORS, OFFICERS. Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, each of its directors, each of its officers who signed the Registration Statement and each person, if any, who controls the Company within the meaning of the Securities Act or the Exchange Act, against any loss, claim, damage, liability or expense, as incurred, to which the Company, or any such director, officer or controlling person may become subject, under the Securities Act, the Exchange Act, or other federal or state statutory law or regulation, or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of such Underwriter), insofar as such loss, claim, damage, liability or expense (or actions in respect thereof as contemplated below) arises out of or is based upon any untrue or alleged untrue statement of a material fact contained in the Registration Statement, any preliminary prospectus or the Prospectus (or any amendment or supplement thereto), or arises out of or is based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Registration Statement, any preliminary prospectus, the Prospectus (or any amendment or supplement thereto), in reliance upon and in conformity with written information furnished to the Company by the Representatives expressly for use therein; and to reimburse the Company, or any such director, officer or controlling person for any legal and other expense reasonably incurred by the Company, or any such director, officer or controlling person in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, liability, expense or action. The indemnity agreement set forth in this Section 7(b) shall be in addition to any liabilities that each Underwriter may otherwise have. (c) INFORMATION PROVIDED BY THE UNDERWRITERS. The Company and each person, if any, who controls the Company within the meaning of the Securities Act or the Exchange Act, hereby acknowledges that the only information that the Underwriters have furnished to the Company in writing expressly for use in the Registration Statement, any preliminary prospectus or the Prospectus (or any amendment or supplement thereto) are the statements set forth in the table in the first, second, eighth and ninth paragraphs under the caption "Underwriting" in the Prospectus; and the Underwriters confirm that such statements are correct. (d) NOTIFICATIONS AND OTHER INDEMNIFICATION PROCEDURES. Promptly after receipt by an indemnified party under this Section 7 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party under this Section 7, notify the indemnifying party in writing of the commencement thereof, but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party for contribution or otherwise than under the indemnity agreement contained in this Section 7 or to the extent it is not prejudiced as a proximate result of such failure. In case any such action is brought against any indemnified party and such indemnified party seeks or intends to seek indemnity from an indemnifying party, the indemnifying party will be entitled to participate in, and, to the extent that it shall elect, jointly with all other indemnifying parties similarly notified, by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party; provided, however, if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that a conflict 23 may arise between the positions of the indemnifying party and the indemnified party in conducting the defense of any such action or that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, the indemnified party or parties shall have the right to select separate counsel to assume such legal defenses and to otherwise participate in the defense of such action on behalf of such indemnified party or parties. Upon receipt of notice from the indemnifying party to such indemnified party of such indemnifying party's election so to assume the defense of such action and approval by the indemnified party of counsel, the indemnifying party will not be liable to such indemnified party under this Section 7 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof unless (i) the indemnified party shall have employed separate counsel in accordance with the proviso to the next preceding sentence (it being understood, however, that the indemnifying party shall not be liable for the expenses of more than one separate counsel (together with local counsel), approved by the indemnifying party (Robertson Stephens in the case of Section 7(b) and Section 8), representing the indemnified parties who are parties to such action), (ii) the indemnifying party shall not have employed counsel reasonably satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of commencement of the action, or (iii) the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party, in each of which cases the reasonable fees and expenses of counsel shall be at the expense of the indemnifying party. (e) SETTLEMENTS. The indemnifying party under this Section 7 shall not be liable for any settlement of any proceeding effected without its written consent, which consent shall not be unreasonably withheld, but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party against any loss, claim, damage, liability or expense by reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel as contemplated by Section 7(d) hereof, the indemnifying party agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 60 days after receipt by such indemnifying party of the aforesaid request and (ii) such indemnifying party shall not have reimbursed the indemnified party in accordance with such request prior to the date of such settlement. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement, compromise or consent to the entry of judgment in any pending or threatened action, suit or proceeding in respect of which any indemnified party is or could have been a party and indemnity was or could have been sought hereunder by such indemnified party, unless such settlement, compromise or consent includes (i) an unconditional release of such indemnified party from all liability on claims that are the subject matter of such action, suit or proceeding and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party. (f) CONTRIBUTION. If the indemnification provided for in this Section 7 is unavailable to or insufficient to hold harmless an indemnified party under Section 7(a) or (b) above in respect of any losses, claims, damages or liabilities (or actions or proceedings in respect thereof) then each indemnifying party shall contribute to the aggregate amount paid or payable by such indemnified party in such proportion as is appropriate to reflect the relative benefits received by such party on the one hand and the Underwriters on the other from the offering of the Shares. If, 24 however, the allocation provided by the immediately preceding sentence is not permitted by applicable law then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the such party on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities, (or actions or proceedings in respect thereof), as well as any other relevant equitable considerations. