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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 25, 2002
COMMISSION FILE NO. 333
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM F-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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VISIBLE GENETICS INC.
(Exact name of Registrant as specified in its charter and translation of
Registrant's name into English)
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ONTARIO 98-0194462
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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700 BAY STREET, SUITE 1000
TORONTO, ONTARIO
CANADA M5G 1Z6
(416) 813-3240
(Address and telephone number of Registrant's principal executive offices)
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BROWN RAYSMAN MILLSTEIN FELDER & STEINER LLP
900 THIRD AVENUE
NEW YORK, NEW YORK 10022
ATTENTION: STEVEN S. PRETSFELDER, ESQ.
(212) 895-2000
(Name, address and telephone number of agent for service)
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS
PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] .
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ].
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ].
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE PRICE PER AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED SHARE (1) PRICE FEE
Common Shares................................... 542,420 $9.37 $5,082,475 $467.59
Common Shares................................... 5,059,015(2) N/A N/A N/A
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(1) This amount is based upon the average of the high and low sales prices as of
January 23, 2002, and is being used solely for the purpose of calculating
the registration fee pursuant to Rule 457 under the Securities Act of 1933.
(2) Pursuant to Rule 429 under the Securities Act of 1933, as amended, this
Registration Statement contains a combined prospectus that also relates to
(i) 507,761 common shares previously registered on Registration Statement on
Form F-3 (File No. 333-67607), originally filed on November 20, 1998, of
which the Registrant paid a total filing fee of $5,070.95; (ii) 3,307,797
common shares previously registered on Registration Statement on Form F-3
(File No. 333-91155), originally filed on November 17, 1999, of which the
Registrant paid a total filing fee of $26,439.93; (iii) 411,773 common
shares previously registered on Registration Statement on Form F-3 (File
No. 333-94649), originally filed on January 14, 2000, of which the
Registrant paid a total filing fee of $21,687.20; and (iv) 831,684 common
shares previously registered on Registration Statement on Form F-3 (File
No. 333-40616), originally filed on June 30, 2000, of which the Registrant
paid a total filing fee of $19,650.99. These 5,059,015 shares do not
represent newly issued shares.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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SELLING SHAREHOLDERS' PROSPECTUS
5,601,435 SHARES
VISIBLE GENETICS INC.
COMMON SHARES
This is an offering of common shares by certain shareholders of Visible
Genetics Inc. The selling shareholders will receive all of the proceeds from the
sale of the common shares, less any commissions or discounts paid to brokers or
other agents. We will not receive any of the proceeds from the sale of the
common shares.
The selling shareholders may offer and sell the common shares on the Nasdaq
National Market at prevailing market prices or in privately negotiated
transactions at prices other than the market price. On , the closing
sale price for our common shares on the Nasdaq National Market was $ .
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INVESTING IN OUR SHARES INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 2.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
THE DATE OF THIS PROSPECTUS IS
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TABLE OF CONTENTS
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PAGE
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............. ii
PROSPECTUS SUMMARY.......................................... 1
RISK FACTORS................................................ 2
FORWARD-LOOKING STATEMENTS.................................. 18
CAPITALIZATION AND INDEBTEDNESS............................. 20
NATURE OF TRADING MARKET.................................... 21
DIVIDEND POLICY............................................. 21
SELECTED CONSOLIDATED FINANCIAL DATA........................ 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 24
INFORMATION ABOUT OUR COMPANY............................... 35
SELLING SHAREHOLDERS........................................ 40
PLAN OF DISTRIBUTION........................................ 42
DESCRIPTION OF CAPITAL SHARES............................... 43
EXPENSES OF THE ISSUE....................................... 45
LEGAL MATTERS............................................... 46
EXPERTS..................................................... 46
WHERE YOU CAN FIND MORE INFORMATION......................... 46
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REGISTERED OR UNREGISTERED TRADEMARKS OR TRADE NAMES OF VISIBLE GENETICS
USED IN THIS PROSPECTUS INCLUDE: CLIP, GEL TOASTER, GENEOBJECTS, LONG-READ
TOWER, MICROCEL, OPENGENE, SUREFILL, TRUGENE, VISIBLE GENETICS AND THE VISIBLE
GENETICS LOGO. EACH TRADEMARK, TRADE NAME OR SERVICE MARK OF ANY OTHER COMPANY
APPEARING IN THIS PROSPECTUS BELONGS TO ITS HOLDER.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which we have filed with or submitted to the
Securities and Exchange Commission, are incorporated by reference in this
prospectus:
Our Annual Report on Form 20-F for the year ended December 31, 2000, which
we refer to in this prospectus as our Annual Report on Form 20-F;
Our Report on Form 6-K Filing No. 1 for the Month of July, 2001;
Our Report on Form 6-K Filing No. 2 for the Month of July, 2001;
Our Report on Form 6-K Filing No. 1 for the Month of September, 2001;
Our Report on Form 6-K Filing No. 1 for the Month of October, 2001;
Our Report on Form 6-K Filing No. 1 for the Month of November, 2001;
Our Report on Form 6-K Filing No. 2 for the Month of November, 2001; and
Our Report on Form 6-K Filing No. 1 for the Month of December, 2001.
In addition, all documents which we file with the Securities and Exchange
Commission pursuant to Section 13, 14 or 15(d) of the Securities Exchange Act of
1934, as amended after the date of this prospectus and before termination of the
offering, including all annual reports on Form 20-F or Form 10-K, and all
filings on Forms 10-Q and 8-K, will be deemed to be incorporated by reference in
this prospectus and to be a part of this prospectus from the date those
documents are filed. We may also incorporate in this prospectus any Form 6-K
which we submit to the Securities and Exchange Commission by identifying in such
form that it is being incorporated by reference into this prospectus. Any
statement contained in a document which is incorporated, or deemed to be
incorporated, by reference into this prospectus, shall be considered modified or
superseded for purposes of this prospectus to the extent that a statement
contained in this prospectus or in any other subsequently filed or submitted
document which also is, or is deemed to be, incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this prospectus.
You may request a copy of any document incorporated by reference in this
prospectus at no cost. To receive a copy you can call us at (416) 813-3240, or
write us at:
Visible Genetics Inc.
700 Bay Street
Suite 1000
Toronto, Ontario, Canada M5G 1Z6
Attention: Mr. Thomas J. Clarke
To obtain more information about our company from the Securities and
Exchange Commission, see the section of this prospectus entitled "Where You Can
Find More Information."
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PROSPECTUS SUMMARY
THIS PROSPECTUS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE
IN THIS PROSPECTUS. YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE
DETAILED INFORMATION REGARDING OUR COMPANY AND THE SHARES BEING SOLD IN THIS
OFFERING, WHICH INFORMATION APPEARS ELSEWHERE IN THIS PROSPECTUS AND IN SELECTED
PORTIONS OF OUR ANNUAL REPORT ON FORM 20-F AND OTHER DOCUMENTS FILED WITH OR
SUBMITTED TO THE SECURITIES AND EXCHANGE COMMISSION THAT WE HAVE INCORPORATED BY
REFERENCE INTO THIS PROSPECTUS. ALL FINANCIAL INFORMATION PROVIDED IN THIS
PROSPECTUS IS IN U.S. DOLLARS.
OUR BUSINESS
We develop, manufacture and sell integrated DNA sequencing systems that
analyze genetic information to improve the treatment of selected diseases. Our
strategy is to become a leader in the emerging field of pharmacogenomics.
Pharmacogenomics is the science of individualizing therapy based on genetic
differences among patients. Our genotyping technology, which uses 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 those caused by Human Immunodeficiency Virus, or HIV,
hepatitis B, hepatitis C, and some cancers.
Our OpenGene System consists of disease-specific genotyping kits and
software, automated DNA sequencers, disposable gel cassettes and related
equipment. Our genotyping kits contain the necessary chemicals, reagents,
third-party licenses and other consumables and materials required for sequencing
specific disease-associated genes.
The first clinical diagnostic application we have targeted is HIV. We have
developed our TRUGENE HIV-1 Genotyping Kit 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 mutation,
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. On September 26, 2001, we received
clearance from the U.S. Food and Drug Administration, or FDA, to market our
TRUGENE HIV-1 Genotyping Kit for clinical use in the United States. We began
selling our TRUGENE HIV-1 Genotyping Kit to the clinical diagnostic market in
the U.S. during the fourth quarter of 2001.
We also have developed a genotyping kit for hepatitis C. We are developing
the next generation of our TRUGENE HIV-1 Genotyping Kit, genotyping kits for
other species of HIV not tested for in our TRUGENE HIV-1 Genotyping Kit, a
genotyping kit for hepatitis B, the next generation of our hepatitis C
genotyping kit, and genotyping kits for certain cancers.
Our principal executive offices are located at 700 Bay Street, Suite 1000,
Toronto, Ontario, Canada M5G 1Z6. Our telephone number is (416) 813-3240.
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RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS AND UNCERTAINTIES DESCRIBED BELOW
BEFORE MAKING AN INVESTMENT DECISION. IF ANY OF THE FOLLOWING RISKS ACTUALLY
OCCUR, OUR BUSINESS, FINANCIAL CONDITION OR OPERATING RESULTS COULD BE
MATERIALLY HARMED. THIS COULD CAUSE THE TRADING PRICE OF OUR COMMON SHARES TO
DECLINE, AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT.
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE KNOWN AND
UNKNOWN RISKS AND UNCERTAINTIES. THESE STATEMENTS RELATE TO OUR PLANS,
OBJECTIVES, EXPECTATIONS AND INTENTIONS. OUR ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE DISCUSSED IN THESE STATEMENTS. FACTORS THAT COULD
CONTRIBUTE TO THESE DIFFERENCES INCLUDE THOSE DISCUSSED BELOW AND ELSEWHERE IN
THIS PROSPECTUS.
OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT TO EVALUATE OUR FUTURE
PROSPECTS AND OUR PROSPECTS MUST BE CONSIDERED IN LIGHT OF THE DIFFICULTIES
FREQUENTLY ENCOUNTERED BY COMPANIES IN THE EARLY STAGES OF COMMERCIAL
MANUFACTURING AND MARKETING.
Although we began operations in 1993, we are only in the early stages of
commercially manufacturing and marketing our products. In late 1996, we began
manufacturing and selling the initial versions of our automated DNA sequencers
and related products to the research and clinical research markets. We began
selling our TRUGENE HIV-1 Genotyping Kit and related DNA sequencing equipment
and products, which we call our HIV OpenGene System, to the clinical diagnostic
market in the United States in the fourth quarter of 2001. 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 the nine months ended
September 30, 2001, were $10.4 million and sales for our fiscal years ended
December 31, 2000 and December 31, 1999, were $13.1 million and $13.6 million,
respectively. 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 attributable to common shareholders of $35.4 million
in the year ended December 31, 2000 and $32.2 million for the nine months ended
September 30, 2001. As of September 30, 2001, our accumulated deficit was
$120.8 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 activities 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:
- our ability to successfully market and sell our TRUGENE HIV-1 Genotyping
Kit and related products, and our ability to bring our hepatitis C
genotyping kit to market and, in the future, other genotyping kits and
related products, to the clinical diagnostic market;
- whether the FDA takes enforcement action to restrict the use of unapproved
(also known as "home brew") HIV genotyping tests to provide drug
resistance reports to physicians and other healthcare providers in the
clinical diagnostic market in the United States;
- our ability to manufacture our products according to schedule and within
budget;
- whether we obtain regulatory approval to sell other genotyping kits and
related DNA sequencing equipment and products 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 TRUGENE HIV-1 Genotyping Kit and, in the future, our other
products;
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- our ability to acquire and protect intellectual property important to our
business through patents, licenses or other arrangements;
- our ability to effectively manage the growth of our business; and
- our ability to continue to develop advanced versions of our products and
technologies and new products and technologies in a timely manner.
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:
- our decision to increase or decrease sales of equipment, genotyping kits
and other consumables at reduced prices;
- our decision to reduce prices of our products in response to price
reductions by competitors;
- unanticipated costs or delays in manufacturing our products;
- the amount and timing of operating costs and capital expenditures relating
to research and development, and the expansion of our business, operations
and infrastructure;
- unanticipated costs or delays in carrying out our clinical trials; and
- general economic conditions, as well as economic conditions specific to
the biotechnology industry.
We believe that period to period comparisons of our operating results may
not be meaningful and you should not rely on any such comparisons as an
indication of our future performance. In addition, it is likely that in one or
more future quarters our operating results will fall below the expectations of
securities analysts and investors. In such event, the market price of our common
shares is likely to fall.
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. We are
not aware of any other 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 TRUGENE HIV-1 Genotyping Kit or other genotyping kits to manage drug
treatment of HIV and other 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 home brew genetic tests,
phenotyping assay services, DNA probe-based diagnostic systems and other DNA
sequencers. If our products are not accepted by the
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clinical diagnostic market, our business, financial condition and results of
operations will be materially harmed.
IF THE FDA DOES NOT PROHIBIT CERTAIN OF OUR COMPETITORS FROM USING HOME BREW
GENOTYPING TESTS TO PROVIDE HIV DRUG RESISTANCE TESTING AND DRUG RESISTANCE
REPORTS TO PHYSICIANS, WE WILL SUFFER A SIGNIFICANT COMPETITIVE DISADVANTAGE.
