[ON LETTERHEAD OF MDS INC.]
October 28, 2003
Hemosol Inc.
2585 Meadowpine Blvd.
Mississauga, Ontario
L5N 8H9
Attention: Lee Hartwell,
President and Chief Executive Officer
Dear Sirs:
RE: RESTRUCTURING OF HEMOSOL INC.
The purpose of this letter is to set out the understanding upon which Hemosol
Inc. ("HEMOSOL") and MDS Inc. ("MDS") propose to restructure Hemosol to provide
Hemosol with additional cash resources to fund its business (the
"RESTRUCTURING"). Hemosol and MDS acknowledge that MDS has not had an
opportunity to review Hemosol's books and records, nor has Hemosol completed its
analysis of the full economic impact of the Restructuring (including the 10%
limited partnership interest in the Blood Products Partnership (as defined in
Schedule A hereto) to be held by Hemosol and the arrangements for Hemosol's
manufacturing facility) and, accordingly, the terms upon which the parties would
be prepared to negotiate the Restructuring may change depending upon the results
of such review.
The parties also acknowledge that this letter of understanding is not intended
to create a binding obligation as to the terms of the Restructuring or whether
the Restructuring will in fact take place. Completion of the Restructuring is
subject to the fulfillment of the conditions hereinafter set out, as well as the
entering of a definitive agreement between the parties.
1. THE RESTRUCTURING
The Restructuring will allow Hemosol to monetize the value of its tax
losses in a manner that allows the existing shareholders of Hemosol to
continue to have an equity interest in the Hemosol business through a
structure that facilitates future financings. It is not intended that
the Restructuring provide MDS with any special advantages as a
shareholder of Newco (as defined below) and Hemosol that MDS does not
currently have as a shareholder of Hemosol. The principal terms and
conditions of the Restructuring currently under discussion are as
follows.
The shareholders of Hemosol will exchange their existing shares for new
voting common shares of Hemosol and voting common shares of a new
corporation ("NEWCO"). The assets and liabilities of Hemosol, with the
exception of its manufacturing facility and
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bank loan, will be transferred to a partnership approximately 90% of
which will be owned by Newco and approximately 10% by Hemosol. MDS will
transfer to Hemosol a 99.99% interest in a separate partnership that
operates MDS' Ontario laboratory business (the "ONTARIO LABORATORY
BUSINESS") in exchange for non-voting common shares of Hemosol and
additional voting common shares of Hemosol, such that MDS will own less
than 50% of the voting shares of Hemosol. Cash flow from the Ontario
Laboratory Business will be used to pay dividends on the voting common
shares and non-voting common shares of Hemosol. A diagram showing the
structure of Hemosol and Newco immediately following the Restructuring
is illustrated in Exhibit 1 to Schedule A hereto.
The Restructuring will be effected substantially as described in
Schedule A hereto under the relevant statute(s) and consistent with the
terms and conditions contained in the advance income tax ruling dated
September 23, 2003 issued by Canada Customs and Revenue Agency ("CCRA")
relating to Hemosol and MDS and otherwise on terms and conditions
satisfactory to MDS and Hemosol in all material respects. All corporate
and transactional documents necessary to implement the Restructuring,
other than any meeting materials required to be delivered to Hemosol's
shareholders and the incorporation and organization of Newco, will be
prepared by counsel to MDS.
The value of Hemosol's tax attributes will be reflected in the
redemption amount of Hemosol's preferred shares as described in
Schedule A, and thus will be paid to Newco on the redemption of such
preferred shares. Subject to due diligence, MDS anticipates that this
would represent net cash consideration to Newco of between $10 million
and $15 million. At the time the Restructuring is completed, it is MDS'
intention that Hemosol have sufficient funds to allow Hemosol to redeem
its preferred shares. These funds would be advanced either from MDS
(subject to CCRA approval) or from cash flow from the Labs Partnership
(as defined in Schedule A hereto). In addition, Hemosol will incur
transaction, dividend and operating cash costs as a result of the
Restructuring, estimated to be approximately $11 million, that will be
funded by cash flow from the Labs Partnership.