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the "control" Shareholders on the one hand or the Underwriters on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and Underwriters agree that it would not be just and equitable if contributions pursuant to this Section 7(f) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 7(f). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to above in this Section 7(f) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (f), (i) no Underwriter shall be required to contribute any amount in excess of the underwriting discounts and commissions applicable to the Shares purchased by such Underwriter and (ii) no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this Section 7(f) to contribute are several in proportion to their respective underwriting obligations and not joint. (g) TIMING OF ANY PAYMENTS OF INDEMNIFICATION. Any losses, claims, damages, liabilities or expenses for which an indemnified party is entitled to indemnification or contribution under this Section 7 shall be paid by the indemnifying party to the indemnified party as such losses, claims, damages, liabilities or expenses are incurred, but in all cases, no later than forty-five (45) days of invoice to the indemnifying party. (h) SURVIVAL. The indemnity and contribution agreements contained in this Section 7 and the representation and warranties set forth in this Agreement shall remain operative and in full force and effect, regardless of (i) any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter, the Company, its directors or officers or any persons controlling the Company, (ii) acceptance of any Shares and payment therefor hereunder, and (iii) any termination of this Agreement. A successor to any Underwriter, or to the Company, its directors or officers, or any person controlling the Company, shall be entitled to the benefits of the indemnity, contribution and reimbursement agreements contained in this Section 7. (i) ACKNOWLEDGEMENTS OF PARTIES. The parties to this Agreement hereby acknowledge that they are sophisticated business persons who were represented by counsel during the negotiations regarding the provisions hereof including, without limitation, the provisions of this 25 Section 7, and are fully informed regarding said provisions. They further acknowledge that the provisions of this Section 7 fairly allocate the risks in light of the ability of the parties to investigate the Company and its business in order to assure that adequate disclosure is made in the Registration Statement and Prospectus as required by the Securities Act and the Exchange Act. SECTION 8. DEFAULT OF ONE OR MORE OF THE SEVERAL UNDERWRITERS. If, on the First Closing Date or the Second Closing Date, as the case may be, any one or more of the several Underwriters shall fail or refuse to purchase Shares that it or they have agreed to purchase hereunder on such date, and the aggregate number of Common Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase does not exceed 10% of the aggregate number of the Shares to be purchased on such date, the other Underwriters shall be obligated, severally, in the proportions that the number of Firm Shares set forth opposite their respective names on SCHEDULE A bears to the aggregate number of Firm Shares set forth opposite the names of all such non-defaulting Underwriters, or in such other proportions as may be specified by the Representatives with the consent of the non-defaulting Underwriters, to purchase the Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase on such date. If, on the First Closing Date or the Second Closing Date, as the case may be, any one or more of the Underwriters shall fail or refuse to purchase Shares and the aggregate number of Shares with respect to which such default occurs exceeds 10% of the aggregate number of Shares to be purchased on such date, and arrangements satisfactory to the Representatives and the Company for the purchase of such Shares are not made within 48 hours after such default, this Agreement shall terminate without liability of any party to any other party except that the provisions of Section 5, and Section 7 shall at all times be effective and shall survive such termination; provided, however, that the Company shall not be obligated to pay any expenses of, or any other amounts to, or to indemnify, any Underwriter who has defaulted in its obligations under this Agreement. In any such case either the Representatives or the Company shall have the right to postpone the First Closing Date or the Second Closing Date, as the case may be, but in no event for longer than seven days in order that the required changes, if any, to the Registration Statement and the Prospectus or any other documents or arrangements may be effected. As used in this Agreement, the term "Underwriter" shall be deemed to include any person substituted for a defaulting Underwriter under this Section 8. Any action taken under this Section 8 shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. SECTION 9. TERMINATION OF THIS AGREEMENT. This Agreement may be terminated by the Representatives by notice given to the Company if (a) at any time after the execution and delivery of this Agreement and prior to the First Closing Date (i) trading or quotation in any of the Company's securities shall have been suspended or limited by the Commission or by the Nasdaq Stock Market, or trading in securities generally on either the Nasdaq Stock Market or the New York Stock Exchange shall have been suspended or limited, or minimum or maximum prices shall have been generally established