-----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, FVXRlJCA0qqG7cEc4t9gnb4qjjI2CiblmVLaYCHKY2HnS7je9OXNuWfDA4cI69sQ dVxyi9tJHmf6cgqxTdJcDQ== 0000912057-02-024218.txt : 20020614 0000912057-02-024218.hdr.sgml : 20020614 20020614095012 ACCESSION NUMBER: 0000912057-02-024218 CONFORMED SUBMISSION TYPE: 20-F PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020614 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VISIBLE GENETICS INC CENTRAL INDEX KEY: 0001010819 STANDARD INDUSTRIAL CLASSIFICATION: IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES [2835] IRS NUMBER: 000000000 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 20-F SEC ACT: 1934 Act SEC FILE NUMBER: 000-28550 FILM NUMBER: 02678795 BUSINESS ADDRESS: STREET 1: 700 BAY ST STREET 2: SUITE 1000 CITY: TORONTO ONTARIO CANA STATE: A6 ZIP: 00000 BUSINESS PHONE: 2127025700 MAIL ADDRESS: STREET 1: 700 BAY ST STE 1000 STREET 2: TORONTO ONTARIO CANADA CITY: M5G 1Z6 20-F 1 a2080893z20-f.txt FORM 20-F AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 14, 2002 ================================================================================ 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, 2001 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, 2001, the Registrant had outstanding 19,197,191 Common Shares and 25,153 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, 2001 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: - our expectations about our ability to sell our company or enter into another strategic transaction; - our expectations about our financial performance; - our future capital needs; - our ability to bring our Atlanta manufacturing facility fully operational in a timely manner; - acceptance of genotyping in the clinical diagnostic market; - acceptance of our products in the clinical diagnostic market; - our expectations about the markets for our products; - our marketing and sales plans; - the performance of our products; - our intention to introduce new products; - FDA and other regulatory approval for certain of our products; - reimbursement of our products by insurance companies and other third-party payors; - our ability to compete in the clinical diagnostic, clinical research and research markets; - our patent applications; and - our expectations about the effect of the existing lawsuits against our company. We have based these forward-looking statements largely on our current expectations. However, forward-looking statements are subject to a number of risks and uncertainties, certain of which are beyond our control. Actual results could differ materially from those anticipated as a result of the factors described under "Risk Factors" including, among others: - whether we sell our company or enter into another strategic transaction; - the timing of our future capital needs or our inability to raise additional capital when needed; - uncertainty of acceptance of genotyping, in general, and of our products, in particular, in the clinical diagnostic market; - failure of the FDA to take enforcement action to restrict the use of home brew genotyping tests to provide drug resistance reports to physicians and other healthcare providers in the clinical diagnostic market in the United States; - refusal of insurance companies and other third-party payors to reimburse patients and clinicians for our products; - problems that we may face in our ability to sell our hepatitis C genotyping kit to the clinical research market; - problems that we may face in manufacturing, marketing and distributing our products; - delays in obtaining, or our inability to obtain, approval by the FDA for changes made to FDA-approved products; - delays in obtaining, or our inability to obtain, approval by foreign regulatory authorities for our HIV OpenGene System and, certain of our other products, for the clinical diagnostic market; - delay in obtaining, or our inability to obtain, approval by the FDA for certain of our other products for the clinical diagnostic market; - problems, delays and expenses we may face with future clinical trials; - problems in acquiring and protecting intellectual property important to our business through patents, licenses and other arrangements. - our ability to successfully defend claims that our products may infringe the intellectual property rights of others; - problems with important suppliers and business partners; and - delays in developing, or the failure to develop, new products and enhanced versions of existing products. 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. Registered or unregistered trademarks or trade names of Visible Genetics Inc. used in this annual report include: CLIP, GEL TOASTER, GENEOBJECTS, LONG-READ TOWER, MICROCEL, OPEN GENE, SUREFILL, TRUGENE, VISIBLE GENETICS and the Visible Genetics logo. 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..........................................1 Item 2. Offer Statistics and Expected Timetable........................................................1 Item 3. Key Information................................................................................1 Selected Financial Data........................................................................1 Risk Factors...................................................................................2 Item 4. Information on the Company....................................................................18 Recent Developments...........................................................................18 Overview......................................................................................18 Property, Plants and Equipment................................................................34 History and Development of the Company........................................................35 Organizational Structure......................................................................35 Item 5. Operating and Financial Review and Prospects..................................................36 Operating Results.............................................................................36 Liquidity and Capital Resources...............................................................41 Item 6. Directors, Senior Management and Employees....................................................46 Directors and Senior Management...............................................................46 Compensation..................................................................................49 Board Committees..............................................................................50 Employees.....................................................................................50 Share Ownership...............................................................................51 Item 7. Major Shareholders and Related Party Transactions.............................................52 Major Shareholders............................................................................52 Related Party Transactions....................................................................54 Item 8. Financial Information.........................................................................54 Consolidated Statements and Other Financial Information.......................................54 Item 9. The Offer and Listing.........................................................................55 Nature of Trading Market......................................................................55 Item 10. Additional Information........................................................................56 By-Laws and Articles of Incorporation.........................................................56 Material Contracts............................................................................61 Exchange Controls.............................................................................62 Taxation......................................................................................62
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PAGE Documents on Display..........................................................................71 Item 11. Quantitative and Qualitative Disclosures About Market Risk....................................71 Item 12. Description of Securities Other than Equity Securities........................................72 PART II.......................................................................................................72 Item 13. Defaults, Dividend Arrearages and Delinquencies...............................................72 Item 14. Material Modifications to the Rights of Security Holders......................................72 PART III......................................................................................................72 Item 17. Financial Statements..........................................................................72 Item 18. Financial Statements..........................................................................72 Item 19. Exhibits......................................................................................72
-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 2001, 2000 and 1999, and the Consolidated Balance Sheet data as at December 31, 2001 and 2000, as set forth below, have been derived from our consolidated financial statements which have been audited by PricewaterhouseCoopers LLP, Chartered Accountants in Canada, whose report with respect to such financial statements is included herein. The Consolidated Statements of Operations data for fiscal years 1998 and 1997, and the Consolidated Balance Sheet data as at December 31, 1999, 1998 and 1997, 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, ----------------------- STATEMENT OF OPERATIONS DATA: 2001 2000 1999 1998 1997 ----------- ----------- ---------- ---------- ---------- Sales..................................... $ 13,580 $ 13,073 $ 13,627 $ 10,875 $ 3,033 Cost of sales............................. 9,998 10,134 9,273 6,673 1,995 ----------- ----------- ---------- ---------- ---------- Gross margin.............................. 3,582 2,939 4,354 4,202 1,038 Sales, general and administrative expense. 33,986 28,571 19,074 11,516 7,448 Research and development expense.......... 10,835 10,606 7,935 6,289 4,123 Other expense............................. 1,920 - 1,329 420 654 ----------- ----------- ---------- ---------- ---------- Loss from operations before interest...... (43,159) (36,238) (23,984) (14,023) (11,187) Interest income........................... 2,513 4,481 695 264 774 Interest and financing expense............ (8) (17) (1,998) (1,132) (3) ----------- ----------- ---------- ---------- ---------- Net loss.................................. (40,654) (31,774) (25,287) (14,891) (10,416) Cumulative preferred dividends and accretion of discount attributable to preferred shares...................... (3,427) (3,656) (1,770) - - ----------- ----------- ---------- ---------- ---------- Net loss attributable to common shareholders.......................... $ (44,081) $ (35,430) $ (27,057) $ (14,891) $ (10,416) =========== =========== ========== ========== ========== Net loss per common share................. $ (2.67) $ (2.42) $ (2.73) $ (1.91) $ (1.48) Weighted average number of common shares outstanding........................... 16,481,916 14,612,172 9,916,954 7,782,094 7,059,578 DECEMBER 31, ------------ BALANCE SHEET DATA: 2001 2000 1999 1998 1997 ---------- ---------- --------- --------- --------- Cash, cash equivalents and short-term investments........................... $ 53,195 $ 80,399 $ 42,688 $ 11,274 $ 7,588 Working capital........................... 50,985 78,107 45,319 8,432 9,561 Total assets.............................. 93,369 110,176 58,640 27,783 13,936 Indebtedness.............................. - - - 7,495 - Mandatorily redeemable convertible preferred shares ..................... 26,886 24,397 27,556 - - Accumulated deficit ...................... (136,840) (92,039) (59,438) (34,151) (19,260) Shareholders' equity...................... 57,550 76,665 24,351 14,579 12,610
RISK FACTORS ALTHOUGH WE ARE ACTIVELY PURSUING POSSIBLE STRATEGIC TRANSACTIONS, INCLUDING A POSSIBLE SALE OF OUR COMPANY, WE CANNOT BE CERTAIN OF WHETHER WE WILL BE ABLE TO COMPLETE ANY STRATEGIC TRANSACTION OR OF THE TERMS UPON WHICH A STRATEGIC TRANSACTION WOULD BE COMPLETED. We currently are engaging in discussions with third parties regarding strategic alternatives, including the potential sale of our company. We cannot be certain whether we will be able to sell our company or complete any of the other strategic alternatives we currently are pursuing. We also cannot be certain as to the terms upon which any strategic transaction would be completed, including the consideration that would be paid to our common shareholders should we sell our company. If we enter into a strategic transaction that would include an investment in our company, the ownership interest of our existing common shareholders would be diluted. WE MAY NEED TO RAISE ADDITIONAL CAPITAL IN THE FUTURE AND WE CANNOT BE CERTAIN THAT WE WILL BE ABLE TO RAISE CAPITAL WHEN NECESSARY ON ACCEPTABLE TERMS. At this time, our sales are not sufficient to meet our anticipated financing requirements. Based on our current plans, we believe that current cash balances and anticipated funds from operations will be sufficient to enable us to meet our operating needs for the next 9 to 12 months. However, the amount of funds that we will need during this period will be determined by many factors, some of which are beyond our control. These factors, among others, include: - our success in selling our HIV OpenGene System to the clinical diagnostic market; - our ability to manufacture enough of our genotyping kits to meet the needs of our customers; - the costs we incur in pursuing strategic transactions; - our ability to acquire and protect intellectual property important to our business through patents, licenses or other arrangements; - our success in introducing new products during the period; - the costs of conducting clinical trials; - regulatory costs incurred in bringing products to market; - our need to defend claims that our products may infringe the intellectual property rights of others; - the costs of acquiring and integrating any new business or technologies during the period; and - our incurring significant fixed overhead and other expenses prior to increasing our revenues. We expect that we will need to obtain additional funds at the end of this 9 to 12 month period. However, we may need to obtain additional funds sooner or in greater amounts than we currently anticipate. 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 2 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. OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT TO EVALUATE OUR FUTURE PROSPECTS AND OUR PROSPECTS MUST BE CONSIDERED IN LIGHT OF THE DIFFICULTIES FREQUENTLY ENCOUNTERED BY COMPANIES IN THE EARLY STAGES OF COMMERCIAL MANUFACTURING AND MARKETING. Although we began operations in 1993, we are only in the early stages of commercially manufacturing and marketing our products. In late 1996, we began manufacturing and selling the initial versions of our automated DNA sequencers and related products to the research and clinical research markets. We began selling our FDA-cleared TRUGENE HIV-1 Genotyping Kit and related DNA sequencing equipment and products, which we call our HIV OpenGene System, to the clinical diagnostic market in the United States in the fourth quarter of 2001. Our limited operating history makes it difficult to evaluate our business and our prospects for future profitability. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in the early stages of commercial manufacturing and marketing. Sales for our fiscal years ended December 31, 2001 and December 31, 2000, were $13.6 million and $13.1 million, respectively. In the future, sales may not increase or they may decrease. WE HAVE A HISTORY OF LOSSES, WE ANTICIPATE ADDITIONAL LOSSES AND WE MAY NEVER BECOME PROFITABLE. We incurred a net loss attributable to common shareholders of $10.8 million in the fiscal quarter ended March 31, 2002 and $44.1 million in the fiscal year ended December 31, 2001. As of March 31, 2002, our accumulated deficit was $147.5 million. Our losses have resulted principally from expenses incurred in connection with sales and marketing of our products, 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, clinical trials and sales and marketing activities, in an effort to achieve greater sales and expand our business. It is uncertain when, if ever, we will become profitable. Our ability to become profitable will depend on many factors including, among others: - our ability to successfully market and sell our TRUGENE HIV-1 Genotyping Kit and related products, and in the future, other genotyping kits and related products, to the clinical diagnostic market; - our ability to sell our hepatitis C genotyping kit to the clinical diagnostic market; - whether the FDA takes enforcement action to restrict the use of unapproved (also known as "home brew") HIV genotyping tests to provide drug resistance reports to physicians and other healthcare providers in the clinical diagnostic market in the United States; - our ability to manufacture our products according to schedule and within budget; - whether we obtain regulatory approval to sell other genotyping kits and related DNA sequencing equipment and products for other diseases to the clinical diagnostic market in the United States and abroad; - the decision of third-party payors to reimburse clinicians and patients for use of our TRUGENE HIV-1 Genotyping Kit and, in the future, our other products; 3 - our ability to acquire and protect intellectual property important to our business through patents, licenses or other arrangements; - our ability to effectively manage the growth of our business; and - our ability to continue to develop advanced versions of our products and technologies and new products and technologies in a timely manner. OUR OPERATING RESULTS MAY FLUCTUATE FROM QUARTER TO QUARTER DUE TO MANY FACTORS AND, THEREFORE, YOU SHOULD NOT RELY ON PERIOD TO PERIOD COMPARISONS OF OUR OPERATING RESULTS AS AN INDICATION OF FUTURE PERFORMANCE. Our operating results have varied on a quarterly basis in the past and may fluctuate significantly in the future as a result of a variety of factors, many of which are outside our control. Factors that may affect our quarterly operating results include, among others: - our decision to increase or decrease sales of equipment, genotyping kits and other consumables at reduced prices; - our decision to reduce prices of our products in response to price reductions by competitors; - unanticipated costs or delays in manufacturing our products; - the amount and timing of operating costs and capital expenditures relating to research and development, the fluctuations in sales of our products during any given quarter, and the expansion of our business, operations and infrastructure; - unanticipated costs or delays in carrying out our clinical trials; - general economic conditions, as well as economic conditions specific to the biotechnology industry; and - costs of pursuing strategic transactions. We believe that period to period comparisons of our operating results may not be meaningful and you should not rely on any such comparisons as an indication of our future performance. In addition, it is likely that in one or more future quarters our operating results will fall below the expectations of securities analysts and investors. In such event, the market price of our common shares is likely to fall. THE MARKET FOR GENOTYPING PRODUCTS IS NEW AND GENOTYPING MAY NOT BECOME AN ACCEPTED METHOD OF MANAGING DRUG TREATMENT. An essential part of our business strategy is our plan to sell our products to the clinical diagnostic market. Our ability to do so will depend on the widespread acceptance and use by doctors and clinicians of genotyping to manage drug treatment of certain diseases or other medical conditions. The use of genotyping by doctors and clinicians for this purpose is relatively new. We are not aware of any other DNA sequencing products that have been approved by the FDA for clinical diagnostic purposes. We cannot be certain that doctors and clinicians will want or continue to have a need to use DNA sequencing systems designed for these purposes. If genotyping is not accepted by this market or not needed as frequently as we currently anticipate, we will not be able to carry out our business plan and our business, financial condition and results of operations will be materially harmed. 4 IF GENOTYPING IS ACCEPTED AS A METHOD TO MANAGE DRUG TREATMENT, WE CANNOT BE CERTAIN THAT OUR PRODUCTS WILL BE ACCEPTED IN THE CLINICAL DIAGNOSTIC MARKET. If genotyping becomes widely accepted in the clinical diagnostic market, we cannot predict the extent to which doctors and clinicians may be willing to utilize our TRUGENE HIV-1 Genotyping Kit or other genotyping kits to manage drug treatment of HIV and other selected diseases or other medical conditions. Doctors and clinicians may prefer competing technologies and products that can be used for the same purposes as our products such as home brew genetic tests, phenotyping assay services, DNA probe-based diagnostic systems and other DNA sequencers. If our products are not accepted by the clinical diagnostic market, our business, financial condition and results of operations will be materially harmed. IF THE FDA DOES NOT PROHIBIT CERTAIN OF OUR COMPETITORS FROM USING HOME BREW GENOTYPING TESTS TO PROVIDE HIV DRUG RESISTANCE TESTING AND DRUG RESISTANCE REPORTS TO PHYSICIANS, WE WILL SUFFER A SIGNIFICANT COMPETITIVE DISADVANTAGE AND OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS WILL BE MATERIALLY HARMED. Some of our competitors, including some large clinical laboratories, have developed home brew HIV genotyping tests which are not approved for clinical diagnostic use by the FDA or other regulatory agencies. We believe that three of these clinical laboratories currently are the largest commercial users of HIV genotyping tests. The FDA has said that it will not require premarket approval of these home brew tests developed in-house by clinical laboratories if they are used exclusively by the laboratories for HIV monitoring and if the laboratories do not make any medical claims for their tests and provide only analytical results to their customers. We believe that some of these laboratories have interpreted the FDA policy to mean that they are permitted to use their home brew genotyping tests to conduct HIV drug resistance testing in the laboratories and provide drug resistance reports about specific patients to physicians, in direct competition with our TRUGENE HIV-1 Genotyping Kit. We believe, however, that the FDA policy prohibits the use of the HIV home brew genotyping tests for these purposes and that these laboratories are required to obtain FDA approval before using their genotyping tests in this fashion. We are not certain how the FDA will interpret, or whether and when it will enforce, its policy as it applies to these HIV home brew genotyping tests. Since our business plan contemplates that we will generate future revenue from sales of our TRUGENE HIV-1 Genotyping Kit to these laboratories, if the FDA does not prohibit these laboratories from using their home brew genotyping tests in this fashion, we will suffer a significant competitive disadvantage and 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 genotyping kits to the clinical diagnostic market will depend partly on the willingness of insurance companies and other third-party payors to reimburse doctors and patients for use of our products. Physicians' recommendations to use genotyping, as well as decisions by patients to pursue genotyping, are likely to be influenced by the availability of reimbursement for genotyping by insurance companies or other third-party payors. Government and private third-party payors are increasingly attempting to contain health care costs by limiting both the extent of coverage and the reimbursement rate of products and services for testing and treatment. 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 5 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. MANUFACTURING PROBLEMS COULD HAMPER OR DELAY OUR ABILITY TO SELL OUR PRODUCTS TO THE MARKETPLACE. We have limited experience in large-scale manufacturing and assembly of our products. Since we started manufacturing and assembling operations in 1996, we have experienced delays, quality control problems and capacity constraints from time to time. Until March 31, 2002, we manufactured genotyping kits at our Pittsburgh, Pennsylvania facility. We closed that facility in April 2002, and we currently do not have another facility available to manufacture genotyping kits for full scale commercial production. We plan to manufacture our genotyping kits at our new facility in Atlanta, Georgia. We have completed construction of this facility and we currently are testing the facility to ensure regulatory compliance. We expect our Atlanta facility to be cleared for full scale commercial production during the third quarter of 2002. However, qualifying the facility for regulatory compliance may take longer than expected. We currently have an adequate supply of genotyping kits in inventory to meet our current orders. Until our Atlanta facility becomes fully operational, we may experience shortages in the supply of genotyping kits from time to time. Any significant delay in making the Atlanta facility fully operational will severely limit our ability to meet our customer's future demands for genotyping kits. When we begin manufacturing genotyping kits at our Atlanta facility, 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 adversely affect customer satisfaction and the market acceptance of our products, and our business, financial condition and results of operations will be materially harmed. WE NEED TO OBTAIN A LICENSE OR ENTER INTO A DISTRIBUTION AGREEMENT FOR SOME OF THE COMPONENTS INCLUDED IN OUR HEPATITIS C GENOTYPING KIT, BUT MAY NOT BE ABLE TO DO SO ON ACCEPTABLE TERMS. We have developed a genotyping kit for hepatitis C. We need to obtain a license for some of the components included in our hepatitis C genotyping kit, but we do not have a license at this time and we may not be able to obtain a license on acceptable terms or at all. If we are unable to obtain a license, our customers may be able to purchase the required components from a licensed supplier. Alternatively, we may attempt to enter into a distribution arrangement that would enable us to distribute our hepatitis C genotyping kit without our own license. However, we may not be able to enter into a distribution arrangement on acceptable terms or at all. If we are unable to obtain a required license or enter into a distribution arrangement or if we are unable to make alternate arrangements, we may not be able to sell our hepatitis C genotyping kit to the clinical research or clinical diagnostic markets. If we are unable to sell our hepatitis C genotyping kit or if we encounter significant costs in doing so, our business, financial condition and results of operations will be materially harmed. IF WE ARE REQUIRED TO OBTAIN FDA APPROVAL TO SELL OUR HEPATITIS C GENOTYPING KIT TO THE CLINICAL RESEARCH MARKET, OUR SALES OF THIS GENOTYPING KIT WILL BE SIGNIFICANTLY DELAYED. Our hepatitis C genotyping kit identifies the specific hepatitis C subtypes a patient is most likely to have contracted. The report generated does not provide information about a patient's drug resistance or 6 recommend the use of specific drugs for treatment of that patient. We believe that FDA approval is not generally required for hepatitis C genotyping products which are used for epidemiological studies. However, the FDA has not provided definitive guidance as to whether a hepatitis C product used for the purpose and in the manner we intend our hepatitis C genotyping kit to be used, would require approval. We are aware of at least one product similar to ours that is being marketed and sold by a competitor without FDA approval. To our knowledge, the FDA has not advised that company that FDA approval is required to market and sell the product for the purposes for which it is intended to be used and has not initiated enforcement action to stop the marketing or sale of the product. We do not intend to seek FDA clearance to market our hepatitis C genotyping kit for the purposes for which it is intended to be used. However, we cannot be certain that the FDA will not determine that authorization is required for us to market and sell the hepatitis C genotyping kit for these purposes or direct us not to sell the kit without authorization. If we are required to obtain FDA approval, we will not be able to sell our hepatitis C genotyping kit to the clinical research market until FDA approval is obtained. The FDA approval process is lengthy and expensive and we may never receive FDA approval. If we are required to obtain FDA approval and we are unable to do so or if we encounter significant delays in obtaining FDA approval, our business, financial condition and results of operations will be materially harmed. WE DO NOT HAVE MARKETING EXPERIENCE IN THE CLINICAL DIAGNOSTIC MARKET, WE CANNOT BE CERTAIN WE WILL SUCCESSFULLY DEVELOP THE MARKETING CAPABILITIES REQUIRED TO SELL OUR PRODUCTS TO THIS MARKET AND IN SOME MARKETS WE WILL BE DEPENDENT ON THE EFFORTS OF DISTRIBUTORS TO SELL OUR PRODUCTS. We have no experience marketing products to the clinical diagnostic market. We have built a sales force to sell our HIV OpenGene System in the clinical diagnostic market in North America and selected other countries. We began selling our HIV OpenGene System to the clinical diagnostic market in the United States in the fourth quarter of 2001. We cannot be certain that we will successfully market and sell our products to the clinical diagnostic market. We have granted rights to distribute our OpenGene Systems to distributors in the clinical diagnostic, clinical research, and research markets in many countries outside of the United States and Canada. Our ability to successfully sell products in countries in which we rely on distribution agreements will depend to a great extent on the efforts of the distributors. Failure to successfully market our products, will impede our ability to generate significant revenues and become profitable and our business, financial condition and results of operations will be materially harmed. On February 27, 2002, we received notice of a lawsuit that has been filed in Milan, Italy against our company and two of our subsidiaries by Nuclear Laser Medicine Srl. The lawsuit seeks unspecified damages and seeks to enforce an alleged agreement covering distribution of our hepatitis C and HIV products in Italy. We believe that these claims are without merit and intend to vigorously contest the allegations made in the lawsuit. Since the amount of damages are unspecified, we cannot at this time determine, if we are unsuccessful, whether this legal action will have a material adverse effect on our business, financial condition or results of operations. WE MAY NOT RECEIVE APPROVAL OF CERTAIN FOREIGN REGULATORY AUTHORITIES FOR OUR HIV OPENGENE SYSTEM, AND THEREFORE, WE MAY NOT BE ABLE TO SELL OUR HIV OPENGENE SYSTEM TO THE CLINICAL DIAGNOSTIC MARKET IN SOME FOREIGN COUNTRIES. We have obtained regulatory approval to sell our HIV OpenGene System to the clinical diagnostic market in the United States, Argentina, Canada, France and Israel. However, in Canada we will be required to meet additional regulations that become effective in January 2003. We cannot be certain that we will be able to comply with these new 7 regulations. If we do not comply with these new regulations, we will be unable to sell our HIV OpenGene System to the clinical diagnostic market in Canada. We are required to obtain approval from regulatory authorities to sell our HIV OpenGene System to the clinical diagnostic market in some other countries. We believe we currently are able to sell our HIV OpenGene System to the clinical diagnostic market in the following European Union (EU) member states (in addition to France): Belgium, Luxembourg, United Kingdom, Holland, Scandinavia and Spain. We expect that further regulatory approvals will not be required in these EU member states until new EU wide regulations go into effect in December 2003. We anticipate being in compliance with the new EU regulations as they become effective. However, we cannot be certain that we will be able to meet any future EU regulations in a timely manner, or at all. In some EU and other counties, we may face an approval process similar to that required by the FDA. We cannot be certain that we will obtain the necessary approvals to sell our HIV OpenGene System to the clinical diagnostic market in any of these countries. In some cases, the failure to obtain approval could materially harm our business, financial condition and results of operations. EACH TIME WE MAKE ALTERATIONS TO ANY FDA APPROVED PRODUCTS, WE MAY NEED TO SEEK ADDITIONAL FDA APPROVAL, WHICH MAY LENGTHEN THE TIME AND INCREASE THE COST OF BRINGING UPGRADED OR NEW PRODUCTS TO MARKET. We may need to seek additional FDA approval if we make changes to a product specifically approved by the FDA. We will be required to obtain prior clearance from the FDA for those product changes that could significantly affect safety or effectiveness. We also may be required to obtain similar foreign regulatory approval. To obtain additional approval for some types of changes, we may have to conduct additional human clinical trials to demonstrate that the altered product will produce at least the same results as the approved product or will be as safe and effective as the approved product. Obtaining additional FDA or foreign regulatory approval is likely to be time consuming and costly and, as a result, we may experience delays in bringing these upgraded or new products to market. We expect to update the drug resistance algorithms, embedded in the software package included in our HIV OpenGene System, approximately every six months. FDA review and approval of any significant updates may be required. Based on informal discussions with the FDA, we expect that, if FDA approval is required, the FDA's review and approval of these updates will not exceed 90 days, provided we satisfy the FDA's approval requirements. However, there can be no assurance that such review process will not take longer. If the FDA's review process takes longer than 90 days, we may be delayed in bringing these updates to market. WE MAY NOT RECEIVE APPROVAL OF THE FDA FOR OTHER PRODUCTS WE MAY DEVELOP, AND, THEREFORE, WE MAY NOT BE ABLE TO SELL OUR OTHER PRODUCTS TO THE CLINICAL DIAGNOSTIC MARKET IN THE UNITED STATES. In the future, we may seek FDA approval to sell other products, including other genotyping kits, for clinical diagnostic purposes in the United States. In order to obtain FDA approval for our other products we will have to submit an application supported by extensive test data demonstrating the utility, reliability and performance of these products. We will also be required to show the FDA that we maintain good laboratory, clinical and manufacturing practices. The FDA approval process is lengthy and expensive. You should be aware of the following possibilities: - We may never obtain approval from the FDA to sell our other products to the clinical diagnostic market; 8 - The FDA may disagree with us that the data are adequate, and we may therefore have to do additional testing; - The additional testing, if any, may show that our other products are not reliable enough, and therefore cannot be authorized by the FDA, or the additional testing may show that our other products do not work as well as they need to for successful marketing, even if marketing is authorized by the FDA; - The additional testing, if any, may be too costly to carry out, either because we lack adequate funds or because the market potential for our other products does not justify the costs; - There may be significant delays in the FDA review process; - The FDA may approve the sale of our other products with conditions that could limit the market for these products or make them more difficult or expensive to sell than we anticipate; and - The FDA may seek to revoke marketing authorization for certain of our products for a variety of reasons. If we fail to receive FDA approval, if FDA approval is delayed or revoked, or if the FDA imposes conditions that make it difficult to sell or market our other products, we will be unable to carry out our business plan to sell our other products for clinical diagnostic use in the United States and our business, financial condition and results of operations could be materially harmed. 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. 9 IF WE ARE UNABLE TO CONTINUE DEVELOPING ADVANCED TECHNOLOGY, ADVANCED VERSIONS OF OUR EXISTING PRODUCTS AND NEW PRODUCTS IN A TIMELY AND COST-EFFECTIVE MANNER, OUR ABILITY TO GENERATE REVENUE AND BECOME PROFITABLE WILL BE IMPAIRED. We believe that if we are to generate additional revenue and become profitable, we must continue to develop advanced technology, advanced versions of our existing products and new products. These technology and products must be developed and introduced to the market in a timely and cost-effective manner to meet both changing customer needs and technological developments. We cannot assure you that we will be able to successfully or timely develop any new technology, products or advanced versions of existing products, or that any new technology, products or advanced versions of existing products will achieve acceptance in the market. If we are unable to successfully develop new technology, products or advanced versions of existing products in the future or if those technologies or products are not accepted in the market, our ability to generate significant revenues will be significantly impaired, we could experience additional significant losses and our business, financial condition and results of operations will be materially harmed. IF WE ARE UNABLE TO SUCCESSFULLY PROTECT OUR INTELLECTUAL PROPERTY OR OBTAIN CERTAIN LICENSES, OUR COMPETITIVE POSITION WILL BE HARMED. Our success will partly depend on our ability to obtain patents and licenses, and to protect our trade secrets. We own or jointly own numerous U.S. and foreign patents. We own or jointly own U.S. patent applications and foreign applications presently pending as PCT applications, or as national phase PCT applications, designating intergovernmental agencies and multiple countries including the European Patent Office, Australia, Canada and Japan. We cannot assure you that our patent applications will result in patents being issued in the United States or foreign countries. In addition, the U.S. Patent and Trademark Office may reverse its decision or delay the issuance of patents that have been allowed. We also cannot assure you that any technologies or products that we may develop in the future will be patentable. In addition, competitors may develop products similar to ours that do not conflict with our patents. Others may challenge our patents and, as a result, our patents could be narrowed or invalidated. From time to time, we may be required to obtain licenses from third parties for some of the technology or components used or included in certain of our genotyping kits or other products. We cannot be certain that we will be able to obtain these licenses on acceptable terms or at all. In certain instances, if we are unable to obtain a required license, our ability to sell or use certain products may be limited. To help protect our proprietary rights in unpatented trade secrets, we generally require our employees, consultants and advisors to sign confidentiality agreements. However, we cannot guarantee that these agreements will provide us with adequate protection if confidential information is used or disclosed improperly. In addition, in some situations, these agreements may conflict with, or be limited by, the rights of third parties with whom our employees, consultants or advisors have prior employment or consulting relationships. Further, others may independently develop similar proprietary information and techniques, or otherwise gain access to our trade secrets. OTHERS COULD CLAIM THAT WE INFRINGE ON THEIR INTELLECTUAL PROPERTY RIGHTS, WHICH MAY RESULT IN COSTLY AND TIME CONSUMING LITIGATION. Our success will also depend partly on our ability to operate without infringing upon the proprietary rights of others, as well as our ability to prevent others from infringing on our proprietary rights. We may be required at times to take legal action in order to protect our proprietary rights. Also, 10 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. The Board of Trustees of the Leland Stanford Junior University has filed a lawsuit in the United States District Court for the Northern District of California claiming that our TRUGENE HIV-1 Genotyping Kit infringes patents owned by the University. We have received an attorney opinion that we do not infringe any claim of the patents-in-suit. We believe that these claims are without merit and intend to vigorously contest the allegations made in the lawsuit. Since the amount of damages are unspecified, we cannot at this time determine, if we are unsuccessful, whether this legal action will have a material adverse effect on our business, financial condition or results of operations. CERTAIN SUPPLIES AND PARTS THAT WE NEED ARE AVAILABLE ONLY FROM LIMITED SOURCES AND OUR BUSINESS WILL SUFFER IF WE CANNOT OBTAIN THESE SPECIALIZED ITEMS USED IN OUR GENOTYPING KITS. Our genotyping kits include dyes, reagents and other chemicals supplied by third parties. Certain of these dyes, reagents and other chemicals are available only under license from their manufacturers. We cannot be certain that we will be able to renew these licenses upon expiration on favorable terms or at all. While we believe that alternative dyes, chemicals and reagents are available, alternate products may not be as effective as certain of the products that we presently use. If we switched to an alternative dye, chemical or reagent, we may also have to adapt our analysis software and/or our DNA sequencing equipment to the new product, which could take time. If the genotyping kit is FDA approved, we may also be required to seek FDA approval for the altered genotyping kit if the alternative product were to substantially alter the performance of the genotyping kit or if the changes could significantly affect safety or effectiveness. This could cause delays in production and in bringing the altered genotyping kit to market. We currently purchase acrylamide, an important chemical used in our MicroCel cassettes, from one supplier. This supplier has informed us that it is experiencing financial hardship. We have located one alternative supplier and are seeking others. If we purchase acrylamide from other suppliers, we may experience quality control or other problems with the acrylamide from such other suppliers. We also use certain custom-designed components supplied by third parties in our DNA sequencers and other equipment. We believe that there are alternate suppliers for these custom-designed parts. However, we will incur costs in switching to alternate suppliers and will likely experience delays in production of the products that use any of these parts until such time as we are able to locate alternate suppliers or parts on acceptable terms. WE ARE DEPENDENT ON OUR LICENSE FOR THE POLYMERASE CHAIN REACTION TECHNOLOGY WE USE IN MOST OF OUR GENOTYPING KITS AND OUR BUSINESS WOULD SUFFER IF THE LICENSE IS TERMINATED. We license the polymerase chain reaction technology that we use in most of our genotyping kits from Roche Molecular Systems, Inc. and F. Hoffmann-La Roche Ltd. This license is not exclusive, and therefore, may be granted by the Roche companies to our competitors and others. We are required to pay royalties to the Roche companies for this license. The license is for the life of the patents included within the licensing agreement. The license may be terminated by Roche Molecular Systems and F. Hoffman-La 11 Roche prior to the expiration under certain limited circumstances. The termination of this license would have a material adverse effect on our ability to produce or sell our TRUGENE HIV-1 Genotyping Kit and our other genotyping kits that use this technology. Consequently, we could experience a deterioration of anticipated future sales of those genotyping kits and further losses, and our business, financial condition and results of operations would be materially harmed. WE ARE DEPENDENT ON OUR LICENSE FOR CERTAIN TECHNOLOGY WE USE IN OUR DNA SEQUENCING INSTRUMENTS AND OUR BUSINESS WOULD SUFFER IF THE LICENSE IS TERMINATED. We license certain intellectual property owned or exclusively licensed by Applera Corporation, Applied Biosystems Group, which we refer to in this annual 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. Either party may terminate the agreement under certain limited circumstances. The termination of this license would have a material adverse effect on our ability to produce or sell our DNA sequencing instruments and genotyping kits. Consequently, we could experience a deterioration of anticipated future sales of our genotyping kits and further losses, and our business, financial condition and results of operations would be materially harmed. WE FACE SUBSTANTIAL COMPETITION FROM MANY COMPANIES, AND WE MAY NOT BE ABLE TO EFFECTIVELY COMPETE. The biotechnology industry is highly competitive. We compete with entities in the United States and abroad that are engaged in the development and production of products that analyze genetic information. They include: - purveyors of home brew genetic tests, which may not have undergone clinical validation and have not been approved by the FDA or other regulatory agencies, including Laboratory Corporation of America Holdings, Quest Diagnostics Inc. and Specialty Laboratories, Inc. - manufacturers of genotyping test kits, including the Celera Diagnostics division of Applera; - purveyors of phenotyping or genotyping assay services, including ViroLogic, Inc. and Tibotec-Virco NV (a subsidiary of Johnson & Johnson); - manufacturers and distributors of DNA probe-based diagnostic systems such as Abbott Laboratories, Chiron Corp., Roche Diagnostics, Gene Probe Inc., Innogenetics NV, Digene Corporation and Johnson & Johnson; and - manufacturers and distributors of DNA sequencers such as Applera, Amersham Pharmacia Biotech, Inc., LI-COR, Inc., Hitachi, Ltd. and Beckman Coulter, Inc. Many of our competitors have much greater financial, technical research and development resources and production and marketing capabilities than we do. Smaller companies may also prove to be significant competitors, particularly through collaborative arrangements with large pharmaceutical and biotechnology companies. If any of our competitors were to devote significant resources to developing an integrated solution for genotyping, we would experience significantly more competitive pressure. We cannot predict whether we could successfully compete with these pressures and, if we are unable to do so, our business, financial condition and results of operations could suffer. 12 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 unexpected revenue shortfall. Therefore, any significant shortfall in revenues as compared to our planned expenditures will materially harm our business, financial condition, and results of operations. If we are unable to manage our growth, we may not be able to implement our business plan and our business, financial condition and results of operations will be materially harmed. IF WE ARE UNABLE TO EFFECTIVELY INTEGRATE FUTURE ACQUISITIONS OF NEW OR COMPLEMENTARY BUSINESSES, PRODUCTS OR TECHNOLOGY, OUR BUSINESS MAY BE HARMED. We have made and in the future may make acquisitions of complementary businesses, products, services or technologies. We have limited experience in integrating newly acquired organizations into our operations. Acquisitions expose us to many risks, including: - difficulty in assimilating technologies, products, personnel and operations; - diversion of management's attention from other business concerns; - large write-offs and amortization expenses related to goodwill and other intangible assets; - entering markets in which we have no or limited experience; and - incurrence of debt or assumption of other liabilities. The occurrence of one or more of these factors could materially harm our business, financial condition and results of operations. In addition, if we issue additional securities in connection with an acquisition, the ownership interests of our existing securities holders will be diluted. 13 WE MAY BE SUED BY CLINICIANS, PATIENTS OR THIRD-PARTY PAYORS AND OUR INSURANCE MAY NOT SUFFICIENTLY COVER ALL CLAIMS BROUGHT AGAINST US. The testing, manufacturing, sale, marketing and use of our products exposes us to the risk of product liability claims. In addition, clinicians, patients, third-party payors and others may at times seek damages based on testing or analysis errors based on a technician's misreading of the sequencing results, mishandling of the patient samples or similar claims. Although we have obtained liability insurance coverage, we cannot guarantee that liability insurance will continue to be available to us on acceptable terms or that our coverage will be sufficient to protect us against all claims that may be brought against us. A liability claim, even one without merit or for which we have substantial coverage, could result in significant legal defense costs, thereby increasing our expenses, lowering our earnings and, depending on revenues, potentially resulting in additional losses. OUR INTERNATIONAL OPERATIONS MAY BE ADVERSELY AFFECTED BY RISKS ASSOCIATED WITH INTERNATIONAL BUSINESS. We sell our products in many countries and operate offices in North America and Europe. Therefore, we are subject to certain risks that are inherent in an international business. These include: - varying regulatory restrictions on sales of our products to certain markets and unexpected changes in regulatory requirements; - tariffs, customs, duties and other trade barriers; - difficulties in managing foreign operations and foreign distribution partners; - longer payment cycles and problems in collecting accounts receivable; - fluctuations in currency exchange rates; - political risks; - foreign exchange controls that may restrict or prohibit repatriation of funds; - varying laws relating to, among other things, employment and employment termination; - export and import restrictions or prohibitions, and delays from customs brokers or government agencies; - seasonal reductions in business activity in certain parts of the world; and - potentially adverse tax consequences. Depending on the countries involved, any or all of the foregoing factors could materially harm our business, financial condition and results of operations. WE MAY 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 14 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 2001 there can be no assurance that we will not be treated as a PFIC in 2002 or 2003. 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 2001 taxable year approximately 16% of our assets averaged over the taxable year produced, or were held for the production of, passive income, and approximately 16% of our gross income was passive income. If we become a PFIC, many of our U.S. shareholders will, in absence of certain elections as discussed below, be subject to the following adverse tax consequences: - They will be taxed at the highest ordinary income tax rates in effect during their holding period on certain distributions on our common shares, and gain from the sale or other disposition of our common shares; - They will be required to pay interest on taxes allocable to prior periods; and - The tax basis of our common shares will not be increased to fair market value at the date of their deaths. If we become a PFIC, our U.S. shareholders could avoid these tax consequences by making a qualified electing fund election or a mark-to-market election. These elections would need to be in effect for all taxable years during which we were a PFIC and during which our U.S. shareholders held our common shares. A U.S. shareholder who makes a qualified electing fund election, will be taxed currently on our ordinary income and net capital gain (unless a deferral election is in effect). A U.S. shareholder who makes a mark-to-market election, will include as ordinary income each year an amount equal to the excess of the fair market value of our common shares over the adjusted tax basis as of the close of each year (with certain adjustments for prior years). If we become a PFIC, our U.S. shareholders will generally be unable to exchange our common shares for shares of an acquiring corporation on a tax-deferred basis under the reorganization rules of the Internal Revenue Code (unless shares are received in an acquiring corporation which itself is a PFIC in the year the reorganization was completed), 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. 15 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 with the approval of our Series A Preferred Shareholders, we can issue preferred shares with more voting rights, higher dividend payments or more favorable rights upon dissolution, than the common shares. If we issued certain types of preferred shares in the future, it may also be more difficult for a third-party to acquire a majority of our outstanding voting shares. In addition, we have a "classified" Board of Directors, which means that only approximately one-third of our directors are eligible for election each year. Therefore, if shareholders wish to change the composition of the Board of Directors, it would take at least two years to remove a majority of the existing directors, and three years to change all directors. Also, the holders of our Series A preferred shares are entitled to vote as a class for one director. The Series A Director serves for a one year term and any vacancy may be filled only by a vote of the holders of Series A preferred shares. If we do not redeem our Series A preferred shares as required during 2006, 2007, and 2008, then our Series A shareholders will be entitled to special voting rights enabling them to elect a majority of our Board of Directors, who will continue to serve as directors until we have redeemed our Series A preferred shares as required. Having a classified Board of Directors and these special rights of the Series A preferred shareholders may, in some circumstances, deter or delay mergers, tender offers or other possible transactions which may be favored by some or a majority of our shareholders. BECAUSE OUR PREFERRED SHAREHOLDERS ARE ENTITLED TO CERTAIN PREFERENCES OVER OUR COMMON SHAREHOLDERS, UNDER CERTAIN CIRCUMSTANCES, OUR COMMON SHAREHOLDERS MAY NOT RECEIVE A RETURN OF THE FULL AMOUNT THEY HAVE INVESTED IN OUR COMPANY. In July 1999, we issued 33,948 Series A preferred shares and, as of May 31, 2002, 25,153 remained outstanding. Our Series A preferred shares entitle the holders to certain preferences over our common shares, including the following: - we may not issue any securities that rank senior to, or in parity with, the Series A preferred shares without obtaining the approval of the holders of a majority of the Series A preferred shares; - we may not issue dividends to holders of common shares until all accrued and unpaid dividends on the Series A preferred shares are paid in full; and - if we liquidate or wind-up our company or if we sell our company or in certain other circumstances, holders of Series A preferred shares are entitled to receive an amount equal to $1,000 per Series A preferred share, or approximately $25.2 million in the aggregate, plus accrued and unpaid dividends, before holders of common shares would be entitled to receive any distribution. 16 THE HOLDERS OF OUR SERIES A PREFERRED SHARES HAVE ANTI-DILUTION PROTECTION THAT MAY ENTITLE THEM TO RECEIVE ADDITIONAL COMMON SHARES UNDER SOME CIRCUMSTANCES, WHICH WOULD DILUTE THE OWNERSHIP INTERESTS OF THE HOLDERS OF OUR COMMON SHARES. Currently our Series A preferred shares are convertible, at the holders' option, into common shares at the conversion price of $10.72 per share. However, the conversion price may be adjusted in a number of circumstances. In some circumstances, such as certain issuances of our common shares or securities convertible into our common shares at a price per share less than the conversion price for the Series A preferred shares, the ownership interest of the holders of Series A preferred shares in our company (on a fully-diluted basis) may increase. As a result, the ownership interests of the holders of our common shares would be diluted. THE VOLATILITY OF THE STOCK MARKET OR TRADING ACTIONS OF SOME SHAREHOLDERS 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. We have publicly announced that we are in discussions with third parties regarding strategic alternatives, including a potential sale of our company. If we sell our company, we cannot be certain of the consideration that would be paid to our common shareholders. However, arbitrageurs and other investors may purchase our common shares with the expectation that, upon the completion of a sale, our common shareholders will be paid a premium over our current market price. If we do not complete a sale of our company, or if investor expectations change prior to the completion of a sale, these investors may sell their common shares, which could drive down the price of our common shares on Nasdaq. 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 May 31, 2002, we had 22,178,342 outstanding voting shares. This includes 2,975,051 shares issuable upon conversion of our Series A preferred shares. All of these shares (including the common shares to be issued upon conversion of the Series A preferred shares) are eligible for sale under Rule 144, pursuant to currently effective registration statements, or are otherwise freely tradable. In addition: - Our officers and directors own options to acquire an additional 1,031,376 shares. The shares to be issued upon exercise of these options have been registered and may be freely sold when issued. Our officers and directors also own 41,066 shares that may be sold subject to volume restrictions imposed by Rule 144. - Our employees and consultants who are not deemed affiliates hold options to buy a total of 1,057,646 shares. The shares to be issued upon exercise of these options have been registered and may be freely sold when issued. 17 - We may issue options to purchase up to an additional 125,576 shares under our share option plans. The shares to be issued upon exercise of these options have been registered and may be freely sold when issued. - Our Board of Directors has approved the issuance of options to purchase an additional 1,000,000 shares under our 2000 Employee Option Plan and has granted options to officers and employees to purchase 193,375 of these shares, which are not reflected in the option numbers shown above. The shares to be issued upon exercise of these options have not been registered and may be freely sold only pursuant to an effective registration statement. Sales of substantial amounts of common shares into the public market could lower the market price of our common shares. In general, under Rule 144 as currently in effect, a person (or persons whose shares are required to be aggregated) who has owned shares for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of (i) 1% of the number of our common shares then outstanding (which equals approximately 192,033 common shares as of May 31, 2002) or (ii) the average weekly trading volume of our common shares during the four calendar weeks preceding the filing of a Form 144 with respect to such sale. Sales under Rule 144 are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about our company. Under Rule 144(k), a person who is not deemed to have been our affiliate at any time during the three months preceding a sale, and who has owned the shares proposed to be sold for at least two years, is entitled to sell his shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. ITEM 4. INFORMATION ON THE COMPANY. RECENT DEVELOPMENTS We currently are in discussions with third parties regarding strategic alternatives, including the potential sale of our company. We have retained Bear, Stearns & Co. Inc. to act as our financial advisor and to assist us in this process. We cannot be certain whether we will be able to sell our company or complete any other strategic transaction. We also cannot be certain of the terms upon which a sale or any other strategic transaction would be completed. 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, and some cancers. Our OpenGene System consists of disease-specific genotyping kits and software, automated DNA sequencers, disposable gel cassettes and related equipment. Our genotyping kits contain the necessary 18 chemicals, reagents, third-party licenses and other consumables and materials required for sequencing specific disease-associated genes. 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. On September 26, 2001, we received clearance from the U.S. Food and Drug Administration, or FDA, to market our TRUGENE HIV-1 Genotyping Kit for clinical diagnostic use in the United States. We began selling our FDA-cleared TRUGENE HIV-1 Genotyping Kit to the clinical diagnostic market in the U.S. during the fourth quarter of 2001. We also have developed a genotyping kit for hepatitis C. We are developing the next generation of our TRUGENE HIV-1 Genotyping Kit, genotyping kits for other species of HIV not tested for in our TRUGENE HIV-1 Genotyping Kit, a genotyping kit for hepatitis B, the next generation of our hepatitis C genotyping kit, and genotyping kits for certain cancers. 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: - genes as potential targets for therapeutic intervention; - mutations in a gene that may predispose an individual to a particular disease; - genetic variation among individuals that may cause different reactions to drug treatment; and - mutations in the genes of infectious organisms (such as viruses and bacteria) and tumors that may result in drug resistance, thereby influencing treatment methods. 19 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. 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. 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 20 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. OUR OPENGENE SYSTEM Our OpenGene System consists of automated DNA sequencers, disposable gel cassettes, related equipment and software and disease-specific genotyping kits. Our OpenGene System has been designed expressly to meet the needs of the clinical diagnostic market. We believe that our integrated OpenGene System provides a cost effective and efficient clinical diagnostic solution that will make DNA sequencing a viable diagnostic tool for the management of selected diseases and medical conditions because: - it reads DNA strands faster than existing sequencers designed for the research market; - it is designed to efficiently read and analyze the shorter DNA strands typically used for clinical diagnosis; - it is significantly less expensive than comparable sequencers designed for the research market; - it is small and lightweight; - it utilizes easy to use disposable gel cassettes; - it includes our proprietary software package designed for DNA analysis and patient data management; - our genotyping kits include the reagents, primers and other chemicals, third-party licenses, software and other materials required to conduct tests for specific disease-associated genes; and - our genotyping kits are standardized, validated and undergo quality control testing to provide reliable, reproducible results. 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: 21 - 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 genotyping kits. We designed this system for the clinical diagnostic market. - TARGET THE HIV GENOTYPING MARKET. We are focusing initially on the HIV market because there is clinical evidence to suggest that genotyping may be effective in managing the treatment of 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 have received regulatory approval to sell our HIV OpenGene System for clinical diagnostic use in the United States, Argentina, Canada, France and Israel, and we intend to seek approval from regulatory authorities in other countries. - LEVERAGE OUR OPENGENE SYSTEM FOR ADDITIONAL APPLICATIONS. We have developed, and are developing, other disease-specific genotyping kits 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 genotyping kit, we have developed genotyping kits for hepatitis B and hepatitis C, and are developing genotyping kits for the next generation of our TRUGENE HIV-1 Genotyping Kit, genotyping kits for other species of HIV not tested for in our TRUGENE HIV-1 Genotyping Kit, and genotyping kits for certain cancers. - 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. - OFFER 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 genotyping kits and other technologies. - TAILOR OUR MARKETING EFFORTS TO LOCAL MARKETS. We have established our sales and marketing force in the United States, Canada, selected European countries and in other areas where we believe that the size of the market and our familiarity with regulatory and other local conditions justify the development of our own sales force. In selected geographic and product markets where we believe that regulatory and other market factors make it more prudent to rely on a third-party local sales and marketing effort, we seek to enter into distribution and marketing arrangements with leading distributors. - MAINTAIN OUR TECHNOLOGICAL LEADERSHIP IN GENOTYPING. We plan to continue to invest significant resources in research and development so that we may continue to provide customers with advanced genotyping technologies and products. Where we believe it is cost effective or otherwise appropriate, we will continue to license and acquire technologies and products to include in our OpenGene System and genotyping kits. We will also seek to continue to collaborate with hospitals, academic institutions, pharmaceutical companies and life science companies to develop additional genotyping kits and other products. 22 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. GENOTYPING KITS AND OTHER CONSUMABLES. Genotyping kits consist of various reagents, enzymes, primers and other chemicals, and other consumables consist of disposable gel cassettes, acrylamide and other materials. SEQUENCING SYSTEMS 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 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, can be connected to almost any computer network, has no moving parts and consumes only 400 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 MicroCel cassette. The acrylamide gel is the medium through which the DNA is separated for sequencing. 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 23 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. GENOTYPING KITS AND OTHER CONSUMABLES GENOTYPING KITS. We sell genotyping kits which assist in identifying disease-associated genetic mutations and gene sequences. We sell our TRUGENE HIV-1 Genotyping Kit to the clinical diagnostic market and we sell other genotyping kits to the research and clinical research markets. Our TRUGENE HIV-1 Genotyping Kit and other genotyping kits are described in the section of this annual report entitled "-Applications For Our OpenGene System." GENOTYPING KIT TECHNOLOGIES. We have developed and are developing genotyping kits with features designed to make our genotyping kits suitable for the clinical diagnostic market. We use certain technologies proprietary to us, and other technologies licensed to us, to ensure that our genotyping kits will meet the needs of this market. These technologies include our CLIP and CAS technology, polymerase chain reaction technology, or PCR, Uracil-DNA-glycosylase, or UDG, technology and fluorescent DNA sequencing technology. We have U.S. and foreign patents covering our 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 and the CAS technology from Genassiance Pharmaceuticals, Inc. 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 for research and 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. MICROCEL CASSETTE. The MicroCel cassette is a disposable, polyacrylamide electrophoretic gel cassette which acts as the detection medium for our DNA sequencers. 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 slab gel 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. 24 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 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 FDA-approved HIV OpenGene System enables 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. In September 2001, we received clearance from the FDA to market our TRUGENE HIV-1 Genotyping Kit for clinical use in the United States. The FDA authorization allows us to sell our TRUGENE HIV-1 Genotyping Kit for support of anti-retroviral therapy in HIV. We are not restricted in the claims we can make with regard to the mutations or our interpretation of them. We initiated the sale of our TRUGENE HIV-1 Genotyping Kit for use in the clinical research market in the fourth quarter of 1998 and the clinical diagnostic market in the fourth quarter of 2001. We have pending and issued patents 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 940,000 people in North America, 1,560,000 in Europe and Central Asia and a total of 40 million people worldwide are infected with HIV. In 2001 alone, there were approximately 5 million new HIV infections, including 45,000 in North America and 280,000 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. 25 Currently, there are 16 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. 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, have demonstrated the benefits of genotyping HIV to manage a patient's drug therapy. These studies 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. HEPATITIS C We have developed a genotyping kit for hepatitis C. Hepatitis is an inflammation of the liver. Hepatitis C is one type of virus that causes this inflammation. There are approximately 4.0 million people in the United States who test positive for hepatitis C. There are six major sub-types of hepatitis C. Knowing the sub-type helps the physician determine how long the patient will require drug treatment. Our hepatitis C genotyping kit generates a report which identifies the specific hepatitis C subtypes a patient is most likely to have contracted. The report generated does not provide information about the patient's drug resistance or recommend the use of specific drugs for treatment of that patient. We believe that FDA approval is not generally required for hepatitis C genotyping products which are used for epidemiological studies. However, the FDA has not provided definitive guidance as to whether a hepatitis C product used for the purpose and in the manner we intend our hepatitis C genotyping kit to be used, would require approval. We are aware of at least one product similar to ours that is being marketed and sold by a competitor without FDA approval. To our knowledge, the FDA has not advised that company that FDA approval is required to market and sell the product for the purposes for which it is intended to be used and has not initiated enforcement action to stop the marketing or sale of the product. We do not intend to seek FDA clearance to market our hepatitis C genotyping kit for the purpose for which it is intended to be used. However, we cannot be certain that the FDA will not determine that authorization is required for us to market and sell the hepatitis C genotyping kit for these purposes or direct us not be sell the kit without authorization. 26 We are currently developing a second hepatitis C genotyping kit which will perform drug resistance testing and generate a report recommending the use of specific drugs for treatment of the patient. We may need FDA approval to sell that genotyping kit to the clinical diagnostic market and, if FDA approval is required, we will conduct the necessary clinical studies to obtain FDA approval for diagnostic use. HEPATITIS B We have developed a genotyping kit for hepatitis B which we plan to launch in the next twelve months. 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 (HBV), of whom approximately 1.2 million are located in the United States. In the United States, approximately 140,000 people are infected with HBV every year. Chronic HBV infection leads to inflammation of the liver which may progress to cirrhosis and liver cancer. Hepatitis B currently is treated with interferon or lamivudine and several new reverse transcriptase inhibitors are in development. Genotyping may be used to identify the subtype of hepatitis virus present, which has implications for disease progression, and, also, to detect mutations in the virus that cause the disease to become resistant to lamivudine. Our hepatitis B genotyping kit sequences the part of the virus which indicates both viral genotype and lamivudine resistance. The report generated identifies the viral genotype circulating in the patient and the mutations which may be associated with lamivudine resistance. As new reverse transcriptase inhibitors become clinically available, we expect that our current genotyping kit will be useful in identifying new resistance mutations selected by these agents. We also are developing a next-generation HBV genotyping kit which will contain several modules capable of analyzing any part of the HBV genome. This will allow mapping of viral resistance throughout the hepatitis B virus and will also allow clinicians to determine factors associated with disease pathology (HbeAg) and the progression to liver cancer. We expect that this genotyping kit will assist clinicians in therapeutic management of chronic HBV infection. OTHER GENOTYPING KITS We are developing the next generation of our TRUGENE HIV-1 Genotyping Kit and additional genotyping kits for HIV species not covered by our TRUGENE HIV-1 Genotyping Kit. In addition, we are currently developing genotyping kits for certain cancers. REGULATION BY THE FDA AND OTHER GOVERNMENT AGENCIES We sell many of our products for research and clinical research purposes. We believe that we do not need authorization from the FDA or regulatory authorities in foreign countries to sell these products for research purposes, as long as they are properly labeled. However, we must obtain regulatory approval in the United States and many other countries before selling many of our products for clinical diagnostic purposes. We have received approval from the FDA, and from regulatory authorities in Argentina, Canada, France and Israel to sell our TRUGENE HIV-1 Genotyping Kit for clinical diagnostic purposes. FDA APPROVAL PROCESS. Products that are used to diagnose diseases in people are considered medical devices, which are regulated by the FDA. To obtain FDA authorization for a new medical device, a company may have to submit data relating to safety and efficacy based on extensive testing. This testing, and the preparation of necessary applications and the processing of those applications by the FDA, are expensive and may take several years to complete. The following describes several important aspects of the FDA authorization process. 27 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, 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 FURTHER FDA APPROVAL OF CHANGES TO FDA APPROVED PRODUCTS. It is necessary to obtain clearance from the FDA before making changes to FDA approved products if those changes could significantly affect safety or effectiveness. To obtain approval of some types of changes, it may be necessary to conduct additional human clinical trials to determine that the altered product will produce at least the same results as the approved product or will be as safe and effective as the approved product. We expect to update the drug resistance algorithms embedded in the software of our FDA approved TRUGENE HIV-1 Genotyping Kit approximately every six months. Based on informal discussions with the FDA, we expect that the FDA's review and approval of these updates will not exceed 90 days, provided we satisfy the FDA's approval requirements. Since it generally takes us at least 90 days to prepare our updated software products for commercial distribution, we do not anticipate that FDA approval of updates will delay the introduction of updated software products to market. 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 are 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 28 manufacture some of the components of our OpenGene System 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 genotyping kits for legitimate scientific research. REGULATORY APPROVAL OUTSIDE THE UNITED STATES. We market or plan to market our products in various countries outside the United States. Government authorization requirements similar to the FDA's exist in some of these countries. Therefore, authorization to sell our products for clinical diagnostic purposes in some of these countries may 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, as well as the domestic politics and financial stability of the countries involved. We have received approval from French regulatory authorities to market our HIV OpenGene System for clinical diagnostic purposes in France (December 2000), from Argentine regulatory authorities to market our HIV OpenGene System for clinical diagnostic purposes in Argentina (February 2001), from Canadian regulatory authorities to market our TRUGENE HIV-1 Genotyping Kit for clinical or research use in Canada (December 2001), and from the Israeli regulatory authorities to market our OpenGene System in Israel (February 2002). However, in Canada we will be required to meet additional regulations that become effective in January 2003. We cannot be certain that we will be able to comply with these new regulations. If we do not comply with these new regulations, we will be unable to sell our HIV OpenGene System to the clinical diagnostic market in Canada. We believe we are currently able to sell our HIV OpenGene System to the clinical diagnostic market in the following European Union (EU) member states (in addition to France): Belgium, Luxembourg, United Kingdom, Holland, Scandinavia and Spain. We expect that further regulatory approvals will not be required in these EU member states until new EU wide regulations go into effect in December 2003. We anticipate being in compliance with the new EU regulations as they become effective. 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 29 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 began to market our FDA cleared HIV OpenGene System to the clinical diagnostic market in the United States during the fourth quarter of 2001. We have a sales and marketing force of 75 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 toll-free telephone numbers in North America and Europe 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 2001 approximately 9% of our revenues were derived from sales of sequencers and other products to Amersham. In addition, we have granted rights to distribute our genotyping kits 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 Latin America, Europe, Asia, and Africa. These agreements expire at various times, 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. Our marketing strategy for the HIV OpenGene System consists of several components. We have established relationships with leading doctors, laboratories and healthcare providers in the HIV diagnostics market in the United States, Canada, Europe and Latin America. We have installed our equipment in many of these laboratories and other facilities at no cost to the recipient and are training technicians to use our products. We believe that the use of our products by these industry leaders will facilitate our marketing efforts in the rest of the HIV clinical diagnostic market. We have established special marketing relationships with some laboratories, under which we co-sponsor local physician and patient educational events. We also provide other marketing and support services to these laboratories. We advertise in a variety of publications and prepare marketing materials directed to doctors, laboratories, payors and patients. We conduct drug resistance and other seminars for, and provide educational materials to, physicians and other healthcare providers. We also provide educational material for patients, including a pamphlet that explains resistance testing. 30 We are continuing to market and sell our HIV OpenGene System to hospitals, pharmaceutical companies, academic institutions and clinical reference laboratories for research and clinical research purposes. RESEARCH AND DEVELOPMENT We currently conduct research and development through our own staff and through collaborations with researchers at scientific and academic institutions and hospitals. Our current research and development activities are focused on: - developing the next generation of our TRUGENE HIV-1 Genotyping Kit and additional genotyping kits for different HIV species, development of our genotyping kit for hepatitis B and development of our next generation hepatitis C genotyping kit and additional genotyping kits for certain cancers; - developing new technology for our sequencers and related equipment and software; - refining existing proprietary, disposable gel cassette technology in order to improve performance of our sequencers; and - exploring new technologies for future commercial products. In September 2001, we acquired from Virco UK Limited its research laboratory located in Cambridge, England, along with substantially all of the research staff of 25 scientists at that laboratory. The Cambridge facility is our principal international research hub, headed by Dr. Brendan Larder, who joined our company in June 2001 as our Chief Scientific Officer. Dr. Larder ran this facility for Virco UK Limited prior to joining our company. This acquisition was part of a larger restructuring of our research and development operations, which included the closing of a research lab in Toronto in December 2001, that resulted in the elimination of 27 positions. The activities performed at that lab have been transferred to our Atlanta and Cambridge labs. As a result of this restructuring, all of our research and development activity is now located in three centers. Our Cambridge, England facility focuses on chemistry research, our Atlanta facility on genotyping kits and chemistry development, and our Toronto facility on software research and development. As of May 31, 2002, our research and development staff consisted of 97 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 software for Windows platform as well as additional software applications for the clinical diagnostic market. We incurred $10.8 million of research and development expenses in 2001, $10.6 million in 2000 and $7.9 million in 1999. 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. Until March 31, 2002, we manufactured genotyping kits at our Pittsburgh, Pennsylvania facility. We closed that facility in April 2002, and we currently do not have another facility available to manufacture genotyping kits for full scale commercial production. 31 We plan to manufacture our genotyping kits at our new facility in Atlanta, Georgia. We have completed construction of this facility and we currently are testing the facility to ensure regulatory compliance. We expect our Atlanta facility to be cleared for full scale commercial production during the third quarter of 2002. We expect that when fully operational, our Atlanta facility will allow us to significantly increase our production of genotyping kits. We manufacture certain chemicals and other components included in the genotyping kits. Other genotyping kit components are manufactured by, or licensed from, third parties. We have documented and installed design and production practices in our Toronto and Atlanta 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 may 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 genotyping kits, 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 worldwide license to use and sell Amersham dyes within our genotyping kits, 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 genotyping kits 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 numerous U.S. and foreign patents. We own or jointly own U.S. patent applications and foreign applications presently pending as PCT applications, or as national phase PCT applications, designating intergovernmental agencies and multiple countries including the European Patent Office, Australia, Canada and Japan. Our issued and allowed patents and patent applications cover various aspects of our products and technologies, including several of our genotyping kits and various DNA sequencing and genotyping kit technologies, including 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. 32 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 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. The Board of Trustees of the Leland Stanford Junior University has filed a lawsuit in the United States District Court for the Northern District of California claiming that our TRUGENE HIV-1 Genotyping Kit infringes patents owned by the University. We have received an attorney opinion that we do not infringe any claim of the patents-in-suit. We believe that these claims are without merit and intend to vigorously contest the allegations made in the lawsuit. Since the amount of damages are unspecified, we cannot at this time determine, if we are unsuccessful, whether this legal action will have a material adverse effect on our business, financial condition or results of operations. 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: - purveyors of home brew tests, which may not have undergone clinical validation and have not been approved by the FDA or other regulatory agencies, including Laboratory Corporation of America Holdings, Quest Diagnostics Inc. and Specialty Laboratories, Inc.; - manufacturers of genotyping test kits, including the Celera Diagnostics division of Applera; - purveyors of phenotyping or genotyping assay services, including ViroLogic, Inc. and Tibotec-Virco NV (a subsidiary of Johnson & Johnson); - manufacturers and distributors of DNA probe-based diagnostic systems such as Abbott Laboratories, Chiron Corp., Roche Diagnostics, Gene Probe Inc., Innogenetics NV, Digene Corporation and Johnson & Johnson; and - manufacturers and distributors of DNA sequencers such as Applera, Amersham Pharmacia Biotech, Inc., LI-COR, Inc., Hitachi, Ltd. and Beckman Coulter, Inc. Many of 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. Some of our competitors, including some large clinical laboratories, have developed home brew HIV genotyping tests which are not approved for clinical diagnostic use by the FDA or other regulatory 33 agencies. We believe that three of these clinical laboratories currently are the largest commercial users of HIV genotyping tests. The FDA has said that it will not require premarket approval of these home brew tests developed in-house by clinical laboratories if they are used exclusively by the laboratories for HIV monitoring and if the laboratories do not make any medical claims for their tests and provide only analytical results to their customers. We believe that some of these laboratories have interpreted the FDA policy to mean that they are permitted to use their home brew genotyping tests to conduct HIV drug resistance testing in the laboratories and provide drug resistance reports about specific patients to physicians, in direct competition with our TRUGENE HIV-1 Genotyping Kit. We believe, however, that the FDA policy prohibits the use of the HIV home brew genotyping tests for these purposes and that these laboratories are required to obtain FDA approval before using their genotyping tests in this fashion. We are not certain how the FDA will interpret, or whether and when it will enforce, its policy as it applies to these HIV home brew genotyping tests. 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* Finance, administration and principal executive 20,628 June 2000 - Toronto, Canada offices May 2005 2. Bay Street Software research and development 6,876 November 2000 - Toronto, Canada May 2005 3. Etobicoke MicroCel manufacturing 10,282 June 1996 - Ontario, Canada October 2002 4. Etobicoke Sequencer manufacturing 10,430 September 1998 - Ontario, Canada August 2003 5. Oakville** Not in use 7,996 September 1998 - Ontario, Canada August 2003 6. Meyerside Drive** Not in use 3,100 May 1999 - Mississauga, Canada April 2004 7. University of Not in use 9,621 September 2000 - Pittsburgh August 2002 Applied Research Center, Pittsburgh, Pennsylvania 8. Technology Park Manufacturing and research and development 7,313 March 1998 - Atlanta, Georgia February 2003 9. Suwanee, Georgia*** Kit manufacturing, chemistry development, 99,822 February 2000 - laboratory, and sales and administrative offices March 2010 10. High Wycombe, European head office 5,118 October 2000 - United Kingdom October 2009
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SQUARE FEET LOCATION USE (APPROXIMATE) TERM OF LEASE -------- --- ------------- ------------- 11. Cambridge Science Chemistry research 20,000 January 1999 - Park, United March 2014 Kingdom**** 12. Epinay, France French sales office 2,421 November 2000 - October 2009 13. Madrid, Spain Iberian sales office 258 January 2002 - December 2002 14. Genoa, Italy Italian sales office 386 January 2000 - December 2002 15. Technology Park,** Not in use 21,032 November 1999 - Atlanta, Georgia October 2004
