-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Eg0MW5aIhTcWxs4FSPwsuvoDAGaUlIwEFzsXZaCKkH5dtLIw14G+/avRdEOSO6ds Ym+KSUWuTBKOaW+CY1iFAg== 0000912057-01-504357.txt : 20010524 0000912057-01-504357.hdr.sgml : 20010524 ACCESSION NUMBER: 0000912057-01-504357 CONFORMED SUBMISSION TYPE: 20-F PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010320 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VISIBLE GENETICS INC CENTRAL INDEX KEY: 0001010819 STANDARD INDUSTRIAL CLASSIFICATION: 3826 IRS NUMBER: 000000000 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 20-F SEC ACT: SEC FILE NUMBER: 000-28550 FILM NUMBER: 1572567 BUSINESS ADDRESS: STREET 1: 700 BAY ST STREET 2: SUITE 1000 CITY: TORONTO ONTARIO CANA STATE: A6 BUSINESS PHONE: 2127025700 MAIL ADDRESS: STREET 1: 700 BAY ST STE 1000 STREET 2: TORONTO ONTARIO CANADA CITY: M5G 1Z6 20-F 1 a2041520z20-f.txt FORM 20-F AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON March 20, 2001 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 20-F ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 COMMISSION FILE NO. 0-28550 VISIBLE GENETICS INC. - - -------------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter and translation of Registrant's name into English) ONTARIO, CANADA - - -------------------------------------------------------------------------------- (Jurisdiction of incorporation or organization) 700 BAY STREET, TORONTO, ONTARIO, CANADA M5G 1Z6 - - -------------------------------------------------------------------------------- (Address of principal executive offices) SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON SHARES, NO PAR VALUE - - -------------------------------------------------------------------------------- (Title of Class) Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None Indicate the number of outstanding shares of each of the Registrant's classes of capital or common stock as of the close of the period covered by the annual report: As of December 31, 2000, the Registrant had outstanding 16,244,619 Common Shares and 26,153 Series A Preferred Shares. Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes /X/ No / / Indicate by check mark which financial statement item the Registrant has elected to follow: Item 17 / / Item 18 /X/ ================================================================================ Visible Genetics Inc. Annual Report on Form 20-F For the Fiscal Year Ended December 31, 2000 FORWARD-LOOKING STATEMENTS This annual report includes forward-looking statements. You can identify these forward-looking statements when you see us using words such as "expect," "anticipate," "estimate," "believe," "intend," "may," "predict," and other similar expressions. These forward looking statements cover, among other items: o FDA and other regulatory approval for certain of our products; o acceptance of our products in the clinical diagnostic market; o acceptance of genotyping in the clinical diagnostic market; o our marketing and sales plans; o our expectations about the markets for our products; o the performance of our products; o our intention to introduce new products; o our future capital needs; o our clinical trials; o reimbursement of our products by insurance companies and other third-party payors; o our ability to compete in the clinical diagnostic, clinical research and research markets; o our patent applications; o our ability to bring our Atlanta manufacturing facility fully operational in a timely manner; and o our ability to modify our information systems to accommodate euro transactions. 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: o delays in obtaining, or our inability to obtain, approval by the FDA and other regulatory authorities for our HIV OpenGene System and, in the future, certain of our other products for the clinical diagnostic market; o refusal of insurance companies and other third-party payors to reimburse patients and clinicians for our products; o uncertainty of acceptance of genotyping, in general, and of our products, in particular, in the clinical diagnostic market; o problems, delays and expenses we may face with future clinical trials; o problems that we may face in manufacturing, marketing and distributing our products; o problems and delays we may face in completing our Atlanta manufacturing facility in a timely manner. o delays in the issuance of, or the failure to obtain, patents or licenses for certain of our products and technologies; o problems with important suppliers and business partners; o delays in developing, or the failure to develop, new products and enhanced versions of existing products; and o the timing of our future capital needs or our inability to raise additional capital when needed. We do not undertake any obligation to publicly update or revise any forward-looking statements contained in this annual report, 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 annual report might not transpire. Trademarks or trade names of Visible Genetics Inc. used in this annual report include: CLIP(TM), CLIPPER(TM), GEL TOASTER(TM), GENEKIT(TM), GENEOBJECTS(R), LONG-READ TOWER(TM), MICROCEL(TM), MICROGENE CLIPPER(R), OPEN GENE(R), SUREFILL(TM), TRUGENE(TM), AND VISIBLE GENETICS(R). Each trademark, trade name or service MARK of any other company appearing in this annual report belongs to its holder. TABLE OF CONTENTS PAGE PART I Item 1. Identity of Directors, Senior Management and Advisers.........3 Item 2. Offer Statistics and Expected Timetable.......................3 Item 3. Key Information...............................................3 Selected Financial Data.......................................3 Risk Factors..................................................4 Item 4. Information on the Company...................................18 Overview.....................................................18 Property, Plants and Equipment...............................37 History and Development of the Company.......................38 Organizational Structure.....................................38 Item 5. Operating and Financial Review and Prospects.................40 Operating Results............................................40 Liquidity and Capital Resources..............................44 Item 6. Directors, Senior Management and Employees...................48 Directors and Senior Management..............................48 Compensation.................................................50 Board Committees.............................................51 Employees....................................................52 Share Ownership..............................................52 Item 7. Major Shareholders and Related Party Transactions............54 Major Shareholders...........................................54 Related Party Transactions...................................55 Item 8. Financial Information........................................56 Consolidated Statements and Other Financial Information......56 Item 9. The Offer and Listing........................................56 Nature of Trading Market.....................................56 Item 10. Additional Information.......................................57 By-Laws and Articles of Incorporation........................57 Material Contracts...........................................62 Exchange Controls............................................63 Taxation.....................................................64 Documents on Display.........................................72 -i- TABLE OF CONTENTS (continued) PAGE Item 11. Quantitative and Qualitative Disclosures About Market Risk............................................................73 Item 12. Description of Securities Other than Equity Securities......73 PART II.....................................................................73 Item 13. Defaults, Dividend Arrearages and Delinquencies.............73 Item 14. Material Modifications to the Rights of Security Holders.........................................................73 PART III....................................................................73 Item 17. Financial Statements........................................73 Item 18. Financial Statements........................................73 Item 19. Exhibits....................................................74 -ii- PART I ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS. Not Applicable. ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE. Not Applicable. ITEM 3. KEY INFORMATION. SELECTED FINANCIAL DATA The selected consolidated financial data set forth below should be read in conjunction with "Operating and Financial Review and Prospects" and our Consolidated Financial Statements and the Notes thereto. The Consolidated Statements of Operations data for fiscal years 2000, 1999 and 1998, and the Consolidated Balance Sheet data as of December 31, 2000 and 1999, as set forth below, have been derived from our consolidated financial statements which have been audited by PricewaterhouseCoopers LLP, Chartered Accountants in Canada, whose report with respect to such financial statements is included herein. The Consolidated Statements of Operations data for fiscal years 1997 and 1996, and the Consolidated Balance Sheet data as of December 31, 1998, 1997 and 1996, as set forth below, have been derived from audited consolidated financial statements not included in this annual report. 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)
YEARS ENDED DECEMBER 31, ------------------------------------------------------------------------------------ 2000 1999 1998 1997 1996 ------------ ------------ ------------ ------------ ------------ STATEMENT OF OPERATIONS DATA: Sales .................................... $ 13,073 $ 13,627 $ 10,875 $ 3,033 $ 978 Cost of sales ............................ 10,134 9,273 6,673 1,995 561 ------------ ------------ ------------ ------------ ------------ Gross margin ............................. 2,939 4,354 4,202 1,038 417 Sales, general and administrative expense 28,571 19,074 11,516 7,448 3,377 Research and development expense ......... 10,606 7,935 6,289 4,123 2,745 Other expense ............................ -- 1,329 420 654 -- ------------ ------------ ------------ ------------ ------------ Loss from operations before interest ..... (36,238) (23,984) (14,023) (11,187) (5,705) Interest income .......................... 4,481 695 264 774 609 Interest and financing expense ........... (17) (1,998) (1,132) (3) (69) ------------ ------------ ------------ ------------ ------------ Net loss ................................. (31,774) (25,287) (14,891) (10,416) (5,165) Cumulative preferred dividends and accretion of discount attributable to preferred shares ..................... (3,656) (1,770) -- -- -- ------------ ------------ ------------ ------------ ------------ Net loss attributable to common shareholders ......................... ($ 35,430) ($ 27,057) ($ 14,891) ($ 10,416) ($ 5,165) ============ ============ ============ ============ ============ Net loss per common share ................ ($ 2.42) ($ 2.73) ($ 1.91) ($ 1.48) ($ 0.89) Weighted average number of common shares outstanding .......................... 14,612,172 9,916,954 7,782,094 7,059,578 5,791,367
YEARS ENDED DECEMBER 31, ------------------------------------------------------------------------------------ 2000 1999 1998 1997 1996 ------------ ------------ ------------ ------------ ------------ BALANCE SHEET DATA: Cash and short-term investments .......... $ 80,399 $ 42,688 $ 11,274 $ 7,588 $ 18,928 Working capital .......................... 78,107 45,319 8,432 9,561 20,061 Total assets ............................. 110,356 58,640 27,783 13,936 22,606 Indebtedness ............................. -- -- 7,495 -- -- Mandatorily redeemable convertible preferred shares ..................... 24,397 27,556 -- -- -- Accumulated deficit ...................... (91,212) (59,438) (34,151) (19,260) (8,845) Shareholders' equity ..................... 76,845 24,351 14,579 12,610 21,795
3 RISK FACTORS OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT TO EVALUATE OUR FUTURE PROSPECTS AND OUR PROSPECTS MUST BE CONSIDERED IN LIGHT OF THE DIFFICULTIES FREQUENTLY ENCOUNTERED BY COMPANIES IN THE EARLY STAGES OF COMMERCIAL MANUFACTURING AND MARKETING. Although we began operations in 1993, we are only in the early stages of commercially manufacturing and marketing our products. In late 1996, we began manufacturing and selling to the research and clinical research markets, the initial versions of our automated DNA sequencers and related products. We plan to sell our TRUGENE HIV-1 Genotyping Kit and related DNA sequencing equipment and products, which we call our HIV OpenGene System, and other products to the clinical diagnostic market in the United States and elsewhere if we receive approval of the U.S. Food and Drug Administration, or FDA, and other applicable foreign regulatory authorizations. Our limited operating history makes it difficult to evaluate our business and our prospects for future profitability. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in the early stages of commercial manufacturing and marketing. Sales for our fiscal 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 of $31. 8 million in the year ended December 31, 2000. As of December 31, 2000, our accumulated deficit was $91.2 million. Our losses have resulted principally from expenses incurred in research and development of our technology and products, and from expenses that we have incurred while building our business infrastructure. We expect to continue to incur significant operating losses in the future as we continue our research and development efforts and clinical trials and expand our sales and marketing force and business infrastructure, in an effort to achieve greater sales and expand our business. It is uncertain when, if ever, we will become profitable. Our ability to become profitable will depend on many factors including, among others: o whether we obtain regulatory approval to sell our HIV OpenGene System and, in the future, other GeneKits and related DNA sequencing equipment and products, which we call OpenGene Systems, for other diseases, to the clinical diagnostic market in the United States and abroad; o the decision of third-party payors to reimburse clinicians and patients for use of our TRUGENE HIV-1 Genotyping Kit and, in the future, our other products; o our ability to successfully market and sell our HIV OpenGene System and, in the future, OpenGene Systems for other diseases, to the clinical diagnostic market; o our ability to increase sales of our products to the clinical research and research markets; o our ability to effectively manage the growth of our business; o our ability to continue to develop advanced versions of our products and technologies and new products and technologies in a timely manner; and o our ability to manufacture our products according to schedule and within budget. OUR OPERATING RESULTS MAY FLUCTUATE FROM QUARTER TO QUARTER DUE TO MANY FACTORS AND, THEREFORE, YOU SHOULD NOT RELY ON PERIOD TO PERIOD COMPARISONS OF OUR OPERATING RESULTS AS AN INDICATION OF FUTURE PERFORMANCE. Our operating results have varied on a quarterly basis in the past and may fluctuate significantly in the future as a result of a variety of factors, many of which are outside our control. Factors that may affect our quarterly operating results include, among others: 4 o unanticipated costs or delays in carrying out our clinical trials; o the amount and timing of operating costs and capital expenditures relating to research and development, and the expansion of our business, operations and infrastructure; o our decision to increase or decrease sales of equipment, GeneKits and other consumables at reduced prices; o our decision to reduce prices of our products in response to price reductions by competitors; o general economic conditions, as well as economic conditions specific to the biotechnology industry; and o unanticipated costs or delays in manufacturing our products. We believe that period to period comparisons of our operating results may not be meaningful and you should not rely on any such comparisons as an indication of our future performance. In addition, it is likely that in one or more future quarters our operating results will fall below the expectations of securities analysts and investors. In such event, the market price of our common shares is likely to fall. WE MAY NOT RECEIVE APPROVAL OF THE FDA OR FOREIGN REGULATORY AUTHORITIES FOR OUR HIV OPENGENE SYSTEM OR FOR OTHER HIV PRODUCTS WE MAY DEVELOP, AND, THEREFORE, WE MAY NOT BE ABLE TO SELL OUR HIV PRODUCTS TO THE CLINICAL DIAGNOSTIC MARKET IN THE UNITED STATES OR ABROAD. We currently are seeking approval of the FDA to sell our HIV OpenGene System for clinical diagnostic purposes in the United States. In the future, we may seek FDA approval to sell other HIV products for clinical diagnostic purposes in the United States. In order to obtain FDA approval for our HIV OpenGene system we have submitted an application supported by extensive human test data demonstrating the utility, reliability and performance of our HIV OpenGene system. We must also 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: o We may never obtain approval from the FDA to sell our HIV products to the clinical diagnostic market; o The FDA may disagree with us that the data are adequate, and we may therefore have to do additional testing; o The additional testing, if any, may show that our HIV products are not reliable enough, and therefore cannot be authorized by the FDA, or the additional testing may show that our HIV products do not work as well as they need to for successful marketing, even if marketing is authorized by the FDA; o 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 HIV products does not justify the costs; o There may be significant delays in the FDA review process; o The FDA may approve the sale of our HIV products with conditions that could limit the market for these products or make them more difficult or expensive to sell than we anticipate; and o The FDA can revoke marketing authorization for our products for a variety of reasons, such as our failure to comply with the FDA's device requirements or poor product performance in terms of safety and effectiveness. If we fail to receive FDA approval, if FDA approval is delayed or if the FDA imposes conditions that make it difficult to sell or market our products, we will be unable to carry out our business plan to sell 5 our HIV OpenGene System for clinical diagnostic use in the United States and our business, financial condition and results of operations will be materially harmed. We have obtained approval of regulatory authorities in France and Argentina to sell our HIV OpenGene System to the clinical diagnostic market in those countries. We may be required to obtain approval from other foreign regulatory authorities to sell our HIV OpenGene System and other HIV products to the clinical diagnostic market in other countries outside of the United States. In some cases, we will face an approval process similar to that required by the FDA. We cannot be certain that we will obtain the necessary approvals to sell our HIV products to the clinical diagnostic market in these countries. In some cases, the failure to obtain approval could materially harm our business, financial condition and results of operations. WE ARE SEEKING FDA APPROVAL TO MARKET OUR HIV OPENGENE SYSTEM TO THE CLINICAL DIAGNOSTIC MARKET THROUGH AN APPLICATION PROCESS THAT IS NEW AND INFREQUENTLY USED, AND IF THE FDA DOES NOT GRANT OUR REQUEST, OUR ABILITY TO SELL OUR HIV OPENGENE SYSTEM TO THE CLINICAL DIAGNOSTIC MARKET COULD BE DELAYED SIGNIFICANTLY. Our HIV OpenGene System is currently regulated as a Class III medical device. To sell a Class III medical device a company must first get specific approval of the FDA for the device by submitting a premarket approval application, commonly known as a PMA. However, an FDA advisory committee recommended that the FDA reclassify HIV genotyping tests from Class III medical devices to Class II medical devices. To sell a Class II medical device, a company must first obtain permission of the FDA by submitting a 510(k) premarket notification, commonly known as a 510(k), showing that the device is similar to a device already on the market. Generally, a 510(k) notification to the FDA that a new device is similar to an existing device requires less data and takes less time for the FDA to process than a PMA. The FDA is supposed to act on a 510(k) notification within 90 days. By contrast, a PMA application must be supported by more extensive data to prove the safety and efficacy of the device, and a review of a PMA application involves a lengthier process which may take one year or more from filing. The FDA usually follows the advice of its advisory committees. However, to reclassify a device from Class III to Class II, the FDA's administrative process could take several years. Therefore, it is unlikely that reclassification of HIV genotyping tests by the FDA would be effected for several years. We are attempting to accelerate the reclassification process by using an alternative provision of the 1997 Food and Drug Administration Modernization Act. Under this alternative, we have submitted a 510(k) notification to the FDA, which the FDA will reject because our HIV OpenGene System is still a Class III device. After receipt of the rejection, we will have 30 days to seek reclassification of our HIV OpenGene System, and the FDA will have 60 days to rule on this request. If the FDA grants our request, we will be able to immediately market our HIV OpenGene System to the clinical diagnostic market. On September 5, 2000, we submitted our 510(k) notification to the FDA. In December 2000, we received comments from the FDA regarding our application, to which we responded to in January 2001. As of the date of this Annual Report, the FDA has not yet completed its review of our application. We cannot guarantee that this alternative procedure will be successful in shortening the time for FDA approval of our HIV OpenGene System. This process is new and is used infrequently, and, therefore, there is no assurance that the FDA will grant our request for reclassification. If the FDA does not grant our request to reclassify our HIV OpenGene System under this new reclassification procedure, we either will have to submit a PMA application or wait until the FDA acts to reclassify HIV genotyping tests as recommended by its advisory committee. In either event, our ability to sell our HIV OpenGene System for clinical diagnostic use will be delayed, and our business, financial condition, and results of operations could be materially harmed. 6 WE MAY NOT RECEIVE REGULATORY APPROVAL FOR OUR OTHER PRODUCTS AND THEREFORE MAY NOT BE ABLE TO SELL THESE PRODUCTS FOR CLINICAL DIAGNOSTIC PURPOSES IN THE UNITED STATES OR ABROAD. In addition to our HIV OpenGene System, we have also developed and are continuing to develop GeneKits for other clinical diagnostic applications. In order to sell these GeneKits and related DNA sequencing equipment and products to the clinical diagnostic market, we may be required to obtain the approval of the FDA and of foreign regulatory authorities through approval procedures that are the same or similar to those required for our HIV OpenGene System. Our failure to obtain necessary approvals to sell our products for clinical diagnostic use in one or more significant markets could cause material harm to our business, financial condition and results of operations. EACH TIME WE MAKE ALTERATIONS TO ANY FDA APPROVED PRODUCTS, WE MAY NEED TO SEEK ADDITIONAL FDA APPROVAL, WHICH WILL LENGTHEN THE TIME AND INCREASE THE COST OF BRINGING UPGRADED OR NEW PRODUCTS TO MARKET. We may need to seek additional FDA approval if we make changes to a product specifically approved by the FDA. Our HIV OpenGene System, as submitted to the FDA, contains specific reagents, dyes, enzymes, chemicals, software and other materials. If we obtain approval through the 510(k) process, we will be required to obtain prior clearance from the FDA for those product changes that could significantly affect safety or effectiveness. If our HIV OpenGene System is approved through the PMA process, the FDA would require that we obtain additional approval for any change to the kit's components that could alter the performance of the kit, such as changing certain enzymes or reagents. We also may be required to obtain similar foreign regulatory approval. To obtain additional approval, we may have to conduct additional human clinical trials to demonstrate that the altered GeneKit will produce at least the same results as the approved GeneKit or will be as safe and effective as the approved product. Obtaining additional FDA or foreign regulatory approval is likely to be time consuming and costly and, as a result, we may experience delays in bringing these upgraded or new products to market. OUR BUSINESS IS, AND IN THE FUTURE MAY BECOME, SUBJECT TO ADDITIONAL REGULATIONS AND IF WE ARE UNABLE TO COMPLY WITH THEM OUR BUSINESS MAY BE MATERIALLY HARMED. Our reference laboratory in 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. 7 THE MARKET FOR GENOTYPING PRODUCTS IS NEW AND GENOTYPING MAY NOT BECOME AN ACCEPTED METHOD OF MANAGING DRUG TREATMENT. An important part of our business strategy is our plan to sell our products to the clinical diagnostic market. Our ability to do so will depend on the widespread acceptance and use by doctors and clinicians of genotyping to manage drug treatment of certain diseases or other medical conditions. The use of genotyping by doctors and clinicians for this purpose is relatively new. Existing DNA sequencing systems have been designed primarily for research purposes and we are not aware of any DNA sequencing products that have been approved by the FDA for clinical diagnostic purposes. We cannot be certain that doctors and clinicians will want to use DNA sequencing systems designed for these purposes. If genotyping is not accepted by this market, we will not be able to carry out our business plan and our business, financial condition and results of operations will be materially harmed. IF GENOTYPING IS ACCEPTED AS A METHOD TO MANAGE DRUG TREATMENT, WE CANNOT BE CERTAIN THAT OUR PRODUCTS WILL BE ACCEPTED IN THE CLINICAL DIAGNOSTIC MARKET. If genotyping becomes widely accepted in the clinical diagnostic market, we cannot predict the extent to which doctors and clinicians may be willing to utilize our OpenGene System to manage drug treatment of selected diseases or other medical conditions. Doctors and clinicians may prefer competing technologies and products that can be used for the same purposes as our products such as DNA probe-based diagnostic systems, chip-based and assay-based technologies, or homebrew genetic tests and other DNA sequencers. If our products are not accepted by the clinical diagnostic market, our business, financial condition and results of operations will be materially harmed. IF INSURANCE COMPANIES AND OTHER THIRD-PARTY PAYORS DO NOT REIMBURSE DOCTORS AND PATIENTS FOR OUR PRODUCTS, OUR ABILITY TO SELL OUR PRODUCTS TO THE CLINICAL DIAGNOSTIC MARKET WILL BE IMPAIRED. Our ability to successfully sell our TRUGENE HIV-1 Genotyping Kit and other GeneKits to the clinical diagnostic market will depend partly on the willingness of insurance companies and other third-party payors to reimburse doctors and patients for use of our products. Physicians' recommendations to use genotyping, as well as decisions by patients to pursue genotyping, are likely to be influenced by the availability of reimbursement for genotyping by insurance companies or other third-party payors. Government and private third-party payors are increasingly attempting to contain health care costs by limiting both the extent of coverage and the reimbursement rate for testing and treatment products and services. In particular, services that are determined to be investigational in nature or that are not considered "reasonable and necessary" for diagnosis or treatment may be denied reimbursement coverage. If adequate reimbursement coverage is not available from insurers or other third-party payors, we expect that few, if any, patients would be willing to pay for genotyping. In this case, our anticipated revenues will be substantially reduced, our ability to achieve profitability will be significantly impaired and our business, financial condition and results of operations will be materially harmed. WE DO NOT HAVE MARKETING EXPERIENCE IN THE CLINICAL DIAGNOSTIC MARKET, WE CANNOT BE CERTAIN WE WILL SUCCESSFULLY DEVELOP THE MARKETING CAPABILITIES REQUIRED TO SELL OUR PRODUCTS TO THIS MARKET AND IN SOME MARKETS WE WILL BE DEPENDENT ON THE EFFORTS OF DISTRIBUTORS TO SELL OUR PRODUCTS. We have no experience marketing products to the clinical diagnostic market. If the FDA approves the sale of our HIV OpenGene System to the clinical diagnostic market in the United States, we intend to expand our internal sales force to sell products to these markets in North America and selected other countries. It will take significant time, money and resources to expand our sales force. We cannot be certain that we will develop the marketing capabilities necessary to successfully market and sell our products to the clinical diagnostic market. 8 We have granted rights to distribute our GeneKits and OpenGene Systems to distributors in the clinical diagnostic, clinical research, and research markets in over 40 countries outside of the United States and Canada, including Mexico and certain countries in Central America, South America, Europe, Asia, and Africa. These agreements expire at various times from April 2001 through March 2003, and in many cases, are subject to automatic renewal. Certain of the agreements may also be terminated by either party upon specified notice periods and may require us to make termination payments under certain circumstances. Certain of the agreements also provide for minimum annual purchases for specified periods. Our 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 may be materially harmed. IF WE ARE UNABLE TO CONTINUE DEVELOPING ADVANCED TECHNOLOGY, ADVANCED VERSIONS OF OUR EXISTING PRODUCTS AND NEW PRODUCTS IN A TIMELY AND COST-EFFECTIVE MANNER, OUR ABILITY TO GENERATE REVENUE AND BECOME PROFITABLE WILL BE IMPAIRED. We believe that if we are to generate additional revenue and become profitable, we must continue to develop advanced technology, advanced versions of our existing products and new products. These technology and products must be developed and introduced to the market in a timely and cost-effective manner to meet both changing customer needs and technological developments. We cannot assure you that we will be able to successfully or timely develop any new technology, products or advanced versions of existing products, or that any new technology, products or advanced versions of existing products will achieve acceptance in the market. If we are unable to successfully develop new technology, products or advanced versions of existing products in the future or if those technologies or products are not accepted in the market, our ability to generate significant revenues will be significantly impaired, we could experience additional significant losses and our business, financial condition and results of operations will be materially harmed. MANUFACTURING PROBLEMS COULD HAMPER OR DELAY OUR ABILITY TO INTRODUCE OUR PRODUCTS TO THE MARKETPLACE. We have limited experience in large-scale assembly and manufacturing of our products. Since we started assembling and manufacturing operations in 1996, we have experienced delays, quality control problems and capacity constraints from time to time. Our plant in Pittsburgh, Pennsylvania which manufactures our TRUGENE HIV-1 Genotyping Kit , currently has a limited production capacity. Our new facility in Atlanta, Georgia is in the process of being designed, built and equipped in accordance with our specifications. Construction may take longer than expected, and the planned and actual construction costs of building and qualifying the facility for regulatory compliance may be higher than expected. Any significant delay in making the Atlanta facility operational will limit our ability to increase production. When we are in a position to increase production and begin manufacturing and assembling new products, additional problems may arise. These may include technological, engineering, quality control and other production difficulties. We may also have difficulty complying with FDA quality system regulations at each of our facilities. If we experience these problems, we could be delayed in filling orders, shipping existing products and introducing new products to the marketplace. These problems could also adversely affect customer satisfaction and the market acceptance of our products. 9 IF WE ARE UNABLE TO SUCCESSFULLY PROTECT OUR INTELLECTUAL PROPERTY OR OBTAIN CERTAIN LICENSES, OUR COMPETITIVE POSITION WILL BE HARMED. Our success will partly depend on our ability to obtain patents and licenses from third parties and protect our trade secrets. We own or jointly own 42 U.S. patents. We own or jointly own an additional 20 U.S. patent applications pending, of which 5 have been allowed. We own 18 foreign patents. We own or jointly own foreign applications presently pending as PCT applications, or as national phase PCT applications, designating intergovernmental agencies and multiple countries including the European Patent Office, Australia, Canada and Japan. We cannot assure you that our patent applications will result in patents being issued in the United States or foreign countries. In addition, the U.S. Patent and Trademark Office may reverse its decision or delay the issuance of patents that have been allowed. We also cannot assure you that any technologies or products that we may develop in the future will be patentable. In addition, competitors may develop products similar to ours that do not conflict with our patents. Others may challenge our patents and, as a result, our patents could be narrowed or invalidated. From time to time, we may be required to obtain licenses from third parties for some of the technology or components used or included in certain of our GeneKits or other products. We cannot be certain that we will be able to obtain these licenses on acceptable terms or at all. In certain instances, if we are unable to obtain a required license, our ability to sell or use certain products may be impaired. To help protect our proprietary rights in unpatented trade secrets, we generally require our employees, consultants and advisors to sign confidentiality agreements. However, we cannot guarantee that these agreements will provide us with adequate protection if confidential information is used or disclosed improperly. In addition, in some situations, these agreements may conflict with, or be limited by, the rights of third parties with whom our employees, consultants or advisors have prior employment or consulting relationships. Further, others may independently develop similar proprietary information and techniques, or otherwise gain access to our trade secrets. OTHERS COULD CLAIM THAT WE INFRINGE ON THEIR INTELLECTUAL PROPERTY RIGHTS, WHICH MAY RESULT IN COSTLY AND TIME CONSUMING LITIGATION. Our success will also depend partly on our ability to operate without infringing upon the proprietary rights of others, as well as our ability to prevent others from infringing on our proprietary rights. We may be required at times to take legal action in order to protect our proprietary rights. Also, from time to time, we receive notices from third parties claiming that we may infringe their patent or other proprietary rights. Despite our best efforts, we may be sued for infringing on the patent or other proprietary rights of others. Such litigation is costly, and, even if we prevail, the cost of such litigation could harm us. If we do not prevail, in addition to any damages we might have to pay, we could be required to stop the infringing activity or obtain a license. We cannot be certain that any required license would be available to us on acceptable terms, or at all. 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. CERTAIN SUPPLIES AND PARTS THAT WE NEED ARE AVAILABLE ONLY FROM LIMITED SOURCES AND OUR BUSINESS WILL SUFFER IF WE CANNOT OBTAIN THESE SPECIALIZED ITEMS USED IN OUR GENEKITS. Our GeneKits include dyes, reagents and other chemicals supplied by third parties. We believe that some dyes supplied by Amersham International Public Limited Company under our exclusive worldwide license to use and sell Amersham dyes within our GeneKits, may not be available from other suppliers. However, our customers might be able to purchase some, but not all, of these dyes directly from Amersham. In addition, certain reagents and other chemicals that we use and include in our GeneKits are available only under license from their manufacturers. We cannot be certain that we will be able to renew these licenses upon expiration on favorable terms or at all. While we believe that 10 alternative dyes, chemicals and reagents are available, alternate products may not be as effective as certain of the products that we presently use. If we switched to an alternative dye, chemical or reagent, we may also have to adapt the GeneKit's analysis software and/or our DNA sequencing equipment to the new product, which could take time. If the GeneKit is FDA approved, we may also be required to seek FDA approval for the altered GeneKit if the alternative product were to substantially alter the performance of the GeneKit or if the changes could significantly affect safety or effectiveness. This could cause delays in production and in bringing the changed GeneKit to market. We currently purchase acrylamide, an important chemical used in our MicroCel cassettes, from one supplier. This supplier has informed us that it is experiencing financial hardship. Should this supplier go out of business, we will need to find an alternative source of acrylamide. We cannot be certain that we will be able to find a satisfactory alternate supplier. If we are unable to find an alternate reliable supplier, we may elect to manufacture acrylamide in our own facilities. We have no experience in this area and we cannot be certain that we will be able to do so successfully. If we are unable to locate reliable alternate supplies or make acrylamide on our own, our business could be materially and adversely harmed. We also use certain custom-designed components supplied by third parties in our DNA sequencers and other equipment. We believe that there are alternate suppliers for these custom-designed parts. However, we will incur costs in switching to alternate suppliers and will likely experience delays in production of the products that use any of these parts until such time as we are able to locate alternate suppliers or parts on acceptable terms. WE ARE DEPENDENT ON OUR LICENSE FOR THE POLYMERASE CHAIN REACTION TECHNOLOGY WE USE IN OUR GENEKITS AND OUR BUSINESS WOULD SUFFER IF THE LICENSE IS TERMINATED OR NOT RENEWED. We license the polymerase chain reaction technology that we use in our GeneKits from Roche Molecular Systems, Inc. and F. Hoffmann-La Roche Ltd. 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, which expire at various times commencing July 2004. The license may be terminated by Roche Molecular Systems and F. Hoffmann-La Roche prior to expiration under certain limited circumstances. The termination of this license would have a material adverse effect on our ability to produce or sell GeneKits. Consequently, we could experience a deterioration of anticipated future sales of our GeneKits and further losses. WE 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 (formerly known as PE Biosystems), which we refer to in this report 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, which expire at various times commencing in 2005. Either party may terminate the agreement under certain other 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 GeneKits. Consequently, we could experience a deterioration of anticipated future sales of our GeneKits and further losses. 11 WE FACE SUBSTANTIAL COMPETITION FROM MANY COMPANIES, AND WE MAY NOT BE ABLE TO EFFECTIVELY COMPETE. The biotechnology industry is highly competitive. We compete with entities in the United States and abroad that are engaged in the development and production of products that analyze genetic information. They include: o manufacturers of phenotyping assays, including ViroLogic, Inc. and VIRCO; o manufacturers of genotyping test kits , including Applera; o purveyors of homebrew genetic tests, which typically have not undergone clinical validation and have not been approved by the FDA or other regulatory agencies, including Laboratory Corporation of America Holdings, Quest Diagnotistics Inc. and Specialty Laboratories, Inc. o 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; o manufacturers of alternate technologies used to analyze genetic information, such as chip-based and assay-based technologies, including, Hyseq Inc., Affymetrix Inc., ChemCore Inc., CuraGen Corp., Nanogen, Inc.; and o manufacturers and distributors of DNA sequencers such as Applera, Amersham Pharmacia Biotech, Inc., LI-COR, Inc., Hitachi, Ltd. and Molecular and Genetic BioSystems, 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. 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 12 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: o difficulty in assimilating technologies, products, personnel and operations; o diversion of management's attention from other business concerns; o large write-offs and amortization expenses related to goodwill and other intangible assets; o entering markets in which we have no or limited experience; and o incurrence of debt or assumption of other liabilities. The occurrence of one or more of these factors could materially harm our business, financial condition and results of operations. In addition, if we issue additional securities in connection with an acquisition, the ownership interests of our existing security holders will be diluted. A SIGNIFICANT PORTION OF OUR SALES DURING 2000 HAVE BEEN TO ONE DISTRIBUTOR AND WE MAY CONTINUE IN THE FUTURE TO RELY HEAVILY ON THAT DISTRIBUTOR FOR SALES TO THE RESEARCH AND CLINICAL RESEARCH MARKETS. In February 1996, we granted Amersham an exclusive worldwide license to use and sell the Seq4x4(TM) DNA sequencer and related products used and sold with the sequencer, which is designed for the research market. During 2000 approximately 11% of our revenues resulted from sales of sequencers and other products to Amersham. Our agreement with Amersham expires in February 2002, and is automatically renewed each year, unless either party notifies the other at least six months in advance of renewal that it wishes to terminate the agreement. We cannot be certain that Amersham will be successful in selling these products. In addition, we cannot be certain that the agreement will not be terminated before expiration or that, upon expiration, it will be renewed on favorable terms or at all. WE MAY BE SUED BY CLINICIANS, PATIENTS OR THIRD-PARTY PAYORS AND OUR INSURANCE MAY NOT SUFFICIENTLY COVER ALL CLAIMS BROUGHT AGAINST US. The testing, manufacturing, sale and marketing of our products exposes us to the risk of product liability claims. In addition, clinicians, patients, third-party payors and others may at times seek damages based on testing or analysis errors based on a technician's misreading of the sequencing results, mishandling of the patient samples or similar claims. Although we have obtained liability insurance coverage, we cannot guarantee that liability insurance will continue to be available to us on acceptable terms or that our coverage will be sufficient to protect us against all claims that may be brought against us. A liability claim, even one without merit or for which we have substantial coverage, could result in significant legal defense costs, thereby increasing our expenses, lowering our earnings and, depending on revenues, potentially resulting in additional losses. OUR INTERNATIONAL OPERATIONS MAY BE ADVERSELY AFFECTED BY RISKS ASSOCIATED WITH INTERNATIONAL BUSINESS. We sell our products in many countries and operate offices in North America and Europe. Therefore, we are subject to certain risks that are inherent in an international business. These include: 13 o varying regulatory restrictions on sales of our products to certain markets and unexpected changes in regulatory requirements; o tariffs, customs, duties and other trade barriers; o difficulties in managing foreign operations and foreign distribution partners; o longer payment cycles and problems in collecting accounts receivable; o fluctuations in currency exchange rates; o political risks; o foreign exchange controls that may restrict or prohibit repatriation of funds; o varying laws relating to, among other things, employment and employment termination; o export and import restrictions or prohibitions, and delays from customs brokers or government agencies; o seasonal reductions in business activity in certain parts of the world; and o potentially adverse tax consequences. Depending on the countries involved, any or all of the foregoing factors could materially harm our business, financial condition and results of operations. 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 and assuming that we receive FDA approval for our HIV OpenGene System during 2001, we believe that current cash balances and anticipated funds from operations will be sufficient to enable us to meet our operating needs for the next 24 months. In addition, the actual amount of funds that we will need during the next 24 months will be determined by many factors, some of which are beyond our control. These factors include: o the length of time it takes the FDA to complete its review; o the cost and length of time required to complete any additional clinical trials which may be required for FDA approval to sell our HIV OpenGene System to the clinical diagnostic market; o our success in introducing new products during the period; o our success in selling our products in the clinical research market during this period; o our incurring significant fixed overhead and other expenses prior to increasing our revenues; and o the costs of acquiring and integrating any new business or technologies during the period. We may need to obtain additional funds sooner or in greater amounts than we currently anticipate and we may need to obtain additional funds at the end of this 24 month period. If we do not obtain FDA approval for our HIV OpenGene System during 2001 we will need to obtain additional funding within 18 to 24 months, unless we significantly curtail our operations. 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 14 when needed, we would be unable to carry out our business plan, we would have to significantly limit our operations and our business, financial condition and results of operations would be materially harmed. WE MAY REQUIRE APPROVAL OF THE HOLDERS OF OUR SERIES A PREFERRED SHARES IN ORDER TO OBTAIN CERTAIN TYPES OF FINANCING AND WE MAY BE PREVENTED FROM OBTAINING THESE TYPES OF FINANCING BY THE HOLDERS OF OUR SERIES A PREFERRED SHARES. We will be required to obtain the consent of the holders of a majority of our then outstanding Series A preferred shares prior to issuing any equity security that has rights as to dividends and liquidation that are senior or equal to those of the Series A preferred shares. Also, under certain circumstances, if we propose to sell equity securities, including debt securities convertible into equity securities, certain holders of our Series A preferred shares will be entitled to preemptive rights which allow them to purchase a proportional amount of the securities being offered. We will also be required to obtain the consent of the holders of a majority of our then outstanding Series A preferred shares if we wish to borrow money and at such time or as a result of such loans, the total principal amount of our indebtedness and capitalized lease obligations exceeds $15.0 million. In addition, if we were to enter into a credit facility with a financial institution, we may be subject to additional limitations on our ability to incur additional indebtedness. As a result, we may be delayed in, or prohibited from, obtaining certain types of financing. OUR U.S. INVESTORS COULD SUFFER ADVERSE TAX CONSEQUENCES IF WE ARE CHARACTERIZED AS A PASSIVE FOREIGN INVESTMENT COMPANY. Although we do not believe that we were a passive foreign investment company (or PFIC) for United States federal income tax purposes during 2000 there can be no assurance that we will not be treated as a PFIC in 2001 or thereafter. We would be a PFIC if 75% or more of our gross income in a taxable year is passive income. We also would be a PFIC if at least 50% of the value of our assets averaged over the taxable year produce, or are held for the production of, passive income. For these purposes, the value of our assets is calculated based on our market capitalization. Passive income includes, among other items, interest, dividends, royalties, rents and annuities. For the 2000 taxable year approximately 12% of our assets averaged over the taxable year produced, or were held for the production of, passive income, and approximately 26% 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: o They will be taxed at the highest ordinary income tax rates in effect during their holding period on certain distributions on our common shares, and gain from the sale or other disposition of our common shares; o They will be required to pay interest on taxes allocable to prior periods; and o The tax basis of our common shares will not be increased to fair market value at the date of their 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 15 excess of the fair market value of our common shares over the adjusted tax basis as of the close of each year (with certain adjustments for prior years). If we become a PFIC, our U.S. shareholders will generally be unable to exchange our common shares for shares of an acquiring corporation on a tax-deferred basis under the reorganization rules of the Internal Revenue Code, and the benefits of many other nonrecognition provisions of the Internal Revenue Code will not apply to transfers of our common shares. In addition, if we become a PFIC, pledges of our common shares will be treated as sales for U.S. federal income tax purposes. Our U.S. shareholders should note that state and local taxes may also apply if amounts are included in U.S. federal taxable income under the PFIC rules of the Internal Revenue Code. The PFIC rules are very complex. Our U.S. shareholders are strongly encouraged to consult with their tax advisors concerning all of the tax consequences of investing in our common shares and the possible benefits of making a tax election given their circumstances. Additionally, our U.S. shareholders should review "Item 10. Additional Information - Taxation- U.S. Federal Income Tax Considerations-Tax Status of the Company-PASSIVE FOREIGN INVESTMENTS COMPANIES" for a more detailed description of the PFIC rules and how they may affect their ownership of our common shares. OUR AMENDED ARTICLES OF INCORPORATION AND BY-LAWS CONTAIN CERTAIN PROVISIONS THAT MAKE IT DIFFICULT FOR A THIRD-PARTY TO ACQUIRE OUR COMPANY EVEN IF DOING SO WOULD BE BENEFICIAL TO OUR SHAREHOLDERS AND, THEREFORE, OUR SHAREHOLDERS MAY NOT BE ABLE TO MAXIMIZE THE RETURN ON THEIR INVESTMENT. Our authorized capital consists of an unlimited number of preferred shares. The Board of Directors, without any further vote by the common shareholders, has the authority to issue preferred shares and to determine the price, preferences, rights and restrictions, including voting and dividend rights, of these shares. The rights of the holders of common shares are subject to the rights of holders of any preferred shares that the Board of Directors may issue in the future. That means, for example, that we can issue preferred shares with more voting rights, higher dividend payments or more favorable rights upon dissolution, than the common shares. If we issued certain types of preferred shares in the future, it may also be more difficult for a third-party to acquire a majority of our outstanding voting shares. In addition, we have a "classified" Board of Directors, which means that only approximately one-third of our directors are eligible for election each year. Therefore, if shareholders wish to change the composition of the Board of Directors, it would take at least two years to remove a majority of the existing directors, and three years to change all directors. Also, the holders of our Series A preferred shares are entitled to vote as a class for one director. The Series A Director serves for a one year term and any vacancy may be filled only by a vote of the holders of Series A preferred shares. If we do not redeem our Series A preferred shares as required during 2006, 2007, and 2008, then our Series A shareholders will be entitled to special voting rights enabling them to elect a majority of our Board of Directors, who will continue to serve as directors until we have redeemed our Series A preferred shares as required. Having a classified Board of Directors and these special rights of the Series A preferred shareholders may, in some circumstances, deter or delay mergers, tender offers or other possible transactions which may be favored by some or a majority of our shareholders. BECAUSE OUR PREFERRED SHAREHOLDERS ARE ENTITLED TO CERTAIN PREFERENCES OVER OUR COMMON SHAREHOLDERS, UNDER CERTAIN CIRCUMSTANCES, OUR COMMON SHAREHOLDERS MAY NOT RECEIVE A RETURN OF THE FULL AMOUNT THEY HAVE INVESTED IN OUR COMPANY. In July 1999, we issued 33,948 Series A preferred shares and as of February 28, 2001, 26,153 remained outstanding. Our Series A preferred shares entitle the holders to certain preferences over our common shares, including the following: 16 o we may not issue any securities that rank senior to, or in parity with, the Series A preferred shares without obtaining the approval of the holders of a majority of the Series A preferred shares; o we may not issue dividends to holders of common shares until all accrued and unpaid dividends on the Series A preferred shares are paid in full; and o if we liquidate or wind-up our company or if we sell our company or in certain other circumstances, holders of Series A preferred shares are entitled to receive an amount equal to $1,000 per Series A preferred share, or approximately $26.0 million in the aggregate, plus accrued and unpaid dividends, before holders of common shares would be entitled to receive any distribution. THE VOLATILITY OF THE STOCK MARKET COULD DRIVE DOWN THE PRICE OF OUR COMMON SHARES WHICH COULD RESULT IN LOSSES TO OUR SHAREHOLDERS. The market prices for securities of life sciences companies, particularly those that are not profitable, have been highly volatile, especially recently. Publicized events and announcements may have a significant impact on the market price of our common shares. In addition, the stock market from time to time experiences extreme price and volume fluctuations which particularly affect the market prices for emerging and life sciences companies, such as ours, and which are often unrelated to the operating performance of the affected companies. These broad market fluctuations may make it difficult for a shareholder to sell shares at a price equal to or above the price at which the shares were purchased. FUTURE SALES BY EXISTING SHAREHOLDERS MAY LOWER THE PRICE OF OUR COMMON SHARES WHICH COULD RESULT IN LOSSES TO OUR SHAREHOLDERS. As of February 28, 2001, we had outstanding 19,017,035 voting shares, including 2,737,298 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: o Our officers and directors own options to acquire an additional 962,362 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 110,622 shares that may be sold subject to volume restrictions imposed by Rule 144. o Our employees and consultants who are not deemed affiliates hold options to buy a total of 890,233 shares. The shares to be issued upon exercise of these options have been registered and may be freely sold when issued. o We may issue options to purchase up to an additional 604,146 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. 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 162,797 common shares as of February 28, 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 17 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. ITEM 4. INFORMATION ON THE COMPANY. OVERVIEW We develop, manufacture and sell integrated DNA sequencing systems that analyze genetic information to improve the treatment of selected diseases. Our strategy is to become a leader in the emerging field of pharmacogenomics. Pharmacogenomics is the science of individualizing therapy based on genetic differences across patients. Our genotyping technology, which employs DNA sequencing, enables the analysis in the clinical diagnostic laboratory of individual genetic variations. DNA sequencing is generally considered the most thorough and accurate method for genotyping diseases. We believe that individualizing therapy through pharmacogenomics will improve the treatment of many diseases, such as those caused by Human Immunodeficiency Virus, or HIV, hepatitis B, hepatitis C, tuberculosis and eventually some cancers. Our OpenGene System consists of automated DNA sequencers, disposable gel cassettes, related equipment and software and disease-specific GeneKits. Our GeneKits contain the necessary chemicals, reagents, third-party licenses and other consumables and materials required for sequencing specific disease-associated genes. We have developed GeneKits for HIV, hepatitis B and hepatitis C. We are developing a GeneKit for tuberculosis, the next generation of our TRUGENE HIV-1 Genotyping Kit, and GeneKits for other species of HIV not tested for in our TRUGENE HIV-1 Genotyping Kit. We began selling our DNA sequencers and related equipment and consumables to the research and clinical research markets in the third quarter of 1996 and began selling GeneKits into the same markets in the third quarter of 1997. The first clinical diagnostic application we are targeting is HIV. We have developed our 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 mutations, which may lead to drug resistance. One of the central challenges in maintaining HIV patients on long-term drug therapy is to adjust each patient's medication as drug-resistant strains of the virus emerge. Several clinical trials, including one that we conducted, have shown that patients whose drug therapy is managed using HIV genotyping had greater reductions in viral load than HIV patients who were not genotyped. In June 1999, we completed a European trial, which is called VIRADAPT, which showed, among other things, that after six months patients who received standard of care treatment and underwent periodic genotyping had a mean decrease in viral load of approximately 93% as compared to a mean decrease in viral load of approximately 79% in the non-genotyping group. In addition, after six months, 32% of the patients in the genotyping group had undetectable viral loads as compared to 14% of patients in the non-genotyping group. These differences were found to be statistically significant. Three other trials conducted by others also have demonstrated the benefits of drug resistance genotyping over standard of care treatment. o A trial called GART, was funded by the National Institutes of Health, or NIH, and was completed in the United States in December 1998. It showed that, at the end of 8 weeks, patients who received standard of care treatment and underwent periodic genotyping had a mean decrease in viral load of approximately 93%, as compared to 76% to patients in the non-genotyping group. This difference was found to be statistically significant. 18 o A trial called NARVAL was conducted during 1999 and 2000 by l'Agence Nationale de Recherche sur le SIDA. The study showed that, after six months, 36% of the patients who received genotyping resistance testing using our HIV OpenGene System achieved viral suppression (meaning a viral load of less than 200 copies per ml) as compared to 27% of the patients in the standard of care group and 26% of those patients who received resistance testing using phenotyping tests. These differences were found to be statistically significant. o A trial called HAVANA was conducted during 1999 and 2000 in Europe by a consortium of medical centers known as the HAVANA study group. The study showed that, after six months, patients who received genotyping using our HIV OpenGene System, had a 50% greater reduction in their viral load than those who received standard of care treatment without genotyping. This difference was found to be statistically significant. In June 1999, we also initiated a trial called SEARCH to test the clinical utility of our HIV OpenGene System in genotyping HIV infected patients. Based on the results from the VIRADAPT and GART clinical trials, the FDA has advised us that we are not required to complete the SEARCH trial and has also indicated that we will not be required to demonstrate further the clinical utility of our HIV OpenGene System in the treatment of HIV infected individuals. On September 5, 2000, we submitted our application to the FDA for approval to sell our HIV OpenGene System to the clinical diagnostic market. In December 2000, we received comments from the FDA regarding our application, to which we responded in January 2001. As of the date of this Annual Report, the FDA has not yet completed its review of our application. In December 2000, we received approval from French regulatory authorities to market our HIV OpenGene System to the clinical diagnostic market in France, and in February 2001, we received approval from Argentine regulatory authorities to market our HIV OpenGene System to the Chnical diagnostic market in Argentina. SCIENTIFIC BACKGROUND DNA. All cells contain DNA, a complex material that stores the genetic blueprint, or makeup, of an organism. DNA is composed of four chemical building blocks called nucleotides. Each nucleotide consists of, among other things, one of four chemical bases: adenine (A), thymine (T), guanine (G) and cytosine (C). These four bases are the genetic alphabet that is used to write messages and instructions which direct the synthesis or expression of the proteins inside the cell, required to make the cell function. A sequence is the particular order of the nucleotides in the DNA. Changes in the DNA sequence, also called mutations, may occur from time to time. These mutations may alter the function of the cell proteins and affect cell functions. PHARMACOGENOMICS. Different people often respond in different ways to the same drug. A drug that is safe and effective in one patient may be toxic or ineffective in another. We believe that some of these differences in response may reflect underlying genetic differences between the individuals concerned. Pharmacogenomics seeks to establish correlations between specific genetic variations and specific responses to drugs. By establishing such correlations, pharmacogenomics may permit both new and existing drugs to be targeted to those patients in whom they are most likely to be both effective and safe. GENOTYPING. Genotyping is the act of selecting and reading the sequence of nucleotides in a specific strand of DNA in order to understand how changes in the DNA may influence the onset and treatment of some diseases and medical conditions. Genotyping is used by scientists, researchers and clinicians to identify: o genes as potential targets for therapeutic intervention; 19 o mutations in a gene that may predispose an individual to a particular disease; o genetic variation among individuals that may cause different reactions to drug treatment; and o mutations in the genes of infectious organisms (such as viruses and bacteria) and tumors that may result in drug resistance, thereby influencing treatment methods. Genotyping is performed using tests that rely on either DNA probe or DNA sequencing technologies. DNA PROBES. A DNA probe is a single-stranded piece of DNA made to be complementary to the unique base sequence of the target gene. The DNA probe operates on the principle that single strands of DNA seek out complementary strands to form a chemical bond. The DNA probe is placed into prepared samples which may include the target gene. If the target gene is present, the probe will bind to the target, indicating its presence. DNA probes are highly specific, target single mutations, and require advance knowledge of the target mutation. Probes are susceptible to producing erroneous results because they are affected by variations in the sequence immediately surrounding their targeted mutation. As a result, DNA probes are effective in detecting diseases only when the disease-associated mutation is at a fixed, known location within a gene or when the sequence within a particular gene is stable. However, in diseases where the mutation causing the disease is not known, probe-based technology is not as effective. Probes also may not effectively provide genotypes for infectious pathogens, such as viruses, in which the DNA sequence is highly variable or where mutations occur to evade immune responses or to develop drug resistance. DNA SEQUENCING. DNA sequencing identifies all the chemical bases of the DNA strand to be examined, one-by-one, readily detecting variations or new mutations within the DNA sequence. Unlike DNA probes, sequencing reads long segments of DNA and can therefore detect new mutations, multiple mutations and insertions and deletions of DNA within a sequence. DNA sequencing is also less sensitive than probes to surrounding variations in the sequence being examined. As a result, sequencing is generally considered the most thorough and accurate method for genotyping diseases, such as cancer, and certain viruses, including HIV, which have high rates of mutation or numerous strains. DNA sequencing is also used to assess predisposition to many diseases and for tissue typing. The DNA sequencing process involves several steps, some of which must be performed manually and are labor intensive. DNA first must be extracted from the sample, which usually is blood, other body fluid or tissue. After the DNA is extracted, it is amplified, or copied, in order to provide enough DNA so that the DNA sequence can be easily detected. This process of extraction and amplification typically requires the use of various reagents, primers and other chemicals, as well as proprietary processes and technologies, some of which must be licensed from third parties. Some laboratories prepare and use their own homebrew reagents and chemicals which usually are not subject to standardized procedures or quality control processes necessary to ensure reliable results. Once the DNA is extracted and amplified, a process called gel electrophoresis is performed. This process involves placing the DNA on a gel substance and running an electrical current through it. This separates the DNA so that the DNA sequence can be read. While historically many scientists performed the entire DNA sequencing process manually, automated DNA sequencers using a number of disposable products have been developed which simplify and expedite parts of this process. DNA SEQUENCING MARKETS DNA sequencing is an important tool for the clinical diagnostic, clinical research and research markets. 20 THE CLINICAL DIAGNOSTIC MARKET. The clinical diagnostic market consists of life science companies, hospitals, reference laboratories, medical clinics and doctors offices which use clinical molecular genetic tests for the diagnosis and management of diseases and for tissue typing. Current tests typically rely on DNA probe-based and other technology including homebrew DNA sequencing tests. Unlike the research market, genotyping for clinical diagnostic purposes generally relies on the sequencing of relatively short DNA strands with high degrees of accuracy. DNA sequencers and related instrumentation used for diagnostic purposes should enable clinicians to rapidly and accurately sequence and analyze a high volume of patient samples at relatively low costs, and fit within the space constraints of a typical clinical laboratory. THE CLINICAL RESEARCH MARKET. The clinical research market includes hospitals, life science companies, pharmaceutical companies, academic institutions and clinical reference laboratories engaged in developing new diagnostic tests, conducting clinical trials, developing drugs and researching targeted therapeutics. Researchers in this sector often work both with DNA probes and DNA sequencing. Researchers typically rely on repetitive sequencing of relatively short DNA strands of targeted gene segments, for which sequencing systems that are smaller in scale than those used in the research market are generally considered most efficient. THE RESEARCH MARKET. The research market includes academic institutions, hospitals, governmental agencies, life science companies and pharmaceutical companies performing molecular genetics and molecular biology research. Researchers generally use DNA sequencing equipment for gene discovery and other large scale research projects which typically must analyze large numbers of samples and sequence long DNA segments. LIMITATIONS OF EXISTING DNA SEQUENCING PRODUCTS Historically, automated DNA sequencers and related products used for genotyping have been developed primarily to meet the needs of the research and clinical research markets. We are not aware of any FDA approved DNA sequencing tests for the clinical diagnostic market. Existing DNA sequencing products typically do not address the needs of the clinical diagnostic market due to one or more of the following: o they cannot sequence DNA strands quickly enough to satisfy diagnostic turnaround times; o they are designed to sequence long DNA segments and therefore may not be efficient for sequencing shorter DNA segments typical in clinical diagnostic testing; o they are expensive; o they are too large for most clinical laboratories; o they use gels usually prepared manually in a process that is time consuming and may result in exposure of laboratory technicians to dangerous chemicals; and o they use homebrew tests, reagents, chemicals and protocols that are not typically subject to the standardized procedures or quality control processes necessary for reliable results. OUR SOLUTION Our OpenGene System consists of automated DNA sequencers, disposable gel cassettes, related equipment and software and disease-specific GeneKits. Our OpenGene System has been designed expressly to meet the needs of the clinical diagnostic market. We believe that our integrated OpenGene System provides a cost effective and efficient clinical diagnostic solution that will make DNA sequencing a viable diagnostic tool for the management of selected diseases and medical conditions because: o it reads DNA strands faster than existing sequencers designed for the research market; 21 o it is designed to efficiently read and analyze the shorter DNA strands typically used for clinical diagnosis; o it is significantly less expensive than comparable sequencers designed for the research market; o it is small and lightweight; o it utilizes easy to use disposable gel cassettes; o it includes our proprietary software package designed for DNA analysis and patient data management; o our GeneKits include the reagents, primers and other chemicals, third-party licenses, software and other materials required to conduct tests for specific disease-associated genes; and o our GeneKits are standardized, validated and undergo quality control testing to provide reliable, reproducible results. We must obtain approval from the FDA and comparable foreign regulatory authorities prior to selling our products for clinical diagnostic use. OUR BUSINESS STRATEGY Our objective is to be a leader in the emerging field of pharmacogenomics. Our goal is to enable clinicians to use genetic information to monitor and customize treatment of diseases, initially for HIV and later for other diseases. Key elements of our business strategy are to: o PROVIDE AN INTEGRATED GENOTYPING SOLUTION FOR THE CLINICAL DIAGNOSTIC MARKET. We intend to meet the needs of the clinical diagnostic market by providing an efficient, inexpensive, easy-to-use genotyping solution. Our integrated OpenGene System, which we believe incorporates these features, includes automated DNA sequencers, disposable gel cassettes, related equipment and software, and disease-specific GeneKits. We designed this system for the clinical diagnostic market. o TARGET THE HIV GENOTYPING MARKET. We are focusing initially on the HIV market because there is clinical evidence to suggest that genotyping may be effective in managing the treatment of diseases associated with HIV. By identifying mutations in HIV through genotyping and consistently countering these mutations with appropriate drug therapy, we believe drug treatment can be administered and monitored more effectively. We are in the process of seeking approval from the FDA to sell our HIV OpenGene System for clinical diagnostic use in the United States. We have already received regulatory approval to sell our HIV OpenGene System for clinical diagnostic use in France and Argentina, and we intend to seek approval from regulatory authorities in other countries. o LEVERAGE OUR OPENGENE SYSTEM FOR ADDITIONAL APPLICATIONS. We are developing other disease-specific GeneKits that we believe have the potential to eliminate or reduce more time consuming and/or expensive tests and that may enable clinicians to better monitor and manage patient treatment. In addition to our HIV GeneKit, we have developed GeneKits for hepatitis B and hepatitis C, and are developing GeneKits for tuberculosis, the next generation of our TRUGENE HIV-1 Genotyping Kit and GeneKits for other species of HIV not tested for in our TRUGENE HIV-1 Genotyping Kit. o OFFER A WIDE RANGE OF TESTING AND SEQUENCING SERVICES. We maintain an accredited reference testing laboratory that provides genotyping and other testing services for HIV, hepatitis B, hepatitis C, other infectious diseases and various genes associated with cancer. We believe that the data which we obtain in providing these services will also assist us in our efforts to develop new GeneKits and other technologies. 22 o PROVIDE SOPHISTICATED SOFTWARE FOR THE CLINICAL RESEARCH AND DIAGNOSTIC MARKETS. Our GeneObjects Software operates our OpenGene System, analyzes the results, and prints out a report that shows the drugs to which a patient has become resistant. This software was designed to meet the needs of clinical research and clinical diagnostic markets. We also have developed an enhanced version of this software, called TRUGENE Software, which is specifically targeted to the clinical diagnostic market and simplifies the work flow and report generation for disease specific applications. o TAILOR OUR MARKETING EFFORTS TO LOCAL MARKETS. We have established and are expanding our sales and marketing force in the United States, Canada, selected European countries and in other areas where we believe that the size of the market and our familiarity with regulatory and other local conditions justify the development of our own sales force. In selected geographic and product markets where we believe that regulatory and other market factors make it more prudent to rely on a third-party local sales and marketing effort, we seek to enter into distribution and marketing arrangements with leading distributors. o MAINTAIN OUR TECHNOLOGICAL LEADERSHIP IN GENOTYPING. We plan to continue to invest significant resources in research and development so that we may continue to provide customers with advanced genotyping technologies and products. Where we believe it is cost effective or otherwise appropriate, we will continue to license and acquire technologies and products to include in our OpenGene System and GeneKits. We will also seek to continue to collaborate with hospitals, academic institutions, pharmaceutical companies and life science companies to develop additional GeneKits and other products. OUR INTEGRATED OPENGENE SYSTEM Our integrated OpenGene System includes the following components: SEQUENCING SYSTEMS Sequencing systems consist of automated DNA sequencers and related equipment. SOFTWARE SYSTEMS. Software systems consist of our proprietary GeneObjects and TRUGENE Software DNA analysis and data management software. GENEKITS AND OTHER CONSUMABLES. GeneKits consist of various reagents, enzymes, primers and other chemicals, and other consumables consist of disposable gel cassettes, acrylamide and other materials. SEQUENCING SYSTEMS LONG-READ TOWER AUTOMATED DNA SEQUENCER. The Long-Read Tower is a two-dye automated sequencer that can read 400 bases in approximately 40 minutes with high accuracy, suitable for clinical diagnostic applications, and can also read longer DNA sequences used in some research applications. Using our proprietary Long-Read MicroCel cassettes, the Long-Read Tower can read 700 bases in under 3 hours with high accuracy. The Long-Read Tower can read 16 lanes and test up to 8 patient samples per gel cassette, and can be networked with other Long-Read Towers or Clippers so that multiple units can run from a single workstation, thereby allowing for a significantly greater number of patient samples to be tested simultaneously. The Long-Read Tower is small (47cm x 39cm x 26cm) and lightweight relative to competitive instruments, and sells at retail prices significantly below comparable automated DNA sequencers. The Long-Read Tower can be connected to almost any computer network, has no moving parts and consumes only 300 watts of power. CLIPPER. The MicroGene Clipper automated DNA sequencer is a smaller version of our Long-Read Tower which, using our proprietary MicroCel cassettes, can read 300 bases in approximately 23 30 minutes with high accuracy, and is suitable for clinical diagnostic applications. The Clipper can read 16 lanes and test up to 8 patient samples per gel cassette, and can be networked so that multiple units can run from a single workstation, thereby allowing for a significantly greater number of patient samples to be tested simultaneously. The Clipper is small (35 cm x 40 cm x 26 cm) and lightweight. The Clipper sells at retail prices significantly below comparable automated DNA sequencers. The Clipper can be connected to almost any computer network, has no moving parts and consumes only 300 watts of power. SEQ4X4. The Seq4x4 automated DNA sequencer is marketed by Amersham as the Amersham Pharmacia Biotech Seq4x4(TM) built to Amersham's specifications to work with Amersham's one color Cy 5.5 terminator chemistry and ThermoSequenase(TM) Kits. The Seq4x4 is a less expensive version of the Clipper that includes many of the features of the Clipper; however, it is a 16 lane one-dye sequencer, and cannot be networked with other sequencers. The Seq4x4 is sold to the research market where it can be used to complement or replace significantly slower manual DNA sequencing methods and to complement currently available, more expensive automated DNA sequencers. GEL TOASTER. The Gel Toaster is a compact (47 cm x 39 cm x 26 cm), lightweight device that uses ultraviolet light to polymerize, or cure, liquid acrylamide that has been injected into the Long-Read MicroCel. The acrylamide gel is the medium through which the DNA is separated for sequencing. We also sell a toaster for use with the Seq4x4. This toaster's dimensions are 33 cm x 11.4 cm x 30.5 cm. SOFTWARE SYSTEMS GENEOBJECTS. GeneObjects is our DNA analysis and data management software package which we have designed for use with our sequencing systems. It automates portions of the test process and facilitates analysis and diagnosis. It also automates certain laboratory management tasks. GeneObjects software is able to sort, analyze and store data by patient (regardless of the test or gel source from which the data is derived) or by the test performed. GeneObjects can also be used to control multiple sequencers over the network from a single workstation. It can use existing microcomputers and sequencers, or be installed as a turnkey system with state-of-the-art hardware. TRUGENE. TRUGENE Software, an enhanced version of our GeneObjects software, is a software system we have developed for genotypic analysis of large quantities of patient samples in a clinical diagnostic setting. The first application is for HIV. The software aligns and reads a DNA sequence and further interprets detected mutations that are associated with drug resistance. GENEKITS AND OTHER CONSUMABLES GENEKITS. We sell to the research and clinical research markets a series of GeneKits which assist in identifying disease-associated genetic mutations and gene sequences. Our TRUGENE HIV-1 Genotyping Kit and other GeneKits are described in the section of this annual report entitled "-Applications For Our OpenGene System." GENEKIT TECHNOLOGIES. We developed and are developing GeneKits with features designed to make our GeneKits suitable for the clinical diagnostic market. We use certain technologies proprietary to us, and other technologies licensed to us, to ensure that our GeneKits will meet the needs of this market. These technologies include our stratified matrix testing method, CLIP and CAS technology, polymerase chain reaction technology, or PCR, Uracil-DNA-glycosylase, or UDG, technology, fluorescent DNA sequencing technology, and an extraction technology referred to as Boom technology. We have U.S. patents covering our stratified matrix testing method and CLIP technology. We license the PCR technology from Roche Molecular Systems, Inc. and F. Hoffmann-La Roche Ltd., the UDG technology from Invitrogen Corporation, the fluorescent DNA sequencing technology from Applera Corporation, the CAS technology from Genassiance Pharmaceuticals, Inc. and the Boom technology from Organon Teknika. 