on any of such stock exchanges by the Commission or the National Association of Securities Dealers, LLC; (ii) a general banking moratorium shall have been declared by any of federal, New York or California authorities; (iii) there shall have occurred any outbreak or escalation of national or international hostilities or any crisis or 26 calamity, or any change in the United States or international financial markets, or any substantial change or development involving a prospective change in United States' or international political, financial or economic conditions, as in the judgment of the Representatives is material and adverse and makes it impracticable or inadvisable to market the Common Shares in the manner and on the terms contemplated in the Prospectus or to enforce contracts for the sale of securities; or (iv) in the judgment of the Representatives there shall have occurred any Material Adverse Change; or (b) in the case of any of the events specified 9(a)(i)-(v), such event singly or together with any other event, makes it, in your judgement, impracticable or inadvisable to market the Common Shares in the manner and on the terms contemplated in the Prospectus. Any termination pursuant to this Section 9 shall be without liability on the part of (x) the Company to any Underwriter, except that the Company shall be obligated to reimburse the expenses of the Representatives and the Underwriters pursuant to Sections 5 and 6 hereof, (y) any Underwriter to the Company or any person controlling the Company, or (z) of any party hereto to any other party except that the provisions of Section 7 shall at all times be effective and shall survive such termination. SECTION 10. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY. The respective indemnities, agreements, representations, warranties and other statements of the Company or any person controlling the company, of its officers, and of the several Underwriters set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation made by or on behalf of any Underwriter or the Company or any of its or their partners, officers or directors or any controlling person, as the case may be, and will survive delivery of and payment for the Shares sold hereunder and any termination of this Agreement. SECTION 11. NOTICES. All communications hereunder shall be in writing and shall be mailed, hand delivered or telecopied and confirmed to the parties hereto as follows: If to the Representatives: FLEETBOSTON ROBERTSON STEPHENS INC. 555 California Street San Francisco, California 94104 Facsimile: (415) 676-2675 Attention: General Counsel If to the Company: VISIBLE GENETICS INC. 700 Bay Street, Suite 1000 Toronto, Ontario Canada M5G 126 Facsimile: (416) 813-3250 Attention: President Any party hereto may change the address for receipt of communications by giving written notice to the others. 27 SECTION 12. SUCCESSORS. This Agreement will inure to the benefit of and be binding upon the parties hereto, including any substitute Underwriters pursuant to Section 8 hereof, and to the benefit of the employees, officers and directors and controlling persons referred to in Section 7, and to their respective successors and personal representatives, and no other person will have any right or obligation hereunder. The term "successors" shall not include any purchaser of the Shares as such from any of the Underwriters merely by reason of such purchase. SECTION 13. PARTIAL UNENFORCEABILITY. The invalidity or unenforceability of any Section, paragraph or provision of this Agreement shall not affect the validity or enforceability of any other Section, paragraph or provision hereof. If any Section, paragraph or provision of this Agreement is for any reason determined to be invalid or unenforceable, there shall be deemed to be made such minor changes (and only such minor changes) as are necessary to make it valid and enforceable. SECTION 14. GOVERNING LAW PROVISIONS. (a) GOVERNING LAW. This agreement shall be governed by and construed in accordance with the internal laws of the state of New York applicable to agreements made and to be performed in such state. (b) CONSENT TO JURISDICTION. Any legal suit, action or proceeding arising out of or based upon this Agreement or the transactions contemplated hereby ("Related Proceedings") may be instituted in the federal courts of the United States of America located in the City and County of San Francisco or the courts of the State of California in each case located in the City and County of San Francisco (collectively, the "Specified Courts"), and each party irrevocably submits to the exclusive jurisdiction (except for proceedings instituted in regard to the enforcement of a judgment of any such court (a "Related Judgment"), as to which such jurisdiction is non-exclusive) of such courts in any such suit, action or proceeding. Service of any process, summons, notice or document by mail to such party's address set forth above shall be effective service of process for any suit, action or other proceeding brought in any such court. The parties irrevocably and unconditionally waive any objection to the laying of venue of any suit, action or other proceeding in the Specified Courts and irrevocably and unconditionally waive and agree not to plead or claim in any such court that any such suit, action or other proceeding brought in any such court has been brought in an inconvenient forum. Each party not located in the United States irrevocably appoints CT Corporation System, which currently maintains a San Francisco office at 49 Stevenson Street, San Francisco, California 94105, United States of America, as its agent to receive service of process or other legal summons for purposes of any such suit, action or proceeding that may be instituted in any state or federal court in the City and County of San Francisco. (c) WAIVER OF IMMUNITY. With respect to any Related Proceeding, each party irrevocably waives, to the fullest extent permitted by applicable law, all immunity (whether on the basis of sovereignty or otherwise) from jurisdiction, service of process, attachment (both before and after judgment) and execution to which it might otherwise be entitled in the Specified Courts, and with respect to any Related Judgment, each party waives any such immunity in the Specified Courts or any