- ---------- * Approximately one-third of this facility is sub-leased. ** We have sub-leased these facilities. *** This facility is not yet cleared for full scale commercial genotyping kit production. **** Approximately half of this facility is sub-leased. 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
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Name of Subsidiary Country of Incorporation ------------------ ------------------------ Visible Genetics France S.A.S.* France Visible Genetics Iberia SL Spain Visible Genetics Israel, Ltd. Israel Visible Genetics Unipessoal, Lda. Portugal Visible Genetics Srl. Italy Visible Genetics UK Ltd United Kingdom
- ---------- * In order to comply with applicable law, Richard T. Daly, the President and Chief Executive Officer of our company, Thomas J. Clarke, the Chief Financial Officer of our company, and Dr. Arthur W.G. Cole, an Executive Vice President of our company and the President of Visible Genetics UK Ltd., each own one common share of Visible Genetics France S.A.S. 36 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. In September 2001, we received clearance from the FDA to market our TRUGENE HIV-1 Genotyping Kit and OpenGene DNA Sequencing System for clinical use in the United States. We began selling our TRUGENE HIV-1 Genotyping Kit to the clinical diagnostic market in the United States during the fourth quarter of 2001. During 2000, we received approval from French regulatory authorities to sell our TRUGENE HIV-1 Genotyping Kit and OpenGene DNA Sequencing System to the clinical diagnostic market in France, and during 2001, we received approval from the appropriate regulatory authorities to sell our TRUGENE HIV-1 Genotyping Kit and OpenGene DNA Sequencing System to the clinical diagnostic markets in Canada and Argentina. Our products and services include: - GENOTYPING KITS AND OTHER CONSUMABLES. Genotyping kits consist of various reagents, enzymes, primers and other chemicals. Other consumables consist of disposable gel cassettes, acrylamide and other materials. - SEQUENCING SYSTEMS. Sequencing systems consist of automated DNA sequencers and related equipment, and our proprietary DNA analysis and data management software. - TESTING, SEQUENCING AND OTHER SERVICES. We provide services, such as viral load testing, genotyping and other molecular services in the U.S.. During the third quarter of 2000 we began to phase-out our testing, sequencing and services business in Europe. During 1996 and 1997, we generated revenues primarily by selling sequencing systems. During this period, our business strategy focused on installing our DNA sequencers and related equipment in research and clinical research facilities. During 1998, we began to shift our strategy to target the clinical diagnostic market and to place greater emphasis on generating recurring revenues from sales of genotyping kits and other consumables initially to the research and clinical research markets and, subject to FDA and foreign regulatory approval, as applicable, to the clinical diagnostic market. As part of this strategy, we may sell our DNA sequencers at reduced prices, or place DNA sequencers at no cost, to customers who commit, or to customers who we anticipate will commit, to purchase significant quantities of genotyping kits and other consumables. This strategy may result, initially, in reduced gross margins and additional losses as we attempt to expand our installed base of DNA sequencers. However, we believe that this strategy, over the long term, will help us maximize recurring sales of our TRUGENE HIV-1 Genotyping Kit and other genotyping kits to the clinical diagnostic market. In addition, in 1999, 37 we sometimes bundled our DNA sequencers and genotyping kits for sale at reduced prices. We discontinued the practice of bundled sales in the second half of 1999. During 2000, in anticipation of our receiving regulatory approval of our TRUGENE HIV-1 Genotyping Kit, we began to de-emphasize marketing and sales of equipment to the research market and sales of testing, sequencing and other services. We have continued to market and sell equipment and genotyping kits to the clinical research market for research and investigational purposes. We anticipate that during 2002 the vast majority of our revenue will be generated by sales of genotyping kits and other consumables to the clinical diagnostic market. OUR OPERATIONS SALES. Sales consist of revenues from the sale of genotyping kits and other consumables, sequencing systems, as well as from the sale of testing services. Sales include shipping charges, but exclude sales and excise taxes. Revenues from the sale of our products are recognized when evidence of an arrangement exists, shipment occurs and title passes to the customer or distributor, sales price is fixed or determinable and there is a reasonable assurance of collectibility. Revenues from the sale of testing and other services are recognized when evidence of an arrangement exists, the services are provided, sales price is fixed or determinable and there is a reasonable assurance of collectibility. Sales of bundled sequencing systems and genotyping kits are recognized proportionately as the components of the bundle are shipped to customers. The total sales price of the bundle is allocated to the components proportionately based on the retail prices typically charged for such components if they were sold individually rather than as part of the bundle. We sell our products in North America, Europe, Asia, Australia, Africa and South America. In the United States, Canada and many countries in Europe, we sell our products directly through our own sales force. In selected geographic and product markets, we seek to sell our products through distribution, marketing or agency agreements with leading distributors. For an analysis of sales by product segment and geographic market for 2001, 2000, and 1999, see Note 13 to our consolidated financial statements. COST OF SALES. Cost of sales consists of manufacturing costs including materials, labor and overheads 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 show expenses, 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. 38 INTEREST AND FINANCING EXPENSE. Interest and financing expense consists of interest paid or accrued, and amortization of warrant costs and other financing expenses. Our financial statements are presented in U.S. dollars and are prepared in accordance with generally accepted accounting principles in the United States. RESULTS OF OPERATIONS COMPARISON OF FISCAL YEAR ENDED DECEMBER 31, 2001 TO FISCAL YEAR ENDED DECEMBER 31, 2000 SALES. Sales increased 4% to $13.6 million in 2001, from $13.1 million in 2000. The increase resulted from an increase in sales of genotyping kits and other consumables offset, in part, by a decline in sequencing system sales and services revenue. During 2001, sales of genotyping kits and other consumables increased 31% to $10.7 million from $8.2 million in 2000, while sales of sequencing systems and services decreased to $2.7 million and $0.2 million, respectively, in 2001, from $4.5 million and $0.4 million, respectively, in 2000. The decrease in sales of sequencing systems in 2001 reflects the decision made, in 2000, to de-emphasize sales of sequencing systems to the research market. The decline in services revenue is due primarily to the phase out of testing services in Europe beginning in the third quarter of 2000. In 2001, sales of genotyping kits and other consumables accounted for 78% of total sales, compared to 62% of total sales in 2000. In 2001, sales of sequencing systems and testing services were 20% and 2%, respectively, of total sales compared to 35% and 3%, respectively, in 2000. Sales in North America, Europe, Japan and the rest of the world were $6.6 million, $5.4 million, $1.2 million and $0.4 million, respectively, for 2001, as compared to $6.6 million, $5.0 million, $0.9 million and $0.6 million, respectively, for 2000. During 2001, Amersham International PLC (Amersham) accounted for approximately 9% of sales, of which 8% comprised sequencing systems and 1% comprised genotyping kits and other consumables. During 2000, sales to Amersham accounted for approximately 11% of sales, of which 10% comprised sequencing systems and 1% comprised genotyping kits and other consumables. The sales to Amersham were made on the same general terms and conditions as the majority of other sales during the respective periods. COST OF SALES. Cost of sales decreased 1% to $10.0 million in 2001, from $10.1 million in 2000. In 2001 cost of sales aggregated 74% of sales, compared to 78% in 2000. The decrease in cost of sales as a percentage of sales was primarily due to the increase in sales of genotyping kits and consumables which on a percentage basis have a lower cost of sales than do sales of sequencing systems. SALES, GENERAL AND ADMINISTRATIVE EXPENSES. Sales, general and administrative expenses increased 19% to $34.0 million, from $28.6 million in 2000. The increase resulted primarily from; - Start up costs related to the new Atlanta manufacturing facility; - Operating costs associated with our North American sales and administrative facility in Atlanta (opened in July 2000); - A full years' amortization of license fees for license agreements entered into in 2000; - Continued expansion of our sales force and marketing activities in North America and Europe. Sales and marketing expenses included in sales, general and administrative expenses increased 16%, to $15.5 million, from $13.4 million in 2000. 39 RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased 2% to $10.8 million in 2001, from $10.6 million in 2000. EXIT AND TERMINATION COSTS. During 2001, we incurred exit and termination costs of $1.9 million. Of this amount, $1.2 million related to the transfer of certain research and development activities from Toronto to facilities in Atlanta and Cambridge, England (which we acquired in 2001), and $0.5 million related to the planned transfer of genotyping kit manufacturing from Pittsburgh to our new manufacturing facility in Atlanta. In addition, $0.2 million related to the sub-lease of a facility in Norcross, Georgia that was vacated in 1999 in connection with the transfer of certain activities to Atlanta. There were no exit and termination costs in 2000. INTEREST INCOME. Interest income decreased to $2.5 million in 2001, from $4.5 million in 2000. The decrease is due to lower average cash balances and lower average interest rates earned on invested cash during 2001. CUMULATIVE PREFERRED DIVIDENDS AND ACCRETION OF DISCOUNT ATTRIBUTABLE TO PREFERRED SHARES. In 2001, cumulative preferred dividends and accretion of discount attributable to preferred shares decreased to $3.4 million from $3.7 million in 2000. The decrease is due to having fewer Series A preferred shares outstanding. In September 2000 a holder of the Series A preferred shares converted 7,795 shares into common shares, and in March 2001 a second holder of the Series A preferred shares converted 1,000 shares into common shares. COMPARISON OF FISCAL YEAR ENDED DECEMBER 31, 2000 TO FISCAL YEAR ENDED DECEMBER 31, 1999 SALES. Sales decreased 4% to $13.1 million in 2000, from $13.6 million in 1999. The decline resulted from a decrease in sequencing systems sales and services revenue offset, in part, by an increase in sales of our genotyping kits and other consumables. In 2000, sales of sequencing systems decreased to $4.5 million from $7.7 million in 1999. The decrease in sales of sequencing systems in 2000 reflects our decision to de-emphasize the sale of sequencing systems to the research market. Services sales decreased from $1.2 million in 1999 to $0.4 million in 2000. The decline in services sales is due primarily to the phase-out of testing services in Europe beginning in the third quarter of 2000, and to our decision to temporarily re-deploy many of our testing services personnel in North America to assist in completing our FDA submission. During 2000 sales of genotyping kits and other consumables increased to $8.2 million from $4.7 million in 1999. In 2000, sequencing systems accounted for 35% of total sales, compared to 57% of total sales in 1999. In 2000, genotyping kits and other consumables accounted for 62% of total sales, compared to 35% of sales in 1999. In 2000, 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 accounted for approximately 11% of sales, of which 10% comprised sequencing systems and 1% comprised genotyping kits and other consumables. During 1999, the sales to Amersham accounted for approximately 21% of sales, of which 19% comprised sequencing systems and 2% comprised genotyping 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 40 no cost, with clinical customers and an increase in discarded materials and other costs attributable to the manufacturing scale up associated with the anticipated U.S. launch of the HIV genotyping kit. SALES, GENERAL AND ADMINISTRATIVE EXPENSES. Sales, general and administrative expenses increased 50% to $28.6 million in 2000, from $19.1 million in 1999. The increase resulted primarily from; - Increased payroll and personnel costs due to continued growth of our business; - Costs associated with opening a North American sales and administrative facility in Atlanta; - Amortization of license fees for license agreements entered into in 2000; - Continued growth of our quality control and regulatory departments; and - Continued expansion of our sales force and our marketing activities in North America and Europe. Sales and marketing expenses included in sales, general and administrative expenses increased 21% to $13.4 million in 2000, from $11.1 million in 1999. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased 34% to $10.6 million in 2000, from $7.9 million in 1999. This increase resulted primarily from increased costs for consultants and increased purchases of laboratory supplies related to preparing our FDA submission. EXIT AND TERMINATION COSTS. There were no exit and termination costs in 2000. During 1999, we incurred exit and termination costs of $1.3 million. Of this amount, $0.8 million related to the transfer of certain of our activities to the new facility in Atlanta, and $0.5 million was for termination benefits payable to two senior officers in connection with the termination of their employment with our company. INTEREST INCOME. Interest income increased to $4.5 million in 2000, from $0.7 million in 1999. This increase reflects interest earned on higher average cash balances as a result of the approximately $30.0 million of cash proceeds received from our July 1999 issuance of Series A preferred shares, approximately $26.7 million of cash proceeds received from our December 1999 private placement of common shares and approximately $75.4 million of cash proceeds received from our April 2000 follow-on public offering of common shares. INTEREST AND FINANCING EXPENSE. Interest and financing expense decreased to approximately nil in 2000, from $2.0 million in 1999. The decrease is due to the repayment in July 1999, concurrent with the issuance of the Series A preferred shares, of our outstanding loans. CUMULATIVE PREFERRED DIVIDENDS AND ACCRETION OF DISCOUNT ATTRIBUTABLE TO PREFERRED SHARES. Cumulative preferred dividends and accretion of discount attributable to preferred shares increased to $3.7 million in 2000, from $1.8 million in 1999. The increase reflects a full year's dividends and amortization of discount on the Series A preferred shares issued in July 1999. LIQUIDITY AND CAPITAL RESOURCES Since inception, we have financed our operations primarily through private placements of equity and public offerings. We have also borrowed funds from institutional lenders. DECEMBER 2001 PRIVATE PLACEMENT. In December 2001, various institutional investors purchased 2,637,890 common shares in a private placement. The investors paid $8.34 per share and we received proceeds, before related fees and expenses, of $22.0 million from the private placement. 41 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 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, which we refer to as the Warburg Pincus Funds, invested $30.0 million in our company. In consideration for this investment, we issued to the Warburg Pincus Funds 30,000 Series A preferred shares convertible at the holders' option into common shares at $11.00 per share, and warrants to purchase 1,100,000 common shares exercisable for four years at a purchase price of $12.60 per share. The Series A preferred shares and warrants included customary anti-dilution provisions, under which the conversion price of the shares and the exercise price of the warrants may be reduced, and the number of shares issuable upon exercise of the warrants may be increased, under certain conditions including the sale of certain securities at a price below the conversion price of the shares or the exercise price of the warrants. As a result of the December 2001 Private Placement, the conversion price of the Series A preferred shares was reduced to $10.72. 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 warrants were valued using the Black-Scholes option valuation model. 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, or in the absence of other equity, against deficit, over seven years, the time period when redemption of the preferred shares first becomes mandatory. The increase in value of the preferred shares to their mandatory redemption price as well as the accrual of dividends on the preferred shares will reduce earnings attributable to common shareholders. In February 2000, the Warburg Pincus Funds exercised all of their warrants at an exercise price of $12.60 per share. Under the terms of our warrant agreement, the Warburg Pincus Funds elected to pay the exercise price for the warrants through a cashless exercise. As a result, the Warburg Pincus Funds received 847,749 of our common shares rather than 1,100,000 common shares they otherwise would have received upon exercise in cash of all of their warrants. The Warburg Pincus Funds subsequently distributed 847,586 of these common shares to their limited partners. In September 2000, the Warburg Pincus Funds, converted a total of 7,795 of our Series A preferred shares, plus a total of $701,550 of dividends that had accrued on those shares, into our common shares at a conversion price of $11.00 per share. As a result of the conversion, the Warburg Pincus Funds received 772,411 of our common shares and continue to hold a total of 22,205 Series A preferred shares. The Warburg Pincus Funds subsequently distributed to their limited partners, all the common shares issued in connection with the conversion of the 7,795 Series A preferred shares. INSTITUTIONAL LOANS. On April 30, 1998, our subsidiary, Visible Genetics Corp., or VGC, borrowed $7.0 million from various funds for which Hilal Capital Management LLC serves or served as general partner, investment advisor or management company. We refer to these funds as the Hilal Funds. In September 1998, VGC borrowed an additional $1.0 million from these lenders. 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 42 payable on December 28, 1999. As part of the loan arrangements we granted the Hilal Funds warrants to purchase a total of 540,000 common shares at an exercise price of $10.00 per share. 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. 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 loans 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 at a purchase price of $12.60 per share. The Series A preferred shares and warrants included customary anti-dilution provisions, under which the conversion price of the shares and the exercise price of the warrants may be reduced, and the number of share issuable upon exercise of the warrants may be increased, under certain conditions, including the sale of certain securities at a price below the conversion price of the shares or the exercise price of the warrants. As a result of the December 2001 Private Placement, the number of warrants was increased to 152,420 and the purchase price of the warrants was reduced to $12.16. 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 warrants were valued using the Black-Scholes option valuation model. 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, or in the absence of other equity, against deficit, over seven years, the time period when redemption of the preferred shares first becomes mandatory. The increase in value of the preferred shares to their mandatory redemption price as well as the accrual of dividends on the preferred shares will reduce earnings attributable to common shareholders. The Series A preferred shares and warrants have the same terms as those granted to the Warburg Pincus Funds. On March 15, 2001, the Hilal Funds converted a total of 1,000 of the Series A preferred shares, plus a total of $139,050 of dividends that accrued on those shares, into 103,550 of our common shares. On November 29, 2001, the Hilal Funds transferred their remaining 2,948 Series A preferred shares to an unrelated party. CAPITAL AND CERTAIN OTHER EXPENDITURES. Additions to fixed assets were approximately $13.2 million, $9.3 million and $1.9 million for the years ended December 31, 2001, 2000 and 1999, respectively. The additions to fixed assets in 2001, include $9.5 million in expenditures related to our Atlanta facility, of which $7.0 million was for leasehold improvements, $1.5 million was for laboratory and scientific equipment, $0.7 million was for computer equipment and software and $0.3 million was for office furniture and equipment. In addition, during 2001 additions to fixed assets for our Canadian facilities were $0.4 million, consisting primarily of additions to computer equipment and software, 43 laboratory and scientific equipment and leasehold improvements. Also, during 2001 additions to fixed assets in Europe were $1.5 million and include $0.8 million for the acquisition of a research laboratory in Cambridge, England. During 2001, we also placed $1.7 million of equipment with certain customers at no charge to those customers. We reflect this on our balance sheet as a component of "Fixed assets." The additions to fixed assets in 2000 include $6.2 million in expenditures related to our Atlanta facility, of which $3.0 million was for leasehold improvements, $1.3 million was for laboratory and scientific equipment, $1.5 million was computer equipment and software and $0.4 million was for office furniture and equipment. In addition, during 2000 additions to fixed assets for our Canadian facilities were $1.2 million, consisting primarily of additions to computer equipment and software, laboratory and scientific equipment and leasehold improvements. During 2000, we also placed $1.4 million of equipment with certain customers at no charge to those customers. The additions to fixed assets in 1999 consisted of $0.9 million for laboratory and scientific equipment, $0.6 million for computer equipment and software and $0.3 million for office furniture, equipment and leasehold improvements primarily to our Canadian facilities. Capital expenditures during these periods were funded from proceeds of private equity placements, public offerings and funds borrowed from institutional lenders. We currently anticipate $2.0 million in regularly planned capital expenditures in 2002. In April 2000 we entered into a worldwide licensing and collaboration agreement with Applera Corporation, Applied Biosystems Group (Applera). Under the terms of the agreement, we paid an initial licensing fee to Applera of $10.0 million in June 2000 and an additional $5.0 million licensing fee in June 2001. We will pay future licensing fees of $5.0 million in each of June 2002 and June 2003, unless the agreement is terminated before those dates. We are not obligated to make any further payments upon the termination of the agreement. In addition, in return for access to the Applera technology and installed instrument customer base, we will pay royalties to Applera based on sales. We may terminate the agreement upon 60 days written notice to Applera and either party may terminate the agreement under certain other limited circumstances. CURRENT AND FUTURE FINANCING NEEDS. We have incurred negative cash flow from operations since we started our business. We have spent, and expect to continue to spend, substantial amounts to complete our planned product development efforts, expand our sales and marketing activities, expand our manufacturing capabilities, conduct our clinical trials, conduct research and build our business infrastructure. At this time, funds from operations are not sufficient to meet our operating needs and other anticipated financial requirements. Based on our current plans we believe that our cash on hand and anticipated funds from operations will be sufficient to enable us to meet our operating needs for the next 9 to 12 months. However, the amount of funds we will need to operate for this time period is subject to many factors, some of which are beyond our control. We may need to obtain additional funds sooner or in greater amounts than we currently anticipate, and we expect that we will need to obtain additional funds at the end of the 9 to 12 month period. Potential sources of financing include strategic relationships, public or private sales of our shares or debt or other arrangements. We do not have any committed sources of financing at this time and it is uncertain whether additional funding will be available when we need it on terms that will be acceptable to us or at all. If we raise funds by selling additional common shares or other securities convertible into common shares, the ownership interest of our existing shareholders will be diluted. If we are not able to obtain financing when needed, we would be unable to carry out our business plan, we would have to 44 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, under certain circumstances we will need the consent of the Series A preferred shareholders. We will be required to obtain the consent of the holders of a majority of the then outstanding Series A preferred shares prior to issuing any equity security that has rights as to dividends and liquidation that are senior or equal to those of the Series A preferred shares. We will also be required to obtain the consent of the holders of a majority of the then outstanding Series A preferred shares if we wish to borrow money and at such time or as a result of such loans, the total principal amount of our indebtedness and capitalized lease obligations exceeds $15.0 million. As a result, we may be delayed in, or prohibited from, obtaining certain types of financing. INTEREST RATE AND INVESTMENT RISK. The primary objective of our investment activities is to preserve principal while at the same time maximizing income received from our investments without significantly increasing risk. Our investment portfolio is primarily comprised of cash and short term interest bearing certificates. FOREIGN CURRENCY RATE FLUCTUATIONS. While our financial statements are in U.S. dollars, revenue is generated in U.S. dollars and other currencies. We incur the majority of our expenses in Canadian and U.S. dollars, British pounds and euros. As a result, we may suffer losses due to fluctuations in exchange rates between the U.S. dollar, and the these other currencies. We do not currently engage in foreign exchange hedging activities or use other financial instruments in this regard. EURO CONVERSION Effective January 1, 1999, 12 of the 15 member countries of the European Union adopted the euro as their common legal currency and each participant established fixed conversion rates between their sovereign, or legacy, currencies and the common euro currency. On January 1, 2002, euro-denominated bills and coins were introduced as legal currency for these countries. By July 1, 2002, the legacy currencies will be phased out entirely as legal tender. During this transition period, public and private parties may choose to pay for goods and services using either the euro or the participating country's legacy currency. We currently conduct business operations in U.S. and Canadian dollars, British pounds and euros. We have made all necessary modifications to our information systems, equipment and processes to accommodate euro transactions. 45 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............................ 52 President, Chief Executive Officer and Director 1998 2004 Thomas J. Clarke........................... 54 Chief Financial Officer 2000 Timothy W. Ellis........................... 54 Chief Operating Officer 1999 Dr. Arthur W.G. Cole....................... 51 Executive Vice President; President, Visible 1996 Genetics UK Ltd. Marguerite Ethier.......................... 39 Vice President, General Counsel 2000 Dr. Brendan Larder......................... 43 Chief Scientific Officer 2001 David A. Galloway.......................... 58 Director 2001 2002 Sheldon Inwentash(1)....................... 46 Director 1994 2002 J. Spencer Lanthier(1)..................... 61 Director 2000 2003 Jacques R. Lapointe(2)..................... 55 Director 2000 2002 Jonathan S. Leff(1)(2)..................... 33 Director 1999 2002 Dr. Heather Munroe-Blum(2)................. 51 Director 2001 2003 Dr. Lloyd M. Smith......................... 47 Director 1995 2004 Dr. Konrad M. Weis......................... 73 Director 1997 2004
- ---------- (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. 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 46 to 1997, Mr. Ellis was President of Dynex Technologies, a manufacture of instruments and consumables for the clinical research industry. DR. ARTHUR W. G. COLE has been Executive Vice President of our company since May 1996 and the President of our Visible Genetics UK Ltd. 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. 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. DR. BRENDAN LARDER has been Chief Scientific Officer our company since September 2001. From 1997 to July 2001, Dr. Larder was the Chief Scientific Officer at Virco UK Limited. From 1985 to 1997, Dr. Larder was a research scientist at the Wellcome Research Laboratories in London. DAVID A. GALLOWAY was appointed to our Board of Directors in November 2001. From 1988 until November 2001, Mr. Galloway was President and Chief Executive Officer of Torstar Corporation, a Canadian media company. Prior to joining Torstar, Mr. Galloway was one of the founding partners of Canada Consulting Group. Mr. Galloway is currently a director of the Bank of Montreal and Corel Corporation. 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 publicly held Canadian biotechnology investment firm. 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 Bank of Canada, British Energy (Canada) Ltd., Bruce Power, Inc., Canada Life Assurance Company, Co-Steel, Inc., Ellis-Don, Inc., The Toronto Stock Exchange and Intertape Polymer, Inc. JACQUES R. LAPOINTE has been a director of our company since April 2000. Since May 2001, Mr. Lapointe has been self-employed as a consultant. From June 1998 until May 2001, Mr. Lapointe was President and Chief Operating Officer of BioChem Pharma Inc., a Canadian biotechnology company. 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 Altarex Corp., Procrea Biosciences Inc., Galileo Genomics Inc., ConjuChem Inc and Bioniche Life Sciences Inc.. 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 presently a member of the board of directors of Intermune Inc., Synaptic Pharmaceutical Corp., Transkaryotic Therapies, Inc., Triangle Pharmaceuticals Inc., ZymoGenetics, Inc., and a number of private health care companies. 47 DR. HEATHER MUNROE-BLUM was appointed to our Board of Directors in July 2001. Since January 1994, Dr. Munroe-Blum has been Vice-President, Research & International Relations at the University of Toronto. Dr. Munroe-Blum is also a governor of the University of Toronto. Dr. Munroe-Blum is currently a member of the Advisory Board of Nestle Canada. 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 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 presently a member of the board of directors of Third Wave Technologies, Inc. DR. KONRAD M. WEIS has been a director of our company since 1997. Dr. Weis 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 board of directors of Demegen Inc. and Titan Pharmaceuticals, Inc. EMPLOYMENT AGREEMENTS We have entered into employment agreements with all of our executive officers. We may terminate these employment agreements for any reason, but we will be required to pay severance in varying amounts if we terminate employment without cause. These employment agreements (other than Dr. Larder's) provide for the payment of a change of control benefit if such officer is employed when a "change of control" (as that term is defined in the employment agreement) occurs, except under certain circumstances. We will pay the officer an amount equal to such officers' salary plus the amount of any cash bonus paid to the officer in calendar year 2001, or in one case, the amount of any cash bonus payable for calendar year 2001 (which we refer to as the Officer's 2001 Compensation). In addition, if the officer remains employed for a period of 90 days following a change of control, the officer will be entitled to a retention benefit equal to such Officer's 2001 Compensation, and if the officer remains employed for an additional 90 day period (for a total of 180 days) following a change of control, the officer will be entitled to an additional retention benefit equal to such Officer's 2001 Compensation, for a total retention benefit equal to two times the Officer's 2001 Compensation. Furthermore, if we terminate the officer's employment prior to the end of the 180 day period for any reason other than cause, such officer will also be entitled to the retention benefit. 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, 2001. 48 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 2001 300,000 112,500 - - - - ------------------------------------------------------------------------------------------------------------------- Thomas J. Clarke 2001 173,523 81,250 - 12,000 - - ------------------------------------------------------------------------------------------------------------------- Timothy W. Ellis 2001 196,667 22,000 5,400(1) 10,000 - - ------------------------------------------------------------------------------------------------------------------- Dr. Arthur W.G. Cole 2001 156,822 15,682 15,326(2) 10,000 - - ------------------------------------------------------------------------------------------------------------------- Marguerite Ethier 2001 126,686 25,737 - 15,000 - - ------------------------------------------------------------------------------------------------------------------- Dr. Brendan Larder 2001 64,357(3) 106,924 13,427(4) 95,000 - - -------------------------------------------------------------------------------------------------------------------
- ---------- (1) Consists of Company matching contributions under Employee Stock Purchase Plan. (2) Consists of automobile allowance of $11,405 and pension contribution of $3,921. (3) Dr. Larder joined the Company in June 2001, and from June 4, 2001 through September 12, 2001, Dr. Larder worked on a part-time basis. (4) Consists of automobile allowance of $1,665 and pension contribution of $11,762. All of the directors, except for Jonathan S. Leff (the Series A Director), J. Spencer Lanthier and directors who are employees, receive a $2,500 fee for each Board of Directors and/or committee meeting they attend, up to a maximum of $10,000 per year. Mr. Lanthier, as Chairman of the Audit Committee, receives a $2,500 fee for each meeting of the Audit Committee he attends, up to a maximum of $10,000 per year, and receives a $2,500 fee for each meeting of the Board of Directors he attends, up to a maximum of $10,000 per year, for total fees of up to a maximum of $20,000 per year. Directors who are not employees are also eligible to participate in the 1997 Director Option Plan or the 2000 Employee Share Option Plan. All directors are reimbursed for reasonable out-of-pocket travel expenses incurred by them in attending meetings of the Board of Directors or committee meetings. The directors receive no other compensation for serving in their capacity as directors of our company The following table sets forth information concerning options granted to our executive officers and directors during the fiscal year ended December 31, 2001. OPTION GRANTS DURING 2001
NUMBER OF EXERCISE PRICE NAME OPTIONS GRANTED ($/SHARE) EXPIRATION DATE ------------------------ --------------- -------------- --------------- Thomas J. Clarke 12,000 $14.98 2011 Timothy W. Ellis 10,000 $14.98 2011 Dr. Arthur W.G. Cole 10,000 $14.98 2011 Marguerite Ethier 15,000 $14.98 2011 Dr. Brendan Larder 95,000 $19.25 2011 Dr. Lloyd Smith 15,000 $32.38 2011 Dr. Heather Munroe-Blum 30,000 $22.07 2011 David Galloway 30,000 $17.80 2011
49 In addition to the options set forth above, the following additional options were granted to our executive officers in 2001, pursuant to shareholder approval obtained at our Annual Meeting, held on June 12, 2002, of an increase in the number of common shares authorized for issuance under the 2000 Employee Share Option Plan from 1,000,000 to 2,000,000. Each option expires in 2011 and has an exercise price of $9.40 ADDITIONAL OPTION GRANTS DURING 2001
NUMBER OF NAME OPTIONS GRANTED ----------------------- ----------------- Thomas J. Clarke 25,000 Timothy W. Ellis 10,000 Dr. Arthur W.G. Cole 10,000 Marguerite Ethier 15,000 Dr. Brendan Larder 20,000
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: - reviewing the scope and results of the audit with the independent auditors; - reviewing with management and the independent auditors the company's interim and year-end financial condition and results of operations; - considering the adequacy of the internal accounting, bookkeeping and control procedures of the company; - 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; - reviewing at least once each year the terms of all material transactions and arrangements between the company and its affiliates; and - ensuring that the Board of Directors is aware of all matters that may significantly impact the financial condition or affairs of the business. The members of the Audit Committee are Messrs. Lanthier, Inwentash and Leff. 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. Leff and Lapointe, and Dr. Munroe-Blum. EMPLOYEES As of May 31, 2002, we employed 334 full-time employees (including executive officers) and 17 independent contractors, of whom: 50 - 97 are engaged in research and development; - 75 are involved in sales and marketing activities; - 103 in manufacturing and operations; and - 59 are involved in finance, legal and administrative functions. We have 125 employees in Canada, 133 in the United States, and 76 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 May 31, 2002:
- --------------------------------------------------------------------------------------------------------------------------- Number of Common Number Shares Which Percentage of May be Range of of Common Common Acquired Range of Expiration Shares Shares Under Option Exercise Prices Dates of Beneficially Name Owned(1) Plans(2) of Options Options Owned(3) - --------------------------------------------------------------------------------------------------------------------------- Richard T. Daly 40,822 445,001 $9.10-$32.63 2009-2010 1.4%(4) - --------------------------------------------------------------------------------------------------------------------------- Thomas J. Clarke - 37,000 $14.98-$15.00 2009-2011 * - --------------------------------------------------------------------------------------------------------------------------- Timothy W. Ellis - 110,000 $14.98-$16.00 2009-2011 * - --------------------------------------------------------------------------------------------------------------------------- Dr. Arthur W.G. Cole - 140,000 $3.50-$48.88 2006-2011 * - --------------------------------------------------------------------------------------------------------------------------- Marguerite Ethier - 24,375 $14.98-$15.00 2010-2011 * - --------------------------------------------------------------------------------------------------------------------------- Dr. Brendan Larder - 95,000 $19.25 2011 * - --------------------------------------------------------------------------------------------------------------------------- David A. Galloway - 30,000 $17.80 2011 * - --------------------------------------------------------------------------------------------------------------------------- Sheldon Inwentash(5) - 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(6) 244 - - - * - --------------------------------------------------------------------------------------------------------------------------- Dr. Heather Munroe-Blum - 30,000 $22.07 2011 * - --------------------------------------------------------------------------------------------------------------------------- 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. 51 (3) This information is based on 22,178,342 voting shares outstanding as of May 31, 2002, which includes 2,975,051 common shares issuable upon conversion of our Series A preferred shares as of May 31, 2002, including accrued dividends through April 15, 2002. 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) Includes 282,492 common shares subject to options exercisable within 60 days of May 31, 2002. (5) Mr. Inwentash is a director of our company. This table does not include 831,684 common shares that are owned of record by GeneVest Inc. ("GeneVest") and 15,000 common shares that are owned by Pinetree Corp. ("Pinetree"). 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. Mr. Inwentash is the President and Chief Executive Officer of Pinetree and beneficially owns approximately 43.5% of its issued and outstanding common shares. In addition, this table does not include 23,054 common shares that are owned by Mr. Iwentash's wife. (6) Mr. Leff is a director of our company. The number of common shares which he owns excludes 25,473 common shares and 2,626,367 common shares issuable upon conversion of Series A preferred shares, as of May 31, 2002, 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. 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 May 31, 2002, 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) - ---- -------------- ----------------------- ------------- Franklin Resources, Inc.(2) Common Shares 3,022,256 13.6% E.M. Warburg, Pincus & Co., LLC(3) Common Shares 2,651,840 12.0% RS Investment Management Co. LLC(4) Common Shares 2,477,983 11.2% Deutsche Bank AG(5) Common Shares 1,716,524 7.7%
(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 2001 and 2002 (prior to June 1, 2002) 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. 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 22,178,342 voting shares outstanding as of May 31, 2002, which includes 2,975,051 common shares issuable upon conversion of our Series A preferred shares as of May 31, 2002, which includes accrued 52 dividends through April 15, 2002. The number of common shares issuable upon conversion of the Series A preferred shares will increase as the dividends payable thereon accrue. (2) 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. (3) Consists of (i) 1,241,043 common shares held by Warburg, Pincus Equity Partners, L.P., which includes 1,240,975 common shares issuable upon conversion of Series A preferred shares which it owns; (ii) 1,313,274 common shares held by Warburg, Pincus Ventures International, L.P., which includes 1,313,242 common shares issuable upon conversion of Series A preferred shares which it owns; (iii) 39,396 common shares held by Warburg, Pincus Netherlands Equity Partners, I, C.V., which includes 39,387 common shares issuable upon conversion of Series A preferred shares which it owns; (iv) 26,264 common shares held by Warburg, Pincus Netherlands Equity Partners, II, C.V., which includes 26,258 common shares issuable upon conversion of Series A preferred shares which it owns; (v) 6,555 common shares held by Warburg, Pincus Netherlands Equity Partners III, C.V. (together with Warburg, Pincus Equity Partners, L.P., Warburg, Pincus Ventures International, L.P., Warburg, Pincus Netherlands Equity Partners, I, C.V., and Warburg, Pincus Netherlands Equity Partners, II, C.V., the "WP Funds"), which includes 6,505 common shares issuable upon conversion of Series A preferred shares which it owns; and (vi) 25,308 common shares held by Warburg, Pincus & Co. ("WP"), which is the sole general partner of each of the WP 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 the Company, is a general partner of WP and a managing director and member of EMW LLC. Mr. Leff may be deemed to have an indirect pecuniary interest (within the meaning of Rule 16a-1 under the Securities Exchange Act of 1934, as amended) in an indeterminate portion of the shares beneficially owned by these shareholders. Mr. Leff disclaims beneficial ownership of all such shares. (4) Includes 1,802,425 common shares beneficially owned by RS Investment Management, Inc. and RS Emerging Growth Fund. G. Randall Hecht, in his capacity as Chief Executive Officer of RS Investment Management Co. LLC, RS Investment Management, Inc. and RS Emerging Growth Fund, has voting and dispositive power of the securities held by these entities. (5) Includes 348,684 common shares issuable upon conversion of Series A preferred shares which it owns and, as of December 31, 2001, 765,000 common shares owned of record by DWS Investment GmbH. As of May 31, 2002, there were 25,153 Series A preferred shares issued and outstanding. Of those shares, 22,205 (88.3%) are owned by certain affiliated funds managed by E.M. Warburg, Pincus & Co., LLC, and 2,948 (11.7%) are owned by Deutsche Bank AG. For more information regarding our Series A preferred shares, 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 53 corresponding to the number of common shares the holder is entitled to receive upon conversion of his Series A preferred shares. On May 31, 2002, 19,125,852 of our common shares were held by 47 U.S. record holders and 22,205 of our Series A preferred shares were held by 5 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. The termination date of Dr. Stevens' options was extended until 2003. In November 1999, Dr. Stevens retired as Chairman of the Board of Directors. Under the terms of our agreement with Dr. Stevens, we paid him $210,400 and $101,608 in 2000 and 2001, respectively. In November 1999, Dr. Chalom Sayada's employment as 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 for 18 months. In consideration of such services, Dr. Sayada earned $151,248 in 2000 and $72,007 for 5 months of service in 2001. During 2001, we paid an aggregate of $13,283 in consulting fees to Dr. Lloyd M. Smith, one of our directors. . For a description of transactions between the company 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 The Board of Trustees of the Leland Stanford Junior University has filed a lawsuit in the United States District Court for the Northern District of California claiming that our TRUGENE HIV-1 Genotyping Kit infringes patents owned by the University. We have received an attorney opinion that we do not infringe any claim of the patents-in-suit. We believe that these claims are without merit and intend to vigorously contest the allegations made in the lawsuit. Since the amount of damages are unspecified, we cannot at this time determine, if we are unsuccessful, whether this legal action will have a material adverse effect on our business, financial condition or results of operations. On February 27, 2002, we received notice of a lawsuit that has been filed in Milan, Italy against us and two of our subsidiaries by Nuclear Laser Medicine Srl. The lawsuit seeks unspecified damages and specific performance relating to an alleged distribution agreement pertaining to our hepatitis C and HIV products in Italy. We believe that these claims are without merit and intend to vigorously contest the allegations made in the lawsuit. Since the amount of damages are unspecified, we cannot at this time determine whether, if we are unsuccessful, this legal action will have a material adverse effect on our business, financial condition or results of operations. 54 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% from issuance through July 15, 2002, and, beginning on July 15, 2002, at the rate of 4% per year. Dividends may not be paid until July 15, 2002. Beginning on July 15, 2002, at our option, we may pay dividends in cash. If dividends are not paid in cash, they will continue to accrue. 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, 1997.................................................... $ 14.25 $ 2.38 Fiscal Year ended December 31, 1998.................................................... $ 14.00 $ 6.00 Fiscal Year ended December 31, 1999.................................................... $ 34.63 $ 8.88 Fiscal Year ended December 31, 2000.................................................... $119.13 $19.38 Fiscal Year ended December 31, 2001.................................................... $ 37.45 $ 8.76 QUARTERLY MARKET PRICES FISCAL YEAR ENDED DECEMBER 31, 2000 First Quarter.......................................................................... $119.13 $29.00 Second Quarter......................................................................... $ 50.44 $19.38 Third Quarter.......................................................................... $ 49.38 $28.00 Fourth Quarter......................................................................... $ 44.25 $21.75 FISCAL YEAR ENDED DECEMBER 31, 2001 First Quarter.......................................................................... $ 37.45 $14.13 Second Quarter......................................................................... $ 24.97 $12.16 Third Quarter.......................................................................... $ 27.10 $16.16 Fourth Quarter......................................................................... $ 20.25 $ 8.76 FISCAL YEAR ENDED DECEMBER 31, 2002 First Quarter ......................................................................... $ 11.59 $ 6.37 Second Quarter (through June 12, 2002)................................................. $ 7.50 $ 2.30 MONTHLY MARKET PRICES December 2001.......................................................................... $ 12.62 $ 8.76 January 2002........................................................................... $ 11.59 $ 8.15 February 2002.......................................................................... $ 10.00 $ 7.09 March 2002............................................................................. $ 8.45 $ 6.37 April 2002............................................................................. $ 7.50 $ 5.82
55 May 2002............................................................................... $ 7.20 $ 2.30 June 2002 (through June 12, 2002)...................................................... $ 3.20 $ 2.62
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. 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: - 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; - relates primarily to his or her remuneration as a director, officer, employee or agent of the company or an affiliate; - is for indemnity or insurance; or - is with an affiliate. Our board of directors may, on behalf of the company and without authorization of our shareholders: - borrow money upon the credit of the company; - issue, reissue, sell or pledge bonds, debentures, notes or other evidences or indebtedness or guarantees of our company, either secured or unsecured; - 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 - 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 56 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 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 57 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 May 31, 2002, 8,795 have been converted and 25,153 remain outstanding. The Series A preferred shares are convertible at the holders' option into common shares at $10.72 per share, as adjusted. Upon conversion, the holders will also receive common shares, at the conversion price of $10.72 per share, as adjusted, equal to the amount of all accrued and unpaid dividends. The Series A preferred shares contain provisions under which the conversion price would be reduced on a weighted average basis if we issue shares, options or certain other securities at prices lower than the conversion price (subject to certain exceptions), and will also be adjusted upon the issuance of certain other securities, certain recapitalization events and in certain other circumstances to protect the holders against the dilutive effect of those events. Dividends on the Series A preferred shares accrue quarterly at the rate of 9% per year until July 15, 2002, and 4% per year thereafter, and are compounded annually. Dividends are not payable until July 15, 2002. Beginning on July 15, 2002, at our option, we may pay dividends in cash. If dividends are not paid in cash, they will continue to accrue. After the third anniversary (July 15, 2002) and prior to the seventh anniversary (July 15, 2006) of the date of issuance of the Series A preferred shares, we have the right to redeem the outstanding Series A preferred shares at a price, which we call the redemption price, equal to $1,000 per share, plus accrued but unpaid dividends, provided that the price of our common shares on the Nasdaq National Market equals or exceeds 150% of the conversion price for 20 trading days during a consecutive 30-day period ending within 10 days before we notify shareholders of the redemption. We 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; 58 (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. 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 59 (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 book value of the assets of our company was 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 and the book value of the assets of our company equaled or exceeded Cdn$218.0 million (in 2002). A non-Canadian, whether a WTO Investor or otherwise, would be deemed to acquire control of our 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 60 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, 2000. 1. 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. 2. 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 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. 3. 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. 4. 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. 5. 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 leased approximately 6,876 square feet of property located at 700 Bay Street, Toronto, Canada, for a term from June 2001 to November 2001. This lease was not renewed. 6. Deed, dated September 12, 2001, by and among Visible Genetics Inc., Visible Genetics UK Ltd., Virco U.K. Limited and Tibotec-Virco N.V. Pursuant to the terms and conditions of this agreement, we, through our wholly-owned subsidiary Visible Genetics UK Ltd, acquired certain assets from Virco U.K. Limited relating to Virco's research laboratory located in Cambridge, England, together with substantially all of Virco's research staff of 25 scientists at the laboratory, for $829,000. In addition, we assumed the lease for the premises at an annual cost of $419,000 (see No. 7 below). 7. Licence to Assign, dated October 10, 2001, by and among Visible Genetics Inc., Visible Genetics UK Ltd., Virco UK Limited and The Master Fellows and Scholars of Trinity College Cambridge. Pursuant to the terms and conditions of this agreement, Visible Genetics UK Ltd., as Assignee, assumed the lease between The Master Fellows and Scholars of Trinity College Cambridge, as 61 Landlord, and Virco U.K. Limited, as Tenant, for approximately 20,000 square feet of property located at Unit 184, Phase 3, Cambridge Science Park, Milton Road, Cambridge, England, for a term from January 1999 to March 2014. We are currently sub-leasing approximately 10,000 square feet of this facility. 8. Common Shares Purchase Agreement, dated December 24, 2001, 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 2,637,890 common shares of our company in a private placement. The investors paid $8.34 per share and we received proceeds, before related fees and expenses of $22.0 million from the private placement. In addition, the investors were granted registration rights for these shares. 9. Registration Rights Agreement, dated December 24, 2001, 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 2,637,890 common shares purchased by them in a private placement. 10. Employment Agreements with Executive Officers. On December 15, 2001, we entered into an employment agreement with Brendan Larder, our Chief Scientific Officer. On February 1, 2002, we entered into employment agreements with Thomas J. Clarke, our Chief Financial Officer, Timothy W. Ellis, our Chief Operating Officer, and Marguerite Ethier, our General Counsel. Also, on February 1, 2002, we amended and restated our employment agreements with Richard T. Daly, our President and Chief Executive Officer and Dr. Arthur W.G. Cole, President of our subsidiary Visible Genetics UK Ltd. For a description of these employment agreements with our executive officers, see "Item 6. Directors, Senior Management and Employees - Employment Agreements." 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. 62 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 thereto which have been publicly announced by the Minister of Finance (Canada) prior to the date hereof. 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 63 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. 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 is an individual who was a Canadian resident for 120 months during any period of twenty consecutive years preceding the time of the disposition of the property, the individual was resident in Canada at any time during the ten years immediately preceding the disposition of the property, and the individual owned the property at the time the individual ceased to be a resident of Canada. 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 33 1/3% 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. 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 64 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, 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 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, 65 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 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 is an individual who was a Canadian resident for 120 months during any period of twenty consecutive years preceding the time of the disposition of the property, the individual was resident in Canada at any time during the ten years immediately preceding the disposition of the property, and the individual owned the property at the time the individual ceased to be a resident of Canada. 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. 66 U.S. FEDERAL INCOME TAX CONSIDERATIONS The following summary describes certain material United States federal income tax consequences applicable to a U.S. Holder (as described below) arising from the purchase, ownership and disposition 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 U.S. Holder may differ from those described below by reason of that U.S. Holder's particular circumstances. This summary does not address all aspects of United States federal income taxation that may be relevant to a particular U.S. Holder in light of such U.S. Holder's circumstances, including, without limitation, financial institutions, mutual funds, broker-dealers, insurance companies, taxpayers who have elected mark-to-market accounting, tax-exempt organizations, taxpayers who hold common shares as part of a straddle, "hedge" or "conversion transaction" with other investments, persons who own (directly, indirectly or through attribution) 10% or more of our company's outstanding voting stock, taxpayers whose functional currency is not the U.S. dollar, shareholders subject to the alternative minimum tax provisions of the Code, and persons who hold common shares through a partnership or other pass-through entity. In addition, not discussed are any aspects of foreign, state or local tax laws or the potential applicability of United States federal and state estate and/or gift taxation. This summary is addressed only to a holder of common shares who is (i) a citizen or resident of the United States for federal income tax purposes, (ii) a corporation, or other entity treated as a corporation under United States federal income tax law, 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 the purchase, ownership or disposition of our common shares. This summary assumes that U.S. Holders hold their common shares as capital assets within the meaning of Section 1221 of the Code. 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 disposition of its 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 67 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 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" or, in the case of certain shareholders, "financial services income." The rules relating to the determination of the amount of foreign income taxes which may be claimed as foreign tax credits are complex and U.S. Holders should consult their tax advisors to determine whether and to what extent a credit would be available. 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 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. Gains or losses 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 federal income tax purposes. 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 or 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 68 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. 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 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 2001 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. Holder, 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. A U.S. Holder who is an individual is not allowed a deduction for interest on the deferred tax liability. 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 69 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 taxes, which deferral is subject to an interest charge. These amounts would be included in income by an electing U.S. Holder for its taxable year in which our company's taxable year ends, whether or not such amounts are actually distributed to the U.S. Holder. 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 2001. However, there can be no assurance that our company will not be classified as a PFIC in 2002 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 70 subject to back-up withholding. U.S. Holders generally are subject to information reporting and back-up withholding on proceeds paid from the disposition of common shares at a rate of 31% for proceeds paid on or before August 6, 2001, 30.5% for proceeds paid from August 7, 2001 through December 31, 2001 and 30% for proceeds paid after December 31, 2001, unless the U.S. Holder provides IRS Form W-9 or otherwise establishes an exemption. 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: Public Reference Room Northeast Regional Office Midwest Regional Office 450 Fifth Street N.W. 233 Broadway 175 West Jackson Boulevard Room 1024 New York, New York 10279 Suite 900 Washington D.C. 20549 Chicago, Illinois 60604
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 market value 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 2001 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, euros 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 71 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. 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, 2001. 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) 72 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) 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 thereto.(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) 73 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) 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.)(28) 10.24 Lease, dated March 27, 2000, by and between Visible Genetics Inc., as Tenant and LuCliff Company Limited, as Landlord.(29) 10.25 Lease, dated November 30, 2000, by and between Visible Genetics Inc., as Tenant and LuCliff Company Limited, as Landlord.(30) 10.26 Lease, dated October 1, 2000, by and between Visible Genetics Inc., as Tenant and LuCliff Company Limited, as Landlord.(31) 10.27 Common Shares Purchase Agreement, dated December 24, 2001, by and among Visible Genetics Inc. and the Investors who are signatories thereto. 10.28 Registration Rights Agreement, dated December 24, 2001, by and among Visible Genetics Inc. and the Investors who are signatories thereto. 10.29 Amended and Restated Employment Agreement, dated as of February 1, 2002, among Visible Genetics Corporation, Visible Genetics Inc. and Richard T. Daly. 10.30 Amended and Restated Employment Agreement, dated as of February 1, 2002, among Visible Genetics Inc., Visible Genetics UK, Ltd. and Arthur Cole. 10.31 Employment Agreement, dated as of February 1, 2002, among Visible Genetics Inc., Visible Genetics Corporation and Thomas J. Clarke. 10.32 Employment Agreement, dated as of February 1, 2002, among Visible Genetics Inc., Visible Genetics Corporation and Tim Ellis. 10.33 Employment Agreement, dated as of February 1, 2002, between Visible Genetics Inc. and Marguerite Ethier. 10.34 Service Agreement, dated December 15, 2001, between Visible Genetics UK, Ltd. and Brendan Larder. 10.35 Deed, dated September 12, 2001, by and among Visible Genetics Inc., Visible Genetics UK Ltd., Virco U.K. Limited and Tibotec-Virco N.V. 74 10.36 Licence to Assign, dated October 10, 2001, by and among Visible Genetics Inc., Visible Genetics UK Ltd., Virco UK Limited and The Master Fellows and Scholars of Trinity College Cambridge, including that certain Lease, dated January 19, 1999, by and among The Master Fellows and Scholars of Trinity College Cambridge, Virco U.K. Limited and Virco NV, attached as Schedule A thereto. - ---------- (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. (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. 75 (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. (28) 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 20, 2001. (29) 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 20, 2001. (30) Incorporated by reference from Exhibit 10.25 to the Company's Annual Report on Form 20-F, File No. 0-28550 filed with the Securities and Exchange Commission on March 20, 2001. 76 (31) Incorporated by reference from Exhibit 10.26 to the Company's Annual Report on Form 20-F, File No. 0-28550 filed with the Securities and Exchange Commission on March 20, 2001. 77 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: June 14, 2002 78 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE Audited Consolidated Financial Statements for the years ended December 31, 2001, 2000 and 1999 Independent Auditors' Report.............................................................................................. F-2 Consolidated Balance Sheets as at December 31, 2001 and 2000.............................................................. F-3 Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999................................ F-4 Consolidated Statements of Deficit for the years ended December 31, 2001, 2000 and 1999................................... F-5 Consolidated Statements of Comprehensive Loss for the years ended December 31, 2001, 2000 and 1999........................ F-5 Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999................................ F-6 Notes to Consolidated Financial Statements................................................................................ F-7
F-1 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, 2001 and 2000 and the consolidated statements of operations, deficit, comprehensive loss, and cash flows for the years ended December 31, 2001, 2000 and 1999. 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 consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2001 and 2000 and the results of its operations and its cash flows for the years ended December 31, 2001, 2000 and 1999 in accordance with generally accepted accounting principles in the United States of America. /s/ PRICEWATERHOUSECOOPERS LLP - ----------------------------------- Chartered Accountants Toronto, Canada February 15, 2002, except as to note 17 which is as of February 27, 2002 F-2 VISIBLE GENETICS INC. CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS
DECEMBER 31 ----------- 2001 2000 ---- ---- ASSETS CURRENT ASSETS Cash and cash equivalents............................................. $ 15,502,095 $ 18,476,303 Short-term investments................................................ 37,692,756 61,922,687 Trade receivables (net of allowance for doubtful accounts of $742,156; 2000-$1,311,530)............................. 3,136,754 3,214,934 Other receivables (Note 4)............................................ 437,888 884,995 Prepaid and deposits.................................................. 392,454 452,124 Inventory (Note 5).................................................... 2,756,950 2,268,877 ------------ -------------- TOTAL CURRENT ASSETS...................................................... 59,918,897 87,219,920 Fixed assets (Note 6)..................................................... 18,656,995 10,292,282 Patents and licenses (Note 7)............................................. 14,336,439 12,182,112 Other long-term assets.................................................... 456,744 481,383 ------------ -------------- $ 93,369,075 $ 110,175,697 ============ ============== LIABILITIES CURRENT LIABILITIES Accounts payable...................................................... $ 3,851,701 $ 3,847,364 Accrued liabilities (Note 8).......................................... 5,081,814 5,265,864 ------------ -------------- 8,933,515 9,113,228 ------------ -------------- TOTAL CURRENT LIABILITIES................................................. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SHARES (NOTE 9)............................................. 26,886,004 24,397,398 ------------ -------------- SHAREHOLDERS' EQUITY Share capital (Note 10)................................................... 195,408,884 169,717,379 Other equity (Note 10).................................................... - - Cumulative translation adjustment......................................... (1,018,839) (1,013,459) Deficit................................................................... (136,840,489) (92,038,849) ------------ -------------- 57,549,556 76,665,071 ------------ -------------- $ 93,369,075 $ 110,175,697 ============ ==============
COMMITMENTS AND CONTINGENCIES (NOTES 14 AND 17) THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. F-3 VISIBLE GENETICS INC. CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31 -------------------------------------------------------------- 2001 2000 1999 ---- ---- ---- SALES Products......................................... $ 13,330,346 $ 12,659,783 $ 12,455,775 Services......................................... 249,568 412,780 1,171,145 ------------- -------------- ------------- 13,579,914 13,072,563 13,626,920 ------------- -------------- ------------- COSTS OF SALES Products......................................... 9,789,570 9,815,741 8,593,774 Services......................................... 208,207 317,748 679,112 ------------- -------------- ------------- 9,997,777 10,133,489 9,272,886 ------------- -------------- ------------- GROSS MARGIN........................................... 3,582,137 2,939,074 4,354,034 ------------- -------------- ------------- EXPENSES Sales, general and administrative (Note 7)....... 33,986,435 28,570,747 19,073,546 Research and development......................... 10,834,731 10,606,516 7,935,327 Exit and termination costs (Note 11) ............ 1,920,000 - 1,329,083 ------------- -------------- ------------- 46,741,166 39,177,263 28,337,956 ------------- -------------- ------------- LOSS FROM OPERATIONS BEFORE INTEREST................... (43,159,029) (36,238,189) (23,983,922) Interest income........................................ 2,513,697 4,480,589 694,549 Interest and financing expense......................... (8,402) (16,536) (1,997,512) ------------- -------------- ------------- NET LOSS FOR THE YEAR.................................. (40,653,734) (31,774,136) (25,286,885) Cumulative preferred dividends and accretion of discount attributable to preferred shares (Note 9).................................. (3,426,827) (3,656,355) (1,770,069) ------------- -------------- ------------- NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS........... $ (44,080,561) $ (35,430,491) $ (27,056,954) ============= ============== ============= Weighted average number of common shares outstanding... 16,481,916 14,612,172 9,916,954 Basic and diluted loss per common share................ $ (2.67) $ (2.42) $ (2.73)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. F-4 VISIBLE GENETICS INC. CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF DEFICIT
YEARS ENDED DECEMBER 31 --------------------------------------------------------------- 2001 2000 1999 ---- ---- ---- Deficit, beginning of year................................... $ (92,038,849) $ (59,438,142) $ (34,151,257) Net loss for the year........................................ (40,653,734) (31,774,136) (25,286,885) Cumulative preferred dividends and accretion of discount attributable to preferred shares................. (4,147,906) (826,571) - ------------- -------------- -------------- DEFICIT, END OF YEAR......................................... $(136,840,489) $ (92,038,849) $ (59,438,142) ============= ============== ==============
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
YEARS ENDED DECEMBER 31 --------------------------------------------------------------- 2001 2000 1999 ---- ---- ---- Net loss for the year........................................ $ (40,653,734) $ (31,774,136) $ (25,286,885) Other comprehensive income Foreign currency translation adjustments................. (5,380) (393,548) (704,733) -------------- -------------- -------------- COMPREHENSIVE LOSS FOR THE YEAR.............................. $ (40,659,114) $ (32,167,684) $ (25,991,618) ============== ============== ==============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. F-5 VISIBLE GENETICS INC. CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31 ------------------------------------------------------------ 2001 2000 1999 ---- ---- ---- CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES Net loss for the year....................................... $ (40,653,734) $ (31,774,136) $ (25,286,885) Add: Items not involving cash - Depreciation............................................ 4,651,803 3,078,551 1,722,886 Amortization............................................ 3,069,946 2,211,253 393,979 Patents and licenses written off........................ 65,014 142,165 451,085 Non-cash financing expense related to warrants granted.. -- -- 1,466,691 Amortization of discount on accounts receivable......... -- -- (48,158) Foreign exchange ....................................... 13,903 (163,252) 26,789 Increase (decrease) from changes in - Trade receivables....................................... 47,568 2,436,001 (1,804,006) Other receivables....................................... 418,349 (267,177) 719,519 Prepaids and deposits................................... 55,530 (19,863) (209,338) Inventory............................................... (486,797) 219,221 1,290,997 Other long-term assets.................................. 24,639 (188,979) (292,404) Accounts payable........................................ 50,497 789,233 (734,230) Accrued liabilities..................................... (77,522) 1,783,467 1,956,660 --------------- -------------- -------------- (32,820,804) (21,753,516) (20,346,415) --------------- -------------- -------------- CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES Purchase of fixed assets.................................... (13,192,037) (9,269,045) (1,919,092) Licenses and patents acquired............................... (5,289,287) (12,413,163) (698,261) Purchase of short-term investments.......................... (116,002,357) (356,812,514) (50,503,643) Redemption of short-term investments........................ 140,232,288 334,784,805 15,716,919 --------------- -------------- -------------- 5,748,607 (43,709,917) (37,404,077) --------------- -------------- -------------- CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES Preferred shares issued, net of expenses.................... -- -- 22,719,748 Warrants issued in connection with preferred shares......... -- -- 6,397,448 Common shares issued, net of expenses....................... 24,026,825 80,929,608 29,009,385 Repayment of notes payable.................................. -- -- (4,100,000) Other equity................................................ -- -- 29,851 Repayment of loan from an officer .......................... -- -- 323,405 --------------- -------------- -------------- 24,026,825 80,929,608 54,379,837 --------------- -------------- -------------- EFFECT OF EXCHANGE RATE FLUCTUATIONS ON CASH BALANCES.......... 71,164 217,143 (2,284) --------------- -------------- -------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS DURING THE YEAR............................................. (2,974,208) 15,683,318 (3,372,939) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................ 18,476,303 2,792,985 6,165,924 --------------- -------------- -------------- CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 15,502,095 $ 18,476,303 $ 2,792,985 =============== ============== ============== SUPPLEMENTAL INFORMATION Interest paid............................................... $ 8,402 $ 16,536 $ 786,585 Income taxes paid........................................... $ $ -- $ --
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED 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 to improve the treatment of selected diseases. The Company's products are intended for clinical diagnostic and research purposes. Prior to marketing some of its products for use in the clinical diagnostic market, the Company will require appropriate regulatory approval. In September 2001, the Company received clearance from the United States Food and Drug Administration ("FDA") to market its TRUGENE(TM) HIV-1 Genotyping Kit and OpenGene(TM) DNA Sequencing System for clinical use in the United States. In addition, the Company has obtained appropriate regulatory approval to market such product in Canada, France and Argentina. 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 France S.A.S., Visible Genetics Israel Ltd., Visible Genetics Iberia SL, Visible Genetics UK Ltd., Visible Genetics Srl. and Visible Genetics Portugal, Unipessoal, Lda. 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 NOTE 2 - CONTINUED 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 into 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, 2001 and December 31, 2000 range from one to five 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 and accounts 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, 2001 and December 31, 2000 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 and amortization 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 NOTE 2 - CONTINUED 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 statements 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 statements 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 $1,607,000, $811,000 and $560,000 for 2001, 2000 and 1999, 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 F-9 VISIBLE GENETICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - CONTINUED 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. 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 are calculated using the weighted average number of common shares outstanding during the year. Diluted earnings (loss) per share are 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, 2001, 2000 and 1999. 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. RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets". These new standards eliminate pooling as a method of accounting for business combinations and feature new accounting rules for goodwill and intangible assets. The Company does not foresee any impact on a cumulative effect of an accounting change or on the carrying values of assets and liabilities recorded in the consolidated balance sheets upon adoption. SFAS No. 141 is effective for business combinations initiated from July 1, 2001. SFAS No. 142 will be adopted on January 1, 2002. Also issued in June 2001 was SFAS No. 143, "Accounting for Asset Retirement Obligations". This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. The Company is analyzing the impact of SFAS No. 143 and will adopt the standard on January 1, 2003. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets". This statement addresses accounting for discontinued operations and the impairment or F-10 VISIBLE GENETICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - CONTINUED disposal of long-lived assets. The Company is analyzing the impact of SFAS No. 144 and will adopt the standard on January 1, 2002. 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) (Applera) (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. Hoffman-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. Uracil-DNA-glycosylase (UDG) 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 $605,000 and $642,000, relating to royalties payable at December 31, 2001 and 2000, respectively. DISTRIBUTION AGREEMENTS Commencing in 1999, the Company entered into various distribution and marketing arrangements with distributors to sell the Company's products to the research and clinical diagnostic markets in selected geographic markets outside North America and certain European countries. NOTE 4 - OTHER RECEIVABLES
DECEMBER 31 ----------------------------------------- 2001 2000 --------------- -------------- Refundable taxes.................................. $ 367,962 $ 753,521 Other............................................. 69,926 131,474 --------------- -------------- $ 437,888 $ 884,995 =============== ==============
F-11 VISIBLE GENETICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 - INVENTORY
DECEMBER 31 ----------------------------------------- 2001 2000 --------------- -------------- Raw materials...................................... $ 939,622 $ 988,927 Work in process.................................... 258,935 149,078 Finished goods..................................... 1,558,393 1,130,872 --------------- -------------- $ 2,756,950 $ 2,268,877 =============== ==============
NOTE 6 - FIXED ASSETS
DECEMBER 31 ----------------------------------------- 2001 2000 --------------- -------------- COST Laboratory and computer equipment............ $ 14,302,970 $ 10,638,719 Equipment on loan to customers............... 3,291,654 1,632,286 Leasehold improvements....................... 11,968,882 4,673,064 --------------- -------------- 29,563,506 16,944,069 --------------- -------------- ACCUMULATED DEPRECIATION AND AMORTIZATION Laboratory and computer equipment............ 7,726,365 5,303,454 Equipment on loan to customers............... 1,764,426 492,592 Leasehold improvements....................... 1,415,720 855,741 --------------- -------------- 10,906,511 6,651,787 --------------- -------------- $ 18,656,995 $ 10,292,282 =============== ==============
NOTE 7 - PATENTS AND LICENSES In April 2000, the Company entered into a worldwide licensing and collaboration agreement with 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 the Company to provide access to technology to facilitate the Company's development and commercialization of new diagnostic tests using the licensed technology. In June 2000 and 2001, the Company paid Applera licensing fees of $10 million and $5 million, respectively, and will pay additional licensing fees totaling $10 million over the next two years. The Company is amortizing the cost of the license fee on a straight-line basis over a ten-year period. In 2001 and 2000, amortization expense related to this agreement was $2,500,000 and $1,743,054, respectively, and is included in "sales, general and administrative" expenses in the consolidated statements of operations. In return for access to the Applera technology and customer base the Company also makes royalty payments to Applera based on sales. The Company may terminate the agreement upon 60 days' F-12 VISIBLE GENETICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. (Genaissance) 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 2001 and 2000, the Company recorded $205,000 and $162,565, respectively, in amortization expense related to this agreement and is included in "sales, general and administrative" expenses in the consolidated statements of operations. The Company's investment in patents and licenses is as follows:
DECEMBER 31 ---------------------------------------- 2001 2000 -------------- -------------- COST Patents................................... $ 1,082,166 $ 1,280,479 Licenses.................................. 18,763,408 13,665,283 --------------- -------------- 19,845,574 14,945,762 --------------- -------------- ACCUMULATED AMORTIZATION Patents................................... 291,505 400,391 Licenses.................................. 5,217,630 2,363,259 --------------- -------------- 5,509,135 2,763,650 --------------- -------------- $ 14,336,439 $ 12,182,112 =============== ==============
The net book value of patents and licenses at December 31, 2001 reflects an impairment loss of $51,451 and $13,563 respectively, recorded during the year. The net book value of patents and licenses at December 31, 2000 reflects impairment losses of $100,045 and $42,120, respectively, recorded during the year. 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 consolidated statements of operations. F-13 VISIBLE GENETICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8 - ACCRUED LIABILITIES
DECEMBER 31 ---------------------------------------- 2001 2000 ---- ---- Warranty provision................................ $ 397,256 $ 378,593 Salaries and benefits............................. 879,252 1,849,879 Professional fees................................. 589,748 425,995 Value added taxes................................. 469,285 796,705 Provision for exit costs.......................... 1,462,539 332,650 Grant payable..................................... 262,876 357,132 Inventory and supplies............................ 264,132 473,448 Other............................................. 756,726 651,462 --------------- -------------- $ 5,081,814 $ 5,265,864 =============== ==============
NOTE 9 - MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SHARES (a) AUTHORIZED AND ISSUED Authorized share capital consists of an unlimited number of preferred shares, which may be issued in one or more series. On July 15, 1999, the Board of Directors authorized the issuance of 33,950 Series A 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, or in the absence of other equity against deficit, over seven years, the time period when redemption of the Series A Shares first becomes mandatory. F-14 VISIBLE GENETICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9 - CONTINUED (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. The initial conversion price was $11.00, subject to certain adjustments. As a result of the December 24, 2001, sale of 2,637,890 of the Company's common shares at a price of $8.34 per common share the conversion price of the Series A Shares was adjusted to $10.72. Upon conversion, the holders will also receive common shares at a conversion price of $10.72 per share, equal to the amount of all accrued and unpaid dividends. On March 15, 2001 a holder of 3,948 Series A Shares converted a total of 1,000 of the Series A Shares, plus a total of $139,050 of dividends that accrued on those shares, into 103,550 of the Company's common shares. Upon conversion of the 1,000 Series A Shares, $938,221 attributable to such shares and carried in Mandatorily Redeemable Convertible Preferred Shares on the consolidated balance sheets was transferred to share capital. 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 consolidated balance sheets. As of December 31, 2001, a total of 25,153 Series A Shares remain outstanding and such shares, including dividends accrued on such shares through December 31, 2001, are convertible into 2,901,894 shares of the Company's common shares. The Series A Shares contain provisions under which the conversion price would be further 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. The dividends will be charged directly to retained earnings, or in the absence of retained earnings, against other equity, or in the absence of other equity, against the deficit. F-15 VISIBLE GENETICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9 - CONTINUED 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 the Board of Directors, who will continue to serve until the Company has redeemed the Series A Shares as required. 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. F-16 VISIBLE GENETICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 - SHARE CAPITAL (a) AUTHORIZED AND ISSUED SHARE CAPITAL Authorized share capital consists of an unlimited number of common shares, without par value.