Some of our competitors, including some large clinical laboratories, have
developed home brew HIV genotyping tests which are not approved for clinical
diagnostic use by the FDA or other regulatory agencies. The FDA has said that it
will not require premarket approval of these home brew tests developed in-house
by clinical laboratories if they are used exclusively by the laboratories for
HIV monitoring and if the laboratories do not make any medical claims for their
tests and provide only analytical results to their customers. We believe that
some of these laboratories have interpreted the FDA policy to mean that they are
permitted to use their home brew genotyping tests to conduct HIV drug resistance
testing in the laboratories and provide drug resistance reports about specific
patients to physicians, in direct competition with our TRUGENE HIV-1 Genotyping
Kit. We believe, however, that the FDA policy prohibits the use of the HIV home
brew genotyping tests for these purposes and that these laboratories are
required to obtain FDA approval before using their genotyping tests in this
fashion. We are not certain how the FDA will interpret, or whether and when it
will enforce, its policy as it applies to these HIV home brew genotyping tests.
If the FDA does not prohibit these laboratories from using their home brew
genotyping tests in this fashion, we will be at a significant competitive
disadvantage and our business, financial condition and result 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 TRUGENE HIV-1 Genotyping Kit and other
genotyping kits 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.
We have built a sales force to sell our HIV OpenGene System in the clinical
diagnostic market in North America and selected other countries. We began
selling our HIV OpenGene System to the clinical diagnostic market in the United
States in the fourth quarter of 2001. We cannot be certain that we will
successfully market and sell our products to the clinical diagnostic market.
We have granted rights to distribute our OpenGene Systems to distributors in
the clinical diagnostic, clinical research, and research markets in many
countries outside of the United States and
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Canada. Our ability to successfully sell products in countries in which we rely
on distribution agreements will depend to a great extent on the efforts of the
distributors.
If we fail to successfully market our products, we will impede our ability
to generate significant revenues and become profitable 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, Pennsylvania which manufactures our
TRUGENE HIV-1 Genotyping Kit, currently has a limited production capacity. The
construction of our new facility in Atlanta, Georgia is complete. We are
currently testing the facility to ensure regulatory compliance. We expect our
Atlanta facility to be cleared for full scale commercial production during the
first six months of 2002. However, qualifying the facility for regulatory
compliance may take longer than expected.
Any significant delay in making the Atlanta facility fully 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.
WE MAY NOT RECEIVE APPROVAL OF CERTAIN FOREIGN REGULATORY AUTHORITIES FOR OUR
HIV OPENGENE SYSTEM, AND THEREFORE, WE MAY NOT BE ABLE TO SELL OUR HIV OPENGENE
SYSTEM TO THE CLINICAL DIAGNOSTIC MARKET IN SOME FOREIGN COUNTRIES.
We have obtained regulatory approval to sell our HIV OpenGene System to the
clinical diagnostic market in the United States, France, Argentina and Canada.
However, we are required to obtain approval from other regulatory authorities to
sell our HIV OpenGene System to the clinical diagnostic market in some other
countries. We believe we are currently able to sell our HIV OpenGene System to
the clinical diagnostic market in the following European Union (EU) member
states (in addition to France): Belgium, Luxembourg, United Kingdom, Holland,
Scandinavia and Spain. We expect that further regulatory approvals will not be
required in these EU member states until new EU wide regulations go into effect
in December 2003. We anticipate being in compliance with the new EU regulations
as they become effective. However, we cannot be certain that we will be able to
meet any future EU regulations in a timely manner, or at all. In some EU and
other counties, we may 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 OpenGene System to the clinical diagnostic market in any of these
countries. In some cases, the failure to obtain approval could materially harm
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 MAY 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. We will be required to obtain prior clearance
from the FDA for those product changes that could significantly affect safety or
effectiveness. We also may be required to obtain similar foreign regulatory
approval. To obtain additional approval for some types of changes, we may have
to
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conduct additional human clinical trials to demonstrate that the altered product
will produce at least the same results as the approved product 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.
We expect to update the drug resistance algorithms, embedded in the software
package included in our HIV OpenGene System, approximately every six months. FDA
review and approval of any significant updates will be required. Based on
informal discussions with the FDA, we expect that the FDA's review and approval
of these updates will not exceed 90 days, provided we satisfy the FDA's approval
requirements. However, there can be no assurance that such review process will
not take longer. If the FDA's review process takes longer than 90 days, we may
be delayed in bringing these updates to market.
WE MAY NOT RECEIVE APPROVAL OF THE FDA FOR OTHER PRODUCTS WE MAY DEVELOP, AND,
THEREFORE, WE MAY NOT BE ABLE TO SELL OUR OTHER PRODUCTS TO THE CLINICAL
DIAGNOSTIC MARKET IN THE UNITED STATES.
In the future, we may seek FDA approval to sell other products, including
other genotyping kits, for clinical diagnostic purposes in the United States.
In order to obtain FDA approval for our other products we will have to
submit an application supported by extensive human test data demonstrating the
utility, reliability and performance of these products. We will also be required
to show the FDA 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 other products to
the clinical diagnostic market;
- The FDA may disagree with us that the data are adequate, and we may
therefore have to do additional testing;
- The additional testing, if any, may show that our other products are not
reliable enough, and therefore cannot be authorized by the FDA, or the
additional testing may show that our other products do not work as well as
they need to for successful marketing, even if marketing is authorized by
the FDA;
- The additional, if any, testing may be too costly to carry out, either
because we lack adequate funds or because the market potential for our
other products does not justify the costs;
- There may be significant delays in the FDA review process;
- The FDA may approve the sale of our other products with conditions that
could limit the market for these products or make them more difficult or
expensive to sell than we anticipate; and
- The FDA may seek to revoke marketing authorization for certain of our
products for a variety of reasons.
If we fail to receive FDA approval, if FDA approval is delayed or revoked,
or if the FDA imposes conditions that make it difficult to sell or market our
other products, we will be unable to carry out our business plan to sell our
other products for clinical diagnostic use in the United States and our
business, financial condition and results of operations could be materially
harmed.
WE FACE CERTAIN RISKS WHICH MAY DELAY OR IMPEDE OUR ABILITY TO BRING OUR
HEPATITIS C GENOTYPING KIT TO MARKET.
We have developed a genotyping kit for hepatitis C which we plan to bring to
market during 2002. Our hepatitis C genotyping kit identifies the specific
hepatitis C subtypes a patient is most likely to
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have contracted. The report generated does not provide information about a
patient's drug resistance or recommend the use of specific drugs for treatment
of that patient. We believe that FDA approval is not generally required for
hepatitis C genotyping products which are used for epidemiological studies.
However, the FDA has not provided definitive guidance as to whether a hepatitis
C product used for the purpose and in the manner we intend our hepatitis C
genotyping kit to be used, would require approval. We are aware of at least one
product similar to ours that is being marketed and sold by a competitor without
FDA approval. To our knowledge, the FDA has not advised that company that FDA
approval is required to market and sell the product for the purposes for which
it is intended to be used and has not initiated enforcement action to stop the
marketing or sale of the product. We do not intend to seek FDA clearance to
market our hepatitis C genotyping kit for the purposes for which it is intended
to be used. However, we cannot be certain that the FDA will not determine that
authorization is required for us to market and sell the hepatitis C genotyping
kit for these purposes or direct us not to sell the kit without authorization.
If we are required to obtain FDA approval in order to sell our hepatitis C
genotyping kit, we will not be able to bring the product to market during 2002.
The FDA approval process is lengthy and expensive and we may never receive FDA
approval.
We also may need to obtain a license for some of the components included in
our hepatitis C genotyping kit before we are able to bring the product to
market. We may not be able to obtain a license on acceptable terms or at all. If
we are unable to obtain a license, our customers may be able to purchase the
required components from a licensed supplier. Alternatively, we may be able to
enter into distribution arrangements that would enable us to distribute the kit
without a license. If we are unable to obtain a required license or if we are
required to make alternate arrangements, we may not be able to bring the
hepatitis C genotyping kit to market during 2002 or at all.
If we are unable to bring our hepatitis C genotyping kit to market or if we
encounter significant delays in doing so, our business, financial condition and
results of operations will be materially harmed.
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 Atlanta, 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 Atlanta 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.
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IF WE ARE UNABLE TO CONTINUE DEVELOPING ADVANCED TECHNOLOGY, ADVANCED VERSIONS
OF OUR EXISTING PRODUCTS AND NEW PRODUCTS IN A TIMELY AND COST-EFFECTIVE MANNER,
OUR ABILITY TO GENERATE REVENUE AND BECOME 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.
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, and to protect our trade secrets.
We own or jointly own numerous U.S. and foreign patents. We own or jointly
own U.S. patent applications and foreign applications presently pending as PCT
applications, or as national phase PCT applications, designating
intergovernmental agencies and multiple countries including the European Patent
Office, Australia, Canada and Japan. We cannot assure you that our patent
applications will result in patents being issued in the United States or foreign
countries. In addition, the U.S. Patent and Trademark Office may reverse its
decision or delay the issuance of patents that have been allowed. We also cannot
assure you that any technologies or products that we may develop in the future
will be patentable. In addition, competitors may develop products similar to
ours that do not conflict with our patents. Others may challenge our patents
and, as a result, our patents could be narrowed or invalidated.
From time to time, we may be required to obtain licenses from third parties
for some of the technology or components used or included in certain of our
genotyping kits 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 limited.
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 notices from third parties claiming that we may
infringe their patent or other proprietary rights. Despite our best efforts, we
may be sued for infringing on the patent or other proprietary rights of others.
Such litigation is costly, and, even if we prevail, the cost of such litigation
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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. In certain instances, if we are unable to obtain a
required license, our ability to sell or use certain products may be impaired.
In addition, 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.
The Board of Trustees of the Leland Stanford Junior University has filed a
lawsuit in the United States District Court for the Northern District of
California claiming that our TRUGENE HIV-1 Genotyping Kit infringes patents
owned by the University. We have received an attorney opinion that we do not
infringe any claim of the patents-in-suit. We do not believe that this legal
action will have a material adverse effect on our business, financial condition
or results of operations.
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 GENOTYPING KITS.
Our genotyping kits include dyes, reagents and other chemicals supplied by
third parties. Certain of these dyes, reagents and other chemicals 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 our analysis software and/or our DNA sequencing equipment to
the new product, which could take time. If the genotyping kit is FDA approved,
we may also be required to seek FDA approval for the altered genotyping kit if
the alternative product were to substantially alter the performance of the
genotyping kit or if the changes could significantly affect safety or
effectiveness. This could cause delays in production and in bringing the altered
genotyping kit to market.
We currently purchase acrylamide, an important chemical used in our MicroCel
cassettes, from one supplier. This supplier has informed us that it is
experiencing financial hardship. Should this supplier go out of business, we
will need to find an alternative source of acrylamide. We cannot be certain that
we will be able to find a satisfactory alternate supplier. If we are unable to
find an alternate reliable supplier, we may elect to manufacture acrylamide in
our own facilities. We have no experience in this area and we cannot be certain
that we will be able to do so successfully. If we are unable to locate reliable
alternate supplies or make acrylamide on our own, our business could be
materially harmed.
We also use certain custom-designed components supplied by third parties in
our DNA sequencers and other equipment. We believe that there are alternate
suppliers for these custom-designed parts. However, we will incur costs in
switching to alternate suppliers and will likely experience delays in production
of the products that use any of these parts until such time as we are able to
locate alternate suppliers or parts on acceptable terms.
WE ARE DEPENDENT ON OUR LICENSE FOR THE POLYMERASE CHAIN REACTION TECHNOLOGY WE
USE IN MOST OF OUR GENOTYPING KITS AND OUR BUSINESS WOULD SUFFER IF THE LICENSE
IS TERMINATED.
We license the polymerase chain reaction technology that we use in most of
our genotyping kits from Roche Molecular Systems, Inc. and F. Hoffmann-La
Roche Ltd. This license is 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 this license. The license is for the life of the
patents included within the licensing agreement. The license may be terminated
by Roche Molecular Systems and F. Hoffman-La Roche prior to the expiration under
certain limited circumstances. The termination of this license would have a
material adverse effect on our ability to produce or sell our TRUGENE HIV-1
Genotyping Kit and our other genotyping kits that use this technology.
Consequently, we could experience a deterioration of anticipated future sales of
those genotyping kits and further losses, and our business could be materially
harmed.
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WE ARE DEPENDENT ON OUR LICENSE FOR CERTAIN TECHNOLOGY WE USE IN OUR DNA
SEQUENCING INSTRUMENTS AND OUR BUSINESS WOULD SUFFER IF THE LICENSE IS
TERMINATED.
We license certain intellectual property owned or exclusively licensed by
Applera Corporation, Applied Biosystems Group, which we refer to in this
prospectus as Applera. The license enables us to utilize certain Applera
technology to manufacture and sell our DNA sequencing instruments, as well as
manufacture and sell clinical sequencing kits to run on DNA sequencing
instruments manufactured by us, Applera and certain other third parties. We are
required to pay royalties to Applera for this license. The license is for the
life of the patents included within the licensing agreement. Either party may
terminate the agreement under certain limited circumstances. The termination of
this license would have a material adverse effect on our ability to produce or
sell our DNA sequencing instruments and genotyping kits. Consequently, we could
experience a deterioration of anticipated future sales of our genotyping kits
and further losses, and our business could be materially harmed.