other court of competent jurisdiction, and will not raise or claim or cause to be pleaded any such immunity at or in respect of any such Related Proceeding or Related 28 Judgment, including, without limitation, any immunity pursuant to the United States Foreign Sovereign Immunities Act of 1976, as amended. SECTION 15. GENERAL PROVISIONS. This Agreement constitutes the entire agreement of the parties to this Agreement and supersedes all prior written or oral and all contemporaneous oral agreements, understandings and negotiations with respect to the subject matter hereof. This Agreement may be executed in two or more counterparts, each one of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement may not be amended or modified unless in writing by all of the parties hereto, and no condition herein (express or implied) may be waived unless waived in writing by each party whom the condition is meant to benefit. Section headings herein are for the convenience of the parties only and shall not affect the construction or interpretation of this Agreement. SECTION 16. DISTRIBUTION OF SHARES IN CANADA. The Representatives hereby agree on behalf of the Underwriters that during the distribution of the Shares, and for a period of 90 days thereafter, the Underwriters shall offer the Shares for sale in Canada only pursuant to exemptions from the prospectus requirements of applicable securities legislation through dealers appropriately registered under such laws or pursuant to exemptions from the applicable registered dealer requirements. [The remainder of this page has been intentionally left blank.] 29 If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Company the enclosed copies hereof, whereupon this instrument, along with all counterparts hereof, shall become a binding agreement in accordance with its terms. Very truly yours, VISIBLE GENETICS INC. By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- The foregoing Underwriting Agreement is hereby confirmed and accepted by the Representatives as of the date first above written. FLEETBOSTON ROBERTSON STEPHENS INC. WARBURG DILLON READ LLC PAINEWEBER INCORPORATED ROTH CAPITAL PARTNERS, INC. On their behalf and on behalf of each of the several underwriters named in SCHEDULE A hereto. BY FLEETBOSTON ROBERTSON STEPHENS INC. By: ------------------------------------------- Mitch Whiteford 30 SCHEDULE A
NUMBER OF FIRM COMMON UNDERWRITERS SHARES TO BE PURCHASED - ----------------------------------------- ---------------------------------- FLEETBOSTON ROBERTSON STEPHENS INC....... [___] WARBURG DILLON READ LLC.................. [___] PAINEWEBER INCORPORATED.................. [___] ROTH CAPITAL PARTNERS, INC............... [___] Total........................... 2,000,000
S-A EXHIBIT A FORM OF LOCK-UP AGREEMENT FleetBoston Robertson Stephens Inc. Warburg Dillon Read LLC PaineWeber Incorporated Roth Capital Partners As Representatives of the Several Underwriters c/o FleetBoston Robertson Stephens Inc. 555 California Street, Suite 2600 San Francisco, California 94104 RE: Visible Genetics Inc. (the "Company") Ladies & Gentlemen: The undersigned is an owner of record or beneficially of certain Common Shares of the Company ("Common Shares") or securities convertible into or exchangeable or exercisable for Common Shares. The Company proposes to carry out a public offering of Common Shares (the "Offering") for which you will act as the representatives (the "Representatives") of the underwriters. The undersigned recognizes that the Offering will be of benefit to the undersigned and will benefit the Company by, among other things, raising additional capital for its operations. The undersigned acknowledges that you and the other underwriters are relying on the representations and agreements of the undersigned contained in this letter in carrying out the Offering and in entering into underwriting arrangements with the Company with respect to the Offering. In consideration of the foregoing, the undersigned hereby agrees that the undersigned will not offer to sell, contract to sell, or otherwise sell, dispose of, loan, pledge or grant any rights with respect to (collectively, a "Disposition") any Common Shares, any options or warrants to purchase any Common Shares or any securities convertible into or exchangeable for Common Shares (collectively, "Securities") now owned or hereafter acquired directly by such person or with respect to which such person has or hereafter acquires the power of disposition, otherwise than (i) as a bona fide gift or gifts, provided the donee or donees thereof agree in writing to be bound by this restriction, (ii) as a distribution to partners or shareholders of such person, provided that the distributees thereof agree in writing to be bound by the terms of this restriction, (iii) with respect to sales or purchases of Common Shares acquired on the open market, (iv) by will or the laws of descent, or (v) with the prior written consent of FleetBoston Robertson Stephens Inc. The foregoing restrictions will terminate after the close of trading of the Common Shares on the 90th day after (and including) the day the Common Shares commenced trading on the Nasdaq National Market (the "Lock-Up Period"). The foregoing restriction has been expressly agreed to preclude the holder of the Securities from engaging in any hedging or other transaction which is designed to or reasonably expected to lead to or result in a Disposition of Securities during the Lock-Up Period, even if such Securities would be disposed of by someone other than such holder. Such prohibited hedging or other transactions would include, A-1 without limitation, any short sale (whether or not against the box) or any purchase, sale or grant of any right (including, without limitation, any put or call option) with respect to any Securities or with respect to any security (other than a broad-based market basket or index) that included, relates to or derives any significant part of its value from Securities. The undersigned also agrees and consents to the entry of stop transfer instructions with the Company's transfer agent and registrar against the transfer of Common Shares or Securities held by the undersigned except in compliance with the foregoing restrictions. This agreement is irrevocable and will be binding on the undersigned