NUMBER OF AVERAGE COMMON ISSUE SHARES PRICE AMOUNT ------ ----- ------ BALANCE, DECEMBER 31, 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 ========== ============== Issued for cash under stock option arrangements ...... 205,997 $ 13.93 2,869,105 Issued upon exercise of warrants...................... 5,135 $ 9.15 46,995 Issued upon conversion of Series A preferred shares... 103,550 $ 9.06 938,221 Issued for private placement offering, net of issue costs............................................... 2,637,890 $ 8.28 21,837,184 ---------- -------------- BALANCE, DECEMBER 31, 2001.............................. 19,197,191 $ 195,408,884 ========== ==============
On December 24, 2001, the Company completed a private placement of 2,637,890 common shares at a price of $8.34 per share before fees and expenses. 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. VISIBLE GENETICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 - CONTINUED (b) OTHER EQUITY
DECEMBER 31 ----------- 2001 2000 1999 ---- ---- ---- Options................................................ $ 322,838 $ 922,714 922,714 Warrants............................................... 3,494,688 3,615,890 9,782,470 Contributed surplus.................................... 61,250 61,250 61,250 Cumulative preferred dividends attributable to Series A Shares...................................... (6,806,046) (4,231,179) (1,400,344) Cumulative accretion of discount attributable to Series A Shares...................................... (2,047,207) (1,195,246) (369,728) Employee share purchase loans.......................... - - (9,034) Cumulative preferred dividends and accretion of discount attributable to preferred stock transferred to deficit............................... 4,974,477 826,571 - ------------- -------------- ---------- $ - $ - 8,987,328 ============= ============== ==========
(c) 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, 2001, an additional 26,791 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 canceled if employment is terminated within three to four years. The number of options that may be canceled 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. On August 21, 2001, the Board of Directors voted to amend the 2000 Employee Share Option Plan (the Plan) to increase the number of options available for grant under the Plan from 1,000,000 to 2,000,000 common shares. Such increase is subject to shareholder approval and is expected to be voted on at the next shareholders' meeting. At December 31, 2001, contingent upon shareholder approval of the increase in the number of options available for grant under the Plan from 1,000,000 to 2,000,000, the Company had granted a total of 216,000 options at a weighed average exercise price of $9.40 per share. Should the shareholders not approve the increase in options available for grant, such options would automatically be canceled. Accordingly, in the following tables such options are not considered to be outstanding. F-18 VISIBLE GENETICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 - CONTINUED
WEIGHTED AVERAGE NUMBER EXERCISE PRICE ------ -------------- 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 Canceled........................................ (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 Canceled........................................ (86,770) $ 5.17 --------- BALANCE, DECEMBER 31, 2000........................ 1,763,396 $ 17.57 ========= ======= Granted at $9.35 to $35.81...................... 673,950 $ 18.60 Exercised....................................... (205,997) $ 9.45 Canceled........................................ (108,873) $ 25.66 --------- BALANCE, DECEMBER 31, 2001........................ 2,122,476 $ 17.83 ========= =======
The fair market value of options granted to directors and employees in 2001 was approximately $7,859,000 (2000 - $13,058,000; 1999 - $6,689,000). If directors' and employee options granted had been recorded at their fair market value, the pro forma net loss attributable to common shareholders in 2001 would have been $(51,540,000) or $(3.13) per share (2000 - $(41,723,000) or $(2.86) per share; 1999 - $(30,533,000) or $(3.08) 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) - 3.5% (2000 and 1999 - 5.5%), average expected volatility - 70% (2000 - 85%; 1999 - - 70%), expected average option term - 4 years (2000 - 4.5 years; 1999 - 4 years). The weighted average fair value for options granted in 2001 was $11.66 (2000 - $21.44; 1999 - $6.68). 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-19 VISIBLE GENETICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 - CONTINUED
WEIGHTED NUMBER AVERAGE EXERCISE NUMBER WEIGHTED AVERAGE OUTSTANDING AT PRICE OF WEIGHTED EXERCISABLE AT EXERCISE PRICE RANGE OF DECEMBER 31, OUTSTANDING AVERAGE DECEMBER 31, OF EXERCISABLE EXERCISE PRICES 2001 OPTIONS REMAINING LIFE 2001 OPTIONS --------------- -------------- ---------------- -------------- -------------- ---------------- $.92-$2.36 70,683 $ 1.52 3.21 years 70,683 $ 1.52 $3.50 135,288 $ 3.50 4.39 years 135,288 $ 3.50 $6.07 1,200 $ 6.07 5.64 years 1,200 $ 6.07 $7.12-$7.87 47,002 $ 7.78 6.16 years 47,002 $ 7.78 $8.00-$9.90 214,702 $ 8.99 7.58 years 169,534 $ 8.93 $10.00-$11.50 399,000 $10.92 8.09 years 168,677 $10.91 $11.76-$16.94 439,286 $15.23 8.78 years 115,625 $15.44 $17.00-$20.88 246,945 $18.87 9.20 years 29,896 $18.07 $21.00-$29.94 119,508 $24.28 8.87 years 26,845 $25.21 $30.00-$39.13 333,237 $33.08 8.65 years 135,938 $32.90 $41.00-$44.88 36,625 $43.22 8.68 years 12,015 $43.20 $45.88-$53.00 79,000 $48.90 8.10 years 29,625 $48.90 --------- ------- 2,122,476 942,328 ========= =======
(d) WARRANTS
EXERCISE NUMBER PRICE EXPIRY DATE ------ -------- ----------- BALANCE, DECEMBER 31, 1998.................................. 741,754 ========= Granted in connection with loans ......................... 140,000 $17.00 April, 2006 Granted in connection with Series A 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 ========== Adjustment to number of warrants granted in connection with Series A Shares........................ 5,322 $12.16 July, 2003 Exercised................................................. (12,576) $12.81 ---------- BALANCE, DECEMBER 31, 2001 941,795 ==========
As a result of the December 24, 2001, sale of 2,637,890 of the Company's common shares, the number of unexercised warrants granted in connection with the Series A Shares was increased by 5,322 and the exercise price of the 152,420 unexercised warrants granted in connection with the Series A Shares was adjusted to $12.16. F-20 VISIBLE GENETICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 - CONTINUED On July 9, 2001, warrants to purchase 12,576 common shares were exercised at a price of $12.81 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 5,135 common shares rather than 12,576 common shares they would otherwise have received upon exercise in cash of all of their warrants. 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 the 1,100,000 common shares they would otherwise have received upon exercise in cash of all of their warrants. NOTE 11 - EXIT AND TERMINATION COSTS EXIT COSTS In September 2001, the Company acquired the Cambridge, England research laboratory of Virco UK Ltd., together with substantially all the research staff of approximately 25 scientists. The Company paid approximately $830,000 for the laboratory assets and assumed the lease of a 20,000 square foot building, which houses the laboratory. The Cambridge facility is the Company's principal international research facility. During 2001, concurrent with the acquisition of the Cambridge research facility and related staff, the Company approved a plan to close the Company's Toronto, Canada research facility. Also, during 2001, the Company approved a plan to close its Pittsburgh manufacturing facility and move all of its kit manufacturing operations to production lines in the Company's Atlanta facility. As a result of the decisions to close the Toronto research and the Pittsburgh manufacturing facilities certain employees have been or will be terminated and the research and production facilities in Toronto and Pittsburgh will be vacated. Accordingly, during 2001 the Company recorded a charge of $1,180,000 related to the closure of the Toronto research facility and a separate $540,000 charge related to the closure of the Pittsburgh manufacturing facility. Such charges, which are reflected in the consolidated statements of operations in 2001, represent costs related to employee severance, the remaining future lease commitments, net of estimated sub-lease income, the unamortized balance of leasehold improvements, and other estimated costs of closing such facilities. As of December 31, 2001, approximately $608,000 of these costs were paid and the balance is included in accrued liabilities. During 1999, the Company approved a plan to move the sales, marketing and various other functions from Canada to the Company's United States facility in Atlanta. In 2000 these functions were moved to the United States 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 sub-lease the premises to be vacated. Accordingly, the Company recorded a charge of approximately $790,000 in the consolidated statements of operations in 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. During 2001 the sub-lessee on one of the facilities that had been sub-leased in 2000 declared bankruptcy and as a result the Company took back the facility and sub-leased the facility to another organization. As a result, during 2001 the Company recorded an additional charge in the consolidated statements of operations of $200,000 to reflect the costs to again sub-lease this facility. F-21 VISIBLE GENETICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 consolidated statements of operations in 1999. NOTE 12 - INCOME TAXES The Company's income tax provision has been determined as follows:
YEARS ENDED DECEMBER 31 ------------------------------------------------------------------ 2001 2000 1999 ---- ---- ---- Net loss for the period comprised of Domestic................................. $ (17,862,925) $ (10,170,354) $ (8,081,807) Foreign.................................. (22,790,809) (21,603,782) (17,205,078) ----------------- --------------- ---------------- $ (40,653,734) $ (31,774,136) $ (25,286,885) ================= =============== ================ Income taxes at 41.75% (44%-2000; 44.6%-1999) $ (16,970,901) $ (13,964,733) $ (11,283,008) Decrease resulting from permanent non- tax deductible expense................... 866,623 1,486,785 736,478 Decrease resulting from foreign rate differences.............................. 354,936 649,188 835,867 Net operating loss and temporary differences for which no benefit has been recognized..... 15,749,342 11,828,760 9,710,663 ----------------- --------------- ---------------- $ - $ - $ - ================= =============== ================
As at December 31, 2001, 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 UNITED STATES NETHERLANDS FRANCE JURISDICTIONS ------ ------------- ----------- ------ ------------- 2002 $ 1,347,000 $ - $ - $ - $ - 2003 2,590,000 - - - - 2004 5,642,000 - - - - 2005 3,366,000 - - 223,000 778,000 2006 3,376,000 - - 1,991,000 541,000 2007 4,476,000 - - - - 2008 8,284,000 - - - - 2010 - - - - 429,000 2011 - - - - 663,000 2012 - 1,238,000 - - - 2018 - 3,962,000 - - - 2019 - 6,514,000 - - - 2020 - 11,913,000 - - - 2021 - 20,609,000 - - - Subsequent to 2021 - - 12,870,000 - 3,365,000 ----------- ------------- ----------- ---------- ---------- TOTAL $29,081,000 $ 44,236,000 $12,870,000 $2,214,000 $5,776,000 =========== ============= =========== ========== ==========
F-22 VISIBLE GENETICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12 - CONTINUED 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 $15,864,500 at December 31, 2001. In addition, the Company has earned non-refundable investment tax credits amounting to approximately $3,756,000 that can be used to reduce future federal income taxes payable. These tax credits expire as follows: 2006 $ 459,000 2007 381,000 2008 452,000 2009 758,000 2010 773,000 2011 933,000 ---------- $3,756,000 ==========
The benefit of these losses, unclaimed deductions and non-refundable investment tax credits has not been reflected in these consolidated financial statements. The deferred tax balances are summarized as follows:
DECEMBER 31, ------------ 2001 2000 ---- ---- DEFERRED TAX ASSETS Research expenses................................. $ 4,778,400 $ 6,989,800 Non-capital losses................................ 34,959,000 20,903,500 Investment tax credits............................ 2,624,700 1,704,300 Fixed assets...................................... 3,116,000 2,414,800 Share issue costs................................. 1,143,200 2,662,900 Warranty and other provisions..................... 1,433,100 537,300 ---------------- ---------------- 48,054,400 35,212,600 Valuation allowance............................... (48,054,400) (35,212,600) ---------------- ---------------- Net deferred tax asset (liability)................ $ - $ - ================ ================
The valuation allowance increased by $12,841,800 during 2001 (2000 - $9,203,900). 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 13 - 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, Genotyping Kits and Other Consumables, and Testing Services. The accounting F-23 VISIBLE GENETICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 13 - CONTINUED policies of the segments are the same as those described above in Note 2, "Summary of significant accounting policies."
2001 GENOTYPING KITS SEQUENCING AND OTHER TESTING RECONCILING SYSTEMS CONSUMABLES SERVICES ITEMS TOTAL ---------- -------------- -------- ----------- ----- Revenues.................... $ 2,667,994 $ 10,662,352 $ 249,568 $ - $ 13,579,914 Depreciation and amortization.............. (1,932,063) (5,151,120) (703,580) - (7,786,763) Loss from operations before interest........... (8,714,785) (34,316,948) (127,296) - (43,159,029) Additions to fixed assets... 568,102 12,483,334 140,601 - 13,192,037 Total assets................ 3,049,353 35,717,218 1,407,653 53,194,851(1) 93,369,075 2000 GENOTYPING KITS SEQUENCING 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) 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................ 3,254,096 24,356,264 2,166,347 80,398,990(1) 110,175,697 1999 GENOTYPING KITS SEQUENCING 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 42,687,963(1) 58,639,549
Reconciling items consist of: (1) Cash, cash equivalents and short-term investments F-24 VISIBLE GENETICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 13 - CONTINUED
GEOGRAPHIC INFORMATION REVENUES, BY CUSTOMER LOCATION YEARS ENDED DECEMBER 31 ------------------------------ -------------------------------------------------------------- 2001 2000 1999 ---- ---- ---- Canada $ 357,495 $ 822,568 $ 468,535 United States 6,239,804 5,798,864 4,686,868 ------------- ------------ ------------ North America 6,597,299 6,621,432 5,155,403 ------------- ------------ ------------ France 855,379 760,742 1,252,222 Italy 1,295,486 839,243 602,484 Other Europe 3,217,229 3,371,016 3,696,261 ------------- ------------ ------------ Europe 5,368,094 4,971,001 5,550,967 ------------- ------------ ------------ Japan 1,195,099 927,644 1,609,799 Other Asia and Latin America 419,422 552,486 1,310,751 ------------- ------------ ------------ Asia and Latin America 1,614,521 1,480,130 2,920,550 ------------- ------------ ------------ $ 13,579,914 $ 13,072,563 $ 13,626,920 ============= ============ ============ GEOGRAPHIC INFORMATION FIXED ASSETS DECEMBER 31 ------------ -------------------------------------------------------------- 2001 2000 1999 ---- ---- ---- Canada $ 1,790,281 $ 2,614,017 $ 2,530,222 United States 14,710,160 6,486,653 955,161 Europe 2,156,554 1,191,612 687,952 ------------- ------------ ----------- $ 18,656,995 $ 10,292,282 $ 4,173,335 ============= =========== ============
In 2001, one customer accounted for 9% of sales, of which 8% comprised Sequencing Systems and 1% comprised Genotyping Kits and Other Consumables. (2000 - - one customer accounted for 11% of sales, of which 10% comprised Sequencing Systems and 1% comprised Genotyping Kits and Other Consumables; 1999 - one customer accounted for 21% of sales, of which 19% comprised Sequencing Systems and 2% comprised Genotyping Kits and Other Consumables). F-25 VISIBLE GENETICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 14 - 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 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: 2002 $ 1,803,010 2003 1,030,443 2004 926,480 2005 1,077,553 2006 and thereafter 6,088,748 ----------------- $ 10,926,234 =================
Rent expense was $2,329,495 in 2001 (2000 - $1,768,346; 1999 - $851,876). CONTINGENCIES During 2000 and 2001 the Company sub-leased certain facilities it had vacated (see Note 11). In the event of default by the sub-lessees the Company remains contingently liable for remaining future lease commitments of approximately $1,568,000 related to these sub-leases. In September 2001, a lawsuit was filed in the United States District Court for the Northern District of California against the Company by The Board of Trustees of the Leland Stanford Junior University claiming that the Company's TRUGENE HIV-1 Genotyping Kit infringes patents owned by the university. The Company has received an attorney opinion that it does not infringe any claim of the patents-in-suit. No amount has been provided in these consolidated financial statements in respect of these allegations, as the amount of loss, if any, cannot be determined and the results of such allegations cannot be predicted with certainty. NOTE 15 - RELATED PARTY TRANSACTIONS During 2001, the Company incurred consulting fees to a director of the Company in the amount of $13,283 (2000 and 1999 - nil). During 2000, the Company incurred consulting fees to a firm, of which the president was a director of the Company, in the amount of $64,487 (1999 - $291,115). During 2000, the Company incurred legal fees to a law firm, in which a partner was a former director of the Company, in the amount of $10,939 (2001 - nil; 1999 - $246,210). During 2000, the Company also incurred consulting fees to a former director of the Company, in the amount of $28,250 (2001 - nil; 1999 - $58,269). NOTE 16 - COMPARATIVE FIGURES Certain comparative figures have been reclassified to conform to the financial statement presentation adopted in the current year. F-26 VISIBLE GENETICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 17 - SUBSEQUENT EVENT On February 27, 2002, the Company received notice of a lawsuit that has been filed in Milan, Italy against Visible Genetics Inc. and two of the Company's wholly-owned subsidiaries by Nuclear Laser Medicine Srl. The lawsuit seeks unspecified damages and specific performance relating to an alleged distribution agreement pertaining to the Company's Hepatitis C and HIV products in Italy. No amount has been provided in these consolidated financial statements in respect of these allegations, as the amount of loss, if any, cannot be determined and the results of such allegations cannot be predicted with certainty. F-27 EXHIBIT INDEX
EXHIBITS NUMBER DESCRIPTION OF DOCUMENT PAGE - ------ ----------------------- ---- 8 See Item 4. Information on the Company-Organizational Structure 10.27 Common Shares Purchase Agreement, dated December 24, 2001, by and among Visible Genetics Inc. and the Investors who are signatories thereto. 10.28 Registration Rights Agreement, dated December 24, 2001, by and among Visible Genetics Inc. and the Investors who are signatories thereto. 10.29 Amended and Restated Employment Agreement, dated as of February 1, 2002, among Visible Genetics Corporation, Visible Genetics Inc. and Richard T. Daly. 10.30 Amended and Restated Employment Agreement, dated as of February 1, 2002, among Visible Genetics Inc., Visible Genetics UK Ltd. and Arthur Cole. 10.31 Employment Agreement, dated as of February 1, 2002, among Visible Genetics Inc., Visible Genetics Corporation and Thomas J. Clarke. 10.32 Employment Agreement, dated as of February 1, 2002, among Visible Genetics Inc., Visible Genetics Corporation and Tim Ellis. 10.33 Employment Agreement, dated as of February 1, 2002, between Visible Genetics Inc. and Marguerite Ethier. 10.34 Service Agreement, dated December 15, 2001, between Visible Genetics UK Ltd. and Brendan Larder. 10.35 Deed, dated September 12, 2001, by and among Visible Genetics Inc., Visible Genetics UK Ltd., Virco U.K. Limited and Tibotec-Virco N.V. 10.36 Licence to Assign, dated October 10, 2001, by and among Visible Genetics Inc., Visible Genetics UK Ltd., Virco UK Limited and The Master Fellows and Scholars of Trinity College Cambridge, including that certain Lease, dated January 19, 1999, by and among The Master Fellows and Scholars of Trinity College Cambridge, Virco U.K. Limited and Virco NV, attached as Schedule A thereto.
EX-10.27 3 a2080893zex-10_27.txt EXHIBIT 10.27 EXHIBIT 10.27 VISIBLE GENETICS INC. --------------------- COMMON SHARE PURCHASE AGREEMENT ------------------------------- DECEMBER 24, 2001 TO EACH OF THE INVESTORS WHO ARE SIGNATORIES HERETO Ladies and Gentlemen: Visible Genetics Inc., an Ontario corporation (the "COMPANY"), hereby agrees with each of you as follows: 1. AGREEMENT TO SELL AND PURCHASE THE SHARES. 1.1 SALE OF SHARES. Subject to the terms of this Common Share Purchase Agreement (this "PURCHASE AGREEMENT"), at the Closing (as defined in Section 3.1 hereof), the Company agrees to sell to each of the Investors who has executed a counterpart execution page to this Purchase Agreement (each, "INVESTOR"), and each Investor agrees to purchase from the Company, the aggregate number of common shares, without par value ("COMMON SHARES") set forth above such Investor's signature on the counterpart execution page hereof, at a purchase price of $US8.34, PROVIDED, THAT, the aggregate purchase price for the Shares sold to the Investors pursuant to this Agreement shall be $22 million. The Common Shares sold hereunder shall be referred to herein as the "SHARES." 1.2 SEPARATE AGREEMENT. Each Investor shall severally, and not jointly, be liable for only the purchase of the Shares that appears above such Investor's signature and that relates to such Investor. The Company's agreement with each of the Investors is a separate agreement, and the sale of Shares to each of the Investors is a separate sale. The obligations of each Investor hereunder are expressly not conditioned on the purchase by any or all of the other Shares such other Investors have agreed to purchase. 1.3 ACCEPTANCE OF PROPOSED PURCHASE OF SHARES. Each Investor understands and agrees that the Company, in its sole discretion, reserves the right to accept or reject, in whole or in part, any proposed purchase of Shares. The Company shall have no obligation hereunder with respect to any Investors until the Company shall execute and deliver to such Investors an executed copy of this Purchase Agreement. If this Purchase Agreement is not executed and delivered by the Company or the offering is terminated, this Purchase Agreement shall be of no further force and effect. 1.4 USE OF PROCEEDS. The proceeds of the sale of Shares by the Company may be used for general corporate purposes. 2. CLOSING AND DELIVERY. 2.1 CLOSING. The closing of the purchase and sale of the Shares pursuant to this Purchase Agreement (the "CLOSING") shall be held contemporaneously with the satisfaction or waiver of all conditions to Closing set forth in Sections 5 and 6 hereof. The Closing shall take place on December 24, 2001 at the offices of Baer Marks & Upham LLP, located at 805 Third Avenue, New York, New York, or on such other date and place as may be agreed to by the Company and the Investors. Prior to the Closing, each Investors shall execute any related agreements or other documents required to be executed hereunder. 2.2 DELIVERY OF THE SHARES AT THE CLOSING. At the Closing, the Company shall deliver to each Investor stock certificates registered in the name of such Investor, or in such nominee name(s) as designated by such Investor, representing the Shares to be purchased by such Investor at the Closing as set forth in the Schedule of Investors against payment of the purchase price for such Shares by means of a wire transfer of same day funds to an account designated by the Company in a written notice to MPM BioEquities Master Fund, LLC ("MPM"). The name(s) in which the stock certificates are to be issued to each Investor are set forth in the Investor's counterpart execution page hereto, as completed by each Investor. 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to the Investors that: 3.1 CORPORATE ORGANIZATION (a) The Company is a corporation duly organized, validly existing and in good standing under the laws of the Province of Ontario. True and complete copies of the Company's Restated Articles of Incorporation, Articles of Amendment dated July 15, 1999 ("ARTICLES OF AMENDMENT") and By-law No. 3 (collectively, the "ORGANIZATIONAL DOCUMENTS") have been provided to the Investors. (b) The Company has all requisite power and authority and has all necessary approvals, licenses, permits and authorization to own, operate or lease its properties and to carry on its business as now conducted, except where the failure to have any such approval, license, permit or authorization would not reasonably be expected to have a material adverse effect on the business, properties, prospects or financial condition of the Company and its subsidiaries taken as a whole (a "MATERIAL ADVERSE EFFECT"). The Company has all requisite power and authority to execute and deliver this Purchase Agreement and the Registration Rights Agreement dated the date hereof between the Company and the Investors (the "REGISTRATION RIGHTS AGREEMENT" and with the Purchase Agreement, the "TRANSACTION DOCUMENTS") and to perform its obligations hereunder and thereunder. (c) The Company has filed all necessary documents to qualify to do business as a foreign corporation in, and the Company is in good standing under the laws of, each jurisdiction in which the conduct of the Company's business or the nature of the properties 2 owned or leased by the Company requires such qualification, except where the failure to so qualify would not reasonably be expected to have a Material Adverse Effect. 3.2 SUBSIDIARIES (a) SCHEDULE 3.2 sets forth; (i) the name of each subsidiary of the Company, other than subsidiaries that are dormant or that do not carry on business activities; (ii) the name of each corporation, partnership, joint venture or other entity (other than such subsidiaries) in which the Company or any of its subsidiaries has, or pursuant to any agreement has the right or obligation to acquire at any time by any means, directly or indirectly, an equity interest or investment; (iii) in the case of each of such corporations described in clauses (i) and (ii) above, (A) the jurisdiction of incorporation and (B) the capitalization thereof and the percentage of each class of voting capital stock owned by the Company or any of its subsidiaries. (b) Each subsidiary of the Company listed on SCHEDULE 3.2 has been duly organized, is validly existing and in good standing under the laws of the jurisdiction of its organization, has the corporate power and authority to own and lease its properties and to conduct its business and is duly registered, qualified and authorized to transact business and is in good standing in each jurisdiction in which the conduct of its business or the nature of its properties requires such registration, qualification or authorization, except where the failure to be so qualified would not reasonably be expected to have a Material Adverse Effect. All of the issued and outstanding equity or other participating interests of each subsidiary have been duly authorized and validly issued, are fully paid and non-assessable, and, to the extent owned by the Company as indicated on SCHEDULE 3.2, are owned free and clear of any mortgage, pledge, lien, encumbrance, security interest, claim or equity, except as set forth on SCHEDULE 3.2. (c) For purposes of this Purchase Agreement, "SUBSIDIARY" shall mean any (i) Person (as hereinafter defined in Section 3.5) of which the Company (or other specified Person) shall own directly or indirectly through a subsidiary, a nominee arrangement or otherwise (A) at least a majority of the outstanding voting capital stock (or other outstanding voting shares of beneficial interest) or (B) at least a majority of the partnership, membership, joint venture or similar interests, or (ii) in which the Company (or other specified Person) is a general partner or joint venturer. 3.3 CAPITALIZATION (a) The authorized capital stock of the Company consists of an unlimited number of shares of Common Shares and an unlimited number of preferred shares, without par value ("PREFERRED SHARES"). As of the close of business on December 20, 2001, 16,559,301 Common Shares were issued and outstanding, (ii) 25,153 Series A Convertible Preferred Shares, without par value ("SERIES A PREFERRED SHARES"), were issued and outstanding, which, including dividends accrued through October 15, 2001, were convertible into 2,777,880 Common Shares, (iii) 2,401,639 Common Shares were outstanding under the Company's employee stock option plans listed on SCHEDULE 3.3(A), (iv) 936,473 Common Shares were reserved for issuance under the Company's outstanding warrants, and (v) there were no bonds, debentures, notes or other 3 evidences of indebtedness issued or outstanding having the right to vote on any matters on which the Company's shareholders may vote. From December 20, 2001 to the date hereof, the Company has not issued any shares or capital stock nor has the Company issued any instruments convertible into shares of capital stock. (b) All of the outstanding Common Shares and Preferred Shares of the Company have been duly and validly issued and are fully paid and non-assessable, and were issued in accordance with all applicable United States federal and state and Canadian federal and provincial securities laws. Upon issuance, sale and delivery as contemplated by this Purchase Agreement, the Shares will be duly authorized, validly issued, fully paid and non-assessable shares, free of all preemptive or similar rights. (c) Except for the rights which attach to the outstanding Series A Preferred Shares as described in the Articles of Amendment of the Company and the options which are listed on SCHEDULE 3.3(A) and the warrants, options and convertible securities which are listed on SCHEDULE 3.3(C) hereto, on the Closing Date, there will be no shares of Common Shares, Preferred Shares or any other equity security of the Company issuable upon exercise, conversion or exchange of any security of the Company nor will there be any rights, options or warrants outstanding or other agreements to acquire shares of Common Shares or any other equity security of the Company nor will the Company be contractually obligated to purchase, redeem or otherwise acquire any outstanding shares of Common Shares. Except as set forth on SCHEDULE 3.3(C), (i) no stockholder of the Company is entitled to any preemptive or similar rights to subscribe for shares of capital stock of the Company, (ii) the Company has not agreed to register any of its securities under the Securities Act (other than pursuant to the Registration Rights Agreement) and (iii) there are no existing voting trusts or similar agreements to which the Company or any of its subsidiaries is a party with respect to the voting of the capital stock of the Company or any of its subsidiaries. 3.4 CORPORATE PROCEEDINGS, ETC. The Company has full corporate power to execute and deliver each Transaction Document, to perform its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. The execution, delivery and performance of the Transaction Documents by the Company and each of the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate action on the part of the Company. No other corporate action on the part of the Company is necessary to authorize the execution, delivery and performance of the Transaction Documents by the Company and each of the transactions contemplated hereby and thereby, and upon such execution and delivery (assuming the Transaction Documents are duly authorized, executed and delivered by the other parties thereto), each of the Transaction Documents shall constitute a valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except that (i) the enforceability hereof and thereof may be subject to applicable bankruptcy, insolvency or other similar laws, now or hereinafter in effect, affecting creditors rights generally, (ii) the availability of the remedy of specific performance or injunctive or other forms of equitable relief may be subject to equitable defenses and would be subject to the discretion of the court before which any proceeding therefor may be brought, and (iii) the rights 4 to indemnity or contribution may be limited by Federal or state securities law or public policy underlying such laws. 3.5 CONSENTS AND APPROVALS. Except as set forth in SCHEDULE 3.5, the execution and delivery by the Company of the Transaction Documents, the performance by the Company of its obligations hereunder and thereunder and the consummation by the Company of the transactions contemplated hereby and thereby do not require the Company or any of its subsidiaries to obtain any consent, approval or action of, or make any filing with or give any notice to, any individual, firm, corporation, partnership, limited liability company, trust or other entity (collectively, "PERSON") or public, governmental or judicial authority or agency (collectively, "GOVERNMENTAL ENTITY"), including, but not limited to, pursuant to the Competition Act (Canada) and the Investment Canada Act, as amended. 3.6 ABSENCE OF CONFLICTS, ETC. Except as set forth in SCHEDULE 3.6, the execution and delivery by the Company of the Transaction Documents do not, and, the fulfillment of the terms hereof and thereof by the Company, and the issuance of the Shares, will not, result in a breach of any of the terms, conditions or provisions of, or constitute a default under, or permit the acceleration of rights under or termination of, the Organizational Documents, any material agreement to which the Company or its subsidiaries is a party, or any order, judgment, rule or regulation of any Governmental Entity having jurisdiction over the Company or any, of its subsidiaries or over their respective properties or businesses, except for such breaches or defaults that would not reasonably be expected to have a Material Adverse Effect. 3.7 SEC REPORTS (a) Except to the extent they may have been subsequently amended or otherwise modified prior to the date hereof by subsequent reporting or filings, as of their respective dates, the Company and each of the Company's SEC Reports (as defined below) (as the same may have been amended or otherwise modified) complied in all material respects with the requirements of the Securities Act of 1933, as amended (the "SECURITIES ACT") or the Exchange Act and the rules and regulations of the SEC thereunder applicable to such reports and registration statements, and the Company's SEC Reports did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. "SEC Reports" means the following Company reports filed or furnished by the Company with or to the United States Securities and Exchange Commission ("SEC"): (i) Annual Reports on Form 20-F for the fiscal years ended December 31, 1999 and 2000; (ii) periodic reports on Form 6-K since January 1, 2000, (iii) all other documents filed by the Company with the SEC (pursuant to Sections 13, 14(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT")) since January 1, 2000; and (iv) all registration statements since January 1, 2000. The SEC Reports are all the documents (other than preliminary material) that the Company filed or was required to file with the SEC from January 1, 2000 through the date hereof. 5 (b) The audited consolidated financial statements as at and for the period ended December 31, 2000 of the Company included in the SEC Reports (the "2000 FINANCIAL STATEMENTS") comply as to form in all material respects with accounting requirements of the Securities Act or the Exchange Act, as applicable, and with the published rules and regulations of the SEC with respect thereto. The 2000 Financial Statements (i) have been prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP") applied on a consistent basis (except as may be indicated therein or in the notes thereto), (ii) present fairly, in all material respects, the financial position of the Company and its subsidiaries as of the dates thereof and the results of their operations and cash flows for the periods then ended and (iii) are in all material respects in agreement with the books and records of the Company and its subsidiaries. (c) The unaudited interim financial statements of the Company as at and for all periods commencing on or after January 1, 2001 included in the SEC Reports comply as to form in all material respects with accounting requirements of the Securities Act or the Exchange Act, as applicable, and with the published rules and regulations of the SEC with respect thereto. The condensed financial statements included in the SEC Reports: (i) have been prepared in accordance with GAAP applied on a consistent basis (except as may be indicated therein or in the notes thereto); (ii) present fairly, in all material respects, the financial position of the Company and its subsidiaries as of the dates thereof and the results of their operations and cash flows for the periods then ended subject to normal year-end audit adjustments and any other adjustments described therein and the fact that certain information and notes have been condensed or omitted in accordance with the Exchange Act and the rules and regulations promulgated thereunder; and (iii) are in all material respects in agreement with the books and records of the Company and its subsidiaries. (d) The Company and its subsidiaries keep proper accounting records in which all material assets and liabilities, and all material transactions, of the Company and its subsidiaries are recorded in conformity with applicable accounting principles. No part of the Company's or any of its subsidiaries, accounting system or records, or access thereto, is under the control of a Person who is not an employee of the Company or such subsidiary. 3.8 ABSENCE OF CERTAIN DEVELOPMENTS. Except as disclosed in the SEC Reports filed with or furnished to the SEC on or prior to the date hereof or in SCHEDULE 3.8, and except for the transactions contemplated by this Purchase Agreement, since December 31, 2000, (i) the Company and each of its subsidiaries has conducted its business only in the ordinary and usual course in accordance with past practice, and (ii) there have not occurred any events or changes (including the incurrence of any liabilities of any nature, whether or not accrued, contingent or otherwise) that have had, or is reasonably likely in the future to have, individually or in the aggregate, a Material Adverse Effect. 3.9 COMPLIANCE WITH LAW (a) Neither the Company nor any of its subsidiaries is in violation of any laws, ordinances, governmental rules or regulations to which it is subject, except for violations which 6 would not reasonably be expected to have a Material Adverse Effect, including without limitation laws or regulations relating to human therapeutic or diagnostic products or devices, the environment or to occupational health and safety and, except as set forth in SCHEDULE 3.9, no material expenditures are or will be required in order to cause its current operations or properties to comply with any such law, ordinances, governmental rules or regulations. Neither the Company nor any of its subsidiaries has received written notice of violation of any law, ordinance, governmental rule or regulation, which if violated, would reasonably be expected to have a Material Adverse Effect. No investigation or review by any Governmental Entity with respect to the Company or any of its subsidiaries is pending or, to the best of the Company's knowledge, threatened nor has any Governmental Entity indicated an intention to conduct the same, except for an investigation or review conducted as a result of an application or other filing made by the Company. (b) Neither the Company nor any of its subsidiaries nor, to the Company's knowledge, any of the officers, directors, employees, agents or other representatives of the Company or any of its subsidiaries or affiliates (as that term is defined in Rule 405 promulgated under the Securities Act ("AFFILIATES")), has, directly or indirectly, made or authorized any payment, contribution or gift of money, property, or services, (i) as a kickback or bribe to any Person or (ii) to any political organization, or the holder of or any aspirant to any elective or appointive public office, except in each case as permitted by applicable law and except for personal political contributions not involving the direct or indirect use of funds of the Company or any of its subsidiaries. (c) The Company and its subsidiaries have all licenses, permits, franchises or other governmental authorizations necessary to the ownership of their property or to the conduct of their respective businesses, except for those which if violated or not obtained would not reasonably be expected to have a Material Adverse Effect (and except for any of the foregoing relating to Intellectual Property which are covered by the provisions of Section 3.18). Neither the Company nor any subsidiary has finally been denied any application for any such licenses, permits, franchises or other governmental authorizations necessary to its business. 3.10 LITIGATION. Except as set forth on SCHEDULE 3.10 or in any SEC Report, there is no legal action, suit, arbitration or other legal, administrative or other governmental investigation, inquiry or proceeding (whether federal, state, local or foreign) pending or, to the Company's knowledge, threatened, against or affecting the Company or any subsidiary or any of their respective properties, assets or businesses which, either alone or in the aggregate, would reasonably be expected to have a Material Adverse Effect or prevent or delay the consummation of the transactions contemplated by the Transaction Documents. The Company is not aware of any fact which might result in or form the basis for any such action, suit, arbitration, investigation, inquiry or other proceeding. Except as set forth in SCHEDULE 3.10, neither the Company nor any subsidiary is subject to any order, writ, judgment, injunction, decree, determination or award of any Governmental Entity against it. 3.11 MATERIAL CONTRACTS. Neither the Company nor any of its subsidiaries is in default (or would be in default with notice or lapse of time, or both) under, is in violation (or 7 would be in violation with notice or lapse of time, or both) of, or has otherwise breached, any indenture, note, credit agreement, loan document, lease, license or other agreement (unless such default has been waived), which default, alone or in the aggregate with all other such defaults, would reasonably be expected to have a Material Adverse Effect. All material agreements to which the Company or any of its subsidiaries is a party (reflecting all amendments thereto through the date of filing), which are required to be filed with the SEC, have been filed by the Company with the SEC pursuant to the requirements of the Securities Act and the Exchange Act. Except as set forth in SCHEDULE 3.11, each material agreement to which the Company or any of its subsidiaries is a party is in full force and effect and is binding upon the Company and, to the best of the Company's knowledge, is binding upon such other parties, in each case in accordance with its terms. There are no material unresolved disputes involving the Company or any of its subsidiaries under any such material agreement. 3.12 ABSENCE OF UNDISCLOSED LIABILITIES. Except as disclosed on SCHEDULE 3.12 and except for indebtedness or liabilities that are reflected or reserved against in the most recent financial statements included in the SEC Reports, neither the Company nor any of its subsidiaries has any debt, obligation or liability of a kind required by GAAP to be reflected on a balance sheet (whether accrued, absolute, contingent, liquidated or otherwise, whether due or to become due and whether or not known to the Company) arising out of any transaction entered into at or prior to the Closing, or any act or omission at or prior to the Closing, or any state of facts existing at or prior to the Closing, except current liabilities incurred and obligations under agreements entered into since December 31, 2000, each in the usual and ordinary course of business none of which (individually or in the aggregate) would reasonably be expected to have a Material Adverse Effect. 3.13 LABOR RELATIONS AND EMPLOYMENT (a) Except as set forth in SCHEDULE 3.13(A), (i) to the Company's knowledge, there are no union claims to represent the employees of the Company or any of its subsidiaries; (ii) neither the Company nor any of its subsidiaries is a party to or bound by any collective bargaining or similar agreement with any labor organization, or work rules or practices agreed to with any labor organization or employee association applicable to employees of the Company or any of its subsidiaries; (iii) none of the employees of the Company or any of its subsidiaries is represented by any labor organization and the Company does not have any knowledge of any current union organizing activities among the employees of the Company or any of its subsidiaries, nor to the Company's knowledge does any question concerning representation exist concerning such employees; (iv) the Company and its subsidiaries are in compliance with all applicable laws respecting employment and employment practices, terms and conditions of employment, wages, hours of work, occupational safety and health, equal opportunity, collective bargaining and payment of social security or social insurance premiums, as applicable, except where the failure to be in compliance would not reasonably be expected to have a Material Adverse Effect, and are not engaged in any discriminatory employment practices or unfair labor practices under applicable law, ordinance or regulation; (v) there is no unfair labor practice charge or complaint against the Company or any of its subsidiaries pending or, to the best of the Company's knowledge, threatened before any state or foreign agency; (vi) neither the Company 8 nor any of its subsidiaries has received written notice of the intent of any federal, state, local or foreign agency responsible for the enforcement of labor or employment laws to conduct an investigation with respect to or relating to the Company or any of its subsidiaries and no such investigation is in progress; and (vii) there are no complaints, lawsuits or other proceedings pending or, to the best of the Company's knowledge, threatened in any forum by or on behalf of any present or former employee of the Company or any of its subsidiaries alleging breach of any express or implied contract of employment, any law or regulation governing employment or the termination thereof or other discriminatory, wrongful or tortious conduct in connection with the employment relationship, except for any complaints, lawsuits or other proceedings which would not reasonably be expected to have a Material Adverse Effect. (b) Except as set forth in SCHEDULE 3.13(B), the employment of all Persons and officers employed by the Company or any of its subsidiaries is terminable at will without any penalty or severance obligation of any kind on the part of the Company or such subsidiary. All sums due for employee compensation and benefits, including, without limitation, retiree benefits, and all vacation time owing to any employees of the Company or any of its subsidiaries have been duly and adequately accrued in all material respects on the accounting records of the Company and its subsidiaries in accordance with GAAP. (c) Except as set forth on SCHEDULE 3.13(C), the Company and its subsidiaries have in force written confidentiality and non-disclosure agreements and patent/copyright/ invention assignment agreements with, and require as a condition of employment the execution of such agreements by, all of its technical research employees, all research consultants, all of its officers and such other members of its staff as in the regular course of their duties are reasonably likely to receive material confidential information regarding the Company, its Intellectual Property (as hereinafter defined) and its current and prospective business plans. (d) The Company is not aware that any of its officers or key employees or any officers or key employees of its subsidiaries is obligated under any contract (including licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any Governmental Entity, that would interfere with the use of such employee's best efforts to promote the interests of the Company or that would conflict with the Company's business as currently conducted. (e) Except as set forth in SCHEDULE 3.13(E), the Company is not aware that any officer or key employee, or that any group of key employees, intends to terminate their employment with the Company or any of its subsidiaries, nor does the Company have a present intention to terminate the employment of any of the foregoing. 3.14 EMPLOYEE BENEFIT PLANS. (a) With respect to Employee Benefit Plans (as hereinafter defined) of the Company and its subsidiaries: (i) the fair market value of the assets of each funded Employee Benefit Plan, if any, the liability of each insurer for any Employee Benefit Plan funded through insurance or any book reserve established for any other Employee Benefit Plan to the extent 9 required by applicable law, together with any accrued contributions, is sufficient to procure or provide for the accrued benefit obligations, as of the date hereof, with respect to all current and former participants in such Employee Benefit Plan according to the actuarial assumptions and valuations, if any, most recently used to determine employer contributions to and liabilities of such Employee Benefit Plan, and no transaction contemplated by this Purchase Agreement shall cause such assets or insurance obligations or any book reserve to be less than such benefit obligations; (ii) each Employee Benefit Plan has been maintained and administered, in all material respects, in accordance with its terms and with all applicable provisions of law (including rules and regulations thereunder); and (iii) each Employee Benefit Plan which is required to be registered with any Governmental Entity has been registered and maintained in good standing with the appropriate Governmental Entity, except where the failure to be so registered or to maintain good standing would not reasonably be expected to have a Material Adverse Effect. (b) For purposes of this Purchase Agreement, "EMPLOYEE BENEFIT PLAN" shall mean all material employee benefit or executive compensation arrangements, perquisite programs or payroll practices, including, without limitation, any such arrangements or payroll practices providing severance pay, sick leave, vacation pay, salary continuation for disability, retirement benefits, deferred compensation, bonus pay, incentives pay, stock options (including those held by Directors, employees, and consultants), hospitalization insurance, medical insurance, life insurance, scholarships or tuition reimbursements, that are maintained by the Company or any of its subsidiaries or to which the Company or any subsidiary is obligated to contribute thereunder for current or former employees of the Company or any subsidiary. 3.15 REAL PROPERTY (a) The Company and its subsidiaries do not own any real property in whole or in part. (b) SCHEDULE 3.15 lists all real property leased by the Company or its subsidiaries as well as the commencement and expiration dates of all leases relating thereto (the "LEASED REAL PROPERTY"). The Company or one of its subsidiaries has a valid and existing lease or sublease for each property subsumed within the Leased Real Property. All leases covering any of the Leased Real Property are valid and enforceable by the Company or one of its subsidiaries, as the case may be, in accordance with their respective terms, are in full force and effect, except that the enforceability thereof may be subject to applicable bankruptcy, insolvency or other similar laws, now or hereinafter in effect, affecting creditors rights generally, and the availability of the remedy of specific performance or injunctive or other forms of equitable relief may be subject to equitable defenses and would be subject to the discretion of the court before which any proceeding therefor may be brought, and have not been modified, supplemented or terminated in any material respect except as set forth in SCHEDULE 3.15, and there is not under any such lease any default by the Company or one of its subsidiaries or, to the best of the Company's knowledge, by any landlord or lessor under any such lease except for any such default which would not reasonably be expected to have a Material Adverse Effect. The facilities and real 10 properties covered by the Leased Real Property constitute all of the facilities and real properties presently used by the Company or its subsidiaries. 3.16 CONDITION OF PROPERTIES. All facilities, machinery, equipment, fixtures, vehicles and other properties owned, leased or used by the Company and its subsidiaries are in good operating condition and repair (normal wear and tear excepted), are reasonably fit and usable for the purposes for which they are being used, are adequate and sufficient for the Company's or such subsidiary's business and conform with all applicable ordinances, regulations and laws except where the failure to conform with the applicable ordinances, regulations or laws would not reasonably be expected to have a Material Adverse Effect. 3.17 ENVIRONMENTAL MATTERS. (a) The Company and its subsidiaries (i) are in compliance with all Environmental Laws; (ii) have obtained all necessary Environmental Permits, all of which are in full force and effect; and (iii) are in compliance with all terms and conditions of such Environmental Permits, except for any failure to comply or the absence of any such permit which would not reasonably be expected to have a Material Adverse Effect. (b) Neither the Company nor any of its subsidiaries has violated or done any act which would reasonably be expected to result in liability under, or have otherwise failed to act in a manner which would reasonably be expected to expose any of them to liability under, any Environmental Law except for any liability that would not reasonably be expected to have a Material Adverse Effect. No event has occurred which, upon the passage of time, the giving of notice, or failure to act would reasonably be expected to give rise to liability to the Company or any of its subsidiaries under any Environmental Law except for any liability that would not reasonably be expected to have a Material Adverse Effect. (c) To the Company's knowledge, no Hazardous Material has been released, spilled, discharged, dumped, or disposed of, by the Company, or otherwise come to be located in, at, beneath or near any of the Leased Real Property as a result of the Company's action including properties formerly owned, operated or otherwise controlled by the Company or any of its subsidiaries (i) in violation of any Environmental Law or (ii) in such manner as would reasonably be expected to result in environmental liability to the Company or any of its subsidiaries, except in the case of each of the foregoing where such action or omission is not reasonably believed to have a Material Adverse Effect. (d) To the Company's knowledge, there have been and are no: (i) aboveground or underground storage tanks; (ii) surface impoundments for Hazardous Materials; (iii) wetlands as defined under any Environmental Law; or (iv) asbestos or asbestos containing materials or polychlorinated biphenyl ("PCB") or PCB-containing equipment, located within any portion of the Leased Real Property. (e) No liens currently encumber any Leased Real Property in connection with any actual or alleged liability of the Company under any Environmental Law. 11 (f) (i) Neither the Company nor any of its subsidiaries has received any written notice, claim, demand, suit or request for information from any Governmental Entity or private entity with respect to any liability or alleged liability under any Environmental Law, nor to the knowledge of the Company, has any other entity whose liability, in whole or in part, may be attributed to the Company or any of its subsidiaries, received any such notice, claim, demand, suit or request for information; (ii) neither the Company nor any of its subsidiaries has ongoing negotiations with or agreements with any Governmental Entity or other Person or entity relating to any Remedial Action or other claim arising under or related to any Environmental Law. (g) Neither the Company nor any of its subsidiaries has disposed, or arranged for the disposal, of any Hazardous Materials at any facility that is or has ever been the subject of investigation or response action under the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. ss. 9601 ET SEQ. ("CERCLA"), Resource Conservation and Recovery Act, 42 U.S.C. ss. 6901 ET SEQ. ("RCRA"), or any state or Canadian law of similar effect. (h) The Company does not have in its possession any environmental studies and reports pertaining to any of the Leased Real Property. For purposes of this Purchase Agreement, the following terms shall have the following meanings: "ENVIRONMENTAL LAWS" shall mean any statute, regulation, ordinance, order, decree, treaty, agreement, compact, common law duty or other requirement of United States, Canadian or international law other than those covered by or included in Section 3.19 hereof relating to protection of human health, safety or the environment (including, without limitation, ambient air, surface water, groundwater, wetlands, soil, surface and subsurface strata). "ENVIRONMENTAL PERMITS" shall mean all permits, licenses, approvals, authorizations, consents or registrations required under any applicable Environmental Law. "HAZARDOUS MATERIALS" shall mean any chemicals, pollutants, contaminants, wastes, toxic substances, hazardous substances, hazardous materials, hazardous wastes, radioactive materials, petroleum or petroleum products other than those covered by or included in Section 3.19 hereof. "REMEDIAL ACTION" shall mean any action required to: (i) clean up, remove or treat Hazardous Materials; (ii) prevent a release or threat of release of any Hazardous Material; (iii) perform pre-remedial studies, investigations or post-remedial monitoring and care; or (iv) cure a violation of Environmental Law 3.18 INTELLECTUAL PROPERTY (a) Except as described in SCHEDULE 3.18(A), the Company or one of its subsidiaries owns or, with respect to Intellectual Property licensed to the Company, or one of its subsidiaries from third parties, has the valid right to use, free and clear of all liens and other encumbrances or claims of any nature ("LIENS") which result from or are related to actions or 12 omissions of the Company or any of its subsidiaries and, to our knowledge, free and clear of Liens which result from or are related to the actions or omissions of third parties, except in each case for Liens that are not material and do not interfere with the use of such Intellectual Property, all of the Intellectual Property necessary for the conduct of the business of the Company or any of its subsidiaries, except where the failure to own or have the right to use any item of Intellectual Property would not reasonably be expected to have a material adverse effect on the business, properties and financial conditions of the Company and its subsidiaries taken as a whole. Except as set forth on SCHEDULE 3.18(A), all Intellectual Property that is material to the Company, is valid, subsisting, unexpired, in proper form and enforceable and all renewal fees and other maintenance fees that have fallen due on or prior to the effective date of this Agreement have been paid; provided that the representation and warranty in this sentence is made to our knowledge with respect to Intellectual Property licensed by the Company or one of its subsidiaries from third parties. (b) Except as set forth on SCHEDULE 3.18(B), there is no claim, suit, action or proceeding pending or, to the Company's knowledge, threatened against the Company or one of its subsidiaries: (i) alleging any conflict or infringement with any third party's proprietary rights; or (ii) challenging the Company or one of its subsidiaries, ownership or use, or the validity or enforceability of any Intellectual Property; and to the Company's knowledge no listed application or registration/patent of the Company is the subject of any patent interference proceeding or similar proceeding. Except as set forth on SCHEDULE 3.18(B), there is no claim, suit, action or proceeding pending or, to the Company's knowledge, threatened by the Company or one of its subsidiaries, alleging any third party's intellectual property rights conflict or infringe the Intellectual Property of the Company or one of its subsidiaries. (c) Except as set forth in SCHEDULE 3.18(C), no former or present employee, officer or director of the Company or any of its subsidiaries holds any right, title or interest, directly or indirectly, in whole or in part, in or to any Intellectual Property. (d) The Company or one of its subsidiaries owns or has the right to use all computer software, software systems and databases and all other information systems currently used in the business of the Company or any of its subsidiaries, including, without limitation, all computer software used in the business of the Company on personal computers by employees of the Company or any of its subsidiaries. For purposes of this Purchase Agreement, "INTELLECTUAL PROPERTY" shall mean all of the following, owned or used in the business of the Company or any of its subsidiaries: (i) trademarks and service marks (registered or unregistered), trade dress, trade names and other names and slogans embodying business or product goodwill or indications of origin, all applications or registrations in any jurisdiction pertaining to the foregoing and all goodwill associated therewith; (ii) patents, patentable inventions, discoveries, improvements, ideas, know-how, formula methodology, processes, technology and computer programs, software and databases (including source code, object code, development documentation, programming tools, drawings, specifications and data) and all applications or registrations in any jurisdiction pertaining to the foregoing, including all reissues, continuations, divisions, continuations-in-part, 13 renewals or extensions thereof; (iii) trade secrets, including confidential and other non-public information, and the right in any jurisdiction to limit the use or disclosure thereof; (iv) copyrights in writings, designs, mask works or other works, and applications or registrations in any jurisdiction for the foregoing; (v) database rights; (vi) Internet Web sites, domain names and registrations or applications for registration thereof; (vii) licenses, immunities, covenants not to sue and the like relating to any of the foregoing; (viii) books and records describing or used in connection with any of the foregoing; and (ix) claims or causes of action arising out of or related to infringement or misappropriation of any of the foregoing. 3.19 REGULATORY MATTERS (a) As to each product subject to the jurisdiction of the U.S. Food and Drug Administration ("FDA") under the Federal Food, Drug and Cosmetic Act and the regulations thereunder ("FDCA") (each such product, a "REGULATED PRODUCT") that is manufactured, tested, distributed and/or marketed by the Company or any of its subsidiaries, such Regulated Product is being manufactured, tested, distributed and/or marketed in substantial compliance with all applicable requirements under FDCA and similar state and foreign laws and regulations, including but not limited to those relating to investigational use, premarket clearance, good manufacturing practices, labeling, advertising, record keeping, filing of reports and security. (b) To the Company's knowledge, there are no rule making or similar proceedings before the FDA or comparable federal, Canadian, state, provincial, local or foreign government bodies which involve or, to the Company's knowledge, affect the Company or any of its subsidiaries which, if the subject of an action unfavorable to the Company or any of its subsidiaries, would be reasonably likely to have a Material Adverse Effect. (c) Except as set forth on SCHEDULE 3.19, neither the Company nor any of its subsidiaries has received any written notices or correspondence from the FDA or any other governmental agency requiring the termination, suspension or modification of any tests or evaluations conducted on behalf of the Company or any of its subsidiaries. 3.20 TAX MATTERS. Except as set forth on SCHEDULE 3.20, there are no United States or Canadian federal, state, provincial, county, municipal or local taxes or comparable foreign taxes due and payable by the Company or any of its subsidiaries which have not been paid other than any unpaid taxes which individually or in the aggregate are not reasonably expected to have a Material Adverse Effect and unpaid taxes which are being contested in good faith by the Company or one of its subsidiaries and for which the Company has recorded adequate reserves in accordance with GAAP. The provisions for taxes on the consolidated balance sheet of the Company for the year ended December 31, 2000 are sufficient for the payment of all accrued and unpaid United States and Canadian federal, state, provincial, county, municipal and local taxes or comparable foreign taxes of the Company and its subsidiaries whether or not assessed or disputed as of the date of such balance sheet. The Company and each of its subsidiaries has duly filed all United States and Canadian federal, state, provincial, county, municipal and local or comparable foreign tax returns required to have been filed by it and there are in effect no waivers of applicable statutes of limitations with respect to taxes for any year. Except as set forth on 14 SCHEDULE 3.20, neither the Company nor any of its subsidiaries has been subject to a tax audit of any kind, whether in Canada, the United States or other jurisdiction in which such entity conducts business. 3.21 INSURANCE. The Company and its subsidiaries and their respective properties are insured in such amounts, against such losses and with such insurers as are prudent when considered in light of the nature of the properties and businesses of the Company and its subsidiaries. SCHEDULE 3.21 sets forth a complete and accurate list of the insurance policies of the Company and its subsidiaries as in effect on the date hereof, including in each case the applicable coverage limits, deductibles and the policy expiration dates. No written notice of any termination or threatened termination of any of such policies has been received by the Company or any of its subsidiaries and such policies are in full force and effect. 3.22 TRANSACTIONS WITH RELATED PARTIES. Except as set forth in the Company's Annual Report on Form 20-F for its fiscal year ended December 31, 2000, in any subsequent SEC Report or in SCHEDULE 3.22, neither the Company nor any subsidiary is a party to any agreement with any of the Company's directors, officers or shareholders or any Affiliate or family member of any of the foregoing under which it: (i) leases any real or personal property other than automobiles (either to or from such Person), (ii) licenses real or personal property or Intellectual Property (either to or from such Person), (iii) is obligated to purchase any tangible or intangible asset from or sell such asset to such Person, (iv) purchases products or services from such Person, or (v) has borrowed money from or lent money to such Person. Except as set forth in SCHEDULE 3.22, to the Company's knowledge, there exist no agreements among shareholders of the Company, except as contemplated by the Transaction Documents, to act in concert with respect to their voting or holding of Company securities. 3.23 INTEREST IN COMPETITORS. Except as set forth in Section 3.18 or Schedules 3.18(a), (b) or (c), neither the Company, nor any or its subsidiaries, nor, to the Company's knowledge, any of their respective officers or directors, has any interest, either by way of contract or by way of investment (other than as holder of not more than 2% of the outstanding capital stock of a publicly traded Person) or otherwise, directly or indirectly, in any Person other than the Company and its subsidiaries that (i) provides any services or designs, produces or sells any product or product lines or engages in any activity similar to or competitive with any activity currently conducted by the Company or any of its subsidiaries or (ii) has any direct or indirect interest in any asset or property, real or personal, tangible or intangible, of the Company. 3.24 PRIVATE OFFERING. Neither the Company nor anyone acting on its behalf shall offer the Shares for issue or sale to, or solicit any offer to acquire, any of the same from, anyone so as to bring the issuance and sale of the Shares within the provisions of Section 5 of the Securities Act. Based upon the representations of the Investors set forth in Section 4, the offer, issuance and sale of the Shares, are and will be exempt from the registration and prospectus delivery requirements of the Securities Act, and have been registered or qualified (or are exempt from registration and qualification) under the registration, permit or qualification requirements of all applicable state securities laws, and are qualified for distribution or are exempt from such requirements for qualification under applicable Canadian federal and provincial securities laws. 15 3.25 MATERIAL FACTS. This Agreement and the other Transaction Documents do not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements contained therein or herein, in light of the circumstances in which they were made, not misleading. 4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE INVESTORS. 4.1 INVESTMENT REPRESENTATIONS. Each Investor, severally and not jointly, represents and warrants to, and covenants with, the Company that: (a) Investor is knowledgeable, sophisticated and experienced in making, and is qualified to make, decisions with respect to investments in shares presenting an investment decision like that involved in the purchase of the Shares, including investments in securities issued by the Company, and has requested, received, reviewed and considered all information Investor deems relevant (including but not limited to, the SEC Reports) in making an informed decision to purchase the Shares. (b) Investor is purchasing the Shares in the ordinary course of its business for its own account for investment only and with no present intention of distributing the Shares or any arrangement or understanding with any other persons regarding the distribution of the Shares (except for transfers to "affiliates," meaning, for purposes of this Section 4.1(b), with respect to an Investor, any other person directly or indirectly controlling, controlled by or under direct or indirect common control with such Investors). (c) Investor shall not, directly or indirectly, offer, sell, pledge, transfer or otherwise dispose of (or solicit any offers to buy, purchase or otherwise acquire or take a pledge of) any of the securities purchased hereunder except in compliance with the Securities Act, applicable Blue Sky laws, and the rules and regulations promulgated thereunder, and any applicable Canadian laws, rules or regulations. (d) Investor has completed or caused to be completed the information requested on the Investors' counterpart execution page and the Registration Questionnaire, attached as Appendix I to the Registration Rights Agreement for use in preparation of the Registration Statement, and the answers thereto are true and correct in all material respects as of the date hereof and will be true and correct, in all material respects, as of the effective date of the Registration Statement (provided that Investors shall be entitled to update such information by providing notice thereof to the Company prior to the effective date of such Registration Statement). (e) Investor has, in connection with its decision to purchase the Shares, relied with respect to the Company and its affairs solely upon the SEC Reports and the representations and warranties of the Company contained herein. (f) Investor is an "accredited investor" within the meaning of Rule 501 of Regulation D promulgated under the Securities Act. 16 (g) Investor has full right, power, authority and capacity to enter into this Purchase Agreement and the Registration Rights Agreement and to perform the transactions contemplated hereby and thereby. This Purchase Agreement and the Registration Rights Agreement have been duly authorized, executed and delivered by the Investor. Assuming due authorization, execution and delivery by each of the other parties hereto and thereto, this Purchase Agreement and the Registration Rights Agreement are valid and binding obligations of Investor, enforceable against it in accordance with their terms, except as may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles; and (h) Investor is a resident of the city and state set forth under its name on the Counterpart Execution Page hereof and is not a resident of Canada or any province of Canada. 4.2 INDEPENDENT ADVICE. Investor understands that nothing in the SEC Reports, this Purchase Agreement, the Registration Rights Agreement or any other materials presented to Investors in connection with the purchase and sale of the Shares constitutes legal, tax or investment advice and that no independent legal counsel retained by the Company has reviewed these documents and materials on Investor's behalf. Investor has consulted such legal, tax and investment advisors as it, in its sole discretion, has deemed necessary or appropriate in connection with its purchase of the Shares. 4.3 NO TRANSFERABILITY. Investor understands that: (a) subject to Section 4.1(b), the Shares shall not be transferable in the absence of registration under the Securities Act or an exemption therefrom or in the absence of compliance with any term of this Purchase Agreement; (b) the Company shall provide stop transfer instructions to its transfer agent with respect to the Shares in order to enforce the restrictions contained in this Section 4.4; and (c) each certificate representing Shares shall be in the name of Investor and shall bear substantially the following legends (in addition to any legends required under applicable securities laws): "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR REGISTERED OR QUALIFIED UNDER THE SECURITIES LAWS OF ANY JURISDICTION, AND MAY ONLY BE SOLD, PLEDGED, TRANSFERRED OR OTHERWISE DISPOSED OF BY AN INVESTOR IF SUBSEQUENTLY REGISTERED UNDER THE SECURITIES ACT AND REGISTERED OR QUALIFIED UNDER ANY APPLICABLE STATE SECURITIES LAWS, UNLESS EXEMPTIONS FROM SUCH REGISTRATION AND QUALIFICATION REQUIREMENTS ARE AVAILABLE." 17 5. CONDITIONS TO COMPANY'S OBLIGATIONS AT THE CLOSING. The Company's obligations to complete the sale and issuance of the Shares and to deliver Shares to each Investor, individually, as set forth in the Schedule of Investors shall be subject to the following conditions (to the extent not waived in writing by the Company): 5.1 PAYMENT FOR SHARES. Each Investor shall have paid to the Company the purchase price for the Shares purchased by it, in accordance with provisions of Section 2.2. 5.2 REPRESENTATIONS AND WARRANTIES CORRECT. The representations and warranties made by such Investors in Section 4 hereof shall be true and correct as of the Closing. 5.3 COVENANTS PERFORMED. Each Investor shall have performed and complied in all material respects with all of its obligations under this Purchase Agreement which are to be performed or complied with on or prior to Closing. 5.4 MINIMUM SALE. The aggregate purchase price for the Shares sold to Investors pursuant to this Agreement shall not be less than $20 million. 5.5 APPROVAL OF COMPANY'S BOARD OF DIRECTORS. The Company's Board of Directors shall have adopted resolutions authorizing the execution, delivery and performance of the Transaction Documents and the transactions contemplated therein. 6. CONDITIONS TO INVESTORS' OBLIGATIONS AT THE CLOSING. Each Investor's obligation to accept delivery of the Shares and to pay for the Shares shall be subject to the following conditions (to the extent not waived by such Investors): 6.1 REGISTRATION RIGHTS AGREEMENT. The Company shall have executed and delivered the Registration Rights Agreement. 6.2 REPRESENTATIONS AND WARRANTIES CORRECT. The representations and warranties made by the Company in Section 4 shall be true and correct as of the Closing. 6.3 COVENANTS PERFORMED. The Company shall have performed and complied in all material respects with all of its obligations under this Purchase Agreement which are to be performed or complied with on or prior to the Closing. 6.4 LEGAL OPINIONS. (a) Investors shall have received from Baer Marks & Upham LLP, counsel to the Company, an opinion letter addressed to the Investors, dated as of the date of the Closing, in a form acceptable to the Investors and their counsel, Goodwin Procter LLP ("GOODWIN PROCTER") subject to customary assumptions and qualifications. 