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:
- purveyors of home brew genetic tests, which may not have undergone
clinical validation and have not been approved by the FDA or other
regulatory agencies, including Laboratory Corporation of America Holdings,
Quest Diagnostics Inc. and Specialty Laboratories, Inc.
- manufacturers of genotyping test kits, including the Celera Diagnostics
division of Applera;
- purveyors of phenotyping assay services, including ViroLogic, Inc. and
Tibotec-Virco NV;
- 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; and
- manufacturers and distributors of DNA sequencers such as Applera, Amersham
Pharmacia Biotech, Inc., LI-COR, Inc., Hitachi, Ltd. and Beckman
Coulter, Inc.
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.
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If we are successful in increasing sales and expanding our markets, there
will be additional demands on our management, marketing, distribution, customer
support and other operational and administrative resources and systems. To
accommodate future growth, we may add staff and information and other systems.
We cannot guarantee that we will be able to do so or that, if we do so, we will
be able to effectively integrate them into our existing staff and systems. In
addition, our current and future expense levels are based largely on our
investment plans and estimates of future revenues and are, to a large extent,
fixed. We may be unable to adjust spending in a timely manner to compensate for
any unexpected revenue shortfall. Therefore, any significant shortfall in
revenues as compared to our planned expenditures will materially harm our
business, financial condition, and results of operations. If we are unable to
manage our growth, we may not be able to implement our business plan and our
business, financial condition and results of operations will be materially
harmed.
IF WE ARE UNABLE TO EFFECTIVELY INTEGRATE FUTURE ACQUISITIONS OF NEW OR
COMPLEMENTARY BUSINESSES, PRODUCTS OR TECHNOLOGY, OUR BUSINESS MAY BE HARMED.
We have made and in the future may make acquisitions of complementary
businesses, products, services or technologies. We have limited experience in
integrating newly acquired organizations into our operations. Acquisitions
expose us to many risks, including:
- difficulty in assimilating technologies, products, personnel and
operations;
- diversion of management's attention from other business concerns;
- large write-offs and amortization expenses related to goodwill and other
intangible assets;
- entering markets in which we have no or limited experience; and
- incurrence of debt or assumption of other liabilities.
The occurrence of one or more of these factors could materially harm our
business, financial condition and results of operations.
In addition, if we issue additional securities in connection with an
acquisition, the ownership interests of our existing securities holders will be
diluted.
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, marketing and use 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;
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- fluctuations in currency exchange rates;
- political risks;
- foreign exchange controls that may restrict or prohibit repatriation of
funds;
- varying laws relating to, among other things, employment and employment
termination;
- export and import restrictions or prohibitions, and delays from customs
brokers or government agencies;
- seasonal reductions in business activity in certain parts of the world;
and
- potentially adverse tax consequences.
Depending on the countries involved, any or all of the foregoing factors
could materially harm our business, financial condition and results of
operations.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL IN THE FUTURE AND WE CANNOT BE CERTAIN
THAT WE WILL BE ABLE TO RAISE CAPITAL WHEN NECESSARY ON ACCEPTABLE TERMS.
At this time, our sales are not sufficient to meet our anticipated financing
requirements. Based on our current plans, we believe that current cash balances
and anticipated funds from operations will be sufficient to enable us to meet
our operating needs for the next 15 to 18 months. However, the amount of funds
that we will need during this period will be determined by many factors, some of
which are beyond our control. These factors, among others, include:
- our success in selling our HIV OpenGene System to the clinical diagnostic
market;
- our ability to acquire and protect intellectual property important to our
business through patents, licenses or other arrangements;
- our success in introducing new products during the period;
- the costs of conducting clinical trials;
- regulatory costs incurred in bringing products to market;
- our need to defend claims that our products may infringe the intellectual
property rights of others;
- the costs of acquiring and integrating any new business or technologies
during the period; and
- our incurring significant fixed overhead and other expenses prior to
increasing our revenues.
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 15 to18 month period. If we need to obtain funds, 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.
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We will be required to obtain the consent of the holders of a majority of
our then outstanding Series A preferred shares prior to issuing any equity
security that has rights as to dividends and liquidation that are senior or
equal to those of the Series A preferred shares. Also, under certain
circumstances, if we propose to sell equity securities, including debt
securities convertible into equity securities, certain holders of our Series A
preferred shares will be entitled to preemptive rights which allow them to
purchase a proportional amount of the securities being offered. We will also be
required to obtain the consent of the holders of a majority of our then
outstanding Series A preferred shares if we wish to borrow money and at such
time or as a result of such loans, the total principal amount of our
indebtedness and capitalized lease obligations exceeds $15.0 million. In
addition, if we were to enter into a credit facility with a financial
institution, we may be subject to additional limitations on our ability to incur
additional indebtedness. As a result, we may be delayed in, or prohibited from,
obtaining certain types of financing.
OUR U.S. INVESTORS COULD SUFFER ADVERSE TAX CONSEQUENCES IF WE ARE CHARACTERIZED
AS A PASSIVE FOREIGN INVESTMENT COMPANY.
Although we do not believe that we were a passive foreign investment company
(or PFIC) for United States federal income tax purposes during 2000 there can be
no assurance that we will not be treated as a PFIC in 2001 or 2002. 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 2000 taxable year and for the first nine months of the 2001 taxable
year, approximately 12% and 15%, respectively, of our assets averaged over these
taxable periods produced, or were held for the production of, passive income,
and approximately 26% and 18%, respectively, of our gross income was passive
income.
If we become a PFIC, many of our U.S. shareholders will, in absence of
certain elections as discussed below, be subject to the following adverse tax
consequences:
- They will be taxed at the highest ordinary income tax rates in effect
during their holding period on certain distributions on our common shares,
and gain from the sale or other disposition of our common shares;
- They will be required to pay interest on taxes allocable to prior periods;
and
- The tax basis of our common shares will not be increased to fair market
value at the date of their deaths.
If we become a PFIC, our U.S. shareholders could avoid these tax
consequences by making a qualified electing fund election or a mark-to-market
election. These elections would need to be in effect for all taxable years
during which we were a PFIC and during which our U.S. shareholders held our
common shares. A U.S. shareholder who makes a qualified electing fund election,
will be taxed currently on our ordinary income and net capital gain (unless a
deferral election is in effect). A U.S. shareholder who makes a mark-to-market
election, will include as ordinary income each year an amount equal to the
excess of the fair market value of our common shares over the adjusted tax basis
as of the close of each year (with certain adjustments for prior years).
If we become a PFIC, our U.S. shareholders will generally be unable to
exchange our common shares for shares of an acquiring corporation on a
tax-deferred basis under the reorganization rules of the Internal Revenue Code,
and the benefits of many other nonrecognition provisions of the Internal Revenue
Code will not apply to transfers of our common shares. In addition, if we become
a PFIC, pledges of our common shares will be treated as sales for U.S. federal
income tax purposes. Our U.S. shareholders should note that state and local
taxes may also apply if amounts are included in U.S. federal taxable income
under the PFIC rules of the Internal Revenue Code. The PFIC rules are very
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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 "Item 10.
Additional Information--Taxation--U.S. Federal Income Tax Considerations--Tax
Status of the Company--Passive Foreign Investments Companies of 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 with the approval of our Series A Preferred
Shareholders, 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 and as of
December 31, 2001, 25,153 remained outstanding. Our Series A preferred shares
entitle the holders to certain preferences over our common shares, 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 $25.2 million in the aggregate, plus accrued and
unpaid dividends, before holders of common shares would be entitled to
receive any distribution.
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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 December 31, 2001, we had 22,099,085 outstanding voting shares. This
includes 2,901,894 shares issuable upon conversion of our Series A preferred
shares. All of these shares (including the common shares to be issued upon
conversion of the Series A preferred shares) are eligible for sale under
Rule 144, pursuant to currently effective registration statements, or are
otherwise freely tradable. In addition:
- Our officers and directors own options to acquire an additional 1,031,376
shares. The shares to be issued upon exercise of these options have been
registered and may be freely sold when issued. Our officers and directors
also own 898,223 shares that may be sold subject to volume restrictions
imposed by Rule 144.
- Our employees and consultants who are not deemed affiliates hold options
to buy a total of 1,153,764 shares. The shares to be issued upon exercise
of these options have been registered and may be freely sold when issued.
- We may issue options to purchase up to an additional 27,541 shares under
our share option plans. The shares to be issued upon exercise of these
options have been registered and may be freely sold when issued.
- Our Board of Directors has approved, pending shareholder approval, the
issuance of options to purchase an additional 1,000,000 shares under our
2000 Employee Option Plan and has granted options to officers and
employees, pending shareholder approval, to purchase 216,000 of these
shares, which are not reflected in the option numbers shown above. The
shares to be issued upon exercise of these options have not been
registered and may be freely sold only pursuant to an effective
registration statement.
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 191,972 common shares as of
December 31, 2001) 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.
15
<Page>
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. You can identify these
forward-looking statements when you see us using words such as "expect,"
"anticipate," "estimate," "believe," "intend," "may," "predict," and other
similar expressions. These forward looking statements cover, among other items:
- our expectations about our financial performance;
- acceptance of our products in the clinical diagnostic market;
- acceptance of genotyping in the clinical diagnostic market;
- our marketing and sales plans;
- our expectations about the markets for our products;
- the performance of our products;
- our intention to introduce new products;
- our future capital needs;
- FDA and other regulatory approval for certain of our products;
- reimbursement of our products by insurance companies and other third-party
payors;
- our ability to compete in the research, clinical research and clinical
diagnostic markets;
- our patent applications; and
- our expectations about the effect of the existing lawsuit against our
company.
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:
- uncertainty of acceptance of genotyping, in general, and of our products,
in particular, in the clinical diagnostic market;
- failure of the FDA to take enforcement action to restrict the use of home
brew genotyping tests to provide drug resistance reports to physicians and
other healthcare providers in the clinical diagnostic market in the United
States;
- refusal of insurance companies and other third-party payors to reimburse
patients and clinicians for our products;
- problems that we may face in bringing our hepatitis C genotyping kit to
market;
- problems that we may face in manufacturing, marketing and distributing our
products;
- delays in obtaining, or our inability to obtain, approval by the FDA for
changes made to FDA-approved products;
- delays in obtaining, or our inability to obtain, approval by certain
foreign regulatory authorities for our HIV OpenGene System and certain of
our other products for the clinical diagnostic market;
16
<Page>
- delays in obtaining, or our inability to obtain, approval by the FDA for
certain of our other products for the clinical diagnostic market;
- problems, delays and expenses we may face with our proposed clinical
trials;
- problems in acquiring and protecting intellectual property important to
our business through patents, licenses and other agreements;
- our ability to successfully defend claims that our products may infringe
the intellectual property rights of others;
- 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.
17
<Page>
CAPITALIZATION AND INDEBTEDNESS
The following table shows our capitalization as of September 30, 2001, on an
actual basis, and on an as adjusted basis, after giving effect to the issuance
of 2,637,890 common shares sold on December 24, 2001. This does not include
3,850,217 common shares that are being registered under this registration
statement, of which this prospectus is a part, since these shares are not yet
issued. These shares will be issued upon exercise of warrants or conversion of
Series A preferred shares, held by certain shareholders.
You should carefully read our Consolidated Financial Statements and the
Notes to those statements incorporated into this prospectus by reference.
<Table>
<Caption>
SEPTEMBER 30, 2001 SEPTEMBER 30, 2001
------------------ ------------------
ACTUAL AS ADJUSTED
(IN THOUSANDS) (IN THOUSANDS)
Series A mandatorily redeemable convertible preferred
shares, no par value, 33,950 authorized, 33,948 issued and
25,153 outstanding, actual and as adjusted................ $ 25,998 $ 25,998
--------- ---------
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,
16,510,484 shares issued and outstanding, actual;
19,148,374 shares issued and outstanding, as adjusted... 172,129 194,029
Other equity................................................ (3,444) (3,444)
Cumulative translation adjustment........................... (909) (909)
Accumulated deficit......................................... (120,846) (120,846)
--------- ---------
Total shareholders' equity.............................. 46,930 68,830
--------- ---------
Total capitalization.................................... $ 72,928 $ 94,828
========= =========
</Table>
The number of common shares outstanding excludes:
- 2,135,316 common shares reserved for issuance pursuant to outstanding
stock options at a weighted average exercise price of $18.02;
- 137,546 common shares reserved for future issuance under our Employee
Option Plan;
- 15,000 common shares reserved for future issuance under our Director Share
Option Plan;
- 936,473, actual, and 941,795, as adjusted, common shares reserved for
issuance under outstanding warrants at a weighted average price of $12.02
and
- 2,767,692, actual, and 2,839,188, as adjusted, common shares issuable upon
conversion of the Series A preferred shares as of September 30, 2001. The
number of common shares issuable upon conversion of our Series A preferred
shares will increase as the dividends on the Series A preferred shares
accrue.
In addition, our Board of Directors has approved, pending shareholder
approval, the issuance of options to purchase an additional 1,000,000 shares
under our 2000 Employee Option Plan, which are not reflected in the option
numbers shown above.
18
<Page>
NATURE OF TRADING MARKET
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. Our Series A preferred shares are not listed or
quoted for trading on any securities market.