24 Our proprietary CLIP technology enables DNA samples to be prepared in a single test-tube, single-step process that replaces the multiple individual steps currently required to prepare a sample for DNA sequencing. This technology saves time and reduces the cost of DNA sequence-based diagnostic testing, which is important to the clinical diagnostic market. Our CLIP technology is also more sensitive than traditional techniques, which is especially useful for managing viral diseases because it permits the genotyping of patients with very low viral loads that other methods cannot detect. As a result, using CLIP, HIV patients with low viral loads can be genotyped and treated at the earliest indication of drug resistance. Our exclusive license from Genassiance Pharmaceuticals permits us to use CAS technology solely for diagnostic applications. CAS technology performs similar functions to CLIP technology, using different enzyme chemistry on DNA. PCR is a powerful laboratory technique that can detect, copy and amplify specific DNA sequences. Amplifying the DNA is an essential part of DNA sequencing because it allows the technician to start with minute amounts of DNA and finish with at least a million-fold increase in the number of DNA molecules, ensuring that a sufficient amount of DNA is available to obtain the sequence. UDG is a method of incorporating deoxyuracil into a PCR product to control PCR carry-over contamination. We are not currently using UDG in our products. The fluorescent DNA sequencing technology licensed from Applera relates to methods and machines for automated sequencing of DNA. The technology enables the DNA fragments to be labeled with a fluorescent dye, so that the fragments can be detected when they are separated by electrophoresis. Boom technology enables sensitive, reproducible and accurate extractions of RNA and DNA from blood plasma samples, and from body fluids such as semen and cerebral spinal fluid. The Boom method is especially valuable in HIV genotyping for patients with low viral load. In connection with obtaining the Boom technology license, we granted Organon Teknika a right of first refusal to certain improvements we may develop to DNA sequencing and extraction technology and to some of our reagents and uses of our CLIP technology. MICROCEL CASSETTE. The MicroCel cassette is a disposable, polyacrylamide electrophoretic gel cassette which acts as the detection medium for the Long-Read Tower, Clipper and the Seq4x4. The gel is injected into the cassette. After the cassette is cured, it is placed into the sequencer for DNA sequencing and other tests. The cassette is comprised of two small glass plates, has a 50 micron gap and can be filled with acrylamide and cured in three minutes through a semi-automated process which uses our Gel Toaster and SureFill products. Competitive sequencers typically use significantly thicker (200-500 micron gap) gel systems which are assembled manually by technicians and must be disassembled and cleaned after use. We manufacture the MicroCel cassette in three sizes for use with our different DNA sequencers. SUREFILL CARTRIDGE. The acrylamide injected into the MicroCel cassettes is supplied in a 10 cm long disposable syringe-based SureFill cartridge that contains necessary ingredients to fill 10 MicroCels. SureFill protects the technician from directly handling potentially dangerous chemicals and simplifies the gel preparation process. TESTING, SEQUENCING AND OTHER SERVICES We provide DNA testing, sequencing and other services for HIV, hepatitis B, hepatitis C, and other infectious diseases as well as for certain cancers. We operate an accredited reference testing laboratory in Atlanta, Georgia, that specializes in high resolution genotyping of HIV and other viruses associated with secondary opportunistic infections of patients with AIDS. This facility also provides high resolution DNA sequencing of hepatitis B, cytomegalovirus and other viruses that commonly infect AIDS patients. 25 We also maintain a library of cultures of HIV strains with known drug resistant mutations and a patient database on viral drug resistance and high resolution DNA sequencing data. This data may be used to screen new drugs for possible viral resistance and to identify patterns of cross resistance to new drugs as well as for the development of new AIDS treatment strategies. APPLICATIONS FOR OUR OPENGENE SYSTEM HIV Our HIV OpenGene System will enable physicians to genotype the major HIV species infecting patients and to diagnose and treat HIV based upon the mutations present in the virus. Our TRUGENE HIV-1 Genotyping Kit contains all of the reagents, chemicals, third-party licenses and other materials required to sequence the DNA from the protease and reverse transcriptase regions of the virus, which are known to develop mutations that make the virus resistant to drugs. We initiated the sale of our TRUGENE HIV-1 Genotyping Kit, for use in the clinical research market in the fourth quarter of 1998. We have a patent application pending in the United States and in some foreign countries covering various aspects of our TRUGENE HIV-1 Genotyping Kit. HIV OVERVIEW. HIV is a virus that attacks the cells in the human immune system. Without effective treatment, HIV significantly weakens the immune system, which results in opportunistic infections, neurological dysfunctions, malignant tumors and eventually death. HIV infected patients may develop Acquired Immune Deficiency Syndrome, or AIDS, which is a syndrome of infections, diseases and medical conditions resulting from a weakened immune system. Since the early 1980's, when the HIV epidemic was first identified, it is estimated that more than 21 million people worldwide have died as a result of complications from AIDS. Approximately 900,000 people in North America, 550,000 in Europe and Central Asia and a total of 36 million people worldwide are infected with HIV. In 2000 alone, there were approximately 5.3 million new HIV infections, including 45,000 in North America and 2.8 million in Europe and Central Asia, and 3 million deaths as a result of complications from AIDS. HIV is a highly variable virus with a high rate of mutations. Because of HIV's high mutation rate, drugs used to treat the virus, while generally effective for a period of time, often result in the survival of a virus with mutations that confer resistance to those drugs. Today, there are more than 140 known HIV mutations associated with drug resistance. Currently, there are 15 FDA approved anti-HIV drugs. These drugs specifically target the protease and reverse transcriptase enzymes to interfere with and reduce HIV replication. Mutations in the genetic information of the virus that codes for these two enzymes can result in the development of drug resistance. Current drug therapy usually relies on the use of drug cocktails of two or more antiviral drugs, targeting different stages of the HIV life cycle. A number of studies have shown that drugs given in various combinations reduce the viral load in most patients and can significantly improve these patients' overall health. Viral load is a generally used measurement of the concentration of virus in a patient's blood. HIV patients fail drug therapy in many cases either because the virus mutates and develops resistance to drugs, or because the side effects of drugs or the strict dosing regimens are intolerable, leading patients to skip doses or discontinue using the drugs. One of the central challenges in maintaining HIV patients on long-term drug therapy is to adjust each patient's medication as drug-resistant strains of the virus emerge. Because they rely only on viral load, current disease management methods usually provide a warning that the drugs are no longer working only after the drug-resistant virus has asserted itself and viral load has increased. These methods usually do not tell clinicians which drugs are failing due to emerging resistance or to which drugs the patient should be switched. As a result, there is a need to provide doctors and clinicians with information about HIV drug resistance to enable better management of HIV drug therapy. 26 GENOTYPING AND HIV. Genotyping HIV enables clinicians to identify mutations in the genetic material in the virus. Several clinical trials, one of which we conducted, suggest that by sequencing the patient's HIV, clinicians may be able to detect early in the process that a resistant mutant has emerged and make appropriate changes in medication to manage viral load. Sustaining a low viral load is believed to be a key factor in prolonging the life of an HIV patient. Achieving and maintaining low viral loads may also significantly reduce medical costs because patients with low or undetectable viral loads have fewer opportunistic infections and other symptoms and, therefore, require fewer and shorter hospital stays and fewer other medical services. To test the clinical usefulness of genotyping HIV to manage a patient's drug therapy, the Community Programs for Clinical Research on AIDS, in conjunction with several universities and funded by the NIH, conducted a 16-week prospective trial in the United States of 153 HIV positive patients. This trial, completed in December 1998, is known as GART, which stands for Genotypic Antiretroviral Resistance Testing. To be eligible, each patient had to have a minimum viral load of 10,000 copies per milliliter. The patients were randomly split into two groups. One group received accepted standard of care treatment, but did not undergo HIV genotyping. The other group received accepted standard of care treatment plus HIV genotyping. Physicians of patients in the genotyping group were able, at their discretion, to adjust medication in response to the genotyping results. The study results showed that the patients treated in the genotyping group had a mean decrease in viral load of approximately 93% at the end of eight weeks, compared to an approximately 76% decrease in patients in the non-genotyping group. This difference was found to be statistically significant. In 1999 and 2000, l'Agence Nationale de Recherche sur le SIDA conducted a study in France, known as NARVAL, to look at the value of drug resistance testing in HIV treatment and patient management. The study included a total of 541 patients enrolled into 3 groups: standard of care, phenotyping and genotyping. Patients in the study consisted of heavily pre-treated patients who had received a median of seven prior drugs and had an average viral load of 4.3 log copies per milliliter and an average CD4+ count (a commonly used measurement of the presence of the HIV virus) of 300 cells per microliter. The standard of care group was treated without any resistance test information provided to the physician. In the other two groups, resistance testing was performed either by genotyping or phenotyping and the results were used to assist the physician in the choice of treatment. Our TRUGENE HIV-1 Genotyping Kit was used in the genotyping group. After six months, 36% of the patients in the genotyping group achieved viral suppression, meaning a viral load of less than 200 copies per milliliter, as compared to 27% of the patients in the standard of care group and 26% of the patients in the phenotyping group. These differences were found to be statistically significant. During 1999 and 2000, a consortium of European medical centers conducted another study to examine the benefits of genotypic testing. The study, known as HAVANA, was a six month, randomized, prospective, multi-center study conducted in Europe. In the HAVANA study, 274 HIV-positive patients on antiretroviral therapy for more than six months with viral loads of greater than 1,000 copies per milliliter and a mean CD4+ count of 388 cells per microliter, were randomized to receive genotyping or no genotyping, and were randomized again to receive expert advice or no expert advice from an experienced committee of clinicians and virologists. The study showed that, after six months, patients who received genotyping, regardless of expert advice, had a 50% greater reduction in their viral load than those patients in the standard of care group. Further, 15% more patients in the genotyping group than in the standard of care group, achieved viral loads of less than 400 copies per milliliter. These differences were found to be statistically significant. All viral resistance tests were performed using our TRUGENE HIV-1 Genotyping Kit. OUR CLINICAL TRIALS. In December 1998, the FDA allowed us to initiate human clinical trials of our HIV OpenGene System under our Investigational Device Exemption, or IDE, application. In June 1999, we completed a clinical trial in Europe called VIRADAPT, which demonstrated that patients who received standard of care treatment and whose drug treatments were selected using periodic genotyping 27 had lower viral loads than patients who received standard of care treatment but whose drug treatments were selected without the use of genotyping. This trial was not part of our IDE, but results from this trial were submitted to support our market approval application. In June 1999, we initiated a trial under our IDE called SEARCH to test the clinical utility of our HIV OpenGene System in genotyping HIV infected patients. Based on positive clinical trial results to date, the FDA has advised us that we are not required to complete the SEARCH trial. We began our proficiency trials, under our IDE, in the third quarter of 1999 and completed them in July 2000. In January 2000, we also began a large-scale trial called Vigilance II which is an open label, cost recovery HIV genotyping study conducted under our IDE. The following is a summary of each of these trials: o VIRADAPT. In March 1997, prior to our IDE allowance, we sponsored a prospective trial in Europe called VIRADAPT to determine the usefulness of genotyping in managing the treatment of HIV infected patients. The VIRADAPT trial involved 108 HIV infected patients and was scheduled to last 12 months. To be eligible, each patient had to have a minimum viral load of 10,000 copies per milliliter. The patients were randomly split into two groups. The control group received standard of care treatment, but did not undergo periodic genotyping. The genotyping group received standard of care treatment and underwent periodic genotyping allowing the physicians, at their discretion, to adjust medication in response to the genotyping results. Genotypes were done using either homebrew DNA testing methods or an early version of our TRUGENE HIV-1 Genotyping Kit. At the end of six months, interim results showed that patients treated in the genotyping group of the study had a mean decrease in their viral loads of approximately 93% (32% of patients in the genotyping group had undetectable viral loads), as compared to an approximately 79% decrease in viral loads in the non-genotyping group (14% of patients in the non-genotyping group had undetectable viral loads). This difference was found to be statistically significant. In January 1999, on the recommendation of the data safety management committee for the VIRADAPT trial, the control group was stopped on ethical grounds. The committee decision was based in part on the interim results of the VIRADAPT trial and in part on the release of the results of the GART trial in December 1998, which showed decreases in viral loads for the genotyping patients consistent with the VIRADAPT trial. As a result, beginning in January 1999, all patients received standard of care treatment and underwent periodic genotyping. At the end of 12 months, results showed that 28% of patients in the original genotyping arm had undetectable viral loads. The mean viral loads for this group were maintained at substantially the same level that existed after six months. The data also showed that of those patients who were switched from standard of care treatment only to standard of care treatment and genotyping, 26% had undetectable viral loans as compared to 14% of patients in this group at the end of six months before the treatment was switched. This difference was found to be statistically significant. We have reanalyzed the samples collected in the GART and the VIRADAPT trials using our HIV OpenGene System and have included those results in support of our market approval application to the FDA. o SEARCH. The SEARCH trial was intended to test whether patients whose doctors rely on genotyping using our HIV OpenGene System would experience greater reductions in viral load than those patients whose doctors rely only on standard of care treatment. This trial was intended to demonstrate the clinical utility of our system. We began the SEARCH trial in June 1999 and terminated it in December 2000. To be eligible, each patient must have had a minimum viral load of 1,000 copies per milliliter. Like GART and VIRADAPT, the patients were randomly split into two groups. The control group received standard of care treatment without genotyping, and the genotyping arm received standard of care treatment plus genotyping. In November 1999, the FDA advised us that we are not required to complete the SEARCH trial. The FDA has indicated that it will not require us to demonstrate further the clinical utility of our HIV OpenGene System in the treatment of HIV infected individuals. Based on the FDA's position, we continued to provide genotyping to all 128 patients enrolled in the SEARCH trial up to that time. 28 o PROFICIENCY TRIAL. The proficiency trial was intended to demonstrate the reliability and performance characteristics of our TRUGENE HIV-1 Genotyping Kit and OpenGene System, which is required by the FDA. As part of the test, we genotyped approximately 500 plasma samples, using our HIV OpenGene System at our subsidiary, Applied Sciences, and at six other U.S. sites with certified technicians. To demonstrate the reproducibility of results produced using our TRUGENE HIV-1 Genotyping Kit, samples from the same patients were tested at multiple sites. Multiple technicians tested the same samples and multiple batches of our TRUGENE HIV-1 Genotyping Kit were used to test the same samples. In addition, various interfering drugs or chemical agents were introduced to a series of samples to test the effect of those drugs and agents on the results produced with our GeneKits. We began this trial in the third quarter of 1999 and completed it in July 2000. o VIGILANCE II. Vigilance II is a prospective, open label trial. We began this trial in January 2000. Testing is being performed at approximately 20 sites throughout the United States. All patients enrolled in the study undergo HIV genotyping and the genotyping results are provided to their physicians. Doctors who choose not to change drug treatment based on the genotyping results are required to so inform us, and results on these patients are separately recorded. We plan to use the data collected in Vigilance II in two ways. First, we hope to compile data showing the prevalence of certain mutations in patients from different areas of the country. We believe that this data may be useful in directing doctors in a particular region to use certain drugs because of the prevalence of certain mutations identified in that region. Second, we intend to create a database of the clinical outcome from changes made in drug therapy. Under our IDE, we intend to charge patients for the use of our HIV OpenGene System to recover the costs of conducting this trial. We did not submit the results of this clinical trial as part of our FDA application. MARKETING OF THE HIV OPENGENE SYSTEM. Our marketing strategy for the HIV OpenGene System consists of several components. In the United States, should we obtain FDA approval, we intend to establish relationships with leading doctors, laboratories and healthcare providers in the HIV diagnostics market and train them to use our products. We believe that the use of our products by these industry leaders will facilitate our marketing efforts in the rest of the HIV clinical diagnostic market. In addition, we believe that these industry leaders will help shape reimbursement policies of insurance companies and other third-party payors for HIV genotyping. We have begun to establish a dedicated team to work closely with insurance companies and other third-party payors who will determine whether to reimburse users of HIV GeneKits and related products in the management of their drug therapies. We are also forming a dedicated sales force to sell our HIV OpenGene System to major pharmaceutical companies engaged in research and development of HIV drugs and treatments. Outside North America, some European countries and other selected areas, we seek to enter into distribution arrangements with leading distributors of HIV products to sell our HIV OpenGene System for clinical diagnostic purposes. If government approval is required for sales in those markets, we intend to rely on our local partners to obtain the required authorizations. We intend to continue to market and sell our HIV OpenGene System to hospitals, pharmaceutical companies, academic institutions and clinical reference laboratories for research and clinical research purposes. We expect to continue to service this market regardless of whether the FDA authorizes us to sell our HIV products for clinical diagnostic purposes. HEPATITIS C We have developed a GeneKit for hepatitis C. Hepatitis is an inflammation of the liver. Hepatitis C is one type of virus that causes this inflammation. There are approximately 175 million people worldwide who are chronically infected with hepatitis C, of whom approximately 3.9 million are 29 in the United States. Unlike hepatitis B, interferon drugs work with only certain hepatitis C genotypes. We have developed and are currently testing a Hepatitis C GeneKit that can be used to identify the genotypes of the virus, so that the appropriate drug treatment may be prescribed. Protease inhibitors are also being used experimentally to treat hepatitis C. Our Hepatitis C GeneKit can also be used to detect mutations that may confer resistance to these anti-viral drugs. HEPATITIS B We have developed and are currently testing a GeneKit for hepatitis B. Hepatitis B is a second type of virus that causes inflammation of the liver. There are more than 350 million people worldwide who are chronically infected with hepatitis B, of whom approximately one million are located in the United States. Hepatitis B is treated with interferon drugs or certain reverse transcriptase inhibitors. Genotyping may be used to identify the subtype of hepatitis virus present and to detect mutations in the virus that cause the disease to become resistant to anti-viral drugs. TUBERCULOSIS We are currently developing a GeneKit for tuberculosis. Tuberculosis, commonly known as TB, is a highly contagious bacterial disease of the respiratory system. There are approximately two million deaths per year worldwide caused by TB and eight million new infections per year worldwide. In addition, there is an increase in the number of TB infections which are multi-drug resistant. In order to be infected with TB, a patient must carry a certain mycobacterium. People who test positive for non-TB mycobacterium can be treated at home with certain drugs. Due to the highly contagious nature of TB, people who test positive for TB mycobacterium must be kept in isolation during the early stage of treatment. Current testing methods can take from several days to several weeks to identify whether a patient's mycobacterium is TB or non-TB, forcing hospitals to quarantine both TB and non-TB patients during this period. Quarantining patients for any prolonged period uses significant medical resources. We are developing and currently testing a TB GeneKit designed to genotype the genetic material in the mycobacterium within approximately one day to identify the presence of TB or non-TB mycobacterium. Our TB GeneKit can also be used to detect mutations that confer resistance to drugs used to treat TB. We intend to market and sell our TB GeneKit in those geographic areas where TB poses significant health threats, including Asia, Central Europe, parts of the former Soviet Union and Africa. OTHER HIV We are developing the next generation of our TRUGENE HIV-1 Genotyping Kit and additional GeneKits for HIV species not covered by our existing HIV GeneKit. REGULATION BY THE FDA AND OTHER GOVERNMENT AGENCIES We currently sell our products for research and clinical research purposes and, in some countries outside of North America, for clinical diagnostic purposes. If we receive required regulatory approval, we intend to sell products for clinical diagnostic purposes in the United States and in other countries. We do not believe we need authorization from the FDA or regulatory authorities in foreign countries to sell our products for research purposes, as long as they are properly labeled. We do, however, require authorization in the United States and many other countries to sell our products for clinical diagnostic purposes. FDA APPROVAL PROCESS. Products that are used to diagnose diseases in people are considered medical devices, which are regulated by the FDA. To obtain FDA authorization for a new medical device, a company may have to submit data relating to safety and efficacy based on extensive testing. This testing, and the preparation of necessary applications and the processing of those applications by the 30 FDA, are expensive and may take several years to complete. The following describes several important aspects of the FDA authorization process. The FDA has three classes for medical devices: Class I devices (for example, bandages, manual wheelchairs and ice bags) are the least regulated, but they must still comply with the FDA's labeling, manufacturing, recordkeeping, and other basic requirements. Most Class I devices do not require premarket authorization from the FDA. Class II devices (for example, portable oxygen generators and hypodermic needles and many other medical devices may be subject to additional regulatory controls, such as performance standards and postmarket surveillance. Class III devices (for example, cardiac pacemakers) require specific FDA approval prior to marketing and distribution, and are, as well, subject to the FDA's basic requirements. To sell a Class II medical device, a company must first obtain permission of the FDA by submitting a 510(k) premarket notification, commonly known as a 510(k), showing that the device is similar to a device already on the market. To sell a Class III medical device, a company must first get specific approval of the FDA for the device by submitting a premarket approval application, commonly known as a PMA application. A company may have to include test data in a 510(k), including human test data. It will almost always have to include such test data in a PMA application. If human test data are required for either a 510(k) or a PMA application, and if the device presents a significant risk, the manufacturer must first file an Investigational Device Exemption submission, or IDE, with the FDA. The IDE must contain data, such as animal and laboratory testing, showing that the device is safe for human testing. If the IDE is granted, human testing may begin. Generally, a 510(k) notification to the FDA that a new device is similar to an existing device requires less data and takes less time for the FDA to process than a PMA. The FDA is supposed to act on a 510(k) notification within 90 days. According to the most recent FDA data available, the average time for FDA clearance of a 510(k) is 102 days. By contrast, a PMA application must be supported by more extensive data to prove the safety and efficacy of the device, and review of a PMA application involves a lengthier FDA process. The FDA conducts a preliminary review of the PMA application. If complete, the PMA application is filed by the FDA. Officially, the FDA then has 180 days to review the PMA application, however, as a practical matter, PMA reviews usually take much longer. The average approval time is approximately one year. The FDA may grant expedited (fast-track) review of a PMA application if certain criteria relating to public health importance are met, but that decision is within the FDA's discretion and affects only the timing of the review process, not the outcome. NEED FOR FDA APPROVAL OF SOME OF OUR PRODUCTS. We intend to market some of our products in the U.S. for clinical diagnostic purposes, and therefore we will have to obtain prior FDA authorization, as described above. We believe our HIV OpenGene System is currently considered by the FDA as a Class III medical device. However, in September 1999, the FDA asked an advisory committee of experts whether HIV genotyping tests should be reclassified from Class III to Class II. The advisory committee recommended reclassification subject to certain controls including post-market surveillance of the performance of these products. If the FDA reclassifies HIV genotyping tests from Class III to Class II, we will be able to obtain FDA permission to market our HIV OpenGene System by submitting a 510(k), rather than a PMA. A 510(k) generally contains less data than a PMA and is usually reviewed and approved by the FDA more quickly than a PMA. Although it is likely that the FDA will follow the recommendation of its advisory committee, to do so the FDA is required to issue a proposed regulation, allow the opportunity for public comment and then publish a final regulation reclassifying HIV genotyping tests. This process could take several years to complete. Under the Food and Drug Administration Modernization Act of 1997, there is an alternative option for us to obtain faster reclassification of our HIV OpenGene System. We have elected to use this alternative process. Under this new procedure we will ask the FDA to classify our HIV OpenGene 31 System based upon an evaluation of the risks presented by the device to patients. However, in order for us to use this new procedure, we first submitted a 510(k) to the FDA. Once the FDA completes its review of our application, it will reject the 510(k) because the device is still in Class III. However, once the FDA rejects our 510(k), we will then immediately submit our request for classification of our HIV OpenGene System in Class II. The FDA will than have 60 days to make a decision on this request. This option is likely to be faster than waiting for the FDA to go through its normal reclassification procedures. On September 5, 2000, we submitted our 510(k) application to the FDA for approval to sell our HIV OpenGene System to the clinical diagnostic market. In December 2000, we received comments from the FDA regarding our application, to which we responded to in January 2001. As of the date of this Annual Report, the FDA has not yet completed its review of our application. Since this process is new and is used very infrequently, there is no assurance that the FDA will grant our request for reclassification. If the FDA does not grant our request to reclassify our HIV OpenGene System under this procedure, we will either have to submit a PMA Application or wait until the FDA acts to reclassify HIV genotyping tests as recommended by its advisory committee. We believe that some of our other products will be regulated as Class II or Class III medical devices. OTHER FDA REQUIREMENTS. In addition to government requirements relating to marketing authorization for medical device products, we will also be subject to other FDA requirements. We will have to be registered as a medical device manufacturer with the FDA. We will be inspected on a routine basis by the FDA for compliance with the FDA's quality system regulations, which prescribe standards for manufacturing, testing, distribution, storage, design control and service activities. In addition, because we will manufacture some of our products in Canada, the FDA, in conjunction with the U.S. Customs Service, could impose a ban on our products if the FDA were to conclude that the products appeared to be in violation of the FDA's regulatory requirements, including restrictions that apply to the sale of research-use only products. Also, the FDA's medical device reporting regulation will require us to provide information to the FDA on deaths or serious injuries associated with the use of our devices, as well as product malfunctions that are likely to cause or contribute to death or serious injury if the malfunction were to recur. Finally, the FDA prohibits promoting a device for unauthorized uses and reviews company labeling for accuracy. The FDA has become aware that certain products being sold by other companies for research purposes only, were in fact being used by some customers for clinical diagnostic purposes. In January 1998, the FDA issued a policy statement describing the conditions under which companies may sell research-use only products. These conditions may restrict our ability to sell research-use only products in the United States. We do not believe these conditions will have any negative effect on our sale of GeneKits for legitimate scientific research. REGULATORY APPROVAL OUTSIDE THE UNITED STATES. We plan to market our products outside the United States, initially in Canada, Japan, and in various countries in Europe and South America. Government authorization requirements similar to the FDA's exist in some of these and many other foreign countries. Therefore, authorization to sell our products for clinical diagnostic purposes in Canada, Japan, and the other countries in Europe and South America may also require lengthy and costly testing procedures. In addition, the regulatory bodies in other countries may be affected or influenced by significantly different criteria than those used by the FDA. Sale of our products in these areas may be materially affected by the policies of these regulatory bodies or the domestic politics of the countries involved. In December 2000, we received approval from French regulatory authorities to market our HIV OpenGene System for clinical diagnostic purposes in France, and in February 2001, we received approval from Argentine regulatory 32 authorities to market our HIV OpenGene System for clinical diagnostic purposes in Argentina. We believe that we are currently able to launch our HIV OpenGene System for clinical diagnostic purposes in some of the European Union (EU) member states. We expect that further product approvals will not be required in these EU member states until new EU wide regulations go into effect. We anticipate being in compliance with the new regulations as they become effective. OTHER GOVERNMENT REGULATIONS. We are or may become subject to various federal, state, provincial and local laws, regulations and recommendations, including those relating to workers compensation, safe working conditions, and laboratory and manufacturing practices used in connection with our research and development activities. In addition, our reference laboratory in 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 an applicable state government agency. Our Atlanta laboratory performs high complexity tests, and is therefore subject to the most stringent level of regulation under CLIA. This laboratory is certified under CLIA and by the state of Georgia. We are also subject to various laws and regulations in Canada, the United States and Europe, including those relating to product emissions use and disposal of hazardous or toxic chemicals or potentially hazardous substances, infectious disease agents and other materials, workers compensation, safe working conditions, and laboratory and manufacturing practices used in connection with our research and development activities. SALES AND MARKETING We market our OpenGene System in North America and in many European countries to the research and clinical research markets through our direct sales force. We have a sales and marketing force of 68 people. Many members of our sales force have scientific backgrounds. Our marketing force includes a team of trained application specialists who provide intensive on-site training, after-sales support and site-by-site trouble shooting. We offer service contracts to our customers on our sequencers, certain equipment and software. We have established a toll-free telephone number in North America for customer service. The members of our internal sales force are compensated on a commission and salary basis. For other areas of the world and in selected product markets, our strategy is to establish relationships with leading distributors to market and sell our products. We granted Amersham the exclusive worldwide license to use and sell the Seq4x4 and related products used and sold with the sequencer, which is designed for the research market. In November 1999, we granted Amersham-Pharmacia Biotech K.K. the exclusive right to distribute our products to the research market in Japan. During 2000 approximately 11% of our revenues were derived from sales of sequencers and other products to Amersham. In addition, we have granted rights to distribute our GeneKits and OpenGene Systems to distributors in the clinical diagnostic, clinical research, and research markets in over 40 countries outside the United States and Canada, including Mexico and certain countries in Central America, South America, Europe, Asia, and Africa. These agreements expire at various times from April 2001 through March 2003, and in many cases, are subject to automatic renewal. Certain of the agreements may also be terminated by either party upon specified notice periods and may require us to make termination payments under certain circumstances. Certain of the agreements also provide for minimum annual purchases for specified periods. Our 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. 33 Our marketing strategy for the HIV OpenGene System consists of several components. In the United States, should we obtain FDA approval, we intend to establish relationships with leading doctors, laboratories and healthcare providers in the HIV diagnostics market and train them to use our products. We believe that the use of our products by these industry leaders will facilitate our marketing efforts in the rest of the HIV clinical diagnostic market. In addition, we believe that these industry leaders will help shape reimbursement policies of insurance companies and other third-party payors for HIV genotyping. We have begun to establish a dedicated team to work closely with insurance companies and other third-party payors who will determine whether to reimburse users of HIV GeneKits and related products in the management of their drug therapies. We are also forming a dedicated sales force to sell our HIV OpenGene System to major pharmaceutical companies engaged in research and development of HIV drugs and treatments. Our marketing efforts also include product advertisement and participation in trade shows and product seminars. RESEARCH AND DEVELOPMENT We currently conduct research and development through our own staff and through collaborations with researchers at scientific and academic institutions and hospitals. Our current research and development activities are focused on: o developing additional GeneKits, including the next generation of our TRUGENE HIV-1 Genotyping Kit and additional HIV GeneKits for different HIV species, and a GeneKit for tuberculosis and testing our GeneKit for hepatitis B; o developing new technology for our sequencers and related equipment and software; o refining existing proprietary, disposable gel cassette technology in order to improve performance of our sequencers; and o exploring new technologies for future commercial products. As of February 28, 2001, our research and development staff consisted of 96 people. This includes a team of software developers who have developed our GeneObjects software and are developing our TRUGENE Software. Our software developers are working on an advanced version of our GeneObjects software as well as additional software applications for the clinical diagnostic market. We incurred $10.6 million of research and development expenses in 2000, $7.9 million in 1999 and $6.3 million in 1998. We have four facilities in the United States and Canada where we conduct research and development. MANUFACTURING We assemble our DNA sequencers and related equipment at a manufacturing facility in Toronto, Canada. Component parts are manufactured by third parties in accordance with our design specifications. We manufacture our disposable gel cassettes at our second manufacturing facility in Toronto. We make GeneKits in our Pittsburgh, Pennsylvania facility. We plan to make GeneKits at our new facility in Atlanta, Georgia, which is in the process of being built. We plan to close our Pittsburgh facility once our new Atlanta facility is completed and fully operational. We manufacture certain chemicals and other components included in the GeneKits. Other GeneKit components are manufactured by, or licensed from, third parties. Our new facility in Atlanta is being designed to enable us to increase significantly our production of GeneKits. Based upon our experience with our Pittsburgh facility, we believe that we will be in a 34 position to qualify our Atlanta facility under applicable FDA standards. We expect that this new approximately 50,000 square foot manufacturing facility will become available to us in stages and that we will be in a position to commence commercial production at this facility at some time during the second half of 2001. We have documented and installed design and production practices in our Toronto and Pittsburgh facilities to comply with the FDA's quality system regulations. We have implemented a quality management system at these manufacturing facilities in order to ensure product performance, reliability and quality. We intend to take the same actions at our new Atlanta facility. We intend to seek certification of compliance to ISO 9001 for our Toronto and Atlanta facilities. In addition to adhering to ISO goals and FDA quality standards, we have implemented our own quality control and quality assurance standards and programs. We provide one year warranty coverage for product defects on the instrument component of our sequencers. All product repairs are performed by our employees at one of our manufacturing facilities. In connection with our GeneKits, sequencers and related equipment, we use certain dyes and custom-designed component parts supplied by third parties. We believe that some dyes supplied by Amersham under our exclusive worldwide license to use and sell Amersham dyes within our GeneKits, may not be available from other suppliers, although our customers might be able to purchase some, but not all, dyes directly from Amersham. In addition, certain reagents and other chemicals that we use and include in our GeneKits are available only under license from their manufacturers. While we believe that alternative reagents and chemicals are available, alternate supplies may not be as effective as certain of the products that we presently use. In addition, we believe that there are alternative suppliers for our custom-designed DNA sequencer parts, but that we would incur costs in switching to alternative suppliers and would likely experience delays in production of the products that use any of these parts until such time as we were able to locate alternate suppliers or parts. PROPRIETARY RIGHTS We rely on patents, licenses from third parties, trade secrets, trademarks, copyright registrations and non-disclosure agreements to establish and protect our proprietary rights in our technologies and products. We own or jointly own 42 U.S. patents. We own or jointly own additional 20 U.S. patent applications pending, of which 5 have been allowed. We own 18 foreign patents. We own or jointly own foreign applications presently pending as PCT applications, or as national phase PCT applications, designating intergovernmental agencies and multiple countries including the European Patent Office, Australia, Canada and Japan. Our issued and allowed patents and patent applications cover various aspects of our products and technologies, including viral load testing, several of our GeneKits and various DNA sequencing and GeneKit technologies, including the stratified matrix testing technology, the MicroCel technology, basecalling technology, and the CLIP technology. Our competitive position is also dependent upon unpatented trade secrets. We are developing a substantial database of information concerning our research and development and have taken security measures to protect our data. However, trade secrets are difficult to protect. In an effort to protect our trade secrets, we have a policy of requiring our employees, consultants and advisors to execute non-disclosure agreements. These agreements provide that confidential information developed or made known to an individual during the course of their relationship with us must be kept confidential, and may not be used, except in specified circumstances. In April 2000, we entered into a worldwide licensing and collaboration agreement with Applera whereby we gained access to certain patents and intellectual property owned or exclusively licensed by 35 Applera. The agreement enables us to utilize certain Applera technology to manufacture and sell DNA sequencing instruments, as well as manufacture and sell clinical sequencing kits to run on DNA sequencing instruments manufactured by us, Applera and other third parties. In addition, Applera may collaborate with us to provide access to technology to facilitate our development and commercialization of new diagnostic tests using the licensed technology. In addition, we gained access to certain other Applera chemistry patents, which are enabling for the manufacture of certain reagent products to be used on Applera manufactured instruments, as well as third party sequencing instruments. We will pay Applera a total licensing fee of $25.0 million over a period of four years, and will also make royalty payments to Applera based on sales in return for access to the Applera technology and installed instrument customer base. We may terminate the agreement upon 60 days written notice to Applera and either party may terminate the agreement under certain other limited circumstances. From time to time, we receive notice from third parties claiming that we may infringe their patents. COMPETITION The biotechnology industry is highly competitive. We compete with entities in the United States and abroad that are engaged in the development and production of products that analyze genetic information. They include: biotechnology, pharmaceutical, chemical and other companies; academic and scientific institutions; governmental agencies; and public and private research organizations. Some of our major competitors include: o manufacturers of phenotyping assays, including ViroLogic, Inc. and VIRCO; o manufacturers of genotyping test kits , including Applera; o purveyors of homebrew genetic tests, which typically have not undergone clinical validation and have not been approved by the FDA or other regulatory agencies, including Laboratory Corporation of America Holdings, Quest Diagnotistics Inc. and Specialty Laboratories, Inc. o 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; o manufacturers of alternate technologies used to analyze genetic information, such as chip-based and assay-based technologies, including, Hyseq Inc., Affymetrix Inc., ChemCore Inc., CuraGen Corp., Nanogen, Inc.; o manufacturers and distributors of DNA sequencers such as Applera, Amersham Pharmacia Biotech, Inc., LI-COR, Inc., Hitachi, Ltd. and Molecular and Genetic BioSystems, Inc.; Many of these companies and many of our other competitors have much greater financial, technical and research and development resources and production and marketing capabilities than we do. Our GeneKits also compete with homebrew genetic tests for HIV and other diseases designed by laboratories and some of the companies listed above. Homebrew tests include a variety of small-scale genotyping tests which typically have not undergone clinical validation and have not been approved by the FDA or other regulatory agencies. We believe that we are able to compete primarily on the basis of the following: o our ability to provide an integrated DNA sequencing system; 36 o ease of use; o speed of sequencing; o cost-effectiveness; o clinical data with respect to the HIV market; and o with respect to the HIV market, FDA approval of our HIV OpenGene System, if and when we obtain it. PROPERTY, PLANTS AND EQUIPMENT The table below lists the locations of our facilities and summarizes certain information about each location.
SQUARE FEET LOCATION USE (APPROXIMATE) TERM OF LEASE -------- --- ------------- -------------- 1. Bay Street Research, sales and principal 20,628 June 2000 - Toronto, Canada executive offices May 2005 2. Bay Street Administrative offices 6,876 June 2000 - Toronto, Canada November 2001 3. Bay Street* Research offices 6,876 November 2000 - Toronto, Canada May 2005 4. Etobicoke MicroCel manufacturing 8,482 June 1996 - Ontario, Canada May 2001 5. Etobicoke Sequencer manufacturing 10,500 September 1998 - Ontario, Canada August 2003 6. Oakville** Not in use 7,996 September 1998 - Ontario, Canada August 2003 7. University of Kit manufacturing and research 9,621 September 2000 - Pittsburgh and August 2002 Applied development Research Center, Pittsburgh, Pennsylvania 8. Technology Park Research and development 7,313 March 1998 - Atlanta, Georgia February 2003 9. Atlanta, Georgia *GeneKit manufacturing, research 99,822 February 2000 - and development, and laboratory March 2010 and sales and administrative offices 10. High Wycombe, European head office 5,118 October 2000 - United Kingdom October 2009 11. Epinay, France French sales office 2,421 November 2000 - October 2009 12. Madrid, Spain Iberian sales office 193 January 2001 - June 2001
37
SQUARE FEET LOCATION USE (APPROXIMATE) TERM OF LEASE -------- --- ------------- -------------- 13. Genoa, Italy Italian sales office 193 January 2000 - December 2001 14. Technology Not in use 21,032 November 1999 - Park,** October 2004 Atlanta, Georgia
- - ----------- * This facility is not yet fully operational. ** We have sub-leased these facilities. We believe that additional facilities will be available at reasonable market rates to meet any future needs we may have for additional space. HISTORY AND DEVELOPMENT OF THE COMPANY Our company was incorporated in April 1993 pursuant to the laws of the province of Ontario, Canada under the name Gene-Reader Inc. In May 1994, Gene-Reader amalgamated with its wholly-owned subsidiary, Visible Genetics Inc., and continued operations. Pursuant to the articles of amalgamation, our company retained the articles of incorporation of Gene-Reader and changed its name to Visible Genetics Inc. Our registered office is located at 700 Bay Street, Suite 1000, Toronto, Ontario, Canada M5G 1Z6 and our telephone number is (416) 813-3240. ORGANIZATIONAL STRUCTURE The table below lists our subsidiaries. Unless otherwise indicated, we, or one of our subsidiaries, owns 100% of the outstanding capital stock of the subsidiary.
Name of Subsidiary Country of Incorporation ------------------ ------------------------ Applied Sciences, Inc. United States Gene Foundry, Inc. United States Visible Genetics B.V. Holland Visible Genetics Corp. United States Visible Genetics Europe, S.A.* France Visible Genetics Iberia SL Spain Visible Genetics Israel, Ltd. Israel Visible Genetics Srl. Italy Visible Genetics UK Ltd United Kingdom
- - ---------- * In order to comply with applicable law, Dr. Arthur W.G. Cole, an Executive Vice President of our company and the President of Visible Genetics Europe, S.A., owns one share of common stock of Visible Genetics Europe, S.A. 38 ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS. YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS IN CONJUNCTION WITH ITEM 3 -"SELECTED FINANCIAL DATA" AND OUR CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS ANNUAL REPORT. IN ADDITION TO HISTORICAL INFORMATION, THE FOLLOWING DISCUSSION CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES, SUCH AS STATEMENTS OF OUR PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS. SEE " FORWARD-LOOKING STATEMENTS." 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. Our products and services include: o GENEKITS AND OTHER CONSUMABLES. GeneKits consist of various reagents, enzymes, primers and other chemicals, and other consumables consist of disposable gel cassettes, acrylamide and other materials. o SEQUENCING SYSTEMS. Sequencing systems consist of automated DNA sequencers and related equipment, and our proprietary DNA analysis and data management software. o 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 and we do not intend to provide these services in Europe in the future. During 1996 and 1997, we generated revenues primarily by selling sequencing systems. During this period, our business strategy focused on installing our DNA sequencers and related equipment in research and clinical research facilities. During 1998, we began to shift our strategy to target the clinical diagnostic market and to place greater emphasis on generating recurring revenues from sales of GeneKits and other consumables initially to the research and clinical research markets and, subject to FDA and foreign approval, as applicable, to the clinical diagnostic market. As part of this strategy, we may sell our DNA sequencers at reduced prices, or at no cost, to customers who commit, or to customers who we anticipate will commit, to purchase significant quantities of GeneKits and other consumables. This strategy may result, initially, in reduced gross margins and additional losses as we attempt to expand our installed base of DNA sequencers. However, we believe that this strategy, over the long term, will help us maximize recurring sales of our HIV GeneKit and other GeneKits to the clinical diagnostic market, should we receive FDA and foreign regulatory approval. In addition, in 1998 and 1999, we sometimes bundled our DNA sequencers and GeneKits for sale at reduced prices. We discontinued the practice of bundled sales in the second half of 1999. In September 2000 we submitted an application to the FDA for approval to sell our HIV Open Gene System to the clinical diagnostic market. The FDA has not yet completed its review of our submission. In December 2000 we received approval from French regulatory authorities to sell our HIV OpenGene System to the clinical diagnostic market in France and, in February 2001 we received regulatory approval to sell our HIV OpenGene System to the clinical diagnostic market in Argentina. During 2000, in anticipation of our receiving regulatory approval of our HIV GeneKit, 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 GeneKits to the clinical research 39 market for research and investigational purposes. If we receive FDA approval, we anticipate that, within six to 12 months after approval, substantially all of our revenue will be generated by sales of GeneKits and other consumables to the clinical diagnostic market. OUR OPERATIONS SALES. Sales consist of revenues from the sale of sequencing systems, GeneKits and other consumables as well as from the sale of testing services. Sales include shipping charges, but exclude sales and excise taxes. Revenues from the sale of our products are recognized when 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 GeneKits are recognized proportionately as the components of the bundle are shipped to customers. The total sales price of the bundle is allocated to the components proportionately based on the retail prices typically charged for such components if they were sold individually rather than as part of the bundle. We sell our products in North America, Europe, Asia, Australia, 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 seek to sell our products through distribution, marketing or agency agreements with leading distributors. Currently, we have entered into agreements with distributors or agents in approximately 40 countries throughout the world. For an analysis of sales by product segment and geographic market, see Note 14 to our Consolidated Financial Statements. 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. 40 RESULTS OF OPERATIONS 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 GeneKits 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 GeneKits 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, GeneKits 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 GeneKits and other consumables. During 1999, the sales to Amersham accounted for approximately 21% of sales, of which 19% comprised sequencing systems and 2% comprised GeneKits and other consumables. The sales to Amersham were made on the same general terms and conditions as the majority of other sales during the respective periods. COST OF SALES. Cost of sales increased 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 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 US launch of the HIV GeneKit, if FDA approval is received. 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; o Increased payroll and personnel costs due to continued growth of our business; o Costs associated with opening a North American sales and administrative facility in Atlanta; o Amortization of license fees for license agreements entered into in 2000; o Continued growth of our quality control and regulatory departments; and o 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. 41 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 relocation 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 GeneKits and other consumables. In 1999, 340 sequencing systems were sold, as compared to 412 sequencing systems sold in 1998. The decrease in sequencing systems sold in 1999 as compared to 1998 is due to a decline in Seq4x4 sales to Amersham, which decreased from 273 units in 1998 to 85 units in 1999. In 1998 Amersham began to actively market the Seq4x4 and initial sales were high as Amersham filled their distribution pipeline. Subsequently, Amersham's marketing effort has been transferred to the Long-Read Tower at a higher unit price but lower anticipated volume. In 1999, sequencing systems accounted for 57% of total sales, compared to 74% of total sales in 1998. In 1999, GeneKits and other consumables accounted for 35% of total sales, compared to 13% of total sales in 1998. Testing services accounted for 8% of sales in 1999, compared to 13% of sales in 1998. Sales in North America, Europe, Japan and the rest of the world were $5.2 million, $5.5 million, $1.6 million and $1.3 million, respectively, for 1999, as compared to $4.4 million, $4.6 million, $1.6 million and $0.3 million, respectively, during 1998. During 1999, Amersham accounted for approximately 21% of sales, of which 19% comprised sequencing systems and 2% comprised GeneKits and other consumables. During 1998, Amersham accounted for 30% of sales, of which 29% comprised sequencing systems and 1% comprised GeneKits and other consumables. The sales to Amersham were made on the same general terms and conditions as the majority of other sales during the respective periods. COST OF SALES. Cost of sales increased 39% to $9.3 million in 1999, from $6.7 million in 1998. In 1999, cost of sales aggregated 68% of sales, compared to 61% of sales in 1998. This increase in cost of sales as a percentage of sales was primarily related to a write-off of obsolete and discontinued instruments and related parts totaling $0.6 million recorded in the second quarter of 1999. SALES, GENERAL AND ADMINISTRATIVE EXPENSES. Sales, general and administrative expenses increased 66% to $19.1 million in 1999, from $11.5 million in 1998. This increase resulted primarily from increased 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 42 America and Europe. Sales and marketing expenses included in sales, general and administrative expenses increased 79% to $11.1 million in 1999, from $6.2 million in 1998. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased 26% to $7.9 million in 1999, from $6.3 million in 1998. This increase resulted from increased payroll and personnel costs, along with increased purchases of laboratory supplies, as we developed additional GeneKits and continued our research programs. Additionally, we incurred costs for pre-clinical and clinical trials related to our FDA submission for our HIV OpenGene System. EXIT AND TERMINATION COSTS. During 1999, we incurred exit and termination costs of $1.3 million. There were no such costs in 1998. Of this amount, $0.8 million related to the planned relocation of certain of our activities to a new location in Atlanta, and $0.5 million was for termination benefits payable to two senior officers in connection with the termination of their employment with our company. INTEREST INCOME. Interest income increased to $0.7 million in 1999, from $0.3 million in 1998. The increase reflects interest earned on higher average cash balances as a result of the proceeds received from financings completed during the third and fourth quarters of 1999. INTEREST AND FINANCING EXPENSE. Interest and financing expense increased to $2.0 million in 1999, from $1.1 million in 1998. This increase was due to interest and financing costs on our term loan agreements entered into in April and September 1998 and the Warburg Pincus financing (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. 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. 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 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 43 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 Series A preferred shares. 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 44 were recorded as financing expenses in 1998. The remaining $0.6 million was recorded as non-cash financing expenses in 1999. On April 30, 1999, we granted the Hilal Funds warrants to purchase an additional 140,000 common shares which may be exercised until April 30, 2006, at a price of $17.00 per share. The warrants were valued using the Black-Scholes option valuation model, resulting in a value being attributed to these warrants of $0.9 million. This amount was recorded as a deferred charge on the balance sheet and was to be amortized to financing expense over the remaining term of the loan maturing on December 31, 1999. As a result, the entire amount was recorded as a non-cash charge to financing expense in 1999. On July 15, 1999, we repaid or satisfied all of the loans made to us by the Hilal Funds. Of the $8.0 million principal amount of the loans, we paid $4.1 million of principal plus accrued interest on the loan in cash. The Hilal Funds converted the remaining $3.9 million principal amount plus accrued interest into 3,948 Series A preferred shares and 147,098 warrants to purchase our common shares. The warrants were valued using the Black-Scholes option valuation model. The value of the net proceeds was allocated between convertible preferred shares and warrants based on the relative fair value of each instrument. The total amount allocated to warrants and preferred shares, was $0.9 million and $3.0 million, respectively. The value of the warrants is treated as a discount to the preferred shares and will be charged directly to retained earnings or, in the absence of retained earnings, against other equity over seven years, the time period when redemption of the preferred shares first becomes mandatory. The increase in value of the preferred shares to their mandatory redemption price as well as the accrual of dividends on the preferred shares will reduce earnings attributable to common shareholders. The Series A preferred shares and warrants have the same terms as those granted to the Warburg Pincus Funds. CAPITAL AND CERTAIN OTHER EXPENDITURES. Additions to fixed assets were approximately $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 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. We reflect this on our balance sheet as a component of "Fixed assets." 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 over the last three years were funded from proceeds of private equity placements, public offerings and funds borrowed from institutional lenders. We currently anticipate additional expenditures of approximately $8.5 million during 2001 to complete our Atlanta facility, in addition to approximately $3.0 million of regularly planned capital expenditures. 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 June 2000. We will pay future licensing fees of $5.0 million in each of June 2001, June 2002 and June 2003, unless the agreement is terminated before those dates. We are not obligated to make any further payments upon the termination of the agreement. In addition, we will pay royalties to Applera based on sales in return for access to the Applera technology and installed instrument customer base. We may 45 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 and assuming that we receive FDA approval for our HIV GeneKit during 2001, we believe that our cash on hand and anticipated funds from operations will be sufficient to enable us to meet our operating needs for the next 24 months. However, the actual amount of funds we will need to operate for the next 24 months is subject to many factors, some of which are beyond our control. We may need to obtain additional funds sooner or in greater amounts than we currently anticipate and we may need to obtain additional funds at the end of the 24 month period. If we do not obtain FDA approval for our HIV GeneKit during 2001, we will need to obtain additional funding within 18 to 24 months, unless we significantly curtail operations. 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. If we wish to issue equity securities or obtain additional financing, we will need, under certain circumstances, the consent of the Series A preferred shareholders. We will be required to obtain the consent of the holders of a majority of the then outstanding Series A preferred shares prior to issuing any equity security that has rights as to dividends and liquidation that are senior or equal to those of the Series A preferred shares. We will also be required to obtain the consent of the holders of a majority of the then outstanding Series A preferred shares if we wish to borrow money and at such time or as a result of such loans, the total principal amount of our indebtedness and capitalized lease obligations exceeds $15.0 million. As a result, we may be delayed in, or prohibited from, obtaining certain types of financing. EURO CONVERSION Effective January 1, 1999, 11 of the 15 member countries of the European Union adopted the euro as their common legal currency and each participant established fixed conversion rates between their sovereign, or legacy, currencies and the common euro currency. The legacy currencies of the individual countries are scheduled to remain legal tender as denominations of the euro until January 1, 2002, when euro-denominated bills and coins will be introduced. During this transition period, public and private parties may choose to pay for goods and services using either the euro or the participating country's legacy currency. By July 1, 2002, the legacy currencies will be phased out entirely as legal tender. We currently conduct business operations in U.S. and Canadian dollars and several other currencies. Since our information systems and processes generally accommodate multiple currencies, we anticipate that any necessary modification to our information systems, equipment and processes to 46 accommodate euro transactions will be made on a timely basis and do not expect any failures that would have a material adverse effect on our financial position or results of operations. ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES. DIRECTORS AND SENIOR MANAGEMENT The following table sets forth certain information with respect to our executive officers and directors. This information is supplied based upon our records and information furnished by our executive officers and directors.
DIRECTOR'S YEAR TERM NAME AGE POSITION APPOINTED EXPIRES - - ---- --- -------- --------- ------- Richard T. Daly............... 51 President, Chief Executive 1998 2001 Officer and Director Thomas J. Clarke.............. 52 Chief Financial Officer 2000 Timothy W. Ellis.............. 53 Chief Operating Officer 1999 Dr. Arthur W.G. Cole.......... 50 Executive Vice President; 1996 President, Visible Genetics Europe S.A. Dr. James M. Dunn............. 46 Vice President, Technology 1994 Marguerite Ethier............. 37 Vice President, General Counsel 2000 Michael A. Cardiff(2)......... 42 Director 1999 2003 Sheldon Inwentash(1).......... 45 Director 1994 2002 J. Spencer Lanthier(1)........ 60 Director 2000 2003 Jacques R. Lapointe........... 53 Director 2000 2002 Jonathan S. Leff(1)(2)........ 32 Director 1999 2001 Prof. J. Robert S. Prichard(2) 51 Director 1999 2002 Dr. Lloyd M. Smith............ 46 Director 1995 2001 Dr. Konrad M. Weis............ 72 Director 1997 2001
- - ---------- (1) Member of Audit Committee (2) Member of Compensation Committee The following is the business experience for at least the last five years of each of our executive officers and directors: RICHARD T. DALY has been a Director of our company since June 1998, and President and Chief Executive Officer since July 1999. Mr. Daly served as Executive Vice President from March 1999 until July 1999. Prior to joining Visible Genetics, Mr. Daly founded, and, from March 1989 through July 1998, served as Chairman and Chief Executive Officer of Clinical Partners, Inc., a San Francisco-based company providing comprehensive, therapy-specific management of HIV and AIDS patients for employers and managed health-care organizations. Prior to founding Clinical Partners, Mr. Daly spent over 15 years in the healthcare industry with several companies in a variety of executive positions in sales, marketing and general management, including serving as the President of Baxter Canada for a period of four years, and President of the Health Data Institute. THOMAS J. CLARKE has been Chief Financial Officer of our company since January 2000. From July 1997 to January 2000, Mr. Clarke was Chief Operating Officer of CCS TrexCom, Inc., a telecommunications software company. From 1991 to July 1997, Mr. Clarke was Chief Financial Officer of CCS TrexCom. From 1989 to 1990, Mr. Clarke was Chief Financial Officer of Medaphis Corporation, a medical transaction-processing company. From 1986 to 1989, Mr. Clarke was Senior Vice President and Chief Financial Officer of Days Inn Corporation. From 1985 to 1986, Mr. Clarke was Controller of 47 Quadram Corporation. From 1980 to 1985, Mr. Clarke held various financial positions at Contel Corporation. Mr. Clarke is a Certified Public Accountant. TIMOTHY W. ELLIS has been Chief Operating Officer of our company since November 1999. From January 1998 to November 1999, Mr. Ellis operated his own management consultant practice. From 1991 to 1997, Mr. Ellis was President of Dynex Technologies, a manufacture of instruments and consumables for the clinical research industry. From 1988 to 1991, Mr. Ellis was President of Genetic Systems Corporation. From 1985 to 1988, Mr. Ellis was General Manager of Abbott Laboratories' Clinical Chemistry Business Unit. DR. ARTHUR W. G. COLE has been Executive Vice President of our company since May 1996 and the President of our Visible Genetics Europe S.A. subsidiary since September 1999. From May 1996 to September 1999, Dr. Cole also served as Chief Business Officer of our company. From 1995 to May 1996, Dr. Cole was a business consultant to companies in the biotechnology industry through AC Consulting. From 1981 to 1995, Dr. Cole worked at Pharmacia Biotech, AB, a Swedish biotechnology supply company in a range of positions, including five years as Vice President. During his time with Pharmacia, Dr. Cole ran the division responsible for worldwide sales of DNA sequencing equipment and supplies. DR. JAMES M. DUNN has been Vice President, Technology of our company since June 1998 and was our Director of Molecular Test Development from January 1994 to June 1998. Prior to joining our company, Dr. Dunn was a research consultant to the Hospital for Sick Children from August 1993 to January 1994 and a National Cancer Institute of Canada research fellow at the Division of Biology, California Institute of Technology from 1990 to 1993. Dr. Dunn received a B.Sc. in chemistry from the University of British Columbia and a Ph.D. from the University of Toronto. MARGUERITE ETHIER has been Vice President, General Counsel of our company since January 2000. From 1998 to 1999, Ms. Ethier was a partner in the law firm of McCarthy Tetrault, and from 1995 to 1997 and 1992 to 1993, Ms. Ethier was an associate with McCarthy Tetrault. From 1993 to 1995, Ms. Ethier was an associate with the law firms of Townsend & Townsend Khourie & Crew and Howard Rice Nemerovski Canady Falk & Rabkin. Ms. Ethier holds a B.Sc. degree from the University of Alberta, an M.Sc. degree from the University of Toronto, and an LL.B. degree from Osgoode Hall Law School. Ms. Ethier is a member of the Ontario and California bars, and is qualified as both a registered Canadian Patent Agent and a United States Patent Attorney. MICHAEL A. CARDIFF has been a director of our company since June 1999. Since September 1999, Mr. Cardiff has been President and Chief Executive Officer of Prologic Corporation, a developer of software solutions for the financial services industry. From October 1996 to September 1999, Mr. Cardiff was Executive Vice President, Financial Services of EDS Canada. From November 1994 to September 1996, Mr. Cardiff was Senior Vice President of Sales and Marketing of EDS Canada and from 1989 to 1994, he held several positions with Stratus Computer Corp. Mr. Cardiff presently is a member of the boards of directors of Visual Insights Canada, Inc., SOLCORP Insurance Software Solutions Corp. and Spectra Securities Software Inc. SHELDON INWENTASH has been a director of our company since April 1994. Since November 1993, Mr. Inwentash has been the Chairman and Chief Executive Officer of GeneVest Inc., a Canadian company which is a principal shareholder of our company. Since February 1992, Mr. Inwentash has been the Chairman and Chief Executive Officer of Pinetree Capital Corp., a venture capital firm. J. SPENCER LANTHIER has been a director of our company since April 2000. From 1993 until his retirement in 1999, Mr. Lanthier was Chairman and Chief Executive Officer of KPMG Canada LLP. Mr. Lanthier is presently a member of the board of directors of KPMG Canada. 48 JACQUES R. LAPOINTE has been a director of our company since April 2000. Since June 1998, Mr. Lapointe has been President and Chief Operating Officer of BioChem Pharma Inc. From April 1994 to June 1998, Mr. Lapointe was Managing Director and Business Development Director of Glaxo Wellcome Plc. Mr. Lapointe is presently a member of the board of directors of BioChem Pharma Inc. and ConjuChem Inc., a biotechnology company. JONATHAN S. LEFF has been a director of our company since July 1999, serving as the nominee of the Series A preferred shareholders. Mr. Leff joined E.M. Warburg, Pincus & Co., LLC in July 1996 as an Associate. In January 1999, he became a Vice President, and in January 2000, he became a Managing Director. Mr. Leff is also a director of Intermune Pharmaceuticals Inc., Transkaryotic Therapies, Inc. and a number of private health care companies. PROF. J. ROBERT S. PRICHARD has been a director of our company since May 1999. Since July 2000, Prof. Prichard has been a Professor of Law at Harvard University and President Emeritas of the University of Toronto. From 1990 until July 2000, Prof. Prichard was the President of the University of Toronto. From 1984 to 1990, Prof. Prichard was Dean of the Faculty of Law at the University of Toronto. Prof. Prichard is a past Chairman of the Council of Ontario Universities, a director of the Association of American Universities and a director of the Association of Universities and Colleges of Canada and the International Association of Universities. Prof. Prichard presently serves as a director of the University Health Network, Onex Corporation, BioChem Pharmaceuticals, Moore Corporation Limited, Four Seasons Hotels Inc., Tesma International Inc., Bank of Montreal, Brascan Corp. and Charles River Associates. DR. LLOYD M. SMITH has been a director of our company since March 1995. Since June 1994, Dr. Smith has been Professor of Chemistry at the University of Wisconsin-Madison. Dr. Smith has been involved in the development of fluorescence-based automated DNA sequencers for over 15 years, has written numerous scientific papers and is a named inventor on a number of U.S. patents. Dr. Smith is a past member of the National Institutes of Health National Human Genome Research Institute Study Section. Dr. Smith is a member of the Scientific Advisory Board of CuraGen Corp. He also serves, or has served, on the editorial boards of GENOME RESEARCH, DNA SEQUENCE GENETIC ANALYSIS: TECHNIQUES AND APPLICATIONS and JOURNAL OF CAPILLARY Electrophoresis and was a member of the scientific advisory boards of Fotodyne Incorporated and Boehringer Mannheim Corp. Dr. Smith is currently a member of the Board of Directors of Third Wave. DR. KONRAD M. WEIS has been a director of our company since 1997. Dr. Weis has been the honorary Chairman of Bayer Corporation since 1991. He was President and Chief Executive Officer of the company that later became Bayer Corporation from 1974 until his retirement in 1991. He presently is a member of the boards of directors of Demegen Inc. and Titan Pharmaceuticals, Inc. COMPENSATION The following table sets forth information concerning total compensation earned or paid to our executive officers for services rendered to our company during the fiscal year ended December 31, 2000. 49 EXECUTIVE OFFICER COMPENSATION SUMMARY TABLE
------------------------------------------------------------------------------------------------------------------- LONG-TERM ANNUAL COMPENSATION COMPENSATION ------------------------------------------------------------------------------------------------------------------- SECURITIES UNDERLYING OTHER ANNUAL OPTIONS ALL OTHER SALARY BONUS COMPENSATION GRANTED COMPENSATION NAME YEAR ($) ($) ($) (#) ($) ------------------------------------------------------------------------------------------------------------------- Richard T. Daly 2000 248,667 100,000 1,908 120,000 - ------------------------------------------------------------------------------------------------------------------- Thomas J. Clarke 2000 159,385 - - 40,000 - ------------------------------------------------------------------------------------------------------------------- Timothy W. Ellis 2000 180,000 - - - - ------------------------------------------------------------------------------------------------------------------- Dr. Arthur W.G. Cole 2000 164,285 37,711 5,977 30,000 - ------------------------------------------------------------------------------------------------------------------- Dr. James M. Dunn 2000 130,460 - 8,293 30,000 - ------------------------------------------------------------------------------------------------------------------- Marguerite Ethier 2000 125,207 16,654 - 25,000 - -------------------------------------------------------------------------------------------------------------------
All of our directors who are not employees receive a $2,500 fee for each Board of Directors or committee meeting they attend, up to $10,000 per year. Directors who are not employees are also eligible to participate in our Director Option Plan. All directors are reimbursed for reasonable out-of-pocket travel expenses incurred by them in attending meetings of the Board of Directors or committee meetings. Our directors receive no other compensation for serving in their capacity as directors of our company. The following table sets forth information concerning options granted to our executive officers and directors during the fiscal year ended December 31, 2000.