and the respective successors, heirs, personal representatives, and assigns of the undersigned. In the event the Offering has not occurred on or before June 30, 2000, this Lock-Up Agreement shall be of no further force or effect. Dated -------------------------------------------------------- ------------------------------------------------------------- Printed Name of Holder By: ---------------------------------------------------------- Signature ------------------------------------------------------------- Printed Name of Person Signing (and indicate capacity of person signing if signing as custodian, trustee, or on behalf of an entity) A-2 EXHIBIT B-1 MATTERS TO BE COVERED IN THE OPINION OF COMPANY'S U.S. COUNSEL (i) Each of Applied Sciences, Inc. ("ASI") and Visible Genetics Corp. ("VGC") has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation; (ii) Each of ASI and VGC has the corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus; (iii) Each of ASI and VGC is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction, if any, in which the ownership or leasing of its properties or the conduct of its business requires such qualification, except where the failure to be so qualified or be in good standing would not reasonably be expected to have a Material Adverse Effect. (iv) To such counsel's knowledge, the issued and outstanding capital shares of the Company outstanding prior to the issuance of the Shares will not have been issued in violation of or subject to any [NON-STATUTORY CO-SALE RIGHT, RIGHT OF FIRST REFUSAL OR OTHER SIMILAR RIGHT, OTHER THAN ANY REGISTRATION RIGHTS DESCRIBED IN OPINION (xiv) HEREOF]; (v) All issued and outstanding shares of capital stock of each of ASI and VGC have been duly authorized and validly issued and are fully paid and nonassessable, and, to such counsel's knowledge, have not been issued in violation of or subject to any preemptive right arising under the certificate of incorporation or applicable law, co-sale right, right of first refusal or other similar right, other than any registration rights described in Opinion (xiv) hereof and except as otherwise described in the Prospectus to the knowledge of the Company are owned by the Company free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest; (vi) This Agreement is enforceable in accordance with its terms, except as rights to indemnification hereunder may be limited by applicable law and except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting creditors' rights generally or by general equitable principles (whether relief is sought in a proceeding at law or in equity); (vii) The Registration Statement has become effective under the Act and, to such counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or threatened under the Securities Act; (viii) The Registration Statement and the Prospectus, and each amendment or supplement thereto (other than the financial statements (including supporting schedules) and financial data derived therefrom as to which such counsel need express no opinion), as of the effective date of the Registration Statement, complied as to form in all material respects with the requirements of the Act and the applicable Rules and Regulations; and each of the Incorporated Documents (other than the financial statements (including supporting schedules) and the financial data derived therefrom as to which such counsel need express no opinion) complied when filed pursuant to the Exchange Act as to form in all material respects with the requirements of the Act and the Rules and Regulations of the Exchange Act and the applicable rules and regulations of the Commission thereunder; (ix) The description in the Registration Statement and the Prospectus of U.S. statutes, other than those statutes regarding the FDA or intellectual property, are accurate and fairly present the information required to be presented by the Securities Act; (x) To such counsel's knowledge, there are no agreements, contracts, leases or documents to which the Company is a party of a character required to be described or referred to in the Registration Statement or Prospectus or any Incorporated Document or to be filed as an exhibit to the Registration Statement or any Incorporated Document which are not described or referred to therein or filed as required; (xi) The performance of this Agreement and the consummation of the transactions herein contemplated (other than performance of the Company's indemnification obligations hereunder, concerning which no opinion need be expressed) will not to such counsel's knowledge, result in a material breach or violation of any of the terms and provisions of, or constitute a default under, any bond, debenture, note or other evidence of indebtedness, or any lease, contract, indenture, mortgage, deed of trust, loan agreement, joint venture or other agreement or instrument filed as an exhibit to the Annual Report on Form 20-F filed for the year ended December 31, 1999 to which the Company is a party or by which its properties are bound, or any applicable statute, rule or regulation known to such counsel or, to such counsel's knowledge, any order, writ or decree of any court, government or governmental agency or body having jurisdiction over the Company or any of its subsidiaries, or over any of their properties or operations; (xii) No consent, approval, authorization or order of or qualification with any court, government or governmental agency or body having jurisdiction over the Company or any of its subsidiaries, or over any of their properties or operations is necessary in connection with the consummation by the Company of the transactions herein contemplated, except (i) such as have been obtained under the Securities Act, (ii) such as may be required under state or other securities or Blue Sky laws in connection with the purchase and the distribution of the Shares by the Underwriters, (iii) such as may be required by the National Association of Securities Dealers, LLC and (iv) such as may be required under the federal or provincial laws of Canada; (xiii) To such counsel's knowledge, there are no legal or governmental proceedings pending or threatened against the Company or any of its subsidiaries of a character required to be disclosed in the Registration Statement or the Prospectus [or any