<Table>
<Caption>
HIGH LOW
---------------- ---------------
ANNUAL MARKET PRICES
Fiscal Year ended December 31, 1997....................... $14.25 $2.38
Fiscal Year ended December 31, 1998....................... $14.00 $6.00
Fiscal Year ended December 31, 1999....................... $34.63 $8.88
Fiscal Year ended December 31, 2000....................... $119.13 $19.38
Fiscal Year ended December 31, 2001....................... $37.45 $8.76
QUARTERLY MARKET PRICES
FISCAL YEAR ENDED DECEMBER 31, 2000
First Quarter............................................. $119.13 $29.00
Second Quarter............................................ $50.44 $19.38
Third Quarter............................................. $49.38 $28.00
Fourth Quarter............................................ $44.25 $21.75
FISCAL YEAR ENDED DECEMBER 31, 2001
First Quarter............................................. $37.45 $14.13
Second Quarter............................................ $24.97 $12.16
Third Quarter............................................. $27.10 $16.16
Fourth Quarter............................................ $20.25 $8.76
FISCAL YEAR ENDED DECEMBER 31, 2002
First Quarter (through January 23, 2002).................. $11.59 $8.15
MONTHLY MARKET PRICES
July 2001................................................. $24.00 $18.75
August 2001............................................... $26.84 $20.60
September 2001............................................ $27.10 $16.16
October 2001.............................................. $20.25 $14.05
November 2001............................................. $15.30 $8.95
December 2001............................................. $12.62 $8.76
January 2002 (through January 23, 2002)................... $11.59 $8.15
</Table>
19
<Page>
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
(through July 15, 2002), and, beginning on July 15, 2002, at the rate of 4% per
year. Dividends may not be paid until July 15, 2002. Beginning on July 15, 2002,
at our option, we may pay dividends in cash. If dividends are not paid in cash,
they will continue to accrue.
COMMON SHARES. We have not declared or paid any cash dividends on our
common shares. We currently intend to retain any future earnings for use in the
operation and expansion of our business. We do not anticipate paying any cash
dividends on our common shares in the foreseeable future.
20
<Page>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data set forth below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our Consolidated Financial Statements
and the Notes thereto included in our Annual Report on Form 20-F, incorporated
into this prospectus by reference. The Consolidated Statement of Operations data
for fiscal years 1998, 1999 and 2000 and the Consolidated Balance Sheet data as
at December 31, 1999 and 2000, as set forth below, have been derived from our
consolidated financial statements which have been audited by
PricewaterhouseCoopers LLP, Chartered Accountants in Canada, whose report with
respect to such financial statements appears in our Annual Report on Form 20-F,
incorporated into this prospectus by reference. The Consolidated Statement of
Operations data for fiscal years 1996 and 1997 and the Consolidated Balance
Sheet data as at December 31, 1996, 1997 and 1998, as set forth below, have been
derived from audited consolidated financial statements not included in this
prospectus. The Consolidated Statement of Operations data for the nine-month
period ended September 30, 2000 and 2001 and the Consolidated Balance Sheet data
as at September 30, 2001 are derived from unaudited consolidated financial
statements included in our Report on Form 6-K Filing No. 1 for the Month of
November, 2001, incorporated into this prospectus by reference, which in the
opinion of our management, reflect all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the financial data for such
period. Historical results are not necessarily indicative of results to be
expected for any future period.
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<Table>
<Caption>
NINE MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------------------- ------------------------
1996 1997 1998 1999 2000 2000 2001
-------------- --------- --------- --------- ---------- ---------- -----------
(UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Sales.............................. $ 978 $ 3,033 $ 10,875 $ 13,627 $ 13,073 $ 10,060 $ 10,389
Cost of sales...................... 561 1,995 6,673 9,273 10,134 7,564 7,424
-------------- --------- --------- --------- ---------- ---------- ----------
Gross margin....................... 417 1,038 4,202 4,354 2,939 2,496 2,965
Sales, general and administrative
expense.......................... 3,377 7,448 11,516 19,074 28,571 20,142 25,006
Research and development expense... 2,745 4,123 6,289 7,935 10,606 7,859 7,955
Other expense...................... -- 654 420 1,329 -- -- 1,920
-------------- --------- --------- --------- ---------- ---------- ----------
Loss from operations before
interest......................... (5,705) (11,187) (14,023) (23,984) (36,238) (25,505) (31,916)
Interest income.................... 609 774 264 695 4,481 3,304 2,290
Interest and financing expense..... (69) (3) (1,132) (1,998) (17) (9) (8)
-------------- --------- --------- --------- ---------- ---------- ----------
Net loss........................... (5,165) (10,416) (14,891) (25,287) (31,774) (22,210) (29,634)
Cumulative preferred dividends and
accretion of discount
attributable to preferred
shares........................... -- -- -- (1,770) (3,656) (2,806) (2,539)
Net loss attributable to common
shareholders..................... $ (5,165) $ (10,416) $ (14,891) $ (27,057) $ (35,430) $ (25,016) $ (32,173)
============== ========= ========= ========= ========== ========== ==========
Net loss per common share.......... $ (0.89) $ (1.48) $ (1.91) $ (2.73) $ (2.42) $ (1.77) $ (1.96)
============== ========= ========= ========= ========== ========== ==========
Weighted average number of common
shares outstanding............... 5,791,367 7,059,578 7,782,094 9,916,954 14,612,172 14,125,983 16,385,987
</Table>
<Table>
<Caption>
SEPTEMBER 30,
1996 1997 1998 1999 2000 2001
-------- -------- -------- -------- -------- -------------
(unaudited)
BALANCE SHEET DATA:
Cash and short-term investments.......................... $18,928 $ 7,588 $11,274 $42,688 $80,399 $ 40,708
Working capital.......................................... 20,061 9,561 8,432 45,319 78,107 38,436
Total assets............................................. 22,606 13,936 27,783 58,640 110,356 83,001
Indebtedness............................................. -- -- 7,495 -- -- --
Mandatorily redeemable convertible preferred shares...... -- -- -- 27,556 24,397 25,998
Accumulated deficit...................................... (8,845) (19,260) (34,151) (59,438) (91,212) (120,846)
Shareholders' equity..................................... 21,795 12,610 14,579 24,351 76,845 46,930
</Table>
21
<Page>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OPERATING RESULTS
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.
On September 26, 2001, we received clearance from the FDA to market our
TRUGENE HIV-1 Genotyping Kit for clinical use in the United States. We began
selling our TRUGENE HIV-1 Genotyping Kit to the clinical diagnostic market in
the U.S. during the fourth quarter of 2001.
In December 2000, we received approval from French regulatory authorities to
sell our HIV OpenGene System to the clinical diagnostic market in France, and
during 2001, we also received approval from the appropriate regulatory
authorities to sell our HIV OpenGene System to the clinical diagnostic markets
in Canada and Argentina.
Our products and services include:
- GENOTYPING KITS AND OTHER CONSUMABLES. Genotyping kits consist of various
reagents, enzymes, primers and other chemicals, and other consumables
consist of disposable gel cassettes, acrylamide and other materials.
- SEQUENCING SYSTEMS. Sequencing systems consist of automated DNA sequencers
and related equipment, and our proprietary DNA analysis and data
management software.
- TESTING, SEQUENCING AND OTHER SERVICES. We provide services, such as viral
load testing, genotyping and other molecular services in the United
States. During the third quarter of 2000 we began to phase-out our
testing, sequencing and services business in Europe.
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 genotyping kits and other consumables initially to the research and clinical
research markets and, subject to FDA and foreign regulatory approval, as
applicable, to the clinical diagnostic market. As part of this strategy, we may
sell our DNA sequencers at reduced prices, or place DNA sequencers at no cost,
to customers who commit, or to customers who we anticipate will commit, to
purchase significant quantities of genotyping kits and other consumables. 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 TRUGENE HIV-1 Genotyping Kit and other genotyping kits to the
clinical diagnostic market. In addition, in 1998 and 1999, we sometimes bundled
our DNA sequencers and genotyping kits for sale at reduced prices. We
discontinued the practice of bundled sales in the second half of 1999.
During 2000, in anticipation of our receiving regulatory approval of our
TRUGENE HIV-1 Genotyping Kit, we began to de-emphasize marketing and sales of
equipment to the research market and sales of testing, sequencing and other
services. We have continued to market and sell equipment and genotyping kits to
the clinical research market for research and investigational purposes. We
anticipate that during 2002 the vast majority of our revenue will be generated
by sales of genotyping kits and other consumables to the clinical diagnostic
market.
22
<Page>
OUR OPERATIONS
SALES. Sales consist of revenues from the sale of genotyping kits and other
consumables, sequencing systems, 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 evidence of an arrangement
exists, shipment occurs and title passes to the customer or distributor, sales
price is fixed or determinable and there is a reasonable assurance of
collectibility. Revenue from the sale of testing and other services are
recognized when evidence of an arrangement exists, the services are provided,
sales price is fixed or determinable and there is a reasonable assurance of
collectibility. Sales of bundled sequencing systems and genotyping kits 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, Africa 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 sell our products through distribution, marketing or
agency agreements with leading distributors.
For an analysis of sales by product segment and geographic market for 2000,
1999 and 1998, see Note 14 to our Consolidated Financial Statements found in our
Annual Report on Form 20-F incorporated into this prospectus by reference, and
for an analysis of sales by product segment for the nine months ended
September 30, 2001 and 2000, see Note 8 to our Consolidated Financial Statements
found in our Report on Form 6-K Filing No. 1 for the month of November, 2001,
incorporated into this prospectus by reference.
COST OF SALES. Cost of sales consists of manufacturing costs including
materials, labor and overhead chargeable to inventory, royalties paid on product
sales and amortization of instruments placed with customers. The gross margin
from sales of our products and services varies depending on product category,
sales volumes, 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,
advertising and trade shows, occupancy costs, utilities, professional fees,
consulting fees, travel costs, capital taxes, depreciation of fixed assets,
amortization of license fees and amortization of costs related to patent
acquisition.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
consist primarily of salaries and related expenses for employees engaged in
research and development, occupancy costs, consulting fees, travel costs,
depreciation and amortization of fixed assets and costs related to FDA clinical
trials for our HIV OpenGene System.
INTEREST INCOME. Interest income consists of income earned on cash, cash
equivalents and marketable securities.
INTEREST AND FINANCING EXPENSE. Interest and finance expense consists of
interest paid or accrued, and amortization of warrant costs and other financing
expenses.
Our financial statements are presented in U.S. dollars and are prepared in
accordance with generally accepted accounting principles in the United States.
23
<Page>
RESULTS OF OPERATIONS
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2001 TO NINE MONTHS ENDED
SEPTEMBER 30, 2000
SALES. Sales increased 3% to $10.4 million for the nine months ended
September 30, 2001, from $10.1 million for the nine months ended September 30,
2000. The increase resulted from an increase in sales of genotyping kits and
consumables offset, in part, by a decline in sequencing system sales and
services revenue. For the nine months ended September 30, 2001, sales of
genotyping kits and consumables increased to $8.1 million from $5.8 million in
the comparable period of 2000, while sales of sequencing systems and services
decreased to $2.1 million and $0.2 million, respectively, for the nine months
ended September 30, 2001, from $3.9 million and $0.4 million, respectively, for
the comparable period of 2000. The decrease in sales of sequencing systems in
the nine months September 30, 2001, reflects the decision made, in the second
half of 2000, to de-emphasize sales of sequencing systems to the research
market. The decline in services revenue is due primarily to the phase out of
testing services in Europe beginning in the third quarter of 2000. During the
nine months ended September 30, 2001, sales of genotyping kits and consumables
accounted for 78% of total sales, compared to 57% of sales in the comparable
period of 2000. For the nine months ended September 30, 2001 sales of sequencing
systems and testing services accounted for 20% and 2%, respectively, of total
sales, compared to 39% and 4%, respectively, for the comparable period of 2000.
Sales in North America, Europe, Japan and the rest of the world were
$5.1 million, $4.0 million, $1.0 million and $0.3 million, respectively, for the
nine months ended September 30, 2001, as compared to $5.0 million,
$3.9 million, $0.9 million and $0.3 million, respectively, for the comparable
period of 2000. During the nine months ended September 30, 2001, sales to
Amersham International PLC accounted for approximately 10% of sales, of which 8%
comprised sequencing systems and 2% comprised genotyping kits and other
consumables. During the comparable period of 2000, the sales to Amersham
accounted for approximately 12% of sales, of which 11% comprised sequencing
systems and 1% comprised genotyping kits 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 decreased 2% to $7.4 million for the nine
months ended September 30, 2001, from $7.6 million for the nine months ended
September 30, 2000. For the nine months ended September 30, 2001, cost of sales
aggregated 71% of sales, compared to 75% for the comparable period of 2000. The
decrease in cost of sales as a percentage of sales was primarily due to the
increase, as a percentage of sales, in sales of genotyping kits and consumables
which on a percentage basis have a lower cost of sales than do sales of
sequencing systems.
SALES, GENERAL AND ADMINISTRATIVE EXPENSES. Sales, general and
administrative expenses increased 24% to $25.0 million for the nine months ended
September 30, 2001, from $20.1 million for the nine months ended September 30,
2000. These increases resulted primarily from:
- Start up costs related to our new Atlanta manufacturing facility;
- Costs associated with the opening, in July 2000, of a North American sales
and administrative facility in Atlanta;
- Amortization of license fees for license agreements entered into in 2000;
and
- Continued expansion of our sales force and marketing activities in North
America and Europe.