OPTION GRANTS DURING 2000 NUMBER OF EXERCISE PRICE EXPIRATION NAME OPTIONS GRANTED ($/SHARE) DATE - - --------------------- --------------- -------------- ----------- Richard T. Daly 120,000 $32.63 2010 Thomas J. Clarke 40,000 $15.00 2009 Dr. Arthur W.G. Cole 30,000 $48.88 2010 Dr. James M. Dunn 30,000 $48.88 2010 Marguerite Ethier 25,000 $15.00 2010 Michael A. Cardiff 15,000 $43.13 2010 J. Spencer Lanthier 15,000 $32.75 2010 15,000 $43.13 2010 Jacques R. Lapointe 15,000 $32.75 2010 15,000 $43.13 2010
BOARD COMMITTEES AUDIT COMMITTEE. The Audit Committee recommends to the Board of Directors the firm to be appointed each year as independent auditors of the company's financial statements and to perform services related to the completion of such audit. The Audit Committee also has responsibility for: o reviewing the scope and results of the audit with the independent auditors; o reviewing with management and the independent auditors the company's interim and year-end financial condition and results of operations; 50 o considering the adequacy of the internal accounting, bookkeeping and control procedures of the company; and o reviewing any non-audit services and special engagements to be performed by the independent auditors and considering the effect of such performance on the auditors' independence. The Audit Committee also reviews at least once each year the terms of all material transactions and arrangements between the company and its affiliates. The members of the Audit Committee are Messrs. Inwentash, Leff and Lanthier. COMPENSATION COMMITTEE. The Compensation Committee establishes and reviews overall policy and structure with respect to compensation matters, including the determination of compensation arrangements for directors, executive officers and key employees of the company. The Compensation Committee is also responsible for the administration and award of options to purchase shares pursuant to the company's option and share purchase plans. The members of the Compensation Committee are Messrs. Cardiff, Leff and Prichard. EMPLOYEES As of February 28, 2001, we employed 341 full-time employees (including executive officers) and 3 independent contractors, of whom: o 96 are engaged in research and development; o 68 are involved in sales and marketing activities; o 124 in manufacturing and operations; and o 53 are involved in finance, legal and administrative functions. We have 168 employees in Canada, 132 in the United States, and 41 in Europe Our employees are not represented by a union or other collective bargaining unit and we have never experienced a work stoppage. We believe that our employee relations are good. SHARE OWNERSHIP The following table sets forth certain information concerning the share ownership of our directors and executive officers as of February 28, 2001:
================================= ============= ==================== =============== =============== =============== Number of Number of Common Range of Range of Percentage of Common Shares Which May Exercise Expiration Common Shares Shares be Acquired Under Prices of Dates of Beneficially Name Owned(1) Option Plans(2) Options Options Owned(3) - - --------------------------------- ------------- -------------------- --------------- --------------- --------------- Richard T. Daly 77,564 445,001 $9.10 - 32.63 2009-2010 * - - --------------------------------- ------------- -------------------- --------------- --------------- --------------- Thomas J. Clarke -- 35,000 $15.00 2009 * - - --------------------------------- ------------- -------------------- --------------- --------------- --------------- Timothy W. Ellis -- 100,000 $16.00 2009 * - - --------------------------------- ------------- -------------------- --------------- --------------- --------------- Dr. Arthur W.G. Cole -- 134,620 $3.50 - 48.88 2006-2010 * - - --------------------------------- ------------- -------------------- --------------- --------------- --------------- Dr. James M. Dunn 32,814 44,616 $2.74 - 48.88 2004-2010 * - - --------------------------------- ------------- -------------------- --------------- --------------- --------------- Marguerite Ethier -- 23,125 $15.00 2010 * - - --------------------------------- ------------- -------------------- --------------- --------------- --------------- Michael A. Cardiff -- 30,000 $17.68 - 43.13 2009-2010 * ================================= ============= ==================== =============== =============== ===============
51
================================= ============= ==================== =============== =============== =============== Number of Number of Common Range of Range of Percentage of Common Shares Which May Exercise Expiration Common Shares Shares be Acquired Under Prices of Dates of Beneficially Name Owned(1) Option Plans(2) Options Options Owned(3) - - --------------------------------- ------------- -------------------- --------------- --------------- --------------- Sheldon Inwentash(4) -- 30,000 $8.00 - 11.50 2006-2008 * - - --------------------------------- ------------- -------------------- --------------- --------------- --------------- J. Spencer Lanthier -- 30,000 $32.75 - 43.13 2010 * - - --------------------------------- ------------- -------------------- --------------- --------------- --------------- Jacques R. Lapointe -- 30,000 $32.75 - 43.13 2010 * - - --------------------------------- ------------- -------------------- --------------- --------------- --------------- Jonathan Leff(5) 244 -- -- -- * - - --------------------------------- ------------- -------------------- --------------- --------------- --------------- Dr. J. Robert S. Prichard -- 30,000 $17.68 2009 * - - --------------------------------- ------------- -------------------- --------------- --------------- --------------- Dr. Lloyd M. Smith -- 15,000 $32.38 2011 * - - --------------------------------- ------------- -------------------- --------------- --------------- --------------- Dr. Konrad Weis -- 15,000 $8.00 2008 * ================================= ============= ==================== =============== =============== ===============
- - ---------- * Represents less than 1%. (1) Represents shares owned beneficially by the named individual other than those shares which may be acquired under our company's option plans. Unless otherwise noted, all persons referred to above have sole voting and sole investment power. (2) Includes all shares which the named individual has the right to acquire under all vested and unvested options and warrants granted to such individual under our company's option plans. (3) This information is based on 19,017,035 voting shares outstanding as of February 28, 2001, which includes 2,737,298 common shares issuable upon conversion of our Series A preferred shares as of February 28, 2001. Common shares subject to options exercisable within 60 days are deemed outstanding for computing the percentage ownership of the person holding the options but are not deemed outstanding for computing the percentage ownership of any other person. (4) Mr. Inwentash is a director of our company. This table does not include 1,682,034 common shares that are owned of record by GeneVest Inc. ("GeneVest"). Mr. Inwentash is the President and Chief Executive Officer of GeneVest and together with his affiliates, beneficially owns 45% of its issued and outstanding common shares. Pursuant to rule 10b5-1 of the Securities Exchange Act of 1934, as amended, Mr. Inwentash has adopted a plan to sell certain shares during 2001 which he beneficially owns or which he may be deemed to beneficially own, including certain shares owned by GeneVest. (5) Mr. Leff is a director of our company. The number of common shares which he owns excludes 165 common shares and 2,324,081 common shares issuable upon conversion of Series A preferred shares, as of February 28, 2001, owned by certain affiliated funds managed by E.M. Warburg, Pincus & Co., LLC. Mr. Leff, who is a Managing Director at E.M. Warburg, Pincus & Co., disclaims beneficial ownership of those shares. 52 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS. MAJOR SHAREHOLDERS The following table sets forth certain information regarding the beneficial ownership of our outstanding common shares, as of February 28, 2001, for all shareholders known to beneficially own or exercise control or direction over more than 5% of our common shares:
NUMBER OF COMMON SHARES BENEFICIALLY OWNED OR OVER WHICH CONTROL OR PERCENTAGE OF NAME TITLE OF CLASS DIRECTION IS EXERCISED CLASS(1) ---- -------------- ---------------------- -------- Peter K. Hilal, M.D. for Hilal Capital Management LLC and Hilal Capital Partners LLC(2)............ Common Shares 2,452,773 12.5% Warburg, Pincus Funds(3)............................ Common Shares 2,324,554 12.2% GeneVest Inc. (4)................................... Common Shares 1,682,034 8.8% Franklin Resource, Inc.(5).......................... Common Shares 2,414,290 12.7%
- - ---------- (1) The information in this table is based on our records, information provided to us by directors and executive officers and a review of any Schedules 13D and 13G filed in 2000 and 2001 by our shareholders with the Securities and Exchange Commission. Beneficial ownership is determined in accordance with rules of the Securities and Exchange Commission and includes shares over which the indicated beneficial owner exercises voting and/or investment power. Our common shares subject to options and/or warrants currently exercisable or exercisable within 60 days are deemed outstanding for computing the percentage ownership of the person holding the options and/or warrants but are not deemed outstanding for computing the percentage ownership of any other person. This information is based on 19,017,035 voting shares outstanding as of February 28, 2001, which includes 2,737,298 common shares issuable upon conversion of our Series A preferred shares as of February 28, 2001. The number of common shares issuable upon conversion of our Series A preferred shares will increase as the dividends payable thereon accrue. (2) Consists of (i) 1,496,458 common shares, (ii) 413,217 common shares issuable upon conversion of 3,948 Series A preferred shares and (iii) 543,098 common shares issuable upon exercise of warrants held by Hilal Capital International, Ltd., Hilal Capital, LP and Hilal Capital QP, LP. 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. For a description of the changes in ownership of our Company by these shareholders, please see "Item 5 - Operating and Financial Review and Prospects - Liquidity and Capital Resources - INSTITUTIONAL LOANS." (3) Consists of (i) 1,098,210 common shares held by Warburg, Pincus Equity Partners, L.P., which includes 1,098,142 common shares issuable upon conversion of Series A preferred shares which it owns; (ii) 1,162,124 common shares held by Warburg, Pincus Ventures International, L.P., which includes 1,162,092 common shares issuable upon conversion of Series A preferred shares which it owns; (iii) 34,863 common shares held by Warburg, Pincus Netherlands Equity Partners, I, C.V., which includes 34,854 common shares issuable upon conversion of Series A preferred shares which it owns; (iv) 23,242 common shares held by Warburg, Pincus Netherlands Equity Partners, II, C.V., which 53 includes 23,236 common shares issuable upon conversion of Series A preferred shares which it owns; (v) 5,807 common shares held by Warburg, Pincus Netherlands Equity Partners III, C.V., which includes 5,757 common shares issuable upon conversion of Series A preferred shares which it owns; and (vi) 308 common shares held by Warburg Pincus & Co. 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. For a description of the changes in ownership of our Company by the Warburg Pincus Funds since 1999, please see "Item 5 - Operating and Financial Review and Prospects - Liquidity and Capital Resources - WARBURG PINCUS FINANCING ." (4) GeneVest Inc. is a Canadian company incorporated pursuant to the laws of Alberta, Canada. Mr. Sheldon Inwentash, one of our directors, is the President and Chief Executive Officer of GeneVest and, together with his affiliates, beneficially owns approximately 45% of GeneVest's issued and outstanding common shares. In June 2000, we filed a registration statement with the Securities and Exchange Commission covering 1,927,134 common shares owed by GeneVest Inc. (see "Related Party Transactions" below). Since June 30, 2000, Genevest has sold 245,100 common shares in open market transactions. In February 2000, pursuant to rule 10b5-1 of the Securities Exchange Act of 1934, as amended, Mr. Inwentash adopted a plan to sell certain shares during 2001 which he beneficially owns or which he may be deemed to beneficially own, including certain shares owned by GeneVest. (5) Franklin Adviser, Inc., as investment advisor to Franklin Resources, Inc., has sole investment and dispositive power over these securities. Charles B. Johnson and Robert H. Johnson, Jr. each own in excess of 10% of the outstanding common stock of Franklin Resources, Inc., and may be deemed (for purposes of Rule 13d-3 under the Securities Exchange Act of 1934, as amended) to be the beneficial owners of these securities. As of February 28, 2001, there were 26,153 Series A preferred shares issued and outstanding. Of those shares, 22,205 (84.9%) are owned by certain affiliated funds managed by E.M. Warburg, Pincus & Co., LLC, and the other 3,948 (15.1%) are owned by the Hilal Funds. For more information regarding our Series A preferred shares and the Warburg Pincus and Hilal funds, see "Item 5. Operating and Financial Review and Prospects -Liquidity and Capital Resources." The holders of Series A preferred shares are entitled to vote as a group with the holders of common shares on all matters, except that holders of Series A preferred shares are entitled to vote separately for one director and are not entitled to participate in the vote for any other directors of our company. On all other matters, each holder of Series A preferred shares is entitled to the number of votes corresponding to the number of common shares the holder is entitled to receive upon conversion of his Series A preferred shares. On February 28, 2001, 14,395,830 of our common shares were held by 49 U.S. record holders and 26,153 of our Series A preferred shares were held by 8 U.S. record holders. RELATED PARTY TRANSACTIONS Dr. John K. Stevens, served as the President and Chief Executive Officer of our company until his retirement in July 1999. In accordance with the terms of his employment agreement, Dr. Stevens received a severance package of two years salary plus benefits. We extended the termination date of Dr. Stevens' options until 2003. In November 1999, Dr. Stevens retired as Chairman of the Board of 54 Directors. In 2000, we paid Dr. Stevens $210,400. Under the terms of our agreement with Dr. Stevens, he is entitled to receive an additional $105,200 during 2001, subject to certain conditions. In November 1999, Dr. Chalom Sayada's employment as our Vice President for European Business Development was terminated. In connection with his termination of employment, we paid him $262,500. In addition, we retained him as a consultant to provide marketing and strategy services to us for 18 months. In consideration of such services, he earned $151,248 in 2000 and will earn approximately $44,000 for the remaining 4 months of service. In June 2000 we filed a registration statement with the Securities and Exchange Commission covering 1,927,134 common shares owed by GeneVest Inc. Mr. Sheldon Inwentash, one of our directors, is the President and Chief Executive Officer of GeneVest and, together with his affiliates, beneficially owns approximately 45% of GeneVest's issued and outstanding common shares. During 2000, we paid an aggregate of $64,487 in consulting fees to Clinical Partners, Inc. in connection with clinical studies performed by Clinical Partners for us. Richard T. Daly, our President and Chief Executive Officer, is the founder and was previously the Chairman and President of Clinical Partners. For a description of transactions between the company, and the Hilal Funds and the Warburg Pincus Funds, see "Item 5. Operating and Financial Review and Prospects -Liquidity and Capital Resources." ITEM 8. FINANCIAL INFORMATION. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION See Item 19(a) for audited consolidated financial statements. LEGAL PROCEEDINGS We are not a party to any material legal proceedings. On December 27, 1999, Applera filed a lawsuit against our company in the United States District Court for the Northern District of California claiming that our DNA sequencing equipment and products infringe certain patents licensed to Applera by the California Institute of Technology. On April 25, 2000, we entered into a worldwide licensing and collaboration agreement with Applera whereby we gained access to certain patents and intellectual property owned or exclusively licensed by Applera including the patents that were the subject of the lawsuit. In connection with the agreement, the lawsuit was withdrawn. For more information on our licensing and collaboration agreement with Applera, see "Item 4. Information about the Company-Business Overview-Proprietary Rights." DIVIDEND POLICY 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. SERIES A PREFERRED SHARES. Dividends on our Series A preferred shares accrue at the rate of 9% per year until July 2002, and 4% per year thereafter. Dividends may not be paid until July 2002. Beginning in August 2000, at our option, we may pay dividends in cash. If dividends are not paid in cash, they will continue to accrue. 55 SIGNIFICANT CHANGES None. ITEM 9. THE OFFER AND LISTING. 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.
HIGH LOW ---- ---- ANNUAL MARKET PRICES Fiscal Year ended December 31, 1996 .. $ 11.50 $ 7.75 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 QUARTERLY MARKET PRICES FISCAL YEAR ENDED DECEMBER 31, 1999 First Quarter ........................ $ 21.75 $ 10.00 Second Quarter ....................... $ 21.81 $ 15.31 Third Quarter ........................ $ 22.81 $ 8.88 Fourth Quarter ....................... $ 34.63 $ 15.00 FISCAL YEAR ENDED DECEMBER 31, 2000 First Quarter ........................ $ 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 (through March 15, 2001) $ 37.45 $ 20.50 MONTHLY MARKET PRICES September 2000 ....................... $ 48.75 $ 39.00 October 2000 ......................... $ 44.25 $ 21.75 November 2000 ........................ $ 36.00 $ 25.38 December 2000 ........................ $ 39.00 $ 24.00 January 2001 ......................... $ 37.45 $ 28.00 February 2001 ........................ $ 35.13 $ 25.25 March 2001 (through March 15, 2001) .. $ 30.50 $ 20.50
ITEM 10. ADDITIONAL INFORMATION. BY-LAWS AND ARTICLES OF INCORPORATION The company's Restated Articles of Incorporation, which we refer to as our articles of incorporation, are on file with the Ministry of Consumer and Commercial Relations under Ontario Corporation Number 1079808. Our articles of incorporation do not include a stated purpose. 56 DIRECTORS A director of our company need not be a shareholder. In accordance with our by-laws and the Ontario Business Corporations Act, a majority of our directors must be residents of Canada. The Ontario Business Corporations Act requires that a person must be at least 18 years of age, be of sound mind and not be bankrupt in order to serve as a director. Neither our articles of incorporation or by-laws, nor the Ontario Business Corporations Act, impose any mandatory retirement requirements for directors. A director who is a party to, or who is a director or officer of or has a material interest in any person who is a party to, a material contract or transaction or proposed material contract or transaction with our company shall disclose to the company the nature and extent of his interest at the time and in the manner provided by the Ontario Business Corporations Act. The Ontario Business Corporations Act prohibits such a director from voting on any resolution to approve the contract or transaction unless the contract or transaction: o is an arrangement by way of security for money lent to or obligations undertaken by the director for the benefit of the company or an affiliate; o relates primarily to his or her remuneration as a director, officer, employee or agent of the company or an affiliate; o is for indemnity or insurance; or o is with an affiliate. Our board of directors may, on behalf of the company and without authorization of our shareholders: o borrow money upon the credit of the company; o issue, reissue, sell or pledge bonds, debentures, notes or other evidences or indebtedness or guarantees of our company, either secured or unsecured; o subject to certain disclosure requirements of the Ontario Business Corporations Act, give, directly or indirectly, financial assistance to any person by means of a loan, a guarantee or otherwise on behalf of our company to secure performance or any present or future indebtedness, liability or obligation of any person; and o mortgage, hypothecate, pledge or otherwise create a security interest in all or any currently owned or subsequently acquired real or personal property of our company, including book debts, rights, powers, franchises and undertakings, to secure any bonds, debentures, notes or other evidences of indebtedness or guarantee or any other obligation of the company. COMMON SHARES Our articles of incorporation authorize the issuance of an unlimited number of common shares. The holders of the common shares of our company are entitled to receive notice of and to attend all meetings of the shareholders of our company and have one vote for each common share held at all meetings of the shareholders of our company, except for meetings at which only holders of another specified class or series of shares of the company are entitled to vote separately as a class or series. Subject to the prior rights of the holders of preferred shares of our company and to any other shares ranking senior to the common shares with respect to priority in the payment of dividends, the holders of common shares are entitled to receive dividends and our company will pay dividends, as and when declared by our Board of Directors, out of moneys properly applicable to the payment of dividends, in such amount and in such form as our Board of Directors may from time to time determine, and all 57 dividends which our Board of Directors may declare on the common shares shall be declared and paid in equal amounts per share on all common shares at the time outstanding. In the event of the dissolution, liquidation or winding-up of the company, whether voluntary or involuntary, or any other distribution of assets of the company among its shareholders for the purpose of winding up its affairs, subject to the prior rights of the holders of preferred shares and to any other shares ranking senior to the common shares with respect to priority in the distribution of assets upon dissolution, liquidation or winding-up, the holders of the common shares will be entitled to receive the remaining property and assets of the company. PREFERRED SHARES Our articles of incorporation authorize the issuance of an unlimited number of preferred shares, in one or more series. The Ontario Business Corporations Act does not impose restrictions upon our Board of Directors issuing preferred shares of the type authorized by our articles of incorporation. Our Board of Directors may fix, before issuing, the number of preferred shares of each series, the designation, rights, privileges, restrictions and conditions attaching to the preferred shares of each series, including, any voting rights, any right to receive dividends (which may be cumulative or non-cumulative and variable or fixed) or the means of determining the dividends, the dates of payment, any terms and conditions of redemption or purchase, any conversion rights, and any rights on the liquidation, dissolution or winding-up of the company, any sinking fund or other provisions, the whole to be subject to the issue of a Certificate of Amendment setting forth the designation, rights, privileges, restrictions and conditions attaching to the preferred shares of the series. Our articles of incorporation require that preferred shares of each series must, with respect to the payment of dividends and the distribution of assets in the event of the liquidation, dissolution or winding-up of the company, whether voluntary or involuntary, rank on a parity with the preferred shares of every other series. However, we are prohibited from issuing any equity securities that have rights as to dividends and upon liquidation that are senior or equal in rank to the Series A preferred shares without the approval of the holders of a majority of the Series A preferred shares. Therefore, if we wish to issue a series of preferred shares with rights equal or superior to those of our Series A preferred shares we must obtain the approval of the holders of our Series A preferred shares. If we wish to issue a series of preferred shares with rights superior or inferior to those of our Series A preferred shares, we must obtain the approval of our Series A preferred shareholders and our common shareholders to amend our articles of incorporation. If any amount of cumulative dividends (whether or not declared) or declared non-cumulative dividends or any amount payable on any such distribution of assets constituting a return of capital in respect of the preferred shares of such series shall participate ratably with the preferred shares of every other series in respect of all such dividends and amounts. SERIES A PREFERRED SHARES 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, as of February 28, 2001, 7,795 have been converted and 26,153 remain outstanding. The Series A preferred shares are convertible at the holders' option into common shares at $11.00 per share. Upon conversion, the holders will also receive common shares, at the conversion price of $11.00 per share, equal to the amount of all accrued and unpaid dividends. The Series A preferred shares contain provisions under which the conversion price would be reduced on a weighted average basis if we issue shares, options or certain other securities at prices lower than the conversion price (subject to certain exceptions), and will also be adjusted upon the issuance of certain other securities, certain recapitalization events and in certain other circumstances to protect the holders against the dilutive effect of those events. 58 Dividends on the Series A preferred shares accrue quarterly at the rate of 9% per year during the first three years after issuance, and 4% per year thereafter and are compounded annually. Dividends are not payable for the first three years. After three years, at our option, we may pay dividends in cash. If dividends are not paid in cash, they will continue to accrue. After the third anniversary and prior to the seventh anniversary of the date of issuance of the Series A preferred shares, we have the right to redeem the outstanding Series A preferred shares at a price, which we call the redemption price, equal to $1,000 per share, plus accrued but unpaid dividends, provided that the price of our common shares on the Nasdaq National Market equals or exceeds 150% of the conversion price for 20 trading days during a consecutive 30-day period ending within 10 days before we notify shareholders of the redemption. We will be required to redeem one-third of any remaining outstanding Series A preferred shares on each of the seventh, eighth and ninth anniversaries of the date of issuance at 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. 59 ACTION NECESSARY TO CHANGE RIGHTS OF SHAREHOLDERS In order to change the rights of our shareholders, we would need to amend our articles of incorporation to effect the change. Such an amendment would require the approval of holders of two-thirds of the shares cast at a duly called special meeting. If we wish to amend the rights of holders of a specific class of shares, such approval would also be required from the holders of that class. A shareholder is entitled to dissent in respect of such a resolution and, if the resolution is adopted and the company implements such changes, demand payment of the fair value of its shares. MEETINGS OF SHAREHOLDERS An annual meeting of shareholders is held each year for the purpose of considering the financial statements and reports, electing directors, appointing auditors and for the transaction of other business as may be brought before the meeting. The President or the Board of Directors has the power to call a special meeting of shareholders at any time. Notice of the time and place of each meeting of shareholders must be given not less than 21 days, nor more than 50 days, before the date of each meeting to each director, to the auditor and to each shareholder who at the close of business on the record date for notice is entered in the securities register as the holder of one or more shares carrying the right to vote at the meeting. Notice of meeting of shareholders called for any other purpose other than consideration of the minutes of an earlier meeting, financial statements and auditor's report, election of directors and reappointment of the incumbent auditor, must state the nature of the business in sufficient detail to permit the shareholder to form a reasoned judgment on and must state the text of any special resolution or by-law to be submitted to the meeting. The only persons entitled to be present at a meeting of shareholders are those entitled to vote, the directors of the company and the auditor of the company. Any other person may be admitted only on the invitation of the chairman of the meeting or with the consent of the meeting. If a corporation is winding-up, the Ontario Business Corporations Act permits a liquidator appointed by the shareholders, during the continuance of a voluntary winding-up, to call and attend meetings of the shareholders. In circumstances where a court orders a meeting of shareholders, the court may direct how the meeting may be held, including the parties entitled, or required, to attend the meeting. LIMITATIONS ON RIGHT TO OWN SECURITIES There is no limitation imposed by Canadian law or by our articles or other charter documents on the right of a nonresident to hold or vote common shares or preference shares with voting rights (collectively, "Voting Shares"), other than as provided in the Investment Canada Act (the "Investment Act"), as amended by the World Trade Organization Agreement Implementation Act. The Investment Act generally prohibits implementation of a direct reviewable investment by an individual, government or agency thereof, corporation, partnership, trust or joint venture that is not a "Canadian," as defined in the Investment Act (a "non-Canadian"), unless, after review, the minister responsible for the Investment Act is satisfied that the investment is likely to be of net benefit to Canada. An investment in Voting Shares by a non-Canadian (other than a "WTO Investor," as defined below) would be reviewable under the Investment Act if it were an investment to acquire direct control of our company, and the value of the assets of our company were Cdn$5.0 million or more (provided that immediately prior to the implementation of the investment our company was not controlled by WTO Investors). An investment in Voting Shares by a WTO Investor (or by a non-Canadian other than a WTO Investor if, immediately prior to the implementation of the investment our company was controlled by WTO Investors) would be reviewable under the Investment Act if it were an investment to acquire direct control of our company (in 2001) and the value of the assets of our company equaled or exceeded Cdn$209.0 million. A non-Canadian, whether a WTO Investor or otherwise, would be deemed to acquire control of our 60 company for purposes of the Investment Act if he or she acquired a majority of the Voting Shares. The acquisition of less than a majority, but at least one-third of our Voting Shares, would be presumed to be an acquisition of control of our company, unless it could be established that we were not controlled in fact by the acquirer through the ownership of Voting Shares. In general, an individual is a WTO Investor if he or she is a "national" of a country (other than Canada) that is a member of the World Trade Organization ("WTO Member") or has a right of permanent residence in a WTO Member. A corporation or other entity will be a "WTO Investor" if it is a "WTO investor-controlled entity," pursuant to detailed rules set out in the Investment Act. The United States is a WTO Member. Certain transactions involving Voting Shares would be exempt from the Investment Act, including: (a) an acquisition of Voting Shares if the acquisition were made in the ordinary course of that person's business as a trader or dealer in securities; (b) an acquisition of control of our company in connection with the realization of a security interest granted for a loan or other financial assistance and not for any purpose related to the provisions of the Investment Act; and (c) an acquisition of control of our company by reason of an amalgamation, merger, consolidation or corporate reorganization, following which the ultimate direct or indirect control in fact of our company, through the ownership of voting interests, remains unchanged. CHANGE OF CONTROL Our authorized capital consists of an unlimited number of preferred shares. The Board of Directors, without any further vote by the common shareholders, has the authority to issue preferred shares and to determine the price, preferences, rights and restrictions, including voting and dividend rights, of these shares. The rights of the holders of common shares are subject to the rights of holders of any preferred shares that the Board of Directors may issue in the future. That means, for example, that we can issue preferred shares with more voting rights, higher dividend payments or more favorable rights upon dissolution, than the common shares. If we issued certain types of preferred shares in the future, it may also be more difficult for a third-party to acquire a majority of our outstanding voting shares. In addition, we have a "classified" Board of Directors, which means that only approximately one-third of our directors are eligible for election each year. Therefore, if shareholders wish to change the composition of the Board of Directors, it would take at least two years to remove a majority of the existing directors, and three years to change all directors. Also, the holders of our Series A preferred shares are entitled to vote as a class for one director. The Series A Director serves for a one year term and any vacancy may be filled only by a vote of the holders of Series A preferred shares. If we do not redeem our Series A preferred shares as required during 2006, 2007, and 2008, then our Series A shareholders will be entitled to special voting rights enabling them to elect a majority of our Board of Directors, who will continue to serve as directors until we have redeemed our Series A preferred shares as required. MATERIAL CONTRACTS The following is a summary of our company's material contracts, entered into since January 1, 1999. 1. Employment Agreement, dated July 7, 1999, by and among Visible Genetics Corporation, Visible Genetics Inc. and Richard Daly. Pursuant to the terms and conditions of this agreement, Mr. Daly agreed to act as the President and Chief Executive Officer of our company in consideration of a salary and benefits commensurate with that position. 2. Amendment No. 2 to Term Loan Agreement, dated as of April 30, 1999 to the Guarantee dated as of April 30, 1998, by and among Visible genetics Inc., Hilal Capital, L.P., Hilal Capital Q.P., 61 L.P., Hilal Capital International, Ltd., Highbridge International LLC, C.J. Partners L.P. and Hilal Capital Management LLC, as adviser for Leo Holdings, Inc. Pursuant to the terms and conditions of this agreement, we and the Hilal Funds agreed to delay the payment date of a $7.0 million loan, which was originally due on April 29, 1999, to December 31, 1999, and to move up the payment date of a $1.0 million loan, which was originally payable on December 28, 1999, to July 1, 1999. In addition, 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. 3. Securities Purchase Agreement, dated as of July 15, 1999 by and among Visible Genetics Inc., Warburg, Pincus Equity Partners, L.P., Warburg, Pincus Ventures International, L.P., Warburg, Pincus Netherlands Equity Partners I, C.V., Warburg, Pincus Netherlands Equity Partners II, C.V. and Warburg, Pincus Netherlands Equity Partners III, C.V. Pursuant to the terms and conditions of this agreement, 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. 4. Registration Rights Agreement, dated as of July 15, 1999, by and among Visible Genetics Inc., Warburg, Pincus Equity Partners, L.P., Warburg, Pincus Ventures International, L.P., Warburg, Pincus Netherlands Equity Partners I, C.V., Warburg, Pincus Netherlands Equity Partners II, C.V. and Warburg, Pincus Netherlands Equity Partners III, C.V. Pursuant to the terms and conditions of this agreement, the Warburg Pincus Funds received registration rights for the common shares issuable upon the conversion of their 30,000 Series A preferred shares and the exercise of their warrants to purchase 1.1 million common shares. 5. Common Shares Purchase Agreement, dated December 14, 1999, by and among Visible Genetics Inc. and the Investors who are signatories thereto. Pursuant to the terms and conditions of this agreement, various institutional investors purchased 1,916,000 common shares of our company in a private placement. The investors paid $15 per share and we received net proceeds of $26.7 million from the private placement. The institutional investors included the Warburg Pincus Funds, the Hilal Funds, certain investors who had purchased our common shares in a November 1998 private placement and certain new institutional investors. In addition, the investors were granted registration rights for these shares. 6. Registration Rights Agreement, dated December 14, 1999, by and among Visible Genetics Inc. and the Investors who are signatories thereto. Pursuant to the terms and conditions of this agreement, various institutional investors received registration rights for the 1,916,000 common shares purchased by them in a private placement. 7. Lease between Visible Genetics Corp. and Dukes-Weeks Realty Limited Partnership, dated December 22, 1999. Lease of approximately 99,822 square feet in Suwanee Georgia, for a term of 10 years, commencing on February 15, 2000. 8. Lease, dated March 27, 2000, by and between Visible Genetics Inc., as Tenant and LuCliff Company Limited, as Landlord. Pursuant to the terms and conditions of this agreement, we will lease approximately 20,628 square feet of property located at 700 Bay Street, Toronto, Canada, for a term from June 2000 to May 2005. 9. Underwriting Agreement, dated March 30, 2000, by and among, FleetBoston Robertson Stephens Inc., PaineWebber Incorporated, Warburg Dillon Read LLC, Roth Capital Partners, Inc., as representatives of the several underwriters, and Visible Genetics Inc. Pursuant to the terms and conditions of this agreement, we completed an underwritten follow-on public offering of 2,090,000 62 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. 10. Licensing and Collaboration Agreement, dated April 25, 2000, by and between Visible Genetics Inc. and Applera Corporation, Applied Biosytems Group (formerly PE Biosystems). Pursuant to the terms and conditions of this agreement, we gained access to certain patents and intellectual property owned or exclusively licensed by Applera. We will pay Applera a total licensing fee of $25.0 million over a period of four years, and will also make royalty payments to Applera based on sales in return for access to the Applera technology and installed instrument customer base. We may terminate the agreement upon 60 days written notice to Applera and either party may terminate the agreement under certain other limited circumstances. 11. Lease, dated October 1, 2000, by and between Visible Genetics Inc., as Tenant and LuCliff Company Limited, as Landlord. Pursuant to the terms and conditions of this agreement, we will lease approximately 6,876 square feet of property located at 700 Bay Street, Toronto, Canada, for a term from November 2000 to May 2005. 12. Lease, dated November 30, 2000, by and between Visible Genetics Inc., as Tenant and LuCliff Company Limited, as Landlord. Pursuant to the terms and conditions of this agreement, we will lease approximately 6,876 square feet of property located at 700 Bay Street, Toronto, Canada, for a term from June 2001 to November 2001. EXCHANGE CONTROLS There is no law, government decree or regulation in Canada restricting the export or import of capital or affecting the remittance of dividends, interest or other payments to a nonresident holder of common shares, other than withholding tax requirements. TAXATION CANADIAN FEDERAL INCOME TAX CONSIDERATIONS The following summary describes certain material Canadian federal income tax consequences generally applicable to a holder of common shares and a holder of Series A preferred shares each of whom at all relevant times, for purposes of the Income Tax Act (Canada) (the "ITA"), (i) acquires and holds such shares as capital property (including common shares acquired on a conversion of Series A preferred shares) and (ii) deals at arm's length with our company and, in case of a holder of Series A preferred shares, is a resident of the United States and not a resident of Canada for purposes of the Canada-United States Income Tax Convention, 1980 (a "Holder" and a "Series A Holder", with reference to a holder of common shares and a holder of Series A preferred shares, respectively). Generally, common shares and Series A preferred shares will be considered to be capital property to a Holder or a Series A Holder provided that such Holder or Series A Holder does not use or hold such shares in the course of carrying on a business, has not acquired such shares in a transaction or transactions considered to be an adventure in the nature of trade, and is not a financial institution subject to the rules whereby gains and losses on certain securities are recorded on a mark-to-market basis. Some Holders may be entitled to have their common shares treated as capital property by making the irrevocable election in subsection 39(4) of the ITA. This summary is based upon the current provisions of the Canada-United States Income Tax Convention, 1980 (the "U.S. Treaty"), the ITA and the regulations thereunder and on an understanding of the published administrative practices of the Canada Customs and Revenue Agency (the "CCRA"). This summary does not take into account or anticipate any possible changes in law, or in the administration thereof, whether by legislative, governmental or judicial action, except proposals for specific amendment 63 thereto which have been publicly announced by the Minister of Finance (Canada) prior to the date hereof (the "Proposed Amendments"). This summary does not address all aspects of Canadian federal income tax law that may be relevant to Holders or Series A Holders based upon their particular circumstances, and does not deal with provincial, territorial or foreign income tax legislation or considerations, which might differ significantly from the Canadian federal income tax considerations summarized herein. This summary is of a general nature only and is not intended to be, nor should it be construed as, advice to any particular Holder or Series A Holder. Holders and Series A Holders are advised to consult their tax advisors regarding the application of the Canadian federal income tax law to their particular circumstances, as well as any provincial, territorial and other tax consequences of the acquisition, ownership and disposition of their common shares or Series A preferred shares, as the case may be. All amounts relevant in computing the liability of a Holder or Series A Holder under the ITA are to be computed in Canadian currency at the rate of exchange prevailing at the relevant time. COMMON SHARES NONRESIDENTS OF CANADA TAXATION OF DIVIDENDS. A Holder who, at all relevant times, is not resident in Canada for purposes of the ITA (a "NonResident Holder") will be subject to Canadian non-resident withholding tax on dividends paid or credited, or deemed under the ITA to be paid or credited, to the NonResident Holder on the common shares. The rate of withholding tax under the ITA on dividends is 25% of the gross amount of the dividend. Such rate may be reduced under the provisions of an applicable international tax treaty. Pursuant to the U.S. Treaty, the rate of Canadian withholding tax applicable in respect of dividends paid or credited by our company to a NonResident Holder resident in the United States is generally reduced to 15%, or 5% in the case of a corporate NonResident Holder that owns beneficially 10% or more of the voting stock of our company. Moreover, pursuant to Article XXI of the U.S. Treaty, an exemption from Canadian withholding tax generally is available in respect of dividends received by certain trusts, companies and other organizations whose income is exempt from tax under the laws of the United States. DISPOSITION OF COMMON SHARES. A NonResident Holder will not be subject to tax under the ITA in respect of a capital gain realized on the disposition of a common share unless the common share constitutes or is deemed to constitute "taxable Canadian property" (as defined in the ITA) and the capital gain is not exempt from tax under the ITA pursuant to an applicable international tax treaty. Shares of a Canadian corporation that are listed on a prescribed stock exchange (which includes the National Association of Securities Dealers Automated Quotation System) will generally not be considered to be taxable Canadian property to a NonResident Holder, unless, at any time during the five year period immediately preceding the disposition or deemed disposition of the common share, the NonResident Holder, persons with whom the NonResident Holder did not deal at arm's length or any combination thereof owned or had an option to acquire not less than 25% of the issued shares of any class or series of shares of our company. For the purposes of determining whether a property is a taxable Canadian property, a person holding an option to acquire shares or other securities convertible into or exchangeable for shares, or otherwise having an interest in shares, will be considered to own the shares that could be acquired upon the exercise of the option, the conversion or exchange rights or in which there is such interest. The aforementioned rules can apply to any class of shares. A common share acquired by a NonResident holder on the conversion of a Series A preferred share will be considered to be taxable Canadian property. 64 A NonResident Holder whose common shares constitute or are deemed to constitute taxable Canadian property and who would not be eligible for an exemption from tax under the ITA in respect of any gains realized on the disposition of such shares pursuant to an applicable international tax treaty is referred to the discussion below under "Canadian Residents - DISPOSITION OF COMMON SHARES" for information regarding the treatment of the disposition under the ITA. Even if the common shares constitute or are deemed to constitute taxable Canadian property to a NonResident Holder and their disposition would give rise to a capital gain, an exemption from tax under the ITA may be available under the terms of an applicable international tax treaty. A NonResident Holder resident in the United States for purposes of the U.S. Treaty will generally be exempt from tax under the ITA in respect of a gain on the disposition of common shares provided that the value of the common shares is not derived principally from real property situated in Canada. Paragraph 5 of Article XIII of the U.S. Treaty provides that paragraph 4 of Article XIII, which normally provides such an exemption for U.S. residents from Canadian tax on the disposition of property such as shares, generally does not apply where the U.S. resident was a Canadian resident for 120 months during any period of twenty consecutive years preceding the time of the disposition of the property and the individual was resident in Canada at any time during the ten years immediately preceding the disposition of the property. As discussed below under "Canadian Residents - DISPOSITION OF COMMON SHARES", a purchase of common shares by our company (other than a purchase of common shares by our company on the open market in a manner in which shares would normally be purchased by any member of the public in the open market) will give rise to a deemed dividend under the ITA. Any such dividend deemed to have been received by a NonResident Holder will be subject to non-resident withholding tax as described above. The amount of any such deemed dividend will reduce the proceeds of disposition of the common share to the NonResident Holder for the purpose of computing the amount of the NonResident Holder's capital gain or loss under the ITA. CANADIAN RESIDENTS TAXATION OF DIVIDENDS. Dividends received on a common share held by a Holder who at all relevant times, is a resident of Canada for purposes of the ITA (a "Resident Holder"), will be required to be included in the Resident Holder's income as computed under the ITA. Under Part I of the ITA, gross-up and dividend tax credit rules normally applicable to taxable dividends received from taxable Canadian corporations by individuals will apply to dividends received by the a Resident Holder who is an individual. Dividends received by a Resident Holder that is a corporation normally will be deductible in computing the taxable income of the Resident Holder. Certain corporations may be liable to pay a 331/3% refundable tax under Part IV of the ITA on such dividends. DISPOSITION OF COMMON SHARES. Upon the disposition or deemed disposition of a common share, a Resident Holder will realize a capital gain (or a capital loss) to the extent that the proceeds of disposition are greater than (or less than) the aggregate of the adjusted cost base to the Resident Holder of the common share and any reasonable costs of disposition. Pursuant to the Proposed Amendments, subject to certain transitional rules which apply in certain circumstances, one-half of any capital gain, referred to as a taxable capital gain, realized by a Resident Holder will be included in the Resident Holder's income for the year of disposition and one-half of any capital loss, referred to as an allowable capital loss, realized by a Resident Holder may be deducted from the Resident Holder's taxable capital gains for the year of disposition. Subject to the detailed rules in the ITA and the Proposed Amendments, any excess of allowable capital losses over taxable capital gains of the Resident Holder may be carried back up to three years and forward indefinitely and deducted against net taxable capital gains in those other years. Where capital losses net of capital gains realized in one taxation year are applied to capital gains net of capital losses realized in another taxation year for which there is a different inclusion rate, the amount of such net capital losses will be adjusted to match the 65 inclusion rate applicable to such net capital gains. In certain cases, a capital loss otherwise determined from the disposition of a common share may be reduced by the amount of dividends previously received. A purchase of common shares by our company (other than a purchase of common shares by our company on the open market in a manner in which shares would normally be purchased by any member of the public in the open market) will give rise to a deemed dividend (except to the extent that such dividend may be regarded under the ITA as proceeds of disposition or a capital gain and not as a dividend for Resident Holders that are corporations) under the ITA. The amount of any such deemed dividend will reduce the proceeds of disposition of the common shares to the Resident Holder for the purpose of computing the amount of the Resident Holder's capital gain or loss under the ITA. SERIES A PREFERRED SHARES TAXATION OF DIVIDENDS. A Series A Holder will be subject to Canadian non-resident withholding tax on dividends paid or credited, or deemed to be paid or credited, to the Series A Holder on the Series A preferred shares. The rate of non-resident withholding tax under the ITA on dividends is 25% of the gross amount of the dividend. Pursuant to the U.S. Treaty, the rate of Canadian non-resident withholding tax applicable in respect of dividends paid or credited to a Series A Holder is generally reduced to 15%, or 5% in the case of a corporate Series A Holder that owns beneficially 10% or more of our voting shares. Moreover, pursuant to Article XXI of the U.S. Treaty, an exemption from Canadian non-resident withholding tax is generally available in respect of dividends received by certain trusts, companies and other organizations whose income is exempt from tax under the laws of the United States. Where our company pays or is deemed to pay a dividend on the Series A preferred shares we will generally be subject to a tax under Part VI.1 of the ITA equal to 25% of the amount of the dividend. We will generally be entitled to deduct nine-fourths of the amount of such tax in computing our taxable income for purposes of Part I of the ITA. REDEMPTION OF THE SERIES A PREFERRED SHARES. A redemption of a Series A preferred share will give rise to a deemed dividend equal to the difference between the amount we paid on the redemption of the Series A preferred share and the paid-up capital of such share as determined in accordance with the ITA. The paid-up capital of such share may be less than the Series A Holder's cost of such share. The amount of any such deemed dividend will reduce the proceeds of disposition to the Series A Holder for purposes of computing the amount of the Series A Holder's capital gain (or capital loss) under the ITA. A redemption of a Series A preferred share will be considered to be disposition under the ITA and will give rise to a capital gain (or capital loss) to the extent that the Series A Holder's proceeds of disposition (excluding any deemed dividend on redemption) exceed the total of the Series A Holder's adjusted cost base of such share and any reasonable costs of disposition. A redemption of a Series A preferred share will trigger certain filing requirements under section 116 of the ITA. For information regarding the treatment of the deemed dividend, see TAXATION OF DIVIDENDS, above. For information regarding the treatment of the capital gain or capital loss, see DISPOSITION OF SERIES A PREFERRED SHARES, below. CONVERSION OF THE SERIES A PREFERRED SHARES. The conversion of a Series A preferred share into common shares will be deemed by the ITA not to be a disposition of the Series A preferred share and, accordingly, a Series A Holder will not be considered to have realized a capital gain or capital loss on such conversion. If, and to the extent that, a dividend is deemed to be paid or credited on the conversion, such dividend will be subject to withholding tax, see TAXATION OF DIVIDENDS, above. Although the matter is not free from doubt, no dividend should be deemed to be paid or credited on the conversion. For purposes of the conversion, the cost of the common shares acquired on conversion will be equal to the adjusted cost base of the Series A preferred shares to the Series A Holder that have been converted. The adjusted cost base to the Series A Holder of the common shares acquired on the conversion will be determined by averaging the cost of the common shares acquired on the conversion 66 with the adjusted cost base to the Series A Holder of all other common shares held as capital property at that time by the Series A Holder. A common share acquired on a conversion will constitute taxable Canadian property under the ITA. Therefore a Series A Holder that disposes of a common share acquired on a conversion will be subject to tax under the ITA in respect of a capital gain realized on the disposition, unless relief under an applicable international tax treaty is available. For more information regarding the treatment of the disposition under the ITA and the U.S. Treaty, see DISPOSITION OF SERIES A PREFERRED SHARES, below. Under the current administrative practice of the CCRA, a Series A holder who, upon conversion of a Series A preferred share, receives cash not in excess of C$200 in lieu of a fraction of a common share may either treat this amount as proceeds of disposition of a portion of the Series A preferred share or, alternatively, reduce the adjusted cost base of the common share received on the conversion by the amount of case received. In the event that the Series A Holder chooses to recognize a disposition of a portion of the Series A preferred share, a capital gain or loss may be realized. For information regarding the treatment of the capital gain or capital loss, see DISPOSITION OF SERIES A PREFERRED SHARES, below. DISPOSITION OF THE SERIES A PREFERRED SHARES. A Series A Holder will be subject to tax under the ITA in respect of a capital gain realized on the disposition of a share if the share constitutes or is deemed to constitute "taxable Canadian property" (as defined in the ITA) and the disposition is not exempt from tax under the ITA due to the application of the U.S. treaty. A Series A preferred share will constitute taxable Canadian property for purposes of the ITA. However, a Series A Holder resident in the United States for purposes of the U.S. Treaty will generally be exempt from Canadian tax in respect of a gain on the disposition of a Series A preferred share provided that the value of the Series A preferred share is not derived principally from real property situated in Canada. Paragraph 5 of Article XIII of the U.S. Treaty provides that paragraph 4 of Article XIII, which normally provides such an exemption for U.S. residents from Canadian tax on the disposition of property such as shares, generally does not apply where the U.S. resident was a Canadian resident for 120 months during any period of twenty consecutive years preceding the time of the disposition of the property and the individual was resident in Canada at any time during the ten years immediately preceding the disposition of the property. A disposition of a Series A preferred share will trigger certain filing requirements under section 116 of the ITA, regardless of whether relief from taxation under an applicable international tax treaty is available. U.S. FEDERAL INCOME TAX CONSIDERATIONS The following summary describes material United States federal income tax consequences arising from the purchase, ownership and sale of common shares. This summary is based on the provisions of the Internal Revenue Code of 1986, as amended (the "Code"), final, temporary and proposed United States Treasury Regulations promulgated thereunder, and the administrative and judicial interpretations thereof, all as in effect as of the date of this annual report and all of which are subject to change, possibly on a retroactive basis. The consequences to any particular investor may differ from those described below by reason of that investor's particular circumstances. This summary does not address the considerations that may be applicable to any particular taxpayer based on such taxpayer's particular circumstances (including potential application of the alternative minimum tax), to particular classes of taxpayers (including financial institutions, broker-dealers, insurance companies, taxpayers who have elected mark-to-market accounting, tax-exempt organizations, taxpayers who hold ordinary shares as part of a straddle, "hedge" or "conversion transaction" with other investments, investors who own (directly, indirectly or through 67 attribution) 10% or more of our company's outstanding voting stock, taxpayers whose functional currency is not the U.S. dollar, persons who are not citizens or residents of the United States, or persons which are foreign corporations, foreign partnerships or foreign estates or trusts as to the United States) or any aspect of state, local or non-United States tax laws. Additionally, the discussion does not consider the tax treatment of persons who hold common shares through a partnership or other pass-through entity or the possible application of United States federal gift or estate tax. This summary is addressed only to a holder of common shares who is (i) a citizen or resident of the United States who owns less than 10% of our company's outstanding voting stock, (ii) a corporation organized in the United States or under the laws of the United States or any state thereof, (iii) an estate, the income of which is includable in gross income for United States federal income tax purposes regardless of source, or (iv) a trust, if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust (a "U.S. Holder"). This summary is for general information purposes only and does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a decision to purchase common shares. This summary generally considers only U.S. Holders that will own their common shares as capital assets. Each shareholder should consult with such shareholder's own tax advisor as to the particular tax consequences to such shareholder of the purchase, ownership and sale of their common shares including the effects of applicable state, local, foreign or other tax laws and possible changes in the tax laws. TREATMENT OF DIVIDEND DISTRIBUTIONS Subject to the discussion below under "Tax Status Of The Company - Passive Foreign Investment Companies," a distribution by our company to a U.S. Holder in respect of the common shares (including the amount of any Canadian taxes withheld thereon) will generally be treated for United States federal income tax purposes as a dividend to the extent of our company's current and accumulated earnings and profits, as determined under United States federal income tax principles. To the extent, if any, that the amount of any such distribution exceeds our company's current and accumulated earnings and profits, as so computed, it will first reduce the U.S. Holder's tax basis in the common shares owned by him, and to the extent it exceeds such tax basis, it will be treated as capital gain from the sale of common shares. While it is not anticipated that our company will pay dividends in the foreseeable future, the gross amount of any distribution from our company received by a U.S. Holder which is treated as a dividend for United States federal income tax purposes (before reduction for any Canadian tax withheld at source) will be included in such U.S. Holder's gross income, will be subject to tax at the rates applicable to ordinary income and generally will not qualify for the dividends received deduction applicable in certain cases to United States corporations. For United States federal income tax purposes, the amount of any dividend paid in Canadian dollars by our company to a U.S. Holder will equal the U.S. dollar value of the amount of the dividend paid in Canadian dollars, at the exchange rate in effect on the date of the distribution, regardless of whether the Canadian dollars are actually converted into United States dollars at that time. Canadian dollars received by a U.S. Holder will have a tax basis equal to the U.S. dollar value thereof determined at the exchange rate on the date of the distribution. Currency exchange gain or loss, if any, recognized by a U.S. Holder on the conversion of Canadian dollars into U.S. dollars will generally be treated as U.S. source ordinary income or loss to such holder. U.S. Holders should consult their own tax advisors concerning the treatment of foreign currency gain or loss, if any, on any Canadian dollars received which are converted into dollars subsequent to distribution. A U.S. Holder generally will be entitled to deduct any Canadian taxes withheld from dividends in computing United States taxable income, or to credit such withheld taxes against the United States federal income tax imposed on such U.S. Holder's dividend income. No deduction for Canadian taxes may be claimed, however, by a noncorporate U.S. Holder that does not itemize deductions. The amount of foreign taxes for which a U.S. Holder may claim a credit in any year is subject to complex limitations and 68 restrictions, which must be determined on an individual basis by each shareholder. Distributions with respect to common shares that are taxable as dividends will generally constitute foreign source income for purposes of the foreign tax credit limitation. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. For this purpose, dividends distributed by our company with respect to the common shares will generally constitute "passive income." Foreign income taxes exceeding a shareholder's credit limitation for the year of payment or accrual of such tax can be carried back for two taxable years and forward for five taxable years, subject to the credit limitation applicable in each of such years. Additionally, the foreign tax credit in any taxable year may not offset more than 90% of a shareholder's liability for United States individual or corporate alternative minimum tax. The total amount of allowable foreign tax credits in any year generally cannot exceed regular U.S. tax liability for the year attributable to foreign source taxable income. A U.S. Holder will be denied a foreign tax credit with respect to Canadian income tax withheld from dividends received on the common shares to the extent such U.S. Holder has not held the ordinary shares for at least 16 days of the 30-day period beginning on the date which is 15 days before the ex-dividend date or to the extent such U.S. Holder is under an obligation to make certain related payments with respect to substantially similar or related property. Any days during which a U.S. Holder has substantially diminished its risk of loss on the common shares are not counted toward meeting the 16 day holding period required by the statute. SALE OR EXCHANGE OF A COMMON SHARE Subject to the discussion below under "Tax Status Of The Company - Passive Foreign Investment Companies," the sale or exchange by a U.S. Holder of a common share generally will result in the recognition of gain or loss by the U.S. Holder in an amount equal to the difference between the amount realized and the U.S. Holder's basis in the common share sold. Such gain or loss will be capital gain or loss provided that the common share is a capital asset in the hands of the holder. The gain or loss realized by a noncorporate U.S. Holder on the sale or exchange of a common share will be long-term capital gain or loss subject to tax at a maximum tax rate of 20% if the common share had been held for more than one year. If the common share had been held by such noncorporate U.S. Holder for not more than one year, such gain will be short-term capital gain subject to tax at a maximum rate of 39.6%. Finally, gain realized by a noncorporate U.S. Holder with respect to common shares acquired after December 31, 2000 and held for more than five years, shall be taxed at a maximum rate of 18%. Gain realized by a corporate U.S. Holder will be subject to tax at a maximum rate of 35%. Gains recognized by a U.S. Holder on a sale, exchange or other disposition of common shares generally will be treated as United States source income for United States foreign tax credit purposes. A loss recognized by a U.S. Holder on the sale, exchange or other disposition of common shares generally is allocated to U.S. source income under recently finalized regulations. However, those regulations require such loss to be allocated to foreign source income to the extent certain dividends were received by the taxpayer within the 24-month period preceding the date on which the taxpayer recognized the loss. The deductibility of a capital loss recognized on the sale, exchange or other disposition of common shares is subject to limitations. A U.S. Holder that receives foreign currency upon disposition of common shares and subsequently converts the foreign currency into U.S. dollars generally will have foreign exchange gain r loss based on any appreciation or depreciation in the value of the foreign currency against the U.S. dollar. U.S. Holders should consult their own tax advisors regarding treatment of any foreign currency gain or loss on any Canadian dollars received in respect of the sale, exchange or other disposition of common shares. TAX STATUS OF THE COMPANY PERSONAL HOLDING COMPANIES. A non-U.S. corporation may be classified as a personal holding company (a "PHC") for United States federal income tax purposes if both of the following two tests are satisfied: (i) if at any time during the last half of the company's taxable year, five or fewer individuals (without regard to their citizenship or residency) own or are deemed to own (under certain attribution rules) more than 50% of the stock of the corporation by value and (ii) 60% or more of such non-U.S. 69 corporation's gross income derived from U.S. sources or effectively connected with a U.S. trade or business, as specifically adjusted, is from certain passive sources such as dividends and royalty payments. Such a corporation generally is taxed (currently at a rate of 39.6% of "undistributed personal holding company income") on the amounts of such passive source income, after making adjustments such as deducting dividends paid and income taxes, that are not distributed to shareholders. We believe that our company was not a PHC in 2000 and is not currently a PHC. However, no assurance can be given that either test will not be satisfied in the future. FOREIGN PERSONAL HOLDING COMPANIES. A non-U.S. corporation will be classified as a foreign personal holding company (an "FPHC") for United States federal income tax purposes if both of the two following tests are satisfied: (i) five or fewer individuals who are United States citizens or residents own or are deemed to own (under certain attribution rules) more than 50% of all classes of the corporation's stock measured by voting power or value and (ii) the corporation receives at least 60% (50% if previously an FPHC) of its gross income (regardless of source), as specifically adjusted, from certain passive sources. If such a corporation is classified as a FPHC, a portion of its "undistributed foreign personal holding company income" (as defined for United States federal income tax purposes) would be imputed to all of its shareholders who are U.S. Holders on the last taxable day of the corporation's taxable year, or, if earlier, the last day on which it is classifiable as a FPHC. Such income would be taxable as a dividend, even if no cash dividend is actually paid. U.S. Holders who dispose of their shares prior to such date would not be subject to tax under these rules. We believe that our company is not currently a FPHC. However, no assurance can be given that our company will not qualify as a FPHC in the future. PASSIVE FOREIGN INVESTMENT COMPANIES. A company will be a passive foreign investment company ("PFIC") if 75% or more of its gross income (including the pro rata share of the gross income of any company (United States or foreign) in which the company is considered to own 25% or more of the shares (determined by market value)) in a taxable year is passive income. Alternatively, the company will be considered to be a PFIC if at least 50% of the value of the company's assets (averaged over the year) (including the pro rata share of the value of the assets of any company in which the company is considered to own 25% or more of the shares (determined by market value)) in a taxable year are held for the production of, or produce, passive income. For these purposes, the value of our assets is calculated based on our market capitalization. Passive income generally includes, among others, interest, dividends, royalties, rents and annuities. If our company is a PFIC for any taxable year, a U.S. Holders, in the absence of an election by such U.S. Holder to treat our company as a "qualified electing fund" (a "QEF election"), as discussed below, would, upon certain distributions by our company and upon disposition of the common shares at a gain, be liable to pay tax at the highest tax rate on ordinary income in effect for each period to which the income is allocated, plus interest on the tax, as if the distribution or gain had been recognized ratably over the days in the U.S. Holder's holding period for the common shares during which our company was a PFIC. Additionally, were our company a PFIC, U.S. Holders who acquire ordinary shares from decedents would be denied the normally available step-up of the income tax basis for such common shares to fair market value at the date of death and instead would have a tax basis equal to the decedent's basis, if lower. If our company is treated as a PFIC for any taxable year, U.S. Holders should consider whether to make a QEF Election for United States federal income tax purposes. If a U.S. Holder has a QEF Election in effect for all taxable years that such U.S. Holder has held the common shares and our company was a PFIC, distributions and gain will not be recognized ratably over the U.S. Holder's holding period or subject to an interest charge, gain on the sale of common shares will be characterized as capital gain and the denial of basis step-up at death described above would not apply. Instead, each such U.S. Holder is required for each taxable year that our company is a qualified electing fund to include in income a pro rata share of the ordinary earnings of our company as ordinary income and a pro rata share of the net capital gain of our company as long-term capital gain, subject to a separate election to defer payment of 70 taxes, which deferral is subject to an interest charge. Consequently, in order to comply with the requirements of a QEF Election, a U.S. Holder must receive from our company certain information. We intend to supply U.S. Holders with the information needed to report income and gain pursuant to a QEF Election in the event our company is classified as a PFIC. The QEF Election is made on a shareholder-by-shareholder basis and can be revoked only with the consent of the Internal Revenue Service (the "IRS"). A shareholder makes a QEF Election by attaching a completed IRS Form 8621 (including the PFIC annual information statement) to a timely filed United States federal income tax return and by filing such form with the IRS Service Center in Philadelphia, Pennsylvania. Even if a QEF Election is not made, a shareholder in a PFIC who is a U.S. Holder must file a completed IRS Form 8621 every year. As an alternative to making a QEF Election, a U.S. Holder may elect to make a mark-to-market election (the "Mark-to-Market Election") with respect to the common shares owned by him. If the Mark-to-Market Election were made, then the rules set forth above would not apply for periods covered by the election. Under such election, a U.S. Holder includes in income each year an amount equal to fair market value of the common shares owned by such U.S. Holder as of the close of the taxable year over the U.S. Holder's adjusted basis in such shares. The U.S. Holder would be entitled to a deduction for the excess, if any, of such U.S. Holder's adjusted basis in his common shares over the fair market value of such shares as of the close of the taxable year; provided however, that such deduction would be limited to the extent of any net mark-to-market gains with respect to the common shares included by the U.S. Holder under the election for prior taxable years. The U.S. Holder's basis in his common shares is adjusted to reflect the amounts included or deducted pursuant to this election. Amounts included in income pursuant to the Mark-to-Market Election, as well as gain on the sale or exchange of the common shares, will be treated as ordinary income. Ordinary loss treatment applies to the deductible portion of any mark-to-market loss, as well as to any loss realized on the actual sale or exchange of the common shares to the extent that the amount of such loss does not exceed the net mark-to-market gains previously included with respect to such common shares. The Mark-to-Market election applies to the tax year for which the election is made and all later tax years, unless the common shares cease to be marketable or the IRS consents to the revocation of the election. We do not believe our company was a PFIC during 2000. However, there can be no assurance that our company will not be classified as a PFIC in 2001 or thereafter because the tests for determining PFIC status are applied annually and it is difficult to make accurate predictions of future income and assets, which are relevant to this determination. U.S. Holders who hold common shares during a period when our company is a PFIC will be subject to the foregoing rules, even if our company ceases to be a PFIC, subject to certain exceptions for U.S. Holders who made a QEF election. U.S. Holders are urged to consult with their own tax advisors about making a QEF Election or Mark-to-Market Election and other aspects of the PFIC rules. BACK-UP WITHHOLDING AND INFORMATION REPORTING U.S. Holders generally are subject to information reporting requirements with respect to dividends paid in the United States on common shares. Under existing regulations, such dividends are not subject to back-up withholding. U.S. Holders generally 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. Treasury regulations generally effective January 1, 2001 may alter the rules regarding information reporting and back-up withholding. In particular, those regulations generally would impose back-up withholding on dividends paid in the United States on common shares unless the U.S. Holder provides IRS Form W-9 or otherwise establishes an exemption. Prospective investors should consult their 71 tax advisors concerning the effect, if any, of these Treasury regulations on an investment in common shares. The amount of any back-up withholding will be allowed as a credit against a U.S. or Non-U.S. Holder's United States federal income tax liability and may entitle such Holder to a refund, provided that certain required information is furnished to the IRS. DOCUMENTS ON DISPLAY We have filed this Annual Report on Form 20-F with the Securities and Exchange Commission under the Securities Exchange Act of 1934. Statements made in this annual report 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 this annual report, 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 this Annual Report on Form 20-F, may be inspected and copied at the public reference facilities of the Securities and Exchange Commission at: 450 Fifth Street N.W. 7 World Trade Center 500 West Madison Street Room 1024 New York, New York 10048 Suite 1400 Washington D.C. 20549 Chicago, Illinois 60661