MDS and Hemosol shall work towards completing the Restructuring at the
earliest possible date, which is currently expected to be December 31,
2003.
2. ACCESS TO INFORMATION
Hemosol agrees to provide MDS and its representatives with reasonable
access to all books, records, information and files (including those
relating to tax losses and other tax carryforwards, adequacy of
insurance coverage, potential claims and rights to intellectual
property) in Hemosol's possession and control and access to Hemosol's
representatives on an as requested basis, as well as access to the
properties and facilities of Hemosol in order to allow MDS and its
representatives to conduct such investigations as they may consider
necessary or advisable for due diligence in connection with the
Restructuring, and further agrees to assist MDS and its representatives
in all reasonable ways in any investigations which they may reasonably
wish to conduct in connection with the Restructuring. MDS agrees to
provide Hemosol and its representatives with reasonable access to all
books, records, information and files relating to the Ontario
Laboratory
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Business in MDS' possession and control and access to the employees,
properties and facilities of the Ontario Laboratory Business in order
to allow Hemosol and its representatives to conduct such investigations
of the Ontario Laboratory Business as they may consider necessary or
advisable for due diligence in connection with the Restructuring, and
further agrees to assist Hemosol and its representatives in all
reasonable ways in any investigation of the Ontario Laboratory Business
which they may reasonably wish to conduct in connection with the
Restructuring. For the purposes hereof, the term "representatives",
when used in relation to a party, means the directors, officers,
employees, accountants, lawyers and financial and other advisors of
such party.
3. CONFIDENTIALITY OF INFORMATION
Each of Hemosol and MDS (each a "RECIPIENT") covenants and agrees to
keep all information provided or made available to it pursuant to
paragraph 2 (the "INFORMATION") confidential and not to disclose same
(except to its representatives or as may be required by law), in whole
or in part, without the prior written consent of the other party
hereto. Moreover, each Recipient covenants and agrees to furnish the
Information only to those of its representatives who need to know the
Information for the purposes contemplated in paragraph 2 and who are
informed by such Recipient of the confidential nature of the
Information and who also agree to be bound by the terms of this
paragraph 3. This paragraph 3 shall be inoperative as to such portions
of the Information that: (a) are or become generally available to the
public other than as a result of disclosure by a Recipient or its
representatives in breach of this agreement; (b) become available to a
Recipient on a non-confidential basis from a source other than the
other party hereto, provided that such source is not known by such
Recipient to be bound by a confidentiality agreement with the other
party hereto or otherwise prohibited from transmitting the Information
to such Recipient by a contractual, legal or fiduciary obligation; or
(c) were known to a Recipient or its representatives on a
non-confidential basis prior to its disclosure to such Recipient or its
representatives by the other party hereto.
4. CONDUCT OF BUSINESS BY HEMOSOL
Hemosol covenants and agrees that for a period commencing on the date
hereof and ending on the earlier of: (i) Hemosol and MDS entering into
a definitive agreement relating to the Restructuring and the other
matters contemplated herein; and (ii) the 30th day after the date on
which this letter is accepted and agreed to by Hemosol (the
"EXCLUSIVITY PERIOD"), unless MDS shall otherwise agree in writing or
as otherwise expressly contemplated by the Restructuring, Hemosol
shall:
(i) make all reasonable commercial efforts, and cause
each of its subsidiaries to use all of its reasonable
commercial efforts, to preserve intact their
respective business organizations and goodwill, to
maintain their governmental or regulatory licences
approvals and consents in good standing, and to
maintain satisfactory relationships with suppliers
and others having business relationships with them;
and
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(ii) promptly notify MDS in writing of any material
adverse change, on a consolidated basis, of Hemosol
and its subsidiaries and of any governmental or third
party complaints, investigations or hearings (or
communications indicating that the same may be
contemplated).