Sales and marketing expenses included in sales, general and administrative
expenses for the nine months ended September 30, 2001 increased 12%, to
$11.2 million, from $10.0 million for the nine months ended September 30, 2000.
24
<Page>
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased 1% to $8.0 million for the nine months ended September 30, 2001, from
$7.9 million for the nine months ended September 30, 2000.
EXIT AND TERMINATION COSTS. During the nine months ended September 30,
2001, we incurred exit and termination costs of $1.9 million. Of this amount,
$1.2 million related to the transfer of certain research and development
activities from our Toronto facility to our facilities in Atlanta and Cambridge,
England (which we acquired in September 2001), and $0.5 million related to the
planned transfer of genotyping kit manufacturing from Pittsburgh to our new
manufacturing facility in Atlanta. In addition, $0.2 million related to the
sub-lease of a facility in Norcross, Georgia that was vacated in 1999 in
connection with the relocation of certain activities to Atlanta.
There were no exit and termination costs in 2000.
INTEREST INCOME. Interest income decreased to $2.3 million for the nine
months ended September 30, 2001, from $3.3 million for the nine months ended
September 30, 2000. The decrease is due to lower average cash balances and lower
average interest rates earned on invested cash during the nine months ended
September 30, 2001.
CUMULATIVE PREFERRED DIVIDENDS AND ACCRETION OF DISCOUNT ATTRIBUTABLE TO
PREFERRED SHARES. Cumulative preferred dividends and accretion of discount
attributable to preferred shares decreased 10% to $2.5 million for the nine
months ended September 30, 2001, from $2.8 million for the nine months ended
September 20, 2000. The decrease is due to having fewer Series A preferred
shares outstanding. In September 2000 a holder of the Series A preferred shares
converted 7,795 shares into common shares, and in March 2001 a second holder of
the Series A preferred shares converted 1,000 shares into common shares.
COMPARISON OF FISCAL YEAR ENDED DECEMBER 31, 2000 TO FISCAL YEAR ENDED
DECEMBER 31, 1999
SALES. Sales declined 4% to $13.1 million in 2000, from $13.6 million in
1999. The decline resulted from a decrease in sequencing systems sales and
services revenue offset, in part, by an increase in sales of our genotyping kits
and other consumables. In 2000, sales of sequencing systems decreased to
$4.5 million from $7.7 million in 1999. The decrease in sales of sequencing
systems in 2000 reflects our decision to de-emphasize the sale of sequencing
systems to the research market. Services sales decreased from $1.2 million in
1999 to $0.4 million in 2000. The decline in services sales is due primarily to
the phase-out of testing services in Europe beginning in the third quarter of
2000, and to our decision to temporarily re-deploy many of our testing services
personnel in North America to assist in completing our FDA submission. During
2000 sales of genotyping kits and other consumables increased to $8.2 million
from $4.7 million in 1999. In 2000, sequencing systems accounted for 35% of
total sales, compared to 57% of total sales in 1999. In 2000, genotyping kits
and other consumables accounted for 62% of total sales, compared to 35% of sales
in 1999. Testing services accounted for 3% of total sales, compared to 8% of
total sales in 1999.
Sales in North America, Europe, Japan and the rest of the world were
$6.6 million, $5.0 million, $0.9 million and $0.6 million, respectively, for
2000, as compared to $5.2 million, $5.5 million, $1.6 million and $1.3 million,
respectively, during 1999. During 2000, Amersham International PLC accounted for
approximately 11% of sales, of which 10% comprised sequencing systems and 1%
comprised genotyping kits and other consumables. During 1999, the sales to
Amersham accounted for approximately 21% of sales, of which 19% comprised
sequencing systems and 2% comprised genotyping kits 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 9% to $10.1 million in 2000, from
$9.3 million in 1999. In 2000, cost of sales aggregated 78% of sales, compared
to 68% of sales in 1999. The increase in cost of
25
<Page>
sales as a percentage of sales was primarily related to amortization of DNA
sequencing systems placed, at no cost, with clinical customers and an increase
in discarded materials and other costs attributable to the manufacturing scale
up associated with the anticipated U.S. launch of our TRUGENE HIV-1 Genotyping
Kit.
SALES, GENERAL AND ADMINISTRATIVE EXPENSES. Sales, general and
administrative expenses increased 50% to $28.6 million in 2000, from
$19.1 million in 1999. The increase resulted primarily from:
- Increased payroll and personnel costs due to continued growth of our
business;
- Costs associated with opening a North American sales and administrative
facility in Atlanta;
- Amortization of license fees for license agreements entered into in 2000;
- Continued growth of our quality control and regulatory departments; and
- Continued expansion of our sales force and our marketing activities in
North America and Europe.
Sales and marketing expenses included in sales, general and administrative
expenses increased 21% to $13.4 in 2000, from $11.1 million in 1999.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased 34% to $10.6 million in 2000, from $7.9 million in 1999. This increase
resulted primarily from increased costs for consultants and increased purchases
of laboratory supplies related to preparing our FDA submission.
EXIT AND TERMINATION COSTS. There were no exit and termination costs in
2000. During 1999, we incurred exit and termination costs of $1.3 million. Of
this amount, $0.8 million related to the transfer of certain of our activities
to the new facility 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 $4.5 million in 2000, from
$0.7 million in 1999. This increase reflects interest earned on higher average
cash balances as a result of the approximately $30.0 million of cash proceeds
received from our July 1999 issuance of Series A preferred shares, approximately
$26.7 million of cash proceeds received from our December 1999 private placement
of common shares and approximately $75.4 million of cash proceeds received from
our April 2000 follow-on public offering of common shares.
INTEREST AND FINANCING EXPENSE. Interest and financing expense decreased to
approximately nil in 2000, from $2.0 million in 1999. The decrease is due to the
repayment in July 1999, concurrent with the issuance of the Series A preferred
shares, of our outstanding loans.
CUMULATIVE PREFERRED DIVIDENDS AND ACCRETION OF DISCOUNT ATTRIBUTABLE TO
PREFERRED SHARES. Cumulative preferred dividends and accretion of discount
attributable to preferred shares increased to $3.7 million in 2000, from
$1.8 million in 1999. The increase reflects a full year's dividends and
amortization of discount on the Series A preferred shares issued in July 1999.
COMPARISON OF FISCAL YEAR ENDED DECEMBER 31, 1999 TO FISCAL YEAR ENDED
DECEMBER 31, 1998
SALES. Sales increased 25% to $13.6 million in 1999, from $10.9 million in
1998. This increase resulted from increased sales of our genotyping kits 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
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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, genotyping kits 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 genotyping
kits and other consumables. During 1998, Amersham accounted for 30% of sales, of
which 29% comprised sequencing systems and 1% comprised genotyping kits and
other consumables. The sales to Amersham were made on the same general terms and
conditions as the majority of other sales during the respective periods.
COST OF SALES. Cost of sales increased 39% to $9.3 million in 1999, from
$6.7 million in 1998. In 1999, cost of sales aggregated 68% of sales, compared
to 61% of sales in 1998. This increase in cost of sales as a percentage of sales
was primarily related to a write-off of obsolete and discontinued instruments
and related parts totaling $0.6 million recorded in the second quarter of 1999.
SALES, GENERAL AND ADMINISTRATIVE EXPENSES. Sales, general and
administrative expenses increased 66% to $19.1 million in 1999, from
$11.5 million in 1998. This increase resulted primarily from increased payroll
and personnel costs due to the continued growth of our business, costs of
quality control and regulatory departments established in 1998 and the continued
expansion of our sales force in North America and Europe. Sales and marketing
expenses included in sales, general and administrative expenses increased 79% to
$11.1 million in 1999, from $6.2 million in 1998.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased 26% to $7.9 million in 1999, from $6.3 million in 1998. This increase
resulted from increased payroll and personnel costs, along with increased
purchases of laboratory supplies, as we developed additional genotyping kits 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 transfer 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 (discussed below) 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.
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LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through private
placements of equity and public offerings. We have also borrowed funds from
institutional lenders.
DECEMBER 2001 PRIVATE PLACEMENT. In December 2001, various institutional
investors purchased 2,637,890 common shares of our company in a private
placement. The investors paid $8.34 per share and we received proceeds, before
related fees and expenses, of $22.0 million from the private placement.
APRIL 2000 PUBLIC OFFERING. In April 2000, we completed an underwritten
follow-on public offering of 2,090,000 common shares at $38 per share. All of
the shares were sold by us. After underwriting discounts, but before related
fees and expenses, we received proceeds of $75.4 million.
DECEMBER 1999 PRIVATE PLACEMENT. In December 1999, various institutional
investors purchased 1,916,000 common shares of our company in a private
placement. The investors paid $15 per share and we received net proceeds of
$26.7 million from the private placement. The institutional investors included
the Warburg Pincus Funds and the Hilal Funds (described below), along with
certain investors who had purchased our common shares in a November 1998 private
placement and certain new institutional investors.
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 Series A preferred shares and
warrants included customary anti-dilution provisions, under which the conversion
price of the shares and the exercise price of the warrants may be reduced, and
the number of share issuable upon exercise of the warrants may be increased,
under certain conditions including the sale of certain securities at a price
below the conversion price of the shares or the exercise price of the warrants.
As a result of the December 2001 Private Placement (described above), the
conversion price of the Series A preferred shares was reduced to $10.72. 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
at an exercise price of $12.60 per share. Under the terms of our warrant
agreement, the Warburg Pincus Funds elected to pay the exercise price for the
warrants through a cashless 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.
The Warburg Pincus Funds subsequently distributed 847,586 of these common shares
to their limited partners.
In September, 2000, the Warburg Pincus Funds, converted a total of 7,795 of
our Series A preferred shares, plus a total of $701,550 of dividends that had
accrued on those shares, into our common shares at a conversion price of $11.00
per share. As a result of the conversion, the Warburg Pincus Funds received
772,411 of our common shares and continue to hold a total of 22,205 Series A
preferred shares. The Warburg Pincus Funds subsequently distributed to their
limited partners, 772,411 common shares issued in connection with the conversion
of the 7,795 Series A preferred shares.
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NOVEMBER 1998 PRIVATE PLACEMENT. In November 1998, various institutional
investors and certain individual investors affiliated with the Hilal Funds
purchased 1,528,989 common shares of our company in a private placement. The
investors paid $9.875 per share and we received total proceeds of
$15.1 million.
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. In addition, the Hilal Funds agreed to permit us to borrow up
to an additional $5.0 million of loans from other lenders which would be senior
to the $7.0 million loan and junior to the $1.0 million loan.
We guaranteed VGC's obligations under both loans. We gave the Hilal Funds a
security interest in most of our assets to secure our obligations under the
guaranty, including a pledge of the outstanding stock of VGC. Both the loan
agreements and the guaranty imposed certain restrictions on us and our
subsidiaries, including limitations on loans and other obligations that we may
incur.
As part of the loan arrangements, we granted the Hilal Funds warrants to
purchase our common shares. Initially, we granted the Hilal Funds warrants to
purchase 420,000 common shares which may be exercised until April 2003, at a
price of $10.00 per share. When we borrowed an additional $1.0 million from the
Hilal funds in September 1998, we granted them warrants for an additional
120,000 common shares which may be exercised until September 2003, at a price of
$10.00 per share. The warrants were valued using the Black-Scholes option
valuation model. The total proceeds received from the Hilal Funds were allocated
between the warrants and term loans based on the relative fair value of each
component, resulting in $0.9 million and $0.2 million of the total proceeds from
the April 1998 and September 1998 term loans, respectively, being allocated to
warrants. The value of the term loans were to be increased to their face value
at their respective maturity dates, resulting in a charge to financing expense
and warrants, by their pro rata share, over the remaining term of the loans. As
a result, non-cash charges of $0.6 million were recorded as financing expenses
in 1998. The remaining $0.6 million was recorded as non-cash financing expenses
in 1999.
On April 30, 1999, we granted the Hilal Funds warrants to purchase an
additional 140,000 common shares which may be exercised until April 30, 2006, at
a price of $17.00 per share. The warrants were valued using the Black-Scholes
option valuation model, resulting in a value being attributed to these warrants
of $0.9 million. This amount was recorded as a deferred charge on the balance
sheet and was to be amortized to financing expense over the remaining term of
the loan maturing on December 31, 1999. As a result, the entire amount was
recorded as a non-cash charge to financing expense in 1999.
On July 15, 1999, we repaid or satisfied all of the loans made to us by the
Hilal Funds. Of the $8.0 million principal amount of the loans, we paid
$4.1 million of principal plus accrued interest on the loan in cash. The Hilal
Funds converted the remaining $3.9 million principal amount plus accrued
interest into 3,948 Series A preferred shares and 147,098 warrants to purchase
our common shares. The Series A preferred shares and warrants included customary
anti-dilution provisions, under which the conversion price of the shares and the
exercise price of the warrants may be reduced, and the number of share issuable
upon exercise of the warrants may be increased, under certain conditions
including the sale of certain securities at a price below the conversion price
of the shares or the exercise price of
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the warrants. As a result of adjustments due to the December 2001 Private
Placement, the number of warrants was increased to 152,420 and the exercise
price of the warrants was reduced to $12.16. 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 the Warburg Pincus Funds.