18 (b) Investors shall have received from Osler, Hoskin & Harcourt LLP, counsel to the Company, an opinion letter addressed to the Investors, dated as of the date of the Closing, in a form acceptable to the Investors and Goodwin Procter, subject to customary assumptions and qualifications. 6.5 MINIMUM SALE. The aggregate purchase price for the Shares sold to the Investors pursuant to this Agreement shall not be less than $20 million. 6.6 APPROVAL OF COMPANY'S BOARD OF DIRECTORS. The Company's Board of Directors shall have adopted resolutions authorizing the execution, delivery and performance of the Transaction Documents and the transactions contemplated therein. 7. MISCELLANEOUS. 7.1 WAIVERS AND AMENDMENTS. Neither this Purchase Agreement nor any provision hereof may be changed, waived, discharged, terminated, modified or amended except upon the written consent of the Company and holders of at least a majority of the Shares, or, in the case of non-material or ministerial amendments, upon the written consent of the Company and MPM. 7.2 HEADINGS. The headings of the various sections of this Purchase Agreement have been inserted for convenience of reference only and shall not be deemed to be part of this Purchase Agreement. 7.3 BROKER'S FEE. The Company and each Investor (severally and not jointly) hereby represent that there are no brokers or finders entitled to compensation in connection with the sale of the Shares, and shall indemnify each other for any such fees for which they are responsible. 7.4 SEVERABILITY. In case any provision contained in this Purchase Agreement should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. 7.5 NOTICES. All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed effectively given: (a) upon personal delivery to the party to be notified, (b) when sent by confirmed facsimile if sent during normal business hours of the recipient; if not, then on the next business day, (c) upon receipt or refusal of receipt when sent by first-class registered or certified mail, return receipt requested, postage prepaid, or (d) upon receipt or refusal of receipt after deposit with a nationally recognized overnight express courier, postage prepaid, specifying next day delivery with written verification of receipt. All communications shall be sent to the party to be notified at the address as set forth below or at such other address as such party may designate by ten (10) days advance written notice to the other party. All communications shall be addressed as follows: (a) if to the Company, to: VISIBLE GENETICS INC. 700 Bay Street, Suite 1000 19 Toronto, Ontario M5G 1Z6 Telephone: (416) 813-3240 Facsimile: (416) 813-3250 Attention: Chief Executive Officer with a copy so mailed to: BAER MARKS & UPHAM LLP 805 Third Avenue New York, New York 10022 Telephone: (212) 702-5700 Facsimile: (212) 702-5941 Attention: Steven S. Pretsfelder (b) if to the Investors, at the address as set forth on the Counterpart Execution Page of this Purchase Agreement with a copy to Goodwin Procter LLP, Exchange Place, 53 State Street, Boston, Massachusetts 02109, telephone: (617) 570-1000; facsimile: (617) 523-1231; Attention: Laura C. Hodges Taylor, P.C. 7.6 GOVERNING LAW; EXCLUSIVE JURISDICTION. This Purchase Agreement shall be governed by and construed in accordance with the laws of the State of New York as applied to contracts entered into and performed entirely in New York by New York residents, without regard to conflicts of law principles. The parties hereto (a) agree that any suit, action or other proceeding arising out of this Agreement shall be brought only in the courts of the State of New York or the courts of the United States located within the State of New York, in each case in the County of New York, (b) consent and submit to the exclusive jurisdiction of each such court in any such suit, action or proceeding and (c) waive any objection which they, or any of them, may have to personal jurisdiction or the laying of venue of any such suit, action or proceeding in any of such courts, and agree not to seek to change venue. 7.7 COUNTERPARTS. This Purchase Agreement may be executed in two or more counterparts, each of which shall constitute an original, but all of which, when taken together, shall constitute but one instrument, and shall become effective when one or more counterparts have been signed by each party hereto and delivered to the other parties. 7.8 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Notwithstanding any investigation made by any party to this Purchase Agreement, all covenants, agreements, representations and warranties made by the Company and each Investors herein shall survive the execution of this Purchase Agreement, the delivery to the Investors of the Shares and the payment therefor until the expiration of the Registration Period as defined in the Registration Rights Agreement. 7.9 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, 20 executors and administrators of the parties hereto. Neither the terms "successors" nor "assigns" as used herein shall include any Person who purchases Shares from any Investor after the Closing and is not an affiliate of an Investor. 7.10 ENTIRE AGREEMENT. This Purchase Agreement and other documents delivered pursuant hereto, including the exhibits, constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof. 7.11 PAYMENT OF FEES AND EXPENSES. Each of the Company and the Investors shall bear its own expenses and legal fees incurred on its behalf with respect to this Purchase Agreement, the Registration Rights Agreement and the transactions contemplated hereby and thereby; PROVIDED, HOWEVER, that the Company shall pay the reasonable fees and expenses of one legal counsel for all Investors in connection with all such agreements and the transactions contemplated hereby and thereby, FURTHER PROVIDED, THAT, without its prior written approval, the Company shall have no obligation to pay any such fees and expenses which exceed $25,000 in the aggregate. The foregoing shall not limit the obligation of the parties under the indemnification obligations set forth in Section 2.5 of the Registration Rights Agreement. 7.12 CONFIDENTIALITY. Each Investor acknowledges and agrees that any information or data it has acquired or hereafter shall acquire pursuant to this Agreement or the Registration Rights Agreement from the Company was received and shall be received by such Investor in confidence except any such information or data which (a) at the time of disclosure was in the public domain or was readily available through public sources other than as a result of any breach of the terms hereof, the Registration Rights Agreement or any other agreement or fiduciary obligation by which such Investor is bound, or (b) was known to the Investor prior to receipt from the Company other than as a result of any breach of any of the terms hereof, the Registration Rights Agreement, or any other agreement or fiduciary obligation by which such Investor is bound, or (c) was obtained from a third party not in violation of any confidentiality, non-disclosure or similar obligations or any fiduciary obligations of such third party or the Investor (the "CONFIDENTIAL Information"). Except to the extent authorized by the Company and required by any federal or state law, rule or regulation or any decision or order of any court or regulatory authority, each Investor agrees that it will refrain from disclosing any such Confidential Information to any Person other than to any agent, attorneys, accountants, employees, officers and directors of Investor (collectively, "AGENTS") who need to know such information in connection with Investor's purchase of the Shares, and who agree to be bound by the confidentiality provisions of this Purchase Agreement. The Investors will be liable for any breach by their agents of the provisions of this Section 7.12. In the event that an Investor or its agents are requested or required by law, rule or regulation or any decision or order of any court or regulatory authority to disclose all or any part of the information contained in the Confidential Information, each such Investor agrees that: (a) the Investor will provide the Company with immediate written notice of any such request or requirement so that the Company may seek an appropriate protective order or other remedy; (b) the Investor will not oppose, and will cooperate with the Company in, seeking such order or remedy; and (c) in all events, including, but not limited to (i) the Company not obtaining a protective order or other remedy that covers all of such Confidential Information or (ii) the Company waiving any provision of this Purchase 21 Agreement, the Investor will disclose only that portion of the Confidential Information which in the written opinion of the Investor's counsel the Investor is legally compelled to disclose, and the Investor will exercise its best efforts to ensure that confidential treatment will be accorded to that portion of the Confidential Information that is being disclosed. Each Investor agrees not to use to the detriment of the Company or for the benefit of any other Person or Persons, or misuse in any way, any Confidential Information of the Company. KNOWLEDGE. The phrases "KNOWLEDGE," "TO THE COMPANY'S knowledge," "TO THE COMPANY'S BEST KNOWLEDGE," "OF WHICH THE COMPANY IS aware" and similar language as used herein shall mean the actual knowledge and current awareness, or knowledge which a reasonable person would have acquired following a reasonable investigation, of Richard T. Daly, Thomas J. Clarke or Marguerite Ethier. [The rest of this page intentionally left blank] 22 If this Purchase Agreement is satisfactory to you, please so indicate by signing the acceptance on a counterpart execution page to this Purchase Agreement and return such counterpart to the Company whereupon this Purchase Agreement will become binding between us in accordance with its terms. VISIBLE GENETICS INC. By: -------------------------------------- Name: Thomas J. Clarke Title: Chief Financial Officer By: -------------------------------------- Name: Marguerite Ethier Title: General Counsel 23 COMMON SHARE PURCHASE AGREEMENT COUNTERPART EXECUTION PAGE By signing below, the undersigned agrees to the terms of the Visible Genetics Inc. Common Share Purchase Agreement and to purchase the number of Shares set forth below. Number of Shares being purchased: ----------------------------------------- INVESTORS: ----------------------------------------- By: -------------------------------------- Name: Title: Address: --------------------------------- ----------------------------------------- ----------------------------------------- Facsimile: ------------------------------- PLEASE COMPLETE THE FOLLOWING: 1. The exact name that your Shares are to be registered in (this is the ------------------------------ name that will appear on your Shares certificate(s)). You may use a nominee name if appropriate: 2. The relationship between the Investors of the Shares and the ------------------------------ Registered Holder listed in response to item 1 above: 3. The mailing address and facsimile number of the Registered Holder ------------------------------ listed in response to item 1 above (if different from above): Facsimile: -------------------- 4. (FOR UNITED STATES INVESTORS:) The Social Security Number or Tax ------------------------------ Identification Number of the Registered Holder listed in the response to item 1 above: EX-10.28 4 a2080893zex-10_28.txt EXHIBIT 10.28 EXHIBIT 10.28 VISIBLE GENETICS INC. REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT ("REGISTRATION RIGHTS AGREEMENT") is entered into as of December 24, 2001, by and among VISIBLE GENETICS INC., an Ontario corporation (the "COMPANY"), and the purchasers of common shares, without par value, of the Company (the "SHARES") who are identified as "Investors" in that certain Common Shares Purchase Agreement of even date herewith (the "PURCHASE AGREEMENT") and whose signatures appear on the execution pages hereof. The purchasers of the Shares shall be referred to hereinafter collectively as the "Investors" and each individually as an "Investor." RECITALS WHEREAS, the Company proposes to sell the Shares pursuant to the Purchase Agreement; WHEREAS, as a condition of entering into the Purchase Agreement, the Investors have requested that the Company extend to them certain registration rights and other rights as set forth below. NOW, THEREFORE, in consideration of the mutual promises, representations, warranties, covenants and conditions set forth in this Registration Rights Agreement and in the Purchase Agreement, the parties mutually agree as follows: 1. DEFINITIONS As used in this Registration Rights Agreement the following terms shall have the following respective meanings: "CLOSING" has the meaning ascribed thereto under the Purchase Agreement. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. "FORM F-3" means such form under the Securities Act as in effect on the date hereof or any successor registration form under the Securities Act subsequently adopted by the SEC which permits inclusion or incorporation of substantial information by reference to other documents filed by the Company with the SEC. "HOLDER" means any Investor or assignee permitted in accordance with Section 5.3 hereof owning of record Registrable Securities that have not been sold to the public. "REGISTER," "REGISTERED," and "REGISTRATION" refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act, and the declaration or ordering of effectiveness of such registration statement or document. "REGISTRABLE SECURITIES" means the Shares or any common shares of the Company which may be issued with respect to or in substitution for such Shares by reason of dividend, stock split, combination of shares, recapitalization, reclassification or reorganization. "REGISTRATION STATEMENT" means any registration statement of the Company that covers the Shares and lists holders thereof as selling shareholders pursuant to the provisions of this Registration Rights Agreement, including the Prospectus included therein, all amendments and supplements thereto (including post-effective amendments) and all exhibits and material incorporated by reference or deemed to be incorporated by reference therein. "SEC" or "COMMISSION" means the Securities and Exchange Commission. "SECURITIES ACT" means the Securities Act of 1933, as amended. 2. REGISTRATION OF SHARES 2.1 REGISTRATION STATEMENT. Within 45 calendar days after the date hereof, the Company shall prepare and file with the Commission a Registration Statement on Form F-3 pursuant to Rule 415 under the Securities Act covering the resale of the Registrable Securities. In addition, the Company shall: (a) Use its best efforts to cause such Registration Statement to become effective as promptly as possible, and in any event within 120 calendar days after the date hereof, and to keep such Registration Statement continuously effective until the earlier of (i) such time as all of the Registrable Securities covered by the Registration Statement have been sold or (ii) such time as all Registrable Securities covered by the Registration Statement may be sold during any 90 day period without registration under the Securities Act pursuant to the exemptions provided by Rule 144 under the Securities Act (the "REGISTRATION PERIOD"). Notwithstanding anything herein to the contrary, the Company may take, or refrain from taking, any action that results in Holders not being able to sell such Registrable Securities pursuant to applicable securities laws during the Registration Period (including, but not limited to, refraining from amending or supplementing the Registration Statement) and/or suspend the effectiveness of the Registration Statement if updating or otherwise amending the Registration Statement, or taking or refraining from taking any other action and/or maintaining the effectiveness of the Registration Statement would require the Company to disclose any material corporate development which disclosure may have a materially adverse affect on the Company ("SUSPENSION RIGHT"). The Suspension Right may not extend for more than 45 consecutive days for any single suspension event, and may not be exercised more than once during any twelve-month period. (b) Prepare and file with the SEC such pre-effective and post-effective amendments and supplements to such Registration Statement and the prospectus used in connection with such Registration Statement as may be necessary to cause the Registration Statement to become effective, to keep the Registration Statement continuously effective during the Registration Period and not misleading, and as may otherwise be required or applicable 2 under, and to comply with the provisions of, the Securities Act with respect to the disposition of all securities covered by such Registration Statement during the Registration Period. (c) Furnish to the Holders such number of copies of a prospectus, including a preliminary prospectus, and each amendment or supplement thereto, in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them, and correct any deficiency between the preliminary prospectus and the final prospectus, and pay any expenses associated with the recirculation of the final prospectus following the correction of such deficiency unless such deficiency is primarily the result of information provided by one or more Holders or one or more underwriters or any of their respective representatives, in which event the Holders whose shares are included in such Registration Statement shall bear the expense of recirculation. (d) Use its best efforts to register and qualify the securities covered by such Registration Statement under such other securities or Blue Sky laws of such jurisdictions as shall be necessary to permit the sale of the Registrable Securities; provided, however, that the Company shall not be required to register or qualify any securities in any jurisdiction in which the Company would be required as a result of such registration or qualification to (i) execute a general consent to service of process which it would not otherwise be required to execute; (ii) qualify generally to do business where it would not otherwise be required to so qualify; or (iii) subject itself to taxation where it would not otherwise be subject to taxation. (e) Notify promptly the Holders of Registrable Securities to be sold (and in any event within three (3) business days after) and (if requested by any such Person) confirm such notice in writing, (i) (A) when a prospectus or any prospectus supplement or post-effective amendment is proposed to be filed, and, (B) with respect to a Registration Statement or any post-effective amendment, when the same has become effective, (ii) of any request by the SEC or any other federal, Canadian, state or provincial governmental authority for amendments or supplements to a Registration Statement or related prospectus or for additional information, (iii) of the issuance by the SEC of any stop order suspending the effectiveness of a Registration Statement or the initiation of any proceedings for that purpose, (iv) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction, or the initiation or threatening of any proceeding for such purpose, and (v) of the happening of any event that makes any statement made in such Registration Statement or related prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires the making of any changes in such Registration Statement, prospectus or documents so that, in the case of the Registration Statement, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, not misleading, and that in the case of the prospectus, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. 3 (f) Use its reasonable best efforts to avoid the issuance of, or, if issued, obtain the withdrawal of, any order suspending the effectiveness of a Registration Statement, or the lifting of any suspension of the qualification (or exemption from qualification) of any of the Registrable Securities for sale in any jurisdiction, at the earliest practicable moment. (g) If requested by the Holders of a majority of the Registrable Securities being sold in connection with such offering, (i) promptly incorporate in a prospectus supplement or post-effective amendment such information as the Holders reasonably request should be included therein regarding such Holders or the plan of distribution of the Registrable Securities, and (ii) make all required filings of the prospectus supplement or such post-effective amendment as soon as practicable after the Company has received notification of such matters to be incorporated in such prospectus supplement or post-effective amendment; provided, however, that the Company shall not be required to take any action pursuant to this Section 2.1(g) that would, in the opinion of outside counsel for the Company, violate applicable law. (h) Upon the occurrence of any event contemplated by Section 2.1(e)(v), as promptly as practicable, prepare a supplement or amendment, including a post-effective amendment, to each Registration Statement or a supplement to the related prospectus or any document incorporated or deemed to be incorporated therein by reference, and file any other required document so that, as thereafter delivered, such Prospectus will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (i) Use its reasonable best efforts to cause all Registrable Securities relating to such Registration Statement to be listed on each securities exchange or automated quotation system, if any, on which securities of the same class issued by the Company are then listed, and if the Registrable Securities are of a class of securities that is listed on a national securities exchange, file copies of any prospectus with such exchange in compliance with Rule 153 under the Securities Act so that the holders of Registrable Securities benefit from the prospectus delivery procedures described therein. (j) In the event of any underwritten public offering requested by the Holders of a majority of the Shares covered by the Registration Statement with an underwriter reasonably acceptable to the Company: (i) enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter(s) of such offering, and furnish, at the request of Holders who own a majority of the Shares covered by such Registration Statement, on the date that such Registrable Securities are delivered to the underwriters for sale (A) an opinion, dated as of such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering, addressed to each underwriter and to each Holder requesting registration of Registrable Securities, and (B) a "comfort" letter dated as of such date, from the independent certified public accountants of the Company, in form and 4 substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to each underwriter and to each Holder requesting registration of Registrable Securities; (ii) if requested by the managing underwriter or underwriters (if any), any selling Holder, or such selling Holder's counsel, promptly incorporate into a prospectus supplement or post-effective amendment such information as such Person reasonably requests to be included therein with respect to the securities being sold by such selling Holder to such underwriter or underwriters, the purchase price being paid therefor by such underwriter or underwriters and any other terms of an underwritten offering of the securities to be sold in such offering, and promptly make all required filings of such prospectus supplement or post-effective amendment; (iii) make available to one representative of the selling Holders, the lead managing underwriter, and one attorney and accountant for the selling Holders and the managing underwriter (collectively, the "INSPECTORS"), such financial and other records, pertinent corporate documents and properties of the Company (collectively, the "RECORDS") reasonably necessary to enable them to exercise their due diligence responsibility under the Securities Act and Exchange Act, and cause the Company's officers, directors and employees to supply such information as may reasonably be requested by any such Inspector in connection with such registration statement; (iv) participate, to the extent reasonably requested by the lead managing underwriter for the offering, in customary reasonable efforts to sell the securities being offered, and cause such steps to be taken as to ensure such good faith participation of senior management officers of the Company in "road shows" as is customary; and (v) cooperate with the lead managing underwriter participating in the disposition of Registrable Securities and its counsel in connection with any filings required to be made with the National Association of Securities Dealers, Inc. ("NASD"), including, if appropriate, the pre-filing of a prospectus as part of a shelf registration statement in advance of an underwritten offering. (k) As soon as practicable, the Company will make generally available to its shareholders an earnings statement (which need not be audited) covering the twelve-month period beginning with the first month after the effective date of the Registration Statement that satisfies the provisions of Section 11(a) of the Securities Act. (l) During the period when the prospectus is required to be delivered under the Securities Act, promptly file all documents required to be filed with the Commission, including pursuant to Sections 13(a), 13(c), 14, or 15(d) of the Exchange Act. (m) Provide a transfer agent and registrar for all Registrable Securities registered pursuant hereunder and a CUSIP number for all such Registrable Securities, in each case no later than the effective date of such registration. 5 2.2 SELLER INFORMATION. (a) The Company may require each selling Holder of Registrable Securities as to which any registration is being effected to furnish to the Company such information regarding such Holder, such Holder's Registrable Securities and such Holder's intended method of disposition as the Company may from time to time reasonably request; provided that such information shall be used only in connection with such registration. (b) (i) If the Registration Statement refers to any Holder by name or otherwise as the Holder of any securities of the Company, then such Holder shall promptly (i) notify the Company and its counsel of the existence of any fact of which such Holder becomes aware and the happening of any event which relates to Holder or the distribution of the securities owned by such Holder which results in the Registration Statement containing an untrue statement of material fact or omitting to state a material fact required to be stated therein or necessary to make any statements therein not misleading, or the Prospectus included in such Registration Statement containing an untrue statement of material fact or omitting to state a material fact required to be stated therein or necessary to make any statements therein, in light of the circumstances under which they were made, not misleading, and (ii) provide to the Company such information which relates to Holder or the distribution of the securities owned by such Holder as shall be necessary to enable the Company to prepare a supplement or post-effective amendment to such Registration Statement or related Prospectus or any document incorporated therein by reference or file any other documents required so that such Registration Statement will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and such Prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (ii) If the Registration Statement refers to any Holder by name or otherwise as the holder of any securities of the Company, then such Holder shall have the right to require in the event that such reference to such Holder by name or otherwise is not required by the Securities Act or any similar Federal or state securities or "blue sky" statute and the rules and regulations thereunder then in force, deletion of the reference to such Holder. 2.3 NOTICE TO DISCONTINUE. Each holder of Registrable Securities agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 2.1(e)(ii) through (v) or Section 2.2(b)(i), such Holder shall forthwith discontinue disposition of Registrable Securities pursuant to the Registration Statement covering such Registrable Securities until such Holder's receipt of the copies of the supplemented or amended prospectus contemplated by Section 2.1(h) or Section 2.2(b)(ii) and, if so directed by the Company, such Holder shall deliver to the Company all copies, other than permanent file copies, then in such Holder's possession of the Prospectus covering such Registrable Securities which is current at the time of receipt of such notice. If the Company shall give any such notice pursuant to Section 2.1, the Company shall extend the period during which such Registration Statement shall be maintained effective pursuant to this Registration Rights Agreement by the number of days in excess of ten (10) business days during the period from and including the date 6 of the giving of such notice pursuant to Section 2.1(e) to and including the date when the Holder shall have received the copies of the supplemented or amended prospectus. 2.4 EXPENSES OF REGISTRATION. Except only as specifically provided herein, all expenses incident to the performance of compliance with this Registration Rights Agreement by the Company shall be borne by the Company, regardless of whether the Registration Statement becomes effective, including, without limitation, (i) all registration and filing fees and expenses (including filings made with the National Association of Securities Dealers ("NASD"), if applicable); (ii) fees and expenses (including fees and expenses of counsel) of compliance with federal securities and state Blue Sky and other Canadian, provincial or other securities laws; (iii) expenses of printing, messenger and delivery services, duplication, word processing and telephone incurred by the Company (but not by the holders of Registrable Securities); (iv) fees and disbursements of counsel for the Company; (v) all application and filing fees in connection with listing Common Shares on a national securities exchange or automated quotation system pursuant to the requirements hereof; and (vi) all fees and disbursements of independent certified public accountants of the Company (including the expenses of any special audit and "cold comfort" letters required by or incident to such performance). The Company will, in any event, bear its own internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expenses of any annual audit and the fees and expenses of any person, including special experts, retained by the Company. The Investors will bear their own expenses not described above in connection with or arising out of the registration of their Shares except that the Company will pay the reasonable fees and expenses of one legal counsel for all Investors in connection with the registration of the Shares pursuant to this Agreement; PROVIDED, THAT, the maximum aggregate amount of all fees and expenses of counsel to the Investor required to be paid by the Company under this Agreement (other than pursuant to Section 2.5) and under the Purchase Agreement shall not exceed $25,000. 2.5 INDEMNIFICATION. (a) INDEMNIFICATION BY COMPANY. To the extent permitted by law, the Company will indemnify and hold harmless each Holder and each underwriter, and each of their respective officers, directors, affiliates, advisors, stockholders, members, partners, agents and employees and each person, if any, who controls such Holder or underwriter within the meaning of the Securities Act or the Exchange Act, against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under the Securities Act, the Exchange Act or other federal, Canadian, provincial or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon or related to any of the following statements, omissions or violations (collectively a "VIOLATION") by the Company: (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendments or supplements thereto, or the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, (ii) any untrue statement or alleged untrue statement of a material fact contained in the Prospectus (including any preliminary, final or summary prospectus, amendment or supplement thereto) included in such Registration Statement or any 7 omission or alleged omission to state a material fact required to be stated therein or necessary to make any statement therein, in light of the circumstances under which they were made, not misleading, or (iii) any violation or alleged violation of the Securities Act, the Exchange Act, any Canadian, provincial or state securities law or any rule or regulation promulgated under the Securities Act, the Exchange Act or any Canadian, provincial or state securities law in connection with the offering covered by the Registration Statement; PROVIDED, HOWEVER, that the Company will not be liable for indemnification in any such case to the extent that any losses, claims, damages or liabilities arise out of or are based upon any untrue statement or alleged untrue statement of a material fact or omission or alleged omission of a material fact so made in reliance upon and in conformity with written information furnished to the Company by such Holder; and PROVIDED, FURTHER, that with respect to any preliminary prospectus, the foregoing indemnity agreement shall not apply or inure to the benefit of any selling Holder or underwriter from whom the person asserting any loss, claim, damage, liability or expense purchased Shares, or any person controlling such selling Holder or underwriter or any of their respective officers, directors, affiliates, advisors, stockholders, members, partners, agents or employees, if copies of the prospectus were timely delivered to the Holder selling the Shares or the underwriter and a copy of the prospectus (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of such Holder selling the Shares or the underwriter to such person, if required by law so to have been delivered, and if the prospectus (as so amended or supplemented) would have cured the defect giving rise to such loss, claim, damage, liability or expense. Subject to Section 2.5(c), the Company will pay to each such Holder, officer, director, affiliate, advisor, underwriter or controlling person any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action as such expenses are incurred. (b) INDEMNIFICATION BY HOLDER OF REGISTRABLE SECURITIES. To the extent permitted by law, each Holder will, if Registrable Securities held by such Holder are included in the securities as to which such registration, qualification or compliance is being effected, indemnify and hold harmless the Company, the officers, directors, affiliates, advisors and underwriters of the Company and each person, if any, who controls the Company within the meaning of the Securities Act or the Exchange Act against any losses, claims, damages or liabilities (joint or several) to which the Company or any such officer, director, affiliate, advisor, underwriter or controlling person may become subject under the Securities Act, the Exchange Act or other federal, Canadian, provincial or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs as a result of reliance by the Company upon and in conformity with written information furnished by such Holder under an instrument duly executed by such Holder and stated to be specifically for use in connection with such registration. Subject to Section 2.5(c), each such Holder will pay to the Company, or any such officer, director, affiliate, advisor, underwriter or controlling person any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action if it is judicially determined that there was such a Violation; PROVIDED, HOWEVER, that in no event shall any indemnity under this Section 2.5(b) exceed the dollar amount of net proceeds from the offering received by such Holder. 8 (c) CONDUCT OF INDEMNIFICATION PROCEEDINGS. Promptly after receipt by an indemnified party under this Section 2.5 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 2.5, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; PROVIDED, HOWEVER, that an indemnified party shall have the right to retain its own counsel, with the fees and expenses to be paid by the indemnifying party, if, (i) in the reasonable judgment of any such indemnified party, based upon advice of counsel, a conflict of interest exists between such indemnified party and the indemnifying party with respect to such claims or (ii) the indemnifying party has not in fact employed counsel to assume the defense of such action within a reasonable time after receiving notice of the commencement of the action or has failed to employ counsel reasonably satisfactory to such indemnified party (in which case, if the indemnified party notifies the indemnifying party in writing that it elects to employ separate counsel at the expense of the indemnifying party, the indemnifying party shall not have the right to assume the defense of such claim on behalf of such indemnified party; provided, however, that the indemnified party shall be entitled to elect only one counsel in the United States (and, if necessary, one counsel in Canada) at the expense of the indemnifying party and such counsel shall be reasonably acceptable to the indemnifying party). All such fees, disbursements and other charges shall be reimbursed by the indemnifying party promptly as they are incurred. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if it is finally determined in a court of competent jurisdiction (which determination is not subject to appeal) that such failure is materially prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 2.5, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 2.5. No indemnifying party shall be liable for any settlement of any claim or action effected by an indemnified party without its written consent, which consent shall not be unreasonably withheld. (d) CONTRIBUTION. (i) If the indemnification provided for in this Section 2.5 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any losses, claims, damages or liabilities referred to herein, the indemnifying party, in lieu of indemnifying such indemnified party thereunder, shall to the extent permitted by applicable law contribute to the amount paid or payable by such indemnified party as a result of such loss, claim, damage or liability in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the Violation(s) that resulted in such loss, claim, damage or liability, as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by a court of law by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. 9 (ii) The Company and the Holders agree that it would not be just and equitable if contribution pursuant to this Section were determined by a method of allocation that does not take account the equitable considerations referred to in the immediately preceding paragraph, provided that a Holder of Registrable Securities shall not be required to contribute under this Section 2.5 in excess of the lesser of (A) that proportion of the total liability indemnified against equal to the proportion of the total Registrable Securities sold under such registration statement by such Holder and (B) the net proceeds received by such Holder from its sale of Registrable Securities under such Registration Statement. No person found guilty of fraudulent representation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person not found guilty of such fraudulent misrepresentation (e) SURVIVAL; SETTLEMENT. The obligations of the Company and Holders under this Section 2.5 shall survive completion of any offering of Registrable Securities in a registration statement, the termination of this Registration Rights Agreement and any sale by the Holders of Registrable Securities. No indemnifying party, in the defense of any such claim or litigation, shall, except with the written consent of each indemnified party in such claim or litigation, consent to entry of any judgment or enter into any settlement which consent shall not be unreasonably withheld, unless such settlement, compromise or consent (i) includes an unconditional release of each indemnified party from all liability arising or that may arise out of such claim, action or proceeding, (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party and (iii) does not commit the indemnified party to take, or to forbear to take, any action. 2.6 TERMINATION OF REGISTRATION RIGHTS. Notwithstanding anything herein to the contrary, a Holder shall not be entitled to any registration rights, rights to liquidated damages or other rights hereunder (a) if all of the Registrable Securities covered by the Registration Statement have been sold or (b) if all Registrable Securities covered by the Registration Statement may be sold during any 90 day period without registration under the Securities Act pursuant to the exemptions provided by Rule 144 under the Securities Act ("TERMINATION EVENT"); PROVIDED, HOWEVER, that any right to liquidated damages, indemnification or any other right that had accrued to the benefit of such Holder prior to the Termination Event but had not been satisfied as of the Termination Event, shall remain in effect after the Termination Event until satisfied. 3. INTENTIONALLY LEFT BLANK 4. LIQUIDATED DAMAGES (a) (i) The Company acknowledges and agrees that the Holders of Registrable Securities will suffer damages, and that it would not be feasible to ascertain the extent of such damages with precision, if the Company fails to fulfill certain of its obligations hereunder. Accordingly, if the Registration Statement has not been declared effective by the Commission within 120 days after the Closing, the Company agrees to pay liquidated damages (for loss of benefit of a bargain and not as a penalty) to each Holder of Registrable Securities in an amount equal to .5% of the dollar amount of such Holder's investment in the Registrable Securities for each month until the Registration Statement is 10 declared effective, or until 180 days after the Closing, whichever occurs first. Commencing on the 181st day of the Closing, if the Registration Default persists, the foregoing required percentage payment by the Company for each month shall increase to .75% until the Registration Statement is declared effective. To the extent applicable, payment of accrued liquidated damages shall be payable monthly in advance with the first payment being due on the 121st day following Closing and additional payments, if any, being due every 30 days thereafter until the Registration Statement is declared effective. (ii) If the Registration Statement is declared effective but shall thereafter cease to be effective without being succeeded within 30 days (or within 45 days in the event that the Company exercises its Suspension Right) by any additional Registration Statement filed and declared effective, the Company agrees to pay liquidated damages (for loss of benefit of a bargain and not as a penalty) to each Holder of Registrable Securities for each month that the Registration Statement is not effective in an amount equal to .5% of the dollar amount of such Holder's investment in Registrable Securities then held by such Holder. To the extent applicable, payment of accrued liquidated damages shall be payable monthly in advance with the first payment being due on the 31st day (or 46th day in the event the Company exercises its Suspension Right) after such Registration Statement ceases to be effective without being succeeded by a successor Registration Statement, and additional payments, if any, being due every 30 days thereafter until a successor Registration Statement is filed and declared effective. (b) All accrued liquidated damages shall be paid to Holders by the Company by wire transfer of immediately available funds or by federal funds check by the Company. Following the cure of a registration default described in Section 4(a)(i) or (ii), the accrual of liquidated damages will cease to accrue with respect to such default. (c) All of the obligations of the Company set forth in this Section 4 that are outstanding with respect to any Registrable Security at the time such security ceases to be a Registrable Security shall survive until such time as all such obligations with respect to such security shall have been satisfied in full. (d) So long as the Company is using best efforts to file and have the Registration Statement (or if applicable, a successor Registration Statement) declared effective, the remedies set forth in this Section 4 shall be the sole and exclusive remedies available to any Holder for failure of the Company to comply with its obligation to file the Registration Statement, have the Registration Statement declared effective or maintain the effectiveness of the Registration Statement under this Agreement. However, if the Company is not using such best efforts, the Holders shall have the right to pursue all available remedies at law or in equity for a breach of such Company obligations. 5. MISCELLANEOUS 5.1 GOVERNING LAW; EXCLUSIVE JURISDICTION. This Registration Rights Agreement shall be governed by and construed in accordance with the laws of the State of New York as applied to contracts entered into and performed entirely in New York by New York 11 residents, without regard to conflicts of law principles. The parties hereto (a) agree that any suit, action or other proceeding arising out of this Agreement shall be brought only in the courts of the State of New York or the courts of the United States located within the State of New York, in each case in the County of New York, (b) consent and submit to the exclusive jurisdiction of each such court in any such suit, action or proceeding and (c) waive any objection which they, or any of them, may have to personal jurisdiction or the laying of venue of any such suit, action or proceeding in any of such courts, and agree not to seek to change venue. 5.2 SURVIVAL. The representations, warranties, covenants, and agreements made herein shall survive any investigation made by any Holder and the closing of the transactions contemplated hereby. 5.3 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors, and administrators of the parties hereto and shall inure to the benefit of and be enforceable by each Permitted Assignee of Registrable Securities from time to time. A "PERMITTED ASSIGNEE" shall mean with respect to any Investor, any other person directly or indirectly controlling or controlled by or under direct or indirect, common control with such Investor. 5.4 ENTIRE AGREEMENT. This Registration Rights Agreement, including any exhibits hereto, the Purchase Agreement and the other documents delivered pursuant thereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and no party shall be liable or bound to any other in any manner by any representations, warranties, covenants and agreements except as specifically set forth herein and therein. 5.5 SEVERABILITY. In case any provision of the Agreement shall be invalid, illegal, or unenforceable, the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 5.6 AMENDMENT AND WAIVER. The provisions of this Registration Rights Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the Company has obtained the written consent of Holders of at least a majority of the then outstanding Registrable Securities; PROVIDED, HOWEVER, that Sections 2.1 and 2.5 shall not be amended, modified or supplemented, and waivers or consents to departures from this proviso may not be given, unless the Company has obtained the written consent of each Holder of the then outstanding Registrable Securities. 5.7 DELAYS OR OMISSIONS. It is agreed that no delay or omission to exercise any right, power or remedy accruing to any Holder, upon any breach, default or noncompliance of the Company under this Registration Rights Agreement shall impair any such right, power or remedy, nor shall it be construed to be a waiver of any such breach, default or noncompliance, or any acquiescence therein, or of any similar breach, default or noncompliance thereafter occurring. It is further agreed that any waiver, permit, consent or approval of any kind 12 or character of any breach, default or noncompliance under the Agreement or any waiver of any provisions or conditions of this Registration Rights Agreement must be in writing and shall be effective only to the extent specifically set forth in such writing by the waiving party. 5.8 NOTICES. All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed effectively given: (a) upon personal delivery to the party to be notified, (b) when sent by confirmed facsimile if sent during normal business hours of the recipient; if not, then on the next business day, (c) upon receipt or refusal of receipt when sent by first-class registered or certified mail, return receipt requested, postage prepaid, or (d) upon receipt or refusal of receipt after deposit with a nationally recognized overnight express courier, postage prepaid, specifying next day delivery with written verification of receipt. All communications shall be sent to the party to be notified at the address as set forth below or at such other address as such party may designate by ten (10) days advance written notice to the other party. All communications shall be addressed as follows: (a) if to the Company, to: VISIBLE GENETICS INC. 700 Bay Street, Suite 1000 Toronto, Ontario M5G 1Z6 Telephone: (416) 813-3240 Facsimile: (416) 813-3250 Attention: Chief Executive Officer with a copy so mailed to: BAER MARKS & UPHAM LLP 805 Third Avenue New York, New York 10022 Telephone: (212) 702-5700 Facsimile: (212) 702-5941 Attention: Steven S. Pretsfelder (b) if to the Investors, at the address as set forth on the Counterpart Execution Page of this Registration Rights Agreement, with a copy to Goodwin Procter LLP, Exchange Place, 53 State Street, Boston, MA 02109 Ph 617-570-1000, fax 617-523-1231 Attn: Laura C. Hodges Taylor, P.C. 5.9 SECURITIES HELD BY THE COMPANY OR ITS AFFILIATES. Whenever the consent or approval of Holders of a specified percentage of Registrable Securities is required hereunder, Registrable Securities held by the Company or its affiliates (as such term is defined in Rule 405 under the Securities Act) (other than the Holders or subsequent Holders of Registrable Securities if such Holders or subsequent Holders are deemed to be such affiliates solely by reason of their holdings of such Registrable Securities) shall not be counted in determining whether such consent or approval was given by the Holders of such required percentage. 13 5.10 TITLES AND SUBTITLES. The titles of the sections and subsections of this Registration Rights Agreement are for convenience of reference only and are not to be considered in construing this Registration Rights Agreement. 5.11 COUNTERPARTS. This Registration Rights 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. If this Registration Rights Agreement is satisfactory to you, please so indicate by signing a counterpart execution page to this Registration Rights Agreement and a Registration Statement Questionnaire and return such counterpart and questionnaire to the Company whereupon subject to the Company's acceptance of your subscription, this Registration Rights Agreement will become binding between us in accordance with its terms. VISIBLE GENETICS INC. By: ------------------------------------ Name: Thomas J. Clarke Title: Chief Financial Officer By: ------------------------------------ Name: Marguerite Ethier Title: General Counsel 14 REGISTRATION RIGHTS AGREEMENT COUNTERPART EXECUTION PAGE By signing below, the undersigned agrees to the terms of the Visible Genetics Inc. Registration Rights Agreement. INVESTOR: By: ------------------------------------ Name: Title: Address: ---------------------------- ---------------------------- ---------------------------- Facsimile: ----------------------------- Appendix I VISIBLE GENETICS INC. REGISTRATION STATEMENT QUESTIONNAIRE In connection with the preparation of the Registration Statement, please provide us with the following information: (i) Please state your or your organization's name exactly as it should appear in the Registration Statement: _____________________ _______________________________ (ii) Please provide the following information, as of December __, 2001: a) Number of Shares that you are purchasing: b) Number of Shares that you seek to include in the Registration Statement: c) Number of Common Shares that you already beneficially own: d) Number of any other securities of the Company that you already beneficially own (please specify the class or type): e) Total Number of Securities that you already beneficially own: (iii) Please indicate the name of any person or entity who has voting or other dispositive power over the shares of Visible Genetics Inc. which you beneficially own. Please indicate for each such person whether the power is held solely by that person or is shared with other persons and, if shared, name all such other persons. ------------------------------------------------------------------- ------------------------------------------------------------------- (iv) If voting or dispositive power is held by an entity, please indicate the identity of the persons who have ultimate voting and/or dispositive power over such entity as it relates to the shares of Visible Genetics Inc., and whether such voting or dispositive power is shared with other persons, and if shared, name all such other persons. ------------------------------------------------------------------- ------------------------------------------------------------------- (v) Have you or your organization had any position, office or other material relationship within the past three years with the Company or its affiliates other than as disclosed in the Company's 2000 Annual Report on Form 20-F? Yes_____ No_____ If yes, please indicate the nature of any such relationships:_________ (vi) Please describe your Plan of Distribution for the shares you wish to sell: ------------------------------------------------------------------- ------------------------------------------------------------------- INVESTOR: By: ------------------------------------ Print Name: Title: The foregoing constitutes the only information furnished to the Company for inclusion in the Registration Statement for purposes of Section 2.5(b) of the Registration Rights Agreement. EX-10.29 5 a2080893zex-10_29.txt EXHIBIT 10.29 EXHIBIT 10.29 THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT is effective as of February 1, 2002 AMONG: VISIBLE GENETICS CORPORATI0N, a corporation duly incorporated under the laws of the State of Delaware and having its principal office in the, City of Suwanee, in the State of Georgia, (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 T. DALY, an individual residing in the City of Palo Alto, in the State of California, (the "Executive") RECITALS: A. The Employer is a wholly owned subsidiary of VGI. B. The Executive was 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. E. The Employer, VGI and Executive entered into an employment agreement dated July 7, 1999. F. The Employer, VGI and the Executive desire to amend and restate the Employment Agreement effective as of February 1, 2002. G. The Employer, VGI and the Executive have entered into an Escrow Agreement dated July 7, 1999 in connection with the Employment Agreement (the "Escrow Agreement"). THEREFORE, the parties agree as follows: ARTICLE 1 POSITION, DUTIES AND REMUNERATION 1.1 EMPLOYMENT Subject to the provisions of Article 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 annual salary, payable in United States currency of three hundred twenty-four thousand dollars (U.S. $324,000.00) paid payable in accordance with the Employer's normal payroll policy. 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. 2 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 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 benefit 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 shall be administered and governed by their respective 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- 3 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. 1.9 TAX MATTERS (a) The Employer will provide the Executive with a one-time payment during calendar year 2000 of 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 Subsections 1.9(a) or 1.9(b) above, 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 4 CONFIDENTIAL INFORMATION NON-CONPETITION/NON-SOLICITATION DURING AND FOLLOWING TERMINATION OF EMYLOYMENT 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: (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, 5 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) "Trade Secret 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 of written form. (d) "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 6 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; (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 authorize 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 7 (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%) 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 8 (b) in any manner whatsoever carry on or be engaged in, or be concerned with or interested in, or advise, lead 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 system, 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 and following his employment, the Executive will execute any documents that the Employer may present to him 9 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 this Article 2 without the necessity of proving actual damage to the Employer or its related corporations. 10 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 month's salary multiplied by the number of months in the Severance Period set out in Section 3.4 hereof. 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 and rights, if any, to which the Executive otherwise may be entitled under Article 4. 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 month's salary multiplied by the number of months in the Severance Period set out in Section 3.4 hereof. 11 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 for purposes of this Section 3.3 shall mean any material breach of fiduciary obligation or gross insubordination. 3.4 TERMINATION FOR ANY REASON Notwithstanding any other provision in this Agreement but subject to the provisions of Article 4 of 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. Unless Article 4 hereof is applicable, 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 hereof 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 12 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 and, if applicable, Article 4, hereof. 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 hereof, benefits provided under this Agreement shall continue for the duration of the Severance Period, and provided that the Executive shall continue to be entitled to all of the benefits provided by Article 4 for so long as, and to the extent, they are applicable. 13 ARTICLE 4 CHANGE OF CONTROL AND RETENTION BENEFITS 4.1 DEFINITIONS. For the purposes of this Article 4, the following terms shall have the meaning set out below: (a) "2001 COMPENSATION" shall mean the Executive's gross base salary paid to him in calendar year 2001, plus the gross amount of any cash bonuses payable to the Executive for calendar year 2001 (whether such cash bonuses are paid in calendar year 2001 or thereafter). (b) "CAUSE" shall mean the Employer's right to terminate the Executive's employment on the basis of (i) the Executive's willful and continued failure to substantially perform his material duties of employment provided that the Employer shall have first provided the Executive with written notice specifying in reasonable detail the factors constituting such failure and such failure shall not have been cured within thirty (30 ) days after such notice; (ii) any commission of an act of fraud, misappropriation, or embezzlement with respect to the business or property of the Employer which is intended to result in substantial personal enrichment of the Executive or causes material harm to the Employer, or (iii) the Executive's conviction of, or plea of guilty or NOLO CONTENDERE to, a felony; PROVIDED, HOWEVER, the Executive shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Employer's (or its successor's) Board of Directors 14 (the "Board") at a meeting of the Board called and held for such purpose, finding that, in the good faith opinion of the Board, the Executive was guilty of the alleged conduct and specifying the particulars thereof in detail; PROVIDED, FURTHER, that the Executive must have received a minimum 30-day notice of such Board meeting and the detailed allegations against the Executive, and that the Executive has been provided the opportunity, together with the Executive's counsel, to be heard before the Board in opposition to the alleged conduct. (c) "CHANGE IN CONTROL" shall mean the happening of any one of the following events: (i) Upon the acquisition by any person, entity or "group," within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 (the "Exchange Act") (other than an acquisition by VGI, the Employer, or any Subsidiary or any employee benefit plan of VGI, the Employer or any Subsidiary) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of fifty percent (50%) or more of either the then outstanding shares of common stock of the Employer or VGI, or the combined voting power of either the Employer's or VGI's then outstanding voting securities, entitled to vote generally in the election of directors; (ii) If individuals who constitute the Board of Directors of the Employer or VGI as of the date hereof (each an "Incumbent Board") cease for any reason to constitute at least a majority of such Board of Directors, provided that any person becoming a member of the Board of Directors of 15 either the Employer or VGI subsequent to the date hereof whose election, or nomination for election by the Employer's or VGI's shareholders, was approved by a vote of at least a majority of the directors then comprising the respective Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is in connection with the actual or threatened election contest relating to the election of the directors of the Employer or VGI, as such terms are used in Rule 141-11 of Regulation 14A promulgated under the Exchange Act) shall be, for purposes of this Agreement, considered as though such person were a member of such Incumbent Board; or (iii) Upon approval of the stockholders of the Employer or VGI of (A) a reorganization, merger or consolidation, in each case, with respect to which persons who were shareholders of the Employer or VGI immediately prior to such reorganization, merger or consolidation do not, immediately thereafter, own more than fifty (50%) of the combined voting power entitled to vote generally in the election of directors of the reorganized, merged or consolidated company, (B) a liquidation or dissolution of the Employer or VGI (other than a liquidation or dissolution in connection with a bankruptcy or insolvency or similar event of the Employer or VGI, or a liquidation or dissolution in which shareholders of the Employer or VGI receive less than a total of US$75 million in connection with such liquidation or dissolution), or (C) the sale of all or substantially all of the assets of the Employer or VGI. 16 (d) "CHANGE OF CONTROL BENEFIT" shall have the meaning set forth in Section 4.2 hereof. (e) "RETENTION BENEFIT" shall have the meaning set forth in Section 4.3 hereof. (f) "RETENTION BENEFIT PAYMENT PERIOD" shall have the meaning set forth in Section 4.3 hereof. (g) "SUBSIDIARY" shall mean any person or entity of whom VGI or the Employer, directly or indirectly, owns fifty percent (50%) or more of the combined voting power entitled to vote generally in the election of directors. (h) "VOLUNTARY TERMINATION" shall mean a voluntary termination of employment with the Employer by the Executive for reasons other than death or disability. 4.2 CHANGE OF CONTROL BENEFIT. If the Executive is employed with the Employer on the date that a Change of Control is deemed to be effective, the Executive shall be entitled to a cash payment equal to the Executive's 2001 Compensation (the "Change of Control Benefit"). The Employer shall pay the Executive the Change of Control Benefit in a lump sum, less applicable withholdings, within five (5) business days immediately following the Change of Control. The payment of the Change of Control Benefit shall be in addition to the payment of all salary and any other amounts otherwise payable to the Executive under this Agreement, option agreement or other agreements with the Employer or VGI or otherwise in connection with his employment by the Employer whether pursuant to employee benefit plans or policies of the Employer or any severance or other benefit available to the Executive under applicable law. 17 4.3 RETENTION BENEFITS. If the Executive is employed by the Employer or VGI or one of VGI's other Subsidiaries following a Change of Control, the Executive shall be entitled to accrue a cash benefit (the "Retention Benefit") provided the Executive remains employed for one (1) or two (2) 90-day periods immediately following the Change of Control (the "Retention Benefit Payment Period"). The accrued Retention Benefit for each 90 day period shall be an amount equal to the Executive's 2001 Compensation, so that if the Executive remains employed for the Retention Benefit Payment Period constituted by two 90 day periods, he would earn a total Retention Benefit equal to two hundred percent (200%) of his 2001 Compensation. The Retention Benefit shall be paid to the Executive in two (2) installments as so earned: The first installment shall be paid ninety (90) days following the date that a Change of Control is deemed to be effective, provided that the Executive is so employed by the Employer, VGI or a Subsidiary on the ninetieth (90th) day following a Change of Control, and, if applicable, a second and final installment shall be paid at the end of second 90 day period, provided, that the Executive is so employed as of the final day of such second 90 day period. If the Executive's employment with the Employer and VGI and Subsidiaries is terminated following a Change of Control, but prior to the end of the second 90 day period, for any reason (including death or disability) other than a termination for Cause by the Employer or a Voluntary Termination, the Employer shall pay the Executive the full amount of the Retention Benefit that the Executive would have been entitled to receive from the effective date of the Change of Control through the end of the Retention Benefit Payment Period had he remained employed through the end of the Retention Benefit Payment Period constituted by two 90 day periods. The Employer shall pay such amount to the Executive within five (5) business days following the termination of the Executive's 18 employment. The payment of the Retention Benefit shall be in addition to the payment of all salary and any other amounts otherwise payable to the Executive under this Agreement or any option agreement or other agreements with the Employer or VGI or otherwise in connection with his employment by the Employer, VGI or one of its Subsidiaries whether pursuant to employee benefit plans or policies of the Employer, VGI or one of its Subsidiaries, or any severance or other benefit available to the Executive under applicable law. 4.4 LIMIT ON CHANGE OF CONTROL AND RETENTION BENEFITS. Notwithstanding any other provision of this Article 4 to the contrary, if any Retention Benefit payment or payments, or any portion of the Change of Control Benefit payment, shall be deemed to be a "parachute payment" as defined in section 280G(b)(2) of the Internal Revenue Code of 1986, as amended (the "Code"), the Employer shall not be obligated to pay any portion of a Retention Benefit payment or payments, or any portion of the Change of Control Benefit payment, to the extent that any such payment or payments shall be deemed an "excess" parachute payment to the Executive as defined in section 280G(b)(1) of the Code and not deductible by the Employer in accordance with section 280G(a) of the Code. Any abatement of payment obligations pursuant to this Section 4.3 shall commence with the last Retention Benefit payment that is earned and accrued by the Executive pursuant to Section 4.4 hereof, and, if necessary, shall continue with preceding Retention Benefit payment obligations in the order of last accrued, first abated, with the Change of Control Benefit payment being the last payment obligation to be abated, if necessary. 19 4.5 SUCCESSOR LIABILITY. Any successor to the Employer or VGI (whether directly or indirectly and whether by purchase, lease, merger, consolidation, or otherwise) or to all or substantially all of the Employer's or VGI's business and/or assets shall assume the Employer's or VGI's respective obligations under this Article 4 and agree expressly to perform the Employer's or VGI's respective obligations under this Article 4 in the same manner and to the same extent as the Employer or VGI would be required to perform such obligations in the absence of a succession. For all purposes under this Article 4, the term "Employer" shall include any successor to the Employer's business and/or assets and the term "VGI" shall include any successor to VGI's business and/or assets. 4.6 TERMINATION UNDER CERTAIN CIRCUMSTANCES. (a) If the Executive's employment terminates for any reason prior to a Change in Control, the Executive shall not be entitled to any payment of a Change of Control Benefit or any Retention Benefits pursuant to this Article 4, but shall be entitled to any payment to which the Executive otherwise would be entitled under any other provision of this Agreement, under any options agreement or other agreements with Employer or VGI to the extent otherwise applicable, under the Employer's then existing employee benefits plans or policies at the time of termination, and under any required severance benefits pursuant to applicable law, if any. (b) If, following a Change in Control, the Executive is terminated by the Employer for Cause or the Executive has a Voluntary Termination, the Executive shall not be entitled to any payment of Retention Benefit under this Article 4 for any period 20 following said termination, but shall be entitled to any payment to which the Executive otherwise would be entitled to under any other provisions of this Agreement, under any options agreement or other agreements with the Employer or VGI, to the extent otherwise applicable, under the Employer's then-existing employee benefit plans or policies at the time of termination, and under any required severance benefit pursuant to applicable law, if any. 4.7 TERMINATION OF ARTICLE 4 The Board of the Employer and VGI, in their sole discretion, shall have the right to terminate the provisions of this Article 4 effective as of December 31 of any year of the term by delivery of written notice to the Executive by no later than January 15 of the following year; provided, however, that if a Change of Control occurs prior to such December 31, or if the Employer or VGI has entered into a binding agreement prior to such December 31, setting forth the material terms of the transaction that will result in the Change of Control, this clause shall have no force or effect. 4.8 RESOLUTION OF DISPUTES UNDER ARTICLE 4. (a) (a) Any dispute or controversy arising out of, relating to, or in connection with this Article 4, or the interpretation, validity, construction, performance, breach, or termination of this Article 4, shall be settled by binding arbitration to be held in New York County, New York and shall be conducted in accordance with the Expedited Employment Arbitration Rules of the American Arbitration Association, in effect at the time of the arbitration ("Rules"), supplemented, as necessary, by those principles which would be applied by a court of law or equity. 21 The arbitrator may grant injunctions or other relief in such dispute or controversy. The decision of the arbitrator shall be final, conclusive and binding on the parties to the arbitration. Judgment may be entered on the arbitrator's decision in any court having jurisdiction. (b) The arbitrator(s) shall apply New York law to the merits of any dispute or claim, without reference to conflicts of law rules. The arbitration proceedings shall be governed by federal arbitration law and by the Rules, without reference to state arbitration law. (c) Notwithstanding anything herein to the contrary, the parties may seek specific performance or injunctive relief with respect to the matters set forth in this Article 4 in the United States District Court for the Southern District of New York or a state court located in New York County, New York. Each party (i) submits to the jurisdiction of any such court for the purpose of any such suit, action, or other proceeding, (ii) agrees that all such claims in respect of any such suit, action or proceeding may be heard and determined in any such court, (iii) waives, to the fullest extent permitted by law, any immunity it may have acquired, or hereafter may acquire, from jurisdiction of any such court or from any legal process therein, and (iv) agrees not to commence any such suit, action or proceeding other than in such court, and waives, to the fullest extent permitted by applicable law, any claim that any such suit, action or proceeding is brought in an inconvenient forum. Each party hereby irrevocably designates CT Corporation 22 System, 111 Eighth Avenue, New York, New York 10011 as agent upon whom process against it may be served for purposes of this Article 4. (d) EXECUTIVE HAS READ AND UNDERSTANDS THIS ARTICLE 4, WHICH DISCUSSES ARBITRATION. EXECUTIVE UNDERSTANDS THAT SUBMITTING ANY CLAIMS ARISING OUT OF, RELATING TO, OR IN CONNECTION WITH THIS ARTICLE 4, OR THE INTERPRETATION, VALIDITY, CONSTRUCTION, PERFORMANCE, BREACH OR TERMINATION THEREOF TO BINDING ARBITRATION, CONSTITUTES A WAIVER OF EXECUTIVE'S RIGHT TO A JURY TRIAL AND RELATES TO THE RESOLUTION OF ALL DISPUTES RELATING TO AND ARISING FROM THIS ARTICLE 4. 4.9 NO DUTY TO MITIGATE The Executive shall not be required to mitigate the amount of any payment contemplated by this Article 4, nor shall any such payment be reduced by any earnings that the Executive may receive from any other source. 4.10 VGI PRIMARILY OBLIGATED VGI shall cause the Employer to perform all of the Employer's obligations under this Article 4. If the Employer or VGI shall fail to perform, or shall otherwise be in default of any obligations under this Article 4, the Executive shall have the right to proceed against the Employer and/or VGI, or both of them, as the primary obligor under this Article 4 in accordance with the provisions hereof. 23 4.11 MISCELLANEOUS (a) The validity, interpretation, construction and performance of this Article 4 shall be governed by the internal substantive laws, but not the conflicts of law rules, of the State of New York. (b) All payments made pursuant to this Article 4 shall be subject to withholding of applicable income and employment taxes. ARTICLE 5 GRANT OF OPTIONS TO PURCHASE COMMON SHARES OF VGI 5.1 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 in United States currency of nine dollars, ten cents (U.S. $9.10) per share. Subject to Article 6 hereof 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 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. 5.2 THE SECOND OPTION The Executive was granted an additional option (the "Second Option") by VGI on July 2, 1999, to purchase four hundred thousand (400,000) common shares of VGI at an exercise price in 24 United States currency of eleven dollars (U.S. $11.00) per common share. Subject to the provisions of Article 6 hereof 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. 5.3 THE ESCROW AGREEMENT Subject to Article 6 hereof, 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" to the Initial Employment Agreement (the "Escrow Agreement"). ARTICLE 6 EFFECT OF TERMINATION OF EMPLOYMENT ON THE FIRST OPTION AND THE SECOND OPTION 6.1 TERMINATION (a) The First Option. (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 25 Section 3.3 hereof, the Executive shall be entitled only to receive those shares issued or issuable upon exercise of the First Option that have been release 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 26 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 6.1(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 escrow pursuant to the Escrow Agreement (taking into account the terms of this Section 6.1). (b) The Second Option. (i) Subject to Section 6.3: 27 (A) if the Executive resigns employment with the Employer, or is terminated for Cause in accordance with Section 3.3 hereof 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 hereof 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 28 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 6.1(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 prior 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 6.1). 6.2 ADDITIONAL OPTIONS Additional options may be granted to Executive by the Employer from time to time on a performance basis, at the sole discretion of Employer. 6.3 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 Article 6 and the Escrow Agreement, a "Change of Control" shall mean: 29 (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 Article 6 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. 6.4 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 Code to the extent that they qualify 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; 30 (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 obligations, 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 minus the exercise price of one share of stock under the option so cancelled; 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 6.4, 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. 31 ARTICLE 7 CONTRACT PROVISIONS 7.1 HEADINGS The headings of the Sections herein are inserted for convenience of reference only and shall not affect the meaning or construction hereof. 