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. ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. INTEREST RATE RISK. The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk. Some of the securities that we invest in may have market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. For example, if we hold a security that was issued with a fixed interest rate at the then-prevailing rate and the prevailing interest rate later rises, the principal amount of our investment will probably decline. We currently maintain an investment portfolio primarily of United States Treasury obligations. The average duration of all of our investments in 2000 was less than one year. Due to the short-term nature of these investments, we believe we have no material exposure to interest rate risk arising from our investments. Therefore, no quantitative tabular disclosure is required. FOREIGN CURRENCY RATE FLUCTUATIONS. Our financial statements are prepared in U.S. dollars and much of our business is conducted in U.S. dollars. However, we incur expenses in Canadian dollars and in other foreign currencies. We also sell products to customers in foreign countries and bill those customers in local currencies at predetermined exchange rates. As our business expands, we anticipate that we will increasingly incur expenses and bill and receive payments in local currencies at prevailing exchange rates. As a result, we may suffer losses due to fluctuations in the exchange rates between the U.S. dollar and the Canadian dollar and the U.S. dollar and the currencies of other countries. We currently engage in limited foreign exchange hedging activities by sometimes purchasing Canadian funds before they are actually required to protect ourselves against the risk of losses due to fluctuations in exchange rates. We do not currently engage in hedging activities for any other foreign currencies. 72 ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES. Not Applicable. PART II ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES. None. ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS. There were no material modifications effecting the rights of securities holders made during the fiscal year ended December 31, 2000. PART III ITEM 17. FINANCIAL STATEMENTS. Not applicable. ITEM 18. FINANCIAL STATEMENTS. See the Index to Consolidated Financial Statements accompanying this report on page F-1. ITEM 19. EXHIBITS. 3.1 Certificate and Restated Articles of Incorporation of the Company.(1) 3.2 Certificate and Articles of Amendment of the Company.(2) 3.3 Amended and Restated Bylaws of the Company.(3) 4.1 Specimen of Certificate for Common Shares.(4) 4.2 Certificate of Designations, Number, Voting Powers, Preference and Rights of Series A Convertible Preferred Shares of Visible Genetics Inc.(5) 10.1 Visible Genetics Inc. Employee Pool Stock Option Plan.(6) 10.2 Visible Genetics Inc. 1997 Director Option Plan.(7) 10.3 Visible Genetics Inc. Employee Share Option Plan, Amended through May 19, 1999.(8) 10.4 Visible Genetics Inc. Employee Share Ownership Plan.(9) 10.5 Visible Genetics Inc. 2000 Employee Share Option Plan.(10) 10.6 PCR Diagnostic License Agreement, dated August 18, 1997, by and between Roche Molecular Systems, Inc., F. Hoffmann-La Roche Ltd. and Visible Genetics Inc. (THIS AGREEMENT IS FILED IN REDACTED FORM BASED UPON A GRANT OF CONFIDENTIAL TREATMENT BY THE SEC.)(11) 73 10.7 Securities Purchase Agreement, dated as of July 15, 1999, by and among Visible Genetics Inc., Warburg, Pincus Equity Partners, L.P., Warburg, Pincus Ventures International, L.P., Warburg, Pincus Netherlands Equity Partners I, C.V., Warburg, Pincus Netherlands Equity Partners II, C.V. and Warburg, Pincus Netherlands Equity Partners III, C.V.(12) 10.8 Registration Rights Agreement, dated as of July 15, 1999, by and among Visible Genetics Inc. and the Investors listed on Schedule I thereto.(13) 10.9 Common Shares Purchase Agreement, dated December 14, 1999, by and among Visible Genetics Inc. and the Investors who are signatories hereto.(14) 10.10 Registration Rights Agreement, dated as December 14, 1999, by and among Visible Genetics Inc. and each of the Investors to that certain Common Shares Purchase Agreement.(15) 10.11 Lease between Visible Genetics Corp. and Duke-Weeks Realty Limited Partnership, dated December 22, 1999.(16) 10.12 Lease between Visible Genetics Inc. and LuCliff Company Limited, dated March 31, 1992.(17) 10.13 Lease between Visible Genetics Inc. and Royal Trust Corporation of Canada, as trustee and RT Pensior Properties Limited dated June 1, 1996.(18) 10.14 Lease between Visible Genetics Inc. and Comwest Properties Limited dated July 20, 1998.(19) 10.15 Lease between Visible Genetics Corp. and the University of Pittsburgh of the Commonwealth System of Higher Education dated Dec 1, 1996.(20) 10.16 Master Agreement, dated as of February 22, 1996 and executed on April 1, 1996, between Amersham International plc., Amersham Canada Limited and the Company. (THIS AGREEMENT IS FILED IN REDACTED FORM BASED UPON A GRANT OF CONFIDENTIAL TREATMENT BY THE SEC.)(21) 10.17 Amersham Supply Agreement, dated as of February 22, 1996 and executed on April 1, 1996, between Amersham International plc, Amersham Canada Limited and the Company. (THIS AGREEMENT IS FILED IN REDACTED FORM BASED UPON A GRANT OF CONFIDENTIAL TREATMENT BY THE SEC.)(22) 10.18 VGI Supply Agreement, dated as of February 22, 1996 and executed on April 1, 1996 between Amersham International plc, Amersham Canada Limited and the Company. (THIS AGREEMENT IS FILED IN REDACTED FORM BASED UPON A GRANT OF CONFIDENTIAL TREATMENT BY THE SEC.)(23) 10.19 Amendment No. 1 to Guarantee, dated as of April 30, 1999 to the Guarantee dated as of April 30, 1998, by and among Visible Genetics Inc., Hilal Capital, L.P., Hilal Capital QP, LP, Hilal Capital International, Ltd., Highbridge International LLC, C.J. Partners L.P. and Hilal Capital Management LLC, as adviser for Leo Holdings, Inc.(24) 10.20 Amendment No. 2 to Term Loan Agreement, dated as of April 30, 1999, to the Term Loan Agreement, dated as of April 30, 1999 as amended by Amendment No. 1 to the Term Loan Agreement dated as of September 29, 1998, by and among Visible Genetics Corp., Hilal Capital, L.P., Hilal Capital QP, LP, Hilal Capital International, Ltd., Highbridge International LLC, C.J. Partners L.P. and Hilal Capital Management LLC, as adviser for Leo Holdings, Inc.(25) 10.21 Letter Agreement between Visible Genetics Inc. and Hilal Capital Management dated July 15, 1999.(26) 74 10.22 Underwriting Agreement, dated March 30, 2000, by and among, FleetBoston Robertson Stephens Inc., PaineWebber Incorporated, Warburg Dillon Read LLC, Roth Capital Partners, Inc., as representatives of the several underwriters, and Visible Genetics Inc.(27) 10.23 Licensing and Collaboration Agreement, dated April 25, 2000, by and among Visible Genetics and Applera Corporation, Applied Biosytems Group (formerly PE Biosystems). (This Agreement is filed in redacted form as it is subject to a request for confidentiality submitted to the SEC). 10.24 Lease, dated March 27, 2000, by and between Visible Genetics Inc., as Tenant and LuCliff Company Limited, as Landlord. 10.25 Lease, dated November 30, 2000, by and between Visible Genetics Inc., as Tenant and LuCliff Company Limited, as Landlord. 10.26 Lease, dated October 1, 2000, by and between Visible Genetics Inc., as Tenant and LuCliff Company Limited, as Landlord. 10.27 Employment Agreement, dated July 7, 1999, by and among Visible Genetics Corporation, Visible Genetics Inc. and Richard Daly. - - ---------- (1) Incorporated by reference from Exhibit 3.1 to Amendment No. 1 to the Company's Registration Statement on Form F-1, File No. 333-3118 filed with the Securities and Exchange Commission on May 16, 1996 (2) Incorporated by reference from Exhibit 3.2 to the Company's Annual Report on Form 20-F, File No. 0-28550 filed with the Securities and Exchange Commission on March 13, 2000. (3) Incorporated by reference from Exhibit 3.2 to Amendment No. 1 to the Company's Registration Statement on Form F-1, File No. 333-3118 filed with the Securities and Exchange Commission on May 16, 1996 (4) 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 16, 1996. (5) Incorporated by reference from Exhibit 4.2 to the Company's Registration Statement on Form F-3, File No.333-91155 filed with the Securities and Exchange Commission on November 17, 1999 (6) Incorporated by reference from Exhibit 4.4 to the Company's Registration Statement on Form S-8, File No. 333-06454 filed with the Securities and Exchange Commission on February 18, 1997. (7) Incorporated by reference from Exhibit 2.1 to the Company's Annual Report on Form 20-F, File No. 0-28550 filed with the Securities and Exchange Commission on April 28, 1997. (8) Incorporated by reference from Exhibit 10.3 to the Company's Annual Report on Form 20-F, File No. 0-28550 filed with the Securities and Exchange Commission on March 13, 2000. (9) Incorporated by reference from Exhibit 2.2 to the Company's Annual Report on Form 20-F, File No. 0-28550 filed with the Securities and Exchange Commission on April 28, 1997. (10) Incorporated by reference from Exhibit B to the Company's Report on Form 6-K, Filing No. 2 for the Month of April 2000, dated April 19, 2000. (11) Incorporated by reference from Exhibit 3.11 to the Company's Annual Report on Form 20-F, File No. 0-28550 filed with the Securities and Exchange Commission on July 19, 1999. 75 (12) Incorporated by reference from Exhibit 10.10 to the Company's Annual Report on Form 20-F, File No. 0-28550 filed with the Securities and Exchange Commission on March 13, 2000. (13) Incorporated by reference from Exhibit 10.11 to the Company's Annual Report on Form 20-F, File No. 0-28550 filed with the Securities and Exchange Commission on March 13, 2000. (14) Incorporated by reference from Exhibit 10.12 to the Company's Annual Report on Form 20-F, File No. 0-28550 filed with the Securities and Exchange Commission on March 13, 2000. (15) Incorporated by reference from Exhibit 10.13 to the Company's Annual Report on Form 20-F, File No. 0-28550 filed with the Securities and Exchange Commission on March 13, 2000. (16) Incorporated by reference from Exhibit 10.14 to the Company's Annual Report on Form 20-F, File No. 0-28550 filed with the Securities and Exchange Commission on March 13, 2000. (17) Incorporated by reference from Exhibit 10.15 to the Company's Annual Report on Form 20-F, File No. 0-28550 filed with the Securities and Exchange Commission on March 13, 2000. (18) Incorporated by reference from Exhibit 10.16 to the Company's Annual Report on Form 20-F, File No. 0-28550 filed with the Securities and Exchange Commission on March 13, 2000. (19) Incorporated by reference from Exhibit 10.17 to the Company's Annual Report on Form 20-F, File No. 0-28550 filed with the Securities and Exchange Commission on March 13, 2000. (20) Incorporated by reference from Exhibit 10.18 to the Company's Annual Report on Form 20-F, File No. 0-28550 filed with the Securities and Exchange Commission on March 13, 2000. (21) Incorporated by reference from Exhibit 10.8 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 16, 1996. (22) Incorporated by reference from Exhibit 10.9 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 16, 1996. (23) Incorporated by reference from Exhibit 10.10 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 16, 1996. (24) Incorporated by reference from Exhibit 10.22 to the Company's Annual Report on Form 20-F, File No. 0-28550 filed with the Securities and Exchange Commission on March 13, 2000. (25) Incorporated by reference from Exhibit 10.23 to the Company's Annual Report on Form 20-F, File No. 0-28550 filed with the Securities and Exchange Commission on March 13, 2000. (26) Incorporated by reference from Exhibit 10.24 to the Company's Annual Report on Form 20-F, File No. 0-28550 filed with the Securities and Exchange Commission on March 13, 2000. (27) Incorporated by reference from Exhibit 1.1 to Amendment No. 1 to the Company's Registration Statement on Form F-3, File No. 333-32258 filed with the Securities and Exchange Commission on March 29, 2000. 76 SIGNATURES The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and has duly caused and authorized the undersigned to sign this annual report its behalf. VISIBLE GENETICS INC. By: /s/ Richard T. Daly -------------------------------------- Richard T. Daly President and Chief Executive Officer Date: March 20, 2001 77 VISIBLE GENETICS INC. CONSOLIDATED FINANCIAL STATEMENTS INDEX CONSOLIDATED FINANCIAL STATEMENTS
PAGE Audited Consolidated Financial Statements for the years ended December 31, 2000, 1999 and 1998 Independent Auditors' Report.......................................................................... F-2 Consolidated Balance Sheets as at December 31, 2000 and 1999.......................................... F-3 Consolidated Statements of Operations for the years ended December 31, 2000, 1999 and 1998............ F-4 Consolidated Statements of Deficit for the years ended December 31, 2000, 1999 and 1998............... F-5 Consolidated Statements of Comprehensive Loss for the years ended December 31, 2000, 1999 and 1998.... F-5 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998............ F-6 Notes to Consolidated Financial Statements............................................................ F-7
F-1 VISIBLE GENETICS INC. AND SUBSIDIARIES INDEPENDENT AUDITORS' REPORT TO THE SHAREHOLDERS OF VISIBLE GENETICS INC. We have audited the consolidated balance sheets of Visible Genetics Inc. as at December 31, 2000 and 1999 and the consolidated statements of operations, deficit, comprehensive loss, and cash flows for the years ended December 31, 2000, 1999 and 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and Canada. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2000 and 1999 and the results of its operations and its cash flows for the years ended December 31, 2000, 1999 and 1998 in accordance with generally accepted accounting principles in the United States of America. /s/ PricewaterhouseCoopers LLP Chartered Accountants Toronto, Canada February 16, 2001 F-2 VISIBLE GENETICS INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31 ASSETS 2000 1999 ---- ---- Current assets Cash and cash equivalents ............................... $ 18,476,303 $ 2,792,985 Short-term investments .................................. 61,922,687 39,894,978 Trade receivables (net of allowance for doubtful accounts of $1,311,530; 1999 - $1,180,801) .................. 3,214,934 5,657,822 Other receivables (Note 4) .............................. 884,995 668,748 Prepaid and deposits .................................... 452,124 436,903 Inventory (Note 5) ...................................... 2,268,877 2,600,007 ------------- ------------- Total current assets ........................................... 87,219,920 52,051,443 ------------- ------------- Fixed assets (Note 6) .......................................... 10,292,282 4,173,335 Patents and licenses (Note 7) .................................. 12,182,112 2,122,367 Other long term assets ......................................... 661,591 292,404 ------------- ------------- $ 110,355,905 $ 58,639,549 ============= ============= LIABILITIES Current liabilities Accounts payable ........................................ $ 3,847,364 $ 3,110,442 Accrued liabilities (Note 8) ............................ 5,265,864 3,622,110 ------------- ------------- Total current liabilities ...................................... 9,113,228 6,732,552 ------------- ------------- MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK (Note 9) ................................. 24,397,398 27,555,652 ------------- ------------- SHAREHOLDERS' EQUITY Share capital (Note 10) ........................................ 169,717,379 75,422,070 Other equity (Note 10) ......................................... (646,363) 8,987,328 Cumulative translation adjustment .............................. (1,013,459) (619,911) Deficit ........................................................ (91,212,278) (59,438,142) ------------- ------------- 76,845,279 24,351,345 ------------- ------------- $ 110,355,905 $ 58,639,549 ============= =============
COMMITMENTS AND CONTINGENCIES (Note 15) THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. F-3 VISIBLE GENETICS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31 -------------------------------------------- 2000 1999 1998 ---- ---- ---- Sales Products .......................................... $ 12,659,783 $ 12,455,775 $ 9,421,933 Services .......................................... 412,780 1,171,145 1,453,415 ------------ ------------ ------------ 13,072,563 13,626,920 10,875,348 ------------ ------------ ------------ Costs of sales Products .......................................... 9,815,741 8,593,774 5,995,869 Services .......................................... 317,748 679,112 677,712 ------------ ------------ ------------ 10,133,489 9,272,886 6,673,581 ------------ ------------ ------------ Gross margin ........................................ 2,939,074 4,354,034 4,201,767 ------------ ------------ ------------ Expenses: Sales, general and administrative (Note 7) .... 28,570,747 19,073,546 11,515,757 Research and development ...................... 10,606,516 7,935,327 6,289,032 Acquired research and development (Note 11) ... -- -- 420,043 Exit and termination costs (Note 12) .......... -- 1,329,083 -- ------------ ------------ ------------ 39,177,263 28,337,956 18,224,832 ------------ ------------ ------------ Loss from operations before interest ................ (36,238,189) (23,983,922) (14,023,065) Interest income ..................................... 4,480,589 694,549 264,195 Interest and financing expense ...................... (16,536) (1,997,512) (1,132,091) ------------ ------------ ------------ Net loss for the year ............................... (31,774,136) (25,286,885) (14,890,961) Cumulative preferred dividends and accretion of discount attributable to preferred stock (Note 9) ................................ (3,656,355) (1,770,069) -- ------------ ------------ ------------ Net loss attributable to common shareholders ........ $(35,430,491) $(27,056,954) $(14,890,961) ============ ============ ============ Weighted average number of common shares outstanding 14,612,172 9,916,954 7,782,094 Basic and diluted loss per common share ............. $ (2.42) $ (2.73) $ (1.91)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. F-4 VISIBLE GENETICS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF DEFICIT
YEARS ENDED DECEMBER 31 --------------------------------------------- 2000 1999 1998 ---- ---- ---- Deficit, beginning of year ....................... $(59,438,142) $(34,151,257) $(19,260,296) Net loss for the year ............................ (31,774,136) (25,286,885) (14,890,961) ------------ ------------ ------------ Deficit, end of year ............................. $(91,212,278) $(59,438,142) $(34,151,257) ============ ============ ============ CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS YEARS ENDED DECEMBER 31 --------------------------------------------- 2000 1999 1998 ---- ---- ---- Net loss for the year ............................ $(31,774,136) $(25,286,885) $(14,890,961) Other comprehensive income: Foreign currency translation adjustments ... (393,548) (704,733) 112,477 ------------ ------------ ------------ Comprehensive loss for the year .................. $(32,167,684) $(25,991,618) $(14,778,484) ============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. F-5 VISIBLE GENETICS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31 ------------------------------------------------ 2000 1999 1998 ---- ---- ---- Cash provided by (used in ) operating activities Net loss for the year ...................................... $ (31,774,136) $ (25,286,885) $ (14,890,961) Add: Items not involving cash - Depreciation ......................................... 3,078,551 1,722,886 1,090,086 Amortization ......................................... 2,211,253 393,979 206,640 Patents and licenses written off ..................... 142,165 451,085 -- Deferred compensation cost related to options granted -- -- 77,469 Non cash financing expense related to warrants granted -- 1,466,691 580,981 Amortization of discount on accounts receivable ...... -- (48,158) -- Foreign exchange ..................................... (163,252) 26,789 28,453 In-process research and development acquired ......... -- -- 420,043 Increase (decrease) from changes in - Trade receivables .................................... 2,436,001 (1,804,006) (2,327,121) Other receivables .................................... (267,177) 719,519 (850,270) Prepaids and deposits ................................ (19,863) (209,338) 28,913 Inventory ............................................ 219,221 1,290,997 (3,149,740) Other long term assets ............................... (369,187) (292,404) -- Accounts payable ..................................... 789,233 (734,230) 2,490,594 Accrued liabilities .................................. 1,783,467 1,956,660 1,159,952 ------------- ------------- ------------- (21,933,724) (20,346,415) (15,134,961) ------------- ------------- ------------- Investing activities Purchase of fixed assets ................................... (9,269,045) (1,919,092) (3,348,261) Licenses and patents acquired .............................. (12,413,163) (698,261) (877,796) Purchase of short-term investments ......................... (356,812,514) (50,503,643) (13,705,737) Redemption of short-term investments ....................... 334,784,805 15,716,919 14,616,777 Acquisition of ACT Gene S.A ................................ -- -- (536,929) ------------- ------------- ------------- (43,709,917) (37,404,077) (3,851,946) ------------- ------------- ------------- Financing activities Preferred stock issued, net of expenses .................... -- 22,719,748 -- Warrants issued in connection with preferred stock ......... -- 6,397,448 -- Common shares issued, net of expenses ...................... 81,109,816 29,009,385 14,640,188 Warrants issued in connection with private placement ....... -- -- 444,572 Issuance of notes payable .................................. -- -- 6,817,559 Warrants issued in connection with notes payable ........... -- -- 1,182,441 Repayment of notes payable ................................. -- (4,100,000) -- Other equity ............................................... -- 29,851 8,259 Repayment of loan from an officer .......................... -- 323,405 -- ------------- ------------- ------------- 81,109,816 54,379,837 23,093,019 ------------- ------------- ------------- Effect of exchange rate fluctuations on cash balances ............. 217,143 (2,284) 193,133 ------------- ------------- ------------- Increase (decrease) in cash during the year ....................... 15,683,318 (3,372,939) 4,299,245 Cash beginning of year ..................................... 2,792,985 6,165,924 1,866,679 ------------- ------------- ------------- Cash, end of year .......................................... $ 18,476,303 $ 2,792,985 $ 6,165,924 ============= ============= ============= Supplemental information Interest paid .............................................. $ 16,536 $ 786,585 $ 48,073 Income taxes paid .......................................... $ -- $ -- $ --
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. F-6 VISIBLE GENETICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - NATURE OF OPERATIONS Visible Genetics Inc. (the "Company") develops, manufactures and sells integrated DNA sequencing systems and genotyping kits that analyze genetic information. Such systems and genotyping kits are designed to identify mutations in the DNA of genes associated with certain diseases. The Company's products are intended for research and clinical diagnostic purposes. Prior to marketing any products for use in the clinical diagnostic market, the Company will require appropriate regulatory approval. In September 2000, the Company filed an application with the United States Food and Drug Administration ("FDA") to market our TRUGENE(TM) HIV-I genotyping kit and OpenGene(TM) system. Such application is currently under review by the FDA. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES These financial statements have been prepared in United States dollars, in accordance with the accounting principles generally accepted in the United States. The principal accounting policies of the Company, which have been consistently applied, are summarized as follows: PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements of the Company include the following wholly owned subsidiaries: Visible Genetics Corp., Visible Genetics B.V., Applied Sciences, Inc., Gene Foundry Inc., Visible Genetics Europe S.A., Visible Genetics Israel Ltd, Visible Genetics Iberia SL, Visible Genetics UK Ltd. and Visible Genetics Srl. All intercompany accounts and transactions have been eliminated upon consolidation. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. REVENUE RECOGNITION AND WARRANTY Revenue from the sale of the Company's products is 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 reasonable assurance of collectibility. There are no significant customer acceptance requirements or post shipment obligations on the part of the Company. Revenue from the sale of services is recognized when evidence of an arrangement exists, the services are provided, sales price is fixed or determinable and there is reasonable assurance of collectibility. A provision is made for estimated warranty costs at the time of the sale. Revenue from extended warranty contracts is recognized over the life of the contract. Sales of bundled sequencing systems and testing kits are recognized pro rata as the components of the bundle are shipped to customers. F-7 VISIBLE GENETICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS As required under Statement of Financial Accounting Standards (SFAS) No. 95, cash equivalents consist of short-term investments that are highly liquid, are readily convertible to cash and have initial terms to maturity of three months or less. Short-term investments consist of United States treasury bills and corporate debt securities. They are classified as held-to-maturity and are recorded at amortized cost. Contractual maturities of short-term investments at December 31, 2000 and December 31, 1999 range from one to six months. FINANCIAL INSTRUMENTS The carrying values of the Company's financial instruments consisting of cash and cash equivalents, short-term investments, trade and other receivables, accounts payable, and notes payable, approximate their fair values due to their short-term nature. CONCENTRATION OF CREDIT RISK The Company's financial instruments that are exposed to concentration of credit risk consist primarily of cash and cash equivalents, short-term investments and receivables. The Company maintains its accounts for cash and cash equivalents and short-term investments with the United States treasury and a number of large low-credit-risk financial institutions and corporations in Canada and the United States in order to reduce its exposure. In addition, the Company limits its maximum investment to any one counterparty to limit its credit exposure. At December 31, 2000 and December 31, 1999 no customers accounted for greater than 10% of gross trade receivables. INVENTORY Inventory is stated at the lower of cost and estimated realizable value. Cost is determined by the first-in first-out method, and includes material, labor, and an allocation of overhead. FIXED ASSETS Fixed assets are recorded at cost. Depreciation is provided on a straight-line basis over the estimated useful lives of the assets, as follows: Laboratory and computer equipment 2 to 5 years Equipment on loan to customers 2 years Leasehold improvements term of the lease PATENTS AND LICENSES External costs of patents and licenses are recorded at cost and amortized over their estimated useful lives, which are generally up to ten years. If the carrying amount of a patent or license is no longer recoverable, the related unamortized cost is written down to fair value. F-8 VISIBLE GENETICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IMPAIRMENT OF LONG-LIVED ASSETS In accordance with the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", the Company reviews long-lived assets, including fixed assets, patents and licenses, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the asset may not be fully recoverable. Under SFAS No. 121, an impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. Impairment, if any, is measured using discounted cash flows. FOREIGN CURRENCY TRANSLATION Monetary assets and liabilities denominated in foreign currencies are translated into United States dollars at the exchange rate prevailing at the balance sheet date. Other assets, liabilities and operating items are translated at exchange rates prevailing at the respective transaction dates. Resulting translation adjustments are included in the consolidated statement of operations. Assets and liabilities of subsidiaries with functional currencies other than United States dollars are translated at the exchange rate prevailing at the balance sheet date, and the results of their operations are translated at average exchange rates for the year. The resulting translation adjustments are reflected in a separate component of shareholders' equity. Other exchange gains or losses are included in the consolidated statement of operations. INCOME TAXES The Company provides for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes," which prescribes an asset and liability approach that results in the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the consolidated financial statements or tax returns. RESEARCH AND DEVELOPMENT EXPENSES Research and development costs are expensed in the period incurred. The Company is entitled to certain Canadian federal and provincial tax incentives for qualified research and development. They are accounted for as a reduction of the related expenditure for current expenses and a reduction of the related asset for capital assets when it is more likely than not that the credit will be realized. The Company is entitled to Canadian federal investment tax credits at a rate of 20% on eligible current and capital expenditures, claimable against income taxes otherwise payable. ADVERTISING COSTS The Company expenses the cost of advertising as incurred. The Company incurred advertising costs of approximately $811,000, $560,000 and $271,000 for 2000, 1999 and 1998, respectively. STOCK OPTIONS The Company follows SFAS No. 123, "Accounting for Stock-Based Compensation" which permits the use of APB No. 25, "Accounting for Stock Issued to Employees" to account for stock options issued to employees and directors. Under that method, the Company uses the intrinsic value method to measure the cost associated with the granting of stock options to employees and directors. The amount by which the market price of the underlying shares exceeds the exercise price of the options at the date of grant, if any, is accounted for as compensation expense over the periods in which services are rendered. F-9 VISIBLE GENETICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Options issued to consultants are recorded at their fair market value at the date of the grant. This amount is charged to operations over the periods in which services are rendered. EARNINGS (LOSS) PER SHARE The Company follows SFAS No. 128 "Earnings Per Share" to calculate basic and diluted earnings (loss) per share. Basic earnings (loss) per share is calculated using the weighted average number of common shares outstanding during the year. Diluted earnings (loss) per share is calculated using the weighted average number of common and potential common shares outstanding during the year. Potential common shares consist of the incremental common shares issuable upon conversion of outstanding convertible preferred stock (using the if converted method) and shares issuable upon the exercise of stock options and warrants (using the treasury stock method). Potential common shares are excluded from the calculation if their effect is anti-dilutive, as was the case for the years ended December 31, 2000, 1999 and 1998. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES The Company follows SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities and is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company does not hold derivative instruments or participate in hedging activities, therefore SFAS No. 133 does not have a significant impact on its financial position or results of operations. NOTE 3 - COLLABORATIVE AND DISTRIBUTION AGREEMENTS COLLABORATIVE AGREEMENTS The Company has agreements with several parties for the use of certain intellectual property in the manufacture of the Company's products, the most significant of which are as follows: Certain technology used in the manufacture of the DNA sequencing instruments and reagents is licensed from Applera Corporation, Applied Biosytems Group (formerly PE Biosystems) (see Note 7). The Polymerase Chain Reaction (PCR) is used in most of the kits made by the Company and is produced and sold under license from Roche Molecular Systems, Inc. and F. Hoffmann-La Roche, Ltd. The reverse transcriptase enzyme used in the TRUGENE(TM) HIV-1 genotyping kit is Superscript II TM licensed from Invitrogen Corporation (formerly Life Technologies, Inc.). A portion of the method of CLIP(TM) sequencing which is used in most of the kits made by the Company is licensed from Genaissance Pharmaceuticals, Inc. UDG (uracil-DNA-glycosylase) is a method of incorporating deoxyuracil into a PCR product, to control PCR carry-over contamination. At present, none of the Company's products incorporate this technology, however, it is possible that future kits may do so. This method is licensed from Invitrogen Corporation (formerly Life Technologies, Inc.). Under these agreements, the Company is required to make certain up-front payments and certain royalty payments on specified product sales ranging from 0.5% to 25% of covered products. Included in accounts payable is an amount of approximately $642,000 and $461,000, relating to royalties payable, at December 31, 2000 and 1999, respectively. F-10 VISIBLE GENETICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DISTRIBUTION AGREEMENTS Commencing in 1999, the Company entered into various distribution and marketing arrangements with distributors to sell the Company's products to the research and clinical diagnostic markets in selected geographic markets outside North America and certain European countries. These agreements expire at various times from April 2001 to March 2003, and in each case, are subject to renewal. Certain of the agreements may also be terminated by either party upon specified notice periods and may require us to make termination payments under certain circumstances. Certain of the Company's agreements also provide for minimum annual purchases for specified periods. NOTE 4 - OTHER RECEIVABLES
DECEMBER 31 ------------------------- 2000 1999 ---------- ----------- Refundable taxes ................................. $ 753,521 $ 105,007 Other ............................................ 131,474 563,741 ----------- ----------- $ 884,995 $ 668,748 =========== =========== NOTE 5 - INVENTORY DECEMBER 31 ------------------------- 2000 1999 ---------- ----------- Raw materials .................................... $ 988,927 $ 1,346,951 Work in process .................................. 149,078 221,771 Finished goods ................................... 1,130,872 1,031,285 ----------- ----------- $ 2,268,877 $ 2,600,007 =========== =========== NOTE 6 - FIXED ASSETS DECEMBER 31 ------------------------- 2000 1999 ---------- ----------- COST Laboratory and computer equipment ......... $10,638,719 $ 6,310,768 Equipment on loan to customers ............ 1,632,286 214,220 Leasehold improvements .................... 4,673,064 1,264,022 ----------- ----------- 16,944,069 7,789,010 ----------- ----------- ACCUMULATED DEPRECIATION AND AMORTIZATION Laboratory and computer equipment ......... 5,303,454 3,118,913 Equipment on loan to customers ............ 492,592 13,963 Leasehold improvements .................... 855,741 482,799 ----------- ----------- 6,651,787 3,615,675 ----------- ----------- $10,292,282 $ 4,173,335 =========== ===========
F-11 VISIBLE GENETICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7 - PATENTS AND LICENSES In April 2000, the Company entered into a worldwide licensing and collaboration agreement with Applera Corporation, Applied Biosystems Group (formerly PE Biosystems) ("Applera"), whereby the Company gained access to certain patents and intellectual property owned by or licensed to Applera. The agreement enables the Company to utilize certain Applera technology to manufacture and sell DNA sequencing instruments, as well as manufacture and sell sequencing kits to run on DNA sequencing instruments manufactured by the Company, Applera and certain other third parties. In addition, Applera may collaborate with us to provide access to technology to facilitate the Company's development and commercialization of new diagnostic tests using the licensed technology. The intellectual property includes two United States patents licensed to Applera from the California Institute of Technology. These were the patents at issue in a patent infringement lawsuit filed by Applera, in December 1999, against the Company. Such lawsuit has been withdrawn by Applera. In June 2000, the Company paid Applera a $10 million licensing fee and will pay additional licensing fees totaling $15 million over the next three years. The Company is amortizing the cost of the license fee on a straight-line basis over a ten-year period. In 2000, amortization expense related to this agreement was $1,743,054 and is included in "sales, general and administrative" expenses in the statement of operations. The Company also makes royalty payments to Applera based on sales in return for access to the Applera technology and installed customer base. The Company may terminate the agreement upon 60 days written notice to Applera and either party may terminate the agreement under certain other limited circumstances. In March 2000, the Company amended a license agreement with Genaissance Pharmaceuticals, Inc. whereby in exchange for a one-time, up front payment of $2,050,000, the license field was broadened and the royalty paid by the Company to Genaissance on certain sales in the United States was reduced. Such up front payment is being amortized on a straight-line basis over a ten-year period. In 2000, the Company recorded $162,565 in amortization expense related to this agreement and such amount is included in "sales, general and administrative" expenses in the statement of operations. The Company's investment in patents and licenses is as follows:
DECEMBER 31 ------------------------- 2000 1999 ----------- ----------- COST Patents ................................ $ 1,280,479 $ 1,078,173 Licenses ............................... 13,665,283 1,596,591 ----------- ----------- 14,945,762 2,674,764 ----------- ----------- ACCUMULATED AMORTIZATION Patents ................................ 400,391 207,197 Licenses ............................... 2,363,259 345,200 ----------- ----------- 2,763,650 552,397 ----------- ----------- $12,182,112 $ 2,122,367 =========== ===========
F-12 VISIBLE GENETICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The net book value of patents and licenses at December 31, 2000 reflects an impairment loss of $100,045 and $42,120, respectively, recorded during the year. The net book value of patents and licenses at December 31, 1999 reflects an impairment loss of $401,085 and $50,000, respectively, recorded during 1999. These impairment losses were recorded as a result of the Company abandoning certain patents and licensed technologies and such losses are included in "sales, general and administrative" expenses in the statements of operations. NOTE 8 - ACCRUED LIABILITIES
DECEMBER 31 ----------------------- 2000 1999 ---- ---- Warranty provision $ 378,593 $ 387,103 Salaries and benefits 1,849,879 1,149,279 Professional fees 425,995 393,196 Value added taxes 796,705 565,782 Provision for exit costs 309,100 789,849 Grant payable 357,132 -- Inventory and supplies 473,448 57,035 Other 675,012 279,866 ---------- ---------- $5,265,864 $3,622,110 ========== ==========
NOTE 9- MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK (A) AUTHORIZED AND ISSUED Authorized share capital consists of an unlimited number of preferred shares which may be issued in one or more series. On July 15, 1999, the Board of Directors authorized the issuance of 33,950 Series A Mandatorily Redeemable Convertible Preferred Shares (Series A Shares), of which 33,948 were issued during 1999. On July 15, 1999, the Company issued 30,000 Series A Shares and warrants to purchase 1,100,000 common shares to certain affiliated funds managed by E.M. Warburg, Pincus & Co., LLC (Warburg Pincus) for net proceeds of $29,219,854. In addition, on July 15, 1999 in connection with the repayment of certain loans with institutional lenders, the Company issued 3,948 Series A Shares and warrants to purchase 147,098 common shares for net proceeds of $3,845,008. The fair market value of the warrants was estimated at the date of grant using the Black-Scholes option valuation model based upon the following assumptions: dividend yield - nil, risk-free interest rate - 5.61%, average expected volatility - 70%, expected term - 4 years. The value of the net proceeds was allocated between warrants and Series A Shares based on the relative fair value of each instrument. The total amount relating to Warburg Pincus, net of issue costs of $780,146 allocated to warrants and Series A Shares was $6,420,672 and $22,799,182, respectively. The total amount relating to the institutional investors, net of issue costs of $102,992 allocated to warrants and Series A Shares was $858,607 and $2,986,401, respectively. The value of the warrants is treated as a discount to the Series A 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 Series A Shares first becomes mandatory. F-13 VISIBLE GENETICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (B) RIGHTS and conditions of Series A shareholders CONVERSION The Series A Shares are convertible at any time, at the option of the holders, into common shares of the Company at a conversion price of $11.00, subject to certain adjustments. Upon conversion, the holders will also receive common shares at a conversion price of $11.00 per share, equal to the amount of all accrued and unpaid dividends. On September 14, 2000, the Warburg Pincus funds converted a total of 7,795 Series A Shares, plus a total of $701,550 of dividends that accrued on those shares, into 772,411 of the Company's common shares. Upon conversion of the 7,795 Series A Shares, $6,814,550, attributable to such Series A Shares was transferred to share capital on the balance sheet. As of December 31, 2000, a total of 26,153 Series A Shares remain outstanding and such shares, including dividends accrued on such shares through December 31, 2000, are convertible into 2,698,425 shares of the Company's common stock. The Series A Shares contain provisions under which the conversion price would be reduced on a weighted average basis if the Company issues shares, options or certain other securities at prices lower than the conversion price (subject to certain exceptions), and will also be adjusted upon the issuance of certain other securities, certain recapitalization events and in certain other circumstances to protect the holders against the dilutive effect of those events. The conversion right will terminate on any redemption of the Series A Shares or any liquidation of the Company. Each Series A Share will automatically convert into common shares at its then effective conversion price, if at least a majority of the Series A Shares are either voted to be converted or have already been converted into common shares. DIVIDENDS Dividends on the Series A Shares accrue quarterly at the rate of 9% per year during the first three years after issuance, and 4% per year thereafter and are compounded annually. Dividends are not payable for the first three years. After three years, at the Company's option, dividends are payable in cash. If dividends are not paid in cash, they will continue to accrue. The Company is prohibited from declaring or issuing any dividends to holders of common shares before paying all unpaid dividends on Series A Shares. The Company is also prohibited from issuing any equity securities that are senior or equal in rank to the Series A Shares without approval of the holders of a majority of such shares. If the Company were to be liquidated or sold or under certain other circumstances, holders of Series A Shares would be entitled to receive an amount equal to $1,000 per share, plus accrued dividends, before holders of common shares would be entitled to any distributions. REDEMPTION After the third anniversary and prior to the seventh anniversary of the date of issuance of the Series A Shares, the Company has the right to redeem the outstanding Series A Shares at the redemption price, equal to $1,000 per share, plus accrued but unpaid dividends, subject to certain conditions. The Company will be required to redeem one-third of any remaining outstanding Series A Shares on each of the seventh, eighth and ninth anniversaries of the date of issuance at the redemption price. If the Company fails to redeem the shares as required, holders may appoint a majority of our Board of Directors, who will continue to serve until the Company has redeemed the Series A Shares as required. F-14 VISIBLE GENETICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS VOTING The holders of the Series A Shares are entitled to vote as a group with the holders of common shares on all matters, except that holders of the Series A Shares are entitled to vote separately for one director and are not entitled to participate in the vote for any other directors of the Company. On all other matters, each holder of Series A Shares is entitled to the number of votes equal to the number of common shares the holder is entitled to receive upon conversion of the preferred shares. OTHER Certain holders of Series A Shares are also entitled to certain other rights, including the right to participate, on a pro rata basis, in future Company financings, subject to certain exceptions. The right of certain holders of Series A Shares to participate in future offerings in this manner provides those shareholders with the opportunity to avoid having their ownership interest in the Company diluted under certain circumstances when the interest of common shareholders would be diluted. The Company is also prohibited from incurring indebtedness for borrowed money and capital lease obligations in excess of $15,000,000 outstanding at any one time, without first obtaining approval of the holders of a majority of the then outstanding Series A Shares. NOTE 10 - SHARE CAPITAL (A) AUTHORIZED AND ISSUED SHARE CAPITAL Authorized share capital consists of an unlimited number of common shares, without par value. F-15 VISIBLE GENETICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NUMBER OF AVERAGE COMMON SHARES ISSUE PRICE AMOUNT ------------- ----------- ------ BALANCE, DECEMBER 31, 1997 ...................... 7,248,696 $ 31,281,622 ============ ============ Issued for cash under stock option arrangements .............................. 385,548 $ 2.39 921,395 Issued for acquisition of ACT Gene S.A ...... 85,000 $ 5.78 490,875 Issued for private placement offering, net of issue costs (I) ........................... 1,528,989 $ 9.88 13,718,793 ------------ ------------ BALANCE, DECEMBER 31, 1998 ...................... 9,248,233 46,412,685 ============ ============ Issued for cash under stock option arrangements .............................. 384,217 $ 4.68 1,798,266 Issued upon exercise of warrants ............ 73,665 $ 7.40 545,337 Issued for private placement offering, net of issue costs ............................... 1,916,000 $ 13.92 26,665,782 ------------ ------------ BALANCE, DECEMBER 31, 1999 ...................... 11,622,115 75,422,070 ============ ============ Issued for cash under stock option arrangements .............................. 905,307 $ 7.34 6,646,945 Issued upon exercise of warrants ............ 854,786 $ 7.37 6,299,348 Issued upon conversion of Series A preferred shares .......................... 772,411 $ 8.82 6,814,550 Issued for secondary public offering, net of issue costs ........................ 2,090,000 $ 35.66 74,534,466 ------------ ------------ BALANCE, DECEMBER 31, 2000 ...................... 16,244,619 $169,717,379 ============ ============
(I) The value of the warrants issued in 1998 in connection with the private placement (Note 10(e)) in the amount of $444,572 has been recorded as a reduction of the proceeds of issue and an increase to warrants included in Other equity (Note 10(b)). The fair market value of the warrants is estimated at the date of grant using the Black-Scholes option valuation model based upon the following assumptions: dividend yield - nil, risk-free interest rate - 4.0%, average expected volatility - 65%, expected term - 2.5 years On April 5, 2000 the Company completed an underwritten public offering of 2,000,000 common shares at $38.00 per common share, before underwriter's discount, and on May 3, 2000, pursuant to the terms of the underwriting agreement, the Company sold an additional 90,000 common shares, also at a price of $38.00 per common share, to cover the underwriter's over-allotment. F-16 VISIBLE GENETICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (B) OTHER EQUITY
2000 1999 1998 ---- ---- ---- Options .............................................. $ 922,714 $ 922,714 922,714 Warrants ............................................. 3,796,098 9,782,470 1,610,791 Contributed surplus .................................. 61,250 61,250 61,250 Cumulative preferred dividends attributable to Series A preferred shares ......................... (4,231,179) (1,400,344) -- Cumulative accretion of discount attributable to Series A preferred shares ......................... (1,195,246) (369,728) -- Loan to an officer to purchase shares ................ -- -- (323,405) Employee share purchase loans -- (9,034) (38,885) ----------- ----------- ----------- $ (646,363) $ 8,987,328 2,232,465 =========== =========== ===========
Employee share purchase loans are non-recourse and secured only by the shares themselves. The loan to an officer was made in July 1996 to purchase shares of the Company. The loan was interest free and was originally repayable in 2006. In November 1999, the loan was repaid. (C) DEFERRED COMPENSATION COSTS
2000 1999 1998 ---- ---- ---- BALANCE, BEGINNING OF YEAR ....... $ -- $ -- $(77,469) Charged to expense during the year -- -- 77,469 -------- -------- -------- BALANCE, END OF YEAR ............. $ -- $ -- $ -- ======== ======== ========
(D) OPTIONS The Company has incentive plans under which options to purchase common shares may be granted to its employees, consultants or directors at the discretion of the Board of Directors. In addition to the options outstanding, at December 31, 2000 an additional 700,746 options can be granted under the various option plans. Under the plans, each option is for the purchase of one common share, expires up to ten years from the date of issue, and is generally earned over a three to four year period. There are no repurchase features. Certain options issued to employees may be cancelled if employment is terminated within three to four years. The number of options that may be cancelled is reduced in stages over that period. Options issued to employees after May, 1996 must be exercised within 90 days of the termination of employment. F-17 VISIBLE GENETICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
WEIGHTED AVERAGE NUMBER EXERCISE PRICE ------ -------------- BALANCE, DECEMBER 31, 1997 ........................... 1,551,470 $ 4.32 ========== ========= Granted at $7.70 to $10.98 ...................... 580,364 $ 8.26 Exercised ....................................... (387,881) $ 2.41 Cancelled ....................................... (45,902) $ 4.01 ---------- --------- BALANCE, DECEMBER 31, 1998 ........................... 1,698,051 $ 6.11 ========== ========= Granted at $3.50 to $19.08 ...................... 1,001,545 $ 11.69 Exercised ....................................... (383,749) $ 4.82 Cancelled ....................................... (170,294) $ 7.51 ---------- --------- BALANCE, DECEMBER 31, 1999 ........................... 2,145,553 $ 8.82 ========== ========= Granted at $3.00 to $53.00 ..................... 609,054 $ 31.67 Exercised ...................................... (904,441) $ 7.50 Cancelled ...................................... (86,770) $ 5.17 ---------- --------- BALANCE, DECEMBER 31, 2000 ........................... 1,763,396 $ 17.57 ========== =========
The fair market value of options granted to directors and employees in 2000 was approximately $13,058,000 (1999 - $6,689,000; 1998 - $2,397,000). If directors and employee options granted had been recorded at their fair market value, the pro forma net loss attributable to common shareholders in 2000 would have been $(41,723,000) or $(2.86) per share (1999 - $(30,533,000) or $(3.08) per share; 1998 - $(16,753,000) or $(2.15) per share). The fair market value of each option is estimated at the date of grant using the Black-Scholes option valuation model based upon the following assumptions: dividend yield - nil, risk-free interest rate (for four-year zero coupon bond) - 5.5% (1998 - 5.0%), average expected volatility - 85% (1999 - 70% and 1998 - 65%), expected average option term - 4.5 years. The weighted average fair value for options granted in 2000 was $21.44 (1999 - $6.68; 1998 - $4.13). The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock option plans have characteristics significantly different from those of traded options, and because change in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. F-18 VISIBLE GENETICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NUMBER WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE OUTSTANDING AT EXERCISE PRICE EXERCISABLE AT EXERCISE PRICE OF RANGE OF DECEMBER 31, OF OUTSTANDING WEIGHTED AVERAGE DECEMBER 31, EXERCISABLE EXERCISE PRICES 2000 OPTIONS REMAINING LIFE 2000 OPTIONS - - --------------- -------------- --------------- ---------------- -------------- ----------------- $0.92 - $2.30 88,307 $1.62 4.28 years 88,307 $1.62 $3.50 153,508 $3.50 5.40 years 153,508 $3.50 $4.45-$6.07 1,200 $6.07 6.64 years 1,003 $6.07 $7.12-$7.84 72,274 $7.72 6.94 years 65,965 $7.72 $7.87-$9.35 224,567 $8.89 7.68 years 145,244 $8.89 $10.00-$11.50 405,523 $10.83 7.99 years 51,094 $10.82 $11.76-$16.45 193,280 $14.76 7.17 years 38,653 $14.76 $17.00-$19.08 127,658 $18.03 8.45 years 76,880 $18.03 $21.75-$29.94 81,000 $26.62 9.52 years 9,216 $22.80 $30.00-$39.13 279,579 $31.64 9.46 years 53,001 $31.35 $41.00-$44.88 57,250 $43.39 9.58 years 648 $42.99 $45.88-$53.00 79,250 $48.35 9.16 years 9,878 $48.60 --------- ------- 1,763,396 693,397 ========= ======= (E) WARRANTS EXERCISE NUMBER PRICE EXPIRY DATE ------ ----- ----------- BALANCE, DECEMBER 31, 1997........................ 79,803 ========== Granted in connection with loans ........... 540,000 $10.00 April, 2003 - September, 2003 Granted in connection with private placement (Note 10(a)) 121,951 $12.81 November, 2003 ---------- BALANCE, DECEMBER 31, 1998........................ 741,754 ========== Granted in connection with loans ............ 140,000 $17.00 April, 2006 Granted in connection with preferred shares (Note 9) 1,247,098 $12.60 July, 2003 Exercised.................................... (76,734) $6.90 ---------- BALANCE, DECEMBER 31, 1999........................ 2,052,118 ========== Granted in connection with real estate lease. 10,000 $31.88 January , 2010 Exercised.................................... (1,113,069) $12.47 ---------- BALANCE, DECEMBER 31, 2000........................ 949,049 ==========
F-19 VISIBLE GENETICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On February 17, 2000, warrants to purchase 1,100,000 common shares were exercised at a price of $12.60 per common share. Under terms of the warrant agreement, the warrant holders elected to pay the exercise price for the warrants through a non-cash exercise. As a result the warrant holders received 847,749 common shares rather than 1,100,000 common shares they would otherwise have received upon exercise in cash of all of their warrants. NOTE 11 - ACQUISITIONS Effective April, 1998, the Company acquired 100% of the shares of ACT Gene S.A., a DNA diagnostic testing company, for 85,000 common shares of the Company, and cash payable of $650,000. The acquisition was accounted for as a purchase, and resulted in the recording of an excess of purchase price over tangible net assets of $488,000, of which $420,043 was recorded as in-process research and development, and reflected as an expense in 1998. The nature of the acquired research and development relates to the cost and time pertaining to the development of a test kit and research clinical samples necessary for the development of several kits designed for use with DNA sequencing systems. As of April, 1998 the kit was approximately 80% completed and was expected to be completed during 1999. As a result of development delays the kit was not completed until 2000. The projected incremental cash flows of these projects were discounted using discount rates ranging from 60% to 70%. The primary risk factor affecting the commercialization of each of these products is the receipt of FDA and foreign regulatory agency approvals for use in the clinical diagnostic market. NOTE 12 - EXIT AND TERMINATION COSTS EXIT COSTS During 1999, the Company approved a plan to move the sales, marketing and various other functions from Canada to a United States facility in Atlanta and in 2000 these functions were moved to the United States facility. Such facility also houses Applied Sciences, Inc. (a wholly owned subsidiary of the Company) and construction of kit manufacturing production lines is currently underway in this same facility. As a result of the decision to centralize United States operations in Atlanta, certain premises leased by the Company were vacated. In December 1999, the Company commenced efforts to sublease the premises to be vacated. Accordingly, the Company recorded a charge of approximately $790,000 in the statement of operations in 1999, which is included in accrued liabilities at December 31, 1999. This amount represents the remaining future lease commitments, net of estimated sub-lease income, the unamortized balance of leasehold improvements, and other estimated costs of sub-leasing the vacated facilities. All of the vacated facilities were sub-leased during 2000. TERMINATION COSTS During 1999, two senior officers of the Company received special termination benefits in connection with their departure from the Company. The termination benefits included lump-sum payments and periodic future payments, as specified in the related termination agreements, offered by the Company and accepted by the officers. The present value of the obligations for special termination benefits approximated $539,000, which was included in the statement of operations in 1999. As of December 31, 2000, approximately $434,000 (1999- $162,000) of these costs were paid and the balance is included in accrued salaries and benefits. F-20 VISIBLE GENETICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 13 - INCOME TAXES The Company's income tax provision has been determined as follows:
YEARS ENDED DECEMBER 31 -------------------------------------------- 2000 1999 1998 ---- ---- ---- Net loss for the period comprised of: Domestic ............................................ $(10,170,354) $ (8,081,807) $ (6,195,350) Foreign ............................................. (21,603,782) (17,205,078) (8,695,611) ------------ ------------ ------------ $(31,774,136) $(25,286,885) $(14,890,961) ============ ============ ============ Income taxes at 44.0% (44.6% in 1999 & 1998) .......... $(13,964,733) $(11,283,008) $ (6,641,369) Decrease resulting from permanent non- tax deductible expense ............................ 1,486,785 736,478 52,182 Decrease resulting from foreign rate differences ....................................... 649,188 835,867 114,856 Net operating loss and temporary differences for which no benefit has been recognized ............................... 11,828,760 9,710,663 6,474,331 ------------ ------------ ------------ $ -- $ -- $ -- ============ ============ ============
As at December 31, 2000, the Company has available losses in various countries that may be used to reduce taxable income in future years, and expire as follows:
OTHER CANADA(1) UNITED STATES NETHERLANDS JURISDICTIONS --------- ------------- ----------- ------------- 2001 $ 463,000 $ -- $ -- $ -- 2002 1,425,000 -- -- -- 2003 2,739,000 -- -- -- 2004 6,008,000 -- -- 95,000 2005 3,679,000 -- -- 469,000 2006 2,991,000 -- -- -- 2007 621,000 -- -- -- 2010 -- -- -- 163,000 2012 -- 1,238,000 -- -- 2018 -- 3,962,000 -- -- 2019 -- 6,514,000 -- -- 2020 -- 11,946,000 -- -- Subsequent to 2020 -- -- 7,213,000 642,000 ----------- ----------- ---------- ---------- TOTAL $17,926,000 $23,660,000 $7,213,000 $1,369,000 =========== =========== ========== ==========
- - ---------- (1) IN ADDITION TO THE CANADIAN LOSSES ABOVE, THE COMPANY HAS CERTAIN SCIENTIFIC RESEARCH AND DEVELOPMENT EXPENDITURES ELIGIBLE FOR TAX PURPOSES INCURRED BY THE COMPANY THAT MAY ALSO BE DEFERRED AND DEDUCTED IN FUTURE YEARS. THESE UNCLAIMED DEDUCTIONS, WHICH CAN BE CARRIED FORWARD INDEFINITELY, AMOUNTED TO APPROXIMATELY $16,210,000 AT DECEMBER 31, 2000. IN ADDITION, THE COMPANY HAS EARNED NON-REFUNDABLE INVESTMENT TAX CREDITS AMOUNTING TO APPROXIMATELY $2,996,000 THAT CAN BE USED TO REDUCE FUTURE FEDERAL INCOME TAXES PAYABLE. THESE EXPIRE AS FOLLOWS: 2006 $484,000 2007 407,000 2008 485,000 2009 802,000 2010 818,000 ---------- $2,996,000 ==========
F-21 VISIBLE GENETICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The benefit of these losses, unclaimed deductions and non-refundable investment tax credits has not been reflected in these financial statements. The deferred tax balances are summarized as follows:
2000 1999 ---- ---- DEFERRED TAX ASSETS Research expenses ................ $ 6,989,800 $ 5,776,300 Non-capital losses ............... 20,903,500 15,555,300 Investment tax credits ........... 1,704,300 1,597,600 Fixed assets ..................... 2,414,800 1,048,100 Share issue costs ................ 2,662,900 1,221,400 Warranty and other provisions .... 537,300 810,000 ------------ ------------ 35,212,600 26,008,700 Valuation allowance .............. (35,212,600) (26,008,700) ------------ ------------ Net deferred tax asset (liability) $ -- $ -- ============ ============
The valuation allowance increased by $9,203,900 during 2000 (1999 - $10,802,900). Realization of the future tax benefits related to the deferred tax assets is dependent upon many factors, including the Company's ability to generate taxable income within the loss carryforward periods. NOTE 14 - SEGMENTED INFORMATION The Company follows SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." with disclosure based upon the internal organization used by management for making operating decisions and assessing performance. SFAS No. 131 also requires disclosures as to products and services, geographic areas and major customers. The Company's reportable segments are Sequencing Systems, GeneKits and other Consumables, and Testing services. The accounting policies of the segments are the same as those described above in Note 2, "Summary of significant accounting policies." F-22 VISIBLE GENETICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2000
SEQUENCING GENEKITS AND OTHER TESTING RECONCILING SYSTEMS CONSUMABLES SERVICES ITEMS TOTAL ------- ----------- -------- ----- ----- Revenues $ 4,522,661 $ 8,137,122 $ 412,780 $ -- $ 13,072,563 Depreciation and amortization (1,512,839) (3,507,732) (411,398) -- (5,431,969) Profit (loss) from operations before interest (12,023,931) (24,089,606) (124,652) -- (36,238,189) Additions to fixed assets 2,079,845 5,543,748 1,645,452 -- 9,269,045 Total assets 3,308,159 24,482,409 2,166,347 80,398,990(1) 110,355,905 Reconciling items consist of: 1 Cash, cash equivalents and short-term investments 1999 SEQUENCING GENEKITS AND OTHER TESTING RECONCILING SYSTEMS CONSUMABLES SERVICES ITEMS TOTAL ------- ----------- -------- ----- ----- Revenues $ 7,725,910 $ 4,729,865 $ 1,171,145 $ -- $ 13,626,920 Depreciation and amortization (1,184,981) (999,571) (383,398) -- (2,567,950) Profit (loss) from operations before interest (13,889,277) (10,099,584) 4,939 -- (23,983,922) Additions to fixed assets 697,030 849,144 372,918 -- 1,919,092 Total assets 7,466,062 6,724,730 1,760,794 42,687,9632 58,639,549 Reconciling items consist of: (2)Cash, cash equivalents and short-term investments 1998 SEQUENCING GENEKITS AND OTHER TESTING RECONCILING SYSTEMS CONSUMABLES SERVICES ITEMS TOTAL ------- ----------- -------- ----- ----- Revenues $ 8,042,421 $ 1,379,512 $ 1,453,415 $ -- $ 10,875,348 Depreciation and amortization (396,837) (666,061) (233,828) -- (1,296,726) Profit (loss) from operations before interest (10,879,023) (3,023,804) 299,805 (420,043)3 (14,023,065) Additions to fixed assets 1,199,316 1,137,904 1,011,041 -- 3,348,261 Total assets 8,859,003 5,281,294 2,368,060 11,274,178 4 27,782,535 Reconciling items consist of: (3)Acquired research and development (Note 11) (4) Cash, cash equivalents and short-term investments
F-23 VISIBLE GENETICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GEOGRAPHIC INFORMATION - YEARS ENDED DECEMBER 31 REVENUES, BY CUSTOMER LOCATION 2000 1999 1998 ---- ---- ---- Canada $ 822,568 $ 468,535 $ 844,863 United States 5,798,864 4,686,868 3,513,150 ----------- ----------- ----------- North America 6,621,432 5,155,403 4,358,013 ----------- ----------- ----------- France 760,742 1,252,222 1,616,788 Other Europe 4,210,259 4,298,745 2,949,288 ----------- ----------- ----------- Europe 4,971,001 5,550,967 4,566,076 ----------- ----------- ----------- Japan 927,644 1,609,799 1,640,123 Other Asia and Latin America 552,486 1,310,751 311,136 ----------- ----------- ----------- Asia and Latin America 1,480,130 2,920,550 1,951,259 ----------- ----------- ----------- $13,072,563 $13,626,920 $10,875,348 =========== =========== =========== GEOGRAPHIC INFORMATION -DECEMBER 31 FIXED ASSETS 2000 1999 1998 ----------- ----------- ----------- Canada $ 2,614,017 $ 2,530,222 $ 2,346,394 United States 6,486,653 955,161 1,083,788 Europe 1,191,612 687,952 446,981 ----------- ----------- ----------- $10,292,282 $ 4,173,335 $ 3,877,163 =========== =========== ===========
In 2000, one customer accounted for 11% of sales, of which 10% comprised Sequencing Systems and 1% comprised GeneKits and Other Consumables. (1999 - one customer accounted for 21% of sales, of which 19% comprised Sequencing Systems and 2% comprised GeneKits and Other Consumables; 1998 - one customer accounted for 30% of sales, of which 29% comprised Sequencing Systems and 1% comprised GeneKits and Other Consumables). F-24 VISIBLE GENETICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 15 - COMMITMENTS AND CONTINGENCIES COMMITMENTS The Company is committed to make payments under a license agreement of $5,000,000 per year in each of the years 2001, 2002 and 2003. The Company has collaborative arrangements with certain third parties that provide for royalty payments (see Note 3). The Company has entered into operating leases for premises and equipment as follows: 2001 $ 1,392,336 2002 1,225,965 2003 1,064,529 2004 956,741 2005 and thereafter 3,556,030 ------------ $ 8,195,601 ============ Rent expense was $1,768,346 in 2000 (1999 - $851,876; 1998 - $554,497). CONTINGENCIES During 2000 the Company sub-leased certain facilities that it had vacated (see Note 12). In the event of default by the subleasees the Company remains contingently liable for remaining future lease commitments of approximately $1,079,000 related to these sub-leases. The Company is subject to claims in the normal course of business. Based on a current assessment of such claims, management believes that as of December 31, 2000, there are no unasserted, asserted or pending material claims against the Company. NOTE 16- RELATED PARTY TRANSACTIONS During 2000, the Company incurred legal fees to a law firm, in which a partner was a former director of the Company, of $10,939 (1999 - $246,210; 1998 - - - $164,624). During 2000, the Company incurred consulting fees to a firm, of which the president was a director of the Company, of $64,487 (1999 - $291,115; 1998 - $280,000). During 2000, the Company also incurred consulting fees to a former director of the Company, of $28,250 (1999 - $58,269; 1998 - nil). NOTE 17 - COMPARATIVE FIGURES Certain comparative figures have been reclassified to conform to the financial statement presentation adopted in the current year. F-25 EXHIBIT INDEX
EXHIBITS NUMBER DESCRIPTION OF DOCUMENT PAGE ------ ----------------------- ---- 8 See Item 4. Information on the Company-Organizational Structure 10.23 Licensing and Collaboration Agreement, dated April 25, 2000, by and between Visible Genetics and Applera Corporation, Applied Biosytems Group (formerly PE Biosystems). (THIS AGREEMENT IS FILED IN REDACTED FORM AS IT IS SUBJECT TO A REQUEST FOR CONFIDENTIALITY SUBMITTED TO THE SEC.) 10.24 Lease, dated March 27, 2000, by and between Visible Genetics Inc., as Tenant and LuCliff Company Limited, as Landlord. 10.25 Lease, dated November 30, 2000, by and between Visible Genetics Inc., as Tenant and LuCliff Company Limited, as Landlord. 10.26 Lease, dated October 1, 2000, by and between Visible Genetics Inc., as Tenant and LuCliff Company Limited, as Landlord. 10.27 Employment Agreement, dated July 7, 1999, by and among Visible Genetics Corporation, Visible Genetics Inc. and Richard Daly.