On March 15, 2001, the Hilal Funds converted a total of 1,000 of the
Series A preferred shares, plus a total of $139,050 of dividends that accrued on
those shares, into 103,550 of our common shares.
On November 29, 2001, the Hilal Funds transferred their remaining 2,948
Series A preferred shares to an unrelated party.
CAPITAL AND CERTAIN OTHER EXPENDITURES. Additions to fixed assets were
approximately $12.2 million for the nine months ended September 30, 2001, and
$9.3 million, $1.9 million and $3.3 million for the years ended December 31,
2000, 1999 and 1998, respectively.
The additions to fixed assets for the nine months ended September 30, 2001,
include $9.2 million in expenditures related to our Atlanta facility, of which
$7.0 million was for leasehold improvements, $1.2 million was for laboratory and
scientific equipment, $0.7 million was computer equipment and software and
$0.3 million was for office furniture and equipment. In addition, for the nine
months ended September 30, 2001 additions to fixed assets for our Canadian
facilities were $0.6 million, consisting primarily of additions to computer
equipment and software, laboratory and scientific equipment and leasehold
improvements. Also, during the nine months ended September 30, 2001, additions
to fixed assets in Europe were $1.1 million and include $0.8 million for the
acquisition of a research laboratory in Cambridge, England. During the nine
months ended September 30, 2001, we also placed $1.3 million of equipment with
certain customers at no charge to those customers. We reflect this on our
balance sheet as a component of "Fixed assets."
The additions to fixed assets in 2000 include $6.2 million in expenditures
related to our Atlanta facility, of which $3.0 million was for leasehold
improvements, $1.3 million was for laboratory and scientific equipment,
$1.5 million was computer equipment and software and $0.4 million was for office
furniture and equipment. In addition, during 2000 additions to fixed assets for
our Canadian facilities were $1.2 million, consisting primarily of additions to
computer equipment and software, laboratory and scientific equipment and
leasehold improvements. During 2000, we also placed $1.4 million of equipment
with certain customers at no charge to those customers.
The additions to fixed assets in 1999 consisted of $0.9 million for
laboratory and scientific equipment, $0.6 million for computer equipment and
software and $0.3 million for office furniture, equipment and leasehold
improvements primarily to our Canadian facilities. Additions to fixed assets in
1998 consisted of $1.4 million for laboratory and scientific equipment,
$0.9 million for leasehold improvements and $0.9 million for computer equipment
and software, of which $1.9 million was for our Canadian facilities,
$1.0 million was for our United States facilities and $0.3 million was for our
European facilities. Capital expenditures during these periods were funded from
proceeds of private equity placements, public offerings and funds borrowed from
institutional lenders.
In April 2000 we entered into a worldwide licensing and collaboration
agreement with Applera. Under the terms of the agreement, we paid an initial
licensing fee to Applera of $10.0 million in
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June 2000 and an additional $5.0 million licensing fee in June 2001. We will pay
Applera licensing fees of $5.0 million in each of June 2002 and June 2003,
unless the agreement is terminated before those dates. We are not obligated to
make any further payments upon the termination of the agreement. In addition, in
return for access to the Applera technology and installed instrument customer
base, we will pay royalties to Applera based on sales. We may terminate the
agreement upon 60 days written notice to Applera and either party may terminate
the agreement under certain other limited circumstances.
CURRENT AND FUTURE FINANCING NEEDS. We have incurred negative cash flow
from operations since we started our business. We have spent, and expect to
continue to spend, substantial amounts to complete our planned product
development efforts, expand our sales and marketing activities, expand our
manufacturing capabilities, conduct our clinical trials, conduct research and
build our business infrastructure. At this time, funds from operations are not
sufficient to meet our operating needs and other anticipated financial
requirements.
Based on our current plans we believe that our cash on hand and anticipated
funds from operations will be sufficient to enable us to meet our operating
needs for the next 15 to 18 months. However, the amount of funds we will need to
operate for this time period 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 funs
at the end of the 15 to 18 month period.
Potential sources of financing include strategic relationships, public or
private sales of our shares or debt or other arrangements. 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.
INTEREST RATE AND INVESTMENT RISK. The primary objective of our investment
activities is to preserve principal while at the same time maximizing income
received from our investments without significantly increasing risk. Our
investment portfolio is primarily comprised of cash and short term interest
bearing certificates.
FOREIGN CURRENCY RATE FLUCTUATIONS. While our financial statements are in
U.S. dollars, revenue is generated in U.S. dollars and other currencies. We
incur the majority of our expenses in Canadian and U.S. dollars, British pounds
and euros. As a result, we may suffer losses due to fluctuations in exchange
rates between the U.S. dollar, and the these other currencies. We do not
currently engage in foreign exchange hedging activities or use other financial
instruments in this regard.
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EURO CONVERSION
Effective January 1, 1999, 12 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. On January 1, 2002, euro-denominated
bills and coins were introduced as legal currency for these countries. By
July 1, 2002, the legacy currencies will be phased out entirely as legal tender.
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.
We currently conduct business operations in U.S. and Canadian dollars,
British pounds and euros. We have made all necessary modifications to our
information systems, equipment and processes to accommodate euro transactions.
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INFORMATION ABOUT OUR COMPANY
For a detailed description of our business and information about our
management, see our Annual Report on Form 20-F and our Reports on Form 6-K,
which are incorporated into this prospectus by reference. The following
information supplements or supercedes, as appropriate, the information contained
in our Annual Report on Form 20-F and our Reports on Form 6-K, which are
incorporated into this prospectus by reference.
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 the next generation of our TRUGENE HIV-1 Genotyping Kit and
additional genotyping kits for different HIV species, development of our
genotyping kit for hepatitis B and development of our next generation
hepatitis C genotyping kit and additional genotyping kits for certain
cancers;
- developing new technology for our sequencers and related equipment and
software;
- refining existing proprietary, disposable gel cassette technology in order
to improve performance of our sequencers; and
- exploring new technologies for future commercial products.
In September 2001, we acquired from Virco UK Limited its research laboratory
located in Cambridge, England, along with substantially all of the research
staff of 25 scientists at that laboratory. The Cambridge facility will be our
principal international research hub, headed by Dr. Brendan Larder, who joined
our company in June 2001 as our Chief Scientific Officer. Dr. Larder ran this
facility for Virco UK Limited prior to joining our company.
This acquisition was part of a larger restructuring of our research and
development operations, which included the closing of a research lab in Toronto
in December 2001, that resulted in the elimination of 27 positions. The
activities performed at that lab have been transferred to our Atlanta and
Cambridge labs. As a result of this restructuring, all of our research and
development activity is now located in three centers, Cambridge, Atlanta and
Toronto. Our facility in Cambridge focuses on chemistry research, Atlanta on
genotyping kits and chemistry development, and Toronto on software research and
development.
REGULATION BY THE FDA AND OTHER GOVERNMENT AGENCIES
On September 26, 2001, we received clearance from the FDA to market our
TRUGENE HIV-1 Genotyping Kit for clinical use in the United States. The FDA
authorization allows us to sell our TRUGENE HIV-1 Genotyping Kit for support of
anti-retroviral therapy in HIV. We are not restricted in the claims we can make
with regard to the mutations or our interpretation of them. We expect to update
the drug resistance algorithms embedded in our software approximately every six
months. FDA review and approval of any significant updates will be required.
Based on informal discussions with the FDA, we expect that the FDA's review and
approval of these updates will not exceed 90 days, provided we satisfy the FDA's
approval requirements. Since it generally takes us at least 90 days to prepare
our updated software products for commercial distribution, we do not anticipate
that FDA approval of updates will delay the introduction of updated software
products to market.
During December, 2001, we received approval from the Therapeutics Product
Directorate of Health Canada to allow our TRUGENE HIV-1 Genotyping Test to be
used for clinical or research use in Canada.
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SALES AND MARKETING
Our marketing strategy for the HIV OpenGene System consists of several
components. We have established relationships with leading doctors, laboratories
and healthcare providers in the HIV diagnostics market in the United States,
Canada, Europe and Latin America. We have installed our equipment in many of
these laboratories and other facilities, and are training technicians 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. We have established special marketing relationships with some
laboratories, under which we co-sponsor local physician and patient educational
events. We also provide other marketing and support services to these
laboratories.
We advertise in a variety of publications and prepare marketing materials
directed to doctors, laboratories, payors and patients. We conduct drug
resistance and other seminars for, and provide educational materials to,
physicians and other healthcare providers. We also provide educational material
for patients, including a pamphlet that explains resistance testing.
HEPATITIS C
We have developed a genotyping kit for hepatitis C which we plan to bring to
market during 2002. Hepatitis is an inflammation of the liver. Hepatitis C is
one type of virus that causes this inflammation. There are approximately
4.0 million people in the United States who test positive for hepatitis C. There
are six major sub-types of hepatitis C. Knowing the sub-type helps the physician
determine how long the patient will require drug treatment.
Our hepatitis C genotyping kit generates a report which identifies the
specific hepatitis C subtypes a patient is most likely to have contracted. The
report generated does not provide information about the patient's drug
resistance or recommend the use of specific drugs for treatment of that patient.
We believe that FDA approval is not generally required for hepatitis C
genotyping products which are used for epidemiological studies. However, the FDA
has not provided definitive guidance as to whether a hepatitis C product used
for the purpose and in the manner we intend our hepatitis C genotyping kit to be
used, would require approval. We are aware of at least one product similar to
ours that is being marketed and sold by a competitor without FDA approval. To
our knowledge, the FDA has not advised that company that FDA approval is
required to market and sell the product for the purposes for which it is
intended to be used and has not initiated enforcement action to stop the
marketing or sale of the product. We do not intend to seek FDA clearance to
market our hepatitis C genotyping kit for the purpose for which it is intended
to be used. However, we cannot be certain that the FDA will not determine that
authorization is required for us to market and sell the hepatitis C genotyping
kit for these purposes or direct us not be sell the kit without authorization.
We are currently developing a second hepatitis C genotyping kit which will
perform drug resistance testing and generate a report recommending the use of
specific drugs for treatment of the patient. We will need FDA approval to sell
that genotyping kit to the clinical diagnostic market and we plan to conduct the
necessary clinical studies to obtain FDA approval for diagnostic use.
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.
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Some of our major competitors include:
- purveyors of home brew tests, which may not have undergone clinical
validation and have not been approved by the FDA or other regulatory
agencies, including Laboratory Corporation of America Holdings, Quest
Diagnostics Inc. and Specialty Laboratories, Inc.
- manufacturers of genotyping test kits, including the Celera Diagnostics
division of Applera;
- purveyors of phenotyping assay services, including ViroLogic, Inc. and
Tibotec-Virco NV;
- 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; and
- manufacturers and distributors of DNA sequencers such as Applera, Amersham
Pharmacia Biotech, Inc., LI-COR, Inc., Hitachi, Ltd. and Beckman
Coulter, Inc.
PROPERTY
The table below lists the locations of our facilities and summarizes certain
information about each location.
<Table>
<Caption>
SQUARE FEET
LOCATION USE (APPROXIMATE) TERM OF LEASE
-------- --------------------------- ------------- ------------------
1. Bay Street* ............... Finance, administration and 20,628 June 2000-
Toronto, Canada principal executive offices May 2005
2. Bay Street ................ Software research and 6,876 November 2000-
Toronto, Canada development May 2005
3. Etobicoke ................. MicroCel manufacturing 10,282 June 1996-
Ontario, Canada October 31, 2002
4. Etobicoke ................. Sequencer manufacturing 10,430 September 1998-
Ontario, Canada August 2003
5. Oakville** ................ Not in use 7,996 September 1998-
Ontario, Canada August 2003
6. Meyerside Drive** ......... Not in use 3,100 May 1, 1999-
Mississauga, Canada April 30, 2004
7. University of Kit manufacturing 9,621 September 2000-
Pittsburgh ................ August 2002
Applied Research Center,
Pittsburgh, Pennsylvania
8. Technology Park ........... Manufacturing and research 7,313 March 1998-
Norcross, Georgia and development February 2003
9. Suwanee, Georgia*** ....... Kit manufacturing, 99,822 February 2000-
chemistry March 2010
development, and laboratory
and sales and
administrative offices
10. High Wycombe, ............. European head office 5,118 October 2000-
United Kingdom October 2009
11. Cambridge Science Park .... Chemistry research 20,000 January 1999-
United Kingdom**** March 2014
</Table>
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<Table>
<Caption>
SQUARE FEET
LOCATION USE (APPROXIMATE) TERM OF LEASE
-------- --------------------------- ------------- ------------------
12. Epinay, France ............ French sales office 2,421 November 2000-
October 2009
13. Madrid, Spain ............. Iberian sales office 258 January 2002-
December 2002
14. Genoa, Italy .............. Italian sales office 386 January 2000-
December 2002
15. Technology Park,** ........ Not in use 21,032 November 1999-
Norcross, Georgia October 2004
</Table>
- ------------------------
* We have subleased 6,876 square feet of this facility.
** We have subleased these facilities.
*** This facility is not fully operational.
****Approximately half of this facility is subleased.
We believe that additional facilities will be available at reasonable market
rates to meet any future needs we may have for additional space.