7.2 WITHHOLDING All payment 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. 7.3 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. 7.4 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. 7.5 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 32 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. 7.6 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, 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. 7.7 GOVERNING LAW Except as otherwise provided in Article 4, 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. Except as otherwise provided in Article 4, 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. 7.8 SURVIVAL The provisions of Articles 2, 3, 4, 5 and 6 hereof shall survive the termination of this Agreement for the periods of time specified or contemplated therein. 7.9 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, on the date of his termination, 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. 33 7.10 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 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 equalization payment shall be in an amount such that, after tax, it will equal the shortfall in net after tax income. ARTICLE 8 MISCELLANCEOUS 8.1 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. 8.2 INDEMNIFICATION AGREEMENT The Employer and Executive have entered into an Indemnification Agreement attached hereto as SCHEDULE "B". 8.3 ARBITRATION Any dispute, controversy, claim or difference between the parties hereto arising out of Article 3 hereof including questions of fact, procedures, practices or standards relevant to Article 3 hereof 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 34 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. 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 affect. 35 8.4 NOTICES Notices and all other communications contemplated by this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered by either FedEx or other reputable overnight courier service or by registered or certified U.S. mail, return receipt requested. In the case of the Executive, mailed notices shall be addressed to him at the home address which he most recently communicated to the Employer in writing. In the case of the Employer, mailed notices shall be addressed to its corporate headquarters, and all notices shall be directed to the attention of its President, with a copy to Visible Genetics Inc., 700 Bay Street, Toronto, Ontario, M5G 1ZG Canada, attention: General Counsel. All notices to VGI shall be delivered to the foregoing address. Notices shall be deemed delivered and received upon receipt or refusal of receipt. 36 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: VISIBLE GENETICS CORP. By: ---------------------------------------- Name: Title: ------------------------------------------- Name: Title: EXECUTIVE ------------------------------------------- Richard T. Daly 37 EX-10.30 6 a2080893zex-10_30.txt EXHIBIT 10.30 EXHIBIT 10.30 AMENDED AND RESTATED EMPLOYMENT AGREEMENT THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT is effective as of February 1, 2002, between 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 hereinafter referred to as "VGI," VISIBLE GENETICS UK, LTD., a corporation organized under the laws of the United Kingdom and having its head office in Apollo Centre, Desborough Road, High Wycombe, United Kingdom HP11 2QW hereinafter referred to as the "Employer," and DR. ARTHUR COLE, an individual residing in 19 Barcombe Heights, Paignton, Devon, England TQ3 1PU, hereinafter referred to as the "Executive". WHEREAS the Executive has been employed by VGI or the Employer since May 22, 1996 pursuant to an employment agreement dated May 22, 1996 between VGI and the Executive (the "Initial Employment Agreement"); AND WHEREAS VGI, the Employer and Executive desire to amend and restate the Employment Agreement effective as of February 1, 2002. The parties agree as follows: 1. POSITION DUTIES AND REMUNERATION 1.1 Executive shall serve as President of Employer. At the request of VGI, the Executive shall also serve as the Executive Vice President of VGI. 1.2 Executive shall be paid a gross annual salary, payable in UK currency of L142,000. 1.3 In addition to salary, for the performance of services hereunder, the Executive shall be entitled to the following benefits paid by the Employer: health and dental coverage, long term disability insurance and life insurance benefits, and a lease of a motor vehicle or, in the alternative, a cash allowance which shall be used for the lease and maintenance of a motor vehicle and motor vehicle insurance (both collision and public liability), as agreed upon between the Employer and Executive, subject to all the terms and conditions now evidenced by this Agreement. 1.4 The Executive agrees to perform faithfully the duties inherent in the position and all other lawful instructions and duties as the Employer may from time to time reasonably require commensurate with his position. 1.5 The Executive agrees to use his best efforts to promote the interests of the Employer, to devote his full time and attention to the business of the Employer and to adhere to the instructions and directives of the Employer. 1.6 During the term of his employment, the Executive agrees to refrain from engaging in any activity which will in any manner, directly or indirectly, compete with the trade or business of VGI or the Employer as defined herein. 1.7 During the term of his employment, the Executive agrees not to possess or acquire, directly or indirectly, any interest in any firm, partnership, association or corporation, the business operations of which will in any manner, directly or indirectly, compete with the business of VGI or the Employer other than as a stockholder holding no greater than one per cent (1%) of a public company whose shares are listed for trading on a recognized stock exchange or traded on the over-the-counter market, 1.8 In consideration of the salary received from the Employer, the Executive acknowledges and agrees that every idea, invention or concept, whether patentable or not, originated by himself or in collaboration with others during or outside normal office hours and concerning directly or indirectly the business of the Employer or VGI, is and shall remain the sole and exclusive property of the Employer. 1.9 The Employer agrees in its sole discretion to review the salary and benefits payable to Executive hereunder annually. 1.10 The Employer agrees to pay, on an annual basis, for the Executive's membership at a fitness club. 2. EMPLOYMENT CONDITIONS 2.1 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. 3. NON-COMPETITION/NON-SOLICITATION DURING AND FOLLOWING TERMINATION OF EMPLOYMENT NON-COMPETITION 3.1 The Executive agrees that during the term of his employment and following the termination of his employment for whatever reason he will not, at any time, during the period of one (1) year from the date of such termination (without the prior written consent of the Employer) either individually or in partnership, or in conjunction with any person or persons, firm, association, syndicate, company, corporation or any other entity whatsoever as principal, agent, director, officer, employee, consultant, investor, or in any other 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 part thereof to be used or employed by any person or persons, firm, association, syndicate, company or corporation, engaged in or concerned with any interest in any business that competes directly or indirectly with the business of VGI or the Employer: (i) worldwide; or 2 (ii) in North America; or (iii) in the Dominion of Canada including all provinces and territories. For the purposes hereof the business of VGI and 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 VGI's or the Employer's products in development or being sold at the time of the Executive's termination or voluntary leaving. NON-SOLICITATION 3.2 The Executive agrees that during the term of his employment and following the termination of his employment for whatever reason he will not, at any time, during the period of two (2) years from the date of such termination (without the prior written consent of the Employer) either individually or in partnership, or in conjunction with any person or persons, firm, association, syndicate, company, corporation or any other entity whatsoever as principal, agent, director, officer, employee, consultant, or in any other manner whatsoever solicit directly or indirectly the employees of VGI or the Employer to leave the Employer and work for another employer. 4. CONFIDENTIAL INFORMATION 4.1 The Executive acknowledges that in the course of carrying out, performing and fulfilling his responsibilities to the Employer, he will have access to and be entrusted with detailed, confidential information, and trade secrets concerning the business of VGI and the Employer and their respective clients and the present and contemplated products, techniques and other services evolved or used by VGI or the Employer, their related corporations and their respective clients, and that the disclosure of such confidential information would be highly detrimental to the best interests of VGI and the Employer, their related corporations and their respective clients. Accordingly, the Executive acknowledges and agrees that the right to maintain the confidentiality of such confidential information, and trade secrets, and the fight to preserve their goodwill, constitute proprietary rights which the VGI, the Employer and their related corporations are entitled to protect. Accordingly, the Executive covenants and agrees with VGI and the Employer that, save with the prior written consent of the Employer, he will not, either during the term of his employment by the Employer, or at any time thereafter for a period of twenty (20) years, disclose any of such confidential information, and trade secrets to any person, not in the employ of VGI, the Employer or their respective related corporations, nor shall he use the same for any purpose other than for the purposes of the Employer. The Executive shall not be responsible for the release of confidential information that was released through no fault of his own or confidential information that independently becomes part of the public domain. 3 The Executive agrees that all restrictions contained in this clause are reasonable and valid in the circumstances and all defenses to the strict enforcement thereof by VGI and the Employer or their respective related corporations are hereby waived by the Executive. 5. RIGHTS OF ENFORCEMENT 5.1 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. 5.2 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. VGI, the Employer or any of their respective related corporations, on any application to a court of competent jurisdiction, shall be entitled to injunctive relief against the Executive to enforce the terms of Articles 3 and 4 hereof without the necessity of proving actual damage to VGI, the Employer or their respective related corporations. 6. TERMINATION OF EMPLOYMENT 6.1 (a) This Agreement and the employment of the Executive may be terminated by the Employer for any reason upon prior written notice or payment of salary and benefits in lieu of notice for the Required Notice Period to be paid as a lump sum payment subject to all statutory deductions. For the purposes hereof, the "Required Notice Period" shall mean a period of twelve (12) months for the Executive employed by Employer during the first year of employment plus one (1) additional month for each full year of employment with Employer thereafter. (b) This Agreement and the employment of the Executive may be terminated by the Executive for any reason upon prior written notice to the Employer of 180 days. 6.2 The Executive may be dismissed at any time by the Employer without notice or payment in lieu of notice for just and sufficient cause. 6.3 The parties have negotiated the duration of the notice period set out in Subsections 6.1 (a) and (b) and the period of notice forms part of the consideration given by the Executive for his salary. 6.4 Unless Article 7 hereof is applicable, upon the termination of this Agreement and on termination of the employment of the Executive, whether upon notice or otherwise, the Executive shall have no claim against the Employer for any further liability to make payments in connection with the termination of the Executive's employment, other than those arising from this Article 6. 4 7. CHANGE OF CONTROL AND RETENTION BENEFITS 7.1 DEFINITIONS. For the purposes of this Article 7, the following terms shall have the meaning set out below: (a) "2001 COMPENSATION" shall mean the Executive's gross base salary paid to him in calendar year 2001, plus the gross amount of any cash bonuses paid to the Executive in calendar year 2001. (b) "CAUSE" shall mean the Employer's right to terminate the Executive's employment on the basis of (i) the Executive's willful and continued failure to substantially perform his material duties of employment provided that the Employer shall have first provided the Executive with written notice specifying in reasonable detail the factors constituting such failure and such failure shall not have been cured within thirty (30 ) days after such notice; (ii) any commission of an act of fraud, misappropriation, or embezzlement with respect to the business or property of the Employer which is intended to result in substantial personal enrichment of the Executive or causes material harm to the Employer, or (iii) the Executive's conviction of, or plea of guilty or NOLO CONTENDERE to, a felony; PROVIDED, HOWEVER, the Executive shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Employer's (or its successor's) Board of Directors (the "Board") at a meeting of the Board called and held for such purpose, finding that, in the good faith opinion of the Board, the Executive was guilty of the alleged conduct and specifying the particulars thereof in detail; PROVIDED, FURTHER, that the Executive must have received a minimum 30-day notice of such Board meeting and the detailed allegations against the Executive, and that the Executive has been provided the opportunity, together with the Executive's counsel, to be heard before the Board in opposition to the alleged conduct. (c) "CHANGE IN CONTROL" shall mean the happening of any one of the following events: (i) Upon the acquisition by any person, entity or "group," within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 (the "Exchange Act") (other than an acquisition by VGI, the Employer, or any Subsidiary or any employee benefit plan of VGI, the Employer or any Subsidiary) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of fifty percent (50%) or more of either the then outstanding shares of common stock of the Employer or VGI, or the combined voting power of either the Employer's or VGI's then outstanding voting securities, entitled to vote generally in the election of directors; (ii) If individuals who constitute the Board of Directors of the Employer or VGI as of the date hereof (each an "Incumbent Board") cease for any reason to constitute at least a majority of such Board of Directors, provided that any person becoming a member of the Board of Directors of either the Employer or VGI subsequent to the date hereof 5 whose election, or nomination for election by the Employer's or VGI's shareholders, was approved by a vote of at least a majority of the directors then comprising the respective Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is in connection with the actual or threatened election contest relating to the election of the directors of the Employer or VGI, as such terms are used in Rule 141-11 of Regulation 14A promulgated under the Exchange Act) shall be, for purposes of this Agreement, considered as though such person were a member of such Incumbent Board; or (iii) Upon approval of the stockholders of the Employer or VGI of (A) a reorganization, merger or consolidation, in each case, with respect to which persons who were shareholders of the Employer or VGI immediately prior to such reorganization, merger or consolidation do not, immediately thereafter, own more than fifty (50%) of the combined voting power entitled to vote generally in the election of directors of the reorganized, merged or consolidated company, (B) a liquidation or dissolution of the Employer or VGI (other than a liquidation or dissolution in connection with a bankruptcy or insolvency or similar event of the Employer or VGI, or a liquidation or dissolution in which shareholders of the Employer or VGI receive less than a total of US $75 million in connection with such liquidation or dissolution), or (C) the sale of all or substantially all of the assets of the Employer or VGI. (d) "CHANGE OF CONTROL BENEFIT" shall have the meaning set forth in Section 7.2 hereof. (e) "RETENTION BENEFIT" shall have the meaning set forth in Section 7.3 hereof. (f) "RETENTION BENEFIT PAYMENT PERIOD" shall have the meaning set forth in Section 7.3 hereof. (g) "SUBSIDIARY" shall mean any person or entity of whom VGI or the Employer, directly or indirectly, owns fifty percent (50%) or more of the combined voting power entitled to vote generally in the election of directors. (h) "VOLUNTARY TERMINATION" shall mean a voluntary termination of employment with the Employer by the Executive for reasons other than death or disability. 7.2 CHANGE OF CONTROL BENEFIT. If the Executive is employed with the Employer on the date that a Change of Control is deemed to be effective, the Executive shall be entitled to a cash payment equal to the Executive's 2001 Compensation (the "Change of Control Benefit"). The Employer shall pay the Executive the Change of Control Benefit in a lump sum, less applicable withholdings, within five (5) business days immediately following the Change of Control. The payment of the Change of Control Benefit shall be in addition to the payment of all salary and any other amounts otherwise payable to the Executive under this Agreement, option agreement or other agreements with the Employer or VGI or otherwise in connection with his employment by the Employer whether 6 pursuant to employee benefit plans or policies of the Employer or any severance or other benefit available to the Executive under applicable law. 7.3 RETENTION BENEFITS. If the Executive is employed by the Employer or VGI or one of VGI's other Subsidiaries following a Change of Control, the Executive shall be entitled to accrue a cash benefit (the "Retention Benefit") provided the Executive remains employed for one (1) or two (2) 90-day periods immediately following the Change of Control (the "Retention Benefit Payment Period"). The accrued Retention Benefit for each 90-day period shall be an amount equal to the Executive's 2001 Compensation, so that if the Executive remains employed for the Retention Benefit Payment Period constituted by two 90-day periods, he would earn a total Retention Benefit equal to two hundred percent (200%) of his 2001 Compensation. The Retention Benefit shall be paid to the Executive in two (2) installments as so earned: The first installment shall be paid ninety (90) days following the date that a Change of Control is deemed to be effective, provided that the Executive is so employed by the Employer, VGI or a Subsidiary on the ninetieth (90th) day following a Change of Control, and, if applicable, a second and final installment shall be paid at the end of the second 90-day period; provided, that the Executive was so employed as of the final day of such second 90-day period. If the Executive's employment with the Employer and VGI and Subsidiaries is terminated following a Change of Control, but prior to the end of the second 90-day period, for any reason (including death or disability) other than a termination for Cause by the Employer or a Voluntary Termination, the Employer shall pay the Executive the full amount of the Retention Benefit that the Executive would have been entitled to receive from the effective date of the Change of Control through the end of the Retention Benefit Payment Period had he remained employed through the end of the Retention Benefit Payment Period constituted by two 90-day periods. The Employer shall pay such amount to the Executive within five (5) business days following the termination of the Executive's employment. The payment of the Retention Benefit shall be in addition to the payment of all salary and any other amounts otherwise payable to the Executive under this Agreement or any option agreement or other agreements with the Employer or VGI or otherwise in connection with his employment by the Employer, VGI or one of its Subsidiaries whether pursuant to employee benefit plans or policies of the Employer, VGI or one of its Subsidiaries, or any severance or other benefit available to the Executive under applicable law. 7.4 LIMIT ON CHANGE OF CONTROL AND RETENTION BENEFITS. Notwithstanding any other provision of this Article 7 to the contrary, if any Retention Benefit payment or payments, or any portion of the Change of Control Benefit payment, shall be deemed to be a "parachute payment" as defined in section 280G(b)(2) of the Internal Revenue Code of 1986, as amended (the "Code"), the Employer shall not be obligated to pay any portion of a Retention Benefit payment or payments, or any portion of the Change of Control Benefit payment, to the extent that any such payment or payments shall be deemed an "excess" parachute payment to the Executive as defined in section 280G(b)(1) of the Code and not deductible by the Employer in accordance with section 280G(a) of the Code. Any abatement of payment obligations pursuant to this Section 7.3 shall commence with the last Retention Benefit payment that is earned and accrued by the Executive pursuant to Section 7.4 hereof, and, if 7 necessary, shall continue with preceding Retention Benefit payment obligations in the order of last accrued, first abated, with the Change of Control Benefit payment being the last payment obligation to be abated, if necessary. 7.5 SUCCESSOR LIABILITY. Any successor to the Employer or VGI (whether directly or indirectly and whether by purchase, lease, merger, consolidation, or otherwise) or to all or substantially all of the Employer's or VGI's business and/or assets shall assume the Employer's or VGI's respective obligations under this Article 7 and agree expressly to perform the Employer's or VGI's respective obligations under this Article 7 in the same manner and to the same extent as the Employer or VGI would be required to perform such obligations in the absence of a succession. For all purposes under this Article 7, the term "Employer" shall include any successor to the Employer's business and/or assets and the term "VGI" shall include any successor to VGI's business and/or assets. 7.6 TERMINATION UNDER CERTAIN CIRCUMSTANCES. (a) If the Executive's employment terminates for any reason prior to a Change in Control, the Executive shall not be entitled to any payment of a Change of Control Benefit or any Retention Benefits pursuant to this Article 7, but shall be entitled to any payment to which the Executive otherwise would be entitled under any other provision of this Agreement, under any options agreement or other agreements with Employer or VGI to the extent otherwise applicable, under the Employer's then existing employee benefits plans or policies at the time of termination, and under any required severance benefits pursuant to applicable law, if any. (b) If, following a Change in Control, the Executive is terminated by the Employer for Cause or the Executive has a Voluntary Termination, the Executive shall not be entitled to any payment of Retention Benefits under this Article 7 for any period following said termination, but shall be entitled to any payment to which the Executive otherwise would be entitled to under any other provisions of this Agreement, under any options agreement or other agreements with the Employer or VGI, to the extent otherwise applicable, under the Employer's then-existing employee benefit plans or policies at the time of termination, and under any required severance benefit pursuant to applicable law, if any. 7.7 TERMINATION OF ARTICLE 7 The Board of the Employer and VGI, in their sole discretion, shall have the right to terminate the provisions of this Article 7 effective as of December 31 of any year of the term by delivery of written notice to the Executive by no later than January 15 of the following year; PROVIDED, HOWEVER, that if a Change of Control occurs prior to such December 31, or if the Employer or VGI has entered into a binding agreement prior to such December 31 setting forth the material terms of the transaction that will result in the Change of Control, this clause shall have no force or effect. 8 7.8 RESOLUTION OF DISPUTES UNDER ARTICLE 7. (a) Any dispute or controversy arising out of, relating to, or in connection with this Article 7, or the interpretation, validity, construction, performance, breach, or termination of this Article 7, shall be settled by binding arbitration to be held in New York County, New York and shall be conducted in accordance with the Expedited Employment Arbitration Rules of the American Arbitration Association, in effect at the time of the arbitration ("Rules"), supplemented, as necessary, by those principles which would be applied by a court of law or equity. The arbitrator may grant injunctions or other relief in such dispute or controversy. The decision of the arbitrator shall be final, conclusive and binding on the parties to the arbitration. Judgment may be entered on the arbitrator's decision in any court having jurisdiction. (b) The arbitrator(s) shall apply New York law to the merits of any dispute or claim, without reference to conflicts of law rules. The arbitration proceedings shall be governed by federal arbitration law and by the Rules, without reference to state arbitration law. (c) Notwithstanding anything herein to the contrary, the parties may seek specific performance or injunctive relief with respect to the matters set forth in this Article 7 in the United States District Court for the Southern District of New York or a state court located in New York County, New York. Each party (i) submits to the jurisdiction of any such court for the purpose of any such suit, action, or other proceeding, (ii) agrees that all such claims in respect of any such suit, action or proceeding may be heard and determined in any such court, (iii) waives, to the fullest extent permitted by law, any immunity it may have acquired, or hereafter may acquire, from jurisdiction of any such court or from any legal process therein, and (iv) agrees not to commence any such suit, action or proceeding other than in such court, and waives, to the fullest extent permitted by applicable law, any claim that any such suit, action or proceeding is brought in an inconvenient forum. Each party hereby irrevocably designates CT Corporation System, 111 Eighth Avenue, New York, New York 10011 as agent upon whom process against it may be served for purposes of this Article 7. (d) EXECUTIVE HAS READ AND UNDERSTANDS THIS ARTICLE 7, WHICH DISCUSSES ARBITRATION. EXECUTIVE UNDERSTANDS THAT SUBMITTING ANY CLAIMS ARISING OUT OF, RELATING TO, OR IN CONNECTION WITH THIS ARTICLE 7, OR THE INTERPRETATION, VALIDITY, CONSTRUCTION, PERFORMANCE, BREACH OR TERMINATION THEREOF TO BINDING ARBITRATION, CONSTITUTES A WAIVER OF EXECUTIVE'S RIGHT TO A JURY TRIAL AND RELATES TO THE RESOLUTION OF ALL DISPUTES RELATING TO AND ARISING FROM THIS ARTICLE 7. 7.9 NO DUTY TO MITIGATE The Executive shall not be required to mitigate the amount of any payment contemplated by this Article 7, nor shall any such payment be reduced by any earnings that the Executive may receive from any other source. 9 7.10 VGI PRIMARILY OBLIGATED VGI shall cause the Employer to perform, all of the Employer's obligations under this Article 7. If the Employer or VGI shall fail to perform, or shall otherwise be in default of any obligations under this Article 7, the Executive shall have the right to proceed against the Employer and/or VGI, or both of them, as the primary obligor under this Article 7 in accordance with the provisions hereof. 7.11 MISCELLANEOUS (a) The validity, interpretation, construction and performance of this Article 7 shall be governed by the internal substantive laws, but not the conflicts of law rules, of the State of New York. (b) All payments made pursuant to this Article 7 shall be subject to withholding of applicable income and employment taxes. 8. GRANT OF OPTIONS TO PURCHASE COMMON SHARES (a) On May 22, 1996, the Executive received an irrevocable option to immediately purchase ONE HUNDRED NINE THOUSAND SIX HUNDRED TWENTY, (109,620) common shares of VGI ("Common Shares") at the price of THREE DOLLARS, FIFTY CENTS (US$3.50) per Common Share. The Executive has the right to exercise the option with respect to all or any part of the Common Shares at any time or times prior to the close of business on May 22, 2006. The grant of option and the shares issued upon the exercise (if any) of the share option shall be forfeited at the rate of 25,000 Common Shares per six (6) month period if the Executive does not remain in the employ of VGI or the Employer for whatever reason for three (3) years from May 22, 1996. For example, if the Executive stayed with the Employer for only one (1) year, options to purchase 100,000 Common Shares or the exercise and purchase of such shares or any part thereof were to be forfeited, being 25,000 Common Shares per six (6) months for year two and 25,000 Common Shares per six (6) months for year three. If the forfeiture provisions became operative, VGI would pay to the Executive for these options or any shares, subject to the forfeiture, the amount paid for such options or shares exercised, whichever the case may be. VGI retains the right to shorten the forfeiture provisions in its sole discretion. (b) All options granted shall immediately vest upon the completion of the takeover or sale of VGI or the Employer whether by share exchange, share purchase or purchase of all or substantially all of the VGI's or the Employer's assets. (c) Additional options may be granted to Executive by VGI from time to time on a performance basis, at the sole discretion of VGI. 9. WAIVER 9.1 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 10 construed as such if made in writing signed by a duly authorized representative of the waiving party. 10. SEVERABILITY 10.1 (a) 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. (b) 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. 11. ENTIRE AGREEMENT 11.1 This Agreement, together with Schedules "A" and "B", contains the entire contract of Employment between the parties hereto and supercedes all previous negotiations, understandings and agreements whether verbal or written with respect to any matters herein referred to. 12. GOVERNING LAW AND SURVIVAL 12.1 Except as otherwise provided in Article 7, 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. 12.2 The provisions of Sections 3, 4, 5, 6 and 7 hereof shall survive the termination of this Agreement for the periods of time specified or contemplated therein. 13. MISCELLANEOUS 13.1 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. 13.2 VGI, the Employer and Executive have entered into an Indemnification Agreement attached hereto as Schedule "B". The provisions of the Indemnification Agreement shall apply to the Executive in his capacity as an officer, director, employee, agent or fiduciary of VGI, the Employer, or any other corporation, partnership limited liability company, joint venture, trust, employee benefit plan or other enterprise for which the Executive is or was serving at the request of VGI or the Employer, and the Indemnification Agreement (including the definition of "Corporate Status" therein) hereby is amended accordingly. 13.3 Notices and all other communications contemplated by this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered by either FedEx or other reputable overnight courier service or by registered or certified U.S. mail, return receipt requested. In the case of the Executive, mailed notices shall be addressed to him at 11 the home address which he most recently communicated to the Employer in writing. In the case of the Employer, mailed notices shall be addressed to its corporate headquarters, and all notices shall be directed to the attention of its President, with a copy to Visible Genetics Inc., 700 Bay Street, Toronto, Ontario, M5G 1ZG Canada, attention: General Counsel. All notices to VGI shall be delivered to the foregoing address. Notices shall be deemed delivered and received upon receipt or refusal of receipt. THIS Agreement is binding upon and is for the benefit of the parties and their respective successors. IN WITNESS WHEREOF this Agreement is executed as of the day, month and year first above written. SIGNED, SEALED AND DELIVERED ) VISIBLE GENETICS INC. in the presence of: ) ) ) By: ) ---------------------------- ) Name: ) Title: ) ) ) By: ) ---------------------------- ) Name: ) Title: ) ) ) VISIBLE GENETICS UK, LTD ) ) ) By: ) ---------------------------- ) Name: ) Title: ) ) ) By: ) ---------------------------- ) Name: ) Title: ) ) ) ) --------------------------- ) DR. ARTHUR COLE - ---------------------------- Witness 12 EXHIBIT 10.30 SCHEDULE "A" INTENTIONALLY LEFT BLANK SCHEDULE "B" INDEMNIFICATION AGREEMENT WITH DR. ARTHUR W. G. COLE THIS AGREEMENT, made and entered into as of _________________, ____ ("Agreement"), by and between VISIBLE GENETICS INC., a corporation formed under the laws of the Province of Ontario (the "Company"), and DR. ARTHUR W. G. COLE ("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 directors, and to assume for itself maximum 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. NOW, THEREFORE, in consideration of the promises and the covenants contained herein, the Company and Indemnitee do hereby covenant and agree as follows: SECTION 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), in which event the Company shall have no obligation under this Agreement to continue Indemnitee in any such position. SECTION 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. SECTION 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. SECTION 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 favor. 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), or the Court in which such Proceeding shall have been brought or is pending, shall determine. SECTION 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. SECTION 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 2 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. SECTION 7. PROCEDURE FOR DETERMINATION OF ENTITLEMENT TO INDEMNIFICATION. (a) 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. (b) 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(b)) 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 such 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 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. (c) In the event the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 7(b) 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 3 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 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 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 or the person so appointed shall act as Independent Counsel under Section 7(b) 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(b) 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). SECTION 8. PRESUMPTIONS AND EFFECT OF CERTAIN PROCEEDINGS. (a) 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. (b) 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 60-day period may be extended for a reasonable time, not to exceed an additional 30 days, if the person, persons or entity making the determination with respect to entitlement to indemnification in good 4 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(b) shall not apply (i) if the determination of entitlement to indemnification is to be made by the stockholders pursuant to Section 7(b) of this Agreement and if (A) within 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 75 days after such receipt and such determination is made thereat, or (B) a special meeting of stockholders is called within 15 days after such receipt for the purpose of making such determination, such meeting is held within 60 days after having been so called and such determination is made thereat, or (ii) if the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 7(b) of this Agreement. (c) 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. SECTION 9. REMEDIES OF INDEMNITEE. (a) 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(b) 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 therefor, 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 8 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 pursuant to the provisions of the Arbitrations Act (Ontario). Indemnitee shall commence such proceeding seeking an adjudication or an award in arbitration within 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. (b) 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 5 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. (c) 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. (d) 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. (e) In the event that Indemnitee, pursuant to this Section 9, 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. SECTION 10. NON-EXCLUSIVITY: SURVIVAL OF RIGHTS; INSURANCE; SUBROGATION. (a) 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. (b) 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 6 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. (c) 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. (d) 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. SECTION 11. DURATION OF AGREEMENT. This Agreement shall continue until and terminate upon the later of: (a) 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. SECTION 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 (b) 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-id, illegal or unenforceable. SECTION 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. SECTION 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. 7 SECTION 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. SECTION 16. DEFINITIONS. For purposes of this Agreement: (a) "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 Sections 13(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 event constitute less than a majority of the Board of Directors thereafter; or (iii) during any period of two consecutive years, individuals who at the 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. (b) "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. (c) "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. (d) "Effective Date" means May 21, 1996. (e) "Expenses" shall include all reasonable attorneys' 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. 8 (f) "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, the 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. (g) "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. SECTION 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. SECTION 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. SECTION 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: (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 1Z6 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. 9 SECTION 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. SECTION 21. MISCELLANEOUS. Use of the masculine pronoun shall be deemed to include usage of the feminine pronoun where appropriate. 10 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year first above written. VISIBLE GENETICS INC. By: --------------------------------- SAMUEL SCHWARTZ SECRETARY AND DIRECTOR INDEMNITEE DR. ARTHUR W.G. COLE By: --------------------------------- Dr. Arthur W.G. Cole Executive Vice President and Chief Business Officer Address: c/o Visible Genetics Inc. 700 Bay Street, Suite 1000 Box 333 Toronto, Ontario M5G 1Z6 11 EX-10.31 7 a2080893zex-10_31.txt EXHIBIT 10.31 EXHIBIT 10.31 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT made as of the first day of February, 2002. B E T W E E N 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 hereinafter referred to as the "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 Suwanee in the State of Georgia hereinafter referred to as the "EMPLOYER" - and - THOMAS J. CLARKE, an individual resident in the City of Lilburn, in the State of Georgia hereinafter referred to as the "EXECUTIVE" WHEREAS the Executive has been employed by the Employer since December 14, 1999; AND WHEREAS the Employer and Executive wish to confirm the terms and conditions of that employment and to set out the terms and conditions of the employment on an ongoing basis; AND WHEREAS the Employer is a wholly owned subsidiary of VGI; The parties agree as follows: 1. POSITION, DUTIES AND REMUNERATION 1.1 The Executive shall serve as the Chief Financial Officer of the Employer. At the request of VGI, the Executive also shall serve as the Chief Financial Officer of VG1. The Executive will be paid an annual salary of two hundred twenty five thousand dollars (US $225,000) payable in accordance with the Employer's normal payroll policy. 1.2 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 of equal rank, including the Employer's bonus plan and the Employer's group, life, medical, dental, hospital, long-term disability, accidental death and dismemberment insurance benefit 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 equal rank to the Employer. All plans shall be administered and governed by their respective terms. 1.3 The Executive agrees to perform faithfully the duties inherent in the position and all other lawful instructions and duties as the Employer may from time to time reasonably require. 1.4 The Executive agrees to use his best efforts to promote the interests of the Employer and its affiliates, including 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. 1.5 During the term of his employment, the Executive agrees to refrain from engaging in any activity which will in any manner, directly or indirectly, compete with the trade or business of VGI or the Employer or any other affiliate of VGI. 1.6 During the term of his employment, the Executive agrees not to possess or acquire, directly or indirectly, any interest in any firm, partnership, association or corporation, the business operations of which will in any manner, directly or indirectly, compete with the business of VGI, the Employer or any other affiliate of VGI other than as a stockholder holding no greater than one per cent (1%) of a public company whose shares are listed for trading on a recognized stock exchange or traded on the over-the-counter market. 1.7 The Employer agrees in its sole discretion to review the salary and benefits payable to Executive hereunder annually. 2 1.8 Provided the Executive submits reasonably detailed receipts or other supporting documentation to the Employer, the Employer shall reimburse the Executive for all proper and reasonable out-of-pocket expenses actually incurred by the Executive in the performance of his duties hereunder. 2. EMPLOYMENT CONDITIONS 2.1 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. 3. TERMINATION OF EMPLOYMENT 3.1 This Agreement and the employment of the Executive may be terminated by the Employer for any reason upon prior written notice and payment of an amount equal to twelve (12) months' salary at the rate in effect at the time of termination plus one (1) additional month for each full year of employment with the Employer after December 14, 2000, but in no event more than a total of eighteen (18) months salary ("Termination Payment"). Such amount shall be paid as a lump sum payment subject to all statutory deductions within thirty (30) days following termination. 3.2 The Executive may be dismissed at any time by the Employer for Cause. For purposes of this Article 3, "Cause" means the Executive (a) fails in any material respect to perform his obligations hereunder as provided herein, provided that such Cause shall not exist unless the Employer shall first have provided the Executive with written notice specifying in reasonable detail the factors constituting such material failure and such material failure shall not have been cured by the Executive within 10 days after such notice; (b) has been convicted of a felony or has entered a plea of guilty or NOLO CONTENDERE with respect thereto; (c) has committed any act in connection with his employment with the Employer which involved fraud, misappropriation of funds, or breach of fiduciary duty to the Employer or any affiliate thereof; or (d) has breached in any material respect any of the provisions of the Confidentiality, Invention Agreement and Non-Compete Agreement between the Executive and the Employer dated December 14, 1999. 3 3.3 The employment of the Executive may be terminated by the Executive for any reason upon prior written notice to the Employer of one hundred twenty (120) days. 3.4 Unless Article 4 hereof is applicable, upon the termination of this Agreement and on termination of the employment of the Executive, whether upon notice or otherwise, the Executive shall have no claim against the Employer for any further liability to make payments in connection with the termination of the Executive's employment, other than those arising from this Article 3. 4. CHANGE OF CONTROL AND RETENTION BENEFITS 4.1 DEFINITIONS. For the purposes of this Article 4, the following terms shall have the meaning set out below: (a) "2001 Compensation" shall mean the Executive's gross base salary paid to him in calendar year 2001, plus the gross amount of any cash bonuses paid to the Executive in calendar year 2001. (b) "Cause" shall mean the Employer's right to terminate the Executive's employment on the basis of (i) the Executive's willful and continued failure to substantially perform his material duties of employment provided that the Employer shall have first provided the Executive with written notice specifying in reasonable detail the factors constituting such failure and such failure shall not have been cured within thirty (30) days after such notice; (ii) any commission of an act of fraud, misappropriation, or embezzlement with respect to the business or property of the Employer which is intended to result in substantial personal enrichment of the Executive or causes material harm to the Employer, or (iii) the Executive's conviction of, or plea of guilty or NOLO CONTENDERE to, a felony; PROVIDED, HOWEVER, the Executive shall not be terminated for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Employer's (or its successor's) Board of Directors (the "Board") at a meeting of the Board called and held for such purpose, finding that, 4 in the good faith opinion of the Board, the Executive was guilty of the alleged conduct and specifying the particulars thereof in detail; PROVIDED, FURTHER, that the Executive must have received a minimum 30-day notice of such Board meeting and the detailed allegations against the Executive, and that the Executive has been provided the opportunity, together with the Executive's counsel, to be heard before the Board in opposition to the alleged conduct. (c) "Change in Control" shall mean the happening of any one of the following events: (i) Upon the acquisition by any person, entity or "group," within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 (the "Exchange Act") (other than an acquisition by VGI, the Employer, or any Subsidiary or any employee benefit plan of VGI, the Employer or any Subsidiary) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of fifty percent (50%) or more of either the then outstanding shares of common stock of the Employer or VGI, or the combined voting power of either the Employer's or VGI's then outstanding voting securities, entitled to vote generally in the election of directors; (ii) If individuals who constitute the Board of Directors of the Employer or VGI as of the date hereof (each an "Incumbent Board") cease for any reason to constitute at least a majority of such Board of Directors, provided that any person becoming a member of the Board of Directors of either the Employer or VGI subsequent to the date hereof whose election, or nomination for election by the Employer's or VGI's shareholders, was approved by a vote of at least a majority of the directors then comprising the respective Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is in connection with the actual or threatened election contest relating to the election of the directors of the Employer or VGI, as such terms are used in Rule 141-11 of Regulation 14A promulgated under the Exchange act) shall be, for 5 purposes of this Agreement, considered as though such person were a member of such Incumbent Board; or (iii) Upon approval of the stockholders of the Employer or VGI of (A) a reorganization, merger or consolidation, in each case, with respect to which persons who were shareholders of the Employer or VGI immediately prior to such reorganization, merger or consolidation do not, immediately thereafter, own more than fifty (50%) of the combined voting power entitled to vote generally in the election of directors of the reorganized, merged or consolidated company, (B) a liquidation or dissolution of the Employer or VGI (other than a liquidation or dissolution in connection with a bankruptcy or insolvency or similar event of the Employer or VGI, or a liquidation or dissolution in which shareholders of the Employer or VGI receive less than a total of US $75 million in connection with such liquidation or dissolution), or (C) the sale of all or substantially all of the assets of the Employer or VGI. (d) "Change of Control Benefit" shall have the meaning set forth in Section 4.2 hereof. (e) "Retention Benefit" shall have the meaning set forth in Section 4.3 hereof. (f) "Retention Benefit Payment Period" shall have the meaning set forth in Section 4.3 hereof. (g) "Subsidiary" shall mean any person or entity of whom VGI or the Employer, directly or indirectly, owns fifty percent (50%) or more of the combined voting power entitled to vote generally in the election of directors. (h) "Voluntary Termination" shall mean a voluntary termination of employment with the Employer by the Executive for reasons other than death or disability. 4.2 CHANGE OF CONTROL BENEFIT. If the Executive is employed with the Employer on the date that a Change of Control is deemed 6 to be effective, the Executive shall be entitled to a cash payment equal to the Executive's 2001 Compensation (the "Change of Control Benefit"). The Employer shall pay the Executive the Change of Control Benefit in a lump sum, less applicable withholdings, within five (5) business days immediately following the Change of Control. The payment of the Change of Control Benefit shall be in addition to the payment of all salary and any other amounts otherwise payable to the Executive under this Agreement, option agreement or other agreements with the Employer or VGI or otherwise in connection with his employment by the Employer whether pursuant to employee benefit plans or policies of the Employer or any severance or other benefit available to the Executive under applicable law. 4.3 RETENTION BENEFITS. If the Executive is employed by the Employer or VGI's other Subsidiaries following a Change of Control, the Executive shall be entitled to accrue a cash benefit (the "Retention Benefit") provided the Executive remains employed for one (1) or two (2) 90-day periods immediately following the Change of Control, (the "Retention Benefit Payment Period"). The accrued quarterly Retention Benefit shall be an amount equal to the Executive's 2001 Compensation, so that if the Executive remains employed for the entire Retention Benefit Payment Period, he would earn a Total Retention Benefit equal to two hundred percent (200%) of his 2001 Compensation. The Retention Benefit shall be paid to the Executive in two (2) installments as so earned: The first installment shall be paid ninety (90) days following the date that a Change of Control is deemed to be effective, provided that the Executive is so employed by the Employer, VGI or a Subsidiary on the ninetieth (90th) following a Change of Control, and, if applicable, a second and final installment shall be paid at the end of the Retention Benefit Payment Period, provided, that the Executive is so employed as of the final day of the Retention Benefit Payment Period. If the Executive's employment with the Employer and VGI and Subsidiaries is terminated following a Change of Control, but prior to the end of the second 90 day period for any reason (including death or disability) other than a termination for Cause by the Employer or a Voluntary Termination, the Employer shall pay the Executive the full amount of the Retention Benefit that the Executive would have been entitled to receive from the effective date of the Change of Control through the end of the Retention Benefit Payment Period. The Employer shall pay such amount to the Executive within five (5) business days following the termination of 7 the Executive's employment. The payment of the Retention Benefit shall be in addition to the payment of all salary and any other amounts otherwise payable to the Executive under this Agreement or any option agreement or other agreements with the Employer or VGI or otherwise in connection with his employment by the Employer, VGI or one of its Subsidiaries whether pursuant to employee benefit plans or policies of the Employer, VGI or one of its Subsidiaries, or any severance or other benefit available to the Executive under applicable law. 4.4 LIMIT ON CHANGE OF CONTROL AND RETENTION BENEFITS. Notwithstanding any other provision of this Article 4 to the contrary, if any Retention Benefit payment or payments, or any portion of the Change of Control Benefit payment, shall be deemed to be a "parachute payment" as defined in section 280G(b)(2) of the Internal Revenue Code of 1986, as amended (the "Code"), the Employer shall not be obligated to pay any portion of a Retention Benefit payment or payments, or any portion of the Change of Control Benefit payment, to the extent that any such payment or payments shall be deemed an "excess" parachute payment to the Executive as defined in section 280G(b)(1) of the Code and not deductible by the Employer in accordance with section 280G(a) of the Code. Any abatement of payment obligations pursuant to this Section 4.3 shall commence with the last Retention Benefit payment that is earned and accrued by the Executive pursuant to Section 4.4 hereof, and, if necessary, shall continue with preceding Retention Benefit payment obligations in the order of last accrued, first abated, with the Change of Control Benefit payment being the last payment obligation to be abated, if necessary. 4.5 SUCCESOR LIABILITY. Any successor to the Employer or VGI (whether directly or indirectly and whether by purchase, lease, merger, consolidation, or otherwise) or to all or substantially all of the Employer's or VGI's business and/or assets shall assume the Employer's or VGI's respective obligations under this Article 4 and agree expressly to perform the Employer's or VGI's respective obligations under this Article 4 in the same manner and to the same extent as the Employer or VGI would be required to perform such obligations in the absence of a succession. For all purposes under this Article 4, the term "Employer" shall include any successor to the Employer's business and/or assets and the term "VGI" shall include any successor to VGI's business and/or assets. 8 4.6 TERMINATION UNDER CERTAIN CIRCUMSTANCES. (a) If the Executive's employment terminates for any reason prior to a Change in Control, the Executive shall not be entitled to any payment of a Change of Control Benefit or any Retention Benefits pursuant to this Article 4, but shall be entitled to any payment to which the Executive otherwise would be entitled under any other provision of this Agreement, under any options agreement or other agreements with Employer or VGI to the extent otherwise applicable, under the employer's then existing employee benefits plans or policies at the time of termination, and under any required severance benefits pursuant to applicable law, if any. (b) If, following a Change in Control, the Executive is terminated by the Employer for Cause or the Executive has a Voluntary Termination, the Executive shall not be entitled to any payment of Retention Benefit under this Article 4 for any period following said termination, but shall be entitled to any payment to which the Executive otherwise would be entitled to under any other provisions of this Agreement, under any options agreement or other agreements with the Employer or VGI, to the extent otherwise applicable, under the Employer's then-existing employee benefit plans or policies at the time of termination, and under any required severance benefit pursuant to applicable law, if any. 4.7 TERMINATION OF ARTICLE 4. The Board of the Employer and VGI shall have the right, in their sole discretion, to terminate the provisions of this Article 4 effective as of December 31 of any year of the term by delivery of written notice to the Executive by no later than January 15 of the following year, provided however, that if a Change of Control occurs prior to such December 31, or if the Employer or VGI has entered into a binding agreement prior to such December 31 setting forth the material terms by which the Change of Control will be effected, this clause shall have no force or effect. 4.8 NO DUTY TO MITIGATE. The Executive shall not be required to mitigate the amount of any payment contemplated by this 9 Article 4, nor shall any such payment be reduced by any earnings that the Executive may receive from any other source. 4.9 VGI PRIMARILY OBLIGATED. VGI shall cause the Employer to perform all of the Employer's obligations under this Article 4. If the Employer or VGI shall fail to perform, or shall otherwise be in default of any obligations under this Article 4, the Executive shall have the right to proceed against the Employer and/or VGI, or both of them, as the primary obligor under this Article 4 in accordance with the provisions hereof. 4.10 WITHHOLDING. All payments made pursuant to this Article 4 shall be subject to withholding of applicable income and employment taxes. 5. CONTRACT PROVISIONS 5.1 GOVERNING LAW. The validity, interpretation, construction and performance of this Agreement shall be governed by the internal substantive laws, but not the conflicts of law rules, of the State of New York. 5.2 Resolution of Disputes. (a) Any dispute or controversy arising out of, relating to, or in connection with this Agreement or the interpretation, validity, construction, performance, breach, or termination of this Agreement, shall be settled by binding arbitration to be held in New York County, New York and shall be conducted in accordance with the Expedited Employment Arbitration Rules of the American Arbitration Association, in effect at the time of the arbitration ("Rules"), supplemented, as necessary, by those principles which would be applied by a court of law or equity. The arbitrator may grant injunctions or other relief in such dispute or controversy. The decision of the arbitrator shall be final, conclusive and binding on the parties to the arbitration. Judgment may be entered on the arbitrator's decision in any court having jurisdiction. 10 (b) The arbitrator(s) shall apply New York law to the merits of any dispute or claim, without reference to conflicts of law rules. The arbitration proceedings shall be governed by federal arbitration law and by the Rules, without reference to state arbitration law. (c) Notwithstanding anything herein to the contrary, the parties may seek specific performance or injunctive relief with respect to the matters set forth in this Agreement in the United States District Court for the Southern District of New York or a state court located in New York County, New York. Each party (i) submits to the jurisdiction of any such arbitrator or court for the purpose of any such suit, action, or other proceeding, (ii) agrees that such claims in respect of any such suit, action or proceeding may be heard and determined before any such arbitrator or in any such court, (iii) waives, to the fullest extent permitted by law, any immunity it may have acquired, or hereafter may acquire, from jurisdiction of any such arbitrator or court or from any legal process therein, and (iv) agrees not to commence any such suit, action or proceeding other than before such arbitrator or in such court, and waives, to the fullest extent permitted by applicable law, any claim that any such suit, action or proceeding is brought in an inconvenient forum. Each party hereby irrevocably designates CT Corporation System, 111 Eighth Avenue, New York, New York 10011 as agent upon whom process against it may be served for the purposes of this Agreement. (d) EXECUTIVE HAS READ AND UNDERSTANDS THIS SECTION 5.2, WHICH DISCUSSES ARBITRATION. EXECUTIVE UNDERSTANDS THAT SUBMITTING ANY CLAIMS ARISING OUT OF, RELATING TO, OR IN CONNECTION WITH THIS AGREEMENT, OR THE INTERPRETATION, VALIDITY, CONSTRUCTION, PERFORMANCE, BREACH OR TERMINATION THEREOF TO BINDING ARBITRATION, CONSTITUTES A WAIVER OF EXECUTIVES RIGHT TO A JURY TRIAL AND RELATES TO THE RESOLUTION OF ALL DISPUTES RELATING TO AND ARISING FROM THIS AGREEMENT. 11 5.3 HEADINGS. The headings of the Sections herein are inserted for convenience of reference only and shall not affect the meaning or construction hereof. 5.4 WITHHOLDING. All payment 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. 5.5 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. 5.6 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. 5.7 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. 5.8 ENTIRE AGREEMENT. This Agreement, contains the entire contract of Employment between the parties hereto with respect to the subject matter of this Agreement, and supersedes and replaces all previous negotiations, understandings and agreements whether verbal or written with respect to any matters herein referred to. The parties acknowledge that the provisions of the Confidentiality and 12 Invention Assignment Agreement dated December 14, 1999 between Employer and the Executive remains in full force and effect. 5.9 SURVIVAL. The provisions of Articles hereof shall survive the termination of this Agreement for the periods of time specified or contemplated therein. 5.10 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, on the date of his termination, 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. 5.11 NOTICES. Notices and all other communications contemplated by this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered by either FedEx of other reputable overnight courier service or by registered or certified U.S. mail, return receipt requested. In the case of the Executive, mailed notices shall be addressed to him at the home address which he most recently communicated to the Employer in writing. In the case of the Employer, mailed notices shall be addressed to its corporate headquarters, and all notices shall be directed to the attention of its President, with a copy to Visible Genetics Inc., 700 Bay Street, Toronto, Ontario, M5G ZG Canada, attention: General Counsel. All notices to VGI shall be delivered to the foregoing address. Notices shall be deemed deliverable and received upon receipt or refusal of receipt. 13 IN WITNESS WHEREOF this Agreement is executed as of the day, month and year first above written. ) VISIBLE GENETICS INC. ) --------------------------------------- ) Per: ) ) --------------------------------------- ) Per: ) ) ) ) VISIBLE GENETICS CORPORATION --------------------------------------- Per: --------------------------------------- Per: --------------------------------------- Thomas J. Clarke 14 EX-10.32 8 a2080893zex-10_32.txt EXHIBIT 10.32 EXHIBIT 10.32 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT made as of the first day of February, 2002. B E T W E E N 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 hereinafter referred to as the "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 Suwanee in the State of Georgia hereinafter referred to as the "EMPLOYER" - and - TIMOTHY W. ELLIS, an individual resident in the City of Clifton, in the Commonwealth of Virginia hereinafter referred to as the "EXECUTIVE" WHEREAS the Executive has been employed by the Employer since November 1, 1999; AND WHEREAS the Employer and Executive wish to confirm the terms and conditions of that employment and to set out the terms and conditions of the employment on an ongoing basis; AND WHEREAS the Employer is a wholly owned subsidiary of VGI; The parties agree as follows: 1. POSITION, DUTIES AND REMUNERATION 1.1 The Executive shall serve as the Chief Operating Officer of the Employer. At the request of VGI, the Executive also shall serve as the Chief Operating Officer of VGI. The Executive will be paid an annual salary of two hundred twenty five thousand dollars (US $225,000) in equal monthly installments. 1.2 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 of equal rank, including the Employer's bonus plan and the Employer's group, life, medical, dental, hospital, long-term disability, accidental death and dismemberment insurance benefit 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 equal rank to the Employer. All plans shall be administered and governed by their respective terms. 1.3 The Executive agrees to perform faithfully the duties inherent in the position and all other lawful instructions and duties as the Employer may from time to time reasonably require. 1.4 The Executive agrees to use his best efforts to promote the interests of the Employer and its affiliates, including 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. 1.5 During the term of his employment, the Executive agrees to refrain from engaging in any activity which will in any manner, directly or indirectly, compete with the trade or business of VGI or the Employer or any other affiliate of VGI. 1.6 During the term of his employment, the Executive agrees not to possess or acquire, directly or indirectly, any interest in any firm, partnership, association or corporation, the business operations of which will in any manner, directly or indirectly, compete with the business of VGI, the Employer or any other affiliate of VGI other than as a stockholder holding no greater than one per cent (1%) of a public company whose shares are listed for trading on a recognized stock exchange or traded on the over-the-counter market. 1.7 The Employer agrees in its sole discretion to review the salary and benefits payable to Executive hereunder annually. 2 2. EMPLOYMENT CONDITIONS 2.1 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. 3. TERMINATION OF EMPLOYMENT 3.1 This Agreement and the employment of the Executive may be terminated by the Employer for any reason upon prior written notice and payment of an amount equal to twelve (12) months' salary at the rate in effect at the time of termination plus one (1) additional month for each full year of employment with the Employer after November 1, 2000, but in no event more than a total of eighteen (18) months salary ("Termination Payment"). Such amount shall be paid as a lump sum payment subject to all statutory deductions within thirty (30) days following termination. 3.2 The Executive may be dismissed at any time by the Employer for Cause. For purposes of this Article 3, "Cause" means the Executive (a) fails in any material respect to perform his obligations hereunder as provided herein, provided that such Cause shall not exist unless the Employer shall first have provided the Executive with written notice specifying in reasonable detail the factors constituting such material failure and such material failure shall not have been cured by the Executive within 10 days after such notice; (b) has been convicted of a felony or has entered a plea of guilty or NOLO CONTENDERE with respect thereto; (c) has committed any act in connection with his employment with the Employer which involved fraud, misappropriation of funds, or breach of fiduciary duty to the Employer or any affiliate thereof; or (d) has breached in any material respect any of the provisions of the Confidentiality, Invention Agreement and Non-Compete Agreement between the Executive and the Employer dated November 1, 1999. 3.3 The employment of the Executive may be terminated by the Executive for any reason upon prior written notice to the Employer of one hundred twenty (120) days. 3.4 Unless Article 4 hereof is applicable, upon the termination of this Agreement and on termination of the employment of the Executive, whether upon notice or otherwise, the 3 Executive shall have no claim against the Employer for any further liability to make payments in connection with the termination of the Executive's employment, other than those arising from this Article 3. 3.5 Provided the Executive submits reasonably detailed receipts or other supporting documentation to the Employer, the Employer shall reimburse the Executive for all proper and reasonable out-of-pocket expenses actually incurred by the Executive in the performance of his duties hereunder. 4. CHANGE OF CONTROL AND RETENTION BENEFITS 4.1 DEFINITIONS. For the purposes of this Article 4, the following terms shall have the meaning set out below: (a) "2001 Compensation" shall mean the Executive's gross base salary paid to him in calendar year 2001, plus the gross amount of any cash bonuses paid to the Executive in calendar year 2001. (b) "Cause" shall mean the Employer's right to terminate the Executive's employment on the basis of (i) the Executive's willful and continued failure to substantially perform his material duties of employment provided that the Employer shall have first provided the Executive with written notice specifying in reasonable detail the factors constituting such failure and such failure shall not have been cured within thirty (30) days after such notice; (ii) any commission of an act of fraud, misappropriation, or embezzlement with respect to the business or property of the Employer which is intended to result in substantial personal enrichment of the Executive or causes material harm to the Employer, or (iii) the Executive's conviction of, or plea of guilty or NOLO CONTENDERE to, a felony; PROVIDED, HOWEVER, the Executive shall not be terminated for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Employer's (or its successor's) Board of Directors (the "Board") at a meeting of the Board called and held for such purpose, finding that, 4 in the good faith opinion of the Board, the Executive was guilty of the alleged conduct and specifying the particulars thereof in detail; PROVIDED, FURTHER, that the Executive must have received a minimum 30-day notice of such Board meeting and the detailed allegations against the Executive, and that the Executive has been provided the opportunity, together with the Executive's counsel, to be heard before the Board in opposition to the alleged conduct. (c) "Change in Control" shall mean the happening of any one of the following events: (i) Upon the acquisition by any person, entity or "group," within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 (the "Exchange Act") (other than an acquisition by VGI, the Employer, or any Subsidiary or any employee benefit plan of VGI, the Employer or any Subsidiary) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of fifty percent (50%) or more of either the then outstanding shares of common stock of the Employer or VGI, or the combined voting power of either the Employer's or VGI's then outstanding voting securities, entitled to vote generally in the election of directors; (ii) If individuals who constitute the Board of Directors of the Employer or VGI as of the date hereof (each an "Incumbent Board") cease for any reason to constitute at least a majority of such Board of Directors, provided that any person becoming a member of the Board of Directors of either the Employer or VGI subsequent to the date hereof whose election, or nomination for election by the Employer's or VGI's shareholders, was approved by a vote of at least a majority of the directors then comprising the respective Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is in connection with the actual or threatened election contest relating to the election of the directors of the Employer or VGI, as such terms are used in Rule 141-11 of Regulation 14A promulgated under the Exchange act) shall be, for 5 purposes of this Agreement, considered as though such person were a member of such Incumbent Board; or (iii) Upon approval of the stockholders of the Employer or VGI of (A) a reorganization, merger or consolidation, in each case, with respect to which persons who were shareholders of the Employer or VGI immediately prior to such reorganization, merger or consolidation do not, immediately thereafter, own more than fifty (50%) of the combined voting power entitled to vote generally in the election of directors of the reorganized, merged or consolidated company, (B) a liquidation or dissolution of the Employer or VGI (other than a liquidation or dissolution in connection with a bankruptcy or insolvency or similar event of the Employer or VGI, or a liquidation or dissolution in which shareholders of the Employer or VGI receive less than a total of US $75 million in connection with such liquidation or dissolution), or (C) the sale of all or substantially all of the assets of the Employer or VGI. (d) "Change of Control Benefit" shall have the meaning set forth in Section 4.2 hereof. (e) "Retention Benefit" shall have the meaning set forth in Section 4.3 hereof. (f) "Retention Benefit Payment Period" shall have the meaning set forth in Section 4.3 hereof. (g) "Subsidiary" shall mean any person or entity of whom VGI or the Employer, directly or indirectly, owns fifty percent (50%) or more of the combined voting power entitled to vote generally in the election of directors. (h) "Voluntary Termination" shall mean a voluntary termination of employment with the Employer by the Executive for reasons other than death or disability. 4.2 CHANGE OF CONTROL BENEFIT. If the Executive is employed with the Employer on the date that a Change of Control is deemed 6 to be effective, the Executive shall be entitled to a cash payment equal to the Executive's 2001 Compensation (the "Change of Control Benefit"). The Employer shall pay the Executive the Change of Control Benefit in a lump sum, less applicable withholdings, within five (5) business days immediately following the Change of Control. The payment of the Change of Control Benefit shall be in addition to the payment of all salary and any other amounts otherwise payable to the Executive under this Agreement, option agreement or other agreements with the Employer or VGI or otherwise in connection with his employment by the Employer whether pursuant to employee benefit plans or policies of the Employer or any severance or other benefit available to the Executive under applicable law. 4.3 RETENTION BENEFITS. If the Executive is employed by the Employer or VGI's other Subsidiaries following a Change of Control, the Executive shall be entitled to accrue a cash benefit (the "Retention Benefit") provided the Executive remains employed for one (1) or two (2) 90-day periods immediately following the Change of Control, (the "Retention Benefit Payment Period"). The accrued quarterly Retention Benefit shall be an amount equal to the Executive's 2001 Compensation, so that if the Executive remains employed for the entire Retention Benefit Payment Period, he would earn a Total Retention Benefit equal to two hundred percent (200%) of his 2001 Compensation. The Retention Benefit shall be paid to the Executive in two (2) installments as so earned: The first installment shall be paid ninety (90) days following the date that a Change of Control is deemed to be effective, provided that the Executive is so employed by the Employer, VGI or a Subsidiary on the ninetieth (90th) following a Change of Control, and, if applicable, a second and final installment shall be paid at the end of the Retention Benefit Payment Period, provided, that the Executive is so employed as of the final day of the Retention Benefit Payment Period. If the Executive's employment with the Employer and VGI and Subsidiaries is terminated following a Change of Control, but prior to the end of the second 90 day period for any reason (including death or disability) other than a termination for Cause by the Employer or a Voluntary Termination, the Employer shall pay the Executive the full amount of the Retention Benefit that the Executive would have been entitled to receive from the effective date of the Change of Control through the end of the Retention Benefit Payment Period. The Employer shall pay such amount to the Executive within five (5) business days following the termination of 7 the Executive's employment. The payment of the Retention Benefit shall be in addition to the payment of all salary and any other amounts otherwise payable to the Executive under this Agreement or any option agreement or other agreements with the Employer or VGI or otherwise in connection with his employment by the Employer, VGI or one of its Subsidiaries whether pursuant to employee benefit plans or policies of the Employer, VGI or one of its Subsidiaries, or any severance or other benefit available to the Executive under applicable law. 4.4 LIMIT ON CHANGE OF CONTROL AND RETENTION BENEFITS. Notwithstanding any other provision of this Article 4 to the contrary, if any Retention Benefit payment or payments, or any portion of the Change of Control Benefit payment, shall be deemed to be a "parachute payment" as defined in section 280G(b)(2) of the Internal Revenue Code of 1986, as amended (the "Code"), the Employer shall not be obligated to pay any portion of a Retention Benefit payment or payments, or any portion of the Change of Control Benefit payment, to the extent that any such payment or payments shall be deemed an "excess" parachute payment to the Executive as defined in section 280G(b)(1) of the Code and not deductible by the Employer in accordance with section 280G(a) of the Code. Any abatement of payment obligations pursuant to this Section 4.3 shall commence with the last Retention Benefit payment that is earned and accrued by the Executive pursuant to Section 4.4 hereof, and, if necessary, shall continue with preceding Retention Benefit payment obligations in the order of last accrued, first abated, with the Change of Control Benefit payment being the last payment obligation to be abated, if necessary. 