Incorporated Document] by the Securities Act or by the Exchange Act or the applicable rules and regulations of the Commission thereunder, other than those described therein; and (xiv) To such counsel's knowledge, except as set forth in the Registration Statement and Prospectus and any Incorporated Document, no holders of Company Shares or other securities of the Company have registration rights with respect to securities of the Company and, except as set forth in the Registration Statement and Prospectus, all holders of securities of the Company having rights known to such counsel to registration of such shares of Company Shares or other securities, because of the filing of the Registration Statement by the Company have, with respect to the offering contemplated thereby, waived such rights or such rights have expired by reason of lapse of time following notification of the Company's intent to file the Registration Statement or are not exercisable in accordance with their terms by virtue of the Underwriter's determination that marketing factors do not permit the securities owned by such persons to be included in the Registration Statement or have included securities in the Registration Statement pursuant to the exercise of and in full satisfaction of such rights. (xv) The Company is not and, after giving effect to the offering and the sale of the Shares and the application of the proceeds thereof as described in the Prospectus, will not be, an "investment company" as such term is defined in the Investment Company Act of 1940, as amended. [SUCH COUNSEL MAY RELY ON A CERTIFICATE OF THE APPROPRIATE OFFICERS OF THE COMPANY AS TO THE MANNER IN WHICH THE COMPANY'S FUNDS ARE AND WILL BE INVESTED.] (xx) Each document filed pursuant to the Exchange Act (other than the financial statements and supporting schedules included therein, as to which no opinion need be rendered) and incorporated or deemed to be incorporated by reference in the Prospectus complied when so filed as to form in all material respects with the Exchange Act; and such counsel has no reason to believe that any of such documents, when they were so filed, contained an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made when such documents were filed, not misleading. Additional Matters to be Covered in the Opinion of Baer Marks & Upham LLP (xxi) The statements contained in the Prospectus and Registration Statement under the caption "RISK FACTORS - U.S. investors in our company could suffer adverse tax consequences if we are characterized as a passive foreign investment company" and in Item 7 of Part I of the Annual Report on Form 20-F filed for the year ended December 31, 1999, insofar as they refer to statements of law of the United States or legal conclusions thereunder, are correct in all material respects and present fairly the information described therein. In addition, such counsel shall state that such counsel has participated in conferences with officials and other representatives of the Company, the Representatives, Underwriters' counsel and the independent certified public accountants of the Company, at which such conferences the contents of the Registration Statement and Prospectus and related matters were discussed, and although they have not verified the accuracy or completeness of the statements contained in the Registration Statement or the Prospectus, nothing has come to the attention of such counsel which leads them to believe that, at the time the Registration Statement became effective and at all times subsequent thereto up to and on the First Closing Date or Second Closing Date, as the case may be, the Registration Statement and any amendment or supplement thereto and any Incorporated Document, when such documents became effective or were filed with the Commission (other than the financial statements including supporting schedules and other financial and statistical information derived therefrom, as to which such counsel need express no comment) contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or at the First Closing Date or the Second Closing Date, as the case may be, the Registration Statement, the Prospectus and any amendment or supplement thereto and any Incorporated Document (except as aforesaid) contained any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. Such counsel shall also state that the conditions for the use of Form F-3 set forth in the General Instructions thereto have been satisfied. EXHIBIT B-2 MATTERS TO BE COVERED IN THE OPINION OF CANADIAN COUNSEL TO THE COMPANY (i) The Company is a corporation amalgamated under the laws of the Province of Ontario. There are no restrictions on the corporate power and capacity of the Company to own and lease property and assets and to carry on business. (ii) The Company's authorized equity capitalization consists of an unlimited number of Common Shares and an unlimited number of Preferred Shares, issuable in series, of which 33,950 Series A Convertible Preferred Shares (the "Series A Shares") have been authorized for issuance. (iii) The Common Shares to be issued by the Company pursuant to the terms of the Underwriting Agreement have been duly authorized and, upon issuance and delivery against payment therefor in accordance with the terms of the Underwriting Agreement, will be validly issued and outstanding as fully paid and non-assessable and will not have been issued in violation of, or subject to, any pre-emptive right arising under the Company's charter or by-laws or under the BUSINESS CORPORATIONS ACT (Ontario). (iv) There are no restrictions on the corporate power and capacity of the Company to enter into the Underwriting Agreement or to carry out its obligations under the Underwriting Agreement. The execution and delivery of the Underwriting Agreement and the consummation of the transactions contemplated in the Underwriting Agreement have been duly authorized by all necessary corporation action on the part of the Company. (v) The Underwriting Agreement has been duly executed by the Company. (vi) The performance of the Underwriting Agreement and the consummation of the transactions contemplated thereunder in accordance with the terms of the Underwriting Agreement do not (a) result in any violation of the Company's charter or by-laws, (b) result in a violation of any law of the Province