A-1 EX-10.23 2 a2041520zex-10_23.txt EXHIBIT 10.23 EXHIBIT 10.23 REDACTED SEQUENCE ANALYSIS LICENSE AGREEMENT THIS SEQUENCE ANALYSIS LICENSE AGREEMENT (this "AGREEMENT") is effective the _____ day of April, 2000, between PE Corporation ("PE"), a corporation organized under the laws of the state of Delaware, through its PE Biosystems Stock Group ("ABD"), and Visible Genetics Inc. ("VGI"), a corporation organized under the laws of the Province of Ontario, Canada (PE or ABD and VGI, each a "PARTY", collectively the "PARTIES"). WITNESSETH: A. WHEREAS, the California Institute of Technology ("CALTECH"), a California institution owns the CALTECH Instrument Patent Rights (defined below), and ABD has the exclusive right to license such rights; and B. WHEREAS, CALTECH owns the ABI Process Patent Rights (defined below), and ABD has the exclusive right to license such rights; and C. WHEREAS, ABD has a license to the DUPONT Patents (defined below) owned by E. I. Du Pont De Nemours and Company ("DUPONT"), and the right to grant sublicenses to others under such patents; and D. WHEREAS, VGI wishes to acquire from ABD, and ABD is willing to grant to VGI, a license to the ABI Process Patent Rights, the CALTECH Instrument Patent Rights, and DUPONT Patents under the terms and conditions set forth herein. NOW, THEREFORE, based on the foregoing premises and in consideration of the mutual promises set forth below, and other good and valuable consideration, the receipt of which is hereby acknowledged, the Parties agree as follows: 1/49 EXHIBIT 10.23 REDACTED AGREEMENT: 1. DEFINITIONS 1.1 "ABI PROCESS PATENT RIGHTS" means the claims of U.S. Patent No. 5,821,058, and such other patent claims of patents which issue from any of the patent applications in the chain of the continuation of Patent Application Serial No. 570,973, as well as any continuations, continuations-in-part, divisionals, reissues, revivals or reexaminations of such patents, together with all foreign counterparts thereof, excluding any instrument claims or any instrument system claims therein. 1.2 "AFFILIATE" means a business entity controlled by, controlling or under common control with a Party to this Agreement. For purposes of this SECTION 1.2, the word and root "control" means, in the case of a corporation, either: (a) the direct or beneficial ownership of at least fifty percent (50%) of the shares of stock entitled to vote for Directors to the Board of Directors of such corporation; or, (b) where the laws of a particular jurisdiction limit the percentage ownership of domestic corporations by foreign corporations to less than fifty percent (50%) of the shares of stock entitled to vote for Directors to the Board of Directors, the maximum percentage ownership permitted by such jurisdiction. For purposes of this SECTION 1.2 the word and root "control" means, in the case of a non-corporate entity, either: (a) the right to receive at least fifty percent (50%) of the net proceeds of such entity; or, (b) where the laws of a particular jurisdiction limit the percentage ownership of domestic non-corporate entities by foreign corporations to less than fifty percent (50%), the right to receive the maximum percentage of the net proceeds of such entity permitted by such jurisdiction. An entity shall only have the rights and 2/49 EXHIBIT 10.23 REDACTED responsibilities set forth herein as an Affiliate, including without limitation licenses granted by ABD, for so long as the criteria set forth in this SECTION 1.2 are satisfied with respect to such entity. 1.3 "CALTECH INSTRUMENT PATENT RIGHTS" means the instrument claims and instrument system claims of U.S. Patent No. 5,171,534, and such other instrument claims and instrument system claims of patents which issue from one of the patent applications in the chain of the continuation of Patent Application Serial No. 570,973, as well as any continuations, continuations-in-part, divisionals, reissues, revivals or reexaminations of such patents, together with all foreign counterparts thereof. 1.4 "CALTECH LICENSED INSTRUMENT" means an electrophoresis instrument, the manufacture, use or sale of which would infringe a Valid Claim of the CALTECH Licensed Patents. 1.5 "CALTECH LICENSED PATENTS" means the CALTECH Instrument Patent Rights and the ABI Process Patent Rights. 1.6 "CALTECH LICENSED PRODUCT" means a CALTECH Licensed Instrument and/or a CALTECH Licensed Reagent Product. 1.7 "CALTECH LICENSED REAGENT PRODUCT" means a reagent kit, reagent system, or other reagent combination the manufacture, use or sale of which would infringe a Valid Claim of the ABI Process Patent Rights and which kit, system or combination when sold or distributed hereunder includes, at a minimum, the following components sold as a unit: an enzyme for nucleic acid chain extension, dNTP's, a buffer, a product insert describing the method of use of said CALTECH Licensed Reagent Product in a CALTECH Licensed Instrument. 3/49 EXHIBIT 10.23 REDACTED 1.8 "CHANGE OF CONTROL" means that more than fifty percent (50%) of the voting stock of a Party becomes subject to the ownership or control of a person or entity which person(s) or entity(ies) did not own or control such portion of voting stock on the Effective Date. 1.9 "CONFIDENTIAL INFORMATION" means records or information in the possession or under the control of a Party relating to its technical, marketing, product and /or business affairs or proprietary and trade secret information of that Party. Confidential Information shall not include information (a) rightfully in the possession of the receiving Party prior to disclosure by the disclosing Party, (b) is or becomes a matter of public knowledge through no fault or action by the receiving Party; or (c) subsequent to disclosure, is rightfully obtained by the receiving Party from a third party who is lawfully in possession of such Confidential Information and who has not violated any restrictions with respect thereto, or (d) is independently developed by the receiving Party without resort to the Confidential Information provided by the disclosing Party. 1.10 "DUAL LICENSED INSTRUMENT" means an instrument licensed under both the CALTECH Licensed Patents and the DUPONT Licensed Patents. 1.11 "DUPONT COMPOUND PATENT RIGHTS" means those claims of the DUPONT Licensed Patents that claim any kit, composition of matter or the process(es) of making the same including, without limitation, U.S. Patents 5,151,507; 5,047,519; and 5,242,796. 1.12 "DUPONT LICENSED INSTRUMENT" means an electrophoresis instrument the use or sale of which in the performance of detection and analysis of DNA sequence fragments would infringe a Valid Claim of the DUPONT Terminator Process Patent Rights. 1.13 "DUPONT LICENSED PATENTS" means U.S. Patent Application Serial No. 881,372, filed July 2,1986, and any continuation, continuation-in-part or divisional thereof, and any patent issued from any of the foregoing and any extension, reissue, reexamination or revival of any of 4/49 EXHIBIT 10.23 REDACTED the patents that may have issued or may issue thereon as well as any foreign counterparts of any of the foregoing, including without limitation U. S. Patents 5,151,507; 5,047,519; 5,242,796; and 5,332,666. 1.14 "DUPONT LICENSED PRODUCTS" means DUPONT Licensed Instruments and/or DUPONT Licensed Reagent Products. 1.15 "DUPONT LICENSED REAGENT PRODUCT" means a reagent kit, reagent system, or other reagent combination, the manufacture, use or sale of which for DNA sequence analysis would infringe a Valid Claim of the DUPONT Terminator Process Patent Rights or the DUPONT Compound Patent Rights and which kit, system or combination when sold or distributed hereunder includes at a minimum, the following components sold as a unit: a chain terminator covered by the DUPONT Compound Patent Rights, an enzyme for nucleic acid chain extension, dNTP's, a buffer, a product insert describing the method of use of said DUPONT Licensed Reagent Product. 1.16 "DUPONT PATENTS" means patents and patent applications owned by DUPONT relating (1) to certain chemical compounds and methods of making same, said compounds including chain terminating substrates for DNA sequence analysis, linkers, and dyes; (2) to the process of DNA sequence analysis by the chain termination method; and (3) to certain systems and methods for detecting radiant energy. 1.17 "DUPONT TERMINATOR PROCESS PATENT RIGHTS" means those claims of the DUPONT Licensed Patents that claim the process(es) of using kits or compositions of matter under the DUPONT Compound Patent Rights in the DNA sequencing process, including without limitation, U.S. Patent 5,332,666. 1.18 "EFFECTIVE DATE" shall mean the last signatory date of a Party to this Agreement. 5/49 EXHIBIT 10.23 REDACTED 1.19 "END USER PURCHASER" shall mean a third party purchaser that purchases in an arms-length transaction and that is not (a) an Affiliate of VGI, or (b) a distributor of VGI or an Affiliate; and that purchases a CALTECH Licensed Product and/or DUPONT Licensed Product and uses that product, and as to whom the price paid is not affected by any other purchase, or by any other dealing or by any special course of dealing with VGI or an Affiliate of VGI, or a distributor of VGI or an Affiliate of VGI. 1.20 "LICENSE YEAR" means the twelve (12) month period beginning on the first day of January, April, July or October next following the Effective Date, and each twelve (12) month period thereafter, except that the first License Year hereunder includes the period from the Effective Date to the first day of said twelve (12) month period. 1.21 "IMPROVEMENT" means any beneficial modification or adaptation of the systems or processes claimed in the Licensed Patents, which if unlicensed would infringe any one or more of the claims of the Licensed Patents. 1.22 "NET SELLING PRICE" means: 1.22.1 the actual gross selling price on the invoice of each CALTECH Licensed Product /DUPONT Licensed Product upon its first commercial sale by VGI or its Affiliates, or an agent or distributor, as the case may be to an End User Purchaser, including all packaging, instructional or other charges, but less sales or other taxes, tariffs, duties and other governmental charges (including value added taxes) paid by the seller, cash allowances and usual trade, contract and quantity discounts, and freight charges (if any) and credits and allowances on account of rebates, refunds, returns on sales to said End User Purchasers. No allowance or deduction shall be made for commissions or fees for collection, by whatever name known. In the event VGI is unable to account for a sale to an End User Purchaser, the Net Selling Price shall be 6/49 EXHIBIT 10.23 REDACTED calculated as the sales price to the agent or distributor multiplied by [CONFIDENTIAL INFORMATION FILED SEPARATELY WITH THE SEC]. For sales to a third party with whom VGI has a special course of dealing, the Net Selling Price shall be determined by reference to the listed or published price for the product sold or transferred which would be applicable in a transaction with an End User Purchaser. For purposes of this SECTION 1.22, the "relevant accounting period" shall be the calendar quarter in which the applicable royalties payable in connection with the sale, lease or rental of a product hereunder accrue as set forth in SECTION 6.2. If VGI, or an Affiliate of VGI, leases or rents a CALTECH Licensed Instrument/ DUPONT Licensed Instrument or DUAL Licensed Instrument to an End User Purchaser, Net Selling Price that applies hereunder shall be the Net Selling Price for such Instrument in the relevant accounting period, if such Instrument had been sold. 1.22.2 For a use by VGI or an Affiliate of VGI of CALTECH Licensed Products/ DUPONT Licensed Products, the Net Selling Price that applies hereunder shall be the average selling price for such Products in the relevant accounting period if such products had been sold by VGI to an End User Purchaser instead of used. If VGI, or an Affiliate of VGI, uses a CALTECH Licensed Product /DUPONT Licensed Product to perform services for a fee for others, the Net Selling Price shall be the Net Selling Price for such Product in the relevant accounting period, if such Product had been sold to an End User Purchaser instead of used to perform services for a fee for others. 1.22.3 In the event a CALTECH Licensed Product / DUPONT Licensed Product is sold in combination with other products or with an instrument as a system and the price for the sale of such product is not separately valued on the Invoice or other document evidencing such sale, the Net Selling Price shall be the average price during the relevant accounting period for 7/49 EXHIBIT 10.23 REDACTED such product when sold separately to an End User Purchaser. Notwithstanding the foregoing, in the event VGI or an Affiliate of VGI provides a product to a customer and/or provides service on a product to a customer based, in whole or in part, on that customer's purchases of CALTECH Licensed Product /DUPONT Licensed Product so that the price shown on the invoice for the product is more than the average price in the relevant accounting period for the Product when sold separately and either there is no charge shown for such instrument or such service or both or the charge for such instrument or service is less than the average charged therefor in the relevant accounting period then the Net Selling Price shall be the average price during the relevant accounting period for such product when sold separately to an End User Purchaser. 1.23 "ROYALTY BEARING CLINICAL TRIAL USES" shall include all VGI Licensed Instruments placed for use in clinical trials of such instruments by or on behalf of VGI, and shall also include all Caltech Licensed Reagent Products / Dupont Licensed Reagent Products used in clinical trials by or on behalf of VGI which are revenue-generating for VGI (including but not limited to any bartered goods or services), but shall not include Caltech Licensed Reagent Products / Dupont Licensed Reagent Products used in clinical trials by or on behalf of VGI which are not revenue-generating for VGI. 1.24 "ROYALTY FREE USES" of CALTECH Licensed Instruments / CALTECH Licensed Reagent Products / DUPONT Licensed Products shall include: (a) applications development / methods development / instrument development; (b) validation testing of such products; (c) quality and quality control required for manufacturing such products; (d) regulatory testing and compliance of such products, excluding Royalty Bearing Clinical Trial Uses; and (e) system installation, warranty testing and service testing. 1.25 "TERRITORY" means all countries, territories and protectorates throughout the world. 8/49 EXHIBIT 10.23 REDACTED 1.26 "VALID CLAIM" means the claim of an issued and unexpired patent or patent application which has not been held invalid or otherwise unenforceable by a court from which no appeal has or can be taken, or has not otherwise finally been held unpatentable or unenforceable by the appropriate administrative agency or disclaimed, dedicated to the public, denied or admitted to be invalid or unenforceable through reissue or disclaimer. 1.27 "VGI LICENSED INSTRUMENT" means a slab gel CALTECH Licensed Instrument. The parties agree that the instruments listed in Appendix E are slab gel CALTECH Licensed Instruments. 2. GENERAL LICENSES UNDER PATENT RIGHTS 2.1 LICENSE UNDER THE ABI PROCESS PATENT RIGHTS. Upon the terms and subject to the exceptions and conditions of this Agreement, ABD grants to VGI and its Affiliates a personal, non-transferable (except as provided in SECTION 10), non-exclusive limited license in the Territory under the ABI Process Patent Rights as follows: 2.1.1 REAGENT PRODUCTS (a) to use, sell, advertise, promote and distribute, directly and/ or through its Affiliates, agents and distributors, under VGI's name and trademarks, CALTECH Licensed Reagent Products all in accordance with the applicable label specified in SECTION 4.1, and solely through such label, to grant limited sublicenses to end user purchasers to use CALTECH Licensed Reagent Products pursuant to and in accordance with such label; (b) to make, have made, import, directly and/or through its Affiliates, agents and distributors CALTECH Licensed Reagent Products; 9/49 EXHIBIT 10.23 REDACTED 2.1.2 INSTRUMENTS (a) to use, offer for sale, advertise, promote, sell, lease, rent and distribute, directly and/or through its distributors, under VGI's name and trademarks, VGI Licensed Instruments, all in accordance with the applicable label specified in SECTION 4.2 and Section 4.4, and solely through such label, to grant limited sublicenses to end user purchasers to use VGI Licensed Instruments pursuant to and in accordance with such label; and (b) to make, have made, import, directly and/or through its Affiliates, agents and distributors VGI Licensed Instruments. 2.2 LICENSE UNDER THE DUPONT COMPOUND PATENT RIGHTS. Upon the terms and subject to the exceptions and conditions of this Agreement, ABD hereby grants to VGI and its Affiliates a personal, non-exclusive, non-transferable (except as provided in SECTION 10) non-exclusive limited license in the Territory under the DUPONT Compound Patent Rights to manufacture and have manufactured DUPONT Licensed Reagent Products in the Territory. 2.3 LICENSE UNDER THE DUPONT TERMINATOR PROCESS PATENT RIGHTS. Upon the terms of and subject to the exceptions and conditions of this Agreement, ABD grants to VGI and its Affiliates a personal, non-transferable (except as provided in SECTION 10), non-exclusive limited license in the Territory under the DUPONT Terminator Process Patent Rights as follows: 2.3.1 REAGENT PRODUCTS (a) to use, sell, advertise, promote and distribute, directly and/or through its Affiliates, agents and distributors, under VGI's name and trademarks, DUPONT Licensed Reagent Products all in accordance with the applicable label specified in SECTION 4.1, and solely 10/49 EXHIBIT 10.23 REDACTED through such label, to grant limited sublicenses to end user purchasers to use DUPONT Licensed Reagent Products pursuant to and in accordance with such label; 2.3.2 INSTRUMENTS (a) to use, offer for sale, advertise, promote, sell, lease, rent and distribute, directly and/or through its distributors, under VGI's name and trademarks, DUPONT Licensed Instruments, all in accordance with the applicable label specified in SECTION 4.2 or Section 4.4, and solely through such label, to grant limited sublicenses to end user purchasers to use DUPONT Licensed Instruments pursuant to and in accordance with such label; and (b) to make, have made, import, directly and/or through its Affiliates, agents and distributors DUPONT Licensed Instruments. 2.4 LICENSE UNDER THE CALTECH INSTRUMENT PATENT RIGHTS. Upon the terms and subject to the exceptions and conditions of this Agreement, ABD hereby grants to VGI and its Affiliates a non-transferable (except in accordance with SECTION 10), non-exclusive limited license in the Territory under the CALTECH Instrument Patent Rights to make, have made, use, offer for sale, advertise, promote, sell, lease, rent and distribute, directly and/or through its distributors, under VGI's name and trademarks, VGI Licensed Instruments, all in accordance with the applicable label specified in SECTION 4.2 OR 4.3, and solely through such label, to grant limited sublicenses to end user purchasers to use VGI Licensed Instruments pursuant to and in accordance with such label. 3. RESTRICTIONS; ROYALTY FREE USE; RESIDUAL LICENSE 3.1 OTHER LICENSE RESTRICTIONS. VGI acknowledges that ABD's licensing program dictates that an end-user license to practice the ABI Process Patent Rights must be granted in 11/49 EXHIBIT 10.23 REDACTED two component parts: (1) an up-front fee component that corresponds to a partial license ("Authorization") from ABD to use a CALTECH Licensed Instrument in a process that would infringe the ABI Process Patent Rights and (2) a running royalty component that corresponds to a partial license ("Authorization") from ABD to use a CALTECH Licensed Reagent Product in a process that would infringe the ABI Process Patent Rights. A complete license under the ABI Process Patent Rights requires both components: the up-front fee component and the running royalty component, i.e. both Authorizations. Hence, the end user must use an authorized instrument with authorized reagents in order to have a complete license under the ABI Process Patent Rights. This concept is reflected in the labels attached hereto in Appendix A and Appendix B. The end user purchaser typically acquires the partial license to the CALTECH Licensed Instrument through the purchase of an instrument which carries the up-front fee component, and similarly, the partial license to the CALTECH Licensed Reagent Products is obtained by the purchase of reagents that carry the running royalty component. In addition to the ABI Process Patent Rights, a CALTECH Licensed Instrument also carries a complete license under the CALTECH Instrument Patent Rights. Accordingly, ABD has only licensed VGI and its Affiliates hereunder under this Agreement under the CALTECH Licensed Patents to use and to sublicense their respective end user purchasers to use: (a) VGI Licensed Instruments with CALTECH Licensed Reagent Products, and (b) CALTECH Licensed Reagent Products with CALTECH Licensed Instruments or VGI Licensed Instruments. For the avoidance of doubt, an entity need not acquire both the CALTECH Licensed Instrument and CALTECH Licensed Reagent Products from a single source (e.g., VGI) to practice the ABI Process Patent Rights. Therefore, VGI may sublicense such VGI Licensed Instruments and CALTECH Licensed Reagent Products separately from each other, provided that VGI communicates to such sublicensees (as 12/49 EXHIBIT 10.23 REDACTED set forth in SECTION 4) that a complete license requires that VGI Licensed Instruments be used with CALTECH Licensed Reagent Products, and vice versa, that CALTECH Licensed Reagent Products must be used with CALTECH Licensed Instruments or VGI Licensed Instruments. ABD has extended this Authorization concept under this Agreement to apply to DUPONT Licensed Instruments, which carry an Authorization (the up-front fee portion of a license) under the DUPONT Terminator Process Patent Rights, and to DUPONT Licensed Reagent Products, which carry an Authorization (the running royalty portion of a license) under the DUPONT Terminator Process Patent Rights. Hence, a DUPONT Licensed Instrument must be used with a DUPONT Licensed Reagent Product in order to have a complete license under the DUPONT Licensed Patents. The DUPONT Licensed Reagent Products also carry a complete license under the DUPONT Compound Patent Rights. 3.2 ROYALTY FREE USE LICENSE. Upon the terms and subject to the exceptions and conditions of this Agreement, ABD grants to VGI and its Affiliates a royalty-free, paid-up, non-transferable, non-exclusive license in the Territory under the CALTECH Instrument Patent Rights, ABI Process Patent Rights and claims of the DUPONT Licensed Patents to practice the Royalty Free Uses. 3.3 IMMUNITY. 3.3.1 Upon the terms and subject to the exceptions and conditions of this Agreement, and except as provided in Section 3.3.2, ABD grants to VGI and its Affiliates a non-transferable, non-exclusive immunity from suit in the Territory to continue their manufacturing processes that exist as of the Effective Date to manufacture the products identified in Appendix E 13/49 EXHIBIT 10.23 REDACTED (hereinafter "VGI Products"), and components thereof, and to manufacture said VGI Products and components thereof using said manufacturing processes that exist as of the Effective Date, as those VGI Products and said components exist as of the Effective Date, under any patents or patent applications owned or controlled by ABD or its Affiliates, or for which ABD or its Affiliates has the exclusive right to license, as of the Effective Date, which are not otherwise licensed under this Agreement, to sell said VGI Products and said components, and to pass on to end users of said VGI Products and said components the right to use said VGI Products and said components as they are used as of the Effective Date. 3.3.2 Notwithstanding the immunity from suit of Section 3.3, no immunity is provided for patents owned by Roche, no immunity is provided to practice PCR, no immunity is provided to make thermal cyclers or to use thermal cyclers for PCR, and no immunity is provided to manufacture oligonucleotides. Furthermore, the immunity from suit of Section 3.3 does not include rights under any patents or patent applications owned by third parties or licensed from third parties, in respect of which ABD is obligated to pay a royalty to the owner of the patent or patent application. Nothing in this section derogates from any rights VGI may now have, or in the future obtain, directly or indirectly from Roche or other third parties. 3.3.3 In any patent dispute between the Parties relating to new products provided by VGI (i.e. products not listed in Appendix E or components thereof) in which VGI asserts or relies upon the immunity granted in this Section 3.3, VGI shall bear the burden, on a preponderance of evidence, of showing that said new products are covered by said immunity. Nothing in this Section 3.3 alters any burdens or standards of proof that otherwise exist in law in any patent dispute between the parties. Nothing in this section constitutes any admission by VGI 14/49 EXHIBIT 10.23 REDACTED that any product listed in Schedule E or any new product infringes any patent of ABD or an Affiliate thereof. 3.4 Except for the express rights and express immunities set forth in SECTION 2 and this SECTION 3, no other rights are granted by ABD hereunder, expressly, by implication or by estoppel. 4. MARKING, PROMOTION, UNLICENSED ACTIVITY 4.1 MARKING- REAGENT PRODUCTS. VGI agrees to mark each CALTECH Licensed Reagent Product and each DUPONT Licensed Reagent Product, either on a product insert accompanying the product, or on the product itself, with one of the labels set forth in APPENDIX B, as ABD shall designate in writing (provided such label is appropriate to the applicable product), or such other label as ABD may reasonably designate in writing from time to time. 4.2 MARKING - VGI LICENSED INSTRUMENTS. VGI agrees to affix as permanently and as prominently as practicable to each VGI Licensed Instrument, the label as provided in Appendix A, each with a different serial number. In addition, VGI agrees: 4.2.1 to include prominently in the front of the user's manual for each VGI Licensed Instrument an accurate label as designated from time to time by ABD in writing. Unless and until ABD reasonably instructs VGI differently in writing, VGI shall use the label set forth in APPENDIX A. 15/49 EXHIBIT 10.23 REDACTED 4.2.2 to notify the purchaser of a VGI Licensed Instrument that transfer of such instrument without the serial number or without the label affixed thereto pursuant to SECTION 4.2.1 above, automatically terminates the license granted to the purchaser. 4.2.3 not to designate or refer in advertising, promotional material and marketing presentations to VGI Licensed Instruments covered by this Agreement as "licensed" unless it simultaneously explains that the purchase price of such instrument does not include a complete license under the ABI Process Patent Rights to certain reagents with which such instruments are used unless such instruments are used with reagents for which the applicable reagent royalties have been paid. 4.3 MARKING - DUPONT LICENSED INSTRUMENTS. VGI agrees to affix as permanently and as prominently as practicable to each DUPONT Licensed Instrument the label as provided in Appendix A, and a different serial number for each such instrument. In addition, VGI agrees to: 4.3.1 to include prominently in the front of the user's manual for each DUPONT Licensed Instrument an accurate label as designated from time to time by ABD in writing. Unless and until ABD reasonably instructs VGI differently in writing, VGI shall use the label set forth in APPENDIX A. 4.3.2 to notify the purchaser of a DUPONT Licensed Instrument that transfer of such instrument the without the serial number or without the label affixed thereto pursuant to SECTION 4.3.1 above, automatically terminates the license granted to the end user by this Agreement and the instrument ceases to be an DUPONT Licensed Instrument. 16/49 EXHIBIT 10.23 REDACTED 4.3.3 not to designate or refer in advertising, promotional material and marketing presentations to DUPONT Licensed Instruments covered by this Agreement as "licensed" unless it simultaneously explains that the purchase price of such instruments does not include a complete license under the DUPONT Terminator Process Patent Rights to certain reagents with which such instruments are used unless such instruments are used with reagents for which the applicable reagent royalties have been paid. 4.4 MARKING - DUAL LICENSED INSTRUMENTS. VGI agrees to affix as permanently and prominently as practicable to each DUAL Licensed Instrument, the label as provided in Appendix A, and a different serial number for each such instrument. In addition, VGI agrees: 4.4.1 to include prominently in the front of the user's manual for each DUAL Licensed Instrument an accurate notice as designated from time to time by ABD in writing. Unless and until ABD reasonably instructs differently in writing, VGI shall use the label set forth in APPENDIX A. 4.4.2 to instruct the purchaser of a DUAL Licensed Instrument that transfer of such instrument without the serial number or without the label affixed thereto pursuant to SECTION 4.4.1 above, automatically terminates the license granted to the purchaser. 4.4.3 not to designate or refer in advertising, promotional material and marketing presentations to DUAL Licensed Instruments covered by this Agreement as "licensed" unless it simultaneously explains that the purchase price of such instrument does not include a complete license under the DUPONT Terminator Process Patent Rights and/or ABI Process Patent Rights unless such instruments are used with reagents for which the applicable reagent royalties have been paid. 17/49 EXHIBIT 10.23 REDACTED 4.5 PROMOTION. VGI and its Affiliates agree to use commercially reasonable efforts to sell, market and otherwise promote CALTECH Licensed Products/DUPONT Licensed Products in compliance with this Agreement. These promotional obligations are satisfied if VGI and its Affiliates, as applicable (a) display in catalogues, web sites, and brochures describing CALTECH Licensed Products/DUPONT Licensed Products, the labels described in APPENDIX A and APPENDIX B; (b) comply with the requirements of Section 4.1 - 4.4.3 herein; and (c) bind agents and distributors in writing to sell such products in compliance with this Agreement. The parties agree that such promotional activities shall be commenced by VGI as soon after the Effective Date as is commercially practical. 4.6 UNLICENSED ACTIVITY -- PREVENTION. VGI agrees not to knowingly promote, either by itself or through its Affiliates, and distributors, the unlicensed practice of the CALTECH Licensed Patents or the DUPONT Licensed Patents by its end-user customers. 4.7 UNLICENSED ACTIVITY - ENFORCEMENT. 4.7.1 VGI shall advise ABD, and shall furnish documentary proof which is reasonably acceptable to ABD, upon VGI's becoming aware of substantial infringement by a third party of an enforceable patent right within the CALTECH Licensed Patents/Dupont Licensed Patents by the sale of [CONFIDENTIAL INFORMATION FILED SEPARATELY WITH THE SEC] unlicensed instruments in any country in the Territory, or [CONFIDENTIAL INFORMATION FILED SEPARATELY WITH THE SEC] unlicensed reagents in any country in the Territory. Upon receipt of said documentary 18/49 EXHIBIT 10.23 REDACTED proof, ABD agrees it shall, within its reasonable business judgment, take such action as is required to restrain such infringement. 4.7.2 ABD shall be in full compliance with its obligations under this Section 4.7 if, within six (6) months of ABD having received said documentary proof from VGI about an infringing third party in a particular country, (1) ABD notifies said third party of ABD's enforceable proprietary position and receives from such third party written assurances, which shall be executed by an officer of said third party capable of legally binding that party, that it is not infringing ABD's rights in that country, or (2) said infringement has stopped in that country, or (3) ABD has entered into good faith license negotiations with said third party, or (4) ABD has instituted or is prosecuting an action for patent infringement against at least one infringing third party under the CALTECH Licensed Patents or the DUPONT Licensed Patents in said country. The above six-month period may be extended with the consent of VGI. 4.7.3 It is agreed and understood that nothing in this Section 4.7 or this Agreement shall require ABD to sue more than one party at any one time or to sue in more than one country under the CALTECH Licensed Patents or the DUPONT Licensed Patents. 4.7.4 [CONFIDENTIAL INFORMATION FILED SEPARATELY WITH THE SEC] 4.7.5 If ABD is provided with the documentary proof of ongoing infringing sales in any particular country as above-described and ABD does not within the six-month period pursue one of the above options, VGI shall have the right at the expiration of the six-month period, or such other period as the parties have agreed, to [CONFIDENTIAL INFORMATION FILED SEPARATELY WITH THE SEC]. 4.7.6 VGI's right to [CONFIDENTIAL INFORMATION FILED SEPARATELY WITH THE SEC] terminates and VGI must [CONFIDENTIAL INFORMATION FILED SEPARATELY WITH THE SEC] as of the 19/49 EXHIBIT 10.23 REDACTED time (1) that said third party infringer has delivered written assurances described above or engaged in good faith license negotiations with ABD, provided that if said negotiation does not conclude within one year, VGI may again [CONFIDENTIAL INFORMATION FILED SEPARATELY WITH THE SEC] by [CONFIDENTIAL INFORMATION FILED SEPARATELY WITH THE SEC] in the manner described above until the conclusion of a license with said third party, or (2) the filing or prosecution of an infringement suit against a third party under the CALTECH Licensed Patents and/or the DUPONT Licensed Patents in any country, or (3) as a result of the written assurances received in accordance with the foregoing or the conclusion of any licenses or litigations or otherwise, infringement in fact ceases or is [CONFIDENTIAL INFORMATION FILED SEPARATELY WITH THE SEC] in that country. 20/49 EXHIBIT 10.23 REDACTED 5. FEES AND ROYALTIES 5.1 ISSUE FEE AND RELEASE. For the rights and privileges granted under this Agreement, VGI agrees to pay to ABD a non-refundable license issue fee of Twenty Five Million Dollars, payable in accordance with the provisions of SECTION 6.1. No part of said license issue fee is creditable against other fees or royalties due and payable hereunder. In consideration of payment of said issue fee, VGI and its Affiliates, together with its customers, suppliers, agents, distributors and end users (but only to the extent of their involvement with or for the products of VGI licensed under this Agreement), is and are hereby released from all liability for patent infringement prior to the effective date of this Agreement under the CALTECH Licensed Patents, the DUPONT Licensed Patents, and the residual license in Section 3.3. 5.2 OTHER FEES AND ROYALTIES. In addition to the license issue fee paid under SECTION 5.1 above, VGI shall, subject to SECTION 1.24, pay royalties as follows: 5.2.1 for each VGI Licensed Instrument that is not a DUAL Licensed Instrument used or delivered hereunder by VGI or an Affiliate: (1) a royalty of [CONFIDENTIAL INFORMATION FILED SEPARATELY WITH THE SEC] of the Net Selling Price or (2) [CONFIDENTIAL INFORMATION FILED SEPARATELY WITH THE SEC]. 5.2.2 for each VGI Licensed Instrument that is a DUAL Licensed Instrument used or delivered hereunder by VGI or an Affiliate: (1) a royalty of [CONFIDENTIAL INFORMATION FILED SEPARATELY WITH THE SEC] of the Net Selling Price or (2) [CONFIDENTIAL INFORMATION FILED SEPARATELY WITH THE SEC]. 5.2.3 for each CALTECH Licensed Reagent Product or DUPONT Licensed Reagent Product used or delivered hereunder by VGI or an Affiliate: a royalty in the amount of 21/49 EXHIBIT 10.23 REDACTED [CONFIDENTIAL INFORMATION FILED SEPARATELY WITH THE SEC] of the Net Selling Price; provided however, if any reagent product is both a CALTECH Licensed Reagent Product and a DUPONT Licensed Reagent Product, the combined royalty for such reagent product under both the CALTECH Licensed Patents and the DUPONT Licensed Patents is [CONFIDENTIAL INFORMATION FILED SEPARATELY WITH THE SEC] of the Net Selling Price. 5.3 [CONFIDENTIAL INFORMATION FILED SEPARATELY WITH THE SEC] 5.4 PAYMENT PERIOD FOR INSTRUMENTS. The fees and royalties payable pursuant to SECTION 5.2.1 OR 5.2.2 in respect of a VGI Licensed Instrument or a VGI Licensed Instrument that is also a Dual Licensed Instrument made, used, sold, licensed or leased by VGI or its Affiliates in a particular country shall be payable only for so long as there is at least one Valid Claim in the CALTECH Instrument Patent Rights in such country, which, but for the license granted herein, would be infringed by such products. 5.5 PAYMENT PERIOD FOR CALTECH LICENSED REAGENT PRODUCTS. The fees and royalties payable pursuant to SECTION 5.2.3 in respect of a CALTECH Licensed Reagent Product made, used, sold, licensed or leased by VGI or its Affiliates in a particular country shall be payable only for so long as there is at least one Valid Claim in the ABI Process Patent Rights in such country, which, but for the license granted herein, would be infringed by such products. 5.6 PAYMENT PERIOD FOR DUPONT LICENSED REAGENT PRODUCTS. The fees and royalties payable pursuant to SECTION 5.2.3 in respect of a DUPONT Licensed Reagent Product made, 22/49 EXHIBIT 10.23 REDACTED used, sold, licensed or leased by VGI or its Affiliates in a particular country shall be payable only for so long as there is at least one Valid Claim in the DUPONT Compound Patent Rights or DUPONT Terminator Process Patent Rights in such country, which, but for the license granted herein, would be infringed by such products. 5.7 PAYMENT PERIOD FOR DUPONT/CALTECH LICENSED REAGENT PRODUCTS. The fees and royalties payable pursuant to SECTION 5.2.3 in respect of a reagent product that is both a CALTECH Licensed Reagent Product and a DUPONT Licensed Reagent Product made, used, sold, licensed or leased by VGI or its Affiliates in a particular country shall be payable only for so long as there is at least one Valid Claim in either the ABI Process Patent Rights, DUPONT Compound Patent Rights or DUPONT Terminator Process Patent Rights in such country, which, but for the license granted herein, would be infringed by such products. 6. REMITTANCES, RECORDS AND REPORTS 6.1 ISSUE FEE. The license issue fee shall be paid as follows: (a) Ten Million Dollars ($10,000,000.00) is due and payable within forty-five (45) days from the Effective Date; (b) Five Million Dollars ($5,000,000.00) is due and payable on June 30, 2001; (c) Five Million Dollars ($5,000,000.00) is due and payable on June 30, 2002; and (d) Five Million Dollars ($5,000,000.00) is due and payable on June 30, 2003. Notwithstanding the foregoing, VGI shall not be obligated to pay the license issue fee to the extent the payments associated therewith as set forth above become due and payable after the date this Agreement expires or is terminated. 23/49 EXHIBIT 10.23 REDACTED 6.2 ACCRUAL. Royalties accrue with respect to CALTECH Licensed Reagent Products/ DUPONT Licensed Reagent Products and CALTECH Licensed Instruments/DUPONT Licensed Instruments/DUAL Licensed Instruments on the date such instruments and products are first shipped by or for VGI or its Affiliates to an End User Purchaser. Royalties also accrue, as applicable, when said products and Instruments are first used by or for VGI or on behalf of third parties. 6.3 PAYMENT. Payments of royalties shall be made within forty-five (45) days following the end of each calendar quarter of each License Year for which the royalty was accrued. Such payment shall be accompanied by a statement certified to ABD by an officer of VGI which shall give sufficient information from which to calculate the amount of royalties due hereunder, including, but not limited to, the Net Selling Price of each product for which royalty has accrued during the preceding calendar quarter, the quantity of each such products, and the aggregate royalties due. Payment hereunder shall be made in U.S. Dollars in the United States. Sales in other countries shall be converted to U.S. Dollars based on the rate of exchange as quoted in the WALL STREET JOURNAL for the last business day of the applicable quarter. Such royalty statements shall be submitted even in the event that no sale took place during the period covered by such statement. The payment set forth in SECTION 6.1 shall be remitted to an ABD bank account designated by ABD in writing. VGI shall be entitled to withhold such amount from payments made hereunder as may be required to be withheld by the laws of any relevant jurisdiction, and remitted to the appropriate authority therein as required by such laws. VGI agrees to provide ABD with documentation to establish that such amounts withheld have been remitted by VGI to the relevant authority. 24/49 EXHIBIT 10.23 REDACTED 6.4 INSPECTION. The Parties acknowledge that they are direct competitors, and the royalties paid by VGI to third parties is the Confidential Information of VGI. In particular, ABD acknowledges that the identity of VGI's licensors, and the nature and the amount of the royalties that VGI pays to third parties also constitutes VGI's Confidential Information. VGI shall keep records in sufficient detail to permit the determination of royalties payable hereunder for three (3) years following the sales to which such records relate. At the request of ABD, VGI shall permit an independent Certified Public Accountant designated by ABD and agreed upon by VGI, such agreement not to be unreasonably withheld, to examine such records, in confidence, during VGI's ordinary business hours, not more than once per calendar year, for the sole purpose of verifying or determining royalties paid or payable under this Agreement. The cost of such inspection shall be borne by ABD, provided, however, that in the event any such inspection reveals an underpayment of royalties in excess of seven and a half percent (7.5%), VGI shall pay the reasonable and documented cost of the inspection. 6.5 PRICE LISTS. VGI shall submit to ABD, no less than once each year during the life of this Agreement, copies of the pages of its customer catalogs, or similar equivalent, in which CALTECH Licensed Products and DUPONT Licensed Products are listed for sale. 6.6 INTEREST. If VGI fails to pay any amount owing under this Agreement by the due date, the amount owed shall bear interest at two percent (2%) over the Citibank NA base lending rate ("PRIME RATE"), or if lower, the highest rate allowed by law, from the due date until paid. 25/49 EXHIBIT 10.23 REDACTED 7. TERM OF LICENSE; TERMINATION 7.1 TERM. Unless otherwise terminated pursuant to its terms, the term of this Agreement shall commence on the Effective Date and shall continue until expiration of the last Valid Claim in the last to expire of the CALTECH Licensed Patents and the DUPONT Licensed Patents. 7.2 TERMINATION FOR CONVENIENCE. VGI may terminate this Agreement with respect to any one or more of the CALTECH Licensed Patents or DUPONT Licensed Patents upon sixty (60) days written notice to ABD. 7.3 TERMINATION FOR BREACH. If either Party shall at any time materially breach any of its obligations under this Agreement, and such breach is not cured within thirty (30) days after receiving written notice from the non-breaching Party specifying the nature of the breach, then the non-breaching Party has the right to terminate this Agreement by giving written notice to the breaching Party, provided that neither Party has invoked the provisions of SECTION 13 with respect to such dispute. 7.4 TERMINATION FOR BANKRUPTCY. This Agreement may be terminated by a Party upon notice to the other Party if such other Party (a) is adjudicated bankrupt or insolvent, or admits in writing that it is unable to pay its obligations as they become due; (b) makes a general assignment for the benefit of creditors; (c) has had appointed to it, has applied for or has consented to the appointment of, a receiver, trustee or similar officer for a substantial part of its property and such receiver, trustee or officer does not continue such Party's business in the 26/49 EXHIBIT 10.23 REDACTED ordinary course; or (d) is the subject of any voluntary or involuntary bankruptcy, insolvency arrangement, or similar proceeding (and fails to lift any stay imposed thereby within sixty (60) days after such stay becomes effective). 7.5 TERMINATION FOR CHANGE OF CONTROL. ABD has the right to terminate this Agreement immediately on notice upon any Change of Control of VGI in which the acquiring third party is not a financial institution, unless within thirty (30) days after the effective date of such Change of Control, VGI contacts ABD and informs ABD of the continuation of the Agreement under new ownership or control and complies with the provisions of Section 10. 7.6 EFFECT OF TERMINATION. Any termination pursuant hereto does not relieve VGI or ABD of any obligation or liability accrued hereunder prior to such termination, nor rescind or give rise to any right to rescind anything done or any payments made or other consideration given hereunder prior to the time of such termination and does not affect in any manner any rights of either Party arising out of this Agreement prior to such termination. 7.7 RIGHTS IN BANKRUPTCY. All rights and licenses granted under or pursuant to this Agreement by ABD are, and will otherwise be deemed to be, for purposes of Section 365(n) of the U.S. Bankruptcy Code, licenses of right to "Intellectual Property" as defined under Section 101 of the U.S. Bankruptcy Code. The Parties agree that VGI, as licensee of such rights under this Agreement, will retain and may fully exercise all of their rights and elections under the U.S. Bankruptcy Code, provided that VGI continues to pay its obligations to ABD as they become due. 8. CONFIDENTIALITY-PUBLICITY 27/49 EXHIBIT 10.23 REDACTED 8.1 DISTRIBUTED MATERIAL. With respect to VGI's distribution of any written information to third parties - including but not limited to advertising, brochures, catalogs, promotional and sales material, and public relations material - VGI shall make reasonable changes thereto requested by ABD as regards the accuracy of references to, or descriptions of: PE, the CALTECH Licensed Patents, the DUPONT Licensed Patents, any licenses or authorizations provided under this Agreement, or the existence of this Agreement. 8.2 PRESS RELEASE. The Parties shall cooperate to issue a joint press release within five (5) days after the Effective Date, substantially in the form attached hereto as APPENDIX C. 8.3 GENERAL NON-DISCLOSURE. Each Party acknowledges that by reason of its relation to the other Party under this Agreement has received and will have access to the Confidential Information of the other Party the value of which would be substantially impaired if disclosed to third parties. Accordingly: 8.3.1 Except as provided in SECTION 8.1 and SECTION 8.2, each Party agrees to use reasonable care not to use, disclose or otherwise make available to any third party, the other Party's Confidential Information and each Party agrees to use all reasonable precautions to protect the other Party's Confidential Information and employ at least those precautions that such Party employs to protect its own Confidential Information. 8.3.2 Notwithstanding the foregoing, each Party, may disclose Confidential Information of the other Party to the minimum extent possible that is required to be disclosed under law or pursuant to the lawful request of a governmental entity or agency; provided however, that (a) prior written notice of such required disclosure is furnished to the other Party as 28/49 EXHIBIT 10.23 REDACTED soon as practicable, and (b) reasonable measures are taken to minimize and guard against further disclosure, seeking appropriate confidential treatment and/or protective order and/or assisting the other Party to do so. 8.3.3 Whenever requested by the disclosing Party, the receiving Party shall immediately return to the disclosing Party all manifestations of the Confidential Information in the receiving Party's possession or control, with the exception of royalty reports, or, at the disclosing Party's option, destroy as much of the Confidential Information as the disclosing Party may indicate, with the exception of royalty reports, and promptly thereafter provide the disclosing Party with a certificate of such destruction; provided, however, that each Party may retain one (1) copy of such Confidential Information solely for archival purposes and only in files accessed solely by the legal department of such Party. 8.4 DISCLOSURE OF AGREEMENT. Except as provided in SECTION 8.1 and SECTION 8.2, the terms and conditions of this Agreement, shall be deemed the Confidential Information of the Parties, which the parties shall use reasonable care not to disclose without the prior written approval of the other Party; provided however, each Party may disclose such Confidential Information without such approval or notice in connection with complying with applicable governmental regulations or advising investors and the investment community in such Party's usual course of business. 9. COMPLIANCE AND QUALITY 9.1 COMPLIANCE WITH LAWS. VGI shall use its best efforts to comply in all material respects with all applicable laws, regulations and ordinances and obtain and keep in effect 29/49 EXHIBIT 10.23 REDACTED applicable licenses, permits and other governmental approvals (federal, state or local) as necessary to carry on activities hereunder. 9.2 QUALITY REVIEW. The Parties acknowledge and agree that ABD shall have no rights or responsibilities with respect to the approval or endorsement of instruments of VGI in any way or for any purpose, including sequencing. Quality and quality control with respect to suitability for sequencing, according to standards and requirements that may exist in the marketplace from time to time, are the sole responsibility of VGI. 10. ASSIGNMENT AND TRANSFER 10.1 ASSIGNMENT BY VGI. VGI may not assign its rights or obligations under this Agreement except upon a Change of Control of VGI. Any purported assignment in violation of this Section 10 is null and void. 10.2 Within thirty (30) days after a Change of Control of VGI, VGI's assignee shall: (a) pay an assignment fee of [CONFIDENTIAL INFORMATION FILED SEPARATELY WITH THE SEC] to ABD, in accordance with SECTION 7.5; and (b) lose its entitlement to the [CONFIDENTIAL INFORMATION FILED SEPARATELY WITH THE SEC] that may be applied to any Caltech Licensed Reagent Product or Caltech Licensed Reagent Product / Dupont Licensed Reagent Product as described in SECTION 5.3, if VGI is acquired by a third party that controls the rights to the polymerase chain reaction. 30/49 EXHIBIT 10.23 REDACTED 10.3 ASSIGNMENT BY ABD. ABD may assign all or any part of its rights and obligations under this Agreement at any time without the consent of VGI. VGI agrees to execute such further acknowledgments or other instruments as ABD may reasonably request in connection with such assignment. 10.4 NO OTHER EFFECT. The Parties agree that the rights and obligations under this Agreement shall not change, except as expressly set forth in this Agreement, upon any Change of Control of ABD. 11. WARRANTIES, INDEMNITIES AND IMMUNITIES 11.1 GENERAL INTELLECTUAL PROPERTY. Nothing in this Agreement shall be construed as: (a) a warranty or representation by ABD, DUPONT, or CALTECH as to the validity or scope of any patent; (b) a warranty or representation by ABD, DUPONT, or CALTECH that the manufacture and sale and/or use of CALTECH Licensed Products or DUPONT Licensed Products is or shall be free from infringement of patents of Third Parties; (c) except as expressly set forth herein, conferring the right to use in advertising, publicity or otherwise, in any form, the name of, or any trademark or trade name of, ABD, DUPONT, or CALTECH; (d) an obligation to furnish any know-how; or (e) creating any agency, partnership, joint venture or similar relationship between ABD and VGI or between CALTECH and VGI or between DUPONT and VGI. 11.2 MERCHANTABILITY AND FITNESS. NEITHER ABD, CALTECH, NOR DUPONT MAKE ANY EXPRESS OR IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. 31/49 EXHIBIT 10.23 REDACTED 11.3 DAMAGE LIABILITY. VGI agrees to take all reasonable precautions to prevent death, personal injury, illness and property damage from the use of products licensed under this Agreement. VGI assumes full responsibility for its operation under the patent rights granted under this Agreement, the manufacture of Products, and the use thereof. Furthermore, VGI shall defend, indemnify and hold ABD, DUPONT, and CALTECH harmless from and against all liability, demands, damages, expenses (including reasonable attorneys' fees) and losses for death, personal injury, illness, property damage or any other injury or damage or expenses in connection with state or federal regulatory action, arising out of the use by VGI, its officers, directors, agents and employees of the patent rights licensed hereunder, and the manufacture and use of products licensed under this Agreement, except that VGI shall not be liable to ABD for injury or damage to the extent arising of ABD's acts or omissions. 11.4 POWER AND AUTHORITY. The Parties represent and warrant that they have all necessary corporate power to enter into and perform their respective obligations under this Agreement, and have taken all necessary corporate action under the laws of their jurisdictions and their certificates of incorporation and by-laws to authorize the execution of this Agreement. VGI shall also bind each of its Affiliates to the terms and conditions of this Agreement. 11.5 RIGHT TO GRANT. ABD represents and warrants that it has the lawful right to grant the licenses and/or sublicenses set forth herein. 32/49 EXHIBIT 10.23 REDACTED 11.6 PURCHASER ACTIVITY IMMUNITY. ABD hereby grants to VGI and its Affiliates immunity from suit with respect to any alleged infringement of the CALTECH Licensed Patents or the DUPONT Licensed Patents arising from any activities of purchasers, including without limitation end users, of DUPONT Licensed Products, VGI Licensed Instruments, DUAL Licensed Instruments, or CALTECH Licensed Reagent Products, provided that VGI has materially complied with the provisions of SECTION 4.1 through SECTION 4.6. 12. COLLABORATIONS AND IMPROVEMENTS 12.1 COLLABORATIONS. VGI has requested, and ABD has agreed, that the Parties, through their respective designees, shall meet within ninety (90) days of the Effective Date to explore a collaboration with respect to the development and commercialization of new diagnostic tests using the technology licensed herein. The collaboration shall be directed to such disease states, genetic markers, or infectious processes as the Parties may agree. 12.2 IMPROVEMENTS. Once a year VGI shall provide to ABD a brief, nonconfidential summary of each Improvement. VGI shall provide a full description on a confidential basis if requested by ABD in writing. VGI hereby grants to ABD and its Affiliates an option to negotiate a non-exclusive, royalty-bearing worldwide license to practice any invention or discovery of VGI which constitutes an Improvement of the Licensed Patents made by VGI either prior to or after 33/49 EXHIBIT 10.23 REDACTED the Effective Date in connection with the use of rights by VGI as licensed under this Agreement. Such option shall be for a period of six (6) months from the date of such Improvement summary. 12.3 JOINT IMPROVEMENTS. An Improvement which is jointly made or discovered by VGI with a third party ("JOINT IMPROVEMENT") shall not be subject to SECTION 12 if VGI cannot grant rights to such Joint Improvement to ABD and its Affiliates without the consent of such third party. Provided however that VGI shall use its commercially reasonable efforts to provide ABD and its Affiliates the right to practice such Joint Improvement. The option granted to ABD by VGI applies to Improvements of the Licensed Patents after the Effective Date in connection with the use of rights by VGI as licensed under this Agreement, for which VGI has the right to sublicense. 12.4 TERMS AND CONDITIONS. The terms and conditions of said licenses shall be negotiated in good faith by the Parties, taking into consideration the relevant market factors typically considered in such agreements. Without limiting the foregoing, (a) the cumulative royalty percentage paid by ABD and its Affiliates for each such Improvement shall not exceed the royalty paid by VGI to ABD under this Agreement, and (b) the term of said licenses shall be commensurate with the terms of the last to expire of any patent covering ABD customers' use of such products. 13. DISPUTE RESOLUTION 34/49 EXHIBIT 10.23 REDACTED The Parties recognize that disputes as to certain matters may arise from time to time during the course of the Agreement which relates to the rights and obligations of the Parties hereunder. In the event of such a dispute, either Party may, by notice to the other Party, have such dispute referred to their respective designees according to the following escalation path:
ESCALATED TO THE FOLLOWING LEVEL AT THE PARTIES - - -------------------------------------------------------------------------------- DAYS FROM ORIGINAL NOTICE ABD VGI - - ------------------------- --- --- Five (5) Business Days Joseph Smith Marguerite Ethier (V.P. of Intellectual (V.P. and General Property) Counsel) - - -------------------------------------------------------------------------------- Thirty (30) Business Days Michael Hunkapiller Richard Daly (V.P. and General (President and CEO) Manager)
If this discussion does not result in a resolution of the issue within sixty (60) days, or any extension thereof agreed upon by the Parties in writing, either Party may invoke the Alternative Dispute Resolution Provisions in Appendix D. 14. GENERAL 14.1 ENTIRE AGREEMENT. This Agreement, together with a Non Disclosure Agreement executed by the Parties April 12, 2000, constitutes the entire agreement between the Parties as to the subject matter hereof, and all prior negotiations, representations, agreements and understandings are merged into, extinguished by and completely expressed by it. This Agreement may be modified or amended only by a writing executed by authorized officers of each of the Parties. 35/49 EXHIBIT 10.23 REDACTED 14.2 NOTICE. Any notice required or permitted to be given by this Agreement shall be given by postpaid, first class, registered or certified mail, or by courier, properly addressed to the other Party at the respective address as shown below: If to ABD: Applied Biosystems PE Corporation 850 Lincoln Centre Drive Foster City, California 94404 Attn.: Director of Licensing If to VGI: Visible Genetics Inc. Suite 1000, 700 Bay Street Toronto, Ontario, Canada M5G 1Z6 Attention: General Counsel Either Party may change its address by providing notice to the other. Notice of change of address shall be deemed given when actually received or upon refusal to accept delivery thereof; all other communications and notices shall be deemed to have been given, received and dated on the earlier of (a) when actually received or upon refusal to accept delivery thereof, (b) on the date when delivered personally, (c) two (2) full business after being sent by overnight courier, and (d) five (5) full business days after mailing, as aforesaid. 14.3 GOVERNING LAW. This Agreement is made in the State of California, and it shall be construed and enforced in accordance with the laws of the State of California and the United States. Any legal action arising under this Agreement has venue in the Northern District of California. 14.4 CONFORMITY WITH LAWS. Nothing in this Agreement shall be construed to require the commission of any act contrary to law, and wherever there is any conflict between any provision of this Agreement or concerning the legal right of the Parties to enter into this contract and any statute, law or ordinance, the latter shall prevail, but the provision shall be limited only to the extent necessary. 36/49 EXHIBIT 10.23 REDACTED 14.5 SEVERABILITY. If any provision of this Agreement is held by a court or tribunal of competent jurisdiction, or discovered to both Parties' satisfaction, to be illegal, invalid or unenforceable in any jurisdiction, all other provisions of this Agreement shall be deemed valid and enforceable to the full extent possible. If a provision is held or discovered illegal, invalid or unenforceable in a jurisdiction then, as to such jurisdiction only, the Parties shall use their best efforts to substitute a provision that is valid, legal and enforceable in such jurisdiction which, insofar as possible, implements the purposes of original provision. 14.6 RELATIONSHIP OF PARTIES. This Agreement creates only licensor-licensee relationships between VGI and ABD. No partnership or other legal relationship is created hereunder. Neither Party is, or shall be deemed to be, an agent or legal representative of the other Party for any purpose. Neither Party shall be entitled to enter into any contracts in the name of or on behalf of the other Party, and neither Party shall be entitled to pledge the credit of the other Party in any way or hold itself out as having authority to do so. 14.7 PUBLICITY. No Party hereto may use the name of the other Party in public announcements without the prior consent of the other Party. 14.8 WAIVER. No provision of the Agreement (unless such provision otherwise provides) shall be waived by any act, omission or knowledge of a Party or its agents or employees except by an instrument in writing expressly waiving such provision and signed by a duly authorized officer of the waiving Party. 14.9 ADDITIONAL INSTRUMENTS. Each Party agrees to execute, acknowledge, and deliver such further instruments and to do all such other acts as may be necessary or appropriate to effect the purpose and intent of this Agreement. 37/49 EXHIBIT 10.23 REDACTED 14.10 VOLUNTARY DISMISSAL Within three business days of the Effective Date, counsel for ABD shall prepare, execute and file a Notice of Dismissal pursuant to F.R.C.P. 41(a)(1) with regard to the Perkin-Elmer Corporation, PE Biosystems Group v. Visible Genetics, Inc., C99-05406MJJ. Failure of PE to prepare, execute and file such Notice of Dismissal within such three business days shall constitute a material breach of this Agreement. 14.11 HEADINGS. The headings for each article and section in this Agreement have been inserted for the convenience of reference only and are not intended to limit or expand on the meaning of the language contained in the particular article or section. 14.12 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. 38/49 EXHIBIT 10.23 REDACTED IN WITNESS WHEREOF, the Parties hereto have duly executed this Agreement on the date(s) indicated below. PE CORPORATION VISIBLE GENETICS INC. By:_______________________ By:______________________ Title:____________________ Title:_____________________ Date:____________________ Date:____________________ 39/49 EXHIBIT 10.23 REDACTED APPENDIX A NOTICES TO PURCHASERS FOR INSTRUMENTS 1. VGI LICENSED INSTRUMENTS: A. LABEL LICENSE. VGI shall place a label in a conspicuous location on each VGI Licensed Instrument, and on no other instrument, containing the following statement: NOTICE TO PURCHASER: LIMITED LICENSE This instrument, Serial No. , is authorized for use in DNA sequence and fragment analysis. This authorization is included in the purchase price of this instrument and corresponds to the up-front fee component of a license under the process claims of U.S. Patent No. 5,821,058 and under corresponding process claims in its foreign counterparts. The running royalty component of that license (a) may be purchased from Applied Biosystems or (b) may be obtained by purchasing authorized reagents from authorized suppliers and using such reagents in accordance with the label rights accompanying such reagents. Purchase of this instrument does not by itself convey to the purchaser a complete license or right to perform the above processes. This instrument is also licensed under U.S. Patent 5,171,534 and apparatus claims and system claims in foreign counterparts thereof. No other rights are granted expressly, by implication or by estoppel, or under any other patent rights owned or licensable by Applied Biosystems. Applied Biosystems does not guarantee the performance of this instrument. B. MANUAL NOTICE. VGI shall also place a notice in the front of the user's manual for each VGI Licensed Instrument, and for no other instrument, containing the following statement: NOTICE TO PURCHASER: LIMITED LICENSE This instrument is authorized for use in DNA sequence and fragment analysis. This authorization is included in the purchase price of this instrument and corresponds to the up-front fee component of a license under U.S. Patent No. 5,821,058 and under corresponding process claims in its foreign counterparts. The running royalty component of that license (a) may be purchased from Applied Biosystems or (b) may be obtained by purchasing authorized reagents from authorized suppliers and using such reagents in accordance with the label rights accompanying such reagents. Purchase of this instrument does not by itself convey to the purchaser a complete license or right to perform the above processes. This instrument is also licensed under U.S. Patent 5,171,534 and apparatus claims and system claims in foreign counterparts thereof. No other rights are granted expressly, by implication or by estoppel, or under any other patent rights owned or licensable by Applied Biosystems. Applied Biosystems does not 40/49 EXHIBIT 10.23 REDACTED guarantee the performance of this instrument. For more information regarding these and other licenses, please contact the Director of Licensing at Applied Biosystems, 850 Lincoln Centre Drive, Foster City, California 94404. 2. DUAL LICENSED INSTRUMENTS A. LABEL LICENSE: VGI shall place a label in a conspicuous location on each such DUAL Licensed Instrument, and on no other instrument, containing the following statement: NOTICE TO PURCHASER: LIMITED LICENSE This instrument,Serial No. , is authorized for use in DNA sequence and fragment analysis. This authorization is included in the purchase price of this instrument and corresponds to the up-front fee component of a license under process claims of U.S. Patent No. 5,332,666, and U.S. Patent No. 5, 821,058 and under corresponding process claims in their foreign counterparts. The running royalty component of that license (a) may be purchased from Applied Biosystems or (b) may be obtained by purchasing authorized reagents from authorized suppliers and using such reagents in accordance with the label rights accompanying such reagents. Purchase of this instrument does not by itself convey to the purchaser a complete license or right to perform the above processes. This instrument is also licensed under U.S. Patent 5,171,534 and apparatus claims and system claims in foreign counterparts thereof. No other rights are granted expressly, by implication or by estoppel, or under any other patent rights owned or licensable by Applied Biosystems. Applied Biosystems does not guarantee the performance of this instrument. B. MANUAL NOTICE: VGI shall also place a notice in the front of the user's manual for each DUAL Licensed Instrument, and for no other instrument, containing the following statement: NOTICE TO PURCHASER: LIMITED LICENSE This instrument, Serial No. , is authorized for use in DNA sequence and fragment analysis. This authorization is included in the purchase price of this instrument and corresponds to the up-front fee component of a license under process claims of U.S. Patent No. 5,332,666, and U.S. Patent No. 5, 821,058 and under corresponding process claims in their foreign counterparts. The running royalty component of that license (a) may be purchased from Applied Biosystems or (b) may be obtained by purchasing authorized reagents from authorized suppliers and using such reagents in accordance with the label rights accompanying such reagents. Purchase of this instrument does not 41/49 EXHIBIT 10.23 REDACTED by itself convey to the purchaser a complete license or right to perform the above processes. This instrument is also licensed under U.S. Patent 5,171,534 and apparatus claims and system claims in foreign counterparts thereof. No other rights are granted expressly, by implication or by estoppel, or under any other patent rights owned or licensable by Applied Biosystems. Applied Biosystems does not guarantee the performance of this instrument. For more information regarding these licenses, please contact the Director of Licensing at Applied Biosystems, 850 Lincoln Centre Drive, Foster City, California 94404. 