5. NON-SOLICITATION COVENANTS
As considerable time will be spent and resources employed by MDS to
conduct due diligence relating to Hemosol and the Restructuring,
Hemosol covenants and agrees that during the Exclusivity Period,
Hemosol:
(i) shall not directly or indirectly, through any
representative or otherwise, take action of any kind
to solicit, initiate or encourage inquiries,
proposals or offers from, or participate in any
discussions or negotiations regarding or provide
information relating to Hemosol or any of its
subsidiaries to or co-operate in any way with any
effort or attempt by, any person, entity or group in
connection with any transaction, without regard to
form, involving or relating to Hemosol or any of its
subsidiaries or any of their respective assets, a
principal purpose of which is the acquisition or
utilization of Hemosol's tax losses, other undeducted
tax balances or investment tax credits (an
"EXTRAORDINARY TAX TRANSACTION"); and
(ii) shall immediately cease and cause to be terminated
any existing discussions or negotiations with any
other parties with respect to any Extraordinary Tax
Transaction.
6. CONDITIONS OF THE RESTRUCTURING
The completion of the Restructuring shall be conditional upon the
following:
(a) each of the parties shall have completed, in a satisfactory
manner, their respective due diligence which, for greater
certainty, shall be completed during the Exclusivity Period,
unless extended by the parties in writing;
(b) Hemosol and MDS shall have entered into a definitive
agreement, which Hemosol and MDS agree to negotiate in good
faith, relating to the Restructuring and the other matters
contemplated herein containing representations, warranties and
covenants of Hemosol and MDS and other terms and conditions
that are usual in agreements of this type and acceptable to
both parties;
(c) the board of directors of each of Hemosol and MDS shall have
approved the definitive agreement referred to in (b) above and
the Restructuring;
(d) if Hemosol shareholder approval is required, the board of
directors of Hemosol shall have unanimously recommended that
shareholders vote in favour of the Restructuring and the
requisite shareholder approval shall have been obtained;
Page 5
(e) all necessary consents and approvals shall have been obtained
on terms and conditions satisfactory to MDS and Hemosol; and
(f) there shall not have been enacted, promulgated or announced
any change or proposed change in law or interpretative
guidance or policy of any taxation authority that, in MDS'
view, acting reasonably, could have adverse tax consequences
for MDS or Hemosol in proceeding with the Restructuring,
including, without limiting the generality of the foregoing, a
change or proposed change in the tax treatment on any
dividends to be received by MDS as a shareholder of Hemosol or
an impairment in the ability of Hemosol to fully utilize its
tax losses, other undeducted tax balances and investment tax
credits against income or income taxes arising from income of
the Labs Partnership.
7. EXPENSES
Each of MDS and Hemosol shall be responsible for its own expenses
incurred in connection with the Restructuring and the matters
contemplated herein, including, without limitation, the fees and
disbursements of its legal counsel, accountants and other professional
advisors.
8. OBLIGATION NOT TO DISCLOSE
Hemosol and MDS agree not to publicly disclose the entering into of
this letter of understanding or the contents hereof without the prior
written consent of the other party, except as may be required by law
(and then only with prior written notice to the other party).
9. OTHER MATTERS
This letter of understanding shall be governed by the laws of the
Province of Ontario and the federal laws of Canada applicable therein.
Time shall be of the essence hereof. All references herein to sums of
money are expressed in lawful money of Canada.
It is acknowledged and agreed by the parties hereto that the foregoing does not
represent a legally binding commitment by either MDS or Hemosol to complete the
Restructuring, which is subject, among other conditions, to the parties hereto
entering into a definitive agreement. Notwithstanding the foregoing, the
provisions of paragraphs 2, 3, 4, 5, 7, 8 and 9 are acknowledged and agreed to
be legal, valid and binding agreements of the parties hereto, enforceable
against each of such parties in accordance with their terms.
Page 6
If the foregoing is in accordance with your understanding, please sign and
return the enclosed copy of this letter. This letter is open for acceptance
until 5:00 p.m. (Toronto time) on November 3rd, 2003 and if not accepted and
returned by this time will terminate and be of no force or effect.
Yours truly,
MDS INC.
Per: (signed) JIM GARNER
----------------------
Name: Jim Garner
Title: Executive Vice President & CFO
Accepted and agreed to this 31st day of October, 2003.
HEMOSOL INC.