of Ontario (or the federal law of Canada applicable therein) applicable to the Company and applicable to transactions such as those provided for in the Underwriting Agreement, or (c) to the knowledge of Osler, Hoskin & Harcourt LLP, any judgment, order or decree binding upon the Company of any court, regulatory body, administrative agency or governmental body in Canada having jurisdiction over the Company. (vii) No consent, approval, authorization, licence or order of, or filing with, any court, government, governmental agency or body in Canada having jurisdiction over the Company is required to be obtained or made by the Company under the laws of the Province of Ontario or the federal laws of Canada applicable therein, for the valid authorization, issuance, sale and delivery by the Company of the Shares to be sold by it pursuant to the Underwriting Agreement, or the performance by the Company of the Underwriting Agreement or the consummation by the Company of the transactions contemplated at the date hereof by the Underwriting Agreement, in each case in respect of the distribution of the Shares by the Underwriters outside of Canada. (viii) The provisions of the Common Shares and the Series A Shares conform, in all material respects, with the descriptions thereof contained in the Prospectus under the heading "Description of Capital Shares". (ix) The form of share certificate for the Common Shares has been duly approved by the Company and complies with the provisions of the BUSINESS CORPORATIONS ACT (Ontario). (x) The statements contained in the Prospectus under the headings "Risk Factors - We may require approval of the holders of our Series A preferred shares in order to obtain certain types of financing and we may be prevented from obtaining these types of financing by the holders of our Series A preferred shares", "- Our amended articles of incorporation and by-laws contain certain provisions that make it difficult for a third party to acquire our company even if doing so would be beneficial to our shareholders and, therefore, our shareholders may not be able to maximize the return of their investment", "- Because our preferred shareholders are entitled to certain preferences over our common shareholders under certain circumstances, our common shareholders may not receive a return of the full amount they have invested in our company", "Dividend Policy" and "Description of Capital Shares - Classified Board", in each case , insofar as such statements purport to describe certain provisions of the Company's charter or by-laws, are accurate in all material respects. (xi) The disclosure contained in the Prospectus under the heading "Service and Enforcement of Legal Process" and in Item 6 of Part I of the Annual Report of the Company on Form 20-F filed for the year ended December 31, 1999 (the "Annual Report"), in each case, insofar as such disclosure describes or summarizes matters of Canadian law or constitutes conclusions of Canadian law, fairly summarizes such matters of law or conclusions of law. (xii) The statements contained in Item 7 of Part I of the Annual Report under the heading "Canadian Federal Income Tax Considerations", insofar as they refer to statements of law of Canada or legal conclusions thereunder fairly describe the principal Canadian federal income tax consequences under the INCOME TAX ACT (Canada) to a Holder (as defined therein) of Common Shares and a Series A Holder (as defined therein) of Series A preferred shares of the Company. (xiii) No stamp or other issuance or transfer taxes or duties are payable by or on behalf of the Underwriters to the Canadian government or to the provincial government of Ontario in connection with (A) the issuance, sale and delivery by the Company to or for the respective accounts of the Underwriters of the Common Shares or (B) the sale and delivery outside Canada by the Underwriters of the Common Shares to the initial purchasers thereof in the manner contemplated in the Underwriting Agreement. EXHIBIT C MATTERS TO BE COVERED IN THE OPINION OF INTELLECTUAL PROPERTY COUNSEL FOR THE COMPANY Such counsel are familiar with the technology used by the Company in its business and the manner of its use thereof and have read the Registration Statement and the Prospectus, including particularly the portions of the Registration Statement and the Prospectus referring to patents, trade secrets, trademarks, service marks or other proprietary information or materials and: (i) As to the statements under the captions "Risk Factors -- If we are unable to successfully protect our intellectual property, our competitive position will be harmed." "Risk Factors -- Others could claim that we infringe on their intellectual property rights, which may result in costly, time consuming litigation" and "Business -- Proprietary Rights," nothing has come to the attention of such counsel which caused them to believe that the above-mentioned sections of the Registration Statement and any amendment or supplement thereto made available and reviewed by such counsel, at the time the Registration Statement became effective and at all times subsequent thereto up to and on the Closing Date and on any later date on which Option Shares are to be purchased, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; (ii) Except as described in the Prospectus, such counsel knows of no material action, suit, claim or proceeding relating to patents, patent rights or licenses, trademarks or trademark rights, copyrights, collaborative research, licenses or royalty arrangements or agreements or trade secrets, know-how or proprietary techniques, including processes and substances, owned by or affecting the business or operations of the Company which are pending or threatened against the Company or any of its officers or directors. (iii) The Company is listed in the records of the United States Patent and Trademark Office as the holder of record of the patents listed on a schedule to such opinion (the "Patents") and each of the applications listed on a schedule to such opinion (the "Applications"). To the knowledge of such counsel, there are no claims of third parties to any ownership interest or lien with respect to any of the Patents or Applications. Such counsel is not aware of any material defect in form in the preparation or filing