42/49 EXHIBIT 10.23 REDACTED APPENDIX B NOTICES TO PURCHASERS FOR REAGENT PRODUCTS 1. CALTECH/DUPONT LICENSED REAGENT PRODUCTS. For products that are both a CALTECH Licensed Reagent Product and a DUPONT Licensed Reagent Product, VGI shall affix to each particular product, either on the product insert accompanying the product or on the product itself, the following label: NOTICE TO PURCHASER: LIMITED LICENSE A license under the process claims of U.S. Patents 5,332,666 and 5,821,058, or their foreign counterpart claims, has an up-front fee component and a running-royalty component. The purchase price of [INSERT PRODUCT NAME] includes limited, non-transferable rights under the running-royalty component to use only this amount of the product to practice the DNA sequence and fragment analysis processes described in said patents when this product is used in conjunction with an authorized DNA sequence analysis instrument whose use is covered under the up-front fee component of these patents. No other rights are granted expressly, by implication, or by estoppel, or under any other patent rights owned or licensable by Applied Biosystems. Further information relating to the purchase of licenses for DNA sequence and fragment analysis and other applications may be obtained by contacting the Director of Licensing at Applied Biosystems, 850 Lincoln Centre Drive, Foster City, CA 94404. 2. CALTECH LICENSED REAGENT PRODUCTS. For products that are CALTECH Licensed Reagent Products but not DUPONT Licensed Reagent Products, VGI shall affix to each particular product, either on the product insert accompanying the product or on the product itself, the following label: NOTICE TO PURCHASER: LIMITED LICENSE A license under the process claims of U.S. Patent 5,821,058, or its foreign counterpart claims, has an up-front fee component and a running-royalty component. The purchase price of [INSERT PRODUCT NAME] includes limited, non-transferable rights under the running-royalty component to use only this amount of the product to practice the DNA sequence and fragment analysis processes described in said patent when this product is used in conjunction with an authorized DNA sequence analysis instrument whose use is covered under the up-front fee component of this patent. No other rights are granted expressly, by implication, or by estoppel, or under any other patent rights owned or licensable by Applied Biosystems. Further information relating to the purchase of licenses for DNA sequence and fragment analysis and other applications may be obtained by contacting the Director of Licensing at Applied Biosystems, 850 Lincoln Centre Drive, Foster City, CA 94404. EXHIBIT 10.23 REDACTED 3. DUPONT LICENSED REAGENT PRODUCTS. For DUPONT Licensed Reagent Products that are not also CALTECH Licensed Reagent Products, VGI shall affix to each particular product, either on the product insert accompanying the product or on the product itself, the following label: NOTICE TO PURCHASER: LIMITED LICENSE A license under the process claims of U.S. Patent 5,332,666, or its foreign counterpart claims, has an up-front fee component and a running-royalty component. The purchase price of [INSERT PRODUCT NAME] includes limited, non-transferable rights under the running-royalty component to use only this amount of the product to practice the DNA sequence and fragment analysis processes described in said patent when this product is used in conjunction with an authorized DNA sequence analysis instrument whose use is covered under the up-front fee component of this patent. No other rights are granted expressly, by implication, or by estoppel, or under any other patent rights owned or licensable by Applied Biosystems. Further information relating to the purchase of licenses for DNA sequence and fragment analysis and other applications may be obtained by contacting the Director of Licensing at Applied Biosystems, 850 Lincoln Centre Drive, Foster City, CA 94404. 44 EXHIBIT 10.23 REDACTED APPENDIX C PRESS RELEASE 45 EXHIBIT 10.23 REDACTED APPENDIX D ALTERNATIVE DISPUTE RESOLUTION In the event of any dispute, difference or question arising between the Parties in connection with this agreement, the construction thereof, or the rights, duties or liabilities of either Party excluding any dispute or controversy for which arbitration is prohibited by any applicable law or treaty, and which dispute is not amicably resolved by the good faith efforts of the Parties under Article 13, then such dispute shall be resolved by binding Alternative Dispute Resolution ("ADR") in accordance with CPR Non-Administered Arbitration Rules in effect on the date of notice of such dispute (the "Rules") except as modified in the manner described below: (a) The arbitration shall be governed by the United States Arbitration Act, 9 U.S.C. Sections 1-16 to the exclusion of state laws inconsistent therewith. Either Party may initiate ADR to resolve a dispute, and such Party shall provide written notice to the other party or to counsel for the other Party informing the other Party of such dispute and the issues to be resolved. Within ten (10) business days after the receipt of such notice, the other Party may by written notice to the counsel for the Party initiating ADR, add additional issues to be resolved. From the date of the ADR notice and until such time as any matter has been finally settled by ADR, the running of the time periods in which a Party must cure a breach of this Agreement shall be suspended as to the subject matter of the dispute. The panel members selected shall be members of the Judicial Panel of the CPR, shall be independent, shall not be a past or present employee, consultant, director or shareholder of either a Party or of an Affiliate of either Party, and shall not have been a panel member in any dispute resolution involving a Party or an Affiliate of either Party. Each panel member shall possess the requisite knowledge and experience to adjudicate the technical and legal issues of the dispute. (b) Within ten (20) business days following the receipt of the Original ADR notice ("Notice Date"), the Parties shall meet and confer to select one (1) panel member. If the parties can not agree on a panel member, within fifty (50) business days following the Notice Date, a panel of three (3) members shall be selected in the following manner. ABD and VGI shall each select one (1) panel member. Each Party shall notify the other Party of its selection and shall include a substantially current curriculum vitae with such notice. (c) Prior to the choice of the third panel member, each Party shall have ten (10) business days from the date either Party is notified of the other Party's selection to the panel to object in good faith to such selection. If either Party makes such and objection, the other Party shall choose another panel member in accordance 46 EXHIBIT 10.23 REDACTED with the conditions above; provide however, such second selection shall be objectionable by the other Party only for cause. (d) Within twenty days of the time for objection to a party's panel member, the two panel members shall then together choose a third panel member, who shall also meet the criteria stated in Paragraph (b) above. Either party may object to the third panel member, but only for cause. (e) No later than ninety (90) business days after selection of the third panel member, the panel shall hold a hearing to resolve each of the issues identified by the Parties. (i) Each Party shall have the right to be represented by counsel at the hearing. (ii) The hearing shall be held in New York, New York or at such other place as agreed upon by the Parties in writing. (e) The ADR proceeding shall be confidential and the panel shall issue appropriate protective orders to safeguard each Party's Confidential Information. Except as required by law, no Party shall make (or instruct the panel to make) any public announcement with respect to the proceedings or decision of the panel without the prior written consent of each other Party. The existence of any dispute submitted to ADR, and the award of the panel, shall be kept in confidence by the Parties and the panel, except as required in connection with the enforcement of such award or as otherwise required by applicable law. (f) It is the intention of the Parties that discovery, although permitted as described herein, will be extremely limited except in exceptional circumstances. The panel shall permit such limited discovery necessary for an understanding of any legitimate issue raised in the ADR, including the production of documents. Each Party shall be permitted but not required to take the deposition of not more than five (5) persons, each such deposition not to exceed six (6) hours in length. If the panel believes that exceptional circumstances exist, and additional discovery is necessary for a full and fair resolution of the issue, the panel may order such additional discovery as the panel deems necessary. At the hearing the Parties may present testimony (either by live witness or deposition) and documentary evidence. The panel shall have sole discretion with regard to the conduct of the hearing; provided however, the admissibility of any evidence shall be governed by the Federal Rules of Evidence. (g) Each Party shall be entitled to no more than four (4) hours of hearing to present testimony or documentary evidence. The testimony of both Parties shall be presented during the same calendar day. Such time limitation shall include any direct, cross or rebuttal testimony, but such time limitation shall only be charged against the Party conducting such direct, cross or rebuttal testimony. It shall be the responsibility of the panel to determine whether the Parties have had the four (4) hours to which they are 47 EXHIBIT 10.23 REDACTED entitled. If the panel believes that exceptional circumstances exist, and additional hearing time is necessary for a full and fair resolution of the issue, the panel may order such additional hearing time as the panel deems necessary. (h) At least fifteen (15) business days prior to the date set for the hearing, each Party shall submit to each other Party and the panel a list of all documents on which such Party intends to rely in any oral or written presentation to the panel and a list of all witnesses, if any, such Party intends to call at such hearing and a brief summary of each witnesses testimony. (i) At least five (5) business days prior to the hearing, each Party must submit to the panel and serve on each other Party a proposed ruling on each issue to be resolved. Such writing shall be limited to presenting the proposed ruling, shall contain no argument or analysis of the facts or issues, and shall be limited to not more than ten (10) pages. (j) Not more than five (5) business days following the close of hearings, the Parties may each submit post hearing briefs to the panel addressing the evidence and issues to be resolved. Such post hearing briefs shall not be more than fifty (50) pages. (k) The panel shall rule on each disputed issue after the hearing as expeditiously as possible, but in no event more than thirty (30) days after the close of the hearings. The panel shall, in rendering its decision, apply the substantive law of the state of California, U.S.A., and without giving effect to its principles of conflicts of law, and without giving effect to any rules or laws relating to arbitration. The panel is not empowered with the remedy of termination of the license(s) granted by the accompanying Agreement. (l) Any judgment upon the award rendered by the panel may be entered in any court having jurisdiction thereof. The decision rendered in any such ADR shall be final and not appealable, except in cases of fraud or bad faith on the part of the panel or any Party to the ADR proceeding in connection with the conduct of such proceedings. (m) The panel shall have the option to assess costs and expenses to the non-prevailing Party, otherwise the Parties shall pay their own costs (including, without limitation, attorneys fees) and expenses in connection with such ADR. 48 EXHIBIT 10.23 REDACTED APPENDIX E VISIBLE GENETICS PRODUCT LIST (AS OF APRIL 18, 2000) TRUGENE(TM)HIV-1 Genotyping Kit (Version Dec. 3, 1999) TRUGENE(TM)HCV Genotyping Kit (Version Jan.21, 2000) GeneKit(TM) HLA Sequencing Assay Class I-A Locus (Version Feb. 28, 2000) GeneKit(TM) HLA Sequencing Assay Class I-B Locus (Version Feb. 28, 2000) GeneKit(TM) HLA Sequencing Assay Class I-C Locus (Version Feb. 28, 2000 ) GeneKit(TM) HLA Sequencing Assay Class II-DRB1 Locus (Version 30104) 7-Deaza dGTP Cy Dye Primer Cycle Sequencing Kit (Version 1) Cy(TM)5/Cy5.5 Dye Primer Sequencing Kit (Version 2) GeneKit(TM) p53 Mutation Detection Assay (Version June 23, 1999) 7-Deaza Thermo Sequenase Core Sequencing Kit GeneKit(TM)HPV High Resolution Genotyping Assay GeneKit(TM)HCV NS5B Genotyping Assay GeneKit(TM) HBV Genotyping Assay MicroGene Blaster(TM) (and all parts and accessories) MicroGene Clipper(TM) (and all parts and accessories) Long-Read Tower(TM) (and all parts and accessories) OEM Products including computers, printers and networking products Gel Toaster(TM) System (and all parts and accessories) Long Read Gel Toaster(TM) System (and all parts and accessories) GeneObjects(TM) Software and upgrades including Fragment Analysis software GeneLibrarian(TM) and upgrades GeneLibrarian(TM) CL and upgrades GeneLibrarian(TM) Application Modules and upgrades TRUGENE(TM) CMS Application MicroCel(TM) Cassettes (various) SureFill(TM) Cartridges (various, including accessories) P53 Primer Sets: Exon 2+3, Exon 4, Exon 5, Exon 6, Exon 7, Exon 8, Exon 9, Exon 10, Exon 11 Cy5.5 Labelled Size Standards (various) Cy5 Labelled Size Standards CyDye labelled custom primers Cy5 standard sequencing primers (various) Cy5.5 standard sequencing primers (various) Sequencing accessories including multichannel pipettors, tips, and adaptors 1 and 2 dye core sequencing kits (+/- deaza GTP) CyDye mono reactive dye Pink loading dye and sequencing chemicals (various) And all prior versions thereof, where applicable. 49 EX-10.24 3 a2041520zex-10_24.txt EXHIBIT 10.24 EXHIBIT 10.24 THIS INDENTURE made the 27th day of March, 2000. IN PURSUANCE OF THE SHORT FORMS OF LEASES ACT. B E T W E E N: LuCLIFF COMPANY LIMITED (hereinafter called the "Landlord") THE PARTY OF THE FIRST PART, - and - VISIBLE GENETICS INC., a Corporation duly incorporated under the laws of the Province of Ontario (hereinafter called the "Tenant") THE PARTY OF THE SECOND PART. WHEREAS the Landlord has agreed to lease to the Tenant and the Tenant has agreed to lease from the Landlord the hereinafter described premises forming part of LuCliff Place, an integrated residential and commercial development, located at the South West intersection of Bay and Gerrard Streets in the City of Toronto, in the Province of Ontario; ARTICLE 1 DEFINITIONS The parties hereto agree that when used in this Lease the following words or expressions have the meaning hereinafter set forth: SECTION 1.01 "ADDITIONAL RENT" means any and all sums of money or charges required to be paid by the Tenant under this Lease (except Basic Rent), whether or not the same are designated "Additional Rent" or whether or not payable to the Landlord or otherwise, and all such sums are payable in lawful money of Canada without deduction, abatement, set-off or compensation whatsoever. Additional Rent may be estimated by the Landlord from time to time and such estimated amount is due and payable in equal monthly instalments in advance on the same day as monthly instalments of Basic Rent. SECTION 1.02 "BASIC RENT" means the rent specified in Section 4.01 hereof, INCLUDING BOTH THE "BASIC 9TH FLOOR RENT" AND THE "BASIC 10TH, 11TH, AND 12TH FLOOR RENT" DESCRIBED THEREIN. SECTION 1.03 "BUILDING" means the Office Section and the lobbies, corridors, elevators and facilities serving same. SECTION 1.04 "BUSINESS HOURS" means the period from 8 a.m. to 6 p.m. on Monday to Friday, inclusive, and 8 a.m. to 1 p.m. on Saturdays unless Saturday is a holiday. SECTION 1.05 "COMMON AREAS" mean the common areas, facilities, utilities, improvements, equipment and installations intended and designated from time to time by the Landlord for the common use and enjoyment of all the tenants of the Office Section of the Building, including Page 2 their respective agents, invitees, servants and employees in common with others entitled to the use or benefit thereof in the manner and for the purposes permitted by this Lease, and includes the pedestrian mall of the Building. SECTION 1.06 "LANDLORD'S TAXES" shall mean the aggregate of all Taxes charged against the Office Section or the Landlord in respect thereof including Common Areas and parking facilities and the lands reasonably attributable to the Office Section, plus all costs and expenses (including legal and other professional fees and interest and penalties or deferred payments) incurred, in good faith, by the Landlord, in contesting, resisting or appealing any of the foregoing, and including any amounts imposed, assessed, levied or charged in substitution for or in lieu of any such Taxes, but excluding such taxes as capital gains taxes, corporate, income, profit or excess profit taxes to the extent such taxes are not levied in lieu of any of the foregoing against the Office Section or the Landlord in respect thereof and shall also include any and all taxes which may in the future be levied in lieu of Taxes as herein defined. The Landlord shall be entitled to adjust the Landlord's Taxes to an amount that would have been paid had the Building been fully assessed in the year to which the taxes are attributable as a fully occupied office building. SECTION 1.07 "LEASED PREMISES" means, EXPRESSLY SUBJECT TO THE PROVISIONS OF SECTION 3.01 HEREOF, that portion of the Office Section of the Building as is outlined in colour on the floor plan attached hereto as Schedule "A" forming a part hereof, comprising THE ENTIRE 9TH, 10TH, 11TH, AND 12TH FLOORS OF THE OFFICE SECTION, EACH OF SUCH FLOORS having a Rentable Floor Area of approximately SIX THOUSAND, EIGHT HUNDRED AND SEVENTY SIX (6,876) square feet, AND TWENTY-SEVEN THOUSAND, FIVE HUNDRED AND FOUR (27,504) SQUARE FEET IN THE AGGREGATE. SECTION 1.08 "OFFICE SECTION" means those portions of the Building comprising a part of LuCliff Place intended by the Landlord to be leased for office purposes and the Common Areas and facilities serving same. SECTION 1.09 "OPERATING COSTS" means the Landlord's cost of operating the Building as a first-class office building which shall include all costs properly attributable in accordance with generally accepted accounting practise determined by the Landlord's auditors to the operation, maintenance and management of the Building and the lands appurtenant thereto and shall, without limiting the generality of the foregoing, include: (a) all monies reasonably paid or incurred to persons, firms, companies or corporations employed in the maintenance, security and cleaning of the Building and the lands appurtenant thereto; (b) all costs of repairs; (c) the cost of running, maintaining and repairing the heating, ventilating and air-conditioning plants, distribution systems and associated equipment, including the cost of all fuel, gas and steam; (d) elevator maintenance and operation costs; (e) the cost of providing hot and cold water; (f) the cost of providing electricity not otherwise payable by tenants; (g) window cleaning costs; (h) cost of all-risk, fire, extended perils, liability, boiler and rental insurance; (i) telephone and other public utility costs; Page 3 (j) service contracts with independent contractors; (k) cost of watchmen, reception staff and other on-site personnel, including salaries, wages and fringe benefits; (l) remuneration paid at competitive rates to managing agents; (m) audit costs and accounting services including such costs incurred for the imposition and determination of charges to tenants; (n) costs of legal fees on a solicitor and his own client basis; (o) costs of capital improvements and other costs determined by the Landlord's auditor to be properly chargeable to the capital account to the extent that such capital improvements reduce or avoid Operating Costs; (p) costs of capital improvements and other costs and depreciation determined by the Landlord's auditor to be properly chargeable to replace or upgrade any fixtures, furnishings, and equipment in the Common Areas, including the fixtures and equipment of and for the heating, ventilation, and air-conditioning system, such depreciation being calculated as may be designated by the Landlord's auditors and in accordance with generally accepted principles. Operating Costs shall exclude debt service, depreciation except as mentioned above and expenses properly chargeable to capital account except as mentioned above. In the event any cost or expense is included as an integral part of an expense applicable to a portion of LuCliff Place in addition to the Building or is attributable to part of the Building used in common with tenants of the retail or commercial portions, the Landlord acting reasonably shall make an allocation of such cost or expense which is reasonably attributable to the Building. In the event of any dispute by the Tenant as to the amount of such costs and allocation, an opinion of the Landlord's auditors shall be final and binding as to the amount and allocation for the period. NOTWITHSTANDING THE FOREGOING THE LANDLORD AGREES THAT IN THE SECOND AND SUBSEQUENT YEARS OF THE TERM, OPERATING COSTS (EXCLUDING ANY TAX OR UTILITY COMPONENT THEREOF) WILL NOT INCREASE OVER THE PREVIOUS YEAR BY A PERCENTAGE GREATER THAN THE PERCENTAGE INCREASE IN THE COMMON PRICE INDEX FOR ALL ITEMS IN TORONTO FOR THE SAME PERIOD. SECTION 1.10 "PROPORTIONATE SHARE" means the fraction which has as its numerator the Rentable Floor Area of the Leased Premises and has as its denominator the total Rentable Floor Area of the Building whether rented or not, subject only to the adjustments which follow. The total Rentable Floor Area of the Building shall be calculated as if the Building were entirely leased by tenants renting whole floors. The Rentable Floor Area of the Leased Premises, if the Leased Premises consists of or includes a part of a floor, shall be increased by the fraction of the total area of the Service Areas (as hereinafter defined) if any, on such floor, which has as it numerator the Rentable Floor Area contained in the Leased Premises on such floor and has as its denominator the sum of the Rentable Floor Areas of such floor. The lobby and entrances on the ground floor and subsurface floors used in common by tenants and mechanical equipment areas shall be excluded from the foregoing calculations. The calculation of the total Rentable Floor Area of the Building whether rented or not shall be determined by the Landlord's architect and shall be adjusted from time to time to give effect to any structural or functional change affecting the same. The calculation of the Rentable Floor Area of the Leased Premises shall be adjusted from time to time to give effect to any change therein during the Term of the Lease. SECTION 1.11 "RENT" means the Basic Rent and Additional Rent. Page 4 SECTION 1.12 "RENTABLE FLOOR AREA" (a) in the case of a whole floor of the Building shall include all areas within the outside walls and shall be computed by measuring to the inside surface of the glass outer building walls without deduction for columns and projections necessary to the Building and shall include Service Areas, but shall not include stairs and elevator shafts supplied by the Landlord and flues, stacks, pipe shafts or vertical ducts with their enclosing walls within the area occupied. (b) in the case of a part of a floor of the Building shall include all areas occupied and shall be computed by measuring from the inside surface of the glass outer building walls to the office side of corridors or other permanent partitions and to the centre of partitions which separate the area occupied from adjoining rentable areas without deduction for columns and projections necessary to the Building and shall include Service Areas exclusively serving only the area occupied, plus a proportionate share of the non-exclusive Service Areas located on such floor, but shall not include stains and elevator shafts supplied by the Landlord and flues, stacks, pipe shafts or vertical ducts with their enclosing walls within the area occupied. SECTION 1.13 "SERVICE AREAS" shall mean the area of corridors, elevator lobbies, service elevator lobbies, toilets, air-conditioning rooms, fan rooms, janitor's closets, telephone and electrical closets serving the Leased Premises in common with other premises. SECTION 1.14 "STIPULATED RATE OF INTEREST" means the prime rate of interest charged from time to time by the Royal Bank of Canada at its head office in Toronto to its most preferred borrowers, plus three percent (3%) per annum. SECTION 1.15 "TAXES" shall mean all real property taxes, rates, duties, levies, fees, charges, sewer levies, local improvement rates, and assessments whatsoever imposed, assessed, levied or charged by any school, municipal, regional, provincial, federal, parliamentary or other governmental body, corporation, authority, agency or commission (including, without limitation, school boards and utility commissions) and including all costs and expenses (including legal and other professional fees and interest and penalties on deferred payments) incurred by the Landlord in good faith in contesting, resisting or appealing any of the foregoing, and including any amounts imposed, assessed, levied or charged in substitution for or in lieu of any such taxes, rates, duties, levies, fees, charges or assessments, but excluding such taxes as capital gains taxes, corporate, income, profit or excess profit taxes to the extent such taxes are not levied in lieu of any of the foregoing against the Building or the Landlord in respect thereof and shall also include any and all taxes which may in the future be levied in lieu of taxes as hereinbefore defined. SECTION 1.16 "TENANT'S TAXES" shall mean the aggregate of: (a) all Taxes (whether imposed upon the Landlord or the Tenant) attributable to the personal property, trade fixtures, business, income, occupancy and/or turnover of the Tenant or any other occupant of the Leased Premises, and to any leasehold improvements or fixtures installed by or on behalf of the Tenant within the Leased Premises and to the use by the Tenant of any of the Common Areas; and, (b) the amount by which Taxes (whether imposed upon the Landlord or the Tenant) are increased above the Taxes which would have otherwise been payable, which increase is as a result of the use of the Leased Premises or the Tenant or any other occupant of the Leased Premises being taxed or assessed in support of separate schools. Page 5 ARTICLE 2 NET LEASE AND SECURITY DEPOSIT SECTION 2.01 NET LEASE The Tenant acknowledges and agrees that it is intended that this Lease shall be a completely carefree net lease to the Landlord, that the Landlord shall not be responsible during the Term of the Lease for any costs, charges, expenses and outlays of any nature whatsoever arising from or relating to the Leased Premises, or the use and occupancy thereof, or the contents thereof, or the business carried on therein, and the Tenant shall pay all charges, impositions, costs and expenses of every nature and kind relating to the Leased Premises, except as expressly herein set out and the Tenant covenants with the Landlord accordingly. SECTION 2.02 SECURITY DEPOSIT INTENTIONALLY DELETED ARTICLE 3 DEMISE AND TERM SECTION 3.01 DEMISE AND TERM In consideration of the rents, covenants and agreements herein contained on the part of the Tenant to be paid, observed and performed: (a) THE LANDLORD LEASES TO THE TENANT AND THE TENANT LEASES FROM THE LANDLORD THAT PORTION OF THE LEASED PREMISES COMPRISING THE ENTIRE 10TH, 11TH, AND 12TH FLOORS OF THE OFFICE SECTION OF THE BUILDING FOR AND DURING THE TERM (HEREINAFTER REFERRED TO AS THE "TERM") OF FIVE (5) YEARS COMPUTED FROM THE FIRST DAY OF JUNE, 2000, AND FROM THENCEFORTH NEXT ENSUING AND FULLY TO BE COMPLETED AND ENDED ON THE 31ST DAY OF MAY, 2005, AND (b) THE LANDLORD LEASES TO THE TENANT AND THE TENANT LEASES FROM THE LANDLORD THAT PORTION OF THE LEASED PREMISES COMPRISING THE ENTIRE 9TH FLOOR OF THE OFFICE SECTION OF THE BUILDING FOR AND DURING THE TERM (HEREINAFTER REFERRED TO AS THE "9TH FLOOR TERM") OF ONE (1) YEAR COMPUTED FROM THE FIRST DAY OF JUNE, 2000, AND FROM THENCEFORTH NEXT ENSUING AND FULLY TO BE COMPLETED AND ENDED ON THE 31ST DAY OF MAY, 2001. THE EXPRESSION "LEASED PREMISES" SHALL MEAN AND REFER TO THE PREMISES LEASED FROM TIME TO TIME BY THE TENANT PURSUANT TO THIS LEASE; UNTIL THE EXPIRATION OF THE 9TH FLOOR TERM (AS THE SAME MAY BE EXTENDED PURSUANT TO SECTION 19.01 HEREOF) THE EXPRESSION "LEASED PREMISES" SHALL MEAN AND REFER TO THE ENTIRE 9TH, 10TH, 11TH, AND 12TH FLOORS OF THE OFFICE SECTION OF THE BUILDING, AND FROM AND AFTER THE EXPIRATION OF THE 9TH FLOOR TERM OR EXTENSION THEREOF AS THE CASE MAY BE THE EXPRESSION "LEASED PREMISES" SHALL MEAN AND REFER TO THE ENTIRE 10TH, 11TH, AND 12TH FLOORS OF THE OFFICE SECTION OF THE BUILDING. NOTWITHSTANDING THAT THE 9TH FLOOR TERM MAY EXPIRE SOONER THAN THE TERM, THE LEASE OF THE 9TH FLOOR PORTION OF THE LEASED PREMISES AND THE LEASE OF THE 10TH, 11TH, AND 12TH FLOOR PORTION OF THE LEASED PREMISES SHALL FOR ALL PURPOSES BE CONSIDERED A SINGLE LEASE BY THE TENANT, AND IN THE EVENT OF ANY DEFAULT BY THE TENANT WHETHER IN RESPECT OF THE 9TH FLOOR PORTION OF THE LEASED PREMISES OR IN RESPECT OF THE 10TH, 11TH, AND 12TH FLOOR PORTION OF THE LEASED PREMISES, THE LANDLORD SHALL BE ENTITLED TO EXERCISE ALL OF ITS RIGHTS AND REMEDIES HEREUNDER OR AT LAW WITH RESPECT TO THE ENTIRE LEASED PREMISES. Page 6 Page 7 SECTION 3.02 EXISTING LEASE, EARLY OCCUPANCY (a) THE LANDLORD AND THE TENANT ACKNOWLEDGE AND AGREE THAT THE TENANT CURRENTLY OCCUPIES THE 10TH, 11TH, AND 12TH FLOOR PORTION OF THE LEASED PREMISES PURSUANT TO AN EXISTING LEASE MADE BETWEEN THE LANDLORD AND THE TENANT DATED MARCH 31, 1992, AS AMENDED (THE "EXISTING LEASE"). THE TENANT SHALL CONTINUE TO OCCUPY THE 10TH, 11TH, AND 12TH FLOOR PORTION OF THE LEASED PREMISES PURSUANT TO THE EXISTING LEASE UNTIL THE EXPIRATION OF ITS TERM ON MAY 31, 2000; UPON THE EXPIRATION OF THE TERM OF THE EXISTING LEASE THE TENANT'S OCCUPANCY OF THE 10TH, 11TH, AND 12TH FLOOR PORTION OF THE LEASED PREMISES SHALL BE GOVERNED BY THE TERM OF THIS LEASE, AND ALL OF THE RIGHTS, PRIVILEGES, OPTIONS, COVENANTS, AGREEMENTS, AND OBLIGATIONS OF THE LANDLORD AND THE TENANT UNDER THE EXISTING LEASE SHALL TERMINATE AND BE AT AN END; PROVIDED THAT NOTWITHSTANDING SUCH TERMINATION: (i) THE LANDLORD AND THE TENANT SHALL REMAIN LIABLE FOR ANY BREACH, DEFAULT, OR NON-OBSERVANCE OF ANY COVENANT, AGREEMENT, CONDITION, OR PROVISO CONTAINED IN THE EXISTING LEASE WHICH OCCURS PRIOR TO THE COMMENCEMENT OF THE TERM OF THIS LEASE ON JUNE 1, 2000; (ii) THE LANDLORD AND THE TENANT SHALL READJUST THE ADDITIONAL RENT PAID OR PAYABLE UNDER THE EXISTING LEASE UP TO ITS EXPIRATION AS SET OUT IN THE EXISTING LEASE; THE LANDLORD AND THE TENANT FURTHER AGREE THAT ANY SUCH DEFAULT, BREACH, OR NON-OBSERVANCE BY THE TENANT UNDER THE EXISTING LEASE SHALL BE DEEMED TO BE DEFAULT UNDER THIS LEASE, AND IF THE LANDLORD VALIDLY TERMINATES THE EXISTING LEASE BY REASON OF ANY BREACH, DEFAULT, OR NON-OBSERVANCE BY THE TENANT THEREUNDER, THEN THE LANDLORD SHALL HAVE THE RIGHT, BUT NOT THE OBLIGATION, TO TERMINATE THIS LEASE; (b) FOLLOWING THE EXECUTION OF THIS LEASE BY BOTH THE LANDLORD AND THE TENANT THE TENANT SHALL BE ENTITLED TO OCCUPY THE 9TH FLOOR PORTION OF THE LEASED PREMISES PRIOR TO THE COMMENCEMENT DATE OF THE TERM, BUT UPON NOT LESS THAN ONE (1) BUSINESS DAY'S WRITTEN NOTICE TO THE LANDLORD, FOR THE PURPOSES OF CONSTRUCTING ITS LEASEHOLD IMPROVEMENTS, INCLUDING INSTALLATION OF ITS TRADE FIXTURES, FURNITURE, EQUIPMENT, AND TELEPHONE AND COMPUTER CABLING. THE LANDLORD SHALL ALSO HAVE ACCESS TO AND OCCUPANCY OF THE 9TH FLOOR PORTION OF THE LEASED PREMISES FOR ITS WORK REQUIRED UNDER SECTION 19.04 HEREOF. THE TENANT SHALL BE BOUND BY ALL OF THE TERMS, CONDITIONS, COVENANTS, AND PROVISOS OF THIS LEASE DURING ANY SUCH PERIOD OF OCCUPATION PRIOR TO THE COMMENCEMENT DATE OF THE TERM, SAVE AND EXCEPT THAT DURING SUCH PERIOD OR PERIODS THE TENANT SHALL NOT BE REQUIRED TO PAY ANY BASIC RENT OR ADDITIONAL RENT WHETHER OR NOT THE TENANT CARRIES ON BUSINESS IN THE 9TH FLOOR PORTION OF THE LEASED PREMISES. THE TENANT SHALL BE REQUIRED TO PAY TENANT'S TAXES AND TO PAY FOR ANY ADDITIONAL SERVICES DURING ANY SUCH PERIOD OF EARLY OCCUPANCY. ARTICLE 4 RENT SECTION 4.01 BASIC RENT (A) WITH RESPECT TO THE 10TH, 11TH, AND 12TH FLOOR PORTION OF THE LEASED PREMISES the Tenant shall pay yearly and every year during the Term to the Landlord, without any deduction, abatement, set-off or diminution whatsoever, a Basic Rent of ONE Page 8 HUNDRED AND TWENTY EIGHT THOUSAND, NINE HUNDRED AND TWENTY FIVE DOLLARS ($128,925.00) of lawful money of Canada, payable in equal consecutive monthly instalments in advance of TEN THOUSAND, SEVEN HUNDRED AND FORTY THREE DOLLARS AND SEVENTY FIVE CENTS ($10,743.75) upon the date of commencement of the Term and on the first day of each and every calendar month during the Term thereafter to the Landlord at 700 Bay Street, Toronto, Ontario, M5G 1Z6, or at such other place as the Landlord shall from time to time designate (REFERRED TO IN THIS LEASE AS THE "BASIC 10TH, 11TH, AND 12TH FLOOR RENT"). IT IS ACKNOWLEDGED AND AGREED THAT THE BASIC 10TH, 11TH, AND 12TH FLOOR RENT DESCRIBED IN THIS SECTION 4.01 IS BASED ON AN ANNUAL RENTAL OF SIX DOLLARS AND TWENTY FIVE CENTS ($6.25) PER SQUARE FOOT OF RENTABLE FLOOR AREA OF THE LEASED PREMISES. IT IS FURTHER ACKNOWLEDGED AND AGREED THAT THE LANDLORD'S ARCHITECT HAS CERTIFIED THAT THE 10TH, 11TH, AND 12TH FLOOR PORTION OF THE LEASED PREMISES HAS A RENTABLE FLOOR AREA OF TWENTY THOUSAND, SIX HUNDRED AND TWENTY EIGHT (20,628) SQUARE FEET, AND THE TENANT ACKNOWLEDGES AND AGREES THAT IT IS SATISFIED WITH THE SAID LANDLORD'S ARCHITECT'S CERTIFICATE. (b) WITH RESPECT TO THE 9TH FLOOR PORTION OF THE LEASED PREMISES THE TENANT SHALL PAY YEARLY AND EVERY YEAR DURING THE 9TH FLOOR TERM TO THE LANDLORD, WITHOUT ANY DEDUCTION, ABATEMENT, SET-OFF OR DIMINUTION WHATSOEVER, A BASIC RENT OF TWENTY SEVEN THOUSAND, FIVE HUNDRED AND FOUR DOLLARS ($27,504.00) OF LAWFUL MONEY OF CANADA, PAYABLE IN EQUAL CONSECUTIVE MONTHLY INSTALMENTS IN ADVANCE OF TWO THOUSAND, TWO HUNDRED AND NINETY TWO DOLLARS ($2,292.00) UPON THE DATE OF COMMENCEMENT OF THE 9TH FLOOR TERM AND ON THE FIRST DAY OF EACH AND EVERY CALENDAR MONTH DURING THE 9TH FLOOR TERM THEREAFTER TO THE LANDLORD AT 700 BAY STREET, TORONTO, ONTARIO, M5G 1Z6, OR AT SUCH OTHER PLACE AS THE LANDLORD SHALL FROM TIME TO TIME DESIGNATE (REFERRED TO IN THIS LEASE AS THE "BASIC 9TH FLOOR RENT"). IT IS ACKNOWLEDGED AND AGREED THAT THE BASIC 9TH FLOOR RENT DESCRIBED IN THIS SECTION 4.01(B) IS BASED ON AN ANNUAL RENTAL OF FOUR DOLLARS ($4.00) PER SQUARE FOOT OF RENTABLE FLOOR AREA OF THE 9TH FLOOR PORTION OF THE LEASED PREMISES. IT IS FURTHER ACKNOWLEDGED AND AGREED THAT THE RENTABLE FLOOR AREA OF THE 9TH FLOOR PORTION OF THE LEASED PREMISES HAS NOT YET BEEN CERTIFIED AS AN ACCURATE MEASUREMENT BY THE ARCHITECTS. IF THE CERTIFICATE OF MEASUREMENT PREPARED BY THE ARCHITECTS REVEALS THAT THE NUMBER OF SQUARE FEET OF RENTABLE FLOOR AREA OF THE 9TH FLOOR PORTION OF THE LEASED PREMISES IS GREATER OR LESS THAN SIX THOUSAND, EIGHT HUNDRED AND SEVENTY SIX (6,876) SQUARE FEET THE BASIC ANNUAL NET RENTAL PAYABLE PURSUANT TO THIS SECTION 4.01(B) SHALL NOT BE THE AMOUNT SET OUT ABOVE, BUT SHALL BE AN AMOUNT EQUAL TO FOUR DOLLARS ($4.00) TIMES THE NUMBER OF SQUARE FEET OF RENTABLE FLOOR AREA OF THE 9TH FLOOR PORTION OF THE LEASED PREMISES AS SET FORTH IN THE SAID ARCHITECTS' CERTIFICATE, AND THE EQUAL MONTHLY INSTALMENTS SHALL BE 1/12TH OF SUCH AMOUNT. NOTWITHSTANDING THE FOREGOING THE TENANT AGREES THAT BASIC 9TH FLOOR RENT SHALL BE SUBJECT TO INCREASE IF THE TENANT EXERCISES ITS SECOND OPTION TO EXTEND THE 9TH FLOOR TERM AS DESCRIBED IN SECTION 19.01(B) HEREOF. SECTION 4.02 ADDITIONAL RENT The Tenant shall pay to the Landlord, yearly and every year during the Term, as additional rent ("Additional Rent"): (a) the amount of any Taxes payable by the Tenant to the Landlord pursuant to Article 6 hereof; plus Page 9 (b) the amount of any payments required to be made by the Landlord on account of the cost of utilities supplied to the Leased Premises, together with the cost of lamp and bulb replacements in accordance with the provisions of Section 5.03 hereof; plus (c) the Tenant's Proportionate Share of the Operating Costs in accordance with Section 5.01, including, without limitation, the cost of providing caretaking and cleaning services to the Leased Premises in accordance with the provisions of Section 5.02 hereof; PLUS (d) the Cost of Additional Services in accordance with the provisions of Section 7.12 hereof. SECTION 4.03 PAYMENT OF ADDITIONAL RENT The Additional Rent specified in Section 4.02 hereof, shall be paid and adjusted with reference to a period of twelve (12) calendar months. The Landlord shall have the option from time to time to select a different fiscal period of twelve months or broken portion thereof by notice to the Tenant. After the commencement of the Term, the Landlord shall advise the Tenant, in writing, of its estimate of the Additional Rent to be payable by the Tenant for the period which commenced upon the commencement date of the Term until the end of the respective calendar year, and the 90 days after the commencement of each succeeding calendar period (which commences during the Term) the Landlord shall advise the Tenant in writing of its estimate for the Additional Rent to be incurred in such period or broken portion thereof. Such estimate shall in every case by a reasonable estimate and based wherever possible upon previous operating expenses and, if required by the Tenant, shall be accompanied by reasonable particulars of the manner on which it was arrived at. The Additional Rent payable by the Tenant shall be paid in equal monthly instalments in advance on the first day of each and every month during the Term based on the Landlord's estimate as aforesaid. From time to time the Landlord may re-estimate on a reasonable basis, the amount of Additional Rent for any calendar year or broken portion thereof, in which case the Landlord shall advise the Tenant in writing of such re- estimate and fix new equal monthly instalments for the remaining balance of such calendar year or broken portion thereof such that, after giving credit for the instalment paid by the Tenant on the basis on the previous estimate or estimates, all the Additional Rent will have been paid during such calendar year or broken portion thereof. Within ninety (90) days after the end of each of the Landlord's fiscal period or broken period thereof (or with respect to any component of Additional Rent which cannot be computed within such ninety (90) day period, within thirty (30) days after the Landlord shall have received the information necessary to compute such component of Additional Rent), the Landlord shall submit to the Tenant a detailed statement of actual additional rent payable and a calculation of the amounts by which the Additional Rent payable by the Tenant exceeds or falls short, as the case may be, of the aggregate instalments paid by the Tenant on account of Additional Rent for the calendar year. The Tenant shall further be entitled to receive an audited operating cost statement (certified by the Landlord's chartered accountant) annually not later than 180 days after the end of each calendar year during the Term or renewal thereof. Within thirty (30) days after the receipt of such statement either the Tenant shall pay to the Landlord any amount by which the amount found payable by the Tenant with respect to such calendar year or broken portion thereof, exceeds the aggregate of the monthly payments made by it on account thereof during such calendar year or broken portion thereof or the Landlord shall pay to the Tenant any amount by which the amount found payable as aforesaid is less than the aggregate of such monthly payments. In the event of any dispute by the Tenant of the amount of Additional Rent payable, an opinion of the Landlord's auditors shall be conclusive as to the amount thereof for any period to which such opinion relates. SECTION 4.04 ACCRUAL OF RENT Page 10 Rent shall be considered as accruing from day to day hereunder, and where it becomes necessary to calculate such Rent for an irregular period of less than one year or less than one calendar month, an appropriate apportionment and adjustment shall be made, including an apportionment and adjustment of Additional Rent. Where the calculation of Additional Rent cannot be made until after the termination of this Lease, the obligation of the Tenant to pay such Additional Rent shall survive the termination hereof, and such amount shall be payable by the Tenant upon demand by the Landlord. SECTION 4.05 NO SET-OFF The Tenant hereby expressly waives the benefits of Section 35 of the Landlord and Tenant Act and any amendments thereto and any present of future Act of the Province of Ontario permitting the Tenant to claim a set-off against Rent for any case whatsoever. SECTION 4.06 ADDITIONAL RENT TREATED AS RENT All Additional Rent shall be payable and recoverable as Rent, but in the manner as herein provided, and the Landlord shall have all rights against the Tenant for default in any such payment as in the case of arrears in Rent. SECTION 4.07 RENT PAST DUE If the Tenant fails to pay, when the same is due and payable, any Basic Rent, Additional Rent or other amounts payable by the Tenant under this Lease, such unpaid amounts bear interest at an annual rate equal to the Stipulated Rate of Interest. ARTICLE 5 OPERATING, CARETAKING, AND ELECTRICITY COSTS SECTION 5.01 OPERATING COSTS The Tenant covenants to pay to the Landlord, as Additional Rent, its Proportionate Share of Operating Costs. Payments shall be made in accordance with the provisions of Section 4.02 and 4.03 hereof. SECTION 5.02 CARETAKING COSTS The Tenant covenants to pay to the Landlord as Additional Rent the annual cost of providing the caretaking and cleaning services mentioned in Section 9.08 and 9.09 hereof. In the event that such costs form an integral part of caretaking and cleaning services provided for portions of the Building in addition to the Leased Premises, the Landlord, acting reasonably, shall make an allocation of that portion of such costs which is reasonably attributable to the Leased Premises. In the event of any dispute by the Tenant of the amount of such costs, an opinion of the Landlord's auditors shall be conclusive as to the amount thereof for any period to which such opinion relates. Payments shall be made in accordance with the provisions of Section 4.02 and 4.03 hereof. Payment shall be made in accordance with the provisions of Section 4.02 and 4.03 hereof. SECTION 5.03 ELECTRICITY COSTS The Tenant covenants to pay to the Landlord as Additional Rent, the cost of electric current supplied to the Leased Premises, but not including the cost of electric current included in Operating Costs, as defined. The Tenant further covenants to pay to the Landlord the Page 11 total cost of any replacement of electric light bulbs, tubes and ballasts in the Leased Premises to replace those installed at the commencement of the Term. The Landlord may adopt a system of re-lamping and re-ballasting periodically on a group basis in accordance with good practise in this regard and the Tenant shall pay the actual cost, including parts and labour. Page 12 ARTICLE 6 TAXES SECTION 6.01 PAYMENT OF TENANTS TAXES The Tenant covenants to pay all Tenant's Taxes, as and when the same become due and payable. Where any Tenant's Taxes are payable by the Landlord to the relevant taxing authorities, the Tenant covenants to pay the amount thereof to the Landlord, as Additional Rent, within ten (10) days after written demand. SECTION 6.02 TENANTS PROPORTIONATE SHARE OF LANDLORD'S TAXES (a) The Tenant covenants to pay to the Landlord, as Additional Rent, its Proportionate Share of the Landlord's Taxes in each calendar year. Payments shall be made in accordance with the provisions of Section 4.02 and 4.03 hereof. (b) Notwithstanding the provisions of paragraph 6.02(a) above, if a separate tax bill is issued by any taxation authority for the Leased Premises the Tenant shall not pay its Proportionate Share of the Landlord's Taxes in respect of which the separate tax bill is issued but shall pay to the Landlord the amount of such separate tax bill, together with the Tenant's Proportionate Share of such Landlord's Taxes that are assessed against the Common Areas, and facilities and surrounding lands, if any. (c) If the Leased Premises are separately assessed by any taxing authority then for the purposes of this Section 6.02 and for the purposes of determination of the Tenant's payment on account of the Landlord's Taxes, the Tenant's Proportionate Share shall not mean the fraction defined in Section 1.10 of this Lease but shall mean a fraction, the numerator of which is the assessed value of the Leased Premises and the denominator of which is the assessed value of all premises in the Office Section which are leased or set aside by the Landlord for leasing (expressly excluding the parking lot and Common Areas, facilities, and surrounding lands). SECTION 6.03 PAYMENT OF LANDLORD'S TAXES - APPEALS The Landlord covenants to pay all Landlord's Taxes, subject, nevertheless, to the payments on account of Landlord's Taxes required to be made by the Tenant elsewhere in this Lease. The Landlord may appeal any official assessment or the amount of any Taxes or other taxes based on such assessment and relating to the Building. In connection with any such appeal, the Landlord may defer payment of any Taxes or other taxes, as the case may be, payable by it under the provisions of this Section 6.03 to the extent permitted by law, and the Tenant shall co-operate with the Landlord and provide the Landlord with all relevant information reasonably required by the Landlord in connection with any such appeal. SECTION 6.04 DETERMINATION OF TAXES In the event that the Landlord is unable to obtain from the taxing authorities any separate allocation of Landlord's Taxes, Tenant's Taxes, assessment or Landlord's Taxes attributable to the Office Section and the land attributable thereto, such allocation shall be made by the Landlord, acting reasonably. In the event of any dispute as to the amount of such allocation, an allocation made by a professional tax consultant appointed by the Landlord shall be conclusive. SECTION 6.05 RECEIPTS Whenever requested by the Landlord, the Tenant will deliver to it receipts for payment of all the Tenant's Taxes and furnish such other information in connection therewith as Page 13 the Landlord may reasonably require. ARTICLE 7 TENANT'S FURTHER COVENANTS THE TENANT FURTHER COVENANTS WITH THE LANDLORD as follows: SECTION 7.01 REPAIR To keep in a good and reasonable state of repair, and consistent with the general standards of first-class office buildings in Metropolitan Toronto, but subject to Section 10.01 and with the exception of reasonable wear and tear, the Leased Premises including all leasehold improvements and all trade fixtures therein and all glass therein including the glass portions of exterior walls thereof, but with the exception of structural members or elements of the Leased Premises and defects in construction performed or installations made by the Landlord and insured damage therein. SECTION 7.02 STATE OF REPAIR That the Landlord may enter and view the state of repair, and that the Tenant will repair according to notice in writing, and that the Tenant will leave the Leased premises in a good and reasonable state of repair, subject always to the exceptions referred to in Section 7.01. SECTION 7.03 NOTICE OF ACCIDENT, DEFECTS. ETC. To give to the Landlord prompt written notice of any accident to or defect in the plumbing, water pipes, heating and/or any air-conditioning apparatus, electrical equipment, conduits or wires or other wires or of any damage or injury to the Leased Premises or any part thereof howsoever caused; provided that nothing herein shall be construed so as to require repairs to be made by the Landlord except as expressly provided in this Lease. SECTION 7.04 REPAIR WHERE TENANT AT FAULT If the Building including the Leased Premises, the elevators, boilers, engines, pipes and other apparatus (or any of them) used for the purpose of heating or air-conditioning the Building or operating the elevators, or if the water pipes, drainage pipes, electric lighting or other equipment is destroyed through negligence, carelessness or misuse of the Tenant, his servants, agents, employees or anyone permitted by him to be in the Building, or through him or them in any way stopping up or injuring the heating apparatus, elevators, water pipes, drainage pipes or other equipment or part of the Building, the expense of the necessary repairs, replacements or alterations plus a 15% surcharge for administration costs shall be borne by the Tenant who shall pay the same to the Landlord forthwith on demand. SECTION 7.05 RULES AND REGULATIONS The Tenant and his employees and all persons visiting or doing business with him on the Leased Premises shall be bound by and shall observe the Rules and Regulations attached to this Lease. The Landlord shall have the right at any time and from time to time to make or vary such reasonable Rules and Regulations on Schedule "B" as may be desirable in the sole judgement of the Landlord (but not inconsistent with the provisions of this Lease) for the safety, care, cleanliness, operation and maintenance of the Building and premises and accessories, and for the preservation of good order therein. The Landlord may waive or vary such Rules and Regulations for any one or more tenants without waiving or varying them for all. The Landlord shall not be responsible to the Tenant for the non-observance of any such Rules and Regulations Page 14 by any other tenant. The Landlord agrees to notify the Tenant in writing of any changes in Rules and Regulations. SECTION 7.06 USE OF PREMISES The Leased Premises shall be used only for BUSINESS OFFICES, A SMALL SCALE CUSTOM WORKSHOP, AND RESEARCH LABORATORY OR FOR ANY OTHER USE PERMITTED BY THE APPLICABLE ZONING BY-LAWS AND OTHER LEGISLATION AND WHICH HAS THE PRIOR WRITTEN APPROVAL OF THE LANDLORD and the Tenant shall not carry on or permit to be carried on therein any other trade or business, and the Tenant shall not do or permit to be done or omitted upon the Leased Premises anything which shall cause the rate of insurance upon the Building to be increased and if the rate of insurance on the Building shall be increased by reason of the use made of the Leased Premises or by reason of anything done or omitted or permitted to be done or omitted by the Tenant or by anyone permitted by the Tenant to be upon the Leased Premises, the Tenant shall on demand pay to the Landlord the amount of such increase. SECTION 7.07 CANCELLATION OF INSURANCE If any insurance policy upon the Building shall be about to be cancelled by the insurer by reason of the use of the Leased Premises, the Landlord shall give written notice of such proposed cancellation to the Tenant, and the Tenant shall not later than five (5) days prior to the cancellation date set forth in such notice, stop such use or otherwise arrange for reinstatement of such policy, otherwise the Landlord may, in addition to all other rights it may have, at its option terminate this Lease and upon such termination Rent shall be apportioned and paid in full to the date of such termination, and the Tenant shall deliver possession of the Leased Premises forthwith in a neat and tidy condition to the Landlord, and the Landlord may re-enter and take possession of same. SECTION 7.08 OBSERVANCE OF LAW To comply with all provisions of law including without limitation, federal and provincial legislative enactments, building by-laws, and any other governmental or municipal regulations which relate to the partitioning, equipment, operation and use of the Leased Premises, and to the making of any repairs, replacements, alterations, additions, changes, substitutions or improvements of or to the Leased Premises. And to comply with all police, fire and sanitary regulations imposed by any federal, provincial or municipal authorities or made by fire insurance underwriters, and to observe and obey all governmental and municipal regulations and other requirements governing the conduct of any business conducted in the Leased Premises. SECTION 7.09 WASTE AND NUISANCE No to do or suffer any waste or damage, disfiguration or injury to the Leased Premises or the fixtures and equipment thereof or permit or suffer any overloading of the floors thereof; and not to place therein any safe, heavy business machine or other heavy object without first obtaining the consent in writing of the Landlord (not to be unreasonably withheld); and not to use or permit to be used any part of the Leased Premises for any dangerous, noxious or offensive trade or business and not to cause or permit any nuisance in, at or on the Leased Premises. SECTION 7.10 INFLAMMABLE OR DANGEROUS SUBSTANCES The Tenant covenants not to bring into or store in the Leased Premises any inflammable liquid or dangerous or explosive materials. SECTION 7.11 NO DEFACING Page 15 The Tenant shall not drill, drill into, or in any way deface the walls, ceilings, partitions, floors, wood, stone or ironwork within the Leased Premises without the prior written consent of the Landlord, such consent not to be unreasonably withheld. Boring, cutting or stringing of wires or pipes shall not be done except with the prior written consent of the Landlord, and as it may direct. In the event of any violation of the provisions hereof, the Landlord may, in addition to any other remedies it may have hereunder, repair any damage and the Tenant shall pay the cost thereof plus an administrative charge of fifteen percent (15%) of such cost, to the Landlord, forthwith upon demand, as Additional Rent. SECTION 7.12 ADDITIONAL SERVICES The cost of additional services provided to the Tenant shall be paid to the Landlord upon the Tenant receiving invoices for such additional services. Additional services means any service and/or supervision requested by the tenant and supplied by the Landlord and not otherwise provided for as a service to tenants generally, the costs of which are included in Operating Costs under this Lease. By way of example, additional services may include steam cleaning of carpets, moving furniture and making repairs or alterations to the Tenant's leasehold improvements. The amount charged to the Tenant for an additional service shall include all direct costs incurred by or on behalf of the Landlord in rendering the additional service plus fifteen (15%) of the aforementioned costs to cover the Landlord's overhead. SECTION 7.13 ENTRY BY LANDLORD To permit the Landlord, its servants or agents or contractors, to enter upon the Leased Premises at any time and from time to time for the purpose of inspecting and making repairs, alterations or improvements to the Leased Premises or to the Building, or for the purpose of having access to the utilities and services (which the Tenant agrees not to obstruct), and the Tenant shall not be entitled to compensation for any inconvenience, nuisance or discomfort occasioned thereby. The Landlord, its servants or agents may at any time from time to time enter upon the Leased Premises to remove any article or remedy any condition which in the opinion of the Landlord, reasonably arrived at, would be likely to lead to cancellation of any policy of insurance as referred to in Section 7.07 and such entry by the Landlord shall not be deemed to be a re-entry. Provided that the Landlord shall proceed hereunder in such manner as to minimize interference with the Tenant's use and enjoyment of the Leased Premises. Notwithstanding the foregoing, the Landlord acknowledges that the Tenant requires strict security to be maintained in the Leased Premises to protect the Tenant's business operations, and the Landlord and the Tenant agree to arrange mutually acceptable terms for access by the Landlord or its agents, acting reasonably. SECTION 7.14 INDEMNITY To indemnify and save harmless the Landlord against and from any and all claims, including without limiting the generality of the foregoing, all claims for personal injury and property damage, arising from the conduct of any work or by or through any act or omission of the Tenant or any assignee, subtenant, agent, contractor, servant, employee, invitee or licensee of the Tenant, and against and from all costs, counsel fees, expenses and liabilities incurred in or about any such claim or any action or proceeding brought thereon. This indemnity shall survive the expiry or sooner determination of this Lease. SECTION 7.15 EXHIBITING PREMISES To permit the Landlord or its agents to exhibit the Leased Premises to prospective tenants or other persons having written authority from the Landlord or the agents of the Landlord to view the premises during normal business hours of the last ten (10) months of the Term on terms for access mutually acceptable to the Landlord and the Tenant, acting reasonably. The Landlord shall have the further right to enter upon the Leased Premises during the Term to Page 16 exhibit the Building to any prospective purchaser or mortgagee thereof on terms for access mutually acceptable to the Landlord and the Tenant, acting reasonably. Page 17 SECTION 7.16 ALTERATIONS, LIENS Not to make or erect in or to the Leased Premises any installations, alterations, additions or partitions without submitting drawings and specifications to the Landlord and obtaining the Landlord's prior written consent in each instance, which the Landlord shall not unreasonably withhold, (and the Tenant must further obtain the Landlord's prior written consent to any change or changes in such drawings and specifications submitted as aforesaid, subject to payment of the cost to the Landlord of having its architects approve of such changes, prior to proceeding with any work based on such drawings or specifications); such work may be performed by contractors engaged by the Tenant but in each case only under written contract approved in writing by the Landlord and subject to all reasonable conditions which the Landlord may impose, provided nevertheless that the Landlord may at its option require that the Landlord's contractors be engaged for any mechanical or electrical work; without limiting the generality of the foregoing, any work performed by or for the Tenant shall be performed by competent workmen whose labour union affiliations are not incompatible with those of any workmen who may be employed in the Building by the Landlord, its contractors or subcontractors; the Tenant shall submit to the Landlord's reasonable supervision over construction and promptly pay to the Landlord's or the Tenant's contractors, as the case may be, when due, the cost of all such work and of all materials, labour and services involved therein and of all decoration and all changes in the Building, its equipment or services, necessitated thereby. The Tenant covenants that he will not suffer or permit during the Term hereof any Mechanics' or other liens for work, labour, services or materials, ordered by him or for the cost of which he may be in any way obligated to attach to the Leased Premises or to the Building and that whenever and so often as any such liens shall attach or claims therefor shall be filed the Tenant shall within twenty (20) days after the Tenant has notice of the claim for lien procure the discharge thereof by payment or by giving security or in such other manner as is or may be required or permitted by law. And the Tenant further covenants that whenever and so often as a certificate of action on Mechanics' lien is registered relating to any of the liens referred to in the next preceding sentence, the Tenant shall within twenty (20) days after the Tenant has notice of the registration of such certificate of action have the same vacated. If the Tenant fails to discharge or vacate as aforesaid the Landlord may vacate or discharge same, and any amounts paid by the Landlord in vacating or discharging as aforesaid shall immediately become payable by the Tenant as Rent. THE TENANT SHALL BE PERMITTED TO MAKE NON-STRUCTURAL COSMETIC CHANGES TO THE LEASED PREMISES, SUCH AS PAINTING AND CARPETING WITHOUT FIRST OBTAINING THE LANDLORD'S CONSENT IF SUCH WORK IS VALUED AT LESS THAN FIVE THOUSAND DOLLARS ($5,000.00). SECTION 7.17 SUPERVISION COST To pay the Landlord a fee equal to THE LESSER OF TWENTY CENTS ($0.20) PER SQUARE FOOT OF RENTABLE FLOOR AREA OF THE LEASED PREMISES OR TWO PERCENT (2%) OF THE TOTAL DOLLAR AMOUNT OF THE TENANT'S ALLOWANCE DESCRIBED IN SECTION 19.03 towards the cost of Landlord's supervision and overhead during the installation by the Tenant of ITS INITIAL leasehold improvements and alterations. After installation of the Tenant's initial leasehold improvements the Tenant shall pay to the Landlord its actual costs paid to third parties for plan and drawing review, granting of approvals, and supervision in connection with any leasehold improvements or alterations carried out by or on behalf of the Tenant including engineering and legal costs if any. SECTION 7.18 GLASS To pay the cost of replacement of glass with as good quality and size of any glass broken on the Leased Premises during the continuance of this Lease, unless the Tenant can prove that such breakage is the result of an act of the Landlord, its employees, servants, agents, contractors, licensees or invitees. Page 18 SECTION 7.19 WINDOW COVERINGS To comply with the Landlord's scheme of uniform window covers for the windows of the Building and not use any drapes or curtains except such as have lining on the side thereof facing the interior surface of exterior windows of a colour, shade and material approved by the Landlord. SECTION 7.20 SIGNS Not to erect or maintain any sign, picture, advertisement, notice, lettering, flag, decoration or direction upon any part of the outside walls of the Building or in any common area of the Building or upon either the outside or inside of the windows or doors of the Leased Premises except such as are provided by the Landlord under the provisions of Section 9.12. SECTION 7.21 NAME OF BUILDING Not to refer to the Building by any name other than that designated from time to time by the Landlord nor to use such name for any purpose other than the business address of the Tenant, and the Tenant may use the name of the Building for the business address of the Tenant but for no other purpose, provided the Tenant may use the municipal number instead of the name of the Building. SECTION 7.22 KEEP TIDY At the end of each business day to leave the Leased Premises in a reasonably tidy condition for the purpose of the performance of the Landlord's cleaning services. ARTICLE 8 LANDLORD'S COVENANT SECTION 8.01 QUIET ENJOYMENT THE LANDLORD COVENANTS WITH THE TENANT for quiet enjoyment. ARTICLE 9 LANDLORD'S FURTHER COVENANTS SECTION 9.01 THE LANDLORD FURTHER COVENANTS WITH THE TENANT AS FOLLOWS: SECTION 9.02 LANDLORD'S REPAIRS (a) To keep in a good and reasonable state of repair, and consistent with the general standards of first-class office buildings in Metropolitan Toronto, but subject to Section 12.01 and with the exception of reasonable wear and tear: (i) Those portions of LuCliff Place consisting of lobbies, landscaped areas, entrances and other facilities from time to time provided for common use and enjoyment, and the exterior portions of all buildings and structures from time to time forming part of LuCliff Place and affecting its general appearance. Page 19 (ii) The buildings and structures comprising LuCliff Place (other than the Leased Premises) and premises of other tenants, including the residential and retail portions of LuCliff Place) including the foundation, roof, exterior walls including glass portions thereof, the systems for interior climate control, the elevators, entrances, stairways, corridors and lobbies and washrooms from time to time provided for use in common by the Tenant and other tenants of the Building and LuCliff Place and the systems provided for bringing utilities to the Leased Premises; (iii) The structural members or elements of the Leased Premises; and (b) To repair defects in construction performed or installations made by the Landlord in the Leased Premises and insured damage therein; (c) The Landlord shall not be liable for any damages, direct, indirect or consequential, or for damages for personal discomfort, illness or inconvenience of the Tenant, or the Tenant's servants, clerks, employees, invitees or other persons or by reason of failures of equipment, facilities or systems or reasonable delays in the performance of repairs, replacements and maintenance, unless caused by the deliberate act or omission, or the negligence of the Landlord, its servants, agents or employees. SECTION 9.03 HEATING To provide heating of the Leased Premises to an extent sufficient to maintain therein at all time during normal business hours, except during the making of repairs, a reasonable temperature; but should the Landlord make default in so doing, it shall not be liable for indirect or consequential damages or damages for personal discomfort or illness. SECTION 9.04 AIR-CONDITIONING To operate, as reasonably necessary during business hours the air-conditioning equipment and systems serving the Leased Premises; in case such equipment or systems be damaged or destroyed, or, in the opinion of the Landlord, require repairs, inspections, overhauling or replacement, the Landlord shall carry out such work with all reasonable speed, but shall not be liable for any damages, direct, indirect or consequential, or for personal discomfort or illness of the Tenant or his, its or their servants, clerks, employees, invitees, or other persons by reason of the resulting interruption in air-conditioning nor shall Rent abate during any such interruptions. The Tenant's interior office layout, submitted to the Landlord for approval pursuant to Section 7.16 hereof, shall be modified by the Tenant, if necessary, in accordance with the reasonable requirements of the heating and air-conditioning engineers of the Landlord, in order to secure maximum efficiency of the heating and air-conditioning systems serving the Leased Premises. The Tenant covenants to keep all air-conditioning vents within the Leased Premises free and clear of all obstructions and objects. The Tenant acknowledges that one year may be required after the Tenant has fully occupied the Leased Premises in order to adjust and balance the heating and air-conditioning systems. SECTION 9.05 ELEVATOR To furnish, except when repairs are being made, passenger elevator service during normal business hours; operatorless automatic elevator service, if used, shall be deemed "elevator service" within the meaning of this paragraph; and to permit the Tenant and the employees of the Tenant to have the free use of such elevator service in common with others, but the Tenant and such employees and all other persons using the same shall do so at their sole risk and under no circumstances shall the Landlord be held responsible for any damage or injury happening to any person while using the same or occasioned to any person by any elevator or any of its appurtenances except for such damage or injury resulting from the negligence of the Page 20 Landlord, its servants or employees. In case the elevators of the Building shall be injured or destroyed or be in the course of replacement or rebuilding, the Landlord shall commence the repair thereof as soon as may be conveniently done and shall repair or replace the same and put the same in working order. There shall be no liability on the Landlord for any claim in respect of any failure by the Landlord to provide elevator service during any power failure or other cause beyond the control of the Landlord or by reason of the carrying out of any repairs, maintenance or replacement of elevators, nor shall there be, consequent upon the foregoing, any repayment or reduction in the Rent reserved hereby. SECTION 9.06 ACCESS To permit the Tenant and the employees of the Tenant and all persons lawfully requiring communication with them to have the use during normal business hours in common with others of the common areas of the Building, including the main lobby of LuCliff Place, stairways, corridors on the floor or floors on which the Leased Premises are situate, elevators and washrooms therein. It is agreed that the Tenant and all other persons permitted to use such common areas shall do so at his, her or their sole risk with no liability attributable to the Landlord in any circumstances. At times other than during normal business hours the Tenant and the employees of the Tenant and persons lawfully requiring communications with the Tenant shall have access to the Building and to the Leased Premises and use of the elevators only in accordance with the Rules and Regulations. SECTION 9.07 WASHROOMS To permit the Tenant and the employees of the Tenant in common with others entitled thereto to use those washrooms in the Building on the floor or floors on which the Leased Premises are situated, and which are not entirely within the premises of another tenant. SECTION 9.08 CARETAKING To employ personnel to cause when reasonably necessary from time to time the floors and windows of the Leased Premises to be swept and cleaned and the desks, tables and other furniture of the Tenant to be dusted all in keeping with a first-class office building, but with the exception of the obligation to cause such work to be done, the Landlord shall not be responsible for any act or omission or commission on the part of the person or persons employed to perform such work; such work shall be done at the Landlord's direction without interference by the Tenant, his servants or employees. Save as aforesaid, all carpets, broadloom or drapes shall be cleaned and maintained by the Tenant. SECTION 9.09 MAINTENANCE OF COMMON AREAS To cause the elevators, entrances, stairways, corridors, lobbies, washrooms and other parts of the Building from time to time provided for common use and enjoyment to be swept, cleaned or otherwise