4.5 SUCCESOR LIABILITY. Any successor to the Employer or VGI (whether directly or indirectly and whether by purchase, lease, merger, consolidation, or otherwise) or to all or substantially all of the Employer's or VGI's business and/or assets shall assume the Employer's or VGI's respective obligations under this Article 4 and agree expressly to perform the Employer's or VGI's respective obligations under this Article 4 in the same manner and to the same extent as the Employer or VGI would be required to perform such obligations in the absence of a succession. For all purposes under this Article 4, the term "Employer" shall include any successor to the Employer's business and/or assets and the term "VGI" shall include any successor to VGI's business and/or assets. 8 4.6 TERMINATION UNDER CERTAIN CIRCUMSTANCES. (a) If the Executive's employment terminates for any reason prior to a Change in Control, the Executive shall not be entitled to any payment of a Change of Control Benefit or any Retention Benefits pursuant to this Article 4, but shall be entitled to any payment to which the Executive otherwise would be entitled under any other provision of this Agreement, under any options agreement or other agreements with Employer or VGI to the extent otherwise applicable, under the employer's then existing employee benefits plans or policies at the time of termination, and under any required severance benefits pursuant to applicable law, if any. (b) If, following a Change in Control, the Executive is terminated by the Employer for Cause or the Executive has a Voluntary Termination, the Executive shall not be entitled to any payment of Retention Benefit under this Article 4 for any period following said termination, but shall be entitled to any payment to which the Executive otherwise would be entitled to under any other provisions of this Agreement, under any options agreement or other agreements with the Employer or VGI, to the extent otherwise applicable, under the Employer's then-existing employee benefit plans or policies at the time of termination, and under any required severance benefit pursuant to applicable law, if any. 4.7 TERMINATION OF ARTICLE 4. The Board of the Employer and VGI shall have the right, in their sole discretion, to terminate the provisions of this Article 4 effective as of December 31 of any year of the term by delivery of written notice to the Executive by no later than January 15 of the following year, provided however, that if a Change of Control occurs prior to such December 31, or if the Employer or VGI has entered into a binding agreement setting forth the material terms by which the Change of Control will be effected prior to such December 31, this clause shall have no force or effect. 4.8 NO DUTY TO MITIGATE. The Executive shall not be required to mitigate the amount of any payment contemplated by this 9 Article 4, nor shall any such payment be reduced by any earnings that the Executive may receive from any other source. 4.9 VGI PRIMARILY OBLIGATED. VGI shall cause the Employer to perform all of the Employer's obligations under this Article 4. If the Employer or VGI shall fail to perform, or shall otherwise be in default of any obligations under this Article 4, the Executive shall have the right to proceed against the Employer and/or VGI, or both of them, as the primary obligor under this Article 4 in accordance with the provisions hereof. 4.10 WITHHOLDING. All payments made pursuant to this Article 4 shall be subject to withholding of applicable income and employment taxes. 5. CONTRACT PROVISIONS 5.1 GOVERNING LAW. The validity, interpretation, construction and performance of this Agreement shall be governed by the internal substantive laws, but not the conflicts of law rules, of the State of New York. 5.2 Resolution of Disputes. (a) Any dispute or controversy arising out of, relating to, or in connection with this Agreement or the interpretation, validity, construction, performance, breach, or termination of this Agreement, shall be settled by binding arbitration to be held in New York County, New York and shall be conducted in accordance with the Expedited Employment Arbitration Rules of the American Arbitration Association, in effect at the time of the arbitration ("Rules"), supplemented, as necessary, by those principles which would be applied by a court of law or equity. The arbitrator may grant injunctions or other relief in such dispute or controversy. The decision of the arbitrator shall be final, conclusive and binding on the parties to the arbitration. Judgment may be entered on the arbitrator's decision in any court having jurisdiction. 10 (b) The arbitrator(s) shall apply New York law to the merits of any dispute or claim, without reference to conflicts of law rules. The arbitration proceedings shall be governed by federal arbitration law and by the Rules, without reference to state arbitration law. (c) Notwithstanding anything herein to the contrary, the parties may seek specific performance or injunctive relief with respect to the matters set forth in this Agreement in the United States District Court for the Southern District of New York or a state court located in New York County, New York. Each party (i) submits to the jurisdiction of any such arbitrator or court for the purpose of any such suit, action, or other proceeding, (ii) agrees that such claims in respect of any such suit, action or proceeding may be heard and determined before any such arbitrator or in any such court, (iii) waives, to the fullest extent permitted by law, any immunity it may have acquired, or hereafter may acquire, from jurisdiction of any such arbitrator or court or from any legal process therein, and (iv) agrees not to commence any such suit, action or proceeding other than before such arbitrator or in such court, and waives, to the fullest extent permitted by applicable law, any claim that any such suit, action or proceeding is brought in an inconvenient forum. Each party hereby irrevocably designates CT Corporation System, 111 Eighth Avenue, New York, New York 10011 as agent upon whom process against it may be served for the purposes of this Agreement. (d) EXECUTIVE HAS READ AND UNDERSTANDS THIS SECTION 5.2, WHICH DISCUSSES ARBITRATION. EXECUTIVE UNDERSTANDS THAT SUBMITTING ANY CLAIMS ARISING OUT OF, RELATING TO, OR IN CONNECTION WITH THIS AGREEMENT, OR THE INTERPRETATION, VALIDITY, CONSTRUCTION, PERFORMANCE, BREACH OR TERMINATION THEREOF TO BINDING ARBITRATION, CONSTITUTES A WAIVER OF EXECUTIVES RIGHT TO A JURY TRIAL AND RELATES TO THE RESOLUTION OF ALL DISPUTES RELATING TO AND ARISING FROM THIS AGREEMENT. 11 5.3 HEADINGS. The headings of the Sections herein are inserted for convenience of reference only and shall not affect the meaning or construction hereof. 5.4 WITHHOLDING. All payment 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. 5.5 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. 5.6 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. 5.7 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. 5.8 ENTIRE AGREEMENT. This Agreement, contains the entire contract of Employment between the parties hereto with respect to the subject matter of this Agreement, and supersedes and replaces all previous negotiations, understandings and agreements whether verbal or written with respect to any matters herein referred to. The parties acknowledge that the provisions of the Confidentiality and 12 Invention Assignment Agreement dated November 1, 1999 between Employer and the Executive remains in full force and effect. 5.9 SURVIVAL. The provisions of Articles hereof shall survive the termination of this Agreement for the periods of time specified or contemplated therein. 5.10 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, on the date of his termination, 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. 5.11 NOTICES. Notices and all other communications contemplated by this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered by either FedEx of other reputable overnight courier service or by registered or certified U.S. mail, return receipt requested. In the case of the Executive, mailed notices shall be addressed to him at the home address which he most recently communicated to the Employer in writing. In the case of the Employer, mailed notices shall be addressed to its corporate headquarters, and all notices shall be directed to the attention of its President, with a copy to Visible Genetics Inc., 700 Bay Street, Toronto, Ontario, M5G ZG Canada, attention: General Counsel. All notices to VGI shall be delivered to the foregoing address. Notices shall be deemed deliverable and received upon receipt or refusal of receipt. 13 IN WITNESS WHEREOF this Agreement is executed as of the day, month and year first above written. ) VISIBLE GENETICS INC. ) --------------------------------------- ) Per: ) ) --------------------------------------- ) Per: ) ) ) ) VISIBLE GENETICS CORPORATION --------------------------------------- Per: --------------------------------------- Per: --------------------------------------- Timothy W. Ellis 14 EX-10.33 9 a2080893zex-10_33.txt EXHIBIT 10.33 EXHIBIT 10.33 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT made as of the first day of February, 2002. B E T W E E N 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 hereinafter referred to as the "EMPLOYER" - and - MARGUERITE ETHIER, an individual resident in the City of Toronto, in the Province of Ontario hereinafter referred to as the "EXECUTIVE" WHEREAS the Executive has been employed by the Employer since December 13, 1999; AND WHEREAS the Employer and Executive wish to confirm the terms and conditions of that employment and to set out the terms and conditions of the employment on an ongoing basis; The parties agree as follows: 1. POSITION, DUTIES AND REMUNERATION 1.1 The Executive shall serve as the Vice President and General Counsel of the Employer. The Executive will be paid an annual salary of two hundred twenty thousand Canadian dollars (CDN $225,000) payable in accordance with the company's normal payroll policy. 1.2 In addition to salary, for the performance of her services hereunder, the Executive shall be entitled to participate in all of the Employer's benefit plans generally available to its Executives of equal rank, including the Employer's bonus plan and the Employer's group, life, medical, dental, hospital, long-term disability, accidental death and dismemberment insurance benefit 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 equal rank to the Employer. All plans shall be administered and governed by their respective terms. 1.3 The Executive agrees to perform faithfully the duties inherent in the position and all other lawful instructions and duties as the Employer may from time to time reasonably require. 1.4 The Executive agrees to use her best efforts to promote the interests of the Employer and its affiliates, to devote her full time and attention to the business of the Employer and to adhere to the instructions and directives of the Employer. 1.5 During the term of her employment, the Executive agrees to refrain from engaging in any activity which will in any manner, directly or indirectly, compete with the trade or business of the Employer or any of its affiliates. 1.6 During the term of her employment, the Executive agrees not to possess or acquire, directly or indirectly, any interest in any firm, partnership, association or corporation, the business operations of which will in any manner, directly or indirectly, compete with the business of the Employer or any of its affiliates other than as a stockholder holding no greater than one per cent (1%) of a public company whose shares are listed for trading on a recognized stock exchange or traded on the over-the-counter market. 1.7 The Employer agrees in its sole discretion to review the salary and benefits payable to Executive hereunder annually. 1.8 Provided the Executive submits reasonably detailed receipts or other supporting documentation to the Employer, the Employer shall reimburse the Executive for all proper and reasonable out-of-pocket expenses actually incurred by the Executive in the performance of her duties hereunder. 2. EMPLOYMENT CONDITIONS 2.1 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. 2 3. TERMINATION OF EMPLOYMENT 3.1 This Agreement and the employment of the Executive may be terminated by the Employer for any reason upon prior written notice or payment of salary and benefits in lieu of notice for the Required Notice Period to be paid as a lump sum payment subject to all statutory deductions within thirty (30) days following termination. For purposes hereof, the "Required Notice Period" shall mean a period of twelve (12) months plus one (1) additional month for each full year of employment with the Employer after December 13, 2000. 3.2 The Executive may be dismissed at any time by the Employer for Cause. For purposes of this Article 3, "Cause" means the Executive (a) fails in any material respect to perform her obligations hereunder as provided herein, provided that such Cause shall not exist unless the Employer shall first have provided the Executive with written notice specifying in reasonable detail the factors constituting such material failure and such material failure shall not have been cured by the Executive within 10 days after such notice; (b) has been convicted of a felony or has entered a plea of guilty or NOLO CONTENDERE with respect thereto; (c) has committed any act in connection with her employment with the Employer which involved fraud, misappropriation of funds, or breach of fiduciary duty to the Employer or any affiliate thereof; or (d) has breached in any material respect any of the provisions of the Confidentiality, Invention Agreement and Non-Compete Agreement between the Executive and the Employer dated December 13, 1999. 3.3 The employment of the Executive may be terminated by the Executive for any reason upon prior written notice to the Employer of one hundred twenty (120) days. 3.4 Unless Article 4 hereof is applicable, upon the termination of this Agreement and on termination of the employment of the Executive, whether upon notice or otherwise, the Executive shall have no claim against the Employer for any further liability to make payments in connection with the termination of the Executive's employment, other than those arising from this Article 3. 3 3.5 The parties have negotiated the duration of the notice period set out in Sections 3.1 and 3.3 and the period of notice forms a part of the consideration given by the Executive for her salary. 4. CHANGE OF CONTROL AND RETENTION BENEFITS 4.1 DEFINITIONS. For the purposes of this Article 4, the following terms shall have the meaning set out below: (a) "2001 Compensation" shall mean the Executive's gross base salary paid to her in calendar year 2001, plus the gross amount of any cash bonuses paid to the Executive in calendar year 2001. (b) "Cause" shall mean the Employer's right to terminate the Executive's employment on the basis of (i) the Executive's willful and continued failure to substantially perform her material duties of employment provided that the Employer shall have first provided the Executive with written notice specifying in reasonable detail the factors constituting such failure and such failure shall not have been cured within thirty (30) days after such notice; (ii) any commission of an act of fraud, misappropriation, or embezzlement with respect to the business or property of the Employer which is intended to result in substantial personal enrichment of the Executive or causes material harm to the Employer, or (iii) the Executive's conviction of, or plea of guilty or NOLO CONTENDERE to, a felony; PROVIDED, HOWEVER, the Executive shall not be terminated for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Employer's (or its successor's) Board of Directors (the "Board") at a meeting of the Board called and held for such purpose, finding that, in the good faith opinion of the Board, the Executive was guilty of the alleged conduct and specifying the particulars thereof in detail; PROVIDED, FURTHER, that the Executive must have received a minimum 30-day notice of such Board meeting and the detailed allegations against the Executive, and that the Executive has been provided the opportunity, together with the Executive's counsel, to be heard 4 before the Board in opposition to the alleged conduct. (c) "Change in Control" shall mean the happening of any one of the following events: (i) Upon the acquisition by any person, entity or "group," within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 (the "Exchange Act") (other than an acquisition by VGI, the Employer, or any Subsidiary or any employee benefit plan of VGI, the Employer or any Subsidiary) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of fifty percent (50%) or more of either the then outstanding shares of common stock of the Employer or VGI, or the combined voting power of either the Employer's or VGI's then outstanding voting securities, entitled to vote generally in the election of directors; (ii) If individuals who constitute the Board of Directors of the Employer or VGI as of the date hereof (each an "Incumbent Board") cease for any reason to constitute at least a majority of such Board of Directors, provided that any person becoming a member of the Board of Directors of either the Employer or VGI subsequent to the date hereof whose election, or nomination for election by the Employer's or VGI's shareholders, was approved by a vote of at least a majority of the directors then comprising the respective Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is in connection with the actual or threatened election contest relating to the election of the directors of the Employer or VGI, as such terms are used in Rule 141-11 of Regulation 14A promulgated under the Exchange act) shall be, for purposes of this Agreement, considered as though such person were a member of such Incumbent Board; or (iii) Upon approval of the stockholders of the Employer or VGI of (A) a reorganization, merger or consolidation, in each case, with respect to which persons who were shareholders of the Employer or VGI 5 immediately prior to such reorganization, merger or consolidation do not, immediately thereafter, own more than fifty (50%) of the combined voting power entitled to vote generally in the election of directors of the reorganized, merged or consolidated company, (B) a liquidation or dissolution of the Employer or VGI (other than a liquidation or dissolution in connection with a bankruptcy or insolvency or similar event of the Employer or VGI, or a liquidation or dissolution in which shareholders of the Employer or VGI receive less than a total of US $75 million in connection with such liquidation or dissolution), or (C) the sale of all or substantially all of the assets of the Employer or VGI. (d) "Change of Control Benefit" shall have the meaning set forth in Section 4.2 hereof. (e) "Retention Benefit" shall have the meaning set forth in Section 4.3 hereof. (f) "Retention Benefit Payment Period" shall have the meaning set forth in Section 4.3 hereof. (g) "Subsidiary" shall mean any person or entity of whom VGI or the Employer, directly or indirectly, owns fifty percent (50%) or more of the combined voting power entitled to vote generally in the election of directors. (h) "Voluntary Termination" shall mean a voluntary termination of employment with the Employer by the Executive for reasons other than death or disability. 4.2 CHANGE OF CONTROL BENEFIT. If the Executive is employed with the Employer on the date that a Change of Control is deemed to be effective, the Executive shall be entitled to a cash payment equal to the Executive's 2001 Compensation (the "Change of Control Benefit"). The Employer shall pay the Executive the Change of Control Benefit in a lump sum, less applicable withholdings, within five (5) business days immediately following the Change of Control. The payment of the Change of Control Benefit shall be in addition to the payment of all salary and any other amounts otherwise payable 6 to the Executive under this Agreement, option agreement or other agreements with the Employer or VGI or otherwise in connection with her employment by the Employer whether pursuant to employee benefit plans or policies of the Employer or any severance or other benefit available to the Executive under applicable law. 4.3 RETENTION BENEFITS. If the Executive is employed by the Employer or VGI's other Subsidiaries following a Change of Control, the Executive shall be entitled to accrue a cash benefit (the "Retention Benefit") provided the Executive remains employed for one (1) or two (2) 90-day periods immediately following the Change of Control, (the "Retention Benefit Payment Period"). The accrued quarterly Retention Benefit shall be an amount equal to the Executive's 2001 Compensation, so that if the Executive remains employed for the entire Retention Benefit Payment Period, he would earn a Total Retention Benefit equal to two hundred percent (200%) of her 2001 Compensation. The Retention Benefit shall be paid to the Executive in two (2) installments as so earned: The first installment shall be paid ninety (90) days following the date that a Change of Control is deemed to be effective, provided that the Executive is so employed by the Employer, VGI or a Subsidiary on the ninetieth (90th) following a Change of Control, and, if applicable, a second and final installment shall be paid at the end of the Retention Benefit Payment Period, provided, that the Executive is so employed as of the final day of the Retention Benefit Payment Period. If the Executive's employment with the Employer and VGI and Subsidiaries is terminated following a Change of Control, but prior to the end of the second 90 day period for any reason (including death or disability) other than a termination for Cause by the Employer or a Voluntary Termination, the Employer shall pay the Executive the full amount of the Retention Benefit that the Executive would have been entitled to receive from the effective date of the Change of Control through the end of the Retention Benefit Payment Period. The Employer shall pay such amount to the Executive within five (5) business days following the termination of the Executive's employment. The payment of the Retention Benefit shall be in addition to the payment of all salary and any other amounts otherwise payable to the Executive under this Agreement or any option agreement or other agreements with the Employer or VGI or otherwise in connection with her employment by the Employer, VGI or one of its Subsidiaries whether pursuant to employee benefit plans or policies of the Employer, VGI or one of its Subsidiaries, or 7 any severance or other benefit available to the Executive under applicable law. 4.4 LIMIT ON CHANGE OF CONTROL AND RETENTION BENEFITS. Notwithstanding any other provision of this Article 4 to the contrary, if any Retention Benefit payment or payments, or any portion of the Change of Control Benefit payment, shall be deemed to be a "parachute payment" as defined in section 280G(b)(2) of the Internal Revenue Code of 1986, as amended (the "Code"), the Employer shall not be obligated to pay any portion of a Retention Benefit payment or payments, or any portion of the Change of Control Benefit payment, to the extent that any such payment or payments shall be deemed an "excess" parachute payment to the Executive as defined in section 280G(b)(1) of the Code and not deductible by the Employer in accordance with section 280G(a) of the Code. Any abatement of payment obligations pursuant to this Section 4.3 shall commence with the last Retention Benefit payment that is earned and accrued by the Executive pursuant to Section 4.4 hereof, and, if necessary, shall continue with preceding Retention Benefit payment obligations in the order of last accrued, first abated, with the Change of Control Benefit payment being the last payment obligation to be abated, if necessary. 4.5 SUCCESSOR LIABILITY. Any successor to the Employer or VGI (whether directly or indirectly and whether by purchase, lease, merger, consolidation, or otherwise) or to all or substantially all of the Employer's or VGI's business and/or assets shall assume the Employer's or VGI's respective obligations under this Article 4 and agree expressly to perform the Employer's or VGI's respective obligations under this Article 4 in the same manner and to the same extent as the Employer or VGI would be required to perform such obligations in the absence of a succession. For all purposes under this Article 4, the term "Employer" shall include any successor to the Employer's business and/or assets and the term "VGI" shall include any successor to VGI's business and/or assets. 4.6 TERMINATION UNDER CERTAIN CIRCUMSTANCES. (a) If the Executive's employment terminates for any reason prior to a Change in Control, the Executive shall not be entitled to any payment of a Change of Control Benefit or any Retention Benefits pursuant to this Article 4, but shall be entitled to any payment to which the Executive otherwise would be entitled under 8 any other provision of this Agreement, under any options agreement or other agreements with Employer or VGI to the extent otherwise applicable, under the employer's then existing employee benefits plans or policies at the time of termination, and under any required severance benefits pursuant to applicable law, if any. (b) If, following a Change in Control, the Executive is terminated by the Employer for Cause or the Executive has a Voluntary Termination, the Executive shall not be entitled to any payment of Retention Benefit under this Article 4 for any period following said termination, but shall be entitled to any payment to which the Executive otherwise would be entitled to under any other provisions of this Agreement, under any options agreement or other agreements with the Employer or VGI, to the extent otherwise applicable, under the Employer's then-existing employee benefit plans or policies at the time of termination, and under any required severance benefit pursuant to applicable law, if any. 4.7 TERMINATION OF ARTICLE 4. The Board of the Employer and VGI shall have the right, in their sole discretion, to terminate the provisions of this Article 4 effective as of December 31 of any year of the term by delivery of written notice to the Executive by no later than January 15 of the following year, provided however, that if a Change of Control occurs prior to such December 31, or if the Employer or VGI has entered into a binding agreement prior to such December 31 setting forth the material terms by which the Change of Control will be effected, this clause shall have no force or effect. 4.8 NO DUTY TO MITIGATE. The Executive shall not be required to mitigate the amount of any payment contemplated by this Article 4, nor shall any such payment be reduced by any earnings that the Executive may receive from any other source. 4.9 WITHHOLDING. All payments made pursuant to this Article 4 shall be subject to withholding of applicable income and employment taxes. 9 5. CONTRACT PROVISIONS 5.1 GOVERNING LAW. Except as otherwise provided in this Agreement, 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. Except as otherwise provided in this Agreement, 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. 5.2 Resolution of Disputes under Article 4. (a) Notwithstanding anything herein to the contrary, any dispute or controversy arising out of, relating to, or in connection with Article 4 or the interpretation, validity, construction, performance, breach, or termination of Article 4, shall be settled by binding arbitration to be held in New York County, New York and shall be conducted in accordance with the Expedited Employment Arbitration Rules of the American Arbitration Association, in effect at the time of the arbitration ("Rules"), supplemented, as necessary, by those principles which would be applied by a court of law or equity. The arbitrator may grant injunctions or other relief in such dispute or controversy. The decision of the arbitrator shall be final, conclusive and binding on the parties to the arbitration. Judgment may be entered on the arbitrator's decision in any court having jurisdiction. (b) The arbitrator(s) shall apply New York law to the merits of any dispute or claim, without reference to conflicts of law rules. The arbitration proceedings shall be governed by federal arbitration law and by the Rules, without reference to state arbitration law. (c) Notwithstanding anything herein to the contrary, the parties may seek specific performance or injunctive relief with respect to the matters set forth in Article 4 in the United States District Court for the Southern District of New York or a state court located in New York County, New York. Each party (i) submits to the jurisdiction of any such arbitrator or court for the purpose of any such suit, action, 10 or other proceeding, (ii) agrees that such claims in respect of any such suit, action or proceeding may be heard and determined before any such arbitrator or in any such court, (iii) waives, to the fullest extent permitted by law, any immunity it may have acquired, or hereafter may acquire, from jurisdiction of any such arbitrator or court or from any legal process therein, and (iv) agrees not to commence any such suit, action or proceeding other than before such arbitrator or in such court, and waives, to the fullest extent permitted by applicable law, any claim that any such suit, action or proceeding is brought in an inconvenient forum. Each party hereby irrevocably designates CT Corporation System, 111 Eighth Avenue, New York, New York 10011 as agent upon whom process against it may be served for the purposes of Article 4. 5.3 Resolution of Other Disputes. (a) Any dispute, controversy, claim or difference between the parties hereto arising out of this Agreement other than under Article 4 including questions of fact, procedures, practices or standards 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. 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 11 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. (b) EXECUTIVE HAS READ AND UNDERSTANDS SECTION 5.2 AND SECTION 5.3, WHICH DISCUSS ARBITRATION. EXECUTIVE UNDERSTANDS THAT SUBMITTING ANY CLAIMS ARISING OUT OF, RELATING TO, OR IN CONNECTION WITH THIS AGREEMENT, OR THE INTERPRETATION, VALIDITY, CONSTRUCTION, PERFORMANCE, BREACH OR TERMINATION THEREOF TO BINDING ARBITRATION, CONSTITUTES A WAIVER OF EXECUTIVES RIGHT TO A JURY TRIAL AND RELATES TO THE RESOLUTION OF ALL DISPUTES RELATING TO AND ARISING FROM THIS AGREEMENT. 5.4 HEADINGS. The headings of the Sections herein are inserted for convenience of reference only and shall not affect the meaning or construction hereof. 5.5 WITHHOLDING. All payment 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. 12 5.6 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. 5.7 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. 5.8 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. 5.9 ENTIRE AGREEMENT. This Agreement, contains the entire contract of Employment between the parties hereto with respect to the subject matter of this Agreement, and supersedes and replaces all previous negotiations, understandings and agreements whether verbal or written with respect to any matters herein referred to. The parties acknowledge that the provisions of the Confidentiality and Invention Assignment Agreement dated December 13, 1999, between Employer and the Executive remains in full force and effect. 5.10 SURVIVAL. The provisions of Articles hereof shall survive the termination of this Agreement for the periods of time specified or contemplated therein. 5.11 DIRECTORS AND OFFICERS. If the Executive is a director or officer at the relevant time, the Executive agrees that after 13 termination of her employment with the Employer for any reason, he will, on the date of her termination, tender her resignation from any position he may hold as an officer or director of the Employer or any of its affiliated or associated companies. 5.12 NOTICES. Notices and all other communications contemplated by this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered by either FedEx of other reputable overnight courier service or by registered or certified mail, return receipt requested. In the case of the Executive, mailed notices shall be addressed to her at the home address which he most recently communicated to the Employer in writing. In the case of the Employer, mailed notices shall be addressed to 700 Bay Street, Toronto, Ontario, M5G ZG Canada, and all notices shall be directed to the attention of its President. Notices shall be deemed deliverable and received upon receipt or refusal of receipt. 14 IN WITNESS WHEREOF this Agreement is executed as of the day, month and year first above written. ) VISIBLE GENETICS INC. ) --------------------------------------------- ) Per: ) ) --------------------------------------------- ) Per: ) ) ) --------------------------------------------- --------------------------------------------- Marguerite Ethier 15 EX-10.34 10 a2080893zex-10_34.txt EXHIBIT 10.34 EXHIBIT 10.34 SERVICE AGREEMENT (1) Visible Genetics UK Limited (2) Brendan Larder Dated 2001 OSBORNE CLARKE BRISTOL OFFICE 50 Queen Charlotte Street, Bristol BS1 4HE Telephone 0117 917 3000 Facsimile 0117 917 3005 LONDON OFFICE Hillgate House, 26 Old Bailey, London EC4M 7HW Telephone 020 7809 1000 Facsimile 020 7809 1005 THAMES VALLEY OFFICE Apex Plaza, Forbury Road, Reading RG1 1AX Telephone 0118 925 2000 Facsimile 0118 925 0038 WEB SITE: www.osborneclarke.com CONTENTS 1. Definitions and interpretation...........................................................1 2. Appointment..............................................................................6 3. Term.....................................................................................6 4. Duties of the Executive..................................................................7 5. Hours of work............................................................................8 6. Principal place of work..................................................................8 7. Salary...................................................................................8 8. Expenses.................................................................................9 9. Benefits.................................................................................9 10. Holidays...............................................................................10 11. Sickness or injury.....................................................................11 12. Termination of and suspension from Employment..........................................12 13. Obligations during Employment..........................................................14 14. Obligations after Employment...........................................................18 15. Disciplinary and Grievance procedure...................................................20 16. Collective Agreements..................................................................20 17. Deductions.............................................................................20 18. Entire Agreement.......................................................................20 19. Third Parties..........................................................................20 20. Data Protection........................................................................20 21. Releases and waivers...................................................................21 22. Notices................................................................................21 23. Governing law and jurisdiction.........................................................21 Schedule 1.................................................................................22
i THIS AGREEMENT is made the day of 2001 BETWEEN: (1) VISIBLE GENETICS UK LIMITED (company number: 04076100) whose registered office is at 20/22 Bedford Row, London WC1R 4JS ("THE COMPANY"); and (2) BRENDAN LARDER of Monona, 6 Church Lane, Little Eversden CB3 7HQ ("THE EXECUTIVE"). IT IS AGREED as follows: 1. DEFINITIONS AND INTERPRETATION 1.1 In this Agreement, unless the context otherwise requires, the following expressions have the following meanings:
"AGREEMENT" This Agreement (including any schedule or annexure to it and any document referred to in it or in agreed form); "BOARD" The board of directors of the Company and/or any Group Companies from time to time and includes any committee of the Board duly appointed by it; "BUSINESSES" The development, manufacture and marketing of automated DNA sequencing systems and related diagnostic tests/kits for the analysis of DNA and any other trade or commercial activity which is carried on by any Group Company, or which any Group Company shall have determined to carry on with a view to profit in the immediate or foreseeable future; "CHIEF EXECUTIVE Any person holding office as Chief Executive OFFICER" Officer of Visible Genetics Inc (the parent company of the Company) from time to time, including any person exercising substantially the functions of a chief executive officer of the parent company; 1 "COMPANY INVENTION" Any improvement, invention or discovery made by the Executive which in accordance with Section 39, Patents Act 1977 is the property of the Company; "CONFIDENTIAL Any trade secrets or other information which is INFORMATION" confidential, commercially sensitive and is not in the public domain relating or belonging to the Company or any Group Company including but not limited to information relating to the business methods, corporate plans, management systems, finances, new business opportunities, research and development projects, marketing or sales of any past, present or future product or service, secret formulae, processes, inventions, designs, know-how discoveries, technical specifications and other technical information relating to the creation, production or supply of any past, present or future product or service of the Company or any Group Company, lists or details of clients, potential clients or suppliers or the arrangements made with any client or supplier and any information in respect of which any Group Company owes an obligation of confidentiality to any third party; "CUSTOMER" any person with whom or which the Executive has dealt or of whom or of which he has knowledge by virtue of his Duties in the 6 months preceding the Termination Date and to whom or which the Company or any Group Company shall at any time during the period of 6 months prior to the Termination Date have supplied any Restricted Products or Restricted Services. "DUTIES" The duties of the Executive as set out in clause 4; "EMPLOYMENT" The period of the Executive's employment under this Agreement; 2 "GROUP COMPANIES" The Company, its subsidiaries or subsidiary undertakings, any holding company or parent undertaking and any subsidiary or subsidiary undertaking of any holding company or parent undertaking and "GROUP COMPANY" means any of them; "MATERIAL INTEREST" (a) the holding of any position (whether employed or engaged) or provision of services as director, officer, employee, consultant, adviser, partner, principal, agent or volunteer; (b) the direct or indirect control or ownership (whether jointly or alone) of any shares (or any voting rights attached to them) or debentures save for the ownership for investment purposes only of not more than 5 per cent of the issued ordinary shares of any company whose shares are listed on any Relevant Exchange; or (c) the direct or indirect provision of any financial assistance; "RELEVANT means a Recognised Investment Exchange as defined EXCHANGE" in Section 207, Financial Services Act 1986 or the Alternative Investment Market of the London Stock Exchange or any similar or comparable exchange or market; "RESTRICTED any territory in which the Company or any Group AREA" Company shall carry on the Businesses at the Termination Date; 3 "RESTRICTED Any products of a kind which have been dealt in, PRODUCTS" produced, marketed or sold by the Company or any Group Company in the ordinary course of the Businesses at any time during the 12 months preceding the Termination Date and in respect of which or the marketing of which the Executive's Duties were directly concerned or for which the Executive was responsible during such period or in relation to which the Executive possesses Confidential Information at the Termination Date; "RESTRICTED PROPOSED Any products which are, at the Termination Date, PRODUCTS" proposed to be dealt in, produced, marketed or sold by the Company or any Group Company at any time during the 12 months following the Termination Date and in respect of which or the marketing of which the Executive's Duties were directly concerned or for which the Executive was responsible during such period or in relation to which the Executive possesses Confidential Information at the Termination Date. "RESTRICTED PROPOSED Any services which are, at the Termination SERVICES" Date, proposed to be provided by the Company or any Group Company at any time during the 12 months following the Termination Date and in respect of which or the marketing of which the Executive's Duties were directly concerned or for which the Executive was responsible during such period or in relation to which the Executive possesses Confidential Information at the Termination Date; 4 "RESTRICTED SERVICES" any services of a kind which have been provided by the Company or any Group Company in the ordinary course of the Businesses at any time during the 12 months preceding the Termination Date and in respect of which or the marketing of which the Executive's Duties were directly concerned or for which the Executive was responsible during such period or in relation to which the Executive possesses Confidential Information at the Termination Date; "RESTRICTED the direct or indirect control or ownership SHAREHOLDING" (whether jointly or alone) of shares in a company which, together with shares held by any person acting in concert with him carry 25% or more of the voting rights of that company; "RESTRICTED SUPPLIES" any goods or services supplied to the Company or any Group Company on terms which as to the nature of the supplies and/or the terms of supply are unique to the relationship between the supplier and the relevant Group Company and in respect of which or the marketing of which the Executive's Duties were directly concerned or for which the Executive was responsible during such period or in relation to which the Executive possesses Confidential Information at the Termination Date; "SUPPLIER" any person with whom the Executive has dealt or of whom or of which the Executive has knowledge by virtue of the Duties in the 12 months preceding the Termination Date and who has during that period provided Restricted Supplies to the Company or any Group Company; and. "TERMINATION DATE" the date on which the Employment terminates; "VISIBLE GENETICS INC" the parent company of the Company.
5 1.2 In this Agreement, unless the context otherwise requires: (a) words in the singular include the plural and vice versa and words in one gender include any other gender; (b) a reference to a statute or statutory provision includes: (i) any subordinate legislation (as defined in Section 21(1), Interpretation Act 1978) made under it; and (ii) any statute or statutory provision which modifies, consolidates, re-enacts or supersedes it; (c) a reference to: (i) a "PERSON" includes any individual, firm, body corporate, association or partnership, government or state (whether or not having a separate legal personality); (ii) clauses and schedules are to clauses and schedules of this Agreement and references to sub-clauses and paragraphs are references to sub-clauses and paragraphs of the clause or schedule in which they appear; (d) the table of contents and headings are for convenience only and shall not affect the interpretation of this Agreement. 2. APPOINTMENT 2.1 The Company appoints the Executive and the Executive agrees to serve as Chief Scientific Officer of the Company on the terms set out in this Agreement. In this capacity, and in accordance with clause 4.3 below, the Executive shall also undertake duties as Chief Scientific Officer on behalf of Visible Genetics Inc. 2.2 The Executive warrants that the Executive is free to enter into this Agreement and is not bound by, nor subject to any court order, arrangement, obligation, restriction or undertaking (contractual or otherwise) which prohibits or restricts the Executive from entering into this Agreement or performing the Duties. 3. TERM 3.1 The Executive's employment under the terms of this Agreement commenced on 13 September 2001 and, unless terminated in accordance with clause 12, shall continue until terminated by: (a) the Company giving to the Executive not less than 12 months' prior written notice at any time up until 25 June 2003. Thereafter, the Company shall give to the Executive not less 6 than 12 months' prior written notice plus an additional one month's notice for each full year worked beyond 25 June 2003; or (b) the Executive giving to the Company not less than 6 months' prior written notice. 3.2 The Executive's continuous period of employment with the Company commenced on 25 June 2001. 4. DUTIES OF THE EXECUTIVE 4.1 The Executive shall carry out such duties as may attach to the Executive's office or be assigned to or vested in the Executive by the Chief Executive Officer and/or the Board from time to time (whether or not commensurate with his position) and exercise the powers consistent with such duties. 4.2 At all times during the Employment the Executive shall: (a) unless prevented by ill health and except during holidays taken in accordance with this Agreement, devote the whole of the Executive's working time and attention to the Employment, save that the Executive shall from time to time engage in limited consulting work (for example, speaking at conferences) provided that such activities are disclosed to the Chief Executive Officer, do not interfere with the Executive's duties and responsibilities and the compensation for such activities does not exceed L15,000 per annum; (b) perform the Duties faithfully and diligently; (c) obey all lawful and reasonable directions of the Chief Executive Officer and the Board, observe such restrictions or limitations as may from time to time be imposed by the Chief Executive Officer and the Board upon the Executive's performance of the Duties and implement and abide by any relevant Company policy which may be promulgated or operated in practice from time to time; (d) use best endeavours to promote the interests of the Company and shall not do or willingly permit to be done anything which is harmful to those interests; and (e) keep the Chief Executive Officer and the Board fully informed (in writing if so requested) of the Executive's conduct of the business or affairs of the Company and provide such explanations as the Chief Executive Officer and the Board may require. 7 4.3 The Executive shall (without further remuneration and in addition to the Executive's duties to the Company) if and for so long as the Company requires during the Employment: (a) carry out any duties assigned to the Executive in relation to any Group Company; and (b) act as an officer of any Group Company or hold any other appointment or office as nominee or representative of any Group Company; in each case as if they were to be performed or held by the Executive for or in relation to the Company. 5. HOURS OF WORK 5.1 The Executive's hours of work shall be the Company's normal office hours of 9.00 a.m. to 5.30 p.m. Monday to Friday and such further hours as may be necessary for the proper discharge of the Duties. The Executive shall not be entitled to receive any additional remuneration for work outside the Company's normal office hours. 5.2 The Executive acknowledges that he may be required to work in excess of an average of 48 hours in any one period of 7 calendar days if so requested by the Company and consents to do so. The Executive may withdraw such consent by giving not less than 3 months' prior notice in writing to the Company of such withdrawal. 6. PRINCIPAL PLACE OF WORK 6.1 The Executive's principal place of work shall be at 184 Cambridge Science Park, Milton Road, Cambridge CB4 0GA. 6.2 The Executive shall travel to and work on a temporary basis from such locations within the UK and abroad as the Board may reasonably require for the performance of his Duties. 6.3 There is no current requirement, as at the date of this agreement, for the Executive to work outside the United Kingdom for any consecutive period of one month or more. 7. SALARY AND BONUS 7.1 During the Employment the Company shall pay to the Executive a basic salary at the rate of L137,500 per annum. This salary shall accrue from day to day, be payable by equal monthly instalments in arrears on or about the last day of each month and shall include any fees to which the Executive is entitled as a director of any Group Company. 8 7.2 The Executive's basic salary shall be subject to annual review by the Chief Executive Officer. Any increase in the Executive's basic salary consequent upon such review will be effective from the effective date specified by the Board. 7.3 The Executive will be entitled to participate in any bonus scheme applicable to employees of the Executive's status as Visible Genetics Inc may operate from time to time, subject to the terms and conditions of any such scheme. The bonus scheme as at the date of this Agreement is set out at Schedule 1 to this Agreement. Visible Genetics Inc reserve the right to amend the terms of the current bonus scheme. 8. EXPENSES The Company shall reimburse to the Executive all expenses reasonably and properly incurred by the Executive in the performance of the Duties subject to the production of such receipts or other evidence of expenditure as the Company may reasonably require. 9. BENEFITS 9.1 MOTOR CAR (a) Subject to the Executive holding a licence to drive a car in the United Kingdom, the Company shall provide the Executive with a car of a type appropriate (in the opinion of the Chief Executive Officer) to the Executive's position in the Company for the use of the Executive. (b) The Company shall bear all tax, insurance, maintenance, repair and running costs of the car. (c) The Executive shall at all times maintain the car in a good and roadworthy condition, ensure that the conditions of any policy of insurance relating to it are observed and comply with all regulations laid down by the Company with respect to Company cars. (d) The Executive shall return the car in a clean and proper condition together with its keys, registration papers, car alarms, car alarm codes, accessories and any Company credit or cheque card provided to the Executive exclusively for the purchase of fuel to the Company at any time during the Employment on demand and in any event immediately upon the Termination Date. 9 9.2 PENSION (a) Subject to Inland Revenue limits, the Company shall, in each year of the Employment, contribute a sum equivalent to 20% of the Executive's basic salary into a personal pension plan of the Executive's choice. Such payments to be calculated and paid on a monthly basis so that in the year of joining and leaving, the amount of such contribution shall be reduced pro rata for each complete calendar month not worked. In the event that Inland Revenue limits prevent the full payment (or any part-payment) of this benefit into the Executive's pension plan the Company shall pay the balance of the sum payable direct to the Executive (subject to deduction of income tax and national insurance as appropriate). (b) No contracting-out certificate pursuant to the Pension Schemes Act 1993 is in force in respect of the Employment. 9.3 INSURANCE BENEFITS Subject to sub-clause 12.4(a), the Executive shall be eligible to participate in such of the following insurance schemes as the Company may operate from time to time, subject always to the rules of the relevant scheme: (a) permanent health insurance scheme providing long term disability cover for the Executive; (b) private medical expenses insurance scheme providing cover for the Executive; and (c) death in service insurance scheme providing life insurance cover equivalent to 4 times the Executive's basic salary. Details of the Company's current insurance schemes are available from the Company Secretary. The Company shall pay all premiums in respect of the schemes and may, in its absolute discretion, vary their terms and details from time to time. 9.4 OTHER BENEFITS Any other benefit provided to the Executive shall unless otherwise agreed in writing be at the discretion of the Company who may, at any time, withdraw or vary the terms of such benefit as it sees fit. 10. HOLIDAYS 10.1 The Company's holiday year runs from 1 January to 31 December. 10 10.2 In addition to public or bank holidays, the Executive is entitled to 25 working days' paid holiday in each holiday year, to be taken at such time or times as are agreed with the Chief Executive Officer. 10.3 The Executive may not, without the consent of the Chief Executive Officer carry forward any unused part of the holiday entitlement to a subsequent holiday year. Except on termination of employment, no payment will be made in lieu of any unused holiday entitlement. 10.4 For the holiday year during which the Employment commences or terminates, the Executive's entitlement to holiday accrues on a pro rata basis for each complete month of the Employment during that holiday year. 10.5 On termination of the Employment the Executive shall be entitled to pay in lieu of any outstanding holiday entitlement and shall be required to repay to the Company any salary received for holiday taken in excess of his actual entitlement. The basis for calculating the payment and repayment shall be 1/365 of the Executive's annual basic salary for each day. For the purposes of the calculation of the payment and repayment the amount of the Executive's outstanding or overtaken holiday entitlement shall be grossed up as appropriate to the nearest half day to take account of any non working days falling within the Executive's normal working week. 10.6 The Company may require the Executive to take any outstanding accrued holiday during a period of notice of termination of the Employment. 11. SICKNESS OR INJURY 11.1 If unable to perform the Duties due to sickness or injury the Executive shall report this fact as soon as possible on the first working day of incapacity to the Company Secretary, and provide, so far as practicable, an expected date of return to work. 11.2 To be eligible for sick pay under sub-clause 11.3, the Executive must supply the Company with such certification of sickness or injury as the Company may require. 11.3 If the Executive shall be absent due to sickness or injury duly certified in accordance with the Company's requirements the Executive shall be paid full basic salary for up to 8 weeks' absence in any period of 12 consecutive months and after that, subject to sub-clause 11.4, such remuneration, if any, as the Chief Executive Officer shall determine from time to time. 11.4 Any remuneration paid under sub-clause 11.3 shall be inclusive of any Statutory Sick Pay to which the Executive is entitled or other benefits recoverable by the Executive (whether or not recovered) which may be 11 deducted from it. 11.5 Any outstanding or prospective entitlement to company sick pay in accordance with sub-clause 11.3, private medical insurance benefits or permanent health insurance benefits shall not prevent the Company from exercising its right to terminate the Employment in accordance with sub-clause 12.4 nor shall the Company be liable to compensate the Executive in respect of any such pay or benefit provided that the Company shall not exercise this right where this would deprive the Executive of any permanent health insurance benefit provided under this Agreement to which he would otherwise be entitled. 11.6 If the Executive's sickness, injury or other incapacity is caused by the negligence or breach of statutory duty of a third party and the Executive shall recover any damages or other compensation from such third party for the Executive's loss of earnings whilst incapacitated, the Executive shall repay to the Company the amount of any sick pay paid by the Company to the Executive under sub-clause 11.3 or, if less, the full amount of the damages or compensation received for loss of earnings by the Executive. 11.7 If at any time during the Employment, in the reasonable opinion of the Board, the Executive is unable to perform all or part of the Duties because of sickness or injury then the Executive shall, at the request and expense of the Company: (a) consent to an examination by a doctor to be selected by the Company and approved by the Executive; and (b) authorise this doctor to disclose to and discuss with the Company's medical adviser, or other nominated officer of the Company, the results of or any matter arising out of this examination. 11.8 The Company shall be entitled to rely on the reasonable opinion of any doctor engaged by the Company to examine the Executive under sub-clause 11.7 as to the Executive's fitness for work. The Executive shall not be entitled to attend for work at any time when such doctor considers him to be unfit for work and shall not be entitled to receive any remuneration in excess of any sick pay to which he remains entitled under sub-clause 11.3 during any such period. 12. TERMINATION OF AND SUSPENSION FROM EMPLOYMENT 12.1 IMMEDIATE DISMISSAL The Company may by written notice terminate the Employment without notice or pay in lieu of notice if the Executive: (a) commits a breach of the terms and conditions of this 12 Agreement amounting to gross misconduct; (b) repeats or continues after a written warning any material breach of the terms and conditions of this agreement, including any failure to carry out the Duties efficiently, diligently or competently; (c) commits any act of gross misconduct or is guilty of any conduct which may in the reasonable opinion of the Board, bring any Group Company into disrepute or is calculated or likely prejudicially to affect the interests of any Group Company, whether or not the conduct occurs during or in the context of the Employment; (d) is convicted of any criminal offence punishable with 6 months' or more imprisonment (other than an offence under road traffic legislation in the United Kingdom or elsewhere for which he is not sentenced to any term of imprisonment whether immediate or suspended); (e) commits any act of dishonesty relating to any Group Company, any of its employees or otherwise; (f) becomes of unsound mind or a patient within the meaning of the Mental Health Act 1983 so that in the opinion of the Board he is unable to perform the Duties; or (g) 12.2 RETIREMENT The Employment shall automatically terminate when the Executive reaches the age of 65. 12.3 SUSPENSION In order to investigate a complaint against the Executive of misconduct the Company may suspend the Executive on full pay for so long as may be necessary to carry out a proper investigation and hold any appropriate disciplinary hearing. 12.4 DISMISSAL DUE TO SICKNESS OR INJURY (a) Notwithstanding sub-clauses 9.3 and 11.3, if the Executive is incapable of performing the Duties due to sickness or injury for a period or periods aggregating at least 180 days in any period of 12 months the Company may, by not less than 6 months' prior written notice given at any time whilst such incapacity continues, terminate the Employment. 13 (b) Upon termination of the Employment under this sub-clause the Executive shall cease to be entitled to any payment under sub-clause 11.3 or any other provision of this Agreement. 12.5 PAY IN LIEU On the service of notice to terminate the Employment by the Executive or the Company or at any time during the currency of such notice, the Company shall have the right to terminate the Employment with immediate effect by notifying the Executive in writing that the Employment is being terminated pursuant to this clause and paying to the Executive a sum equivalent to the Executive's basic salary (excluding bonus), pension contributions and an amount equal to the value of any benefits in kind for the unexpired portion of the Executive's contractual notice entitlement. The Company will pay the sum due and payable under this sub-clause subject to deduction of tax and national insurance contributions at source. 12.6 EFFECT OF TERMINATION (a) On the Termination Date or (if earlier) at any time after notice is given by the Company or the Executive to terminate the Employment, the Executive shall, at the request of the Board: (i) resign (without prejudice to any claims which he may have against any Group Company arising out of the Employment or its termination) from all and any offices which he may hold as a director of any Group Company and from all other appointments or offices which he holds as nominee or representative of any Group Company; and (ii) transfer without payment to the Company or as the Company may direct any shares held by him for the purposes only of fulfilling any requirement in the Company's articles of association that a director holds shares in the Company and any shares in any Group Company held by him on trust for the Company or any Group Company. (b) If the Executive should fail to comply with any obligation under sub-clause (a) within 7 days of the Company's request, the Company is irrevocably authorised to appoint some person in his name and on his behalf to sign any documents or do any things necessary or requisite to effect such resignation(s) and/or transfer(s). 13. OBLIGATIONS DURING EMPLOYMENT 14 13.1 INVENTIONS (a) The Executive shall promptly disclose to the Company full details including, without limitation, any and all computer programs, photographs, plans, records, drawings and models, of any know-how, technique, process, improvement, invention or discovery (whether patentable or not) which the Executive (whether alone or with any other person) makes, conceives, creates, develops, writes, devises or acquires at any time during the Employment and which relates or which could relate, directly or indirectly, to the Businesses. (b) If the know-how, technique, process, improvement, invention or discovery is a Company Invention, the Executive shall (to the extent that it does not automatically vest in the Company by operation of law) hold it in trust for the Company and, at the request and expense of the Company, do all things necessary or desirable (including entering into any agreement that the Company reasonably requires) to enable the Company or its nominee to obtain for itself the full benefit of and to secure patent or other appropriate forms of protection for the Company Invention throughout the world. (c) If the know-how, technique, process, improvement, invention or discovery is not a Company Invention, the Company shall treat all information disclosed to it by the Executive as confidential property of the Executive. (d) The patenting and exploitation of any Company Invention shall be at the sole discretion of the Company. 13.2 COPYRIGHT ETC (a) The Executive shall promptly disclose to the Company all works including, without limitation, all copyright works or designs originated, conceived, developed, written or made by the Executive alone or with others during the Employment which relate, or could relate, to the Businesses and shall (to the extent that they do not automatically vest in the Company by operation of law) hold them in trust for the Company until such rights have been fully and absolutely vested in the Company. (b) The Executive assigns to the Company by way of present and future assignment (to the extent not already vested in the Company by operation of law) all copyright, design rights and other proprietary rights (if any) for their full terms throughout the world in respect of all copyright works and designs originated, conceived, written, developed or made by the Executive alone or with others during the Employment which 15 relate, or could relate, to the Businesses. (c) The Executive irrevocably and unconditionally waives in favour of the Company any and all moral rights conferred on the Executive by Chapter IV, Part I, Copyright Designs and Patents Act 1988 and any other moral rights provided for under the laws now or in future in force in any part of the world for any work the rights in which are vested in the Company whether by sub-clause (b) or otherwise. (d) The Executive shall, at the request and expense of the Company, do all things necessary or desirable (including entering into any agreement that the Company reasonably requires to vest the rights referred to in this clause in the Company) to substantiate the rights of the Company under sub-clauses (b) and (c). 13.3 POWER OF ATTORNEY The Executive irrevocably appoints the Company as his attorney in his name and on his behalf to execute documents, to use his name and to do all things which may be necessary or desirable for the Company to obtain for itself or its nominee the full benefit of the provisions of sub-clause 13.1(b) and 13.2(b) and a certificate in writing signed by any director or the Company Secretary that any instrument or act falls within the authority conferred by this clause shall be conclusive evidence that such is the case so far as any third party is concerned. 13.4 CONFLICT OF INTEREST (a) During the Employment, the Executive shall not: (i) directly or indirectly disclose to any person or use other than for any legitimate purposes of any Group Company any Confidential Information; (ii) without the Board's prior written permission hold any Material Interest in any person which: (A) is or shall be wholly or partly in competition with any of the Businesses; (B) impairs or might reasonably be thought by the Company to impair the Executive's ability to act at all times in the best interests of any Group Company; or (C) requires or might reasonably be thought by the Company to require the Executive to disclose or make use of any Confidential Information in 16 order properly to discharge the Duties to or to further the Executive's interest in that person; (iii) at any time (whether during or outside normal working hours) take any preparatory steps to become engaged or interested in any capacity whatsoever in any business or venture which is in or is intended to enter into competition with any of the Businesses; (iv) at any time make any untrue or misleading statement in relation to any Group Company; (v) carry out any public or private work other than the Duties (whether for profit or otherwise and whether during or outside normal working hours) except with the prior written permission of the Board; or (vi) directly or indirectly receive or obtain in respect of any goods or services sold or purchased or other business transacted (whether or not by the Executive) by or on behalf of any Group Company any discount, rebate, commission or other inducement (whether in cash or in kind) which is not authorised by any Company rules or guidelines from time to time and if the Executive or any person in which the Executive holds any Material Interest shall obtain any such discount, rebate, commission or inducement, the Executive shall immediately account to the Company for the amount so received. (b) The Executive shall, at any time during the Employment or following its termination, at the request of the Company or any Group Company return to the relevant Group Company or, at the relevant Group Company's request, shall destroy: (i) any documents, drawings, designs, computer files or software, visual or audio tapes or other materials containing information (including, without limitation, Confidential Information) relating to the Company or any Group Company's business created by, in the possession of or under the control of the Executive; and (ii) any other property of the Company or any Group Company in his possession or under his control. (c) The Executive shall not make or keep or permit any person to make or keep on his behalf any copies or extracts of the items referred to in sub-clause (b) (i) in any medium or form. 17 14. OBLIGATIONS AFTER EMPLOYMENT 14.1 The Executive shall not within the Restricted Area directly or indirectly for the period of 9 months after the Termination Date be engaged on his own account or in the capacity of employee, officer, consultant, adviser, partner, principal or agent in or hold any Restricted Shareholding in any company which carries on any business or venture which: (a) is or is about to be in competition with any of the Businesses with which the Executive has been concerned or involved to any material extent during the 12 months preceding the Termination Date; or in relation to which the Executive at the Termination Date possesses Confidential Information; or (b) requires or might reasonably be thought by the Company to require the Executive to disclose or make use of any Confidential Information in order properly to discharge the Executive's duties to or to further the Executive's interest in that business or venture. 14.2 The Executive shall not directly or indirectly, whether on the Executive's own behalf or on behalf of another person: (a) for the period of 12 months after the Termination Date: (i) accept orders for any Restricted Products or Restricted Services from any Customer; or (ii) accept orders for any Restricted Proposed Products or Restricted Proposed Services from any Customer; (b) for the period of 12 months after the Termination Date accept the supply by any Supplier of Restricted Supplies; (c) for the period of 12 months after the Termination Date: (i) seek, canvass or solicit any business, orders or custom for any Restricted Products or Restricted Services from any Customer; (ii) seek, canvass or solicit any business, orders or custom for any Restricted Proposed Products or Restricted Proposed Services from any Customer; (iii) solicit or entice away or seek to entice away from any Group Company any person who is and was at the Termination Date or during the period of 12 months preceding the Termination Date, employed or engaged by any Group Company in any of the Businesses in a 18 senior managerial, scientific, technical, supervisory, sales or marketing capacity and was a person with whom the Executive dealt in the course of the Duties and who by reason of such employment or engagement is likely to have knowledge of any trade secrets or Confidential Information of the Company or any Group Company; (d) at any time after the Termination Date: (i) induce or seek to induce by any means involving the disclosure or use of Confidential Information any Customer or Supplier to cease dealing with the Company or any Group Company or to restrict or vary the terms upon which it deals with the relevant Group Company; (ii) be held out or represented by the Executive or any other person, as being in any way connected with or interested in any Group Company; or (iii) disclose to any person, or make use of any Confidential Information. 14.3 UNDERTAKINGS The Executive has given the undertakings contained in clause 14 to the Company as trustee for itself and for each Group Company in the business of which the Executive shall be involved or concerned to a material extent during the Employment. The Executive will at the request and cost of the Company enter into direct undertakings with any such Group Company which correspond to the undertakings in clause 14. 14.4 LEGAL ADVICE The undertakings contained in clause 14 are entered into by the Company and the Executive after having been separately legally advised. 19 15. DISCIPLINARY AND GRIEVANCE PROCEDURE 15.1 There are no specific disciplinary rules or procedures applicable to the Executive. Any matters concerning the Executive's unsatisfactory conduct or performance will be dealt with by the Chief Executive Officer. An appeal against any disciplinary decision should be made by the Executive in writing to the Board of Visible Genetics Inc, whose decision will be final. 15.2 If the Executive has any grievance relating to his Employment (other than one relating to a disciplinary decision) he should refer such grievance to the Chief Executive Officer and if the grievance is not resolved by discussion with him it will be referred for resolution to the Board of Visible Genetics Inc, whose decision shall be final. 16. COLLECTIVE AGREEMENTS There are no collective agreements which affect the terms and conditions of the Executive's employment. 17. DEDUCTIONS The Executive consents to the deduction at any time from any salary or other sum due from the Company to the Executive including any payment on termination of employment, of any sum owed by the Executive to the Company. 18. ENTIRE AGREEMENT This Agreement (together with the letter of even date from the Company to the Executive) sets out the entire agreement and understanding between the parties and supersedes all prior agreements, understandings or arrangements (oral or written) in respect of the employment or engagement of the Executive by the Company. No purported variation of this Agreement shall be effective unless it is in writing and signed by or on behalf of each of the parties. 19. THIRD PARTIES Unless expressly provided in this Agreement, no term of this Agreement is enforceable pursuant to the Contracts (Rights of Third Parties) Act 1999 by any person who is not a party to it. 20. DATA PROTECTION The Executive consents to the holding and processing by the Company or any other Group Company of personal data (including, where appropriate, sensitive personal data) relating to the Executive for the purposes of personnel or pensions administration, employee 20 management or compliance with any laws or regulations applicable to the Company or any Group Company or its or their business. 21. RELEASES AND WAIVERS. 21.1 The Company may, in whole or in part, release, compound, compromise, waive or postpone, in its absolute discretion, any liability owed to it or right granted to it in this Agreement by the Executive without in any way prejudicing or affecting its rights in respect of any part of that liability or any other liability or right not so released, compounded, compromised, waived or postponed. 21.2 No single or partial exercise, or failure or delay in exercising any right, power or remedy by the Company shall constitute a waiver by it of, or impair or preclude any further exercise of, that or any right, power or remedy arising under this Agreement or otherwise. 22. NOTICES 22.1 Any notice to a party under this Agreement shall be in writing signed by or on behalf of the party giving it and shall, unless delivered to a party personally, be hand delivered, or sent by prepaid first class post or facsimile, with a confirmatory copy sent by prepaid first class post to, in the case of the Executive, the Executive's last known residential address or, in the case of the Company, the Human Resources Department, Visible Genetics Corporation, 25 Crestridge Drive, Suite 200, Suwanee, Georgia, USA 30024. 22.2 A notice shall be deemed to have been served: (a) at the time of delivery if delivered personally to a party or to the specified address; (b) on the second working day after posting by first class prepaid post; or (c) 2 hours after transmission if served by facsimile on a business day prior to 3pm or in any other case at 10 am on the business day after the date of despatch. 23. GOVERNING LAW AND JURISDICTION 23.1 This Agreement shall be governed by and construed in accordance with English law. 23.2 Each of the parties irrevocably submits for all purposes in connection with this Agreement to the exclusive jurisdiction of the English courts. IN WITNESS this Deed has been executed on the date appearing at the head of page 1. 21 SCHEDULE 1 BONUSES 1. For the period from 13 September 2001 until 12 September 2002, the Executive shall be eligible to receive a guaranteed bonus payment equivalent to 40% of his base salary of L137,500. The bonus shall become payable on 12 September 2002 and shall be paid subject to the deduction of Income Tax and National Insurance Contributions as appropriate. 2. For the period 13 September 2002 until 31 December 2002, the Executive shall be eligible to receive a guaranteed bonus equivalent to 40% of his base monthly salary received during this period. The bonus shall become payable on 31 December 2002 and shall be paid subject to the deduction of Income Tax and National Insurance Contributions as appropriate. 3. Thereafter, the Executive shall be eligible to participate in the Executive Bonus Plan operated by the Company and/or Visible Genetics Inc which will be introduced with effect from 1 January 2003. The level of bonus will be based on the successful achievement of both individual and corporate objectives, the details of which will be agreed in writing with the Executive on or before 1 January 2003 4. In order to be eligible to receive any bonus payment under the terms of this Schedule, the Executive must have been in employment throughout the period in question and remain in employment on the date the bonus becomes payable. 