of the Applications on behalf of the Company. To the knowledge of such counsel, the Applications are being pursued by the Company. To the knowledge of such counsel, the Company owns as its sole property the Patents and pending Applications; (iv) The Company is listed in the records of the appropriate foreign offices as the sole holder of record of the foreign patents listed on a schedule to such opinion (the "Foreign Patents") and each of the applications listed on a schedule to such opinion (the "Foreign Applications"). Such counsel knows of no claims of third parties to any ownership interest or lien with respect to the Foreign Patents or Foreign Applications. Such counsel is not aware of any material defect of form in the preparation or filing of C-1 the Foreign Applications on behalf of the Company. To the knowledge of such counsel, the Foreign Applications are being pursued by the Company. To the knowledge of such counsel, the Company owns as its sole property the Foreign Patents and pending Foreign Applications; and (v) Such counsel knows of no reason why the Patents or Foreign Patents are not valid as issued. Such counsel has no knowledge of any reason why any patent to be issued as a result of any Application or Foreign Application would not be valid or would not afford the Company useful patent protection with respect thereto. C-2 EXHIBIT D MATTERS TO BE COVERED IN THE OPINION OF UNDERWRITERS' COUNSEL (i) The [Firm Shares] [Option Shares] have been duly authorized and, upon issuance and delivery and payment therefor in accordance with the terms of the Underwriting Agreement, will be validly issued, fully paid and non-assessable. (ii) The Registration Statement complied as to form in all material respects with the requirements of the Act; the Registration Statement has become effective under the Act and, to such counsel's knowledge, no stop order proceedings with respect thereto have been instituted or threatened or are pending under the Securities Act. (iii) The Underwriting Agreement has been duly authorized, executed and delivered by the Company. Such counsel shall state that such counsel has reviewed the opinions addressed to the Representatives from each dated the date hereof, and furnished to you in accordance with the provisions of the Underwriting Agreement. Such opinions appear on their face to be appropriately responsive to the requirements of the Underwriting Agreement. In addition, such counsel shall state that such counsel has participated in conferences with officials and other representatives of the Company, the Representatives, Underwriters' Counsel and the independent certified public accountants of the Company, at which such conferences the contents of the Registration Statement and Prospectus and related matters were discussed, and although they have not verified the accuracy or completeness of the statements contained in the Registration Statement or the Prospectus, nothing has come to the attention of such counsel which leads them to believe that, at the time the Registration Statement became effective and at all times subsequent thereto up to and on the First Closing Date or Second Closing Date, as the case may be, the Registration Statement and any amendment or supplement thereto and any Incorporated Document, when such documents became effective or were filed with the Commission (other than the financial statements including supporting schedules and other financial and statistical information derived therefrom, as to which such counsel need express no comment) contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or at the First Closing Date or the Second Closing Date, as the case may be, the Registration Statement, the Prospectus and any amendment or supplement thereto and any Incorporated Document (except as aforesaid) contained any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. D-1 EXHIBIT E MATTERS TO BE COVERED IN THE OPINION OF REGULATORY COUNSEL Such counsel are familiar with the nature of the Company's business and have read the Registration Statement and the Prospectus, including particularly the portions of the Registration Statement and the Prospectus referring to regulatory matters and: As to the statements under the captions "Risk Factors -- We may not receive approval of the FDA or foreign regulatory authorities for our HIV OpenGene System and, in the future, other HIV products, and, therefore, we may not be able to sell our HIV products to the clinical diagnostic market in the United States or abroad," "Risk Factors -- Each time we make alterations to any FDA approved products, we may need to seek additional FDA approval, which will lengthen the time and increase the cost of bringing upgraded or new products to market," and "Business -- Regulation by the FDA and Other Government Agencies," nothing has come to the attention of such counsel which caused them to believe that the above-mentioned sections of the Registration Statement and any amendment or supplement thereto made available and reviewed by such counsel, at the time the Registration Statement became effective and at all times subsequent thereto up to and on the Closing Date and on any later date on which Option Shares are to be purchased, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. E-1 EX-23.1 3 EXHIBIT 23.1 EXHIBIT 23.3 PRICEWATERHOUSECOOPERS PRICEWATERHOUSECOOPERS LLP CHARTERED ACCOUNTANTS 5700 Yonge Street Suite 1900 North York Ontario Canada M2M 4K7 Telephone +1 (416) 218 1500 Facsimile +1 (416) 218-1499 Direct Tel. +1 (416) 218-1432 Direct Fax +1 (416) 218-1499 March 29, 2000
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We hereby consent to the incorporation in the Pre-Effective Amendment No. 1 to Registration Statement on Form F-3 of Visible Genetics Inc. (the "Company") dated March 29, 2000, of our report dated February 18, 2000 relating to our audit of the Company's consolidated balance sheets as at December 31, 1999 and 1998 and the consolidated statements of operations, deficit, comprehensive loss, and cash flows for the years ended December 31, 1999, 1998 and 1997, and to the reference in the Registration Statement to our firm under the headings "Selected Consolidated Financial Data" and "Experts." /s/ PricewaterhouseCoopers Chartered Accountants -----END PRIVACY-ENHANCED MESSAGE-----