SENIOR MANAGEMENT AND DIRECTORS
In June 2001, Dr. Brendan Larder joined our company as Chief Scientific
Officer. From 1985 to 1997, Dr. Larder was a research scientist at the Wellcome
Research Laboratories in London. From 1997 to July 2001, Dr. Larder was the
Chief Scientific Officer at Virco UK Limited. Dr. Larder has been a leading
researcher in the HIV drug resistance area for over 15 years and has published
numerous publications in this field. Dr. Larder discovered HIV drug resistance
and the genetic mechanisms that underlie it, and he pioneered many of the
technologies that are in use today to monitor drug resistance in the clinic.
On October 3, 2001, Dr. James Dunn resigned as Vice President, Technology of
our company. Dr. Dunn continues to provide consulting services to our company on
an as needed basis.
In July 2001, Dr. Heather Munroe-Blum was appointed to the Board of
Directors, filling the vacancy created by the resignation from the Board of
Directors of Michael Cardiff. Since January 1994, Dr. Munroe-Blum has been
Vice-President, Research & International Relations at the University of Toronto.
Dr. Munroe-Blum is also a governor of the University of Toronto.
Dr. Munroe-Blum is currently a member of the Advisory Board of Nestle Canada.
In November 2001, David A. Galloway was appointed to the Board of Directors,
filling the vacancy created by the resignation of Dr. Robert Prichard. From 1988
until November 2001, Mr. Galloway was President and Chief Executive Officer of
Torstar Corporation, a Canadian media company. Prior to joining Torstar,
Mr. Galloway was one of the founding partners of Canada Consulting Group.
Mr. Galloway is currently a director of the Bank of Montreal and Corel
Corporation.
At our annual meeting on May 17, 2001, Richard T. Daly, Dr. Lloyd M. Smith
and Dr. Konrad M. Weis were elected to our Board of Directors to serve as
Class II Directors, for a term expiring in 2004, and Jonathan S. Leff was
elected to our Board of Directors to serve as the Series A Director, for a term
expiring in 2002.
Dr. Munroe-Blum has replaced Mr. Cardiff and Jacques R. Lapointe has
replaced Dr. Prichard on the Compensation Committee of the Board of Directors.
36
<Page>
EMPLOYEES
As of December 31, 2001, we employed 339 full-time employees (including
executive officers) of whom:
- 100 are engaged in research and development;
- 72 are involved in sales and marketing activities;
- 92 in manufacturing and operations; and
- 75 are involved in finance, legal and administrative functions.
TAXATION
BACK-UP WITHHOLDING AND INFORMATION REPORTING
Pursuant to recently effective Treasury regulations, U.S. holders generally
are subject to information reporting requirements and back-up withholding with
respect to dividends paid in the United States on common shares. Back-up
withholding will not apply if a U.S. holder provides an IRS Form W-9 or
otherwise establishes an exemption. U.S. holders are subject to information
reporting and back-up withholding at a rate of 31% on proceeds paid from the
disposition of common shares unless the U.S. holder provides IRS Form W-9 or
otherwise establishes an exemption.
Non-U.S. holders generally are not subject to information reporting or
back-up withholding with respect to dividends paid on, or the proceeds from the
disposition of, common shares, provided that such non-U.S. holder provides a
taxpayer identification number, certifies to its foreign status, or otherwise
establishes an exemption.
The amount of any back-up withholding will be allowed as a credit against a
U.S. or non-U.S. holder's U.S. federal income tax liability and may entitle such
holder to a refund, provided that certain required information is furnished to
the IRS.
37
<Page>
SELLING SHAREHOLDERS
The following table provides certain information with respect to the common
shares held by the selling shareholders as of January 23, 2002.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, and includes voting or investment power with
respect to the common shares. Except as otherwise indicated below, to our
knowledge, the selling shareholders have sole voting and investment power with
respect to their common shares. This information is based on information
provided to us by the selling shareholders.
The selling shareholders are not under any obligation to sell all or any
portion of their common shares, nor are the selling shareholders obligated to
sell any of their common shares immediately under this prospectus. We cannot
estimate the number of the common shares that will be held by the selling
shareholders after completion of this offering. However, for the purposes of
this table, we have assumed that, after completion of this offering, none of the
common shares covered by this prospectus will be held by the selling
shareholders. We will not receive any proceeds from any sales of common shares
by the selling shareholders.
Except as described in our Annual Report on Form 20-F or otherwise noted in
the footnotes following the table, the selling shareholders have not held any
position or office, or have had a material relationship with our company or our
subsidiaries or other affiliates within the past three years, other than owning
the common shares.
<Table>
<Caption>
PERCENTAGE OF
NUMBER OF PERCENTAGE OF COMMON COMMON NUMBER OF PERCENTAGE OF
COMMON COMMON SHARES SHARES COMMON COMMON
SHARES SHARES OFFERED OFFERED SHARES SHARES
BENEFICIALLY BENEFICIALLY PURSUANT PURSUANT BENEFICIALLY BENEFICIALLY
OWNED OWNED BEFORE TO THIS TO THIS OWNED OWNED AFTER
SELLING SHAREHOLDER BEFORE OFFERING OFFERING (24) PROSPECTUS PROSPECTUS (24) AFTER OFFERING OFFERING (24)
- ------------------- --------------- ------------- ---------- --------------- -------------- -------------
Warburg, Pincus Equity Partners,
L.P.(1,6)..................... 1,542,519(11) 7.0% 1,542,519 7.0% 0 --
Warburg, Pincus Ventures
International, L.P.(1,6)...... 1,632,308(12) 7.4% 1,632,308 7.4% 0 --
Warburg, Pincus Netherlands
Equity Partners I,
C.V.(1,6)..................... 48,964(13) * 48,964 * 0 --
Warburg, Pincus Netherlands
Equity Partners II,
C.V.(1,6)..................... 32,643(14) * 32,643 * 0 --
Warburg, Pincus Netherlands
Equity Partners III,
C.V.(1,6)..................... 8,136(15) * 8,136 * 0 --
Warburg, Pincus & Co.(1,7)...... 25,308 * 25,308 * 0 --
Hilal Capital, LP(2,8).......... 198,960(16) * 59,055(20) * 139,905 *
Hilal Capital QP, LP(2,8)....... 331,720(17) 1.5% 152,045(21) * 179,675 *
Hilal Capital International,
Ltd.(2,8)..................... 542,907(18) 2.5% 201,320(22) * 341,587 1.5%
Deutsche Bank AG(3)............. 1,816,992(19) 8.2% 433,392(23) 2.0% 1,383,600 6.3%
GeneVest Inc.(4,9).............. 831,684 3.8% 831,684 3.8% 0 --
Oracle Strategic Partners,
L.P.(5,10).................... 634,061 2.9% 634,061 2.9% 0 --
</Table>
- ------------------------------
* Less than 1%
1 The selling shareholder's business address is 466 Lexington Avenue, New
York, New York 10017.
2 The selling shareholder's business address is 2211 Broadway, New York, New
York 10024.
3 The selling shareholder's business address is c/o Deutsche Banc Alex. Brown
Inc., 31 West 52nd Street, New York, New York 10019.
4 The selling shareholder's business address is 130 King Street, Toronto,
Ontario M5X 1A9 Canada.
38
<Page>
5 The selling shareholder's business address is 712 Fifth Avenue, New York,
New York 10019.
6 Warburg, Pincus & Co. ("WP") is the sole general partner of each of these
funds. Each of these funds is managed by E.M. Warburg, Pincus & Co., LLC
("EMW LLC"). Lionel I. Pincus is the managing partner of WP and the managing
member of EMW LLC, and may be deemed to control both entities. Jonathan S.
Leff, a director of our company, is a general partner of WP and a managing
director and member of EMW LLC. Mr. Leff may be deemed to have an indirect
pecuniary interest (within the meaning of Rule 16a-1 under the Securities
Exchange Act of 1934, as amended) in an indeterminate portion of the shares
beneficially owned by these shareholders. Mr. Leff disclaims beneficial
ownership of all such shares.
7 Lionel I. Pincus is the managing partner of Warburg, Pincus & Co. ("WP"),
and may be deemed to control this entity. Jonathan S. Leff, a director of
our company and is a general partner of WP. 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 this shareholder. Mr. Leff disclaims
beneficial ownership of all such shares.
8 Hilal Capital Management LLC is the investment manager of Hilal Capital
International, Ltd., and has investment and dispositive power over the
securities held by Hilal Capital International, Ltd. Hilal Capital Partners
LLC is general partner of Hilal Capital, LP and Hilal Capital QP, LP, and
has investment and dispositive power over the securities held by those
funds. Peter K. Hilal, M.D. manages and has sole discretion over Hilal
Capital Management LLC and Hilal Capital Partners LLC, and, in that
capacity, has ultimate investment and dispositive power over securities held
by all of those funds.
9 Sheldon Inwentash, a director of our company, is the Chairman and Chief
Executive Officer of GeneVest, and together with his affiliates,
beneficially owns 45% of the issued and outstanding common shares of
GeneVest. Mr. Inwentash disclaims beneficial ownership of these common
shares held of record by GeneVest.
10 Oracle Strategic Partners, L.P. and Oracle Strategic Capital, L.L.C., the
Investment Manager of Oracle Strategic Partners, share voting and
dispositive power over the shares owned by Oracle Strategic Partners. Larry
Feinberg manages and has sole discretion over these funds, and, in that
capacity, has ultimate investment and dispositive power over securities held
by these funds.
11 Includes 1,542,451 common shares issuable upon the conversion of Series A
preferred shares.
12 Includes 1,632,276 common shares issuable upon conversion of Series A
preferred shares.
13 Includes 48,955 common shares issuable upon conversion of Series A preferred
shares.
14 Includes 32,637 common shares issuable upon conversion of Series A preferred
shares.
15 Includes 8,086 common shares issuable upon conversion of Series A preferred
shares.
16 Includes 79,552 common shares issuable upon exercise of warrants.
17 Includes 200,416 common shares issuable upon exercise of warrants.
18 Includes 268,452 common shares issuable upon exercise of warrants.
19 On November 20, 1998, Deutsche Bank AG acquired an aggregate of 2,948 Series
A preferred shares from Hilal Capital, LP, Hilal Capital LP, QP and Hilal
Capital International, Ltd. Includes 433,392 common shares issuable upon the
conversion of those Series A preferred shares and 618,600 common shares
owned of record by DWS Investment GmbH.
20 Includes 22,055 common shares issuable upon exercise of warrants.
21 Includes 56,045 common shares issuable upon exercise of warrants.
22 Includes 74,320 common shares issuable upon exercise of warrants.
23 Includes 433,392 common shares issuable upon conversion of Series A
preferred shares.
24 This information is based on 22,099,085 voting shares outstanding on
December 31, 2001.
39
<Page>
PLAN OF DISTRIBUTION
The common shares may be sold from time to time by the selling shareholders
in one or more transactions at fixed prices, at market prices at the time of
sale, at varying prices determined at the time of sale or at negotiated prices.
The selling shareholders may offer their common shares in one or more of the
following transactions:
- on any national securities exchange or quotation service on which the
common shares may be listed or quoted at the time of sale, including the
Nasdaq National Market;
- in the over-the-counter market;
- in private transactions;
- through options;
- by pledge to secure debts and other obligations;
- or a combination of any of the above transactions.
The common shares described in this prospectus may be sold from time to time
directly by the selling shareholders. Alternatively, the selling shareholders
may from time to time offer common shares to or through underwriters,
broker/dealers or agents. The selling shareholders and any underwriters,
broker/dealers or agents that participate in the distribution of the common
shares may be deemed to be "underwriters" within the meaning of the Securities
Act of 1933. Any profits on the resale of common shares and any compensation
received by any underwriter, broker/dealer or agent may be deemed to be
underwriting discounts and commissions under the Securities Act of 1933.
Any shares covered by this prospectus which qualify for sale pursuant to
Rule 144 under the Securities Act of 1933 may be sold under Rule 144 rather than
pursuant to this prospectus. The selling shareholders may not be able to sell
all of their shares under Rule 144. The selling shareholders may transfer,
devise or gift such shares by other means not described in this prospectus.
To comply with the securities laws of certain jurisdictions, the common
shares must be offered or sold only through registered or licensed brokers or
dealers. In addition, in certain jurisdictions, the common shares may not be
offered or sold unless they have been registered or qualified for sale or an
exemption is available and complied with.
The anti-manipulation provisions of Rules 101 through 104 under
Regulation M of the Securities Exchange Act of 1934 may apply to purchases and
sales of common shares by the selling shareholders. In addition, there are
restrictions on market-making activities by persons engaged in the distribution
of the common shares.
We have agreed to pay all of the expenses relating to the registration,
offering and sale of the common shares by the selling shareholders to the
public, other than commissions or discounts of underwriters, broker-dealers or
agents.
40
<Page>
DESCRIPTION OF CAPITAL SHARES
GENERAL
The current authorized capital of our company consists of an unlimited
number of common shares and an unlimited number of preferred shares. Any series
of preferred shares which our Board of Directors may issue could have rights
equal or superior to the rights of the common shares.
COMMON SHARES
The holders of common shares are entitled to receive dividends if, as and
when declared by our Board of Directors, subject to the rights of the holders of
any other class of our shares entitled to receive dividends in priority to the
common shares. If our company were liquidated or dissolved, the holders of
common shares would be entitled to receive all assets remaining after the rights
of the holders of any other class of shares entitled to receive assets in
priority to the holders of the common shares have been satisfied.