22 EXECUTED as a DEED ) by BRENDAN LARDER ) in the presence of: ) SIGNATURE OF WITNESS: NAME: ADDRESS: OCCUPATION: EXECUTED as a DEED ) (but not delivered until the date ) appearing at the head of page 1) ) by VISIBLE GENETICS UK LIMITED ) acting by: ) Director Director/Secretary 23 EX-10.35 11 a2080893zex-10_35.txt EXHIBIT 10.35 EXHIBIT 10.35 THIS DEED is made the 12th day of September 2001. BETWEEN TIBOTEC-VIRCO N.V. whose registered address is at Intercity Business Park, Gen. De Wittelen L11B , 2800 Mechelen, Belgium (hereinafter referred to as "TVNV"); and VIRCO UK LIMITED (No. 03348588) whose registered address is at Cartwright and Company, 106 High Street, Stevenege, Hertfordshire SGI 3DW England (hereinafter referred to as Virco); and VISIBLE GENETICS UK LTD (No. 04076100) whose registered address is at 20-22 Bedford Row, London, WCIR 4JS (hereinafter referred to as "VG UK"); and VISIBLE GENETICS INC., whose registered address is at 700 Bay Street, Suite 1000 Toronto Canada M5G 1Z6 (hereinafter referred to as "VGI") WHEREAS A. Virco wishes to sell certain Assets set out in Schedule A and VG UK wishes to acquire the said Assets from Virco. Virco shall retain certain other assets ("Excluded Assets") set out in Schedule B. B. VG UK wishes to acquire certain Expensed Items as set out in Schedule C and Virco wishes to sell such Expensed Items to VG UK. C. VG UK wishes to assume certain specific liabilities of Virco in relation to the Lease limited to those that relate to the period following the assignment of the Lease and that Virco will indemnify VG UK in respect of the liabilities to be acquired by VG UK that relate to the period prior to the assignment of the Lease. D. The Parties intend that the employees of Virco shall transfer to VG UK on the Completion Date in accordance with the Transfer of Undertakings for the Protection of Employment Regulations 1981 (as amended) (the TUPE Regulations), and subject to the terms and conditions set out in this deed, and that Virco may from time to time call upon the services of such employees to assist it in audit or regulatory matters. E. The Parties accept that the transaction described herein represents transfer of employees and assets between the companies who are in competition with each other in the same market and that the employees will be involved in research and development of products that may compete with Virco's and TVNV's current or future product portfolio. IT IS AGREED AS FOLLOWS: - 1. DEFINITIONS 1.1 In this deed including the Schedules, the following words and expressions have the following meanings: "Assets" means the assets set out in Schedule A. "Completion Date" means the date on which Virco shall sell certain assets, grant a license to occupy to VG UK, and the employees of Virco shall transfer to VG UK. "Excluded Assets" means the assets set out in Schedule B which shall remain the property of Virco and may be dealt with in any manner Virco sees fit upon the proviso that the Excluded Assets are removed from the Lease Premises prior to the Completion Date. "Expensed Items" means the items which have been expensed during the current fiscal year as set out in Schedule C. "Landlord" means the Master Fellows and Scholars of the Holy and Undivided Trinity within the Town and University of Cambridge of King Henry the Eighth's Foundation, landlord under the Lease. "Lease" means the lease dated 19th January 1999 by the Master Fellows and Scholars of the Holy and Undivided Trinity within the Town and University of Cambridge of King Henry the Eighth's Foundation to Virco, as lessee, and TVNV, as surety, of Trinity College Cambridge of Unit 184, Phase 3 Cambridge Science Park, Milton Road, Cambridge England CB4 0GA with associated rights and obligations, including but not limited to the bank guarantee to Trinity College. "Premises" has the meaning attributed to that term under the Lease. 1.2 The clause and paragraph headings are for ease of reference only and are not to be taken into account in the interpretation of the provisions to which they refer. 1.3 Unless the context otherwise requires, references: 1.3.1 to numbered clauses and Schedules are references to the relevant clause in, or Schedule to, this deed; and 1.3.2 to a numbered paragraph in a Schedule are references to the relevant paragraph in that Schedule. 1.4 Words denoting the singular include the plural meaning and vice versa. 1.5 Words importing one gender include both genders. 2. DEED FOR SALE AND PURCHASE, LICENSE TO OCCUPY AND FOR ASSIGNMENT OF LEASE 2.1 Subject to the terms and conditions of this deed Virco shall:- 2.1.1 on the Completion Date sell to VG UK with full title guarantee and VG UK shall purchase the Assets and Expensed Items owned by Virco as set out in Schedules A and C hereto; but excluding the Excluded Assets. 2.1.2 on or after the 5th October 2001 with full title guarantee assign, and VG UK shall assume obligations under, the Lease, including any goodwill attaching to the Premises from Virco's business to VG UK, as of the date of assignment, to hold the Premises to VG UK for all the residue now unexpired of the term of years granted by the Lease subject to payment of the rent reserved by and the performance and observance of the covenants on the part of the lessee and the conditions contained in the Lease. 2.1.3 Upon the Completion Date grant a license to VG UK to occupy the Premises upon the terms set out in sub-clauses 2.4 to 2.7. 2.2 VG UK liability for the assignment of the Lease shall commence upon the date of assignment, and Virco and TVNV shall otherwise indemnify VG UK in respect of any liabilities acquired under the Lease to the extent that they relate to the period prior to date of assignment. Copies of the Lease have been supplied to VG UK, which shall be deemed to purchase with full knowledge of its contents and shall raise no requisition, enquiry or objection in relation to it. 2.3 VG UK agrees to pay to Virco any and all advance payments made by Virco in relation to the Lease which apply to the period after the date of assignment in cases where such payments are repaid by the Landlord to VG UK. VG UK hereby agrees that such monies shall be payable on demand. 2.4 VG UK shall be entitled to occupy the Premises at its entire risk from the date hereof until the date of completion of the assignment of the Premises between Virco and VG UK ("the Assignment") (or earlier as provided herein) but as licensee only and subject to VG UK being liable to pay all outgoings in respect of the Premises from the date hereof and subject to VG UK paying the license fee referred to in clause 3.1.3 below. 2.5 VG UK shall be bound by the same exceptions and reservations and shall observe and perform the covenants and obligations contained in the Lease as if the Assignment had been completed and shall indemnify Virco against any expense cost loss or liability incurred or suffered by Virco due to any failure by VG UK to observe and perform the obligations on the part of the tenant contained in this clause 2 or as a result of VG UK ceasing to exist or being subject to an insolvency or similar event. 2.6 If this deed becomes null and void (or if Virco's landlord for the time being under the Lease fails to grant consent to the Assignment in the form of a deed by 31 December 2001) VG UK shall cease to occupy the Premises and shall remove from the Premises VG UK's chattels and shall leave the Premises in good repair and condition making good any damage caused to the Premises in the removal of the chattels and any damage caused thereto during the subsistence of the License to occupy as a result of VG UK's acts or omissions. 2.7 The parties agree to use their best endeavours to ensure that the License to Assign is duly executed and delivered by the Landlord on or about October 5, 2001. Upon reasonable written request by VGI after October 5, 2001, Virco shall make application to a court with jurisdiction for a declaration that the Landlord is unreasonably delaying or withholding consent to assignment of Lease. All reasonable costs associated with such application shall be borne equally by VG UK and Virco. 3. PURCHASE CONSIDERATION 3.1 The consideration for the sale of the Assets and Expensed Items, the license to occupy and the assignment of the Lease shall be the following: - 3.1.1 in relation to the Assets set out in Schedule A - their net book value from the fixed asset register of Virco as at 31 August 2001 stg (pound)553,117.38; 3.1.2 all items not classified as Assets or Excluded Assets, as per Schedules A and B, shall be acquired by VG UK for a total consideration of stg (pound)15,487.50. This includes but is not limited To all Expensed Items listed in Schedule C. 3.1.3 VG UK shall pay to Virco (or to Virco's landlord as Virco shall direct) a sum equal to the rent reserved from time to time under the Lease and all outgoings in respect of the Premises by way of license fee which shall be payable at the times and in the manner specified in the Lease 3.1.4 in relation to the assignment of the Lease (pound)1 and a covenant on the part of VG UK, upon the CompletIon Date to pay the rent reserved by the Lease and to observe and perform the covenants on the part of the lessee and the conditions contained in the Lease. 3.2 The consideration shall be paid in sterling cash by VG UK to Virco upon the Completion Date of the purchase in accordance with Clause 4 below. 3.3 The consideration set out above is exclusive of any applicable value added tax, which VG UK may be additionally liable to pay Virco. 3.4 Nothing in this deed shall pass to VG UK, or shall be construed as acceptance by VG UK of any liability, debt or other obligation of Virco, other than as expressly set out in this deed. 4. THE COMPLETION DATE 4.1 The parties hereby agree to use their best endeavours to ensure that the Completion Date will occur by the 12th September 2001. 4.2 Upon the Completion Date, Virco shall deliver or procure delivery to VG UK of: a. Physical possession of all the Assets and Expensed Items capable of passing by delivery with the intent that title in such Assets and Expensed Items shall pass by and upon such delivery; b. Duly executed assignment of the Lease and other documents in the agreed form necessary to assign the Lease to VG UK; c. All personnel files for the Transferred Employees, including all National Insurance PAYE records fully completed in respect of the Transferred Employees showing that all payments are up to date, and all records required to be kept under the Working Time Regulations 1998; and d. Vacant possession of the Premises. 4.3 Against compliance by Virco and TVNV of their obligations hereunder, upon the Completion Date, VG UK shall pay to Virco in respect of the purchase consideration set out in Clause 3 above and except as described herein, Virco shall have no further obligations in relation to the Assets, and Expensed Items and Lease. Such payment shall be made by wire transfer to the account of Virco UK Ltd, Account No. 50706965, Sort Code 20-17-35, at Barclays Bank PLC, Chesterton Road, Cambridge England. 5. EMPLOYEES 5.1 The parties acknowledge and agree that the sale and purchase pursuant to this deed will constitute a relevant transfer of the employees listed on Schedule E (the "Transferred Employees") for the purposes of the TUPE Regulations and that it will not operate so as to terminate any of the contracts of employment of the Transferred Employees and such contracts shall be transferred to VG UK pursuant to the TUPE Regulations with effect from the Completion Date and that from the Completion Date Virco will no longer have any liability with respect to the Transferred Employees, except as provided in Clause 5.2 and 5.3. 5.2 Virco and TVNV agree to fully to indemnify and keep indemnified VG UK against all losses, damages, costs, actions, awards, penalties, fines, proceedings, claims, demands, liabilities (including without limitation any liability to tax), and expenses (including without limitation, legal and other professional fees and expenses) which VG UK may suffer, sustain, incur, pay or be put to by reason or on account of or arising from: (1) any claim or other legal recourse by all or any of the Transferred Employees in respect of any fact or matter concerning or arising from employment with Virco prior to the Completion Date: (2) termination of any agents or contractors contract with Virco (3) any act or omission done or omitted to be done by Virco in relation to the Transferred Employees or any other employee of Virco which by virtue of the TUPE Regulations is deemed to be an act or omission of VG UK; (4) without prejudice to sub-Clause (3) above, any claim or demand or other legal recourse against VG UK by any other person or agent or employee or contractor of Virco who claims (whether correctly or not) that VG UK has inherited liability from Virco in respect of them by this deed; and (5) the employment or termination of employment of any employee of Virco (other than the Transferred Employees) whose employment is transferred to VG UK by the TUPE Regulations. 5.3 The parties agree that Brendan Larder and Sharon Kemp are Transferred Employees for all purposes of this deed. Virco agrees to waive the obligations of Brendan Larder and Sharon Kemp under sub-clause 2.2 (the six-month notice period), sub-clause 10.4, and the entirety of clause 12 (post-termination obligations) of the employment contracts between Virco and each of Sharon Kemp and Brendan Larder. 5.4 The Parties acknowledge that the Transferred Employees shall be free of all restrictions to work for VG UK subject to the following: 5.4.1 VG UK agrees that the obligations of each of the Transferred Employees towards Virco with respect to Virco's confidential information shall remain valid and in force for a period that is the lesser of five years or as described in their original contract, and that each such employee shall be prohibited in using Virco's confidential information and confidential materials for such period. The parties agree that the provisions set out in clause 9 and subclauses 10.1, 10.2 and 10.3 of each of Brendan Larder's and Sharon Kemp's Employment Contract and the provisions of paragraphs 12, 13, 14 and 16 in the Virco Terms and Conditions of Service of all other Transferred Employees, which are reproduced in Schedule D, continue to apply to each Transferred Employee for a period of no greater than five years. 5.4.2 prior to the execution of this deed Brendan Larder and Sharon Kemp shall execute a Letter attached as Schedule F and each Transferred Employee shall execute a Letter of Assurance confirming that they will continue to abide by the terms of their contract of employment with Virco UK Limited with respect to Virco's confidential information and confidential material, that these terms will survive the transfer of their contract of employment to VG UK and that they will not use the confidential materials for the benefit of VG UK or its holding company. For the avoidance of doubt the parties hereby agree that notwithstanding anything to the contrary in their employment contract with Virco the skills, knowledge and work experience acquired by the Transferred Employees during their period of employment with Virco shall not fall under the scope of this clause 5. 5.4.3 prior to execution of this deed, VG UK shall provide a Letter of Assurance that it has not received and does not have in its possession any: i. reagents, biologicals (including but not limited to all human tissue and blood samples), biochemicals, laboratory notebooks and electronic information; and ii. hard copy or electronic format of experimental and production protocols, R & D project descriptions, software development projects including neural network development, algorithms on mutational patterns of HIV, HCV, HBV and other reports belonging to Virco. Such Letter of Assurance is attached as Schedule G. 5.4.4 from the Completion Date, Virco shall have, subject to Clause 5.2 and all reasonable legal and regulatory requirements, no further obligations to the Transferred Employees. 5.4.5 VG UK hereby agrees that Virco may from time to time call upon the services of Morgan Hart and Gemma Young to assist it in audit or regulatory matters. Such assistance shall be limited in the case of Morgan Hart to a maximum period of twelve days, which need not be consecutive, commencing on the Completion Date and ending on March 30, 2002. Such assistance shall be limited in the case of Gemma Young to a maximum period of three days, which need not be consecutive, commencing at the Completion Date, and ending three (3) months after the Completion Date. All costs and expenses incurred by the employees, as a result of such assistance given to Virco pursuant to the terms of this Clause 5.5.5 shall be borne by Virco. For the avoidance of doubt Virco shall pay Morgan Hart's salary for the time period which he assists Virco. For the avoidance of doubt VG UK further agrees that Brendan Larder may present Virco data at the ICAAC conference in September 2001. 5.5 All salaries, business expenses, contractual bonuses and other emoluments, including holiday pay, tax and national insurance payments and contribution to retirement benefit schemes relating to the Transferred Employees shall be borne by Virco up to the Completion Date and all necessary apportionments shall be made. 6. SALE OF THE PARTIES HIV GENOTYPING ASSAY In consideration of the mutual covenants and promises set out in this deed the parties hereby agree as follows: 6.1 VG UK will not offer clinical service laboratory activities in Europe using the Virco HIV genotyping assay for a period of three (3) years from the date of this deed. 6.2 VG UK may offer clinical service laboratory activities based on its HIV genotyping assay as currently available or future developments on it. 7. REPRESENTATIONS, WARRANTIES AND LIABILITIES 7.1 All information contained in this deed and all other information relating to the Assets, Expensed Items, license to occupy, Lease or Transferred Employees given by Virco or its representatives to VG UK or its representatives are true, accurate and complete in every respect and there is no fact or matter relating to the Assets, Expensed Items, license to occupy, Lease or Transferred Employees which is known or ought on reasonable enquiry to be known to Virco which has not been disclosed or which renders any such matters or information untrue, incomplete or misleading or the disclosure of which is material to be known by a purchaser of the Assets, Expensed Items, Lease or Transferred Employees. 7.2 The Parties to this deed have full power and authority and have taken all necessary corporate action to enable each effectively to enter into and perform this deed and all deeds entered into, or to be entered into, pursuant to the terms of this deed, and such deeds when executed, will constitute valid, binding and enforceable obligations on each in accordance with their respective terms and, save with respect to the consent of the Landlord in connection with the license to occupy and the assignment of the Lease, each does not require the consent, approval or authority of any other person to enter into or perform its obligations under this deed and each party's entry into and performance of this deed will not constitute any breach of or default under any obligation binding upon it, and it is not engaged in or threatened under any litigation or arbitration proceedings which might have an effect upon its capacity or ability to perform its obligations under this deed. 7.3 TITLE TO THE ASSETS AND EXPENSED ITEMS 7.3.1 Virco warrants the condition of the Assets and Expensed Items on an "as is where is" basis and, except as provided herein, does not warrant as to the condition, fitness for purpose or any other warranty implied under the Sale of Goods Act 1979 or the Sale and Supply of Goods Act 1994 in respect of the Assets or Expensed Items. 7.3.2 Virco has or will have at Completion Date good and marketable title to and has in its possession and under its control, all of the Assets and Expensed Items which are sold free from any charge, lien, encumbrance, equity, deed of hire or hire purchase or for payment on deferred terms, bill of sale or any obligation to pay any outstanding sums in respect of them and no person other than Virco has or claims any rights in relation to the Assets or Expensed Items or any of them and the Assets or Expensed Items are not subject to or potentially subject to any floating charge or guarantee given by Virco or by any person or company connected with Virco. 7.3.3 All documents which in any way affect the right, title or interest of Virco in or to any of the Assets and which attract stamp duty have been duly stamped within the requisite period for stamping. 7.4 TRANSFERRED EMPLOYEES 7.4.1 No person is employed or engaged by Virco at the Premises (whether under a contract of service or contract for services) other than the Transferred Employees and the Transferred Employees are all employed directly by Virco. 7.4.2 Virco has disclosed copies of all service contracts and contracts for services and full particulars of the current terms of employment or engagement of all Transferred Employees and all of such particulars are true and accurate and complete in all respects. 7.4.3 In respect of each of the Transferred Employees, Virco has performed all obligations and duties required to be performed by it (and has settled all outstanding claims and debts), whether arising under contract, statute, at common law or in equity; 7.4.4 Except as described in this deed with respect to the Schedule D employees, Virco has not offered any contract of employment or contract for services to any person (except to any of the Transferred Employees). 7.4.5 Virco has not offered or agreed for any future variation in any contract of employment in respect of the Transferred Employees or any other person employed by Virco in respect of whom liability is deemed by the TUPE Regulations to pass to VG UK. 7.4.6 Virco has paid, or will make timely payment, to the Inland Revenue and any other appropriate authority all taxes, National Insurance contributions and other levies due in respect of the Transferred Employees in respect of their employment by Virco up to the Completion Date. 7.4.7 There are no enquiries or investigations existing, pending or threatened into Virco by the Equal Opportunities Commission or the Commission for Racial Equality or other similar authorities. 7.4.8 With the exception of Brendan Larder no Transferred Employee has given or received notice terminating his employment or engagement in connection with Virco. There is no person previously employed by Virco who now has or may in the future have a right to return to work (whether for reasons connected with maternity leave or absence by reason of illness or incapacity or otherwise) or a right to be reinstated or re-engaged by Virco or to any other compensation. 7.4.9 There are not in existence and Virco has not proposed or is not proposing to introduce any bonus, profit sharing scheme, share option scheme, share incentive scheme or any other scheme or arrangement under which the Transferred Employees or any of them are or is or would be entitled to participate in the profits of the Assets, Expensed Items, Lease or Employees. 7.4.10 There are no amounts outstanding or promised to any of the Transferred Employees and no liability has been incurred by Virco which remains undischarged for breach of any contract of service or for services or for redundancy payments (including protective awards) or for compensation under any employment legislation or regulations or for wrongful dismissal, unfair dismissal, equal pay, sex, race or disability discrimination or otherwise and no order has been made at any time for the reinstatement or re-engagement of any of the Employees or any person formerly employed or engaged. 7.4.11 Virco has complied with the Working Time Regulations 1998 in respect of the Transferred Employees and any other person who provides services whom Virco has regarded as its employee under such Regulations. 7.4.12 Virco is not engaged or involved in any dispute, claim or legal proceedings (whether arising under contract, common law, statute or in equity) with any of the Transferred Employees nor with any other person employed by Virco in respect of whom liability is deemed to pass to VG UK by virtue of the TUPE Regulations, and so far as Virco is aware there is no likelihood of any such dispute, claim or proceedings arising at any time. 7.4.13 There are no acts or omissions by Virco in relation to any of the Transferred Employees, which could give rise to a successful claim against Virco or VG UK. 7.4.14 Virco has not recognised any trade union, works/staff councils or association of trade unions or any other organisation of employees in respect of the Transferred Employees or any of them. There is no collective deed or other deed or arrangement (whether in writing, or by custom and practice) with any trade union, staff association, staff works council or other organisation of employees in relation to Virco and Virco is not involved or likely to be involved in any industrial or trade dispute or negotiation with any trade union or other employee organisation. 7.5 Neither Virco nor any person for whose acts or omissions it may be vicariously liable is engaged in or subject to any civil, criminal or arbitration proceedings in relation to the Assets, Expensed Items, license to occupy, Lease or Transferred Employees or any of them and there are no such proceedings pending or threatened by or against Virco or against any such person and there are no facts or circumstances likely to give rise to any such proceedings and there are no judgements outstanding against Virco which affect or might affect any of the Assets, Expensed Items, license to occupy, Lease or Transferred Employees. 7.6 Virco warrants that at the Completion Date it has removed its confidential and proprietary information, its Excluded Assets, and those Schedule A assets which are denoted as remaining with Virco, from the Premises. 7.7 Virco warrants that to the best of its knowledge at date of assignment there are no encumbrances nor knows of any impediments which may effect the validity of the Lease or the assignment of the same nor of any amendment to the Lease. For the avoidance of doubt Virco and TVNV represents and warrants that to the best of their knowledge, there is no legal impediment to the Landlord granting the License to Assign the Lease Premises on the date of Assignment. 7.8 Except in respect of death or personal injury caused by Virco's negligence, neither TVNV nor Virco shall be liable to VG UK by reason of any representation (unless fraudulent or negligent) or any implied warranties, condition or other term, or any duty at common law, for any direct, special or consequential loss or damage (whether loss of profit or otherwise) costs, expenses or other claims for compensation whatsoever (whether caused by the negligence of Virco, its employees or agents or otherwise), arising out of the sale or their use or resale by VG UK and the entire liability of Virco under or in connection with the sale of the Assets and Expensed Items shall not exceed the price of the said Assets and Expensed Items, paid by VG UK to Virco. 7.9 VG UK shall indemnify Virco against all claims, demands, proceedings damages, costs and expenses raising out of or incidental to its breach, non-observance or non-performance of the covenants and conditions contained in the license to occupy. 7.10 VG UK shall indemnify Virco against all claims, demands, proceedings damages, costs and expenses raising out of or incidental to its breach, non-observance or non-performance of the covenants and conditions contained in the Lease after the Completion Date and Virco shall indemnify VG UK against all claims, demands, proceedings damages, costs and expenses raising out of or incidental to its breach, non-observance or non performance of the covenants and conditions contained in the Lease to the extent that they relate to the period prior to the date of assignment if: 8. RESCISSION Without prejudice to its other rights and remedies either party may rescind this deed forthwith by notice in writing to the other prior to the Completion Date if: 8.1.1 any or all of the applicable regulatory and parent shareholder/director approvals are not received; or 8.1.2 there is any material misrepresentation of a material fact or fraud in entering into this deed; or 8.1.3 there is any material change in the ownership or control of either party which is unacceptable to the other for any reason; or 8.1.4 one of the parties makes any voluntary arrangement with its creditors or becomes subject to an administration order; or 8.1.5 one of the parties becomes insolvent or compounds with its creditors or convenes a meeting to consider a resolution that it be placed in liquidation (other than a solvent liquidation for the purposes of amalgamation or reconstruction) or suffers a petition to be presented that it be placed in liquidation or has an administrative receiver, receiver or manager appointed in respect of all or any of its assets or is adjudication bankrupt, makes an assignment for the benefit of, or any composition with, its creditors or takes advantage of any insolvency act (or in each case the equivalent in any jurisdiction); or 8.1.6 one of the parties commits any remediable breach of any of the terms or conditions of this deed including a failure to pay pursuant to Clause 3 and fails to remedy the breach within 21 (twenty one) days; or 8.1.7 the Lease is not assigned. 9. PARENTAL GUARANTEES 9.1 VGI hereby irrevocably and unconditionally guarantees to Virco the due and punctual performance of each obligation of VG UK to pay monies under this deed and also guarantees VG UK performance of all other obligations hereunder and VGI hereby agrees that if VG UK shall make any default in observing and performing the said obligations in every such case VGI will pay and make good to TVNV on demand all loses, damages and expenses sustained by Virco in respect of all such matters VGI shall not be discharged from or released from its obligations under this clause 9.1 by any arrangement made between VG UK and VGI and/or any third party. 9.2 TVNV hereby irrevocably and unconditionally guarantees to VG UK the due and punctual performance of each obligation of Virco to pay monies under this deed and also guarantees Virco performance of all other obligations hereunder and TVNV hereby agrees that if Virco shall make any default in observing and performing the said obligations in every such case TVNV will pay and make good to VG UK on demand all loses, damages and expenses sustained by VG UK in respect of all such matters Virco shall not be discharged from or released from its obligations under this clause 9.2 by any arrangement made between TVNV and Virco and/or any third party. 10. ANNOUNCEMENTS No announcement of any kind shall be made in respect of the subject matter of this deed except as specifically agreed between Virco and VG UK. Any announcement by either party shall in any event be issued only after prior consultation with the other and the parties shall make best efforts to agree upon the text of the announcement within five (5) working days of the request. The provisions of this clause 10 shall not apply to disclosures or announcements that are made pursuant to law or regulation. 11. COSTS All expenses incurred by or on behalf of the parties, including all fees of agents, solicitors, accountants, employed by either of the parties in connection with the negotiation, preparation and execution of this deed shall be borne solely by the party which incurred them. 12. NOTICES Any notice or other communication given pursuant to or made under or in connection with the matters contemplated by this deed shall be in writing and shall be delivered by courier, sent by registered post or sent by facsimile to the address or facsimile number of the recipient set out below or as specified by the recipient from time to time. Notices sent by e-mail or facsimile shall not be valid to themselves and must be confirmed in hard copy form by courier or by registered post. Notices to Virco or to TVNV to: C/O Tibotec-Virco N.V Intercity Business Park, Gen. De Wittelan L11B 4, 2800 Mechelen, Belgium Attention: Paul Stoffels Notices to VGI or VG UK: C/O Visible Genetics Inc. 700 Bay Street, Suite 1000 Toronto, Ontario Canada M5G 1Z6 Attention: General Counsel Any notice given pursuant to this clause shall be deemed to have been received: (a) if delivered by courier, at the time of delivery; or (b) if sent by post; where posted in the country of the addressee, on the second working day following the day of posting; and where posted in any other country, on the fifth working day following the day of posting. 13. ENTIRE DEED AND SCHEDULES 13.1 This deed and the Schedules constitute the entire deed and understanding between the parties with respect to all matters which are referred to. 13.2 The Schedules form part of this deed. 13.3 This deed binds each party's successors and assigns. 14. INVALIDITY If any term or provision in this deed shall in whole or in part be held to any extent to be illegal or unenforceable under any enactment or rule of law, that term or provision or part shall to that extent be deemed not to form part of this deed and the enforceability of the remainder of this deed shall not be affected. 15. PROPER LAW The construction, validity and performance of this deed shall be governed by the laws of England. 16. RIGHTS OF THIRD PARTIES A person who is not a party to this deed may not enforce any of its terms under the Contracts (Rights of Third Parties) Act 1999. Notwithstanding any term of this deed, the consent of any third party is not required for any variation (including any release or compromise of any liability under) or termination of this deed. 17. COUNTERPARTS This deed may be executed in any number of counterparts and by facsimile and by the parties on separate counterparts, each of which when so executed shall be an original of this deed, and all of which shall together constitute one and the same instrument. Complete sets of counterparts shall be lodged with each party. EXECUTED BY THE PARTIES AS A DEED Common Seal of TIBOTEC-VIRCO N.V. was hereunto affixed in the presence of : Director:____________________________ Director/Secretary:__________________ Date: _______________________________ Common Seal of VIRCO UK LTD. was hereunto affixed in the presence of: Director_____________________________ Director/Secretary:__________________ Date: _______________________________ Common Seal of VISIBLE GENETICS UK LTD was hereunto affixed in the presence of: Director_____________________________ Director/Secretary:__________________ Date: _______________________________ Common Seal of VISIBLE GENETICS INC. was hereunto affixed in the presence of: Director_____________________________ Director/Secretary:__________________ Date: _______________________________ Page 16 of 16 EX-10.36 12 a2080893zex-10_36.txt EXHIBIT 10.36 EXHIBIT 10.36 DATED 10th OCTOBER, 2001 THE MASTER FELLOWS AND (1) SCHOLARS OF TRINITY COLLEGE CAMBRIDGE VIRCO U.K. LIMITED (2) VISIBLE GENETICS UK LIMITED VISIBLE GENETICS INC (4) --------------------------------- LICENCE TO ASSIGN IN RESPECT OF UNIT 184 PHASE 3 CAMBRIDGE SCIENCE PARK MILTON ROAD CAMBRIDGE -------------------------------- LICENSE TO ASSIGN (WITH SURETY) ("NEW TENANCY") MILLS & REEVE CAMBRIDGE THIS LICENCE is made on 10th October, 2001 BETWEEN: (1) THE MASTER FELLOWS AND SCHOLARS OF THE COLLEGE OF THE HOLY AND UNDIVIDED TRINITY WITHIN THE TOWN AND UNIVERSITY OF CAMBRIDGE OF KING HENRY THE EIGHTH'S FOUNDATION ("LANDLORD"); (2) VIRCO U.K. LIMITED incorporated in England with registered number 03348588 whose registered office is at Cartwright & Company 106 High Street Stevenage Hertfordshire SG1 3DW ("TENANT"); (3) VISIBLE GENETICS UK LIMITED incorporated in England with registered number 04076100 whose registered office is at 20-22 Bedford Row London WC1R 4JS ("ASSIGNEE"); (4) VISIBLE GENETICS INC an Ontario corporation incorporated in the Province of Ontario Canada whose registered office is at 700 Bay Street Suite 1000 Toronto Canada M5G 126 ("SURETY"). NOW THIS DEED WITNESSES as follows: 1. INTERPRETATION 1.1 In this License the following expressions have (unless the context otherwise requires) the following meanings: "ASSIGNMENT" means the assignment of the Lease by the Tenant to the Assignee authorized by this License; "LANDLORD" includes the immediate reversioner from time to time to the Lease; "LEASE" means the lease of the Premises which is briefly described in Schedule 1 and includes any "collateral agreement" (as that term is defined by section 28 Landlord and Tenant (Covenants) Act 1995) mentioned in Schedule 1; "PREMISES" means the premises briefly described in Schedule 1; "TENANT COVENANT" means a "tenant covenant" as defined by section 28 Landlord and Tenant (Covenants) Act 1995. 1.2 In this License unless the context otherwise requires: 1.2.1 words importing any gender include every gender; 1.2.2 words importing the singular number only include the plural number and vice versa; 1.2.3 words importing persons include firms companies and corporations and vice versa; 1.2.4 where any obligation is undertaken by two or more persons jointly those persons will be jointly and severally liable in respect of that obligation; 1.2.5 the headings to the clauses will not affect the interpretation. 1.3 The guarantee given by the Tenant in Schedule 2 is an authorized guarantee agreement under section 16 Landlord and Tenant (Covenants) Act 1995 and is entered into by the Tenant as a result of the Landlord having stipulated that the Landlord's consent to the Assignment is conditional upon the Tenant entering into the guarantee. 2. GRANT OF LICENSE 2.1 At the request of the Tenant and the Surety the Landlord grants to the Tenant its license to assign the Lease to the Assignee. 3. ASSIGNEE'S COVENANTS 3.1 The Assignee covenants with the Landlord that within 28 days of the date of completion of the Assignment it will send to the Landlord: 2 3.1.1 notice of the address to which future rent demands should be sent; 3.1.2 a certified Copy of the deed effecting the Assignment. 4. AUTHORIZED GUARANTEE AGREEMENT 4.1 The Tenant covenants with the Landlord as a primary obligation (and without the need for any express assignment) to observe and perform the covenants set out in Schedule 2. 5. SURETY COVENANTS 5.1 The Surety covenants with the Landlord (and without the need for any express assignment) as a primary obligation to observe and perform the covenants set out in Schedule 3. 6. TENANT'S COVENANT 6.1 The Tenant covenants with the Landlord: 6.1.1 not to allow the Assignee into occupation of the Premises until completion of the Assignment; and 6.1.2 to pay the Landlord's solicitors' and surveyors' reasonable costs incurred in connection with this License not exceeding in the case of the solicitors (pound)[ ] and (pound)[ ] for the surveyors plus (in both instances) Value Added Tax and disbursements. 7. VALIDITY OF LICENSE 7.1 Unless the Assignment is completed within two months after the date of this License (as to which time is of the essence) this License will be void but without any obligation on the part of the Landlord to refund any costs paid by the Tenant in connection with the grant of this License. 8. CONTINUING EFFECT OF THE LEASE 8.1 This License is restricted to the Assignment and all the covenants and conditions in the Lease so far as the law allows remain in full force and effect. 3 9. FORFEITURE 9.1 The condition for re-entry contained in the Lease is exercisable if the Tenant breaches any of the covenants and conditions in this License. 10. RIGHTS OF THIRD PARTIES 10.1 The parties to this License do not intend that any of its terms will be enforceable by virtue of the Contracts (Rights of Third Parties) Act 1999. 11. PROPER LAW 11.1 This License shall be governed by English Law and the Tenant the Assignee and the Surety irrevocably submit to the non-exclusive jurisdiction of the English Courts. 11.2 The Surety irrevocably authorizes and appoints McCarthy Tetrault of Pountney Hill House, 6 Laurence Pountney Hill, London EC4R 0BL (or such other form of solicitors resident in England and Wales as it may from time to time by written notice to the Landlord substitute) to accept service of all legal process arising out of or connected with this License and service on McCarthy Tetrault (or such substitute) shall be deemed to be service on the Surety. 12. NOTICES 12.1 The Landlord shall serve on the Surety confirmatory copies of any notice served on the Tenant or Assignee in writing by courier (but at the Surety's cost) by registered post or by facsimile to the address or facsimile number set out below or as specified from time to time by the Surety: Attention: General Counsel, Visible Genetics Inc, 700 Bay Street, Suite 1000, Toronto, Ontario, Canada M5G 126; Fax: +1-416-813-3255. 13. EXECUTION 13.1 This instrument: 13.1.1 is executed as a deed and by its execution the parties authorize their solicitors to deliver it for them when it is dated; 13.1.2 was delivered when it was dated. 4 SCHEDULE 1 (THE LEASE) The Premises: Unit 184 Phase 3 Cambridge Science Park Milton Road Cambridge The Contractual Term: From 19 January 1999 to 25 March 1999 and thereafter for a term of 15 years The Parties: (1) the Landlord and (2) the Tenant and (3) VIRCO NV 5 SCHEDULE 2 (THE AUTHORIZED GUARANTEE AGREEMENT) 1. In this schedule: "AUTHORIZED GUARANTEE AGREEMENT" means an authorized guarantee agreement within the meaning of section 16 Landlord and Tenant (Covenants) Act 1995; "RELEVANT VARIATION" means a relevant variation as defined in section 18(4) Landlord and Tenant (Covenants) Act 1995; "SECURED OBLIGATIONS" means the obligation of the Assignee: (a) to pay all sums from time to time due or expressed to be due to the Landlord from the Assignee under the Lease; and (b) to observe and perform the Tenant Covenants in the Lease; "TERM" means the contractual term granted by the Lease together with the period of any holding over and any extension of the contractual term by statute or otherwise; "TERMINATING EVENT" means the disclaimer of the Lease (including without limitation the disclaimer by the Crown under section 656 Companies Act 1985) following the liquidation or bankruptcy of the Assignee or the Assignee being wound up or ceasing to exist. 2. This guarantee is given pursuant to a provision in the Lease requiring it to be given and is an Authorized Guarantee Agreement. 3. The Tenant unconditionally and irrevocably covenants with and guarantees to the Landlord that the Assignee will throughout the Term pay and discharge the Secured Obligations when they fall due or are expressed to fall due under the Lease for payment and discharge. 6 4. The Tenant shall upon being requested to do so by the Landlord enter into any deed of variation license consent or other document to which in each case the Assignee is a party and which is in each case supplemental to the Lease for the purpose of acknowledging that the Tenant's liabilities under this Authorized Guarantee Agreement extend to it but to the extent that the document effects a Relevant Variation paragraph 13 shall apply. 5. The guarantee and covenant in paragraph 3 shall impose on the Tenant the same liability as if the Tenant were the principal debtor in respect of the Assignee's obligations under the Lease and that liability shall continue notwithstanding (and will not be discharged in whole or in part or otherwise affected by): (a) any forbearance by the Landlord to enforce against the Assignee the Tenant Covenants; (b) the giving of time or other concessions or the taking or holding of or varying realizing releasing or not enforcing any other security for the liabilities of the Assignee; (c) any legal limitation or incapacity relating to the Assignee; (d) the invalidity or unenforceability of any of the obligations of the Assignee; (e) the Assignee ceasing to exist; (f) the giving and subsequent withdrawal of any notice to determine the Lease; (g) any increase or reduction in the extent of the Premises or in the rent payable under the Lease or any other variation to the Lease; (h) the disclaimer (including without limitation disclaimer by the Crown under section 656 Companies Act 1985) of the Lease; (i) any other act or omission of the Landlord or any other circumstances which but for this paragraph 5 would discharge the Tenant and for the purposes of this paragraph 5 the Tenant shall be deemed liable to continue to pay and discharge,.; the Secured Obligations notwithstanding any of the above matters and any money expressed to be payable by the Assignee which may not be recoverable 7 for any such reason shall be recoverable by the Landlord from the Tenant as principal debtor. 6. The Tenant shall if required by the Landlord in writing within three months after a Terminating Event accept a lease of the Premises for the residue of the contractual term unexpired at and with effect from the date of the Terminating Event at the same annual rent as reserved by the Lease (reviewable at the same times as the annual rent would have been reviewable under the Lease had there been no disclaimer) and subject to the same covenants and provisos (except that the Tenant shall not be required to procure that any other person is made a party to that lease as a guarantor) and the Tenant on execution of the new lease will pay the reserved rents for the period from the date of the disclaimer to the quarter day following the date of the new lease and the costs of and incidental to the new lease and will execute and deliver to the Landlord a counterpart. 7. Where the Tenant consists of more than one person and if the Landlord requires consequently more than one person to take a new lease those guarantors shall take that new lease as joint tenants. 8. Until the Secured Obligations have been paid and discharged in full the Tenant shall not without Consent exercise any rights: (a) of subrogation or indemnity in respect of the Secured Obligations; (b) to take the benefit of share in or enforce any security, or other guarantee or indemnity for the Secured Obligations; (c) to prove in the bankruptcy or liquidation of the Assignee in competition with the Landlord. 9. The Tenant has not taken any security from the Assignee and will not do so. 10. Any security taken by the Tenant in breach of paragraph 8 and all money at any time received in respect of it shall be held in trust for the Landlord as security for the liability of the Tenant under this Authorized Guarantee Agreement. 8 11. Nothing in this Authorized Guarantee Agreement shall operate so as to make the Tenant liable for anything in respect of which the Assignee is released from liability by the provisions of the Landlord and Tenant (Covenants) Act 1995. 12. To the extent that this Authorized Guarantee Agreement purports to impose on the Tenant any liability for anything in respect of which the Assignee is released from liability by the provisions of the Landlord and Tenant (Covenants) Act 1995 the relevant provision of this Authorized Guarantee Agreement shall to that extent only be void but that shall not affect: (a) enforceability of that provision except to that extent; or (b) the enforceability of any other provision of this deed. 13. The Secured Obligations shall not include obligations arising under a Relevant Variation but the making of a Relevant Variation shall not discharge the Tenant's liability under this Authorized Guarantee Agreement. 14. The liability of the Tenant under this Authorized Guarantee Agreement shall be the joint and several liability of all parties who have executed it as Tenant and all other parties who from time to time guarantee the Assignee's obligations to the Landlord and any demand for payment by the Landlord on any one or more of such persons jointly and severally liable shall be deemed to be a demand made on all such persons. 9 SCHEDULE 3 (SURETY COVENANTS) 1. In this schedule: "AUTHORIZED GUARANTEE AGREEMENT" means an authorized guarantee agreement within the meaning of section 16 Landlord and Tenant (Covenants) Act 1995; "RELEVANT VARIATION" means a relevant variation as defined in section 18(4) Landlord and Tenant (Covenants) Act 1995; "SECURED OBLIGATIONS" means the obligation of the Assignee: (a) to pay all sums from time to time due or expressed to be due to the Landlord from the Assignee under the Lease; (b) and to observe and perform: (i) the Tenant Covenants in the Lease; or (ii) the covenants in any Authorized Guarantee Agreement which the Assignee gives to the Landlord consequent upon an assignment of the Lease; "TERM" means the contractual term granted by the Lease together with the period of any holding over and any extension of the contractual term by statute or otherwise; "TERMINATING EVENT" means the disclaimer of the Lease (including without limitation the disclaimer by the Crown under section 656 Companies Act 1985) following the liquidation or bankruptcy of the Assignee or the Assignee being wound up or ceasing to exist. 2. The Surety unconditionally and irrevocably covenants with and guarantees to the Landlord that the Assignee will throughout the Term pay and discharge the Secured Obligations when they fall due or are expressed to fall due under the Lease for payment and discharge. 10 3. The Surety shall upon being requested to do so by the Landlord enter into any deed of variation license consent or other document to which in each case the Assignee is a party and which is in each case supplemental to the Lease for the purpose of acknowledging that the Surety's liabilities under this guarantee extend to it but to the extent that the document effects a Relevant Variation paragraph 12 shall apply. 4. The guarantee and covenant in paragraph 2 shall impose on the Surety the same liability as if the Surety were the principal debtor in respect of the Assignee's obligations under the Lease and that liability shall continue notwithstanding (and will not be discharged in whole or in part or otherwise affected by): (a) any forbearance by the Landlord to enforce against the Assignee the Tenant Covenants or any covenants in any Authorized Guarantee Agreement; (b) the giving of time or other concessions or the taking or holding of or varying realizing releasing or not enforcing any other security for the liabilities of the Assignee; (c) any legal limitation or incapacity relating to the Assignee; (d) the invalidity or unenforceability of any of the obligations of the Assignee; (e) the Assignee ceasing to exist; (f) the giving and subsequent withdrawal of any notice to determine the Lease; (g) any increase or reduction in the extent of the Premises or in the rent payable under the Lease or any other variation to the Lease; (h) the disclaimer (including without limitation disclaimer by the Crown under section 656 Companies Act 1985) of the Lease; (i) any other act or omission of the Landlord or any other circumstances which but for this paragraph 4 would discharge the Surety and for the purposes of this paragraph 4 the Surety shall be deemed liable to continue to pay and discharge the Secured Obligations notwithstanding any of the above matters and 11 any money expressed to be payable by the Assignee which may not be recoverable for any such reason shall be recoverable by the Landlord from the Surety as principal debtor. 5. The Surety shall if required by the Landlord in writing within three months after a Terminating Event accept a lease of the. Premises for the residue of the contractual term unexpired at and with effect from the date of the Terminating Event at the same annual rent as reserved by the Lease (reviewable at the same times as the annual rent would have been reviewable under the Lease had there been no disclaimer) and subject to the same covenants and provisos (except that the Surety shall not be required to procure that any other person is made a party to that lease as a guarantor) and the Surety on execution of the new lease will pay the reserved rents for the period from the date of the disclaimer to the quarter day following the date of the new lease and the costs of and incidental to the new lease and will execute and deliver to the Landlord a counterpart. 6. Where the Surety consists of more than one person and if the Landlord requires consequently more than one person to take a new lease those persons shall take that new lease as joint tenants. 7. Until the Secured Obligations have been paid and discharged in full the Surety shall not without Consent exercise any rights: (a) of subrogation or indemnity in respect of the Secured Obligations; (b) to take the benefit of share in or enforce any security or other guarantee or indemnity for the Secured Obligations; (c) to prove in the bankruptcy or liquidation of the Assignee in competition with the Landlord. 8. The Surety has not taken any security from the Assignee and will not do so. 9. Any security taken by the Surety in breach of paragraphs 8 and 9 and all money at any time received in respect of it shall be held in trust for the Landlord as security for the liability of the Surety under this guarantee. 12 10. Nothing in this guarantee shall operate so as to make the Surety liable for anything in respect of which the Assignee is released from liability by the provisions of the Landlord and Tenant (Covenants) Act 1995. 11. To the extent that this guarantee purports to impose on the Surety any liability for anything in respect of which the Assignee is released from liability by the provisions of the Landlord and Tenant (Covenants) Act 1995 the relevant provision of this guarantee shall to that extent only be void but that shall not affect: (a) enforceability of that provision except to that extent; or (b) the enforceability of any other provision of this guarantee. 12. The Secured Obligations shall not include obligations arising under a Relevant Variation but the making of a Relevant Variation shall not discharge the Surety's liability under this guarantee. 13. The liability of the Surety under this guarantee shall be the joint and several liability of all parties who have executed it as Surety and all other parties who from time to time guarantee the Assignee's obligations to the Landlord and any demand for payment by the Landlord on any one or more of such persons jointly and severally liable shall be deemed to be a demand made on all such persons. The common seal of THE MASTER ) FELLOWS AND SCHOLARS OF ) TRINITY COLLEGE CAMBRIDGE was ) affixed in the presence of ) ..................................................... Senior Bursar ..................................................... Junior Bursar 13 Signed as a deed by VIRCO U.K. LIMITED ) acting by [a director and its secretary] [two ) directors] ) .......................................................... Director .......................................................... Director/Secretary Signed as a deed by VISIBLE GENETICS ) UK LIMITED acting by [ a director and its ) secretary] [two directors] .......................................................... Director .......................................................... Director/Secretary Signed as a deed by VISIBLE GENETICS ) INC. a corporation incorporated in the ) Province of Ontario by [ ] and ) [ ] being persons who in ) accordance with the laws of that territory are ) acting under the authority of the corporation ) .......................................................... Chairman/President/Vice-President .......................................................... Any officer or director 14 SCHEDULE A DATED JANUARY 19, 1999 THE MASTER FELLOWS AND SHCOLARS OF TRINITYCOLLEGE CAMBRIDGE (1) VIRCO U.K. LIMITED (2) VIRCO NV (3) ----------------------------------- LEASE -OF- UNIT 184 PHASE 3 CAMBRIDGE SCIENCE PARK MILTON ROAD, CAMBRIDGE ----------------------------------- Term: 15 years (plus broken quarter Initial Rent: (pound)286,000 per annum Rent Review dates: Every five years Expiry Date: March 24, 2014 MILLS & REEVE Cambridge Definitions and Interpretation.....................................................................................1 The demise habendum and reddendum..................................................................................4 Tenant's covenants.................................................................................................5 Landlord's covenants...............................................................................................5 Proviso agreement and declaration..................................................................................5 Forfeiture......................................................................................................5 Notices .......................................................................................................6 Rent abatement..................................................................................................6 Part II Landlord and Tenant At 1954.............................................................................7 Warranties......................................................................................................7 Landlord's powers to deal with the Landlord's Neighboring Premises..............................................7 Arbitration.....................................................................................................7 Landlord's obligations..........................................................................................7 Value added tax proviso.........................................................................................7 Rights of access or entry.......................................................................................8 Surety's covenant..................................................................................................8 Proper law.........................................................................................................8 Schedule 1.........................................................................................................9 The property and rights included in this demise.................................................................9 Part 1 - The property........................................................................................9 Part 2 - The rights..........................................................................................9 Right to services..................................................................................................9 Right of way.......................................................................................................9 Schedule 2.........................................................................................................10 Part 1 - Exceptions and reservations in favor of the Landlord...................................................10 Right to services..................................................................................................10 Right to light and air.............................................................................................10 Right to support...................................................................................................10 Right to enter.....................................................................................................10 Right to enter to cultivate........................................................................................10 Part 2 - Existing Encumbrances...............................................................................11 Schedule 3.........................................................................................................12 The rents payable by the Tenant.................................................................................12 Part 1 - Rents payable quarterly.............................................................................12 Definitions........................................................................................................12 The rent review....................................................................................................13 Memorandum of agreement as to rent.................................................................................13 Where assessment of rent delayed...................................................................................13 Intermediate rent periods..........................................................................................13 Part 2 - Rents payable upon demand...........................................................................14 Insurance Rent.....................................................................................................14 Rent for common parts..............................................................................................14 Service rent.......................................................................................................15 Interest on arrears................................................................................................15 Insurance excess...................................................................................................16 Schedule 4.........................................................................................................16 Tenant's covenants..............................................................................................16 To pay rent........................................................................................................16 To Pay outgoings...................................................................................................16 To repaid and decorate.............................................................................................16 Not to make alterations............................................................................................17 To permit entry....................................................................................................18 To repair on notice................................................................................................18 To pay Landlord's costs............................................................................................19 As to use and safety...............................................................................................19 Not to sue for unlawful or illegal purposes or cause nuisance......................................................19 Not to reside......................................................................................................20 As to user.........................................................................................................20 To keep open and security..........................................................................................20 Displays and advertisements........................................................................................21 To keep clean......................................................................................................21 To comply with Enactments and give notice..........................................................................21 To comply with the Planning Acts...................................................................................22 Insurance..........................................................................................................23 To Indemnify.......................................................................................................23 Dealings with the Premises.........................................................................................24 To give notice of assignment, devaluation, etc.....................................................................27 As to loss or acquisition of easements.............................................................................27 To produce plans/documents.........................................................................................27 Not to interfere with reserved rights..............................................................................27 To permit entry for reletting, etc.................................................................................28 To yield up........................................................................................................28 New surety.........................................................................................................28 As to value added tax..............................................................................................28 As to maintenance contracts........................................................................................29 Statutory acquisitions.............................................................................................29 Fire fighting appliances...........................................................................................29 Existing Encumbrances..............................................................................................29 Not to obstruct....................................................................................................29 To comply with regulations.........................................................................................30 As to water supply.................................................................................................30 To comply with Planning Agreements.................................................................................30 To pay cost of damage..............................................................................................31 Schedule 5.........................................................................................................31 Landlord's covenants............................................................................................31 As to quiet enjoyment..............................................................................................31 To insure..........................................................................................................31 Schedule 6.........................................................................................................32 Surety's covenants and agreements...............................................................................32 Covenants by Surety................................................................................................32 Agreements by Surety...............................................................................................32 Schedule 7.........................................................................................................34 Guarantee Agreement.............................................................................................34 Definitions and interpretation.....................................................................................34 Guarantee..........................................................................................................35 New lease..........................................................................................................35 Security taken by Guarantor........................................................................................36 Limitation on Guarantor's liability................................................................................36 Joint and several Guarantors.......................................................................................36