Per: (signed) LEE HARTWELL
---------------------
Name: Lee Hartwell
Title: President and Chief Executive Officer
SCHEDULE A
DESCRIPTION OF RESTRUCTURING
1. MDS will contribute the Ontario Laboratory Business to a new limited
partnership (the "LABS PARTNERSHIP"). MDS will be the sole limited
partner with a 99.99% partnership interest and a wholly-owned
subsidiary of MDS ("SUBCO") will be the general partner with a 0.01%
partnership interest. Subco will employ the employees of the Ontario
Laboratory Business, will own the diagnostic laboratory license granted
under the Laboratory and Specimen Collection Centre Licensing Act
(Ontario) and will provide services to the Labs Partnership under a
services agreement. In all other respects, the Ontario Laboratory
Business will be carried on by the Labs Partnership.
2. MDS will sign a management agreement with the Labs Partnership to
provide certain management services to the Labs Partnership.
3. A new corporation ("NEWCO") will be incorporated under the Business
Corporations Act (Ontario). The authorized share capital of Newco will
consist of an unlimited number of common shares.
4. Hemosol and Newco will form a limited partnership (the "BLOOD PRODUCTS
PARTNERSHIP") in the manner described below:
(a) Hemosol will be both a general partner and a limited partner
and Newco will be a general partner;
(b) Hemosol will lend sufficient funds to Newco to enable it to
contribute cash in order to acquire a general partnership
interest entitling it to 0.01% of the income or loss of the
Blood Products Partnership;
(c) Hemosol will transfer its intellectual property, remaining
cash and fixed assets, other than the building housing the
Hemolink manufacturing facility (the "HEMOLINK BUILDING"), to
the Blood Products Partnership and as consideration therefor,
the Blood Products Partnership will assume all of Hemosol's
liabilities, other than its bank loan, and issue to Hemosol a
limited partnership interest and a general partnership
interest entitling it to 10% and 89.99% of the income or loss
of the Blood Products Partnership, respectively. The Blood
Products Partnership will agree to provide all of its assets
as collateral for Hemosol's bank loan and MDS' guarantee
thereof; and
(d) the Hemosol scientists will be transferred to the Blood
Products Partnership.
5. Hemosol will lease the Hemolink Building to the Blood Products
Partnership on commercial terms for the use of the Blood Products
Partnership or for sublease. Hemosol will grant an option to the Blood
Products Partnership to purchase the Hemolink Building for its fair
market value at the time the option is granted. If the option is
exercised, the purchase price will be satisfied by the assumption by
the Blood Products Partnership of
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Hemosol's outstanding bank debt at the time with the balance of the
purchase price settled in cash.
6. The articles of Hemosol will be amended by creating the following three
new classes of shares:
(a) an unlimited number of another class of voting common shares
("HEMOSOL CLASS A COMMON SHARES"). The holder of the Hemosol
Class A Common Shares will be entitled to one vote per share;
(b) an unlimited number of a class of non-voting common shares
("HEMOSOL CLASS B COMMON SHARES") The holders of the Hemosol
Class A Common Shares and the Hemosol Class B Common Shares
will be entitled to dividends if, as and when declared by the
board of directors. No holder of any Hemosol Class A Common
Shares will be entitled to receive dividends in priority to a
holder of any Hemosol Class B Common Shares and vice versa;
and
(c) an unlimited number of non-voting preferred shares ("HEMOSOL
CLASS C PREFERRED SHARES"), with a cumulative dividend rate of
0.25% per month, which will be redeemable at the option of
Hemosol for an amount equal to the fair market value of the
consideration received in exchange for the issuance of the
shares plus any unpaid dividend.
The articles of Hemosol will also be amended to provide that the
business of Hemosol will be restricted to: (a) holding the limited
partnership interests in the Labs Partnership and the Blood Products
Partnership, and the ownership of the Hemolink Building; and (b)
distributing its available cash, after providing for the redemption of
the Hemosol Class C Preferred Shares, to its shareholders.