maintained. SECTION 9.10 LIGHTING To light adequately, when reasonably required, the common areas of the Building except at such times as electric current may not be supplied to the Landlord and except during breakdowns in equipment, and during the making of repairs. SECTION 9.11 DIRECTORY BOARD The Landlord shall install a directory board in the main lobby of the Building containing the names of tenants of space in the Building. The Tenant shall be entitled to have his name shown upon the directory board, but the Landlord shall, in its sole discretion, design the Page 21 style of such identification and allocate the space of the directory board for each Tenant. The Landlord shall, at the request and cost of the Tenant, cause to be painted on or affixed to the entrance door of the Leased Premises the name of the Tenant in accordance with the Landlord's uniform scheme of lettering for such doors. ARTICLE 10 FIXTURES, INSURANCE SECTION 10.01 FIXTURES The Tenant may remove his fixtures, provided further, however, that all installations, alterations, additions, partitions and fixtures other than trade or Tenant's fixtures in or upon the Leased Premises, whether placed there by the Tenant or Landlord, shall, immediately upon such placement, be the Landlord's property without compensation therefor to the Tenant and, except as hereinafter mentioned in this Section 10.01, shall not be removed from the Leased Premises by the Tenant at any time either during or after the Term. Notwithstanding anything herein contained, the Landlord shall be under no obligation to repair or maintain the Tenant's installations, alterations, additions, partitions and fixtures or anything in the nature of a leasehold improvement made or installed by the Tenant; and further notwithstanding anything herein contained, the Landlord shall have the right upon the termination of the Lease by effluxion of time or otherwise to require the Tenant to remove his installations, alterations, additions, partitions and fixtures or anything in the nature of a leasehold improvement made or installed by the Tenant and to make good any damage caused to the Leased Premises by such installation or removal. Provided that the Tenant may, if it is not in default, remove its trade fixtures at the expiration or sooner termination of this Lease, making good any damage caused to the Leased Premises by such installation or removal. The Landlord agrees that the Tenant's fumehoods shall be deemed to be Tenant's trade fixtures. NOTWITHSTANDING THE FOREGOING IF THE TENANT IS NOT THEN IN DEFAULT THE TENANT SHALL NOT BE REQUIRED TO REMOVE ITS LEASEHOLD IMPROVEMENTS AT THE EXPIRATION OF THE TERM OR TO RESTORE THE LEASED PREMISES TO THE CONDITION THEY WERE IN PRIOR TO THE TENANT'S OCCUPANCY. AT THE EXPIRATION OF THE TERM, THE LEASED PREMISES SHALL BE LEFT IN AN "AS IS" CONDITION. IN THE EVENT THE TENANT DOES REMOVE ANY LEASEHOLD IMPROVEMENTS OR TRADE FIXTURES (WITH THE LANDLORD'S PERMISSION) FROM THE LEASED PREMISES, THE TENANT SHALL BE RESPONSIBLE TO REPAIR ANY DAMAGE WHICH MAY HAVE BEEN CAUSED TO THE LEASED PREMISES OR THE BUILDING BY THE INSTALLATION OR REMOVAL THEREOF, REASONABLE WEAR AND TEAR EXCEPTED. Notwithstanding the foregoing all Tenant's personal property, however installed in or affixed to the Leased Premises shall at all times remain the property of the Tenant and may be removed from time to time. For greater certainty, this clause shall also apply to the Tenant's security system. The Tenant shall repair any damage caused by the installation or removal of the Tenant's personal property. The Landlord waives any right to any lien or other security interest in any of the Tenant's personal property, save and except for the Landlord's distress rights hereunder or at law. SECTION 10.02 TENANT'S INSURANCE The Tenant shall take out and keep in force during the Term: (a) Comprehensive general public liability (including bodily injury, death and property damage) insurance on an occurrence basis with respect to the business carried on, in or from the Leased Premises and the Tenant's use and occupancy thereof not less than ONE MILLION DOLLARS ($1,000,000.00) which insurance shall include the Landlord as a named insured and shall protect the Landlord in respect of claims by the Tenant as if the Landlord were separately insured; and (b) Insurance in respect of fire and other such perils as are from time to time defined Page 22 in the usual extended coverage endorsement covering the Tenant's trade fixtures and the furniture and equipment of the Tenant and all leasehold improvements of the Tenant, and which insurance shall include the Landlord as a named insured as the Landlord's interest may appear with respect to insured leasehold improvements and provide that any proceeds recoverable in the event of loss to leasehold improvements shall be payable to the Landlord (but the Landlord agrees to make available such proceeds towards the repair or replacement of the insured property if this Lease is not terminated pursuant to any other provision hereof). All insurance required to be maintained by the Tenant hereunder, shall contain full replacement cost coverage and shall be on terms and with insurers to which the Landlord has no reasonable objection. The Tenant shall furnish to the Landlord if and whenever requested by it, certificates or other evidence acceptable to the Landlord as to the insurance from time to time required to be effected by the Tenant and its renewal or continuation in force. If the Tenant shall fail to take out, renew and keep in force such insurance the Landlord may do so as the agent of the Tenant and the Tenant shall repay to the Landlord any amounts paid by the Landlord as premiums forthwith upon demand. ARTICLE 11 LICENCES, ASSIGNMENTS AND SUBLETTINGS SECTION 11.01 LICENCES, ETC. The Tenant shall not permit any part of the Leased Premises to be used or occupied by any person other than the Tenant, and the employees of the Tenant, or permit any part of the Leased Premises to be used or occupied by a licensee or concessionaire, or permit any persons to be upon the Leased Premises other than the Tenant, and its employees, customers and others having lawful business with them. SECTION 11.02 ASSIGNMENTS AND SUBLETTINGS The Tenant shall not assign this Lease or sublet the whole or any part of the Leased Premises unless: (a) it shall have received or procured a bona fide written offer therefor to take an assignment or sublease which is not inconsistent with, and the acceptance of which would not breach any provisions of this Lease if this Section 11.02 is complied with and which the Tenant has determined to accept subject to this Section 11.02 being complied with, and (b) it shall have first requested and obtained the consent in writing of the Landlord thereto; (c) total rent to be paid by the assignee or subtenant which exceeds the Basic Rent and Additional Rent, on a proportionate basis relative to the space occupied, to be paid by the present Tenant to the Landlord under the terms of the Lease, shall be paid to the Landlord; (d) any fee, payment, charge or other consideration payable by the subtenant or assignee in respect of the Tenant's assignment of this Lease or subletting of the Leased Premises shall accrue to the benefit of and shall be paid to the Landlord. Any request for such consent shall be in writing and accompanied by a true copy of such offer, and the Tenant shall furnish to the Landlord all information available to the Tenant or any additional information requested by the Landlord, as to the responsibility, reputation, Page 23 financial standing and business of the proposed assignee or subtenant. Within fifteen (15) days after the receipt by the Landlord of such request for consent and of all information which the Landlord shall have requested hereunder (and if no such information has been requested, within fifteen (15) days after receipt of such request for consent) the Landlord shall have the right upon notice in writing to the Tenant, if the request is to assign this Lease or sublet the whole of the Leased Premises, to cancel and terminate this Lease, or if the request is to sublet a part of the Leased Premises only, to cancel and terminate this Lease with respect to such part, in each case as of a termination date sixty (60) days following the giving of such notice, and in such event the Tenant shall surrender the whole or part, as the case may be, of the Leased Premises in accordance with such notice and Rent shall be apportioned and paid on the date of surrender and, if a part only of the Leased Premises is surrendered, Rent shall thereafter abate proportionately. If the Landlord shall not exercise the foregoing right of cancellation then the Landlord's consent to the Tenant's request for consent to assign or sublet shall not be unreasonably withheld and if such consent shall be given, the Tenant shall assign or sublet, as the case may be, only upon the terms set out in the offer submitted to the Landlord as aforesaid and not otherwise, and within six (6) months after the Tenant's request for consent and only upon the assignee or subtenant entering into a covenant in form satisfactory to the Landlord's solicitors to perform, observe and keep each and every covenant, proviso, condition and agreement in this Lease on the part of the Tenant to be performed, observed and kept including payment of Rent and all other sums and payments agreed to be paid or payable under this Lease on the days and at the times and in the manner herein specified. Whether or not the Landlord consents to any request as aforesaid, the Tenant shall pay to the Landlord all reasonable costs incurred by the Landlord in considering any request for consent and in completing any of the documentation involved in implementing any such assignment or sublet including the agreements between the Landlord and each of the Tenants and any assignee or subtenant. Without limitation, the Tenant shall for purposes of this paragraph 11 be considered to assign or sublet in any case where it permits the Leased Premises or any portion thereof to be occupied by persons other than the Tenant, its employees and others engaged in carrying on the business of the Tenant, whether pursuant to the assignment, subletting, license or other right, and shall also include any case where any of the foregoing occurs by operation of law. The Tenant shall also be considered to assign or sublet if the Tenant is a corporation of which this Lease is, in the reasonable opinion of the Landlord, a material asset or a material liability and control of such corporation changes, and to permit the application of this provision the Tenant (if a corporation) covenants to notify the Landlord of any proposed change of control. Notwithstanding the foregoing provisions of this Section the Tenant shall have the right to assign this Lease or sublet all or a portion of the Leased Premises to a corporation or entity which controls the Tenant, or is controlled by the Tenant, or is controlled by the same entity that controls the Tenant, without the consent of the Landlord; provided that the Tenant shall be required to notify the Landlord of such assignment or subletting, to provide reasonable proof of the control described above; and further provided that such assignee or subtenant and the Tenant shall be required to enter into the agreement with the Landlord to perform the lease covenants as described above in this Section 11.02; no such assignment or subletting shall release or relieve the Tenant from its obligations to fully perform all the terms, covenants, and conditions of this Lease on its part to be performed, and the Tenant shall be jointly and severally liable with such assignee or subtenant. SECTION 11.03 RELEASE OF TENANT In no event shall any assignment or subletting to which the Landlord may have consented, release or relieve the Tenant from its obligations to fully perform all the terms, covenants and conditions of this Lease on its part to be performed. No consent by the Landlord to any assignment or subletting shall be construed to mean that the Landlord has consented or Page 24 will consent to any further assignment or subletting. The Tenant agrees that it will sign the agreement which is to be signed by any assignee or subtenant as described in Section 11.02 above, and will agree to be jointly and severally liable with such assignee or subtenant. Page 25 ARTICLE 12 DAMAGE AND DESTRUCTION SECTION 12.01 ABATEMENT AND TERMINATION It is agreed between the Landlord and the Tenant that: (a) In the event of damage to the Leased Premises or to the Building or other portions of LuCliff Place affecting access or services essential to the Leased Premises, and if the damage is such that the Leased Premises or any substantial part thereof is rendered not reasonably capable of use and occupancy by the Tenant for the purposes of its business for any period of time in excess of ten (10) days, then (i) Unless the damage was caused by the fault or negligence of the Tenant or its employees, invitees or others under its control, from and after the expiration of ten (10) days after the occurrence of the damage and until the Leased premises are again reasonably capable of use and occupancy as aforesaid, Basic Rent (but not any other payments required to be made by the Tenant hereunder) shall abate from time to time in proportion to the part or parts of the Leased Premises not reasonably capable of such use and occupancy, and (ii) Unless this Lease is terminated as hereinafter provided, the Landlord or the Tenant, as the case may be (according to the nature of the damage and their respective obligations to repair as provided in Sections 9.03 and 7.01, shall repair such damage with all reasonable diligence, but to the extent that any part of the Leased Premises is not reasonably capable of such use and occupancy by reason of damage which the Tenant is obligated to repair hereunder, any abatement of rent to which the Tenant is otherwise entitled hereunder shall not extend later than the time by which, in the reasonable opinion of the Landlord, repairs by the Tenant ought to have been completed with reasonable diligence, and (b) If either: (i) the Leased Premises, or (ii) premises whether of the Tenant or other tenants of LuCliff Place comprising in the aggregate half or more of the Rentable Area of the Building or of LuCliff Place, are substantially damaged or destroyed by any cause to the extent such that in the reasonable opinion of the Landlord they cannot be repaired or rebuilt within one hundred and eighty (180) days after the occurrence of the damage or destruction, the Landlord OR THE TENANT may at its option, exercisable by written notice to the OTHER given within thirty (30) days of the occurrence of such damage order destruction, terminate this lease, in which event neither the Landlord nor the Tenant shall be bound to repair as provided in clauses 9.03 and 7.01 and the Tenant shall instead deliver up possession of the Leased Premises to the Landlord forthwith but in any event within sixty (60) days after delivery of such notice of termination, and rent shall be apportioned and paid to the date upon which possession is so delivered up (but subject to any abatement to which the Tenant may be entitled under Subsection 12.01 (a) of this Section by reason of the Leased Premises having been rendered in whole or in part not reasonably capable of use and occupancy), but otherwise the Landlord or the Tenant as the case may be (according to the nature of the damage and their respective obligations to repair) shall repair such damage with all reasonable diligence. Page 26 ARTICLE 13 LOSS AND DAMAGE TO PROPERTY SECTION 13.01 Saving and excepting any loss, damage or injury arising out of the negligence of the Landlord, its servants or employees and against which the Tenant is not insured and is not required to be insured under this Lease the Landlord shall not be liable or responsible in any way for any loss of or damage or injury to any property belonging to the Tenant or to employees of the Tenant or to any other person while such property is on the Leased Premises or in the Building or in or on the surrounding area owned by the Landlord comprising LuCliff Place, whether or not such property has been entrusted to employees of the Landlord and without limiting the generality of the foregoing, the Landlord shall not be liable for any damage to any such property caused by steam, water, rain or snow which may leak into, issue or flow from any part of the Building or from the water, steam or drainage pipes or plumbing works of the Building, or from any other place or quarter or for any damage caused by or attributable to the condition or arrangement of any electric or other wiring or for any damage caused by anything done or omitted by any other tenant. ARTICLE 14 LIABILITIES SECTION 14.01 IMPOSSIBILITY OF PERFORMANCE It is understood and agreed that whenever and to the extent that the Landlord shall be unable to fulfil, or shall be delayed or restricted in the fulfilment of any obligation hereunder in respect of the supply or provision of any service or utility or the doing of any work or the making of any repairs by reason of being unable to obtain the material, goods, equipment, service, utility or labour required to enable it to fulfil such obligations or by reason of any statute, law or order-in-council or any regulation or order passed or made pursuant thereto or by reason of the order or direction of any administration, controller or board, or any governmental department or officer or other authority or by reason of not being able to obtain any permission or authority required thereby, or by reason of any other cause beyond its control whether of the foregoing character or not, the Landlord shall be entitled to extend the time for fulfilment of such obligation by a time equal to the duration of such delay or restriction and the Tenant shall not be entitled to compensation for any inconvenience, nuisance or discomfort thereby occasioned. SECTION 14.02 CLAIMS FOR COMPENSATION No claim for compensation shall be made by the Tenant by reason of inconvenience, damage or annoyance arising from the necessity of repairing any portion of LuCliff Place of which the Leased Premises form a part, howsoever the necessity may arise. ARTICLE 15 TENANT'S DEFAULT SECTION 15.01 RE-ENTRY Provided and it is hereby expressly agreed that if and whenever the Rent hereby reserved or any part thereof shall not be paid on the days appointed for payment thereof, whether lawfully demanded or not, or in the case of breach or non-observance or non-performance of any Page 27 of the covenants, agreements, provisos, conditions or Rules and Regulations on the part of the Tenant to be kept, observed or performed, FOR A PERIOD OF TEN (10) DAYS FOLLOWING RECEIPT OF WRITTEN NOTICE OF SUCH BREACH OR NON-OBSERVANCE OR NON-PERFORMANCE, or in case the Leased Premises shall be vacated or remain unoccupied for fifteen (15) CONSECUTIVE days or in case the term shall be taken in execution or attachment for any cause whatever, then and in every such case, it shall be lawful for the Landlord thereafter to enter into and upon the Leased Premises or any part thereof in the name of the whole and the same to have again, repossess and enjoy as of its former estate, anything in this Lease contained to the contrary notwithstanding other than proviso to this Section 15: Provided that notwithstanding anything to the contrary hereinbefore in this Section 15 contained, the Landlord shall not at any time have the right to re-enter and forfeit this Lease by reason of the Tenant's default in the payment of Basic Rent and Additional Rent, hereby reserved by this Lease, unless and until the Landlord shall have given to the Tenant at least five (5) business days' written notice of its intention so to do and setting forth the default complained of and the Tenant shall have the right during such five (5) business days to cure any such default in payment of Rent; PROVIDED THAT IN THE EVENT OF A BREACH, NON-OBSERVANCE, OR NON-PERFORMANCE BY THE TENANT WHICH IS CAPABLE OF BEING CURED, BUT IS NOT REASONABLY CAPABLE OF BEING CURED WITHIN THE TEN (10) DAY NOTICE PERIOD DESCRIBED ABOVE THE TENANT SHALL NOT BE DEEMED TO BE IN DEFAULT IF IT HAS COMMENCED TO REMEDY SUCH BREACH OR NON-OBSERVANCE OR NON-PERFORMANCE AND HAS DILIGENTLY THEREAFTER PROCEEDED TO COMPLETE THE REMEDYING THEREOF. SECTION 15.02 LANDLORD'S RIGHT TO PERFORM In addition to all other remedies the Landlord may have by this Lease, at law or in equity, if the Tenant shall make default in any of its obligations hereunder, the Landlord may as its option perform any such obligations after fifteen (15) days' written notice to the Tenant and in such event the cost of performing such obligations plus an administrative charge of fifteen percent (15%) of such cost, shall be payable by the Tenant to the Landlord on the next ensuing Rent payment date as Additional Rent, together with interest at the Stipulated Rate of Interest from the date of the performance of such obligations by the Landlord. On default of such payment, the Landlord shall have the same remedies as on default of payment of Rent. In addition, the Landlord shall be entitled to collect to pro-rated amount of interest computed at the Stipulated Rate of Interest upon all arrears of Rent with a minimum of one (1) month's interest as aforesaid, if the Rent is in arrears for more than five (5) working days. Such interest shall be computed from the day following the due date(s) of such Rent to the date of payment thereof. SECTION 15.03 BANKRUPTCY, ETC. Provided further that in case without the written consent of the Landlord the Leased Premises shall be used by any other person than the Tenant, the Tenant's permitted assigns or permitted subtenant, or shall be used for any other purpose than that for which the same were let or in case the Term or any of the goods and chattels of the Tenant shall be at any time seized in execution or attachment by any creditor of the Tenant or the Tenant shall make any assignment for the benefit of creditors or any bulk sale or become bankrupt or insolvent or take the benefit of any Act now or hereafter in force for bankrupt or insolvent debtors, or, if the Tenant is a corporation and any order shall be made for the winding-up of the Tenant, or other termination of the corporate existence of the Tenant, then in any such case this Lease shall at the option of the Landlord cease and determine and the Term shall immediately become forfeited and void and the then current month's rent and the next ensuing three (3) months' shall immediately become due and be paid and the Landlord may re-enter and take possession of the Leased Premises as though the Tenant or other occupant or occupants of the Leased Premises was or were holding over after the expiration of the Term without any right whatever. SECTION 15.04 VACATED OR IMPROPERLY USED It is hereby declared and agreed by and between the Landlord and tenant that in Page 28 case the said Leased Premises shall become ABANDONED OR IF THE LEASED PREMISES SHALL BECOME vacant or not used for the purpose aforesaid and remain so for a period of fifteen (15) CONSECUTIVE days or if the Leased Premises shall be used by any other person or persons than the Tenant or for any other purpose than that for which the same were let without the written consent of the Landlord this Lease shall at the option of the Landlord forthwith cease and determine and thereupon the instalments of Basic Rent and Additional Rent accruing due during the next ensuing three (3) months shall immediately become due and payable to the Landlord and the Landlord may re-enter and take possession of the demised premises. SECTION 15.05 DISTRESS The Tenant waives and renounces the benefit of any present or future statute taking away or limiting the Landlord's right of distress and covenants and agrees that notwithstanding any such statute none of the goods and chattels of the Tenant on the Leased Premises at any time during the Term shall be exempt from levy by distress for Rent in arrears. The Tenant will not sell, dispose of or remove any of the fixtures, goods or chattels of the Tenant from or out of the Leased Premises during the Term without the consent of the Landlord, unless the Tenant is substituting new fixtures, goods and chattels of equal value or is bona fide disposing of individual items which have become extras for the Tenant's purposes; and the Tenant will be the owner of its fixtures, goods and chattels and will not permit them to become subject to any lien, mortgage, charge or encumbrance. SECTION 15.06 RIGHT OF RE-ENTRY TO RELET The Tenant further covenants and agrees that on the Landlord's becoming entitled to re-enter upon the Leased Premises under any of the provisions of this Lease, the Landlord in addition to all other rights shall have the right to enter the Leased Premises as the agent of the Tenant either by force or otherwise, without being liable for any prosecution therefor and to relet the Leased Premises as the agent of the Tenant, and to receive the Rent therefor and as the agent of the Tenant, to take possession of any furniture or other property on the Leased Premises and to sell the same at public or private sale without notice and to apply the proceeds of such sale and any Rent derived from reletting the Leased Premises upon account of the Rent under this Lease, and the Tenant shall be liable to the Landlord for the deficiency, if any. SECTION 15.07 REMEDIES CUMULATIVE The Landlord may from time to time resort to any or all of the rights and remedies available to it in the event of any default hereunder by the Tenant, either by any provision of this Lease or by statute or the general law, all of which rights and remedies are intended to be cumulative and not alternative, and the express provisions hereunder as to certain rights and remedies are not to be interpreted as excluding any other of additional rights and remedies available to the Landlord by statute or the general law. SECTION 15.08 LEGAL EXPENSES In the event that it shall be necessary for the Landlord to commence an action for the collection of Rent herein reserved or any portion thereof, or any other sum hereunder or if the same must be collected upon the demand of a solicitor, or in the event that it becomes necessary for the Landlord to commence an action to compel performance of any of the terms, conditions, covenants or provisos contained herein, then unless the Landlord shall lose such action it shall be entitled to collect from the Tenant all reasonable expenses incurred therefor, including reasonable legal fees. ARTICLE 16 NON-WAIVER, OVERHOLDING Page 29 SECTION 16.01 NON-WAIVER No condoning, excusing or overlooking by the Landlord or Tenant of any default, breach or non-observance by the Tenant or the Landlord at any time or times in respect of any covenant, proviso or condition herein contained shall operate as a waiver of the Landlord's or the Tenant's rights hereunder in respect of any continuing or subsequent default, breach or non-observance, or so as to defeat or affect in any way the rights of the Landlord or the Tenant herein in respect of any such continuing or subsequent default or breach, and no waiver shall be inferred from or implied by anything done or omitted by the Landlord or the Tenant save only express waiver in writing. SECTION 16.02 OVERHOLDING If the Tenant remains in possession of the Leased Premises after the expiration or sooner termination of the Term without any further written agreement but with the express or implied consent of the Landlord, and in circumstances in which a tenancy other than a weekly tenancy would thereby be implied by implication of law, the Tenant shall be deemed to be a weekly tenant only upon and subject to the same terms and conditions as herein contained, except that the weekly Basic Rent shall be 150% of a prorated portion of Basic Rent payable during the last month of the Term, and nothing, including the acceptance of any Rent by the Landlord, shall extend to the contrary except a specific agreement in writing between the Landlord and the Tenant, and the Tenant hereby authorizes the Landlord to apply any monies received from the Tenant in payment of such weekly Basic Rent. ARTICLE 17 SUBORDINATION, ACKNOWLEDGEMENT, ETC. SECTION 17.01 SUBORDINATION (a) This Lease is subject and subordinate to all mortgages (including any deed of trust and mortgage securing bonds and all indentures supplemental thereto) which may now or hereafter affect LuCliff Place, and to all renewals, modifications, consolidations, replacements and extensions throughout. The Tenant agrees to execute promptly any certificate in confirmation of such subordination as the Landlord may request and hereby constitutes the Landlord the agent and attorney of the Tenant for the purpose of executing any such certificate and of making application at any time and from time to time register postponements in favour of any such mortgage in order to give effect to the provisions of this Section. EACH AND EVERY TIME THAT THE LANDLORD REQUESTS THAT THE TENANT EXECUTE A SUBORDINATION CERTIFICATE AS AFORESAID, THE LANDLORD AGREES TO REQUEST AND TO USE REASONABLE EFFORTS TO OBTAIN FROM ANY SUCH MORTGAGEE A WRITTEN NON-DISTURBANCE AGREEMENT WHEREIN THE MORTGAGEE AGREES THAT THE POSSESSION BY THE TENANT OF THE LEASED PREMISES SHALL NOT BE DISTURBED, AFFECTED, OR IMPAIRED BY THE MORTGAGEE PROVIDED THAT THE TENANT IS NOT IN DEFAULT BEYOND ANY APPLICABLE NOTICE AND CURE PERIOD AND UNDER THIS LEASE. (b) Without limiting the general rights of the Landlord to assign this Lease, the Landlord shall be entitled to assign this Lease as collateral security for any mortgage or mortgages upon LuCliff Place or any part thereof, and the Tenant covenants, if requested to do, to acknowledge in writing any notice of assignment of this Lease by the Landlord. SECTION 17.02 TENANT'S ACKNOWLEDGEMENTS The Tenant agrees that it will at any time and from time to time upon not less than ten (10) days' prior notice execute and deliver to the Landlord a statement in writing certifying Page 30 that this Lease is unmodified and in full force and effect (or, if modified, stating the modifications and that the same is in full force and effect as modified), the amount of the annual rental then being paid hereunder, the dates to which the same, by instalments or otherwise, and other charges hereunder have been paid, and whether or not there is any existing default on the part of the Landlord of which the Tenant has notice and any other matter pertaining to this Lease as to which the Landlord shall request a statement. SECTION 17.03 REGISTRATION The Tenant covenants and agrees with the Landlord that the Tenant will not register this Lease in this form in the Registry Office or the Land Titles Office. The Tenant shall not register or cause to be registered any notice of this Lease except in a form which shall have been approved prior to registration by the solicitors for the Landlord acting reasonably. It is the intent of the parties that such Notice of Lease shall disclose the minimum amount of information regarding the terms and conditions of this Lease that is necessary to protect the Tenant's interest in the lands, and shall not disclose the amount of Rent being paid. ARTICLE 18 MISCELLANEOUS SECTION 18.01 RECOVERY OF ADJUSTMENTS The Landlord shall have (in addition to any other right or remedy of the Landlord) the same rights and remedies in the event of default by the Tenant in payment of any amount payable by the Tenant hereunder, as the Landlord would have in the case of default in payment of Rent. SECTION 18.02 LEASE ENTIRE AGREEMENT The Tenant acknowledges that there are no covenants, representations, warranties, agreements or conditions expressed or implied, collateral or otherwise forming part of or in any way affecting or relating to this Lease save as expressly set out in this Lease and that this Lease constitute the entire agreement between the Landlord and the tenant and may not be modified except as herein explicitly provided or except by subsequent agreement in writing of equal formality hereto executed by the Landlord and the Tenant. Notwithstanding the foregoing, the Tenant shall remain liable to pay for those improvements in the Leased Premises which have been made by the Landlord for or on behalf of the Tenant and which are in excess of the work otherwise required to be done by the Landlord. SECTION 18.03 COVENANTS, SEVERABILITY The Landlord and the Tenant agree that all of the provisions of this Lease are to be construed as covenants and agreements as though the words importing such covenants and agreements were used in each separate paragraph hereof. Should any provision or provisions of this Lease be illegal or not enforceable it or they shall be considered separate and severable from the Lease and its remaining provisions shall remain in force and be binding upon the parties hereto as though the said provision or provisions had never been included. SECTION 18.04 CAPTIONS The captions appearing in this Lease have been inserted as a matter of convenience and for reference only and in no way define, limit or enlarge the scope or meaning of this Lease or of any provisions hereof. Page 31 SECTION 18.05 AGENCY The Landlord may perform all or any of its obligations hereunder by or through such managing or other agency or agencies as it may from time to time determine and the Tenant shall, ^^ as from time to time directed by the Landlord, pay to any such agent any moneys payable hereunder to the Landlord. SECTION 18.06 NOTICE Any notice required or contemplated by any provision of this Lease shall be given in writing enclosed in a sealed envelope addressed, in the case of notice to the Landlord to it at 700 Bay Street, Toronto, Ontario, and in the case of notice to the Tenant to it at the Leased Premises, and mailed in Metropolitan Toronto registered and postage prepaid. The time of giving of such notice shall be conclusively deemed to be the second business day after the day of such mailing. Such notice shall also be sufficiently given if and when the same shall be delivered, in the case of notice to the Landlord, to an executive officer of the Landlord, and in the case of notice to the Tenant, to him personally or to an executive officer of the Tenant if the Tenant is a corporation. Such notice, if delivered, shall be conclusively deemed to have been given and received at the time of such delivery. If in this Lease two or more persons are named as Tenant, such notice shall also be sufficiently given if and when the same shall be delivered personally to any one of such persons. Provided that either party may, by notice to the other, from time to time designate another address in Canada to which notices mailed more than ten (10) days thereafter shall be addressed. SECTION 18.07 INTERPRETATION In this Indenture "herein", "hereof", "hereby", "hereunder", "hereto", "hereinafter", and similar expressions refer to this Indenture and not to any particular paragraph, section or other portion thereof, unless there is something in the subject matter or context inconsistent therewith. SECTION 18.08 BINDING, ENURING AND INTERPRETATION This Indenture and everything contained herein shall enure to the benefit of and be binding upon the respective heirs, executors, administrators, successors, assigns and other legal representatives as the case may be, of each and every one of the parties hereto, subject to the granting of consent by the Landlord as provided in Article 11 to any assignment or sublease, and every reference herein to any party hereto shall include the heirs, executors, administrators, successors, assigns and other legal representatives of such party, and where there is not more than one Tenant or there if a female party or a corporation, the provisions hereof shall be read with all grammatical changes thereby rendered necessary and all covenants shall be deemed joint and several. ARTICLE 19 ADDITIONAL PROVISIONS SECTION 19.01 TENANT'S OPTIONS TO EXTEND 9TH FLOOR TERM (a) Provided that the Tenant has reasonably abided by all the terms, conditions, and covenants of this Lease, including the covenant to pay rent, is not then in default of any such term, condition, or covenant beyond any applicable notice and cure periods, and has not become insolvent or bankrupt or had a receiver appointed in respect of its assets or business the Tenant shall have the option to extend the 9th Floor Term for a further period of one (1) year; Provided that in order to exercise its option to extend the Tenant shall be required to give the Landlord notice thereof in Page 32 writing not later than November 30, 2000, and not earlier than June 1, 2000. If the Tenant does not deliver the notice as aforesaid, the 9th Floor Term shall expire on May 31, 2001. Any extension pursuant to this Section 19.01 shall be upon the same terms, conditions, and covenants contained in this Lease, except that: (i) the Basic 9th Floor Rent payable pursuant to Section 4.01 of this Lease shall not apply, but the Basic 9th Floor Rent for such renewal term shall be the market rental per square foot for similar improved premises in the Building and any other buildings of comparable quality, size, age, and location as the Building at the commencement of the renewal term multiplied by the number of square feet of Rentable Floor Area of the 9th floor portion of the Leased Premises as agreed upon between the Landlord and the Tenant. If the Landlord and the Tenant have not agreed upon such said current market rental prior to sixty (60) days before the expiry of the 9th Floor Term the issue shall NOT be referred to arbitration, but this option to extend shall be null and void and the 9th Floor Term shall expire on May 31, 2001; (ii) Section 19.03, 19.04, and 19.05 shall not apply; (iii) for greater clarity the 9th floor portion of the Leased Premises shall be leased on an "as is" basis, the Landlord shall not be required to do any work in connection therewith, including any of the work described in Section 19.04 below, and there shall be no rent free period, fixturing period, leasehold improvement allowance, or other tenant inducement payments or allowances. (b) If the Tenant has exercised its right to extend the 9th Floor Term as described in subparagraph (a) above, and if the Tenant has reasonably abided by all the terms, conditions, and covenants of this Lease, including the covenant to pay rent, is not then in default of any such term, condition, or covenant beyond any applicable notice and cure periods, and has not become insolvent or bankrupt or had a receiver appointed in respect of its assets or business the Tenant shall have the option to extend the 9th Floor Term for a further period of three (3) years so that it shall be co-terminus with the Term; Provided that in order to exercise its option to extend the Tenant shall be required to give the Landlord notice thereof in writing not later than November 30, 2001, and not earlier than June 1, 2001. If the Tenant does not deliver the notice as aforesaid, the 9th Floor Term shall expire on May 31, 2002. Any extension pursuant to this Section 19.01 shall be upon the same terms, conditions, and covenants contained in this Lease, except that: (i) the Basic 9th Floor Rent payable pursuant to Section 19.01(a) (i) above shall not apply, but the Basic 9th Floor Rent for such renewal term shall be SIX DOLLARS AND TWENTY FIVE CENTS ($6.25) multiplied by the number of square feet of Rentable Floor Area of the 9th floor portion of the Leased Premises (being the same amount per square foot as the Basic 10th, 11th, and 12th Floor Rent); (ii) Sections 19.03, 19.04 and 19.05 shall not apply; (ii) for greater clarity the Premises shall be leased on an "as is" basis, the Landlord shall not be required to do any work in connection therewith, including any of the work described in Section 19.04 below, and there shall be no rent free period, fixturing period, leasehold improvement allowance, or other tenant inducement payments or allowances. SECTION 19.02 FURTHER OPTION TO RENEW Provided that the Tenant has reasonably abided by all the terms, conditions, and covenants of this Lease, including the covenant to pay rent, is not then in default of any such term, condition, or covenant beyond any applicable notice and cure periods, and has not become insolvent Page 33 or bankrupt or had a receiver appointed in respect of its assets or business the Tenant shall have the option to renew the Lease of the entire Leased Premises (being either the 10th, 11th, and 12th floors of the Office Section of the Building, or the 9th, 10th, 11th, and 12th floors thereof if the Tenant has exercised its right to extend the 9th Floor Term pursuant to Section 19.01(b) hereof) for one further term of five (5) years; Provided that in order to exercise its option to renew the Tenant shall be required to give the Landlord notice thereof in writing not later than November 30, 2004, and not earlier than June 1, 2004. If the Tenant does not deliver the notice as aforesaid, this Lease shall terminate upon the expiration of the Term on May 31, 2005. Any renewal pursuant to this Section 19.02 shall be upon the same terms, conditions, and covenants contained in this Lease, except that: (a) there shall be no further right to renew this Lease; (b) the Basic Rent payable pursuant to Section 4.01 of this Lease shall not apply, but the Basic Rent for such renewal term shall be the market rental per square foot for similar improved premises in the Building and any other buildings of comparable quality, size, age, and location as the Building at the commencement of the renewal term multiplied by the number of square feet of Rentable Floor Area of the Leased Premises. If the Landlord and the Tenant have not agreed upon such said current market rental prior to sixty (60) days before the expiry of the Term the issue shall NOT be referred to arbitration, but this option to renew shall be null and void and the Term shall expire on May 31, 2005; (c) Sections 19.03, 19.04 and 19.05 of this Lease shall not apply; (d) for greater clarity the Premises shall be leased on an "as is" basis, the Landlord shall not be required to do any work in connection therewith, including any of the work described in Section 19.04 below, and there shall be no rent free period, fixturing period, leasehold improvement allowance, or other tenant inducement payments or allowances. SECTION 19.03 TENANT'S LEASEHOLD IMPROVEMENTS (TENANT'S ALLOWANCE) Provided that the Lease has been fully executed by the Landlord and the Tenant the Landlord shall pay to the Tenant a leasehold improvement allowance (the "Allowance") of up to SEVEN DOLLARS ($7.00) per square foot of Rentable Floor Area of the 10th, 11th, and 12th floors of the Leased Premises plus GST; The Allowance will be paid on a monthly basis as the costs are incurred as evidenced by invoices related to Tenant improvements work on the Leased Premises delivered to the Landlord by the Tenant up to the maximum of SEVEN DOLLARS ($7.00) per square foot as aforesaid. SECTION 19.04 LANDLORD'S WORK The Landlord shall at the earliest reasonable time provide, in a good and workmanlike manner at its expense the following work (the "Landlord's Work"): (a) replace or repair T-Bar on the 9th Floor ceiling system, acoustic ceiling tiles, and building standard light fixtures where in the reasonable opinion of the Landlord and the Tenant such work is required. All bulbs and ballasts shall be in good working order; (b) provided clean building standard blinds in good working order throughout the Leased Premises; (c) ensure the 9th Floor Premises are clean and free of all refuse and chattels; (d) provide the Tenant with building standard electrical service to the Leased Premises in good working order; Page 34 (e) refurbish, to the most current Building standard, the washrooms serving the 9th, 10th, 11th, and 12th floors on which the Tenant's Premises are located with feminine product dispensers, baseboard heaters and painted where in the reasonable opinion of the Landlord and the Tenant such work is required on a per floor basis; (f) new paint and flooring of the 10th floor Common Area lobby; The Landlord's Work will commence immediately (subject to any existing tenant's occupancy) and shall be done in conjunction with the Tenant's Work. It is understood and agreed that the foregoing shall constitute the Landlord's base building work and such work will not form part of the cost of the Tenant's leasehold improvements described in Section 19.03 above. SECTION 19.05 MOVE IN Provided that the Tenant is not in default of this Lease or the Existing Lease, the Tenant will not be charged for any elevator service, supervision, guard service, or basic cleaning for its initial move in to the 9th Floor portion of the Leased Premises. SECTION 19.06 ENVIRONMENTAL To the best of its knowledge the Landlord warrants that the Premises, the Building, and the land on which the Building is situate, do not contain any environmental contamination, including asbestos, PCB's, or other contaminants, in violation of any laws or by-laws. SECTION 19.07 FIBRE OPTICS The Landlord represents that to the best of its knowledge the Building can provide access points for fibre optic lines. SECTION 19.08 24 HOUR ACCESS It is understood and agreed that the Tenant, its employees and invitees shall have the right twenty-four (24) hours per day, seven (7) days per week, throughout the Term to have access to the Leased Premises and parking facilities for the Building and to use the Common Areas for its intended purposes in common with others entitled thereof. The foregoing access to the Leased Premises shall include continuous supply (except in the case of an emergency and scheduled maintenance) by the Landlord of electric power, hot and cold running water in the Building, heat, air-conditioning (HVAC), lights within the Leased Premises and elevator services to the Leased Premises, as outlined in this Lease, and be subject in the case of hours which are not the normal business hours for the Building, to the terms of this Lease (including, but not limited to charges for Additional Services) and the Rules and Regulations attached as Schedule "B" or made pursuant to this Lease. SECTION 19.09 PARKING (a) The Landlord shall allocate to the Tenant and the Tenant shall rent from the Landlord during the Term and any renewal thereof fifteen (15) unreserved parking spaces in the underground parking garage located at LuCliff Place. (b) The rental for such unreserved underground parking spaces shall be the parking space rental charged from time to time by the Landlord to third parties for unreserved monthly parking in the said underground parking garage. The rent for the unreserved underground parking spaces shall be payable monthly in advance on the first day of each and every month as Additional Rent commencing June 1, 2000. (c) The Landlord shall not be responsible for any loss or damage to property or any Page 35 personal injury which shall be sustained by the Tenant or any employee, customer, or other persons who may be in the said underground parking garage or the entrances and driveways appurtenant thereto, or occasioned in connection with the use of the said underground parking garage. All risks of any such injury or loss are assumed by the Tenant who shall hold the Landlord harmless and indemnified therefrom. The Tenant acknowledges and agrees that no security services shall be provided and that the use of the parking space shall be at the risk of the Tenant, its employees and its customers. Page 36 (d) Notwithstanding any other provision of this Lease the Tenant shall not have the right to assign or sublet the right to use the said unreserved parking spaces without the written consent of the Landlord which may be arbitrarily and unreasonably withheld. Any purported subletting or assigning of, or permission to occupy, any parking space rented by the Tenant hereunder without the Landlord's written consent shall be null and void. If the Tenant purports to so assign, sublet, or permit occupancy without the Landlord's written consent the Landlord shall have the right to terminate the Tenant's right to rent all parking spaces hereunder forthwith by delivery of written notice to the Tenant. (e) The Tenant shall comply with all rules and regulations with respect to the use of the parking facility provided for the Building made by the Landlord from time to time. SECTION 19.10 TENANT'S RIGHT OF FIRST OFFER If the Tenant is not then in default under this Lease the Tenant shall have, throughout the Term and any renewals thereof, the continuing Right of First Offer to lease space that is available or may become available on the 14th floor of the Office Section on the following terms and conditions: (a) The Landlord shall give the Tenant the earliest reasonable notice that space will be coming available. The Landlord will provide the Tenant with an outline of the basic terms and conditions it is willing to accept from a third party dealing at "arm's length" with the Landlord. (b) The Tenant shall have five (5) business days from receipt of the Landlord's outline to enter into an agreement to lease such space from the Landlord for a term expiring on the same date as the Term. (c) If the Tenant fails to enter into such an agreement to lease such space with the Landlord within such five (5) business day period the Landlord shall be free to market such space for lease and enter into any agreement to lease or lease of such space with any third party. SECTION 19.11 COMMISSION The parties acknowledge and agree that as a result of the execution of this Lease the Landlord is obliged to pay a commission to Royal LePage Commercial Inc. pursuant to a Commission Agreement dated February 8, 2000, and that such commission shall not exceed THREE DOLLARS ($3.00) per square foot of Rentable Floor Area of the 10th, 11th, and 12th Floor Portion of the Leased Premises and ONE DOLLAR ($1.00) per square foot of Rentable Floor Area of the 9th Floor Portion of the Leased Premises. The Tenant requests that the Landlord pay the said commission to the said Royal LePage Commercial Inc. and acknowledges that the said commission has been amortized over the Term and the 9th Floor Term and is included in the Basic Rent payable hereunder. If the Landlord does not pay the commission payable to Royal LePage Commercial Inc. pursuant to the above described Commission Agreement the Tenant shall have the right to pay any commission which is payable by the Landlord directly to Royal LePage Commercial Inc. and to set Page 37 off any such payment of commission payable against the Basic Rent and Additional Rent payable to the Landlord under this Lease. IN WITNESS WHEREOF the Landlord and the Tenant have hereunto affixed their respective corporate seals, attested by the hands of their respective duly authorized offices in that behalf. SIGNED, SEALED AND DELIVERED LuCLIFF COMPANY LIMITED Per:_______________________________ Joseph Fong, General Manager Date of signature: VISIBLE GENETICS INC. Per:_______________________________ Date of signature: EX-10.25 4 a2041520zex-10_25.txt EXHIBIT 10.25 EXHIBIT 10.25 LUCLIFF COMPANY LIMITED Commercial & Residential Development LuCliff Place Tel : (416) 595-1774 700 Bay Street, Toronto, Ontario Canada M5G 1Z6 Fax : (416) 595-1745 - - -------------------------------------------------------------------------------- November 30, 2000 Visible Genetics Inc. Suite 1000 700 Bay Street Toronto, Ontario M5G 1Z6 Attention: Mr. Drasko Puseljic Dear Sirs: Re: LuCliff Company Limited (the "Landlord") lease to Visible Genetics Inc. (the "Tenant") 9th - 12th Floors, 700 Bay Street, Toronto Date of Lease: March 27, 2000 (the "Lease") OUR FILE NUMBER: R240.97 Further to our recent telephone conversations we confirm that LuCliff Company Limited has agreed with Visible Genetics Inc. to extend the 9th Floor Term and to modify the provisions of Section 19.01 of the Lease relating to the Tenant's option to extend the 9th Floor Term on the terms and conditions set out below: 1. The 9th Floor Term is extended for a further period of six (6) months from June 1, 2001, to November 30, 2001, subject to the Tenant's right to terminate the Lease of the 9th Floor portion of the Leased Premises described in paragraph 3 below. 2. Section 19.01(a) of the Lease is amended to provide that: (a) the date for delivery of notice in writing exercising the Tenant's first option to extend the 9th Floor Term shall be postponed from November 30, 2000, to May 31, 2001; Visible Genetics Inc. November 30, 2000 Page 2 (b) the option to extend the 9th Floor Term shall not be for a period of one year but shall be for a period of six months commencing December 1, 2001, and expiring on May 31, 2002; and (c) if the Tenant does not deliver the notice as aforesaid on or before May 31, 2001, the 9th Floor Term shall expire on November 30, 2001, subject to the Tenant's right to terminate the Lease of the 9th Floor portion of the Leased Premises as described in paragraph 3 below. 3. The Tenant shall have the right to terminate the Lease of the 9th Floor portion of the Leased Premises prior to its extended expiry date of November 30, 2001, by delivery of not less than six (6) months notice to the Landlord, and in such case the 9th Floor Term shall expire on the date set out in such notice. For greater clarity the parties acknowledge and agree that: (a) the date of expiration of the 9th Floor Term set out in the Tenant's notice of termination may not be later than November 30, 2001, nor earlier than the date that is six (6) months following the delivery of the notice; (b) the Tenant's right to terminate the Lease of the 9th Floor portion of the Leased Premises shall expire on May 31, 2001, and shall not apply during any further extension of the 9th Floor Term pursuant to Section 19.01, during any renewal term of the Lease pursuant to Section 19.02 of the Lease, or during any further or other extension or renewal of the Lease Term. 4. The extension of the 9th Floor Term described in paragraph 1 above shall be upon the same terms and conditions as described in Section 19.01(a) of the Lease with respect to the extension of the 9th Floor Term pursuant to the option therein contained, save and except that: (a) if the Tenant does not exercise its option to extend the 9th Floor Term under Section 19.01(a) of the Lease (as amended by paragraph 2 above), or if the Tenant delivers notice of termination pursuant to paragraph 3 above, then the Basic 9th Floor Rent during such term extension (i.e. for the period from and after May 31, 2001) shall not be market rental as set out in the said Section 19.01(a) but shall be TWELVE DOLLARS ($12.00) multiplied by the number of square feet of Rentable Floor Area of the 9th Floor portion of the Leased Premises; and Visible Genetics Inc. November 30, 2000 Page 3 (b) if the Tenant does exercise its option to extend the 9th Floor Term under Section 19.01(a) of the Lease (as hereby amended), the Basic 9th Floor Rent shall be determined in accordance with the provisions of Section 19.01(a) of the Lease, and will be the same for the six month extension period described in paragraph 1 above and for the further six month extension pursuant to the option. 5. Except as expressly modified and amended by this letter all of the terms, conditions, covenants, and provisos of the Lease shall remain in full force and effect. Terms and expressions when used in this letter shall have the same meaning as when used in the Lease unless the context otherwise requires. Please sign a copy of this letter where indicated below to confirm your agreement to the above Lease amendments. Yours truly, LUCLIFF COMPANY LIMITED JF:dmm Per: Joseph Fong, General Manager We hereby agree that the above letter sets out our agreement with respect to amendments to the above Lease. DATED at Toronto, this day of December, 2000. VISIBLE GENETICS INC. Per: Thomas J. Clarke, C.F.O. EX-10.26 5 a2041520zex-10_26.txt EXHIBIT 10.26 EXHIBIT 10.26 THIS LEASE made as of the first day of October, 2000. B E T W E E N: LUCLIFF COMPANY LIMITED (hereinafter referred to as the "Landlord") OF THE FIRST PART - and - VISIBLE GENETICS INC., a Corporation duly incorporated under the laws of the Province of Ontario (hereinafter referred to as the "Tenant") OF THE SECOND PART WHEREAS by a Lease dated the 27th day of March, 2000, (the "Existing Lease") the Landlord leased to the Tenant certain premises being approximately twenty seven thousand, five hundred and four (27,504) square feet on the 9th, 10th, 11th, and 12th floors of the office building known as 700 Bay Street, Toronto, and more particularly described therein, on the terms and conditions therein set forth. AND WHEREAS the Tenant wishes to lease additional premises on the 14th floor of the Building adjacent to the premises leased pursuant to the Existing Lease upon the terms and conditions hereinafter set forth. DEMISE AND TERM 1. In consideration of the rents, covenants, and agreements herein contained on the part of the Tenant to be paid, observed and performed, the Landlord hereby leases to the Tenant and the Tenant leases from the Landlord, the entire 14th floor of the Office Section comprising approximately six thousand, eight hundred and seventy six (6,876) square feet of Rentable Floor Area, and more particularly described as outlined in red on the plan of the 14th floor attached hereto as Schedule "A" to this lease for and during the term of FOUR (4) YEARS, SIX (6) MONTHS, AND FIFTEEN (15) DAYS to be computed from the 15th day of November, 2000, and from thenceforth next ensuing and fully to be completed on the 31st day of May, 2005; BASIC RENT 2. (a) The Tenant shall pay yearly and every year during the Term without any deduction, abatement, set-off, or diminution whatsoever, a Basic Rent of EIGHTY TWO THOUSAND, FIVE HUNDRED AND TWELVE DOLLARS ($82,512.00) of lawful money of Canada, payable in equal consecutive monthly instalments in advance of SIX THOUSAND, EIGHT HUNDRED AND SEVENTY SIX DOLLARS ($6,876.00) upon the date of commencement of the Term and on the first day of each and every calendar month during the Term thereafter, such payments to be made by cheque or money order payable to the Landlord, or as it may direct in writing from time to time, and to be payable at 700 Bay Street, Toronto, Ontario M5G 1Z6, or at such other such place as the Landlord may direct in writing from time to time. (b) It is acknowledged and agreed that the rent described in this paragraph 2 is based on an annual rental of TWELVE DOLLARS ($12.00) per square foot of Rentable Floor Area of the Leased Premises. It is further acknowledged and agreed that the Landlord's architect has certified Page - 2 - that the Leased Premises has a Rentable Floor Area of six thousand, eight hundred and seventy six (6,876) square feet, and the Tenant acknowledges and agrees that it is satisfied with the said Landlord's architect's certificate. ADDITIONAL RENT 3. The Tenant shall also pay to the Landlord yearly and every year during the Term, Additional Rent as described in the Existing Lease; Without limiting the generality of the foregoing the Tenant shall pay to the Landlord Taxes as described in Article 6 of the Existing Lease and the Tenant's Proportionate Share of Operating Costs as described in Article 5 of the Existing Lease. LANDLORD'S WORK, EARLY OCCUPANCY 4. The Landlord agrees to do the following work as soon as reasonably possible following execution of this Lease and will use its reasonable efforts to complete such work on or before the 15th day of October, 2000: (a) demolish and remove all existing leasehold improvements throughout the Leased Premises including all interior partition walls and floor coverings; (b) refurbish the washrooms and the elevator lobby in the Leased Premises to the same standard as the work done on the 9th - 12th floors of the Office Section; (c) install new Building standard ceiling tiles and lighting throughout the Leased Premises. It is agreed that the foregoing work shall constitute the Landlord's base building work and will not form part of the cost of the Tenant's leasehold improvements described in paragraph 6 below. If the Landlord has not substantially completed the work described in subparagraphs (a) and (c) above by October 15, 2000, then the commencement date of the Term shall not be postponed but the Tenant shall not be required to pay any Basic Rent or Additional Rent until the date that is thirty (30) days after the Landlord has substantially completed such work; provided that the Tenant shall be required to pay for any Additional Services and for utilities consumed in the Leased Premises during such period. 5. As soon as the Landlord's Work described in subparagraphs 4 (a) and (c) above is substantially completed, the Tenant shall be entitled to occupy the Leased Premises prior to the commencement date of the Term, but upon not less than one (1) business day's written notice to the Landlord, for the purposes of constructing its leasehold improvements, including installation of its trade fixtures, furniture, equipment, and telephone and computer cabling. The Tenant shall be bound by all of the terms, conditions, covenants, and provisos of this Lease during any period of occupation prior to the commencement date of the Term, save and except that during such period or periods the Tenant shall not be required to pay any Basic Rent or Additional Rent whether or not the Tenant carries on business in the Leased Premises; provided that the Tenant shall be required to pay for any Additional Services and for utilities consumed in the Leased Premises during any such period of early occupancy. TENANT'S LEASEHOLD IMPROVEMENTS ALLOWANCE 6. Provided that this Lease has been fully executed by the Landlord and the Tenant the Landlord shall pay to the Tenant a leasehold improvement allowance (the "Allowance") of up to TWENTY DOLLARS ($20.00) per square foot of Rentable Floor Area of the Leased Premises; The Allowance will be paid on a monthly basis as the costs are incurred as evidenced by invoices related to Tenant improvements work on the Leased Premises delivered to the Landlord by the Tenant up to the maximum of TWENTY DOLLARS ($20.00) per square foot as aforesaid. The construction of the Tenant's leasehold improvements shall be governed by the provisions of Section 7.16 of the Page - 3 - Existing Lease. Page - 4 - OPTION TO RENEW 7. If the Tenant has exercised the option to renew described in Section 19.02 of the Existing Lease and provided that the Tenant has reasonably abided by all the terms, conditions, and covenants of this Lease, including the covenant to pay rent, is not then in default of any such term, condition, or covenant beyond any applicable notice and cure periods, and has not become insolvent or bankrupt or had a receiver appointed in respect of its assets or business the Tenant shall have the option to renew this Lease for one further term of five (5) years; Provided that in order to exercise its option to renew the Tenant shall be required to give the Landlord notice thereof in writing not later than November 30, 2004, and not earlier than June 1, 2004. If the Tenant does not deliver the notice as aforesaid, this Lease shall terminate upon the expiration of the Term on May 31, 2005. Any renewal pursuant to this paragraph 7 shall be upon the same terms, conditions, and covenants contained in this Lease, except that: (a) there shall be no further right to renew this Lease; (b) the Basic Rent payable pursuant to paragraph 2 of this Lease shall not apply, but the Basic Rent for such renewal term shall be the market rental per square foot for similar improved premises in the Building and any other buildings of comparable quality, size, age, and location as the Building at the commencement of the renewal term multiplied by the number of square feet of Rentable Floor Area of the Leased Premises. If the Landlord and the Tenant have not agreed upon such said current market rental prior to sixty (60) days before the expiry of the Term the issue shall NOT be referred to arbitration, but this option to renew shall be null and void and the Term shall expire on May 31, 2005; (c) Sections 19.03, 19.04 and 19.05 of the Existing Lease shall not apply and paragraphs 4, 5, and 6 of this Lease shall not apply; (d) for greater clarity the Leased Premises shall be leased on an "as is" basis, the Landlord shall not be required to do any work in connection therewith, including any of the work described in Section 19.04 of the Existing Lease or paragraph 4 above, and there shall be no rent free period, fixturing period, leasehold improvement allowance, or other tenant inducement payments or allowances. INCORPORATION OF TERMS AND CONDITIONS OF EXISTING LEASE 8. (a) The Landlord and the Tenant covenant and agree that except as otherwise provided for in this Lease, the terms, conditions, covenants, and provisos contained the Existing Lease shall be incorporated into and shall form part of this Lease, and the Landlord and the Tenant shall be bound by and shall observe and perform all of the terms, conditions, covenants, and agreements on their parts respectively to be performed or observed thereunder. For greater clarity the provisions of Article 3 of the Existing Lease (Demise and Term) and Section 4.01 (Basic Rent) shall not apply to this Lease and the provisions of paragraph 1, 2, and 4 shall apply in their place and stead. (b) Notwithstanding the provisions of subparagraph (a) above the following sections of the Existing Lease shall not apply to and shall not form part of this Lease: (i) Section 19.01 regarding the Tenant's Option to Extend the 9th Floor Term; (ii) Section 19.02 regarding an Option to Renew; The Tenant's Option to renew this Lease shall be as set out in paragraph 7 of this Lease; (iii) Section 19.03 regarding the Tenant's Leasehold Improvements (Tenant's Allowance; (iv) Section 19.09 regarding Parking; Page - 5 - (v) Section 19.10 regarding Tenant's Right of first Offer with respect to the 14th floor; (vi) Section 19.11 regarding Commission. (c) All terms and expressions defined in the Existing Lease shall have the same meanings when used in this lease as when used in the Existing Lease unless the context otherwise requires and except that: (i) "Leased Premises" shall mean the Leased Premises described in paragraph 1 of this Lease; (ii) "Term" shall mean the Term described in paragraph 1 of this Lease; (iii) "Existing Lease" shall mean the Lease described in the first recital to this Lease and shall NOT mean the "Existing Lease" described in Section 3.02 of the said Existing Lease. IN WITNESS WHEREOF the parties of the first and second parts have hereunto affixed their respective corporate seals, attested by the hands of their duly authorized officers in that behalf. LUCLIFF COMPANY LIMITED Per:_______________________________ Joseph Fong, General Manager Date of signature: VISIBLE GENETICS INC. Per:_______________________________ Thomas J. Clarke, Chief Financial Officer Date of signature: EX-10.27 6 a2041520zex-10_27.txt EXHIBIT 10.27 EXHIBIT 10.27 THIS EMPLOYMENT AGREEMENT is made July 7, 1999 AMONG: VISIBLE GENETICS CORPORATION, a corporation duly incorporated under the laws of the State of Delaware and having its principal office in the City of Pittsburgh, in the State of Pennsylvania, (the "Employer") -and- VISIBLE GENETICS INC., a corporation duly incorporated under the laws of the Province of Ontario and having its head office in the City of Toronto, in the Province of Ontario, ("VGI"), -and- RICHARD DALY, an individual residing in the City of San Francisco, in the State of California, (the "Executive") RECITALS: A. The Employer is a wholly owned subsidiary of VGI. B. The Executive has been employed by the Employer effective April 1, 1999. C. The Executive was appointed as President and Chief Executive Officer of VGI effective July 7, 1999. D. VGI and the Employer are parties to a Secondment Agreement, under which the Executive may be seconded to VGI from time to time. - 2 - E. The Employer and Executive wish to set out the terms and conditions of employment. THEREFORE, the parties agree as follows: ARTICLE 1 POSITION, DUTIES AND REMUNERATION 1.1 Employment Subject to the provisions of Section 5 hereof, the Employer agrees to continue to employ the Executive and the Executive agrees to remain in the employ of the Employer and to act as President and Chief Executive Officer ("CEO") of VGI. The Executive will be paid a gross salary of U.S. two hundred and twelve thousand dollars (U.S. $212,000.00) paid in equal monthly installments. 1.2 DUTIES The Executive agrees to perform faithfully the duties of President and CEO and all other lawful instructions and duties as the Employer or VGI may from time to time reasonably require commensurate with his position. 1.3 FULL TIME AND ATTENTION The Executive agrees to use his best efforts to promote the interests of the Employer and VGI; to devote his full time and attention to the business of the Employer and VGI and to adhere to the instructions and directives of the Employer and VGI. 1.4 EMPLOYMENT CONDITIONS The Executive agrees to adhere to and abide by the Employer's policies, as amended from time to time, regarding holidays, sick leave, hospital insurance, and other fringe benefits. The Executive shall be bound by and shall faithfully observe and abide by all of the rules and - 3 - obligations of the Employer from time to time in force which are brought to his notice, or of which he should reasonably be aware of. 1.5 ANNUAL REVIEW The Employer agrees in its sole discretion to review the salary and benefits payable to Executive hereunder annually. 