THIS LEASE is made on January 19, 1999 BETWEEN (1) (the "Landlord") THE MASTER FELLOWS AND SCHOLARS OF THE COLLEGE OF THE HOLY AND UNDIVIDED TRINITY WITHIN THE TOWN AND UNIVERSITY OF CAMBRIDGE OF KING HENRY THE EIGHTH'S FOUNDATION (2) (the "Tenant") VIRCO U.K. LIMITED (company number 03348588) whose registered office is c/o Cartwright & Company, 106 High Street, Stevenage, Herts. SG1 3DW (3) (the "Surety") VIRCO NV of Central Biological Laboratory, Inter City Business Park, Gen de Witterlaan L11B4, 2800 Mechelen, Belgium WHEREAS, the Premises are held by the Landlord which is an exempt charity; NOW THIS LEASE WITNESSETH as follows: 1. DEFINITIONS AND INTERPRETATION 1.1 In this Lease unless the context otherwise requires: "Agreement" means an agreement dated November 25, 1998 and made between the parties hereto in like order. "Basic Rent" means (pound)286,000 per annum exclusive of value added tax (subject to increase as provided in part 1 of schedule 3). "Connected Person" means any person, firm or company which is connected with the Tenant for the purposes of section 839 Income and Corporation Taxes Act 1988. "Consent" means an approval permission authority license or other relevant form of approval given by the Landlord in writing. "Enactments" shall include all present and future Acts of Parliament (including but not limited to the Public Health Acts 1975 to 1961, the Factories Act 1961, the Offices Shops and Railway Premises Act 1963, the Fire Precautions Act 1971, the Defective Premises Act 1972, the Health and Safety at Work, etc. Act of 1974 and the Planning Acts) and all notices, directions, orders, regulations, bye-laws, rules and conditions under or in pursuant of or deriving effect therefrom and any reference herein to a specific enactment or enactments (whether by reference to its or their short title or otherwise) shall include a reference to any enactment amending or replacing the same and any future legislation of a like nature. "the Estate" shall mean Cambridge Science Park shown edged blue on the Plan situate adjoining Milton Road partly in the City of Cambridge and partly in the County of Cambridgeshire (together with any such further neighboring area in respect of which the Landlord or its lessees may from time to time or at any time during the Period of Limitation receive planning permission to develop for uses similar or ancillary to the use of the said area edged blue and which the Landlord during the Period of Limitation elects to include in Cambridge Science Park. "Existing Encumbrances" means the matters set out in part 2 of schedule 2. "Group Company" means any company of which the Tenant is a Subsidiary or which has the same Holding Company as the Tenant where Subsidiary and Holding Company have the meanings given to them by section 736 Companies Act 1985. "Insured Risks" means at any particular time the risk of loss or damage by fire, storm, flood, explosion, riot, civil commotion, bursting or overflow of water tanks, boilers or apparatus impact by road vehicles or aircraft and other aerial devices or articles dropped therefrom and the risk of any other kind of loss or damage which the Landlord may from time to time in their discretion (to be exercised reasonably) deem it desirable to insure against and against which they shall at that particular time have a policy of insurance in effects subject to such exclusions and limitations as the insurers may impose and subject in every case to the availability of insurance cover against the risk and subject to the conditions on which and to the extent that insurance cover against each risk is generally available in relation to property such as the Premises. "Interest" shall mean interest at the yearly rate of four percent above the base rate published from time to time by Barclays Bank PLC or (in the event of base rate or Barclays Bank PLC ceasing to exist) such other equivalent rate of interest as the Landlord may from time to time in writing specify. "Landlord" includes the immediate reversioner to this Lease from time to time. "Landlord's Neighboring Premises" means any land or buildings now or hereafter during the Period of Limitation erected adjoining or neighboring the Premises (whether beside, under or over) which belong to the Landlord now or hereafter during the Period of Limitation. "Lettable Unit" shall mean a pat of the building on the Premises designed or intended for letting or exclusive occupation or capable of being used for separate self-contained occupation which odes not prejudice the use of the remainder of the building on the Premises for separate self-contained occupation. "Period of Limitation" means the period of eighty years commencing on the date hereof or such longer period as the law may permit (which period is hereby specified as the perpetuity period applicable to this Lease under the rule against perpetuities). "the Plan" shall mean the plan annexed hereto. "the Planning Acts" means the Town and Country Planning Acts of 1948 to 1990, the "Planning Hazardous Substances Act 1990, the Planning Listed Buildings and Conservation Areas Act 1990, the Local Government Planning and Land Act 1980 and all notices, directions, orders, regulations, bye-laws, rules and conditions under or in pursuance of or deriving effect therefrom from time to time and any reference herein to these or any other Act or Acts shall include a reference to any statutory modification or re-enactment thereof for the time being in force and any future legislation of a like nature. "the Planning Agreements" shall mean: (a) an agreement dated 8th November 1971 made pursuant to section 37 of the Town and Country Planning Act 1962 between the County Council of the Administrative County of Cambridgeshire and Isle of Ely(1) and the Landlord(2); and 2 (b) an agreement dated 19th August 1975 made pursuant to section 52 of the Town and Country Planning Act 1971 between the same parties and in the same order as the section 37 agreement; and (c) an agreement dated 2nd February 1982 made pursuant to section 52 of the Town and Country Planning Act 1971 between South Cambridgeshire District Council(1) and the Landlord(2); and (d) an agreement dated 26th June 1984 made pursuant to section 52 of the Town and Country Planning Act 1971 between South Cambridgeshire District Council(1) and the Landlord(2); and (e) an agreement dated 2nd June 1988 made pursuant to section 52 of the Town and Country Planning Act 1971 between South Cambridgeshire District Council(1) and the Landlord(2). "the Premises" means the property hereby demised as described in part 1 of schedule 1 including all Service Channels in, on or under such property and fixtures and fittings (other than trade or tenant's fixtures and fittings) therein together with all additions, alterations and improvements to such property. "Schedule of Condition" means a schedule of conditions made between the Landlord(1) and Cantab Pharmaceuticals Research Limited (2) in relation to the Premises dated 15th August 1997, a copy of which is annexed hereto. "Service Channels" means all such flues, sewers, drains, ditches, pipes, wires, watercourses, cables, channels, gutters, ducts and other conductors of services and plumbing and ventilating equipment and motors appurtenant thereto as are now existing or which may be constructed or laid during the Term and within the Period of Limitation as herein defined. "the Surety" shall include the Surety's successors whether by substitution or otherwise including personal representatives. "Surveyor" means the surveyors, consulting engineers and agents for the time being of the Landlord. "the Tenant" shall include the person in whom the Term is presently vested. "the Term" means the total period of demise hereby granted and (other than in the case of the references to the term in the definition of "Relevant Date" and in the habendum of this Lease) includes any period of holding over or any extension or continuance of the contractual term by Enactment or otherwise. 1.2 Words importing the masculine gender only include the feminine gender and vice versa and include any body of persons, corporate or unincorporated words importing the singular number only include the plural number and vice versa and the word "person" shall include any body of persons corporate or unincorporated and all covenants by any party hereto shall be deemed to be joint and several covenants where that party is more than one person and any covenant by the Tenant to do or not to do or omit to do an act or thing shall be deemed to include an obligation 3 not to permit or suffer such act or thing to be done or omitted by any person under the Tenant's control. 1.3 (a) References to numbered clauses and schedules are references to the relevant clause or schedules to this Lease and references to numbered paragraphs are references to the numbered paragraphs of that schedule or the part of the schedule in which they appear. (b) The clause, paragraph and schedule headings do not form part of this Lease and are not to be taken into account when construing it. 1.4 This instrument: (a) is executed as a deed and by its execution the parties authorize their solicitors to deliver it for them when it is dated; and (b) was delivered when it was dated. 1.5 This Lease is a new tenancy for the purposes of the Landlord and Tenant (Covenants) Act 1995. 2. THE DEMISE HABENDUM AND REDDENDUM 2.1 In consideration of the several rents and covenants on the part of the Tenant and the Surety herein respectively reserved and contained the Landlord HEREBY DEMISES unto the Tenant ALL THOSE premises more particularly described in part 1 of schedule 1 TOGETHER WITH (in common with the Landlord, their lessees and assigns and all other persons from time to time having the like rights) the rights set out in part 2 of schedule 1 EXCEPT AND RESERVING UNTO THE LANDLORD and its successors in title assigns and lessees and all persons from time to time authorized by it the interests, rights, reservations and exceptions more particularly set out in part 1 of schedule 2 TO HOLD the Premises unto the Tenant SUBJECT to any or all easements and other rights (if any) now subsisting over or which may affect the same (including any such as are more particularly set out in part 2 of schedule 2) from January 19, 1999 to March 25, 1999 and thereafter for the term of 15 years but determinable nevertheless as hereinafter provided YIELDING AND PAYING THEREFOR unto the Landlord during the Term by way of rent: (a) from the date of this Lease until March 18, 1999 a peppercorn if demanded and thereafter; (b) yearly and proportionately for any fraction of a year the Basic Rent the first such payment or a proportionate part thereof in respect of the period from March19, 1999 to March 25, 1999 to be made on the date hereof and thereafter such rents to be paid by equal quarterly installments in advance on the four usual quarter days in every year; (c) on demand the rents specified in part 2 of schedule 3; (d) any other sums which may become due from the Tenant to the Landlord under the provisions of this Lease; all such payments to be made without any deductions. 4 3. TENANT'S COVENANTS 3.1 The Tenant HEREBY COVENANTS with the Landlord to observe and perform all the covenants and provisions on the Tenant's part set out in schedule 4. 4. LANDLORD'S COVENANTS 4.1 The Landlord HEREBY COVENANTS with the Tenant whilst the reversion to this Lease is vested in the Landlord to observe and perform all the covenants and provisions on the Landlord's part set out in schedule 5 but not so as to impose any personal liability upon the Landlord except for the Landlord's own acts and defaults. 5. PROVISO AGREEMENT AND DECLARATION 5.1 FORFEITURE Without prejudice to any other rights of the Landlord if: (a) the whole or part of the rent remains unpaid twenty-one days after becoming due (whether demanded or not); or (b) any of the Tenant's covenants in this Lease are not performed or observed; or (c) the Tenant or any guarantor or surety of the Tenant's obligations under this Lease (including the Surety): (i) proposes or enters into any composition or arrangement with its creditors generally or any class of its creditors; or (ii) is the subject of any judgment or order made against it which is not complied with within seven days or is the subject of any execution , distress, sequestration or other process leveled upon or enforced against any pat of its undertaking property, assets or revenue; or (iii) being a company: (A) is the subject of a petition presented or an order made or a resolution passed or analogous proceedings taken for appointing an administrator of or winding up such company (save for the purpose of and followed within four months by an amalgamation or reconstruction which does not involve or arise out of insolvency or given rise to a reduction in capital and which is on terms previously approved by Landlord); or (B) an encumbrancer takes possession or exercises or attempts to exercise any power of sale or a receiver or administrative receiver is appointed of the whole or any part of the undertaking property, assets or revenues of such company; or (C) stops payment or agrees to declare a moratorium or becomes or is deemed to be insolvent or unable to pay its debts within the meaning of 5 section 123 Insolvency Act 1986; or (D) without prior consent ceases or threatens to cease to carry on its business in the normal course from the Premises; or (iv) being an individual: (A) is the subject of a bankruptcy petition o bankruptcy order; or (B) is the subject of an application or order or appointment under section 253 or section 273 or section 286 Insolvency Act 1986; or (C) is unable to pay or has no reasonable prospect of being able to pay his debts within the meaning of sections 267 and 268 Insolvency Act 1986. (d) any event occurs or proceedings are taken with respect to the Tenant or any guarantor of the Tenant's obligations under this Lease (including the Surety) in any jurisdiction to which it is subject which has an effect equivalent or similar to any of the events mentioned in clause 5.1(c); then and in any of such cases the Landlord may at any time (and notwithstanding the waiver of any previous right of re-entry) re-enter the Premises whereupon this Lease shall absolutely determine but without prejudice to any right of action of the Landlord in respect of any previous breach by the Tenant of this Lease. 5.2 NOTICES. Any notice under this Lease shall be in writing and any notice (a) to the Tenant or the Surety shall be deemed to be sufficiently served if: (i) left addressed to the Tenant on the Premises; or (ii) sent to the Tenant or the Surety by post at the last known address or (if a Company) registered office of the Tenant or the Surety; and (b) to the Landlord shall be deemed to be sufficiently served if: (i) sent to the Landlord by post at the last known address or (if a Company) registered office of the Landlord; or (ii) whilst the reversion immediately expectant on the determination of the Term is vested in the original Landlord (as named herein) addressed to the Landlord's Senior Bursar and delivered to him personally or sent to him by post. 5.3 RENT ABATEMENT. If the Premises are destroyed or rendered wholly or partly unfit for use by any of the Insured Risks then (provided the destruction or damage is not caused by the act or default of the Tenant or any person on the Premises with the Tenant's express or implied authority or any predecessor in 6 title of any of them so that the insurance policy effected by the Landlord is vitiated or payment of any part of the policy money is withheld), the whole or a fair proportion of the Basic Rent and (in the case of the premises being wholly unfit for use), the rents specified in paragraph 3 of part 2 of schedule 3 according to the extent of the damage sustained shall cease to be payable for the shorter of a period of three years or the period during which the Premises remain unfit for use and any dispute with reference to this proviso shall be referred to arbitration in accordance with the Arbitration Act 1996. 5.4 PART II LANDLORD AND TENANT AT 1954 If this Lease is within Part II of the Landlord and Tenant Act 1954 then subject to the provisions of subsection (2) of section 38 of that Act neither the Tenant nor any assignee or undertenant of the Term or of the Premises shall be entitled on quitting the Premises to any compensation under section 37 of that Act. 5.5 WARRANTIES The Tenant hereby acknowledges and admits that the Landlord has not given or made any representation or warranty that the use of the Premises herein authorized is or will remain a permitted use under the Planning Acts. 5.6 LANDLORD'S POWERS TO DEAL WITH THE LANDLORD'S NEIGHBORING PREMISES Notwithstanding anything herein contained, the Landlord and all persons authorized by the Landlord shall have power without obtaining any consent from or making any compensation to he Tenant to deal as the Landlord may think fit with the Estate and the Landlord's Neighboring Premises and to erect thereon or on any part thereof any building whatsoever and to make any repairs, alterations or additions and carry out any demolition ore rebuilding whatsoever (whether or not affecting the light or air to the Premises) which the Landlord may think fit or desire to do. 5.7 ARBITRATION (Unless the Lease otherwise provides) if any dispute or difference shall arise between the parties hereto touching these presents or the rights or obligations of the parties hereunder, such dispute and difference shall in the event of this Lease expressly so providing and otherwise may by agreement between the parties be referred to a single arbitrator to be agreed upon the parties hereto or in default of agreement to be nominated by the President or Vice President for the time being of the Royal Institution of Chartered Surveyors on the application of any party in accordance with and subject to the provisions of the Arbitration Act 1996. 5.8 LANDLORD'S OBLIGATIONS Nothing herein contained shall render the Landlord liable (whether by implication of law or otherwise howsoever) to do any act or thing which the Landlord has not expressly covenanted to carry out, provide or do in schedule 5. 5.9 VALUE ADDED TAX PROVISO Any consideration on supplies made by the Landlord under this Lease is exclusive of value added tax (or substituted tax). 7 5.10 RIGHTS OF ACCESS OR ENTRY The exercise of all rights of entry onto the Premises by the Landlord or those authorized by the Landlord shall be subject to the following conditions: (a) reasonable prior notice must be given save in emergency; (b) the persons so entering must cause as little disturbance and inconvenience as practicable to the Tenant; (c) the persons so entering must comply with all reasonable requirements stipulated by the Tenant having particular regard to the Tenant's use and business carried on at the Premises; and (d) must make good any damage caused to the reasonable satisfaction of the Tenant as speedily as practicable. 6. SURETY'S COVENANT 6.1 The Surety (in consideration of this demise having been made at the Surety's request) hereby covenants with the Landlord (as principal and not merely as guarantor) that the Surety will observe and perform the covenants, agreements and declarations set out in schedule 6. 7. PROPER LAW 7.1 This Lease shall be governed by English Law and the Tenant and the Surety irrevocably submit to the non-exclusive jurisdiction of the English Courts. 7.2 The Surety irrevocably authorizes and appoints Hewitson Becke & Shaw of 42 Newmarket Road, Cambridge (or such other firm of solicitors resident in England and Wales as it may from time to time by written notice to the Landlord substitute) to accept service of all legal process arising out of or connected with this Lease and service on Hewitson Beck & Shaw (or such substitute) shall be deemed to be service on the Surety. 8 SCHEDULE 1 THE PROPERTY AND RIGHTS INCLUDED IN THIS DEMISE PART 1 - THE PROPERTY. ALL THAT piece or parcel of land forming part of Cambridge Science Park containing 1,897.82 square meters more or less as the same is more particularly delineated on the Plan and thereon edged red together with the care parking spaces laid out thereon and the buildings standing thereon or on some part thereof. PART 2 - THE RIGHTS 1. RIGHT TO SERVICES 1.1 At all times hereafter, the right of passage and running of appropriate services (including, but not limited to, gas, water, electricity, telecommunications, surface water and foul water) through the Services Channels now, under or across the Estate or the Landlord's Neighboring Premises, and to make connection with such Service Channels, or any of them for the purpose of exercising the said rights and all such rights of access for the Tenant and the Tenant's lessees and employees as may from time to time be reasonably required for the purpose of laying, inspecting, cleansing, repairing, maintaining, renewing or adding to such Service Channels or any of them, but the enjoyment of the aforesaid rights shall be subject to the Tenant or other person or person's exercising the same or having the benefit thereof being liable to make good all damage to the Estate or the Landlord's Neighboring Premises thereby occasioned with reasonable dispatch. 2. RIGHT OF WAY 2.1 The right of way for all purposes reasonably necessary for the use and enjoyment of the Premises for the purposes herein authorized, but not further or otherwise, with or without vehicles over the roadways colored brown on the Plan. 9 SCHEDULE 2 PART 1 - EXCEPTIONS AND RESERVATIONS IN FAVOR OF THE LANDLORD 1. RIGHT TO SERVICES 1.1 At all times hereafter the right of passage and running of appropriate services through the Service Channels forming part of the Premises and to make connection with such Service Channels or any of them for the purpose of exercising the said rights and all such rights of access for the Landlord, the Surveyor and the Landlord's lessees and employees, and all persons from time to time authorized by the Landlord as may from time to time be reasonably required for the purpose of laying, cleanings, repairing, maintaining, renewing or adding to such Service Channels or any of them, but the enjoyment of the aforesaid rights shall be subject to the Landlord or other person or person's exercising the same or having the benefit thereof being liable to make good all damage to the Premises thereby occasioned with reasonable dispatch. 2. RIGHT TO LIGHT AND AIR 2.1 Tenant shall not be entitled to any right of access of light or air to the Premises which would restrict or interfere with the user of the Estate or any of the Estate or the Landlord's Neighboring Premises for building or otherwise howsoever. 3. RIGHT TO SUPPORT 3.1 The right to support and shelter and all other rights and privileges in the nature of easements and quasi-easements now or thereafter belonging to or enjoyed by the Estate or the Landlord's Neighboring Premises. 4. RIGHT TO ENTER 4.1 At all times during the Term the right with or without the Surveyor, the Landlord's employees and workmen, and any persons authorized by them to enter the Premises for the purpose of doing any act, matter or thing in respect of which the Landlord is permitted entry to the Premises under Schedule 4, upon the terms therein stated, and for all such other requirements of the Landlord, as in the opinion of the Landlord, shall be reasonably necessary such reservation to be in addition to, and not in substitution for or limitation of, any other rights exceptions or reservations to which the Landlord is entitled hereunder. 5. RIGHT TO ENTER TO CULTIVATE 5.1 A right of access at all times together with the Surveyor, the Landlord's employees, servants, workmen and all persons authorized by the Landlord, to all such parts of the Premises as shall from time to time be unbuilt upon for the purpose of cultivating, planting, maintaining and landscaping the same n such manner as shall, in the discretion (to be exercised reasonably) of the Landlord, from time to time, seem appropriate. 10 Part 2 - Existing Encumbrances (1) The easements, rights, covenants and other matters contained or referred to in the Planning Agreements. (2) All other easements, rights, covenants and other matters affecting the Premises. 11 SCHEDULE 3 THE RENTS PAYABLE BY THE TENANT PART 1 - RENTS PAYABLE QUARTERLY 1. DEFINITIONS 1.1 In this part of this schedule the following words shall have the followings meanings: (a) the "Relevant Date" shall mean March 25, 2004 and every fifth anniversary of that date. (b) "the Full Open Market Yearly Rent" shall mean the best yearly rent for which the whole of the Premises might reasonably be expected to let in the open market by a willing landlord to a willing tenant (after the expiry of any rentfree period or period of concessionary rent which may then be usual on the grant of a new lease to enable the tenant to fit out the Premises) on the assumption (if not fact) that: (i) the Premises are fully repaired, maintained and decorated in accordance with the provisions of this Lease and are vacant and fit for immediate occupation and use (and all statutory requirements are complied with and all requisite consents and permissions therefore have been obtained) and that no work has been carried out thereon which would diminish the rental value of the Premises and that in case the Premises had been damaged or destroyed by any of the Insured Risk they had been fully restored in accordance with the terms hereof; and (ii) the lease of the Premises shall be for a term of years certain for a term equal to the longer of 15 years or the unexpired residue of the Term (taking into account the tenant's right to apply to the court for the grant of a new tenancy under Part II Landlord and Tenant Act 1954) without payment of a fine or premium or any other form of inducement being offered or received and upon the same terms, provisions, agreements and declarations (other than as to the amount of rent and any rent-free period hereunder but including like provisions for the review of rent to those herein contained) and covenants on the part of the Landlord and the Tenant as those herein contained. there being disregarded: (A) any effect on rent of the fact that the Tenant or any undertenant or their respective predecessors in title have been in occupation of the Premises; and (B) any good will attached to the Premises by reason of trade or business carried on therein by the Tenant or any undertenant or their respective predecessors in title; and (C) any effect on rent of any improvements to the Premises (being an improvement effected or completed within a period of twenty-one years immediately preceding the Relevant Date on which the rent is being reviewed) carried out by the Tenant or any undertenant or their respective predecessors in title in that capacity with the prior consent in writing of the Landlord other than an improvement effected at the 12 expense of the Landlord or in pursuance of an obligation to the Landlord whether under this Lease or otherwise PROVIDED THAT the Landlord or their predecessors in title have not had or been entitled to vacant possession of the Premises since the improvement was carried out save in respect of improvements carried out by predecessors occupying the Premises by virtue of a lease dated December 4, 1985; and (D) as far as may be permitted by law all restrictions whatsoever relating to rent contained in any Enactments (whether relating to the method of determination of rent otherwise). 2. THE RENT REVIEW 2.1 At each Relevant Date the rent shall be reviewed in accordance with the provisions of this part of this schedule and from and after each Relevant Date the Tenant shall pay to the Landlord by way of rent in respect of the Premises whichever is the greater of: (a) the maximum yearly rent payable hereunder immediately prior to that Relevant Date; and (b) the Full Open Market Yearly Rent for the Premises at that Relevant Date such Full Open Market Yearly Rent to be determined (in default of agreement between the Landlord and the Tenant) by arbitration in accordance with clause 5.7 of this Lease on the application of the Landlord or the Tenant made at any time before or after that Relevant Date. 3. MEMORANDUM OF AGREEMENT AS TO RENT 3.1 As soon as practicable after the agreement or determination of the amount of the Full Open Market Yearly Rent a memorandum recording the same shall be endorsed on or otherwise annexed to the Original and Counterpart of this Lease. 4. WHERE ASSESSMENT OF RENT DELAYED 4.1 Should the rent to be agreed or determined in accordance with paragraph 2 (herein in this paragraph 4.1 called "the New Rent") not have been agreed or determined as aforesaid by an Relevant Date then the Tenant shall on and after that day pay rent at the rate equal to the rent payable immediately before that Relevant Date (herein in this paragraph 4.1 called "the Old Rent") and so soon as the New Rent shall have been agreed or determined as aforesaid, the Tenant shall forthwith pay to the Landlord by way of additional rent the difference between the New Rent and the Old Rent for each quarter for which the New Rent should have been paid together with interest at 4% below the rate specified in the definition of Interest thereon from the date upon which the same became payable until the date of payment. 5. INTERMEDIATE RENT PERIODS 5.1 If at any Relevant Date the Landlord shall be obliged legally or otherwise to comply with any Enactments dealing with the control or rent and which shall restrict or modify the Landlord's right to review the Old Rent or to receive the New Rent (which expressions are defined in paragraph 4.1) in accordance with the terms hereof then the Landlord shall as often as such Enactment is removed, relaxed or modified be entitled to give not less than one month's notice in writing (herein called "an Intermediate Rent Review Notice") to the Tenant expiring not earlier 13 than the date of each such removal, relaxation or modification to introduce an intermediate review of rent additional to the reviews of rent specified in this part of this schedule and the expiry of the Intermediate Rent Review Notice shall be deemed to be the Relevant Date for the purpose of paragraphs 2, 3 and 4 PROVIDED THAT nothing herein contained shall vary or modify any subsequent Relevant Date as defined in paragraph 1.1(a). PART 2 - RENTS PAYABLE UPON DEMAND 1. INSURANCE RENT 1.1 A sum or sums of money equal to the amount or amounts which the Landlord shall form time to time incur in or in respect of effecting or maintaining the insurance t reasonably competitive rates of the Premises in accordance with the Landlord's covenant contained in paragraph 2 of schedule 5 and all processional fees which the Landlord may from time to time incur in connection with the valuation of the Premises for insurance purposes. 2. RENT FOR COMMON PARTS 2.1 A proper proportion attributable to the Premises of the cost and expense reasonably incurred of making repairing, maintaining. renewing, rebuilding, cleansing and operating all ways, roads, payments, Service Channels, yards, bicycle stores, vehicle parks and gardens, fences, party walls and structures and any installations, equipment, fittings, fixtures, easements, appurtenances or conveniences which shall belong to or be used by the Premises in common with the Estate and the Landlord's Neighboring Premises and with any other premises adjoining or neighboring or over or under the Premises (or any of them) including architect's and surveyor's fees properly incurred in connection with such works (such proper proportion to be certified by the Surveyor whose certificate shall be final and binding on the Tenant). 3. SERVICE RENT 3.1 A service rent in respect of: (a) the maintenance, repair, cultivation and management of the Estate including all roads, ways and paths, service channels, amenity grounds and cultivated areas (whether situate thereon or otherwise serving the same); and (b) all such other matters whatsoever which in the opinion of the Surveyor shall be necessary to maintain high standards for a development of such a character including (without prejudice to the generality hereof) a national figure as certified by the Surveyor equivalent to the reasonable market rental for the time being of any premises provided by the Landlord on the Estate being used or occupied (whether with or without rental) to enable the Landlord, the Surveyor and their respective servants or employees to implement and carry out such maintenance repairs, cultivation and management of the Estate and all other matters as aforesaid but less any rental thereof received by the Landlord; such service rent to be in the reasonable opinion of the Surveyor such as shall be just and equitable in all the circumstances PROVIDED ALWAYS THAT such service rent shall not include any sum in respect of the cost of the initial laying out or construction of the matters 14 referred to in paragraphs 3.1(a) and 3.1(b) above or any work or costs arising out of or in connection with such initial construction. 4. INTEREST ON ARREARS 4.1 Interest on any monies payable by the Tenant to the Landlord under any covenant or provision of this Lease which remain unpaid for seven days shall be payable by the Tenant such Interest to be calculated from the date when such monies were due until the date when such monies are received by the Landlord PROVIDED THAT the provisions of this paragraph 4.1 shall not prejudice any rights or remedies of the Landlord in respect of any breach of any of the covenants on the part of the Tenant herein contained. 5. INSURANCE EXCESS 5.1 If a claim arising under any policy of insurance effected by the Landlord upon the Premises shall be subject to any insurance excess notified to the Tenant in writing at the time of renewal of the policy the Tenant shall reimburse or otherwise indemnify the Landlord against the amount of such excess. 15 SCHEDULE 4 TENANT'S COVENANTS 1. TO PAY RENT 1.1 To pay to the Landlord the rents hereby reserved (including but not limited to the rent as reviewed from time to time in accordance with part 1 of schedule 3) at the times and in the manner herein appointed for payment thereof without any deduction set off or (except as provided by clause 5.3 of this Lease) abatement whatsoever and to pay those rents reserved in part 1 of schedule 3 by standing order to the bankers of the Landlord or as it shall direct. 2. TO PAY OUTGOINGS 2.1 To pay and discharge all rates taxes duties assessments charges impositions and outgoings whatsoever (whether parliamentary local public utility or of any other description and whether or not of a recurrent name) now or at any time during the Term taxed, assessed, charged, imposed upon or payable in respect of the Premises or any part thereof a by the Landlord or Tenet a owner or occupier m respect thereof, except any payable in respect of dealings with the reversion or on rents received (other than Value Added Tax). 3. TO REPAID AND DECORATE 3.1 Well and substantially to cleanse, maintain and repair the Premises and every part thereof (including all additions the and all fixtures, fittings, plant and machinery therein and improvements thereto and the Service Channels forming part of the Premises and the boundary structures (if any) of the Premises) and drains connecting to the Premises to and as far as the common drain. 3.2 As and when reasonably required by the Landlord to clean (and to repaint where appropriate) all external surfaces of the buildings from time to time comprised in the Premises. 3.3 Without prejudice to the generality of paragraphs 3.1 and 3.2, to paint (or otherwise decorate) with two coats of paint (or other suitable materials) all such parts of the Premises as have been usually painted (or otherwise decorated) such painting (or other decoration) to be: (a) as to the outside in every third year of the Term and with such colors as have been approved by the Surveyor; and (b) as to the inside, in every fifth year of the Term; and (c) as to both the outside and the inside, in the last yea of the Term (however determined) and otherwise as the Landlord may reasonably so require. 3.4 Not to remove or damage any of the Landlords fixtures and fittings in the Promises and to replace with similar articles of at least equal quality such fixtures and fittings as may be lost or worn out or become unfit for use; PROVIDED THAT all work referred to it this paragraph 3 shall be done in a good and workmanlike master and to the reasonable satisfaction of the Surveyor AND PROVIDED THAT 16 nothing in this paragraph 3 shall oblige the Tenant to put the Premises into a better state of repair than they are at the commencement of this Lease as evidenced by the Schedule of Condition, AND PROVIDED FURTHER THAT the liability of the Tenant under this paragraph shall not extend to damage caused by any of the Insured Risks unless the insurance shall have been vitiated or insurance monks rendered irrecoverable in whole or in part by any sot omission neglect or default of the Tenant any undertenant or their respective employees, servants, agents independent contractors, customers, visitors, licensees, invitees or my other person under the Tenant's or the undertenant's control. 3.5 The Tenant shall give written notice to the Landlord immediately on becoming aware of: (a) any damage to or destruction of the Premises; or (b) any defect or want or repair in the Premises (including, without limitation, any relevant defect within the meaning of section 4 Defective Premises Act 1972) which the Landlord is liable to repair under this Lease or which the Landlord is or may be liable to repair under common law or by virtue of any Enactment. 4. NOT TO MAKE ALTERATIONS 4.1 Not to make any alteration or addition to the Premises which would reduce or otherwise adversely affect the value of the Landlord's reversionary interest in the Premises or the prospects of re-letting or the letting or re-letting value thereof (as to which the decision of do Surveyor shall be conclusive). 4.2 Without prejudice to the prohibition in paragraph 4.1, not to demolish the existing buildings comprising the Premises or construct new buildings or make any alteration, addition or improvement so the Premises whether structural or otherwise except as expressly permitted under paragraph 4.3. 4.3 The Tent may carry out alterations, additions or improvements to the Premises which do not affect my part of the exterior or structure of the Premises where: (a) the Tenant has submitted to the landlord detailed plans and specifications showing the works; and (b) the Tenant has given to the landlord such covenants relating to the carrying out of the works as the Landlord may reasonably requite (including (but not limited to) reinstatement of the Premises at the expiration or sooner determination of the Term); (c) the Tenant has, if so required by the Landlord, provided the Landlord with suitable security which will allow the Landlord to carry out and complete the works if the Tempt falls to do so; and (d) the Tenant has obtained Consent to the works (which shall not be unreasonably withheld or delayed). PROVIDED THAT the Tenant shell indemnity the Landlord against any liability for any tax assessed upon the Landlord by reason of any such alteration, creation or addition to the Premises carried out by or on behalf of the Tenant. 17 4.4 Without prejudice to any other rights of the landlord immediately upon the Landlord by notice in waiting to that effect requiring them so to do to remove all additional buildings, erections, works, alterations or additions whatsoever to the Premises for which Consent has not first been obtained pursuant to the provisions of paragraph 4.3 (herein called the "Unauthorized Works"), and to make good and restore the Premises to the state and condition thereof before the Unauthorized Works were carried out and if the Tenant shall neglect to do so for seven days after such notice, then it shall be lawful for the Surveyor , the Landlord and the Landlord's servants, contractors, agents and workmen to enter upon the Premises and to remove the Unauthorized Works and to make good and restore the same to the state and condition existing before the carrying out of the Unauthorized Work, and all expenses of so doing shall be repaid to the Landlord by the Tenant within seven days of a written demand in that behalf. 5. TO PERMIT ENTRY 5.1 To permit the Landlord, the Surveyor and their respective workmen and persons duly authorized by them, respectively, on reasonable notice (except in emergency) at reasonable hours to enter the Premises for the purposes of: (a) viewing the same; (b) taking Inventories of the fixtures, fittings, appliances and equipment to be yielded up at the expiration or sooner determination of the Term; (c) inspecting for defects in and recording the condition of the Premises or any other breaches of covenant on the part of the Tenant; (d) inspecting, cleansing, maintaining, repairing, altering, renewing or adding to the Estate or the Landlord's Neighboring Premises as any other premises adjoining the Premises (whether beside, under or over) or any Service Channels not comprised within the Promises; (e) performing any covenant complying with any condition or pursuant to any reservation contained in this Lease; or any other reasonable purpose connected with the management of the Premises or the Estate or the Landlords Neighboring Premises or the Landlord's interest therein PROVIDED THAT the Landlord shall make good all damage to the Premises caused by such entry as soon as practicable without the payment of compensation to the Tenant. 6. TO REPAIR ON NOTICE. 6.1 To make good to the reasonable satisfaction of the Surveyor within two months or sooner if requisite (or immediately in case of emergency) any defect in the repair or decoration of the Premises for which the Tensed is liable hereunder or any other want of compliance with any of the obligations on the part of the Tenant under this Lease of which the Landlord or the Surveyor has given notice in writing to the Tenant or left notice in writing as the Premise. 6.2 If the Tenant shall not comply with paragraph 6.1, the Tenant shall permit the Landlord, the Surveyor and their respective workmen (without prejudice to any other remedy of the Landlord) to enter the Premises and make good such defect, breach or want of compliance as aforesaid 18 without the payment of any compensation to the Tenant and all expenses of so doing (including legal costs and Surveyor's fees properly incurred) shall be paid by the Tenant to the Landlord on demand and shall be recoverable as rent in arrears. 7. TO PAY LANDLORD'S COSTS 7.1 To pay the Landlord's costs and expenses (including legal costs and Surveyor's and other professional fees) such costs and expenses to be reasonable and proper: (a) In or in contemplation of any proceedings relating to the Premises under sections 146 and/or 147 of the Law of Property Act 1925 or the preparation and service of notice thereunder (whether or not any right of re-entry or forfeiture has been waived by the Landlord or a notice served under section 146 is complied with by the Tenant or the Tenant has been relieved under to provisions of the said Act and notwithstanding that forfeiture is avoided otherwise than by relief granted by the Court). (b) In the preparation and service of any Schedule of Dilapidation at any time during or within the three months after the Term. (c) In connection with the recovery of arrears of rend due from the Tenant hereunder (including, but not limited to, bailiff's commission incurred by the Landlord of and incidental to every distress levied by the Landlord on the Tenant's goods for the recovery of overdue rent or other suns due under this Lease). (d) In connection with approving plans and specifications required hereunder and the supervision and inspection of alterations, erections, additions and any other works carried out by the Tenant and any undertenant. (e) In respect of any application for Consent required by this Lease whether or not such Consent be granted. 8. AS TO USE AND SAFETY. 8.1 Not to keep or use or permit, or suffer to be kept or used on the Premises any materials which are inflammable, explosive or otherwise dangerous (save in accordance with health and safety legislation), nor any machinery, apparatus or equipment or any other thing which may attack or in any way injure by percolation, corrosion, vibration, excessive weight strain or otherwise the surfaces, floors ceilings, roofs contents, or structure of any building comprised therein and in the Estate or in the Landlord's Neighboring Premises (or either of them), the keeping or using whereof may contravene any Enactments. 9. NOT TO SUE FOR UNLAWFUL OR ILLEGAL PURPOSES OR CAUSE NUISANCE. 9.1 Not to: (a) use or permit or suffer the Premises or any part thereof to be use for any unlawful, illegal or immoral purpose or for the manufacture, sale or consumption of intoxicating liquors or for the manufacture, sale or consumption of Controlled Drugs, as defined by the Misuse of Drugs Act of 1971 (otherwise by a practitioner or pharmacist, as defined by that Act), 19 or for the manufacture, publication or sale of any article or thing which may, in the opinion of the Landlord, be pornographic, offensive or obscene or for betting, gaming or lotteries or as a hotel, club, billiards saloon, dance hall, funfair or amusement premises or for an auction or for any noisy, noxious or offensive trade or business; and (b) do or permit or suffer to be done on the Premises or any part thereof anything which may be or become or cause an annoyance, inconvenience, nuisance, damage, disturbance, injury, or danger of or to the Landlord or to the owners, lessees, or occupiers of any premises in the neighborhood or which, in the opinion of the Landlord, would be detrimental to the use or development of the Premises, the Estate and of any Landlord's Neighboring Premises (or any of them ), and to pay to the Landlord all costs, charges and expenses which may be incurred by the Landlord in abating any nuisance on or arising from the Premises, and executing all works as may be necessary for such purpose. (c) use any radio, television, video or sound system audible outside the Premises or play or suffer to be played any musical instrument audible outside the Premises. 10. NOT TO RESIDE 10.1 Not to reside on the Premises and not to create or permit or suffer to be created any residential tenancy or residential occupation of the Premises or any part thereof. 11. AS TO USER. 11.1 Not to use the Premises or any part thereof other than for a purpose appropriate to a Science Park that is to say any one or more of the following uses: (a) scientific research associated with industrial production; (b) light industrial production of kind which is dependent on regular consultation with either or both of the following (i) the Tenant's own research, development and design staff established in the Cambridge Study Area; (ii) the scientific staff or facilities of the University or of local scientific institutions; (c) ancillary buildings and works appropriate in the sole opinion of the Landlord to the use of the Premises as an integral part of a Science Park. 12. TO KEEP OPEN AND SECURITY. 12.1 Not to permit the Premises to remain vacant or unattended for more than 72 hours unless it is first made fully secure. 12.2 To indemnify the Landlord against any empty property rate or penal rate levied or accessed upon the Landlord by reason of the Premises having been left empty. 20 12.3 To ensure that the Landlord at all times has written notice of the names and addresses and telephone number of at least one keyholder of the Premises. 13. DISPLAYS AND ADVERTISEMENTS 13.1 Not to display or permit to be displayed on any part the Premises so as to be visible outside the Premises any name, writing, notice, sign, placard, sticker or advertisement of whatsoever nature other than a notice or sign (not being a "Neon" notice or sign or any notice or sign of a similar nature), displaying the name of the Tenant and the name of the building comprised within the demise (if any) first approved to writing by the Landlord, such approval not a be unreasonably withheld or delayed and not to place, leave or install any merchandise or display outside the Premises, and on any breach by the Tenant, the Landlord, the Surveyor and their respective workmen may, without notice and without prejudice to any other remedy of the Landlord, remove the cause of the breach of this covenant and shall not be liable to make good any loss or pay compensation for so doing. 14. TO KEEP CLEAN 14.1 Not to allow any rubbish or refuse of any description to accumulate upon the Premises save in suitably located dustbins provided by the Tenant for that purpose and so often as it shall be necessary or desirable and, in any event, at least once a week to cause such dustbins to be emptied. 14.2 Generally to keep the premises (including, but and limited to, forecourts, roads and paths) clean and tidy and properly lighted internally and externally. 14.3 To clean the inside and outside of all windows in the Premises at least once each month. 14.4 Not to bring or keep, or suffer to be brought or kept, upon the Premises anything which in the reasonable opinion of the Landlord are or may become unclean, unsightly or detrimental to the Premises, the Estate or the Landlord's Neighboring Premises and nearby premises (or any of them). 14.5 Not to discharge into any Service Channel oil, grease solids, or other deleterious matter or any substance which might be or become a source of damage or injury to the drainage system of the Premises, the Estate or the Landlord's Neighboring Premises (or any of them), or which may pollute the water of any watercourse so as to render the Landlord liable to action or proceedings by any person or body and generally to keep the Service Channels comprised within the demise unobstructed. 15. TO COMPLY WITH ENACTMENTS AND GIVE NOTICE. 15.1 At the Tenant's own expense, to comply with the provisions and requirements of all Enactments or as prescribed or required by any competent authority, court or body so far as they relate to or affect the Premises or the owner or occupier thereof. 15.2 At the Tenant's own expense, to do all works and all other things so as to comply with paragraph 15.1 above including, (without prejudice to the generality of the foregoing) the obtaining of any fire certificate required for the Premises. 21 15.3 Within seven days of receipt of notice thereof, to give to the Landlord particulars of any provision or requirement of all Enactments or as prescribed or required by any competent authority, court or body or proposal therefor relating to the Premises, the Estate or the Landlord's Neighboring Premises (or any of them), or the condition or use thereof, respectively, and at the request an cost of the Landlord in making such objection or representation against any such proposal as the Landlord shall reasonably require. 15.4 To pay to the Landlord upon demand a due proportion of all reasonable costs, charges and expenses (including the Surveyor's and other professional advisers' fees) properly incurred by the Landlord of or incidental to: (a) complying with all provisions and requirements of all Enactments or as prescribed or required by any competent authority, court or body; and (b) doing all works and other things so as to comply therewith; so far as the same relate to any premises capable of being used or enjoyed by the Tenant in common or jointly with any other person or the use thereof. 16. TO COMPLY WITH THE PLANNING ACTS. 16.1 At all times during the Term to comply in all respects with the provisions and requirements of the Planning Acts and any regulations or orders made thereunder and all licenses, consents, permissions and conditions (if any) granted or imposed thereunder so far as the same, respectively, relate to or affect the Premises or any part thereof and to keep the Landlord fully and effectually indemnified against all actions, proceedings, damages, costs, expenses, claims and demands whatsoever is respect of or arising as of any contravention of the Planning Acts and against the cost of any permissions and consents thereunder and the implementation thereof. 16.2 In the event of the Landlord giving Consent to any of the matters in respect of which the Landlord's Consent shall be required pursuant to the provisions of any covenant or condition contained in this Lease to apply at the cost of the Tenant to the local and planning authorities for all necessary consents and permissions in connection therewith and to give notice to the Landlord of the granting or refusal (as the case may be) of all such consents and permissions forthwith on the receipt thereof. 16.3 in the event of the said Planning Authority agreeing to grant such necessary consent or permission only with modifications or subject to conditions to give to the Landlord forthwith full particulars of such modifications or conditions, AND, if such modifications or such conditions shall, in the reasonable opinion of the Landlord, be undesirable, then the Tenant shall not implement or proceed with the matters, works or change of use to which the application relates. 16.4 If the Tenant shall receive any compensation in respect of the Premises under or by virtue of the Planning Acts forthwith to make such provision as is just and equitable for the Landlord to receive their due benefit from such compensation. 16.5 Not to apply for or implement any planning permission in respect of the whole or any part of the Premises if such application or the implementation thereof would or might give rise to any tax charge or other levy payable by the Landlord. 22 16.6 Unless the Landlord shall otherwise direct to carry out before the expiration or sooner determination of the Term any works stipulated to be carried out to the Premises by a date subsequent to such expiration or sooner determination as a condition of the grant of any planning permission obtained by the Tenant during the Term. 17. INSURANCE 17.1 Not to do or omit to do (or permit or suffer to be done or emitted to be done) anything whereby the policy or policies of insurance on the Premises against the Insured Risks may become void or voidable or whereby the rate of premium thereon or upon the Estate or the Landlord's Neighboring Premises (or any of them) or the maybe increased or cause the insurers to impose more onerous terms on such policy or policies and to repay to the Landlord all sums paid by way of increased premiums and any expenses incurred by the Landlord in or about any renewal of such policy or policies consequent upon a breach of this covenant and all such sums shall be added to the rent herein reserved and be recoverable upon demand as rent and in the event of the Premises or any part thereof being damaged by the Insured Risks and the insurance money under any insurance effected against the same being wholly or partly irrecoverable by reason solely or in part of any omission, neglect or default of the Tenant or any undertenant, then, and in every such case, the Tenant will forthwith pay to the Landlord the whole or (as the case may require) an appropriate proportion of the costs of completely rebuilding and reinstating the Premises, provided that the Tenant's obligations under this paragraph shall apply only to the policy or policies the terms of which have been most recently notified to the Tenant by the Landlord (whether under the provisions of paragraph 2.3 of schedule 5 or otherwise). 17.2 To comply with any requirements or recommendations of the insurers of the Premises. 17.3 Unless insured by the Landlord to insure and keep insured in the joint names of the Landlord and the Tenant, the plate and other glass windows, doors and partitions in the Premises against breakage or damage, howsoever causes, in its full reinstatement value for the time being with some Insurance Office approved in writing by the Landlord and whenever so required to produce to the Landlord the policy of such insurance and the receipt for the current year's premium. 17.4 On each occasion that the plate or other glass is broken or damaged, to reinstate the same forthwith with glass of at least the sane nature, thickness and quality. 18. TO INDEMNIFY. 18.1 To keep the Landlord fully and effectually indemnified from and against all liability in respect of losses, damages, proceedings, claims, costs, expenses and any other liability whatsoever arising from or in connection with: (a) the injury or death of any person; (b) damage to or destruction of any property whatsoever; (c) the infringement, disturbance or destruction of any rights, easements or privileges; (d) the breach by the Tenant of any of the terms, covenants and conditions on the part of the Tenant herein contained 23 arising directly or indirectly out of (i) the repair, condition or use of the Premises or of any alteration to the Premises or works carried out r in the course of being carried out to the Promises; (ii) anything now or hereafter attached to or projecting from the Premises and which has been constructed or installed by the Tenant, its undertenants, their respective employees, customers and invitees and anyone else under their respective control; (iii) any act, default or negligence of any person or body other than the Landlord; and to insure against such liability in a reputable Insurance Office. 19. DEALINGS WITH THE PREMISES. 19.1 Unless expressly permitted under paragraph 19.9 or by a Consent granted under paragraphs 19.2, 19.3 or 19.4 or the Tenant shall not assign, underlet, charge, part with or share possession or occupation of all or any part of the Premises, nor hold the Premises on trust for any other person. 19.2 The Landlord shall not unreasonably withhold or delay Consent to a legal charge of the whole of the Premises. 19.3 The Landlord shall not unreasonably withhold or delay Consent to an assignment of the whole of the Premises, but the Landlord and the Tenant agree for the purposes of Section 19(1A) Landlord and Tenant Act 1927 that the Landlord may withhold that Consent unless the following conditions are satisfied: (a) in relation to either a prospective assignee or any prospective guarantor or guarantors: (i) that party shall in the reasonable opinion of the Landlord be a substantial and respectable body or person; and (ii) that party has submitted references reasonably satisfactory to the Landlord. (b) the prospective assignee is not a Group Company or a Connected Person unless the proposed assignment is to a Group Company in connection with a bona fide reconstruction or amalgamation of the Tenant's group of companies; (c) in the reasonable opinion of the Landlord, the prospective assignee is of sufficient financial standing to enable it to comply with the Tenant's covenants in this Lease; (d) the Tenant and the Surety (and any former Tenant or Surety who, by virtue of there having bean an "excluded assignment" as defined in Section 11 of the Landlord and Tenant (Covenants) Act 1995 has not bean released from the Tenant's covenants in this Lease), enters into an authorized guarantee agreement within the meaning of the Landlord and Tenant (Covenants) Act 1995 with the Landlord in the form set out in Schedule 7 or on such other terms as the Landlord may reasonably require; 24 (e) if the Landlord reasonably requires, a guarantor or guarantors acceptable to the Landlord acting reasonably has guaranteed to the Landlord the due performance of the prospective assignee's obligations in the form set out in Schedule 6 or on such other such terms as the Landlord may reasonably require; and (f) any security for the Tenant's obligations under this Lease which the Landlord holds immediately before the assignment is continued or renewed in each case on such terms as the Landlord may reasonably require in respect of the Tenant's liability under the authorized guarantee agreement referred to in paragraph 19.3(d) (but this paragraph shall not apply to any authorized guarantee agreement entered into by a former Tenant or by any guarantor of a former Tenant) and; (g) any sum due from the Tenant to the Landlord under this Lease (or any deed of variation, license, Consent or other document supplemental to or associated with this Lease) is paid; and (h) the Landlord has received an undertaking from the Tenant's solicitors in such form as the Landlord may reasonably require to pay the Landlord on demand the reasonable legal and surveyor's costs and disbursements (including Value Added Tax) properly incurred by the Landlord in considering the Tenant's documentation whether or not the application is withdrawn or the Consent is granted; and (i) the prospective assignee (and any guarantor of the assignee) enters into direct covenants with the Landlord to observe and perform the Tenant's obligations under the Lease then past, present and future during the period that the Term is vested in that assignee and any subsequent period during which such assignee and/or guarantor is liable under any authorized guarantee agreement referred to in paragraph 19.3(d) above. 19.4 The Landlord shall not unreasonably withhold or delay Consent to an underletting of any Lettable Unit as distinct from the whole or any other part of the Premises where all of the following conditions are satisfied: (a) the prospective undertenant has produced references in a form reasonably acceptable to the Landlord; (b) the prospective undertenant has covenanted with the Landlord to observe and perform until it assigns the underlease with Consent as required by the underlease the Tenant's covenants and obligations in this Lease (except the covenant to pay rent and insofar only as such covenants affect the underlet Premises); (c) if the Landlord reasonably requires a guarantor or guarantors acceptable to the Landlord has guaranteed the due performance by the undertenant of its above covenant in such terms as the Landlord may reasonably require; and (d) no fine or premium is taken for the grant of the underlease; and (e) the basic rent payable under the underlease is not less than the best rent reasonably obtainable for the underlease; and 25 (f) any rent free period or other financial inducements given to the undertenant are no greater than is usual at the time in all the circumstances; and (g) the form of the underlease has been approved in writing by the Landlord (approval not to be unreasonably withheld or delayed where the provisions of it are consistent with the provisions of this Lease and where the basic rent is reviewable at the same times and on the same terms as the Basic Rent); and (h) any such underlease shall be excluded from the operation of Sections 24-28 Landlord and Tenant Act 1954; and (i) the total number of such underleases which may subsist at any time during the Term shall not exceed four and at any time the Premises may not comprise more than four separate units of accommodation to the intent that if the Tenant remains in occupation of the Premises, not more than three such underleases may subsist; and (j) any such underlease shall contain provisions enabling the Tenant (as lessor) to recover from the undertenant by way of rent a due proportion of the sum due under this Lease in respect of insurance of the Premises and of the cost to the Tenant of repairing, decorating and operating the Premises and (k) any such underlease shall preclude further underletting of all or part of the underlet premises. 19.5 The Tenant shall: (a) enforce against any undertenant the provisions of any underlease and shall not waive them; (b) operate the rent review provisions contained in any underlease so as to ensure that the rent is reviewed at the correct times and in accordance with those provisions; and (c) not accept a surrender of part only of the underlet premises. 19.6 The Tenant shall not without Consent (which shall not be unreasonably withheld or delayed): (a) vary the terms of any underlease; or (b) agree any review of the rent under any underlease. 19.7 The Tenant shall not require or permit any rent reserved by any underlease to be commuted or to be paid more than one quarter in advance or to be reduced. 19.8 Any Consent granted under this paragraph 19 shall (unless it expressly states otherwise) only be valid if the dealing to which it relates is completed within two months after the date of the Consent. 19.9 The Tenant may (after giving written notice to the Landlord containing all relevant information) share occupation of the Premises with any Group Company on condition that the sharing shall not 26 create any relationship of Landlord and tenant and that on any occupier ceasing to be a Group Company the occupation shall immediately cease to be otherwise in accordance with this paragraph 19. 20. TO GIVE NOTICE OF ASSIGNMENT, DEVALUATION, ETC. 20.1 To produce a certified copy of every assignment, underlease, transfer, charge, Probate Letters of Administration, order, instrument or other writing affecting or evidencing any transmission or devolution of any estate or interest in the Premises or any part thereof to the solicitors of the Landlord for registration within one month from the date thereof and to pay to the Landlord's solicitors their reasonable fees for each such registration. 20.2 Within seven days of an assignment of this Lease to give to the Landlord written notice of the person to whom future rent demands should be sent. 20.3 Upon being requested so to do by the Landlord from time to time to supply the Landlord with such details of the occupiers of the Premises and the terms upon which they occupy. 21. AS TO LOSS OR ACQUISITION OF EASEMENTS 21.1 Not to permit any easement or right comprised in, belonging to or used with the Premises or any part thereof from being obstructed or lost. 21.2 Not to give to any third party any acknowledgement that the die Tenant enjoys the access of light to any of do windows or openings in the Premises by the consent of such third party nor to pay to such third party any sum of money nor to enter into any agreement with such third party for the purpose of inducing or binding such third party to abstain from obstructing the access of light to any such windows or openings. 21.3 To take all such steps that may be necessary to prevent the acquisition of any easement or right against, over, upon or under the Premises or any part thereof and any encroachment thereon and to give to do Landlord immediate notice of my encroachment or threatened encroachment upon the Premises or any attempt to acquire any easement or right under or over the Premises which shall be within the Tenant's knowledge and to do all such things as may be necessary to prevent any encroachment being made or any new easement being acquired. 22. TO PRODUCE PLANS/DOCUMENTS 22.1 If and whenever called upon so to do to produce to the Landlord or the Surveyor all such plans, documents or other evidence as the Landlord may from time to time require to satisfy themselves that the Tenant has complied in all respects with the provisions of the Tenant's covenants herein. 23. NOT TO INTERFERE WITH RESERVED RIGHTS 23.1 Not to interrupt or interfere with any reasonable exercise of the rights contained or referred to in schedule 2. 27 24. TO PERMIT ENTRY FOR RELETTING, ETC. 24.1 During the last six months before the expiration or sooner determination of the Term or after the expiration thereof (or at any time during the Term in the event of a sale of the Landlord's interest in the Premises) to permit the Landlord and the Surveyor to enter upon the Premises and to affix upon any suitable part or parts thereof a notice board or boards for reletting or other disposal of the Premises and not to remove or obscure the same and at all reasonable times in the daytime to permit all persons authorized by the Landlord or the Surveyor to enter and inspect the Premises following reasonable prior notice. 25. TO YIELD UP 25.1 At the expiration or sooner determination of the Term peaceably and quietly to surrender and yield up to the I.andlord the Premises (together with all keys thereto) with vacant possession so repaired, maintained, decorated, cleansed, glazed, painted and kept as herein provided and if so required by the Landlord to remove such tenants and trade fixtu5es as the Landlord may specify the Tenant making good all damage caused by the removal of these to the satisfaction of the Surveyor. 26. NEW SURETY 26.1 If during the Term any surety (which expression in this paragraph 26 includes any guarantor) for the time being of the Tenant's obligations under this Lease (or any of them if there is more than one): (a) (being an individual) dies, has a bankruptcy order made against the surety or an interim receiver appointed in respect to the surety's property; or (b) (being a company) enters into liquidation, has an administration order made in respect of the surety or has a receiver (administrative or otherwise) appointed of any of the surety's undertaking or assets the Tenant will give the Landlord notice of that fact within fourteen days of occurrence of the event and if required by the Landlord will within twenty-eight days of the event procure that some other person acceptable to the Landlord enters into a deed of covenant with the Landlord in the same terms (mutatis mutandis) as the original surety. 27. AS TO VALUE ADDED TAX 27.1 On demand to discharge any liabilities of the Landlord relating to value added tax (or any substituted tax) in respect of any supply of goods or services for value added tax purposes made pursuant to or in consequence of this Lease. 27.2 For the purposes of this paragraph: (a) "VAT" means value added tax or any tax charged in addition to or substitution for it; (b) "VAT Act" means the Value Added Tax Act 1994; and 28 (c) any reference to a statute or statutory instrument includes a reference to any later statute or statutory instrument replacing or amending it. 27.3 The Tenant covenants: (a) to be at the time of this Lease and to remain at all times during the Term and at any time any supply under this Lease is made to the Tenant a taxable person within the meaning of the VAT Act; and (b) not to use or intend to use or permit the use of the Premises at any time during the Term for any purpose or purposes other than eligible purposes (within the meaning of Article 3A of Schedule 10 VAT Act). 27.4 The parties intent that the supplies effected by this Lease are standard rated for VAT purposes and the Tenant covenants not to negate or challenge the treatment of such supplies as standard rated for VAT purposes. 28. AS TO MAINTENANCE CONTRACTS. 28.1 Where there are within the Premises any lifts, hoists, boilers or air-conditioning or central heating installations to enter into and maintain throughout the Term, maintenance and safety contracts with reputable engineers for the maintenance and safety of the same and to produce to the Landlord on demand any such contract and the receipt for the current payments or premiums thereunder. 29. STATUTORY ACQUISITIONS 29.1 Not to do or omit to do any act, matter or thing as a consequence whereof the Landlord's reversion immediately expectant upon the determination of the Term shall become liable to acquisition pursuant to any Enactments. 30. FIRE FIGHTING APPLIANCES 30.1 To keep the Premises sufficiently supplied end equipped with such suitable fire fighting and extinguishing appliances as shall from time to time be required by law or by the local or other competent authority and by the Landlord's insurers and such appliances shall be open to inspection and shall be properly maintained and also not to obstruct the access to or means of working such appliances or the means of escape from the Premises in case of fire. 31. EXISTING ENCUMBRANCES 31.1 To observe and perform all covenants in respect of the Premises arising from the Existing Encumbrances so far as they affect the Premises and we still subsisting. 32. NOT TO OBSTRUCT 32.1 Not to permit any vehicles to stand on the roadways comprised within the Estate or on any other part of the Estate except on such parts as shall from time to time have been authorized by the Landlord or shall have been designated by the Landlord as a loading bay for the Tenant (but 29 during the period of loading and unloading of vehicles only) and not to park on or obstruct any communal part of the Estate. 33. TO COMPLY WITH REGULATIONS 33.1 To comply with all reasonable regulations made by the Landlord form time to time for the management of the Estate and of any land or premises used or to be used in common or jointly with any other person and to procure that the Tenants employees and all persons under the control of the Tenant shall at all times observe and perform the same. 34. AS TO WATER SUPPLY 34.1 Not to use or permit or suffer to be used the supply of water to the Estate for any purpose other than the Tenant's purposes hereby permitted and not in my event to use the same or permit or suffer the same to be used for research or industrial purposes without the provision of a proper recirculation system to a specification first approved by the Statutory Water Undertaker or otherwise in compliance with the reasonable recommendations of the Water Authority. 35. TO COMPLY WITH PLANNING AGREEMENTS 35.1 In addition to and not in substitution for or limitation of the covenants contained herein and in particular the Tenant's covenants as to the use of the Premises or my part thereof to observe and perform all the covenants on the Landlord's part in the Planning Agreements respectively contained and the agreements and provisions of the Planning Agreements to the extent that the same affect the Premises or any part thereof and at all times to indemnify the Landlord against any breach or non-observance of the same. 36. TO PAY COST OF DAMAGE 36.1 Without prejudice to any other provisions herein contained to pay to the Landlord on demand the full cost as assessed by the Surveyor of making good any damage to the said roads colored brown on the Plan and any road fittings including but not limited to lighting and signs or any other put of the Estate whether occasioned by the Tenant, any undertenant or their respective employees, servants, agents, independent contractors, customers, visitors, licensees, invitees or any other person under the Tenant's or the undertenant's control. 30 SCHEDULE 5 LANDLORD'S COVENANTS 1. AS TO QUIET ENJOYMENT 1.1 That the Tenant paying the rents hereby reserved at the times and in the manner herein appointed, and performing and observing the covenants on the Tenant's part and the condition agreements and stipulations herein contained may peaceably enjoy the Premises for the Term without any lawful interruption from the Landlord or any person lawfully claiming under or in trust for the Landlord. 2. TO INSURE 2.1 That the Landlord will, during the Term, insure and keep insured, in some established Insurance Office, the Premises (excluding all plate and other glass therein) against the Insured Risks with a sum assured to cover the following: (a) the full reinstatement value thereof (excluding the amount of any insurance excess for which the Tenant shall be liable) to be determined from time to time by the Landlord; and (b) architect's, surveyor's and other professional fees, demolition, site clearance and the cost of boarding and propping, including a due allowance for cost increases over any likely rebuilding period; and (c) three years' loss of rent; and (d) liability attaching to the Landlord as owners or landlords of the Premises; and (e) incidental expenses. AND where there are within the Premises goods or passenger lifts, hoists, air conditioning or central heating installments the Landlord may insure the same (or any of them) separately in such manner and for such amount as the Landlord may from time to time determine. 2.2 The Landlord shall have full power to settle and adjust with the insurers all questions with regard to the liability of the insurers and the amount or amounts payable under any policy. 2.3 The Landlord will, whenever reasonably requested, but not more than once in every year, produce to the Tenant a copy of the insurance policy (or a summary of the terms of it), and evidence of payment of the current premium. 31 SCHEDULE 6 SURETY'S COVENANTS AND AGREEMENTS 1. COVENANTS BY SURETY 1.1 the Surety HEREBY COVENANTS with and guarantees to the Landlord that: (a) at all time during the Term, and until this demise is lawfully brought to an end and the Landlord has beneficial occupation of the Premises, or until the Tenant assigns this Lease as a whole with Consent as required by this Lease (if earlier), or otherwise if the Tenant remains liable for payment under the Landlord and Tenant Act of 1954 to pay the rents hereby reserved and all other sums and payments covenanted and/or agreed to by paid by the Tenant at the respective times and in manner herein appointed for payment thereof, and will also duly perform and observe and keep the several covenants and provisions on the Tenant's part herein contained; and (b) the Surety will pay and make good to the Landlord all losses, liabilities, costs and expenses sustained by the Landlord through the default of the Tenant in respect of any of the before mentioned matters; and (c) that any neglect or forbearance of the Landlord in endeavoring to obtain payment of the said several rents and payments, as and when the same become due or their delay to take any steps to enforce performance or observance of the several covenants and provisions herein on the Tenant's part contained and any time which may be given by the Landlord to the Tenant, shall not release or in any way lessen or affect the liability of the Surety under the guarantee on the Surety's part herein contained; and (d) if the Tenant (being a Company) shall become the subject to an administration order, or be the subject of a winding up order by the Court, or otherwise go into liquidation, or if the Tenant (being an individual) shall be adjudged bankrupt and the Liquidator or Administrator or the Trustee of the bankrupt's estate (as the case may be) shall disclaim this Lease and if the Landlord shall within three months after such disclaimer by notice in writing, require the Surety to accept a lease of the Premises for a term equal to the residue which, if there had been no such disclaimer, would have remained of the Term at the same rents and under the like covenants and provisions as are reserved by and contained in the Lease, the said new lease, and the rights and liabilities thereunder to take effect as from the date of the said disclaimer, then, and in such case, the Surety shall accept such lease accordingly and execute and deliver to the Landlord a counterpart thereof in all respects at the sole cost of the Surety; and (e) upon demand to pay to the Landlord Interest on all amounts due under this paragraph 1 form the date the same respectively fell due until the date of payment thereof. 2. AGREEMENTS BY SURETY 2.1 It is hereby agreed and declared that: (a) the Surety covenants as principal debtor and not as guarantor and, accordingly (for the avoidance of doubt): 32 (i) it shall be necessary for the Landlord to resort to or seek to enforce any other guarantee or security (whether from the Tenant or otherwise) before claiming payment hereunder; and (ii) until all monies and liabilities due or incurred by the Tenant to the Landlord have been paid or discharged in full notwithstanding payment in whole or in part of the amount by the Surety or any purported release or cancellation hereof, the Surety shall not, by virtue of any such payment or on any other ground: (A) claim any set off or counter claim against the Tenant in respect of any liability on the part of the Surety to the Landlord; and (B) make or enforce any claim or right against the Tenant or prove in competition with the Landlord or exercise any right as a preferential creditor against the Tenant or against the assets of the Tenant; and (b) the Surety's covenants herein contained shall not be affected or modified in any way the liquidation or dissolution of the Tenant or the appointment of any receiver, administrator or manager; and (c) the Landlord shall be at liberty at all times without affecting or discharging the Surety's liability hereunder: (i) to vary release or modify the rights of the Landlord against the Tenant hereunder without the Surety's consent; and (ii) to compound with discharge, release or vary the liability of the Tenant or any other guarantor or other person; and (iii) to appropriate any payment the Landlord may receive from the Tenant, the Surety or any other person towards such monies due under this Lease as the Landlord shall in their absolute discretion think fit. (d) the Landlord and the Tenant shall be at liberty to review the rent hereunder from time to time in accordance with the provisions of this Lease without reference to the Surety and the covenants, conditions, agreements and declarations on the part of the Surety contained in this Lease shall apply to the rent as reviewed from time to time as much as to the rent reserved hereby at the commencement of the Term. 33 SCHEDULE 7 GUARANTEE AGREEMENT THIS DEED dated is made BETWEEN: (1) ("the Guarantor") (2) ("the Landlord") 1. DEFINITIONS AND INTERPRETATION 1.1 In this deed: "Basic Rent", "Consent", "Premises", "Rent", "Rent Day" and "Term" have the same meanings as in the Lease. "the Lease" means [this lease] and includes where relevant any deed of variation license Consent or other document supplemental to or associated with the Lease by which the Tenant is bound whether presently existing or not. "Relevant Variation" means a relevant variation as defined in section 18(4) of the Landlord and Tenant (Covenants) Act 1995. "Secured Obligations" means the obligation to pay all sums from time to time due or expressed to be due to the Landlord from the Tenant under the Lease and to perform all other obligations which from time to time are or are expressed to be obligations of the Tenant under the Lease. "the Tenant" means [the proposed assignee]. 1.2 In this deed unless the context otherwise requires: (a) references to the singular include the plural and vice versa any references to a person includes a reference to a body corporate and words importing any gender include every gender. (b) references to numbered clauses are references to the relevant clause in this deed. 1.3 The clause headings do not form part of this deed and are not to be taken into account when construing it. 1.4 This instrument: (a) is executed as a deed and by its execution the parties authorize their solicitors to deliver it for them when it is dated. (b) was delivered when it was dated. 34 2. GUARANTEE 2.1 This guarantee is given pursuant to a provision in the Lease requiring it to be given and is an authorized guarantee agreement for the purposes of section 16 of the Landlord and Tenant (Covenants) Act of 1995. 2.2 The Guarantor unconditionally and irrevocably covenants with and guarantees to the Landlord that Tenant will, until the Tenant assigns the Lease as a whole with Consent, pay and discharge the Secured Obligations when they fall due or are expressed to fall due under the Lease for payment and discharge. 2.3 The Guarantor shall, upon being requested to do so by the Landlord, enter into any deed of variation, license, Consent or other document to which, in each case, the Tenant is a party and which is, in each case, supplemental to the Lease, for the purpose of acknowledging that the Guarantor's liabilities under this deed extend to it, but to the extent that the document effects a Relevant Variation, paragraph 5.3 shall apply. 2.4 The guarantee and covenant in paragraph 2.2 shall impose on the Guarantor the same liability as if the Guarantor were the principal debtor in respect of the Tenant's obligations under the Lease and that liability shall continue notwithstanding (and will not be discharged in whole or in part or otherwise affected by): (a) any forbearance by the Landlord to enforce against the Tenant the tenant's covenants in the Lease. (b) the giving of time or other concessions or the taking or holding of or varying, realizing, releasing or not enforcing any other security for the liabilities of the Tenant. (c) any legal limitation or incapacity relating to the Tenant. (d) the Tenant ceasing to exist. (e) any increase or reduction in the extent of the Premises or in the rent payable under the Lease or any other variation to the Lease. (f) the disclaimer of the Lease. (g) any other act or omission of the Landlord or any other circumstances which but for this paragraph 2.4 would discharge the Guarantor and for the purposes of this paragraph 2 the Tenant shall be deemed liable to continue to pay and discharge the Secured Obligations notwithstanding any of the above matters and any money expressed to be payable by the Tenant which may not be recoverable for any such reason shall be recoverable by the Landlord from the Guarantor as principal debtor. 3. NEW LEASE 3.1 The Guarantor shall, if required by the Landlord in writing within the period beginning on the day of a disclaimer of this lease and expiring three months after the Landlord has been notified in 35 writing by the Guarantor or the Tenant of that disclaimer, accept a lease of the Premises for the residue of the contractual term unexpired at and with effect from the date of the disclaimer at the same Basic Rent as reserved by the Lease (reviewable at the same times as the Basic Rent would have been reviewable under the Lease had there been no disclaimer) and subject to the same covenants and provisos, and the Tenant, on execution of the new lease, will pay Rent for the period from the date of the disclaimer to the Rent Day following the date of the lease, and the costs of and incidental to the new lease, and will execute and deliver to the Landlord a counterpart. 3.2 If the Landlord requires more than one guarantor to take a new lease, those guarantors shall take that new lease as joint tenants. 4. SECURITY TAKEN BY GUARANTOR 4.1 Until the Secured Obligations have been paid and discharged in full. the Guarantor shall not, without consent, exercise any rights: (a) of subrogation or indemnity in respect of the Secured Obligations. (b) to take the benefit or share in or enforce any security or other guarantee or indemnity for the Secured Obligations. 5. LIMITATION ON GUARANTOR'S LIABILITY 5.1 Nothing in this agreement shall operate so as to make the Guarantor liable for anything in respect of which the Tenant is released from liability by the provisions of the Landlord and Tenant (Covenants) Act 1995. 5.2 To the extent that this deed purports to impose on the Guarantor any liability for anything in respect of which the Tenant is released from liability by the provisions of the Landlord and Tenant (Covenants) Act 1995, the relevant provision of this deed shall to that extent be void, but that shall not affect: (a) enforceability of that provision except to that extent, or (b) the enforceability of any other provision of this deed. 5.3 The Secured Obligations shall not include obligations arising under a Relevant Variation but the making of a Relevant Variation shall not discharge the Guarantor's liability under this deed. 6. JOINT AND SEVERAL GUARANTORS 6.1 The liability of the Guarantor under this deed shall be the joint and several liability of all parties who have executed this deed as Guarantor and all other parties who from time to time guarantee the Tenant's obligations to the Landlord, and any demand for payment by the Landlord on any one or more of such persons jointly and severally liable shall be deemed to be a demand made on all such persons. 36 6.2 Each person who has executed this deed as Guarantor, or on whose behalf this deed has been so executed, agrees to be bound by this deed, notwithstanding that the other person intended to execute or be bound by this deed may not do so or may not be effectually bound, and notwithstanding that this deed may be determined or become invalid or unenforceable against any other person, whether or not the deficiency is known to the Landlord. [Executed by the Guarantor and the Landlord as a deed] Signed as a deed by VIRCO U.K. ) LIMITED acting by a director and ) its secretary ) --------------------------------------- Director --------------------------------------- Secretary Signed as a deed by VIRCO NV acting by: --------------------------------------- --------------------------------------- 37 -----END PRIVACY-ENHANCED MESSAGE-----