7. The shareholders of Hemosol will exchange their common shares on the
basis of one Hemosol Class A Common Share and one Hemosol Class C
Preferred Share for each existing common share held. The Hemosol Class
C Preferred Shares will have a redemption value in aggregate equal to
the enterprise value of Hemosol based on a valuation opinion provided
by a qualified external valuator excluding the following: a 10% limited
partnership interest in the Blood Products Partnership, the Hemolink
Building, cash needed to purchase Newco warrants as described in step
10 below, and the bank loan. The addition to the stated capital of the
Hemosol Class C Preferred Shares will be equal to their aggregate
redemption amount. The addition to the stated capital of the Hemosol
Class A Common Shares will be equal to the paid up capital of the
existing common shares of Hemosol less the aggregate redemption amount
of the Hemosol Class C Preferred Shares. The stated capital amount
being maintained for the existing common shares of Hemosol will be
decreased by an amount equal to the aggregate additions to the stated
capital of the Hemosol Class C Preferred Shares and the Hemosol Class A
Common Shares.
Hemosol will cancel each of the existing common shares of Hemosol
received as a result of the exchange described above.
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8. The shareholders of Hemosol will transfer Hemosol Class C Preferred
Shares to Newco in exchange for common shares of Newco. The common
shares of Newco will be listed on a stock exchange in Canada (and may
also be listed or quoted on a stock exchange or quotation system in the
United States) at the time they are issued to the shareholders of
Hemosol.
9. Hemosol will redeem a portion of the Hemosol Class C Preferred Shares
held by Newco. The redemption price will be satisfied by the transfer
to Newco at fair market value of Hemosol's 89.99% general partnership
interest in the Blood Products Partnership. The balance of the Hemosol
Class C Preferred Shares will be redeemed from time to time based on
Newco's cash flow needs using cash flow generated from the Labs
Partnership as described below. If at a given time the cash flow
generated from the Labs Partnership is not sufficient to satisfy
Newco's cash needs, Hemosol will borrow from its bank to redeem the
Hemosol Class C Preferred Shares. Such borrowing will be repaid using
future cash flow generated from the Labs Partnership.
10. Hemosol will subscribe for warrants to acquire 5,000,000 common shares
of Newco with an exercise price of $1.00 per share. Hemosol will also
subscribe for additional warrants to acquire 5,000,000 common shares
with terms identical to the terms of the 5,000,000 additional Hemosol
warrants to which MDS has contingent rights. The exercise of such
warrants will be conditional on the Blood Products Partnership not
having exercised its option to purchase the Hemolink Building as
described in step 5 above by certain specified dates or in the event
that the Hemolink Building is sold. In each case, the consideration for
the warrants will be cash equal to the fair market value of the
warrants.
11. MDS will surrender its Hemosol warrants to Hemosol at fair market value
and will receive as consideration the warrants of Newco acquired by
Hemosol in step 10.
12. The existing employee stock options of Hemosol will be cancelled for no
consideration and Newco will issue to its employees and the employees
of the Blood Products Partnership stock options to acquire common
shares of Newco. The exercise price of such stock options will not be
less than the trading price of the Newco common shares at the time the
options are granted. If any existing stock options of Hemosol are
in-the-money, MDS and Hemosol will consider mechanisms whereby Newco
will provide the holder(s) of such options with equivalent value.
13. MDS will transfer its interest in the Labs Partnership to Hemosol. As
consideration therefor, Hemosol will issue to MDS Hemosol Class A
Common Shares and Hemosol Class B Common Shares, such that MDS together
with its affiliates will hold slightly less than 50% of the issued and
outstanding Hemosol Class A Common Shares and the balance of the fair
market value for its interest in the Labs Partnership in the form of
Hemosol Class B Common Shares. Following the issue of such shares to
MDS, MDS will hold approximately 99% of the total issued and
outstanding Hemosol Class A Common Shares and Hemosol Class B Common
Shares (based on the current estimated value of the Labs Partnership
and Hemosol at the relevant time).
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14. As a result of step 13, Hemosol will be entitled to 99.99% of the
income or loss of the Labs Partnership. Cash distributions from the
Labs Partnership received by Hemosol will be used to redeem the Hemosol
Class C Preferred Shares. It is anticipated that the balance of cash
will be distributed to the holders of Hemosol Class A Common Shares and
Hemosol Class B Common Shares as dividends.
15. MDS will have a right of first refusal if Hemosol receives an offer to
purchase its partnership interest in the Labs Partnership from a third
party.
EXHIBIT 1
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