The holders of the common shares are entitled to one vote for each common
share held at all meetings of our shareholders.
PREFERRED SHARES
Our Board of Directors is authorized to issue an unlimited number of
preferred shares in one or more series, to fix the number of preferred shares
and determine the designations, rights (including voting and dividend rights),
privileges, restrictions and conditions attaching to the shares of each such
series, without further vote or action by the shareholders. Because the terms of
the preferred shares may be fixed by our Board of Directors without shareholder
action, the preferred shares could, subject to regulatory policies, be issued
quickly, with terms calculated to defeat a takeover of our company or to make
the removal of our directors and executive officers more difficult. Under
certain circumstances, this could have the effect of decreasing the market value
of the common shares. The preferred shares may have voting rights superior to
the common shares and may rank senior to the common shares as to dividends and
as to the distribution of assets in the event our company were liquidated or
dissolved.
On July 15, 1999, our Board of Directors authorized the issuance of 33,950
shares of Series A Convertible Preferred Shares. We have issued 33,948 Series A
Preferred Shares, of which 25,153 shares are outstanding. The Series A preferred
shares are convertible at the holders' option into common shares at $10.72 per
share, as adjusted. Upon conversion, the holders will also receive common
shares, at the conversion price of $10.72 per share, as adjusted, 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 until July 15, 2002, and 4% per year thereafter and are compounded
annually. Dividends are not payable until July 15, 2002. Beginning on July 15,
2002, 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 (July 15, 2002) and prior to the seventh
anniversary (July 15, 2006) 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
41
<Page>
will be required to redeem one-third of any remaining outstanding Series A
preferred shares on each of the seventh, eighth and ninth anniversaries of the
date of issuance at the redemption price, and we will be permitted to redeem the
Series A preferred shares at any time beginning on the seventh anniversary after
issuance. If we fail to redeem the Series A preferred shares as required, the
holders may appoint a majority of our Board of Directors, who will continue to
serve until we have redeemed the Series A preferred shares as required.
The holders of Series A preferred shares are entitled to vote as a group
with the holders of common shares on all matters except that holders of
Series A preferred shares are entitled to vote separately for one director and
are not entitled to participate in the vote for any other directors of our
company. On all other matters, each holder of a Series A preferred share is
entitled to the number of votes equal to the number of common shares the holder
is entitled to receive upon conversion of his Series A preferred shares. Our
agreements with the holders of, and the terms of, the Series A preferred shares
provide that we are prohibited from declaring or issuing any dividends to
holders of our common shares before paying all unpaid dividends on the Series A
preferred shares. We also are prohibited from issuing any equity securities that
have rights as to dividends and liquidation that are senior or equal in rank to
the Series A preferred shares without approval of the holders of a majority of
the Series A preferred shares. If our company were to be liquidated or sold or
under certain other circumstances, holders of Series A preferred shares would be
entitled to receive an amount equal to $1,000 per share, plus accrued dividends,
before holders of our common shares would be entitled to any distributions.
Certain holders of our Series A preferred shares are also entitled to
certain other rights, including the right to participate, on a pro rata basis,
in future company financings, subject to certain exceptions. If we propose to
sell equity securities of any kind, including debt securities convertible into
equity securities, certain holders of our Series A preferred shares are entitled
to purchase a proportional amount of the securities being offered based on the
number of common shares they own assuming conversion of all convertible
securities. These holders are not entitled to exercise this right in connection
with securities issued: (i) to the public in a firm commitment underwriting;
(ii) upon exercise of any of our options or warrants outstanding on July 15,
1999; (iii) pursuant to the acquisition of another entity by us or one of our
subsidiaries by merger, purchase of substantially all of the assets or other
form of reorganization; (iv) in connection with our acquisition or license of
technology rights or other assets; (v) pursuant to our stock option plans, stock
bonus plans, stock purchase plans or other compensation equity agreements or
programs; or (vi) upon conversion or exercise of any equity securities, such as
warrants, options, or other rights to acquire equity securities and debt
securities convertible into equity securities. The right of these holders to
participate in future offerings in this manner provides those holders with the
opportunity to avoid having their ownership interest in our company diluted
under certain circumstances when the interest of our common shareholders would
be diluted.
We 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.
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
42
<Page>
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 Mellon Investor
Services LLC, 85 Challenger Road, Overpeck Center, Ridgefield Park, New Jersey
07660.
EXPENSES OF THE ISSUE
The following table sets forth the estimated expenses of the Company in
connection with the offering described in this prospectus. All of these expenses
are being borne by the Company.
<Table>
Securities and Exchange Commission filing fee............... $ 468
Accounting fees............................................. $ 5,000
Legal fees.................................................. $15,000
Printing and engraving...................................... $10,000
Miscellaneous............................................... $ 4,532
-------
Total................................................... $35,000
=======
</Table>
43
<Page>
LEGAL MATTERS
The validity of the common shares being offered hereby has been passed upon
for us by our attorneys, Osler, Hoskin & Harcourt LLP, Toronto, Ontario. Certain
other matters relating to this offering with respect to United States securities
laws will be passed upon by our attorneys, Brown Raysman Millstein Felder &
Steiner LLP, New York, New York.
EXPERTS
Our Consolidated Financial Statements as at December 31, 2000 and 1999 and
for the years ended December 31, 2000, 1999, and 1998, included in our Annual
Report on Form 20-F, incorporated herein by reference, have been audited by
PricewaterhouseCoopers LLP, Chartered Accountants in Canada, as stated in their
report appearing in our Annual Report on Form 20-F. The Consolidated Financial
Statements have been included in our Annual Report on Form 20-F in reliance upon
such report, given upon the authority of said firm as experts in auditing and
accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a Registration
Statement on Form F-3 under the Securities Act with respect to the common shares
offered hereby. This prospectus, which constitutes a part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement. Certain items of the Registration Statement are contained in exhibits
and schedules as permitted by the rules and regulations of the Securities and
Exchange Commission. Statements made in this prospectus as to the contents of
any contract, agreement or other document referred to are not necessarily
complete. With respect to each such contract, agreement or other document filed
as an exhibit to the Registration Statement or to our Annual Report on
Form 20-F, certain items of which are incorporated by reference into this
prospectus, reference is made to the exhibit for a more complete description of
the matter involved, and each such statement shall be deemed qualified in its
entirety by such reference.
We are subject to the informational requirements of the Exchange Act and
file reports and other information with the Securities and Exchange Commission.
Reports and other information which we file with the Securities and Exchange
Commission, including the Registration Statement on Form F-3 of which this
prospectus is a part, may be inspected and copied at the public reference
facilities of the Securities and Exchange Commission at:
<Table>
450 Fifth Street N.W. 500 West Madison Street
Room 1024 Suite 1400
Washington D.C. 20549 Chicago, Illinois 60661
</Table>
You can also obtain copies of this material by mail from the Public
Reference Section of the Securities and Exchange Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. Additionally, copies of this
material may also be obtained from the Securities and Exchange Commission's
Internet site at http://www.sec.gov. The Commission's telephone number is
1-800-SEC-0330.
44
<Page>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
5,601,435 SHARES
VISIBLE GENETICS INC.
COMMON SHARES
----------------
SELLING SHAREHOLDERS' PROSPECTUS
---------------
You should rely only on information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. The selling shareholders are offering to sell, and
seeking offers to buy, common shares only in jurisdictions where offers and
sales are permitted. The information contained in this prospectus is accurate
only as of the date of this prospectus, regardless of the time of delivery of
this prospectus or of any sale of our common shares.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<Page>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Please see "Expenses of the Issue" found in the Prospectus contained in and
forming a part of this Registration Statement.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 136 of the Ontario Business Corporations Act and Section 7 of the
Company's By-Laws Nos. 1 and 3 provide for the indemnification of directors and
officers of the Company. Under these provisions, the Company shall indemnify a
director or officer of the Company (or a former director or officer) against all
costs, charges and expenses, including amounts paid to settle an action or
satisfy a judgment, reasonably incurred by such director or officer in respect
of any civil, criminal or administrative action or proceeding (other than in
respect of an action by or on behalf of the Company to procure a judgment in its
favor) to which such director or officer (or a former director or officer) is
made a party by reason of his position with the Company, provided such director
or officer: (a) acted honestly and in good faith with a view to the best
interests of the Company and (b) in the case of a criminal or administrative
action or proceeding that is enforced by a monetary penalty, had reasonable
grounds for believing that his conduct was lawful. In respect of an action by or
on behalf of the Company to procure a judgment in its favor, the Company, with
the approval of a court, may indemnify a director or officer of the Company (or
a former director or officer) against all costs, charges and expenses reasonably
incurred by him in connection with such action if he fulfills the conditions set
out in clauses (a) and (b) of the previous sentence. Notwithstanding the
foregoing, a director or officer of the Company (or a former director or
officer) is entitled to indemnification from the Company with respect to all
costs, charges and expenses reasonably incurred by him in connection with the
defense of any civil, criminal or administrative action or proceeding to which
he is made a party by reason of his position with the Company if he was
substantially successful on the merits in his defense of the action or
proceeding and he fulfills the conditions in clauses (a) and (b) of the second
sentence of this paragraph.
The Company also has a policy insuring it and its directors and officers
against certain liabilities and has entered into indemnification agreements with
each of its directors and officers.
ITEM 16. EXHIBITS
The following exhibits are being filed herewith:
<Table>
4.1 Specimen of Certificate for Common Shares(1)
4.2 Certificate of Designations, Number, Voting Powers,
Preferences and Rights of Series A Convertible Preferred
Shares of Visible Genetics Inc.(2)
5.1 Opinion of Osler, Hoskin & Harcourt LLP as to the legality
of the Common Shares
23.1 Consent of Osler, Hoskin & Harcourt LLP (included in Exhibit
5.1)
23.2 Consent of Brown Raysman Millstein Felder & Steiner LLP
23.3 Consent of PricewaterhouseCoopers LLP
24 Powers of Attorney (included on the executed signature page
of this Registration Statement)
</Table>
- ------------------------
(1) Incorporated by reference from Exhibit 4.1 to Amendment No. 1 to the
Company's Registration Statement on Form F-1, File No. 333-3118, filed with
the Securities and Exchange Commission on May 15, 1996.
(2) Incorporated by reference from Exhibit 4.2 to Amendment No. 1 to the
Company's Registration Statement on Form F-3, File No. 333-91155, filed with
the Securities and Exchange Commission on November 17, 1999.
II-1
<Page>
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes as follows:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement to include any
material information with respect to the plan of distribution not previously
disclosed in the Registration Statement or any material change to such
information in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial BONA FIDE offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remains unsold at the
termination of the offering.
(4) To file a post-effective amendment to the Registration Statement to
include any financial statements required by Item 8.A. of Form 20-F at the
start of any delayed offering or throughout a continuous offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the Registration Statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
in the initial BONA FIDE offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-2
<Page>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form F-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Toronto, Province of Ontario, Canada, on the 25th day
of January 2002.
<Table>
VISIBLE GENETICS INC.
By: /s/ RICHARD T. DALY
-----------------------------------------
Richard T. Daly
President and Chief Executive Officer
</Table>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Richard T. Daly and Thomas J. Clarke or any of
them, as his true and lawful attorney-in-fact and agents, with full powers of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement on Form F-3, and to file the same,
with all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite or necessary to be done, as fully to all intents
and purposes as he might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents or any of them, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ RICHARD T. DALY President and Chief Executive
- ------------------------------------------- Officer (principal January 25, 2002
Richard T. Daly executive officer)
Chief Financial Officer
/s/ THOMAS J. CLARKE (Principal financial
- ------------------------------------------- officer and principal January 25, 2002
Thomas J. Clarke accounting officer)
/s/ DAVID A. GALLOWAY
- ------------------------------------------- Director January 25, 2002
David A. Galloway
/s/ SHELDON INWENTASH
- ------------------------------------------- Director January 25, 2002
Sheldon Inwentash
</Table>
II-3
<Page>
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ J. SPENCER LANTHIER
- ------------------------------------------- Director January 25, 2002
J. Spencer Lanthier
/s/ JACQUES R. LAPOINTE
- ------------------------------------------- Director January 25, 2002
Jacques R. LaPointe
/s/ JONATHAN S. LEFF
- ------------------------------------------- Director January 25, 2002
Jonathan S. Leff
/s/ DR. HEATHER MUNROE-BLUM
- ------------------------------------------- Director January 25, 2002
Dr. Heather Munroe-Blum
/s/ DR. LLOYD M. SMITH
- ------------------------------------------- Director January 25, 2002
Dr. Lloyd M. Smith
/s/ DR. KONRAD M. WEIS
- ------------------------------------------- Director January 25, 2002
Dr. Konrad M. Weis
Authorized Representative in the United States:
BROWN RAYSMAN MILLSTEIN FELDER & STEINER LLP January 25, 2002
</Table>
<Table>
/s/ STEVEN S. PRETSFELDER
-----------------------------------------
By: Steven S. Pretsfelder
</Table>
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<Page>
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
5.1 Opinion of Osler, Hoskin & Harcourt LLP as to the legality
of the Common Shares
23.1 Consent of Osler, Hoskin & Harcourt LLP (included in Exhibit
5.1)
23.2 Consent of Brown Raysman Millstein Felder & Steiner LLP
23.3 Consent of PricewaterhouseCoopers LLP
</Table>
II-5