1.6 BENEFITS In addition to salary, for the performance of his services hereunder, the Executive shall be entitled to participate in all of the Employer's benefit plans generally available to its Executives, including group, life, medical, dental, hospital, long-term disability, accidental death and dismemberment insurance benefits plans. In the event the Employer adopts any new benefit plans, pensions or perquisites, the Executive shall have the right to participate on a basis equivalent to other Executives of the Employer. All plans are governed by their terms. 1.7 REIMBURSEMENT FOR EXPENSES Provided that the Executive submits receipts satisfactory to either the Chair of the Board of Directors of the Employer (the "Board") or the Chair of the Compensation Committee of the Board, the Employer shall reimburse the Executive forthwith for all proper and reasonable out-of-pocket expenses actually incurred by the Executive in the performance of his duties, including all business-related travel expenses. 1.8 APARTMENT ACCOMMODATION The Employer shall make available to the Executive apartment accommodation for the occasions in which the Executive must travel for business-related reasons to Toronto. - 4 - 1.9 TAX MATTERS (a) The Employer will provide the Executive with up to Canadian ten thousand dollars (Cdn. $10,000.00) in order that the Executive may obtain income tax advice. (b) The Employer will reimburse the Executive with reasonable expenses each year for income tax return preparation. (c) To receive all or part of the amounts set out in 1.9(a) or (b), the Executive must present receipts satisfactory to the Employer describing the nature of the services provided and the fees charged in respect of such services. 1.10 VACATION The Executive shall be entitled to five (5) weeks' vacation with pay each calendar year. The scheduling of any vacation time must be approved by the Employer. Vacation time will not be accumulated from year to year. Rather, unused entitlement will be forfeited; provided, however, that the Employer will provide any vacation pay entitlements pursuant to applicable employment standards legislation. ARTICLE 2 CONFIDENTIAL INFORMATION, NON-COMPETITION/NON-SOLICITATION DURING AND FOLLOWING TERMINATION OF EMPLOYMENT 2.1 DEFINITIONS In this Article 2 , the following terms shall have the meaning set out below: (a) "Confidential Information" - shall include: (i) Trade Secret Information; (ii) all other proprietary and confidential information concerning the business and affairs of the Employer, including, management methods, operating techniques and procedures, financial and sales information, supplier and client data, and information disclosed in confidence to the Employer by a third party; and (iii) all Inventions, but Confidential Information shall not include information which the Executive can demonstrate: - 5 - (i) was in the public domain or becomes so through no fault of the Executive; or (ii) was disclosed to the Executive by a third party not under an obligation to the Employer to maintain the confidence of such information. (b) "Inventions" - shall mean any improvement, modification or enhancement of any Trade Secret Information together with any other Trade Secret Information which the Executive may make, develop, devise, author or otherwise be involved with, alone or jointly with others, which is, regardless of whether or not the Employer's resources or assets are used, conceived or made wholly or partly by reason of opportunities afforded by the Employer, or with knowledge gained through employment by the Employer (whether perfected or reduced to specific form either prior to the date of this Agreement or during or subsequent to his employment with the Employer) or which: (i) the Executive makes, develops, devises, authors or is otherwise involved with during the term of his employment with the Employer, on or off the Employer's premises, during or after normal business hours; (ii) utilizes any Trade Secret Information of the Employer; or (iii) does not utilize any Trade Secret Information of the Employer but is made, developed, devised or authored to a substantial extent during the time which should properly be devoted by the Executive to the affairs and the business of the Employer. (c) "TradeSecret Information" - shall mean all information relating to the business of the Employer including, but not limited to, all software systems, and design documents, formulae, processes, research techniques and results and instructions in oral form or any media including electronic, chart, graphic or written form. "Employer" shall mean VGI and its affiliates, collectively. 2.2 CONFIDENTIALITY The Executive acknowledges that he is employed in a position of trust and has fiduciary obligations to the Employer and VGI. The Executive covenants that during his employment by the Employer and after the termination of such employment, the Executive shall not, for any reason, directly or indirectly: (a) apply or use any part of the Confidential Information including the Inventions except for the benefit of the Employer; - 6 - (b) divulge or disclose to any person, firm or corporation any part of the Confidential Information including the Inventions, except with the prior written consent of the Employer, and the Executive shall only make such disclosure to: (i) directors, officers, Executives and consultants of the Employer on a "need-to-know" basis only as the Executive may be authorized from time to time by the proper officers of the Employer; or (ii) as required to do so as a matter of law, pursuant to any subpoena or order issued by a court of competent jurisdiction or any competent governmental authority, provided the Executive shall promptly notify the Employer of any such order or requirement, consult with the Employer on the advisability of resisting such order and co-operate with the Employer in attempting to obtain an order protecting the confidence of any information to be disclosed; (c) publish information relating to the Inventions except with the prior written consent of the Employer; or (d) copy or remove from the Employer's premises any part of the Confidential Information including the Inventions, in electronic or physical form, except documents which: (i) are not Trade Secret Information; and (ii) in the ordinary course of business, the Executive would reasonably be expected to perform work on at home or in the course of business travel. Upon request or upon termination of his employment by the Employer, the Executive shall surrender to the Employer all originals and copies of any media of any and all Confidential Information including Inventions which may be in his possession, and the Executive acknowledges and agrees that upon termination of his employment, the Executive has an obligation to make such surrender with or without the express demand of the Employer. 2.3 NON-COMPETITION During the term of this Agreement and for a period of twelve (12) months thereafter, the Executive shall not, either individually or in partnership or jointly or in conjunction with any person as principal, agent, Executive, shareholder (other than a holder of shares listed on the Canadian or United States stock exchange where such holdings do no exceed two percent (2%) - 7 - of the outstanding shares so listed), anywhere within Canada or the United States of America, the United Kingdom or Europe: (a) solicit any clients or potential clients of the Employer for any business that competes directly or indirectly with the business of the Employer, except on behalf of the Employer; or (b) in any manner whatsoever carry on or be engaged in, or be concerned with or interested in, or advise, lend money to, guarantee the debts or obligations of, or permit his name or any party thereof to be used or employed by any person engaged in or concerned with or interested anywhere in any business that competes directly or indirectly with the business of the Employer. For the purposes hereof the business of the Employer shall be defined to mean molecular diagnostic systems, including software instrumentation, and molecular methods, or DNA sequencing technology. This includes, but is not limited to any high speed DNA sequencer or any DNA sequencer that uses an ultra-thin gel cassette, or DNA analysis software that is assay based. This excludes any service-based diagnostic business, or not-for-profit research associated with clinical diagnostics that might use such molecular diagnostic systems, but does include any business that supplies software, instrumentation of supplies that compete with the Employer's products in development or being sold at the time of the Executive's termination or voluntary leaving. 2.4 INVENTIONS The Executive shall promptly disclose to the Employer all Inventions as the Executive becomes aware of them. The Executive acknowledges and agrees that as between the Employer and Executive, all trade secrets, copyright, patents or other intellectual property rights which may subsist in the said Inventions shall be and shall remain the sole and exclusive property of the Employer, and the Employer shall be free to adopt the Inventions. The Executive hereby waives in favour of the Employer his moral rights in all such Inventions. Both during the following his employment, the Executive will execute any documents that the Employer may present to him - 8 - including applications to register intellectual property rights and assignment documents, and shall do all such other things as the Employer may require of the Executive from time to time to afford full and complete protection to the above-stated property rights of the Employer in and to the Inventions, all at the sole expense of the Employer. The Executive shall not at any time contest directly or indirectly the ownership, validity or enforceability of intellectual property rights subsisting in such Inventions. 2.5 CORPORATE OPPORTUNITIES Any business opportunities related to the business of the Employer which become known to the Executive during his employment hereunder must be fully disclosed and made available to the Employer by the Executive, and the Executive agrees not to take or attempt to take any benefit of such opportunity except on behalf of the Employer unless the Employer declines in writing to pursue such opportunity. 2.6 RIGHTS OF ENFORCEMENT The Executive hereby agrees that all restrictions, including but not limited to business scope, geographic area and period of time, in this Agreement are reasonable and valid in view of the nature of the business of the Employer. The Executive further agrees that the remedy at law for any breach by him of the confidentiality or non-competition provisions of this Agreement will be inadequate. The Employer or any related corporation, on any application to a court of competent jurisdiction, shall be entitled to injunctive relief against the Executive to enforce the terms of Article 2 of this Agreement without the necessity of proving actual damage to the Employer or its related corporations. - 9 - ARTICLE 3 TERMINATION OF EMPLOYMENT 3.1 DEATH The Executive's employment shall terminate automatically in the event of the death of the Executive and the Executive's estate shall not be entitled to receive any further compensation under this Agreement other than any amounts that may have accrued to the date of the Executive's death. Notwithstanding the foregoing, shares subject to the First and Second Options or portions thereof shall continue to be released from escrow pursuant to the Escrow Agreement for twelve (12) calendar months following the date of the Executive's death and the Executive's estate will also be entitled to receive one months' salary multiplied by the number of months in the Severance Period set out in Subsection 3.4. 3.2 DISABILITY The Executive's employment shall terminate upon the last day of any period of six (6) months during which the Executive has been continuously disabled from performing his employment duties. The Executive shall not be entitled to receive any further compensation under this Agreement other than any amounts that may have accrued to the date of the Executive's termination of employment under this Section 3.2. Notwithstanding the foregoing, shares subject to the First and Second Options or portions thereof shall continue to be released from escrow pursuant to the Escrow Agreement for twelve (12) calendar months following the date of the Executive's termination of employment under this Section 3.2, and the Executive will also be entitled to receive one months' salary multiplied by the number of months in the Severance Period set out in Subsection 3.4. - 10 - 3.3 CAUSE Notwithstanding any other provisions of this Agreement, the Employer or VGI may terminate this Agreement at any time, without notice, for Cause. The term "Cause" as used herein shall mean any material breach of fiduciary obligation or gross insubordination. 3.4 TERMINATION FOR ANY REASON Notwithstanding any other provision in this Agreement, the Employer may terminate the Executive's employment at any time for any reason by providing the Executive with one (1) months' salary multiplied by the number of months in the Severance Period. The "Severance Period", as used in this Agreement, means: (a) if Executive is terminated by Employer prior to April 1, 2000, twelve (12) months; or (b) if the Executive is terminated after April 1, 2000, twelve (12) months' notice, plus one (1) additional month for each full year of employment with Employer after April 1, 2000 but shall not exceed a total of eighteen (18) months. The Executive agrees that such pay in lieu of notice will fully satisfy the Employer's obligations at common law and no further payments will be owing to him by the Employer or VGI. The parties have negotiated the duration of the Severance Period and it forms part of the consideration given by the Executive for his salary. 3.5 STATUTORY COMPLIANCE Any payment under Section 3.4 is subject to deductions required by law and includes any entitlement the Executive may have to notice of termination, termination pay or severance under the EMPLOYMENT STANDARDS ACT (Ontario) or any similar legislation. The Executive shall have no claim against the Employer or VGI for any further liability to make payments in connection with the termination of the Executive's employment, other than those arising from Section 3.4 of this Agreement. - 11 - 3.6 RESIGNATION The employment of the Executive may be terminated by the Executive for any reason upon prior written notice to the Employer of one hundred and eighty (180) days. 3.7 RETURN OF EMPLOYER PROPERTY Upon termination of employment for whatever reason, the Executive will promptly return to the Employer, in good condition, all items of any and every nature or kind used by him in the course of his employment, or otherwise furnished to him by the Employer or VGI, including without limitation all equipment, credit cards, computers, cellular phones, fax machines, books, records, reports, files, manuals, literature, software, confidential information or other materials belonging to the Employer or an affiliated company. 3.8 BENEFIT TERMINATION Upon termination of employment, all benefits provided under this Agreement shall cease as permitted by applicable employment standards legislation, provided that if the Executive's employment is terminated by the Employer under Section 3.4, benefits provided under this Agreement shall continue for the duration of the Severance Period. ARTICLE 4 GRANT OF OPTIONS TO PURCHASE COMMON SHARES OF VGI 4.1 THE FIRST OPTION The Executive was granted an option (the "First Option") by VGI on April 1, 1999 to purchase fifty thousand (50,000) common shares of VGI at an exercise price of U.S. nine dollars, ten cents (US $9.10) per share. Subject to Article 5 and the provisions of the attached Escrow Agreement, the Executive has the right to exercise the First Option with respect to all or any part of the shares subject to the First Option at any time or times prior to the close of business on March 31, 2009. In accordance with the provisions of the Escrow Agreement, one thousand three hundred - 12 - and eighty eight (1,388) shares shall be released from escrow on the first day of every calendar month between May 1, 1999 and March 1, 2002 and the remaining one thousand four hundred and twenty (1,420) shares shall be released from escrow on April 1, 2002. 4.2 THE SECOND OPTION The Executive was granted an additional option (the "Second Option") by VGI on July 7, 1999, to purchase four hundred thousand (400,000) common shares of VGI at an exercise price of U.S. eleven dollars (US $11.00) per common share. Subject to the provisions of Article 5 and the attached Escrow Agreement, the Executive has the right to exercise the Second Option with respect to all or any part of the shares subject to the Second Option at any time or times prior to the close of business on July 6, 2009. In accordance with the provisions of the Escrow Agreement, one hundred thousand (100,000) shares shall be released from escrow on July 7, 2000, eight thousand three hundred and thirty three (8,333) shares shall be released from escrow on each of August 7, 2000 and the seventh day of every calendar month thereafter until June 7, 2003, and eight thousand three hundred and forty five (8,345) shares shall be released from escrow on July 7, 2003. 4.3 THE ESCROW AGREEMENT Subject to Article 5, the First Option and the Second Option (collectively, the "Options") and all shares issued upon the exercise of the Options shall be held subject to the escrow agreement attached hereto as Schedule "A" (the "Escrow Agreement"). ARTICLE 5 EFFECT OF TERMINATION OF EMPLOYMENT ON THE FIRST OPTION AND THE SECOND OPTION 5.1 TERMINATION (a) The First Option. - 13 - (i) Subject to Section 5.3: (A) if the Executive resigns employment with the Employer prior to April 1, 2002, or is terminated for Cause in accordance with Section 3.3, the Executive shall be entitled only to receive those shares issued or issuable upon exercise of the First Option that have been released from escrow pursuant to the Escrow Agreement on or before the date of termination. (B) if the Executive is terminated without Cause prior to April 1, 2000, the Executive shall be entitled to receive those shares issued or issuable upon exercise of the First Option that have been released from escrow pursuant to the Escrow Agreement on or before the date of termination, plus those shares that would have been released from escrow pursuant to the Escrow Agreement had the Executive continued to be employed beyond the date of termination for the number of months in the Severance Period plus an additional six (6) months (and those shares that would have been released from escrow pursuant to the Escrow Agreement during such period shall be deemed to have been released from escrow pursuant to the Escrow Agreement in such circumstances for all purposes of this Agreement and the Escrow Agreement); (C) if the Executive is terminated without Cause after April 1, 2000, the Executive shall be entitled to receive those shares issued or issuable upon exercise of the First Option that have been released from escrow pursuant to the Escrow Agreement on or before the date of termination, plus those shares that would have been released from escrow pursuant to the Escrow Agreement had the Executive continued to be employed beyond the date of termination for the number of months in the Severance Period (and those shares that would have been released from escrow pursuant to the Escrow Agreement during such period shall be deemed to have been released from escrow pursuant to the Escrow Agreement in such circumstances for all purposes of this Agreement and the Escrow Agreement); (D) to the extent of the portion of the First Option that has not been exercised for the full number of shares which may be released from escrow pursuant to the Escrow Agreement to the Executive in accordance with the provisions of this Subsection 5.1(a), that portion of the First Option will remain exercisable and the remaining portion of the First Option will be cancelled; and (E) If the Executive's employment is terminated, VGI shall have the right to purchase for cancellation for a price equivalent to the exercise price paid by the Executive any shares issued pursuant to the exercise of the First Option which have not been released from - 14 - escrow pursuant to the Escrow Agreement (taking into account the terms of this Section). (b) The Second Option. (i) Subject to Section 5.3: (A) if the Executive resigns employment with the Employer or is terminated for Cause in accordance with Section 3.3 prior to July 7, 2000, the Executive shall have no right to purchase any shares pursuant to the Second Option and the Second Option will expire on the date of such resignation or termination; (B) if the Executive resigns employment with the Employer, or is terminated for Cause in accordance with Section 3.3 on or after July 7, 2000 and prior to July 7, 2003, the Executive shall be entitled to receive those shares issued or issuable upon exercise of the Second Option that have been released from escrow pursuant to the Escrow Agreement on or before the date of termination; and (C) if the Executive is terminated by the Employer without Cause prior to July 7, 2003, he shall be entitled to receive those shares issued or issuable upon exercise of the Second Option that have been released from escrow pursuant to the Escrow Agreement on or before the date of termination plus those shares that would have been released from escrow pursuant to the Escrow Agreement had the Executive continued to be employed beyond the date of termination for the number of months in the Severance Period (and those shares that would have been released from escrow pursuant to the Escrow Agreement during such period shall be deemed to have been released from escrow pursuant to the Escrow Agreement in such circumstances for all purposes of this Agreement and the Escrow Agreement); (D) to the extent of the portion of the Second Option that has not been exercised for the full number of shares which may be released from escrow pursuant to the Escrow Agreement to the Executive in accordance with the provisions of this Subsection 5.1(b), that portion of the Second Option will remain exercisable and the remaining portion of the Second Option will be cancelled; and (E) If the Executive's employment is terminated, VGI shall have the right to purchase for cancellation for a price equivalent to the exercise price paid by the Executive any shares issued pursuant to the exercise of the Second Option which have not been released from escrow pursuant to the Escrow Agreement (taking into account the terms of this Section). - 15 - 5.2 ADDITIONAL OPTIONS Additional options may be granted to Executive by Employer from time to time on a performance basis, at the sole discretion of Employer. 5.3 ACCELERATED RELEASE FROM ESCROW The Escrow Agreement provides for an immediate release from escrow upon a Change of Control in certain circumstances. For purposes of this Agreement and the Escrow Agreement, a "Change of Control" shall mean: (a) any transaction or series of related transactions (including a merger or consolidation) by a person or persons acting in concert or combination as a result of which the holders of voting capital stock of VGI immediately prior to such transaction(s) own less than fifty percent (50%) of the outstanding voting capital stock of VGI immediately subsequent to such transaction(s); or (b) an agreement for the sale or disposition of all or substantially all of the assets of VGI to an arm's length third party that is not an affiliate of VGI; provided that no Change of Control shall be deemed to have occurred for purposes of this Agreement or the Escrow Agreement by virtue of any transaction which results in the Executive or an entity in which the Executive has a one-quarter of one percent (.25%) or greater equity interest, either singly, or acting as a joint actor with a group of entities or persons, becoming the beneficial owner, directly or indirectly of twenty-five percent (25%) or more of the combined voting power of VGI's voting securities. 5.4 STATUS OF AND PAYMENT FOR OPTIONS The Options are issued pursuant to VGI's Employee Share Option Plan, as amended. The Options are intended to qualify as "incentive stock options" under Section 422 of the Internal Revenue Code of 1986, as amended, to the extent that they quality as such thereunder. Subject to applicable law, stock purchased upon exercise of any of the Options may be paid for, and any withholding obligation on the part of the Executive in connection with the exercise of any of the Options may be satisfied, at the Executive's election: (a) in cash or by cheque made payable to the order of VGI in the amount of such exercise price or withholding obligation, as the case may be; - 16 - (b) through the delivery of shares of stock of VGI having a fair market value on the date of exercise equal to the amount of such exercise price or withholding obligation, as the case may be; (c) by delivery of an unconditional and irrevocable undertaking by a broker to deliver promptly to VGI sufficient funds to pay the exercise price or such withholding obligation, as the case may be; (d) by the surrender for cancellation of options to purchase such number of shares of stock of VGI as is equal to (i) the amount of such exercise price or withholding obligation, as the case may be, divided by (ii) the fair market value on the date of exercise of one share of stock inus the exercise price of one share of stock under the option so ancelled; or (e) by any combination of the above permissible forms of payment, provided, however, that the Executive may not use shares issued or issuable upon exercise of the Options in payment of the exercise price or satisfaction of the withholding obligation, as the case may be, unless and until such shares have been or are capable of being released from escrow pursuant to the Escrow Agreement at the time of exercise or satisfaction. Whether or not they were ever issued, the number of shares previously subject to the Escrow Agreement that have, pursuant to this Section 5.4, been used as payment for the exercise price or satisfaction of the withholding obligation, as the case may be, shall not thereafter be available for release from escrow. ARTICLE 6 CONTRACT PROVISIONS 6.1 HEADINGS The headings of the Sections herein are inserted for convenience of reference only and shall not affect the meaning or constructions hereof. - 17 - 6.2 WITHHOLDING All payments under this Agreement shall be subject to withholding of such amounts, if any, relating to tax or other payroll deductions as the Employer may reasonably determine and should withhold pursuant to any applicable law or regulation. 6.3 COUNTERPARTS This Agreement may be executed in counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. 6.4 WAIVER The failure of any party to enforce its rights under this Agreement at any time for any period shall not be construed as a waiver of such rights and a waiver shall only be construed as such if made in writing signed by a duly authorized representative of the waiving party. 6.5 SEVERABILITY If any provision of this Agreement or application of any such provision to any person or circumstances shall be invalid under the law of any jurisdiction the remainder of this Agreement or the application of such provision to persons or circumstances other than those as to which it is invalid shall not be effected thereby. In the event a court of competent jurisdiction rules any provision of this Agreement to be invalid, then such ruling shall have no effect on the remaining provisions of this Agreement and they shall continue in full force and effect. 6.6 ENTIRE AGREEMENT This Agreement, together with Schedules "A" and "B", contains the entire contract of Employment between the parties hereto and supersedes and replaces all previous negotiations, - 18 - understandings and agreements whether verbal or written with respect to any matters herein referred to, including the agreement between the parties effective April 1, 1999. 6.7 GOVERNING LAW This Agreement shall be governed by and construed in accordance with the laws of the Province of Ontario and the laws of Canada applicable therein. Each of the parties hereby irrevocably attorns to the jurisdiction of the courts of the Province of Ontario with respect to any matters arising out of this Agreement. 6.8 SURVIVAL The provisions of Articles 2, 3, 4, and 5 hereof shall survive the termination of this Agreement for the periods of time specified or contemplated therein. 6.9 DIRECTORS AND OFFICERS If the Executive is a director or officer at the relevant time, the Executive agrees that after termination of his employment with the Employer for any reason, he will tender his resignation from any position he may hold as an officer or director of the Employer or any of its affiliated or associated companies. 6.10 TAX EQUALIZATION The Employer agrees to pay a cost of living supplement, such supplement to include an equalization payment to be made by the Employer in the event that the net after tax income in respect of the Executive's employment pursuant to the Secondment Agreement is less than the net after tax income which would have resulted had the all the Executive's salary and any sums paid by way of bonus been taxed only in the jurisdiction in which they would otherwise have been taxed, but for the Executive's secondment pursuant to the Secondment Agreement. Such - 19 - equalization payment shall be in an amount such that, after tax, it will equal the shortfall in net after tax income. ARTICLE 7 MISCELLANEOUS 7.1 NO BREACH OF THIRD PARTY AGREEMENT The Executive covenants and acknowledges with the Employer that by entering into this Agreement he will not be in breach of any agreement with any third party. 7.2 INDEMNIFICATION AGREEMENT The Employer and Executive agree to enter into an Indemnification Agreement attached hereto as Schedule "B". 7.3 ARBITRATION Any dispute, controversy, claim or difference between the parties hereto arising out of Article 3 including questions of fact, procedures, practices or standards relevant to Article 3 of this Agreement which cannot be resolved or settled by the parties, shall be settled and determined by arbitration. The provisions of this Section shall be deemed to constitute a "submission" within the meaning of the ARBITRATIONS ACT (Ontario) (the "Act") and the provisions of the Act, except to the extent that a contrary intention is expressed herein, shall apply to any arbitration hereunder. Either party may at any time give written notice to the other of its desire to submit such dispute to arbitration stating with reasonable particularity the subject matter of such dispute. Within five (5) business days after receipt of such notice, the parties shall appoint a single arbitrator with appropriate experience to determine such dispute. If the parties fail to appoint an arbitrator either party may apply to a Judge of the Superior Court of Ontario to appoint an arbitrator to determine such dispute. The arbitrator so appointed shall forthwith proceed to arbitrate the dispute. The award of the arbitrator shall be delivered to the parties within sixty (60) days of his appointment. - 20 - The costs of the arbitration shall be paid as determined by the arbitrator. Notwithstanding anything to the contrary contained in the Act, the award of the arbitrator shall be final and binding upon the parties and all persons claiming through or under them. An award of the arbitrator shall be in substitution for and precludes either party or any person claiming through or under a party to bring any suit, action or other proceeding in any court of law or equity against either party or any person claiming through or under a party or against the arbitrator in respect of any matter for which arbitration is herein provided. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction and thereupon execution or other legal process may issue thereon. The parties hereto and all persons claiming through or under them hereby attorn to the jurisdiction of the arbitrator and to the jurisdiction of any court in which the judgment may be entered. Arbitration may not be waived except upon delivery by the parties of a written notice to that effect. THIS Agreement is binding upon and is for the benefit of the parties and their respective successors. IN WITNESS OF WHICH the Parties have duly executed this Agreement. VISIBLE GENETICS INC. By: ----------------------------------- Name: Title: By: ----------------------------------- Name: Title: - 21 - VISIBLE GENETICS CORPORATION By: ----------------------------------- Name: Title: By: ----------------------------------- Name: Title: SIGNED, SEALED & DELIVERED In the presence of: - - ------------------------------------- ----------------------------------- Witness Richard Daly SCHEDULE A THIS ESCROW AGREEMENT is made July 7, 1999 AMONG: GOLDMAN, SPRING, SCHWARTZ & KICHLER, Barristers and Solicitors, (the "Escrow Agent"), -and- VISIBLE GENETICS INC., a corporation duly incorporated under the laws of the Province of Ontario and having its head office in the City of Toronto, in the Province of Ontario, ("VGI"), - and - VISIBLE GENETICS CORPORATION, a corporation duly incorporated under the laws of the State of Delaware, and having its principal office in the City of Pittsburgh, in the State of Pennsylvania, (the "Employer") -and- RICHARD DALY, an individual residing in the City of San Francisco, in the State of California, (the "Employee"). RECITALS: A. The Employee has been granted an option (the "First Option") to purchase Fifty Thousand (50,000) common shares in the capital of VGI effective April 1, 1999. B. The Employee has been granted an additional option (the "Second Option", collectively, with the First Option, the "Options") to purchase Four Hundred Thousand (400,000) common shares in the capital of VGI effective July 7, 1999. C. As a condition to acquiring the Shares (as defined below) the Employee is required to enter into this Escrow Agreement on the terms and conditions hereinafter set forth. D. Each of the Employer and VGI agree to employ its best efforts to ensure that the terms and conditions of this agreement are complied with. - 2 - E. The Escrow Agent has agreed to undertake and perform its duties according to the terms and conditions of this agreement. NOW THEREFORE THIS AGREEMENT WITNESSES that in consideration of the aforesaid agreements, the mutual covenants and conditions herein contained and other good and valuable consideration, the Employee covenants and agrees with the Employer and VGI and the Employer and VGI and the Escrow Agent covenant and agree with each other and with the Employee as follows: 1. In this Agreement: "Shares" shall mean up to Fifty Thousand (50,000) common shares of VGI issuable to the Employee upon the due exercise of the First Option at U.S. nine dollars and ten cents (U.S. $9.10) per common share and up to Four Hundred Thousand (400,000) common shares of VGI issuable to the Employee upon the due exercise of the Second Option at U.S. eleven dollars (U.S. $11.00) per common share. 2. Subject to the Employment Agreement effective July 7, 1999 (the "Employment Agreement") between the Employer and the Employee, the Options and, upon any exercise of the Options, the Shares issuable pursuant to such exercise, shall be deposited in escrow with the Escrow Agent. 3. Subject to the Employment Agreement, Shares and Options to purchase Shares will be released from escrow as follows: (a) of the Fifty Thousand (50,000) Shares to be issued to the Employee pursuant to the First Option, subject to subsection 3(d) of this Agreement, one thousand three hundred and eighty eight (1,388) Shares shall be released by the Escrow Agent, from the escrow hereby created on the first day of every calendar month between May 1, 1999 and March 1, 2002, and the remaining one thousand four hundred and twenty (1,420) Shares shall be released by the Escrow Agent from the escrow hereby created on April 1, 2002; (b) of the Four Hundred Thousand (400,000) Shares to be issued to the Employee pursuant to the Second Option, subject to subsection 3(d) of this Agreement, one hundred thousand (100,000) Shares shall be released by the Escrow Agent, from the escrow hereby created, on July 7, 2000, and eight thousand three hundred and thirty three (8,333) Shares shall be released by the Escrow Agent, from the escrow hereby created, on each of August 7, 2000 and the seventh day of every calendar month thereafter until June 7, 2003, and eight thousand three hundred and forty five (8,345) Shares shall be released by the Escrow Agent, from the escrow hereby created, on July 7, 2003; (c) if, pursuant to the provisions of Section 5.1 of the Employment Agreement, VGI purchases from the Employee Shares that have not yet been released from escrow, VGI will pay to the Employee for such Shares the amount paid by the Employee for such Shares; and - 3 - (d) upon the occurrence of a "Change of Control" (as defined in the Employment Agreement): (i) during the Employee's active employment by the Employer; or (ii) within ninety (90) days of the date of termination of the Employee's employment with the Employer for a reason other than Cause (as defined in the Employment Agreement), all Shares will be released from escrow immediately (and a Change of Control described in (ii) shall be deemed to have occurred as of, and the release of Shares from escrow shall be effective as of the date of such termination of the Employee's employment with the Employer). 4. (a) Until such time as any Shares are released from the escrow hereby created, the parties hereto agree that the unreleased Shares and the beneficial ownership or any interest in them shall not, subject to this Agreement and the Employment Agreement, be able to be sold, assigned, hypothecated, alienated, transferred, pledged, or otherwise in any manner dealt with. (b) The term "Shares" as used herein shall include any shares or other securities or capital property which shall result from either: (i) a consolidation, change, classification, reclassification or subdivision, as the case may be, of any of the Shares; or (ii) every organization, liquidation, dissolution, winding up, amalgamation, merger, arrangement, continuation or continuance, as the case may be, of VGI, and in any such event, all such shares or other securities or capital property and all certificates or other instruments or documents representing any such shares or other securities or capital property received in substitution for or in respect of the Shares shall be immediately delivered to the Escrow Agent to be held as part of the Shares on the terms and conditions herein set out. 5. Until such time as the Shares are released from the escrow hereby created, the Employee hereby directs the Escrow Agent to retain the unreleased Shares, and not to do or cause anything to be done to release the same from escrow or to allow any transfer, hypothecation, or alienation thereof except in accordance with the provisions hereof. The Escrow Agent hereby accepts the responsibilities hereby placed on it and agrees to perform the same in accordance with the terms hereof. 6. The Employee shall be entitled to all rights (including voting rights and the right to receive any dividends which may be declared) attached to the Shares except any of those rights which may be expressly abrogated by this Agreement. 7. The Employer and VGI hereby acknowledge the terms and conditions of this Agreement and agree to take all reasonable steps to facilitate its performance. - 4 - 8. The release from escrow of any of the Shares pursuant to the terms of this Agreement shall terminate this Agreement only in respect to those Shares so released. 9. Subject as herein provided, the Employee hereby irrevocably appoints the Escrow Agent its attorney for the purpose of cancelling, selling, assigning, or transferring any portion of the Shares upon receipt of any consent, order or direction of VGI and for the purpose of executing any necessary documents relating to such cancellation, selling, assignment or transfer, and with authority to substitute one or more persons with like full power. Such power is hereby declared by the Employee to be an irrevocable power coupled with an interest and duty and shall survive any legal or mental incapacity of the Employee. 10. Notice of any consent, order or direction of the Employer affecting the Shares shall be given by the Escrow Agent to all persons or parties affected thereby at their last known registered address. 11. The parties hereto agree that in consideration of the premises and of the Escrow Agent agreeing to act in such capacity, the Employee and the Employer and VGI do hereby jointly and severally covenant and agree from time to time and at all times hereafter to well and truly save, defend and keep harmless and fully indemnify the Escrow Agent, its successors, and assigns, from and against all loss, costs, charges, suits, demands, claims, damages and expenses which the Escrow Agent, its successor or assigns, may at any time or times hereafter bear, sustain, suffer or be put into for or by reason or on account of its acting as Escrow Agent or anything in any manner relating thereto or by reason of the Escrow Agent's compliance in good faith with the terms hereof. 12. It is further agreed by and between the parties hereto, and without restricting the generality of the foregoing indemnity, that in case proceedings should hereafter be taken in any Court respecting the Shares, the Escrow Agent shall not be obliged to defend any such action or submit its rights to the Court until it shall have been indemnified by other good and sufficient security in addition to other indemnity hereinbefore given against its costs of such proceedings. 13. Wherever the singular or masculine are used throughout this agreement, the same shall be construed as being the plural or feminine or neuter where the context so requires. 14. This Agreement shall enure to the benefit of and be binding upon the parties hereto, their and each of their heirs, executors, administrators, successors, and permitted assigns. - 5 - IN WITNESS OF WHICH the Parties have duly executed this Agreement. GOLDMAN, SPRING, SCHWARTZ & KICHLER By: ----------------------------------- Name: Title: By: ----------------------------------- Name: Title: VISIBLE GENETICS INC. By: ----------------------------------- Name: Title: By: ----------------------------------- Name: Title: VISIBLE GENETICS CORPORATION By: ----------------------------------- Name: Title: By: ----------------------------------- Name: Title: SIGNED, SEALED & DELIVERED In the presence of: - - ------------------------------------- ----------------------------------- Witness Richard Daly SCHEDULE B THIS INDEMNIFICATION AGREEMENT is made [DATE] WITH RICHARD DALY THIS AGREEMENT, made and entered into as of April lst, 1999 ("Agreement") by and between VISIBLE GENETICS INC., a corporation formed under the laws of the Province of Ontario (the "Company") and RICHARD DALY ("Indemnitee"). RECITALS: A. The Company is aware that competent and experienced persons are increasingly reluctant to serve as directors or officers of corporations unless they are protected by comprehensive liability insurance and/or indemnification due to increased exposure to litigation costs and risks resulting from their service to such corporations and due to the fact that the exposure frequently bears no reasonable relationship to the compensation of such directors and officers; B. Based upon their experience as business managers, the Board of Directors of the Company (the "Board") has concluded that, to retain and attract talented and experienced individuals to serve as officers and directors of the Company, and to encourage such individuals to take the business risks necessary for the success of the Company, it is necessary for the Company to contractually indemnify officers and director, and to assume for itself liability for expenses and damages in connection with claims against such officers and directors in connection with their service to the Company; C. Section 136 of the BUSINESS CORPORATIONS ACT of the Province of Ontario under which the Company is organized ("Section 136") empowers the Company to indemnify by agreement its officers, directors, employees and agents, and persons who serve at the request' of the Company, as directors, officers, employees or agents of other corporations or enterprises; in addition, Section 136 expressly provides that the indemnification provided by Section 136 is not exclusive; and D. The Company desires and has requested the Indemnitee to serve or continue to serve as a director or officer of the Company free from undue concern of claims for damages arising out of or related to such services to the Company. THEREFORE, the parties agree as follows: ARTICLE 1 SERVICES BY INDEMNITEE Indemnitee agrees to continue to serve as a director or officer of the Company, subject to any agreement which may exist between the Company or any of its subsidiaries and Indemnitee. Indemnitee may at any time and for any reason resign from such position (subject to any other agreement or contractual obligation or any obligation imposed by operation of law) 1?? in which - 2 - event the Company shall have no obligation under this Agreement to continue Indemnitee in any such position. ARTICLE 2 INDEMNIFICATION - GENERAL The Company shall indemnify Indemnitee against Expenses (as hereinafter defined), judgments, penalties, fines and amounts paid in settlement as provided in this Agreement and to the fullest extent permitted by applicable law in effect on the date hereof and to such greater extent as applicable law may thereafter from time to time permit. The rights of Indemnitee provided under the preceding sentence shall include, but shall not be limited to, the rights set forth in the other Sections of this Agreement. ARTICLE 3 PROCEEDINGS OTHER THAN PROCEEDINGS BY OR IN THE RIGHT OF THE COMPANY Indemnitee shall be entitled to the rights of indemnification provided in this Section 3 if, by reason of his Corporate Status (as hereinafter defined), he is, or is threatened to be made, a party to any threatened, pending, or completed Proceeding (as hereinafter defined), other than a Proceeding by or in the right of the Company. Pursuant to this Section 3 Indemnitee shall be indemnified against Expenses, judgments, penalties, fines and amounts paid in settlement actually and reasonably incurred by him or on his behalf in connection with such Proceeding or any claim issue or matter therein, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal Proceeding, had no reasonable cause to believe his conduct was unlawful. ARTICLE 4 PROCEEDINGS BY OR IN THE RIGHT OF THE COMPANY Indemnitee shall be entitled to the rights of indemnification provided in this Section 4 if, by reason of his Corporate Status, he is, or is threatened to be made, a party to any threatened, pending or completed Proceeding brought by or in the right of the Company to procure a judgment in its favour. Pursuant to this Section, Indemnitee shall be indemnified against Expenses actually and reasonably incurred by him or on his behalf in connection with such Proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company. Notwithstanding the foregoing, no indemnification against such Expenses shall be made in respect of any claim, issue or matter in such Proceeding as to which Indemnitee shall have been adjudged to be liable to the Company if applicable law prohibits such indemnification; provided, however, that if applicable law so permits, indemnification against Expenses shall nevertheless be made by the Company in such event if and only to the extent that the Ontario Court (General Division) 1?? or the Court in which such proceeding shall have been brought or is pending, shall determine. - 3 - ARTICLE 5 INDEMNIFICATION FOR EXPENSES OF A WITNESS Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, by reason of his Corporate Status a witness in any Proceeding, he shall be indemnified against all expenses actually and reasonably incurred by him or on his behalf in connection therewith. ARTICLE 6 ADVANCEMENT OF EXPENSES The Company shall advance all reasonable Expenses incurred by or on behalf of Indemnitee in connection with any Proceeding within twenty days after the receipt by the Company of a statement or statements from Indemnitee requesting such advance or advances from time to time, whether prior to or after final disposition of such Proceeding. Such statement or statements shall reasonably evidence the Expenses incurred by Indemnitee and shall include or be preceded or accompanied by an undertaking by or on behalf of Indemnitee to repay any Expenses advanced if it shall ultimately be determined that Indemnitee is not entitled to be indemnified against such Expenses. ARTICLE 7 PROCEDURE FOR DETERMINATION OF ENTITLEMENT TO INDEMNIFICATION To obtain indemnification under this Agreement, Indemnitee shall submit to the Company a written request, including therein or therewith such documentation and information as is reasonably available to Indemnitee and is reasonably necessary to determine whether and to what extent Indemnitee is entitled to indemnification. The Secretary of the Company shall, promptly upon receipt of such a request for indemnification, advise the Board of Directors in writing that Indemnitee has requested indemnification. Upon written request by Indemnitee for indemnification pursuant to the first sentence of Section 7(a) hereof, a determination, if required by applicable law, with respect to Indemnitee's entitlement thereto shall be made in the specific case: (i) if a Change in Control (as hereinafter defined) shall have occurred, by Independent Counsel (as hereinafter defined) (unless Indemnitee shall request that such determination be made by the Board of Directors or the stockholders, in which case such determination shall be made by the person or persons or in the manner provided for in clause (ii) or (iii) of this Section 7)) in a written opinion to the Board of Directors, a copy of which shall be delivered to Indemnitee; (ii) if a Change of Control shall not have occurred, (A) by the Board of Directors by a majority vote of a quorum consisting of Disinterested Directors (as hereinafter defined), or (B) if a quorum of the Board of Directors consisting of Disinterested Directors is not obtainable or, even if obtainable, such quorum of Disinterested Directors so directs, by Independent Counsel in a written opinion to the Board of Directors, a copy of which shall be delivered to Indemnitee, or (C) by the stockholders of the Company; or (iii) as provided in Section 8(b) of this Agreement; and, if it is so determined that Indemnitee is entitled to indemnification, payment to Indemnitee shall be made within ten (10) days after *' determination. Indemnitee shall cooperate with the person, persons or entity making such determination with respect to Indemnitee's entitlement to indemnification, including providing to such person, persons or entity upon reasonable advance request any documentation or Information which is not privileged or otherwise protected from disclosure and which is reasonably available to Indemnitee and reasonably necessary to such determination. Any costs - 4 - or expenses (including attorneys' fees and disbursements) incurred by Indemnitee in so cooperating with the person, persons or entity making such determination shall be borne by the Company (irrespective of the determination as to Indemnitee's entitlement to indemnification) and the Company hereby indemnifies and agrees to hold Indemnitee harmless therefrom. In the event the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 7) hereof, Independent Counsel shall be selected as provided in this Section 7(c). If a Change of Control shall not have occurred, Independent Counsel shall be selected by the Board of Directors, and the Company shall give written notice to Indemnitee advising him of the identity of Independent Counsel so selected. If a Change of Control shall have occurred, Independent Counsel shall be selected by Indemnitee (unless Indemnitee shall request that such selection be made by the Board of Directors, in which event the preceding sentence shall apply), and Indemnitee shall give written notice to the Company advising it of the identity of Independent Counsel so selected. In either event, Indemnitee or the Company, as the case may be, may, within seven (7) days after such written notice of selection shall have been given, deliver to the Company or to Indemnitee, as the case may be, a written objection to such selection. Such objection may be asserted only on the ground that Independent Counsel so selected does not meet the requirements of "Independent Counsel", as defined in Section 16 of this Agreement, and the objection shall set forth with particularity the factual basis of such assertion. If such written objection is made, Independent Counsel so selected may not serve as Independent Counsel unless and until a Court of competent jurisdiction has determined that such objection is without merit. If, within twenty (20) days after submission by Indemnitee of a written request for indemnification pursuant to Section 7(a) hereof, no Independent Counsel shall have been selected and not objected to, either the Company or Indemnitee may petition the Ontario Court (General Division) or other court of competent jurisdiction for resolution of any objection which shall have been made by the Company or Indemnitee to the other's selection of Independent Counsel and/or for the appointment as Independent Counsel of a person selected by the Court or by such other person as the Court shall designate, and the person with respect to whom an objection is so resolved 6r the person so appointed shall act as Independent Counsel under Section 7) hereof. The Company shall pay any and all reasonable fees and expenses of Independent Counsel incurred by such Independent Counsel in connection with acting pursuant to Section 7) hereof, and the Company shall pay all reasonable fees and expenses incident to the procedures of this Section 7(c), regardless of the manner in which such Independent Counsel was selected or appointed. Upon the due commencement of any judicial proceeding or arbitration pursuant to Section 9(a)(iii) of this Agreement, Independent Counsel shall be discharged and relieved of any further responsibility in such capacity (subject to the applicable standards of professional conduct then prevailing). ARTICLE 8 PRESUMPTIONS AND EFFECT OF CERTAIN PROCEEDINGS If a Change of Control shall have occurred, in making a determination with respect to entitlement to indemnification hereunder, the person or persons or entity making such determination shall presume that Indemnitee is entitled to indemnification under this Agreement if Indemnitee has submitted a request for indemnification in accordance with Section 7(a) of this Agreement, and the Company shall have the burden of proof to overcome that presumption in connection with the making by any person, persons or entity of any determination contrary to that presumption. - 5 - If the person, persons or entity empowered or selected under Section 8 of this Agreement to determine whether Indemnitee is entitled to indemnification shall not have made a determination within 60 days after receipt by the Company of the request therefor, the requisite determination of entitlement to indemnification shall be deemed to have been made and Indemnitee shall be entitled to such indemnification, absent (i) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee's statement not materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification, under applicable law; provided, however, that such sixty (60)-day period may be extended for a reasonable time, not to exceed an additional thirty (30) days, if the person, persons or entity making the determination with respect to entitlement to indemnification in good faith requires such additional time for the obtaining or evaluating of documentation and/or information relating thereto) and provided further, that the foregoing provisions of this Section 8) shall not apply (i) if the determination of entitlement to indemnification is to be made by the stockholders pursuant to Section 7) of this Agreement and if (A) within fifteen (15) days after receipt by the Company of the request for such determination the Board of Directors has resolved to submit such determination to the stockholders for their consideration at an annual meeting thereof to be held within seventy-five (75) days after such receipt and such determination is made there at, or (B) a special meeting of stockholders is called within fifteen (15) days after such receipt for the purpose of making such determination, such meeting is held within sixty (60) days after having been so-called and such determination is made there at, or (ii) if the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 7) of this Agreement. The termination of any Proceeding or of any claim, issue or matter therein, by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not (except as otherwise expressly provided in this Agreement) of itself adversely affect the right of Indemnitee to indemnification or create a presumption that Indemnitee did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Company or, with respect to any criminal proceeding, that Indemnitee had reasonable cause to believe that his conduct was unlawful. ARTICLE 9 REMEDIES OF INDEMNITEE In the event that (i) a determination is made pursuant to Section 7 of this Agreement that Indemnitee is not entitled to indemnification under this Agreement, (ii) advancement of Expenses is not timely made pursuant to Section 6 of this Agreement, (iii) the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 7) of this Agreement and such determination shall not have been made and delivered in a written opinion within 90 days after receipt by the Company of the request for indemnification, or (iv) payment of indemnification is not made pursuant to Section 5 of this Agreement within ten (10) days after receipt by the Company of a written request therefore, or (v) payment of indemnification is not made within ten (10) days after a determination has been made that Indemnitee is entitled to indemnification or such determination is deemed to have been made pursuant to Sections 7 or B of this Agreement, Indemnitee shall be entitled to an adjudication in an appropriate court of the Province of Ontario, or in any other court of competent jurisdiction, of his entitlement to such indemnification or Advancement of Expenses. Alternatively, Indemnitee, at his option, may seek an award in arbitration to be conducted by a single arbitrator - 6 - pursuant to the provisions of the Arbitrations Act (Ontario). Indemnitee shall commence such proceeding seeking an adjudication or an award in arbitration within one hundred and eighty (180) days following the date on which Indemnitee first has the right to commence such proceeding pursuant to this Section 9(a). The Company shall not oppose Indemnitee's right to seek adjudication or award in arbitration. In the event that a determination shall have been made pursuant to Section 7 of this Agreement that Indemnitee is not entitled to indemnification, any judicial proceeding or arbitration commenced pursuant to this Section 9 shall be conducted in all respects as a de novo trial, or arbitration, on the merits and Indemnitee shall not be prejudiced by reason of that adverse determination. If a Change of Control shall have occurred, in any judicial proceeding or arbitration commenced pursuant to this Section 9 the Company shall have the burden of proving that Indemnitee in not entitled to indemnification or advancement of Expenses, as the case may be. If a determination shall have been made or deemed to have been made pursuant to Section 7 or 8 of this Agreement that Indemnitee is entitled to indemnification, the Company shall be bound by such determination in any judicial proceeding or arbitration commenced pursuant to this Section 9, absent (i) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee's statement not materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law. The Company shall be precluded from asserting in any judicial proceeding or arbitration commenced pursuant to this Section 9 that the procedures and presumptions of this Agreement are not valid, binding and enforceable and shall stipulate in any such court or before any such arbitrator that the Company is bound by all the provisions of this Agreement. In the event that Indemnitee, pursuant to this Section 91 seeks a judicial adjudication of or an award in arbitration to enforce his rights under, or to recover damages for breach of, this Agreement, Indemnitee shall be entitled to recover from the Company, and shall be indemnified by the Company against, any and all expenses (of the types described in the definition of Expenses in Section 16 of this Agreement) actually and reasonably incurred by him in such judicial adjudication or arbitration, but only if he prevails therein. If it shall be determined in such judicial adjudication or arbitration that Indemnitee is entitled to receive part but not all of the indemnification or advancement of Expenses sought, the expenses incurred by Indemnitee in connection with such judicial adjudication or arbitration shall be appropriately prorated. ARTICLE 10 NON-EXCLUSIVITY: SURVIVAL OF RIGHTS: INSURANCE: SUBROGATION The rights of indemnification and to receive advancement of Expenses as provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the Amended and Restated Articles of Incorporation, the Amended and Restated By-laws, any agreement, a vote of stockholders or a resolution of directors, or otherwise. No amendment, alteration or termination of this Agreement or any provision hereof shall be effective as to any Indemnitee with respect to any action taken or omitted by such Indemnitee in his Corporate Status prior to such amendment, alteration or termination. - 7 - To the extent that the Company maintains an insurance policy or policies providing liability insurance for directors, officers, employees, agents or fiduciaries of the Company or of any other corporation, partnership, limited liability company, joint venture, trust, employee benefit plan or other enterprise which such person serves at the request of the Company, Indemnitee shall be covered by such policy or policies in accordance with its or their terms to the maximum extent of the coverage available for any such director,; officer, employee or agent under such policy or policies. In the event of any payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Company to bring suit to enforce such rights. The Company shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable hereunder if and to the extent that Indemnitee has otherwise actually received such payment under any insurance policy, contract, agreement or otherwise. ARTICLE 11 DURATION OF AGREEMENT This Agreement shall continue until and terminate upon the later of: (a) ten (10) years after the date that Indemnitee shall have ceased to serve as director or officer, or (b) the final termination of all pending Proceedings in respect of which Indemnitee is granted rights of indemnification or advancement of Expenses hereunder and of any proceeding commenced by Indemnitee pursuant to Section 9 of this Agreement relating thereto. This Agreement shall be binding upon the Company and its successors and assigns and shall inure to the benefit of Indemnitee and his heirs, executors and administrators. ARTICLE 12 SEVERABILITY If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable for any reason whatsoever: (a)the validity, legality and enforceability of the remaining provisions of this Agreement (including, without limitation, each portion of any Section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby; and ) to the fullest extent possible, the provisions of this Agreement (including without limitation, each portion of any Section of this Agreement containing any such provision held to be invalid, illegal or unenforceable that is not itself invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable. ARTICLE 13 EXCEPTION TO RIGHT OF INDEMNIFICATION OR ADVANCEMENT OF EXPENSES Notwithstanding any other provision of this Agreement, Indemnitee shall not be entitled to indemnification or advancement of Expenses under this Agreement with respect to any Proceeding or any claim therein brought or made by him against the Company. - 8 - ARTICLE 14 IDENTICAL COUNTERPARTS This Agreement may be executed in one or more counterparts each of which shall for all purposes be deemed to be an original but all of which together shall constitute one and the same Agreement. Only one such counterpart signed by the party against whom enforceability is sought needs to be produced to evidence the existence of this Agreement. ARTICLE 15 HEADINGS The headings of the paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof. ARTICLE 16 DEFINITIONS For purposes of this Agreement: "CHANGE IN CONTROL" means a change in control of the Company occurring after the Effective Date of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or in response to any similar item on any similar schedule or form) promulgated under the UNITED STATE SECURITIES EXCHANGE ACT of 1934 (the "Act") whether or not the Company is then subject to such reporting requirement; provided, however, that, without limitation, such a Change in Control shall be deemed to have occurred if after the Effective Date (i) any "person" (as such term is used in Section 33(d) and 14(d) of the Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Act) directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding securities without the prior approval of at least two-thirds of the members of the Board of Directors in office immediately prior to such person attaining such percentage interest; (ii) the Company is a party to a merger, consolidation, sale of assets or other reorganization or a proxy contest, as a consequence of which members of the Board of Directors in office immediately prior to such transaction or eye constitute less than a majority of the Board of Director thereafter; or (iii) during any period of two consecutive years, individuals who at `he beginning of much period constituted the Board of Directors including for this purpose any new director whose election or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period) cease for any reason to constitute at least a majority of the Board of Directors. "CORPORATE STATUS" describes the status of a person who is or was a director, officer, employee, agent or, fiduciary of the Company, or of any other corporation, partnership, limited liability company, joint venture, trust, employee benefit plan or other enterprise which such person is or was serving at the request of the Company. "DISINTERESTED DIRECTOR" means a director of the Company who is not and was not a party to the Proceeding in respect; of which indemnification is sought by Indemnitee. - 9 - "EFFECTIVE DATE" means April 1, l999. "EXPENSES" shall include all reasonable attorney:' fees, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing, and binding costs, telephone charges, postage, delivery service fees, and all other disbursements or expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, or being or preparing to be a witness in a Proceeding. "INDEPENDENT COUNSEL" means a law firm, or a member of a law firm, that is experienced in matters of corporation law and neither presently is, nor in the past five years has been retained to represent: (i) the Company or Indemnitee in any matter material to either such party, or (ii) any other party to the proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, `he term `Independent Counsel' shall not include any Person who, under the applicable standards of professional conduct then prevailing would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee's rights under this Agreement. "PROCEEDING" includes any action, suit, arbitration, alternate dispute resolution mechanism, investigation, administrative hearing or any other proceeding whether civil, criminal, administrative or investigative, except one initiated by Indemnitee pursuant to Section 9 of this Agreement to enforce his rights under this Agreement. ARTICLE 17 MODIFICATION AND WAIVER No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. ARTICLE 18 NOTICE BY INDEMNITEE Indemnitee agrees promptly to notify the Company in writing upon being served with any summons, citation, subpoena, complaint, indictment, information or other document relating to any Proceeding or matter which may be subject to indemnification or advancement of Expenses covered hereunder. ARTICLE 19 NOTICES All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if (i) delivered by hand and receipted for by the party to whom said notice or other communication shall have been directed, or (ii) mailed by certified or registered mail with postage prepaid, on the third business day after the date on which it is so mailed: - 10 - (a) If to Indemnitee, to: his address indicated on the signature page hereof (b) If to the Company to: Visible Genetics Inc. 700 Bay Street Suite 1000 Toronto, Ontario Canada MSG 1 or such other address as may have been furnished to Indemnitee by the Company or to the Company by Indemnitee, as the case may be. ARTICLE 20 GOVERNING LAW The parties agree that this Agreement shall be governed by, and construed and enforced in accordance with, the laws of the Province of Ontario. ARTICLE 21 MISCELLANEOUS Use of the masculine pronoun shall be deemed to include usage of the feminine pronoun where appropriate. IN WITNESS OF WHICH the Parties have duly executed this Agreement. VISIBLE GENETICS INC. By: ----------------------------------- Name: Title: By: ----------------------------------- Name: Title: SIGNED, SEALED & DELIVERED In the presence of: - - ------------------------------------- ----------------------------------- Witness Richard Daly -----END PRIVACY-ENHANCED MESSAGE-----